-----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, OuX2rkZoz1qnClD6Vy5FfkUO5knORin87hr+E8fvIE04/OYBRkOH92zz2Wj+Ne8q mE4tqfvCKWTp35x9QO2BKw== 0000950144-98-012373.txt : 19981113 0000950144-98-012373.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950144-98-012373 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAGON TRADE BRANDS INC CENTRAL INDEX KEY: 0000889429 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 911554663 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11368 FILM NUMBER: 98744575 BUSINESS ADDRESS: STREET 1: 180 TECHNOLOGY PARLWAY CITY: NORCROSS STATE: GA ZIP: 30092 BUSINESS PHONE: 7703004000 MAIL ADDRESS: STREET 1: 180 TECHNOLOGY PKWY CITY: NORCROSS STATE: GA ZIP: 30092 10-Q 1 PARAGON TRADE BRANDS INC 1 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 27, 1998 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 --- --- The number of shares outstanding of the registrant's common stock was 11,941,134 shares ($.01 par value) as of September 27, 1998. Page 1 of 34 Exhibit Index on Page 32 -1- 2 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FILING FOR THE THIRTEEN WEEK PERIOD ENDED SEPTEMBER 27, 1998
Page No. ---------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3-14 Consolidated Statements of Operations 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 15 Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities (not applicable) Item 3 Defaults in Senior Securities 28 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 28 Signature Page 31 Exhibit Index 32 Exhibits 35
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (NOTE 2)
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997 -------------- -------------- -------------- -------------- Sales, net of discounts and allowances ..... $136,993 $154,066 $402,281 $425,570 Cost of sales .............................. 109,081 125,465 322,224 345,202 -------- -------- -------- -------- Gross profit ............................... 27,912 28,601 80,057 80,368 Selling, general and administrative expense. 22,003 20,175 60,955 58,557 Research and development expense ........... 913 1,336 3,444 3,242 -------- -------- -------- -------- Operating profit ........................... 4,996 7,090 15,658 18,569 Equity in earnings of unconsolidated subsidiaries ...................... 590 800 2,108 859 Dividend income from unconsolidated subsidiary ........................ -- 1,055 -- 1,055 Interest expense(1) ........................ 51 1,354 341 3,445 Other income ............................... 687 564 1,730 1,490 -------- -------- -------- -------- Earnings before income taxes and bankruptcy costs ............................. 6,222 8,155 19,155 18,528 Bankruptcy costs ........................... 1,724 -- 4,530 -- Provision for income taxes ................. 474 2,394 1,226 6,313 -------- -------- -------- -------- Net earnings ............................... $ 4,024 $ 5,761 $ 13,399 $ 12,215 ======== ======== ======== ======== Basic earnings per common share ............ $ .34 $ .48 $ 1.12 $ 1.03 ======== ======== ======== ======== Diluted earnings per common share .......... $ .34 $ .48 $ 1.12 $ 1.02 ======== ======== ======== ======== Dividends paid ............................. $ -- $ -- $ -- $ -- ======== ======== ======== ======== (1)Contractual Interest .................... $ 1,449 $ 4,348 ======== ========
See Accompanying Notes to Financial Statements -3- 4 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (NOTE 2)
September 27, 1998 December 28, 1997 ------------------ ----------------- ASSETS Cash and short-term investments....................... $ 35,676 $ 991 Receivables........................................... 74,054 70,616 Inventories........................................... 47,507 48,257 Current portion of deferred income taxes.............. 2,384 1,800 Prepaid expenses...................................... 3,177 697 ------------ ------------ Total current assets......................... 162,798 122,361 Property and equipment................................ 103,406 118,383 Construction in progress.............................. 19,510 11,154 Assets held for sale.................................. 11,570 11,073 Investment in unconsolidated subsidiary, at cost...... 22,743 19,964 Investment in and advances to unconsolidated subsidiaries, at equity...................... 61,582 53,844 Goodwill 33,299 34,739 Other assets.......................................... 13,021 4,624 ------------ ------------ Total assets .............................. $ 427,929 $ 376,142 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities not subject to compromise: Short-term borrowings........................ $ 176 $ 14,185 Checks issued but not cleared................ 8,411 9,375 Accounts payable............................. 34,114 40,305 Accrued liabilities.......................... 36,481 32,392 Accrued loss contingency..................... - 200,000 ------------ ------------ Total current liabilities.................... 79,182 296,257 Liabilities subject to compromise (Note 8)............ 327,373 - Long-term debt........................................ - 70,000 Deferred income taxes................................. 4,156 3,656 Deferred compensation................................. - 1,275 ------------ ------------ Total liabilities............................ 410,711 371,188 ------------ ------------ Commitments and contingencies (Notes 1 and 10) Shareholders' equity: Preferred stock: Authorized 10,000,000 shares, no shares issued, $.01 par value............. - - Common stock: Authorized 25,000,000 shares, issued 12,370,711 and 12,343,324 shares, $.01 par value....................... 124 123 Capital surplus....................................... 143,893 144,368 Foreign currency translation adjustment............... (1,540) (1,066) Retained deficit...................................... (114,977) (128,376) Less: Treasury stock, 429,577 and 388,658 shares, at cost......................................... (10,282) (10,095) ------------ ------------ Total shareholders' equity................... 17,218 4,954 ------------ ------------ Total liabilities and shareholders' equity... $ 427,929 $ 376,142 ============ ============
See Accompanying Notes to Financial Statements. -4- 5 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) (NOTE 2)
Thirty-Nine Weeks Ended ----------------------- September 27, 1998 September 28, 1997 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.......................................... $ 13,399 $ 12,215 Non-cash charges (benefits) to earnings: Depreciation and amortization................ 25,703 26,381 Deferred income taxes........................ (84) 9,130 Equity in (earnings) loss of subsidiaries.... (1,149) 308 Changes in operating assets and liabilities: Accounts receivable.......................... (6,829) (8,764) Inventories and prepaid expenses............. (1,730) (67) Accounts payable............................. 34,316 11,169 Checks issued but not cleared................ (964) (91) Accrued liabilities.......................... 7,606 (9,056) Other ............................................... (3,466) (1,482) ------------ ------------ Net cash provided by operating activities.... 66,802 39,743 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment............... (18,640) (40,472) Proceeds from sale of property and equipment.......... 3,433 891 Investment in Grupo P.I. Mabe, S. A. de C.V........... (2,779) (3,433) Investment in and advances to unconsolidated subsidiaries, at equity...................... (4,474) (14,587) Other ............................................... (7,045) (6,668) ------------ ------------ Net cash used by investing activities........ (29,505) (64,269) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings...... (745) 32,400 Pre-petition debt payment authorized by court......... (1,867) - Proceeds from U.S. bank credit facility............... - 15,000 Repayments of U.S. bank credit facility............... - (25,000) Sale of common stock.................................. - 211 ------------ ------------ Net cash provided (used) by financing activities.............................. (2,612) 22,611 ------------ ------------ NET INCREASE (DECREASE) IN CASH....................... 34,685 (1,915) Cash at beginning of period........................... 991 8,297 ------------ ------------ Cash at end of period................................. $ 35,676 $ 6,382 ============ ============ Cash paid (refunded) during the period for: Interest, net of amounts capitalized......... $ 1,450 $ 3,066 ============ ============ Income taxes................................. $ (2,592) $ (117) ============ ============ Bankruptcy costs............................. $ 1,965 $ - ============ ============
See Accompanying Notes to Financial Statements. -5- 6 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS FOR THE THIRTEEN WEEK AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 27, 1998 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) NOTE 1: CHAPTER 11 PROCEEDINGS On January 6, 1998 Paragon Trade Brands, Inc. ("Paragon" or the "Company") filed for relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 filing"), in the United States Bankruptcy Court for the Northern District of Georgia. The Company is currently operating as a debtor in possession under the Bankruptcy Code. See "Notes 10 and 11 of the Notes to Financial Statements" and "PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS." The Company has previously disclosed that The Procter & Gamble Company ("P&G") had filed a claim against the Company in the United States District Court for the District of Delaware, alleging that the Company's "Ultra" disposable baby diaper products infringe two of P&G's inner-leg gather patents. The lawsuit sought injunctive relief, lost profit and royalty damages, treble damages and attorneys' fees and costs. The Company denied liability under the patents and counterclaimed for patent infringement and violation of antitrust laws by P&G. The Company has also previously disclosed that if P&G were to prevail on its claims, award of all or a substantial amount of the relief requested could have a material adverse effect on the Company's financial condition and results of operations. On December 30, 1997, the District Court issued a Judgment and Opinion finding two of P&G's diaper patents to be valid and infringed by the Company's disposable diaper products, while also rejecting the Company's patent infringement claim against P&G. The District Court had earlier dismissed the Company's antitrust counterclaim on summary judgment. The Judgment entitles P&G to damages based on sales of the Company's diapers containing the inner-leg gather feature. Damages of approximately $178.4 million were entered against Paragon by the District Court on May 28, 1998. At the same time, the District Court entered injunctive relief agreed upon by P&G and the Company. The amount of the Delaware Judgment resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the issuance of the Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company. The Chapter 11 filing was designed to (i) prevent P&G from placing liens on Company property; (ii) permit the Company to appeal the Delaware District Court's decision in the P&G case in an orderly fashion; and (iii) give the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. Substantially all liabilities outstanding as of the date of the Chapter 11 filing are subject to resolution under a plan of reorganization to be voted upon by the Company's creditors and shareholders and confirmed by the Bankruptcy Court. Schedules were filed by the Company on March 3, 1998 with the Bankruptcy Court setting forth the unaudited, and in some cases estimated, assets and liabilities of the Company as of the date of the Chapter 11 filing, as shown by the Company's accounting records. The bar date for the filing of proofs of claim by creditors was June 5, 1998. P&G filed alleged claims ranging from approximately $2.3 billion (without trebling) to $6.4 billion (with trebling), which included a claim of $178.4 million for the Delaware judgment. The remaining claims include claims for alleged patent infringement by the Company in foreign countries where it has operations. The Company has reviewed such additional claims and believes them to be without merit. Kimberly-Clark Corporation ("K-C") filed alleged claims ranging from approximately $893 million (without trebling) to $2.3 billion (with trebling), including claims related to the litigation in the Dallas District Court described herein. See "Note 10 of the Notes to Financial Statements" and "PART II: OTHER INFORMATION, ITEM I: LEGAL PROCEEDINGS." K-C's claims in the Bankruptcy case include an attempt to recover alleged lost profits for infringement of the patents asserted in the Dallas District Court, despite the fact that a lost profits theory of damages was not pursued by K-C in the Dallas District Court. The Company continues to believe that it does not infringe any valid claim of the asserted K-C patents. The Company further believes that K-C's attempt to inflate its bankruptcy claims well beyond its claims in the Dallas District Court is inconsistent with applicable law and procedure. See "Note 10 of the Notes to Financial Statements." -6- 7 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) On October 19, 1998, the Company, P&G, K-C and the Creditors' Committee stipulated to an extension of the Company's exclusivity period to November 18, 1998 and for an additional thirty (30) days to December 18, 1998 unless any of the parties files an objection to such additional extension by November 12, 1998. On November 2, 1998, the U.S. Trustee appointed a Committee of Equity Security Holders in the Company's Chapter 11 case. The Company continues to pursue settlement of the K-C and P&G claims as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of each such settlement will be subject to Bankruptcy Court approval. The Chapter 11 filing did not include the Company's wholly owned subsidiaries including Paragon Trade Brands (Canada) Inc., Paragon Trade Brands International, Inc., Paragon Trade Brands FSC, Inc. and Changing Paradigms, Inc. The following information summarizes the combined results of operations for the thirteen and thirty-nine weeks ended September 27, 1998 and September 28, 1997, as well as the combined balance sheets as of September 27, 1998 and December 28, 1997 for these subsidiaries. This information has been prepared on the same basis as the consolidated financial statements.
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997 -------------- -------------- -------------- -------------- Sales, net of discounts and allowances....... $ 15,754 $ 13,154 $ 43,657 $ 39,979 Gross profit................................. 3,168 1,927 7,641 6,451 Earnings before income taxes................. 2,503 1,081 5,817 2,668 Net earnings................................. 1,837` 1,194 4,407 2,301
September 27, 1998 December 28, 1997 ------------------ ----------------- Current assets........................................ $ 17,983 $ 14,782 Non-current assets.................................... $ 52,607 $ 48,840 Current liabilities................................... $ 6,970 $ 8,424 Non-current liabilities............................... $ 9,960 $ 8,873
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Paragon Trade Brands, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and accounts are eliminated. The accompanying consolidated balance sheet as of December 28, 1997, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of management, all adjustments necessary for a fair statement of the results of the interim periods have been included. All such interim adjustments are of a normal recurring nature except for the bankruptcy-related costs. The results of operations for the thirteen and thirty-nine week periods ended September 27, 1998 should not be regarded as necessarily indicative of the results that may be expected for the full year. The financial statements have been prepared on the going concern basis of accounting, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. -7- 8 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform them to the current year's presentation. New Accounting Standards Effective December 29, 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires the display of comprehensive income and its components in the financial statements. See "Note 5 of the Notes to Financial Statements." In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not determined the timing of or method of adoption of Statement 133. As the Company currently does not utilize derivatives, adoption of Statement 133 is not expected to have any impact on the financial statements. NOTE 3: BANKRUPTCY COSTS Bankruptcy costs were directly associated with the Company's Chapter 11 reorganization proceedings and consisted of the following:
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- Sept. 27, 1998 Sept. 27, 1998 -------------- -------------- Professional fees..................................... $ 2,006 $ 4,819 Amortization of DIP credit facility deferred financing costs........................................ 211 611 Other................................................. 12 122 Interest Income....................................... (505) (1,022) ------------- ------------- $ 1,724 $ 4,530 ============= =============
NOTE 4: INCOME TAXES Income tax expense for the subsidiaries not included in the Chapter 11 filing and filing separate tax returns was $474 and $1,226 during the thirteen and thirty-nine week periods ended September 27, 1998, respectively. The Company recorded income tax expense of approximately $1,200 and $4,000 during the thirteen and thirty-nine week periods ended September 27, 1998, respectively, which was offset by a reduction in its deferred tax asset valuation allowance. NOTE 5: COMPREHENSIVE INCOME The following are the components of comprehensive income:
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997 -------------- -------------- -------------- -------------- Net income..................................... $ 4,024 $ 5,761 $ 13,399 $ 12,215 Foreign currency translation adjustment........ (212) (32) (474) (181) ------------- ------------ ------------- ------------- Comprehensive income........................... $ 3,812 $ 5,729 $ 12,925 $ 12,034 ============= ============ ============= =============
-8- 9 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 6: INVENTORIES Inventories consist of the following:
September 27, 1998 December 28, 1997 ------------------ ----------------- LIFO: Raw materials - pulp......................... $ 253 $ 381 Finished goods............................... 24,176 25,770 FIFO: Raw materials - other........................ 8,899 8,561 Materials and supplies....................... 21,163 20,942 ----------- ------------ 54,491 55,654 Reserve for excess and obsolete items........................... (6,984) (7,397) ------------ ------------ Net inventories....................................... $ 47,507 $ 48,257 =========== ============
NOTE 7: ACCRUED LIABILITIES Accrued liabilities are as follows:
September 27, 1998 December 28, 1997 ------------------ ----------------- Payroll - wages and salaries, incentive awards, retirement, vacation and severance pay...... $ 16,316 $ 10,375 Coupons outstanding................................... 3,862 3,824 Other................................................. 16,303 18,193 ------------- --------------- Total................................................. $ 36,481 $ 32,392 ============= ===============
NOTE 8: LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise under the Company's reorganization proceedings include substantially all current and long-term unsecured debt as of the date of the Chapter 11 filing. Pursuant to the Bankruptcy Code, payment of these liabilities may not be made except pursuant to a plan of reorganization or Bankruptcy Court order while the Company continues to operate as a debtor in possession. The Company has received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations including a portion of short-term borrowings and employee wages, benefits and expenses. Liabilities subject to compromise are comprised of the following:
September 27, 1998 December 28, 1997 ------------------ ----------------- Accrued loss contingency.............................. $ 200,000 $ - Bank debt............................................. 81,397 - Accounts payable...................................... 40,507 - Accrued liabilities .................................. 4,179 - Deferred compensation................................. 1,290 - ------------- ----------- $ 327,373 $ - ============= ===========
-9- 10 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 9: EARNINGS PER COMMON SHARE
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997 -------------- -------------- -------------- -------------- Net earnings.......................... $ 4,024 $ 5,761 $ 13,399 $ 12,215 =============== =============== =============== =============== Weighted average number of common shares used in basic EPS (000's) .. 11,938 11,947 11,933 11,900 Effect of dilutive securities: Stock options (000's).............. - 42 1 60 --------------- --------------- --------------- --------------- Weighted number of common shares and dilutive potential common stock in dilutive EPS (000's).............. 11,938 11,989 11,934 11,960 =============== =============== =============== =============== Basic earnings per common share $ .34 .48 $ 1.12 $ 1.03 =============== =============== =============== =============== Diluted earnings per common share $ .34 $ .48 $ 1.12 $ 1.02 =============== =============== =============== ===============
Options to purchase 712,989 and 706,989 shares of common stock outstanding during the thirteen and thirty-nine week periods ended September 27, 1998, respectively, were not included in the calculation because their effect was anti-dilutive. Options to purchase 503,862 shares of common stock outstanding during the thirteen and thirty-nine week periods ended September 28, 1997, were not included in the calculation because their effect was anti-dilutive. NOTE 10: LEGAL PROCEEDINGS The Procter & Gamble Company v. Paragon Trade Brands, Inc. - P&G filed a claim in January 1994 in the District Court for the District of Delaware that the Company's "Ultra" disposable baby diaper products infringe two of P&G's inner-leg gather patents. The lawsuit sought injunctive relief, lost profit and royalty damages, treble damages and attorneys' fees and costs. The Company denied liability under the patents and counterclaimed for patent infringement and violation of antitrust laws by P&G. In March 1996, the District Court granted P&G's motion for summary judgment to dismiss the Company's antitrust counterclaim. The trial was completed in February 1997, the parties submitted post-trial briefs and closing arguments were conducted on October 22, 1997. Legal fees and costs for this litigation have been and will continue to be significant. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion finding that P&G's patents are 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 District Court on June 2, 1998. At the same time, the District Court entered injunctive relief agreed upon by P&G and the Company. The Company had previously filed with the District Court a motion under Rule 59 for a new trial or to alter or amend the Judgment. The District Court denied Paragon's motion by order entered August 4, 1998. The District Court also denied a motion by P&G seeking to recover attorneys' fees it expended in defending itself against Paragon's patent infringement counterclaim. On August 4, 1998, the Company filed with the Federal Circuit Court of Appeals its amended notice of appeal, appealing of the Delaware District Court's December 30, 1997 Judgment, money judgment, injunction and denial of Paragon's Rule 59 motion. The appeal has now been fully briefed; argument has not yet been scheduled. -10- 11 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) On September 22, 1998, P&G filed a motion in the Delaware District Court seeking to have the Court find Paragon in contempt of the injunction entered in the case on account of Paragon's manufacture and sale of its new, single-cuff diaper product. P&G asserts in its claim that Paragon's new diaper design (i) is no more than just colorably different from the design found to infringe the P&G patents at issue in the case and (ii) also infringes such patents. The Company has opposed P&G's motion. Based on the advice of counsel, the Company believes that P&G's motion is without merit and intends to vigorously contest it. If the motion was granted, however, the Company would be forced to discontinue the manufacture and sale of the new design. In addition, P&G has asked that the Court order the Company to send letters to all of its customers advising them that the continued resale by them of the new design would also constitute patent infringement. Consequently, the Company believes that if the motion was granted, it would have a material adverse effect on the Company's financial condition and results of operations and would seriously jeopardize the Company's future viability. The Judgment has 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. P&G has asserted alleged claims against the Company regarding similar patent claims on diaper products sold in other countries. The Company has reviewed such claims and believes them to be without merit. See "--In Re Paragon Trade Brands, Inc." below. The Company continues to pursue settlement of the P&G claim as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of such settlement will be subject to Bankruptcy Court approval. Kimberly-Clark Corporation v. Paragon Trade Brands, Inc. -- On October 26, 1995, 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 inner-leg gathers. The lawsuit seeks injunctive relief, royalty damages, treble damages and attorneys' fees and costs. The Company denied liability under the patents and counterclaimed for patent infringement and violation of antitrust laws by K-C. Several pre-trial motions were filed by each party, including a motion for summary judgment filed by K-C with respect to the Company's antitrust counterclaim and a motion for summary judgment filed by the Company on one of the patents asserted by K-C. In addition, K-C sued the Company on another patent issued to K-C which is based upon a further continuation of one of the K-C patents asserted in the case. That action was consolidated with the pending action. The Court appointed a special master to rule on the various pending motions. Legal fees and costs in connection with this litigation have been and will be significant. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation have been stayed. The Bankruptcy Court issued an order on April 10, 1998 permitting, among other things, a partial lifting of the stay to allow the issuance of the special master's report on the items under his consideration. K-C filed with the Bankruptcy Court a motion for reconsideration of the Bankruptcy Court's April 10 order, which was denied on June 15, 1998. K-C has appealed this denial of reconsideration to the Federal District Court for the Northern District of Georgia. The Company objected to K-C's Appeal and has sought to have it dismissed. K-C has also filed a motion, now pending, with the District Court in Atlanta to withdraw the reference of its proof of claim from the jurisdiction of the Bankruptcy Court. On October 27, 1998, the District Court dismissed without prejudice the appeal, the withdrawal of the reference and the Company's motion to dismiss the appeal and instructed the parties to refile their respective pleadings in sixty days if the parties had not by then resolved their dispute. See "--In Re Paragon Trade Brands, Inc." below. On May 26, 1998, the special master issued his report on the majority of the motions pending before him. His report included a finding, among other things, that Paragon, as the successor-in-interest to the disposable diaper business of Pope & Talbot, Inc. ("Pope & Talbot"), has a fully paid-up license to one of the three asserted K-C inner-leg gather patents, which license runs from the date of the acquisition by the Company of Pope & Talbot. Pope & Talbot had previously obtained the license from K-C. The special master also found that K-C should be -11- 12 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) held to the narrow interpretation of its patent applied by Judge Dwyer in the Western District of Washington in earlier litigation between P&G and K-C on the patent. In addition, the special master also recommended that the Company's antitrust counterclaim and any discovery-related matters in connection therewith be dismissed. Effective September 1, 1998, the K-C case was reassigned to Judge Lindsey, a newly-appointed judge on the Dallas Federal District Court bench. Judge Lindsey has asked the parties to report on the status of the case and the likelihood of settlement, and has indicated that he will set a trial date shortly if settlement does not appear likely. Should K-C prevail on its claims, award of all or a substantial portion of the relief requested by K-C could have a material adverse effect on the Company's financial condition and its results of operations. Based on the advice of patent counsel, the Company believes that the Company's products do not infringe any valid patent asserted by K-C. K-C filed alleged claims ranging from approximately $893 million (without trebling) to $2.3 billion (with trebling). The Company continues to believe that it does not infringe any valid claim of any K-C patent. The Company further believes that K-C's attempt to inflate its bankruptcy claims well beyond its claims in the Dallas District Court is inconsistent with applicable law and procedure. See "--In Re Paragon Trade Brands, Inc.," below. The Company continues to pursue settlement of the K-C claim as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of such settlement will be subject to Bankruptcy Court approval. 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 which found, in essence, two of P&G's diaper patents to be 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 adjudicated by the District Court at that time, the Company estimated that the damages were approximately $200 million. The amount of the damages award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the entry of the Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. Subsequently, damages of approximately $178.4 million were entered against Paragon by the District Court on June 2, 1998. At the same time, the 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 and affords the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing, thereby protecting all stakeholders' interests. The Company is currently operating as a debtor in possession under the Bankruptcy Code. The bar date for the filing of proofs of claim (apparently excluding administrative claims) by creditors was June 5, 1998. P&G filed alleged claims ranging from approximately $2.3 billion (without trebling) to $6.4 billion (with trebling), which included a claim of $178.4 million for the Delaware judgment. See "--The Procter & Gamble Company v. Paragon Trade Brands, Inc.," above. The remaining claims include claims for alleged patent infringement by the Company in foreign countries where it has operations. The Company has reviewed such additional claims and believes them to be without merit. K-C filed alleged claims ranging from approximately $893 million (without trebling) to $2.3 billion (with trebling), including claims related to the litigation in the Dallas District Court described above. See "--Kimberly-Clark Corporation v. Paragon Trade Brands, Inc.," above. K-C's claims in the Bankruptcy case include an attempt to recover alleged lost profits for infringement of the patents asserted in the Dallas District Court, despite the fact that a lost profits theory of damages was not pursued by K-C in the Dallas District Court. The Company continues to believe that it does not infringe any valid claim of the asserted K-C patents. The Company further believes that K-C's attempt to inflate its bankruptcy claims well beyond its claims in the Dallas District Court is inconsistent with law and procedure. -12- 13 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) On October 19, 1998, the Company, P&G, K-C and the Creditors' Committee stipulated to an extension of the Company's exclusivity period to November 18, 1998 and for an additional thirty (30) days to December 18, 1998 unless any of the parties files an objection to such additional extension by November 12, 1998. On November 2, 1998, the U.S. Trustee appointed a Committee of Equity Security Holders in the Company's Chapter 11 case. The Company continues to pursue settlement of the K-C and P&G claims as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of each such settlement will be subject to Bankruptcy Court approval. On January 30, 1998, the Company received Bankruptcy Court approval of a $75 million financing facility with The Chase Manhattan Bank. This facility supplements the Company's cash on hand and operating cash flow and permits the Company to continue to operate its business in the ordinary course. Legal fees and costs in connection with the Chapter 11 filing will be significant. See "Note 11 of the Notes to Financial Statements." The Company is unable to predict at this time when it will emerge from Chapter 11 protection. Other -- The Company is also a party to other legal activities generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party, except for the Chapter 11 filing and the P&G and K-C matters discussed above, will not have a material adverse effect on its financial condition or results of operations. NOTE 11: BANK CREDIT FACILITIES At December 28, 1997, the Company maintained a $150,000 revolving credit facility with a group of nine financial institutions available through February 2001. At December 28, 1997, borrowings under this credit facility totaled $70,000. Borrowings under this credit facility are reflected as long-term debt in the accompanying balance sheet at December 28, 1997. Interest was at fixed or floating rates based on the financial institution's cost of funds. The Company was also required to maintain certain financial covenants under the agreement. Paragon Trade Brands (Canada) Inc. has guaranteed obligations under this revolving credit facility. At December 28, 1997, 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 $50,000 in uncommitted lines of credit. Borrowings under these lines of credit totaled $12,800 at December 28, 1997. Borrowings under these lines of credit were reflected as short-term borrowings in the accompanying balance sheet at December 28, 1997. The terms of the revolving credit facility and the short-term lines of credit described above provide that a voluntary filing of a Chapter 11 petition results in an event of default on such indebtedness. Amounts outstanding under these facilities are reflected as Liabilities Subject to Compromise in the accompanying balance sheet as of September 27, 1998. As a result of its Chapter 11 filing, the Company is prohibited from paying any pre-petition liabilities without Bankruptcy Court approval. Accordingly, no interest expense has been recorded with respect to pre-petition debt balances in the accompanying financial statements for the period subsequent to January 6, 1998. At December 28, 1997, Paragon Trade Brands (Canada) Inc. maintained a Cdn $5,000 revolving term credit facility, guaranteed by the Company, available through October 1998. At December 28, 1997, borrowings under this credit facility totaled $1,385. The filing of a Chapter 11 petition by the Company resulted in an event of default under this revolving credit facility. Borrowings under this facility are reflected as short-term borrowings in the accompanying balance sheets. Interest is at fixed or floating rates based on the financial institution's cost of funds. -13- 14 PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - (CONTINUED) On January 30, 1998, the Bankruptcy Court entered a final order (the "Final Order") approving the Credit Agreement (the "DIP Credit Facility") as provided under the Revolving Credit and Guaranty Agreement dated as of January 7, 1998, among the Company, as borrower, certain subsidiaries of the Company, as guarantors, and The Chase Manhattan Bank, as agent ("Chase"). Pursuant to the terms of the DIP Credit Facility, as amended by the First Amendment dated January 30, 1998, the Second Amendment dated March 23, 1998, the Third Amendment dated April 15, 1998, and the Fourth Amendment dated September 28, 1998, Chase and a syndicate of banks have made available to the Company a revolving credit and letter of credit facility in an aggregate principal amount of $75,000. The Company's maximum borrowing under the DIP Credit Facility may not exceed the lesser of $75,000 or an available amount as determined by a borrowing base formulation. The borrowing base formulation is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The DIP Credit Facility has a sublimit of $10,000 for the issuance of letters of credit. The DIP Credit Facility expires on the earlier of July 7, 1999, or the date of entry of an order by the Bankruptcy Court confirming a plan of reorganization. Obligations under the DIP Credit Facility are secured by the security interest in, pledge and lien on substantially all of the Company's assets and properties and the proceeds thereof, granted pursuant to the Final Order under Sections 364(c)(2) and 364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit Facility may be used to fund working capital and for other general corporate purposes. The DIP Credit Facility contains restrictive covenants, including among other things, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, limitations on transactions with affiliates including investments, loans and advances, the sale of assets, and the maintenance of minimum earnings before interest, taxes, depreciation, amortization and reorganization items, as well as a prohibition on the payment of dividends. The DIP Credit Facility provides that advances made will bear interest at a rate of 0.5 percent per annum in excess of Chase's Alternative Base Rate, or at the Company's option, a rate of 1.5 percent per annum in excess of the reserve adjusted London Interbank Offered Rate for the interest periods of one, two or three months. The Company pays a commitment fee of 0.5 percent per annum on the unused portion thereof, a letter of credit fee equal to 1.5 percent per annum of average outstanding letters of credit and certain other fees. The Company has issued a $1,300 standby letter of credit under the DIP Credit Facility. No loans were outstanding under the DIP Credit Facility at September 27, 1998. Paragon Trade Brands (Canada) Inc. has entered into a new $3,000 Cdn operating credit facility with a financial institution. Borrowings under the Canadian revolving credit facility were repaid in full with the proceeds from borrowings under the new Canadian operating credit facility. Borrowings under this Canadian operating credit facility are secured by substantially all of Paragon Trade Brands (Canada) Inc.'s assets and will bear interest at a rate of 1 percent over the financial institution's prime rate. The Company does not guaranty borrowings under the Canadian operating credit facility. The maximum borrowings under the Canadian operating credit facility are limited to the lesser of $3,000 Cdn or 75 percent of Paragon Trade Brands (Canada) Inc.'s trade accounts receivable. There were $176 in borrowings outstanding against this facility on September 27, 1998. -14- 15 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997 CHAPTER 11 PROCEEDINGS The Company has previously disclosed that The Procter & Gamble Company ("P&G") had filed a claim against it in the United States District Court for the District of Delaware, alleging that the Company's "Ultra" disposable baby diaper products infringe two of P&G's inner-leg gather patents. The lawsuit sought injunctive relief, lost profit and royalty damages, treble damages and attorneys' fees and costs. The Company denied liability under the patents and counterclaimed for patent infringement and violation of antitrust laws by P&G. The Company has also previously disclosed that if P&G were to prevail on its claims, award of all or a substantial amount of the relief requested by P&G could have a material adverse effect on the Company's financial condition and results of operations. See "PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS." On December 30, 1997, the District Court issued a Judgment and Opinion finding two of P&G's diaper patents to be valid and infringed by the Company's disposable diaper products, while also rejecting the Company's patent infringement claim against P&G. The District Court had earlier dismissed the Company's antitrust counterclaim on summary judgment. The Judgment entitles P&G to damages based on sales of the Company's diapers containing the inner-leg gather feature. While a final damages number was not adjudicated by the District Court, the Company estimated at that time that the damages were 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 Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company. On January 6, 1998, the Judgment was entered on the docket in Delaware in such a manner that P&G would have been able to begin placing liens on the Company's assets. As a result, the Company filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., in the United States Bankruptcy Court for the Northern District of Georgia (Case No. 98-60390) on January 6, 1998 (the "Chapter 11 filing"). None of the Company's subsidiaries or affiliates were included in the Chapter 11 filing. The Chapter 11 filing was designed to (i) prevent P&G from placing liens on Company property; (ii) permit the Company to appeal the Delaware District Court's decision on the P&G case in an orderly fashion; and (iii) give the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing. Subsequently, damages of approximately $178.4 million were entered against Paragon by the District Court on May 28, 1998. At the same time, the District Court entered injunctive relief agreed upon by P&G and the Company. The Company is currently operating as a debtor in possession under the Bankruptcy Code. The bar date for the filing of proofs of claim by creditors was June 5, 1998. P&G filed alleged claims ranging from approximately $2.3 billion (without trebling) to $6.4 billion (with trebling), which included a claim of $178.4 million for the Delaware judgment. The remaining claims include claims for alleged patent infringement by the Company in foreign countries where it has operations. The Company has reviewed such additional claims and believes them to be without merit. Kimberly-Clark Corporation ("K-C") filed alleged claims ranging from approximately $893 million (without trebling) to $2.3 billion (with trebling), including claims related to the litigation in the Dallas District Court described herein. See "PART II: OTHER INFORMATION, ITEM I, LEGAL PROCEEDINGS." K-C's claims in the Bankruptcy case include an attempt to recover alleged lost profits for infringement of the patents asserted in the Dallas District Court, despite the fact that a lost profits theory of damages was not pursued by K-C in the Dallas District Court. The Company continues to believe that it does not infringe any valid claim of the asserted -15- 16 K-C patents. The Company further believes that K-C's attempt to inflate its bankruptcy claims well beyond its claims in the Dallas District Court is inconsistent with applicable law and procedure. On October 19, 1998, the Company, P&G, K-C and the Creditors' Committee stipulated to an extension of the Company's exclusivity period to November 18, 1998 and for an additional thirty (30) days to December 18, 1998 unless any of the parties files an objection to such additional extension by November 12, 1998. On November 2, 1998, the U.S. Trustee appointed a Committee of Equity Securities Holders in the Company's Chapter 11 case. The Company continues to pursue settlement of the K-C and P&G claims as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of each such settlement will be subject to Bankruptcy Court approval. The Company is unable to predict at this time when it will emerge from Chapter 11 protection. See "Notes 1, 10 and 11 of Notes to Financial Statements" and "PART II: OTHER INFORMATION, ITEM 1: LEGAL PROCEEDINGS" herein. RESULTS OF OPERATIONS Net earnings were $4.0 million in the third quarter of 1998 compared with net earnings of $5.8 million in the third quarter of 1997. The decrease in profits in the third quarter of 1998 compared to the same period in 1997 was primarily due to lower volumes and bankruptcy costs of $1.7 million, primarily related to professional fees. These negative impacts were partially offset by non-operating factors related to lower taxes and lower interest expense. The third quarter of 1998 was favorably impacted by a reduction in the deferred tax asset valuation allowance of $1.2 million. There was $.1 million of interest expense in the third quarter of 1998 compared to $1.4 million in the third quarter of 1997. The decrease resulted from the suspension of interest on the credit facilities due to the Chapter 11 filing. Pre-tax results from operations, equity in earnings of unconsolidated subsidiaries and dividends received from an unconsolidated subsidiary were $5.6 million in the third quarter of 1998 compared to $8.9 million in the third quarter of 1997. Results were negatively impacted by lower volumes and prices, higher trade merchandising expenses, higher cost product designs and higher selling, general and administrative expenses ("SG&A"). Results in the third quarter of 1997 also included a dividend received from Grupo P.I. Mabe, S.A. de C.V. ("Mabesa"). These negative factors were partially offset by improved efficiencies and lower manufacturing overhead in the baby diaper business, favorable raw material prices, lower operating losses associated with the feminine care business and lower packaging artwork expenses. Basic earnings per share in the third quarter of 1998 were $.34 compared to basic earnings per share of $.48 in the third quarter of 1997. Basic earnings per share, excluding bankruptcy costs and adjusted to reflect an effective tax rate of 38.5 percent and the Company's contractual interest charges, were $.25 per share in the third quarter of 1998. Basic earnings per share of $.34 in the third quarter of 1998 included a net loss of $.18 related to the feminine care and adult incontinence businesses. Basic earnings per share of $.48 in the third quarter of 1997 included a net loss of $.26 related to the feminine care and adult incontinence businesses. Losses in the feminine care and adult incontinence businesses are expected to continue throughout 1999. NET SALES Net sales were $137.0 million in the third quarter of 1998, a 11.1 percent decrease from the $154.1 million reported in the third quarter of 1997. Diaper unit sales decreased 14.8 percent to 866 million diapers in the third quarter of 1998 compared to a record 1,017 million diapers in the third quarter of 1997. Volume was primarily impacted by the temporary discontinuation of shipments to a customer due to product design issues associated with a new product rollout. The Company believes these product design issues have been resolved. The Company expects to resume shipments to that customer in the first quarter of 1999. The lost sales, due to the temporary discontinuation of shipments discussed above, should be partially offset during the fourth quarter of 1998 by the start of shipments to a large European customer in the United Kingdom. The decrease in baby diaper sales was partially offset by sales growth in the feminine care, adult incontinence and household cleaning products businesses. -16- 17 Volume also remained under pressure from discounts and promotional allowances by branded manufacturers and value segment competitors. These conditions are expected to continue during the fourth quarter of 1998 and throughout 1999. Volume, during the fourth quarter of 1998 and in 1999, could also be negatively impacted by a prolonged Chapter 11 case. Excluding the effect of a favorable product mix, average sales prices during the third quarter of 1998 decreased approximately 1.5 percent compared to the third quarter of 1997. The decrease in prices was primarily due to the use of multiple packs by the branded manufacturers and value segment competitors, competitive pressure from store-brand diaper competitors and price decreases in Canada. The Company began to implement a price increase of approximately 5 percent during the third quarter of 1998 in response to increases announced by K-C and P&G. The price increase is expected to be substantially realized during the fourth quarter of 1998 but it is difficult to predict the timing and the amount of final realization of this price increase. COST OF SALES Cost of sales in the third quarter of 1998 was $109.1 million compared to $125.5 million in the third quarter of 1997, an 13.1 percent decrease. As a percentage of net sales, cost of sales was 79.6 percent in the third quarter of 1998 compared to 81.4 percent in the comparable 1997 period. Costs were lower in the third quarter of 1998 compared to the same period of 1997 primarily due to lower raw material costs, improved baby diaper manufacturing efficiencies, lower baby diaper overhead costs and improved operating results in the feminine care business. These lower costs were partially offset by higher product design costs associated with the Company's conversion to a single leg cuff diaper. Raw material costs, including pulp and super absorbent polymer, were at lower price levels in the third quarter of 1998 compared to the same period of 1997. Raw material prices, including pulp, are expected to remain at similar levels during the fourth quarter of 1998 and through the first half of 1999. Product costs, however, are expected to remain at higher levels during the fourth quarter of 1998 and during 1999 due to higher costs of new product designs. Baby diaper labor costs were similar during the third quarter of 1998 compared to the third quarter of 1997. The costs associated with the new product rollout temporarily offset ongoing manufacturing efficiencies including the use of automated packaging. Baby diaper overhead costs were lower during the third quarter of 1998 compared to the same period in 1997 due to cost management efforts. Labor and overhead costs were also lower in the feminine care business as a result of improved operating results, cost management and the shut down of tampon-related production equipment during the first quarter of 1998. Labor costs are expected to remain at similar levels during the fourth quarter of 1998 and early 1999 due to inefficiencies related to new product designs and introductions. Depreciation costs were lower in the third quarter of 1998 compared to the third quarter of 1997 primarily due to lower baby diaper depreciation. These costs were partially offset by increases related to the feminine care and adult incontinence business. Depreciation costs should remain at similar levels during the fourth quarter of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE SG&A expenses were $22.0 million in the third quarter of 1998 compared to $20.2 million in the third quarter of 1997. As a percentage of net sales, these expenses were 16.1 percent in 1998 compared to 13.1 percent for the same period in 1997. The increase in costs is primarily attributable to an increase in trade merchandising expenses, incentive-based accruals, selling expenses and information system costs related to the Company's new information system installation, which is part of its Year 2000 remediation project discussed below. It is anticipated that these expenses will continue at similar levels during the fourth quarter of 1998. These increased costs were partially offset by lower packaging artwork and design costs. It is anticipated that packaging costs will increase during the first half of 1999 due to new product introductions. RESEARCH AND DEVELOPMENT Research and development expenses were $.9 million in the third quarter of 1998 compared to $1.3 million in the third quarter of 1997. The decrease was primarily due to lower baby diaper and feminine care product development and testing. -17- 18 INTEREST EXPENSE There was $.1 million interest expense in the third quarter of 1998 compared to $1.4 million in the third quarter of 1997. The decrease resulted from the suspension of interest on the credit facilities due to the Chapter 11 filing. There were no borrowings under the DIP credit facility during the third quarter of 1998. The third quarter of 1997 included interest on approximate average borrowings of $86 million under the pre-petition revolving credit facility. EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $.6 million in the third quarter of 1998 compared to $.8 million during the third quarter of 1997. The decrease reflects inefficiencies due to product rollouts at Paragon-Mabesa International, S.A. de C.V. ("PMI") and start up costs at Goodbaby Paragon Hygenic Products Ltd. ("Goodbaby"), a joint venture in China. DIVIDEND INCOME Dividend income of $1.1 million was received during the third quarter of 1997. The dividend represented a distribution from Mabesa, an unconsolidated subsidiary accounted for on the cost basis. BANKRUPTCY COSTS Bankruptcy costs were $1.7 million during the third quarter of 1998. These costs were primarily related to professional fees and are expected to continue at similar levels until the Company emerges from Chapter 11 protection. INCOME TAXES Income tax expense for the subsidiaries not included in the Chapter 11 filing and filing separate tax returns was $.5 million during the period ended September 27, 1998. The Company recorded income tax expense of approximately $1.2 million during the third quarter of 1998, which was offset by a reduction in its deferred tax asset valuation allowance. RAW MATERIALS The Company's agreement with Weyerhaeuser Company ("Weyerhaeuser") whereby it purchases 100 percent of its requirements of bleached chemical fluff pulp expired August 31, 1998. The Company intends to continue purchasing 100 percent of its fluff pulp requirements from Weyerhaeuser at prices as favorable as those Weyerhaeuser charges other North American disposable diaper manufacturers for similar grade pulp. The Company believes that at least two other sources of supply exist for fluff pulp. THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997 RESULTS OF OPERATIONS Net earnings were $13.4 million in the first three quarters of 1998 compared with net earnings of $12.2 million in the first three quarters of 1997. The increase in profits in the first three quarters of 1998 compared to the same period in 1997 was primarily due to non-operating factors related to lower taxes and lower interest expense. The first three quarters of 1998 was favorably impacted by a reduction in the Company's deferred tax asset valuation allowance of $4.0 million. Interest expense in the first three quarters of 1998 was $3.1 million lower than the same period of 1997. The decrease resulted from the suspension of interest on the credit facilities due to the Chapter 11 filing. These benefits were partially offset by bankruptcy costs of $4.5 million, primarily related to professional fees. Pre-tax results from operations, equity in earnings of unconsolidated subsidiaries and dividends received from an unconsolidated subsidiary were $17.8 million in the first three quarters of 1998 compared to $20.5 million in the first three quarters of 1997. The decrease in profits in the first three quarters of 1998 compared to the same period in 1997 was primarily due to lower volume and prices, higher costs of sourcing products from PMI under a supply contract, royalties payable to P&G under a product conversion agreement, higher product design costs associated with the breathable baby diaper product, higher trade merchandising expenses and higher SG&A. These negative impacts were partially offset by improved manufacturing efficiencies and lower overhead in the -18- 19 baby diaper business, lower raw material costs, improved results from unconsolidated subsidiaries, lower packaging artwork expenses and lower operating losses associated with the feminine care business. Basic earnings per share in the first three quarters of 1998 were $1.12 compared to basic earnings per share of $1.03 in the first three quarters of 1997. Basic earnings per share, excluding bankruptcy costs and adjusted to reflect an effective tax rate of 38.5 percent and the Company's contractual interest charges, were $.78 per share during the first three quarters of 1998. Basic earnings per share of $1.12 in the first three quarters of 1998 included a net loss of $.50 related to the feminine care and adult incontinence businesses. Basic earnings per share of $1.03 in the first three quarters of 1997 included a net loss of $.70 related to the feminine care and adult incontinence businesses. Losses in the feminine care and adult incontinence businesses are expected to continue throughout 1999. NET SALES Net sales were $402.3 million in the first three quarters of 1998, a 5.5 percent decrease from the $425.6 million reported in the first three quarters of 1997. Diaper unit sales decreased 7.9 percent to 2,597 million diapers in the first three quarters of 1998 compared to 2,821 million diapers in the first three quarters of 1997. The decrease in sales was primarily due to lower volumes in the baby diaper business during the second quarter of 1998, due to uncertainties related to the bankruptcy and the temporary discontinuation of shipments to a customer during the third quarter due to product design issues associated with a new product rollout, as discussed above. The Company believes these product design issues have been resolved. The Company expects to resume shipments to that customer in the first quarter of 1999. The lost sales, due to the temporary discontinuation of shipments discussed above, should be partially offset during the fourth quarter of 1998 by the start of shipments to a large European customer in the United Kingdom. The decrease in baby diaper volume was partially offset by sales growth in the feminine care, adult incontinence and household cleaning products businesses. Volume also remained under pressure from discounts and promotional allowances by branded manufacturers and value segment competitors and by customer losses to a store-brand diaper competitor. Volume during the fourth quarter of 1998 and in 1999 could also be negatively impacted by a prolonged Chapter 11 case. Excluding the effect of a favorable product mix, average sales prices during the first three quarters of 1998 decreased approximately 2.5 percent compared to the first three quarters of 1997. The decrease in prices was primarily due to the use of multiple packs by the branded manufacturers and value segment competitors, competitive pressure from store-brand diaper competitors and price decreases in Canada. The Company began to implement a price increase of approximately 5 percent during the third quarter of 1998 in response to increases announced by K-C and P&G. The price increase is expected to be substantially realized during the fourth quarter of 1998 but it is difficult to predict the timing and the amount of final realization of this price increase. COST OF SALES Cost of sales in the first three quarters of 1998 was $322.2 million compared to $345.2 million in the first three quarters of 1997, a 6.7 percent decrease. As a percentage of net sales, cost of sales was 80.1 percent in the first three quarters of 1998 compared to 81.1 percent in the comparable 1997 period. Costs were lower in the first three quarters of 1998 compared to the same period in 1997, primarily due to lower raw material costs, improved baby diaper efficiencies, lower baby diaper overhead costs and improved operating results in the feminine care business. The lower costs were partially offset by the sourcing of products from PMI under a supply contract and charges related to royalties payable to P&G under a product conversion agreement. Costs were also higher due to the product design costs associated with the Company's conversion to a single leg cuff diaper in the third quarter of 1998. Raw material costs, including pulp and super absorbent polymer, were at lower price levels in the first three quarters of 1998 compared to the same period of 1997. Raw material prices, including pulp, are expected to remain at similar levels during the fourth quarter of 1998 and through the first half of 1999. Product costs, however, are expected to remain at higher levels during the fourth quarter of 1998 and during 1999 due to higher costs of new product designs. Baby diaper labor costs were lower during the first three quarters of 1998 compared to the first three quarters of 1997. The lower costs reflect increased manufacturing efficiencies including the use of automated packaging. Baby diaper -19- 20 overhead costs were lower during the first three quarters of 1998 compared to the same period in 1997 due to cost management efforts. Labor and overhead costs were also lower in the feminine care business as a result of improved operating results, cost management and the shut down of tampon-related production equipment during the first quarter of 1998. Labor costs are expected to remain at increased levels during the fourth quarter of 1998 and early 1999 due to inefficiencies related to new product designs and introductions. Depreciation costs were at similar levels in the first three quarters of 1998 compared to the first three quarters of 1997. Decreases in baby diaper depreciation were offset by increases related to the feminine care and adult incontinence businesses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE SG&A expenses were $61.0 million in the first three quarters of 1998 compared to $58.6 million in the first three quarters of 1996. As a percentage of net sales, these expenses were 15.2 percent in 1998 compared to 13.8 percent for the same period in 1997. The increase in costs is primarily attributable to an increase in trade merchandising expenses, incentive-based accruals, selling expenses and information system costs related to the Company's new information system installation, which is part of the Company's Year 2000 remediation project discussed below. It is anticipated that these expenses will continue at similar levels during the fourth quarter of 1998. These increased costs were partially offset by lower legal expenses and packaging artwork and design costs. It is anticipated that the packaging costs will increase during the first half of 1999 due to new product introductions. RESEARCH AND DEVELOPMENT Research and development expenses were $3.4 million in the first three quarters of 1998 compared to $3.2 million in the first three quarters of 1997. The increase was primarily due to baby diaper product development and testing. The increase in baby diaper spending has been partially offset by a decrease in feminine care and adult incontinence product development spending. INTEREST EXPENSE Interest expense was $.3 million in the first three quarters of 1998 compared to $3.4 million in the first three quarters of 1997. The decrease resulted from the suspension of interest on the credit facilities due to the Chapter 11 filing. There were no borrowings under the DIP credit facility during the first three quarters of 1998. The first three quarters of 1997 included interest on approximate average borrowings of $77 million under the pre-petition revolving credit facility. EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES The equity in earnings of unconsolidated subsidiaries was $2.1 million in the first three quarters of 1998 compared to $.9 million in the first three quarters of 1997. The increase primarily reflects improved operating results at PMI and earnings of Stronger Corporation S.A.. DIVIDEND INCOME Dividend income of $1.1 million was received during the third quarter of 1997. The dividend represented a distribution from Mabesa, an unconsolidated subsidiary accounted for on the cost basis. BANKRUPTCY COSTS Bankruptcy costs were $4.5 million during the first three quarters of 1998. These costs were primarily related to professional fees and are expected to continue at similar levels until the Company emerges from Chapter 11 protection. INCOME TAXES Income tax expense for the subsidiaries not included in the Chapter 11 filing was $1.2 million during the first three quarters of 1998. The Company recorded income tax expense of approximately $4.0 million during the first three quarters of 1998, which was offset by a reduction in its deferred tax asset valuation allowance. -20- 21 LIQUIDITY AND CAPITAL RESOURCES During the first three quarters of 1998, cash flow from earnings and non-cash charges to earnings was $37.9 million compared to $47.7 million in the same period in 1997. During the first three quarters of 1998, cash flow was positively impacted by approximately $33.3 million by an increase in post-petition accounts payable and checks issued but not cleared. Cash was also positively impacted by the receipt of $3.4 million from previous equipment sales and by an increase in accrued liabilities, primarily related to incentive-pay accruals. Cash flow has been negatively impacted by an increase in receivables primarily due to an overall slowness of payment from a few large customers. Cash was also used by an increase in prepaid expenses, primarily prepaid insurance and deposits to suppliers due to the bankruptcy. The cash produced from operations supported capital expenditures of $26.0 million, including approximately $7.5 million of computer software and consulting costs related to the Company's Year 2000 remediation efforts discussed below, in the first three quarters of 1998 compared to $46.4 million in the same period of 1997. The expenditures were primarily in support of the baby diaper business, specifically new product enhancements and automated packaging. Capital spending is expected to be approximately $39 million during 1998 and will include further expenditures for product enhancement and a company-wide information system upgrade related to the Company's Year 2000 remediation efforts. Capital spending is expected to be approximately $60 million in 1999. The cash produced from operations also supported the Company's acquisition of its share of Goodbaby, a joint venture in China on December 31, 1997. The joint venture partners are Goodbaby Group and First Shanghai Investment of Hong Kong. Paragon maintains a 40 percent ownership position in the venture. Initial registered capital of the venture was approved at $15 million, to be funded over a two-year period. The Company also made an additional payment to Mabesa as an earnout payment based on 1997 performance. 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. As a result of the Chapter 11 filing, the Company is prohibited from paying any pre-petition liabilities without Bankruptcy Court approval. The Chapter 11 filing resulted in a default under its pre-petition revolving credit facility and borrowings under its uncommitted lines of credit. See "Note 11 of Notes to Financial Statements." In connection with the Chapter 11 filing, on January 30, 1998, the Bankruptcy Court entered a final order approving the Credit Agreement (the "DIP Credit Facility") as provided under the Revolving Credit and Guarantee Agreement dated as of January 7, 1998, among the Company, as Borrower, the subsidiaries of the Company, as guarantors, and a bank group led by The Chase Manhattan Bank ("Chase"). Pursuant to the terms of the DIP Credit Facility, as amended by the First Amendment dated January 30, 1998, the Second Amendment dated March 23, 1998, the Third Amendment dated April 15, 1998, and the Fourth Amendment dated September 28, 1998, Chase and a syndicate of banks has made available to the Company a revolving credit and letter of credit facility in an aggregate principal amount of $75 million. The Company's maximum borrowing under the DIP Credit Facility may not exceed the lesser of $75 million or an available amount as determined by a borrowing base formulation. The borrowing base formulation is comprised of certain specified percentages of eligible accounts receivable, eligible inventory, equipment and personal and real property of the Company. The DIP Credit Facility has a sublimit of $10 million for the issuance of letters of credit. The DIP Credit Facility expires on the earlier of July 7, 1999, or the date of entry of an order by the Bankruptcy Court confirming a plan of reorganization. Obligations under the DIP Credit Facility are secured by the security interest, pledge and lien on substantially all of the Company's assets and properties and the proceeds thereof, granted pursuant to the Final Order under Sections 364(c)(2) and 364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit Facility may be used to fund working capital and for other general corporate purposes. The DIP Credit Facility contains restrictive covenants, including among other things, limitations on the creation of additional liens and indebtedness, limitations on capital expenditures, limitations on transactions with affiliates including investments, loans and advances, the sale of assets, and the maintenance of minimum earnings before interest, taxes, depreciation, amortization and reorganization items, as well as a prohibition on the payment of dividends. -21- 22 The DIP Credit Facility provides that advances made will bear interest at a rate of 0.5 percent per annum in excess of Chase's Alternative Base Rate, or at the Company's option, a rate of 1.5 percent per annum in excess of the reserve adjusted London Interbank Offered Rate for the interest periods of one, two or three months. The Company pays a commitment fee of 0.5 percent per annum on the unused portion thereof, a letter of credit fee equal to 1.5 percent per annum of average outstanding letters of credit and certain other fees. The Company may utilize, in accordance with certain covenants, its DIP credit facility for continued investments in its foreign subsidiaries. The DIP credit facility in combination with internally generated funds is anticipated to be adequate to finance these investments and the Company's 1998 capital expenditures. See "Note 11 of Notes to Financial Statements." YEAR 2000 The "Year 2000 issue" is generally defined as the inability of computer hardware, software and embedded systems to properly recognize and process date-related information for dates after December 31, 1999. The Company began its efforts to address this problem as early as 1995. The Company's efforts generally are separated into three areas: (i) business information systems ("Business Systems"), (ii) non-information technology systems, including real estate facilities and manufacturing equipment ("Infrastructure Systems"), and (iii) vendors, suppliers, customers and third party information interfaces ("Third Party Dependencies"). The Company has established a formal "Y2K Project Office" to assess, manage and implement its Year 2000 activities. The Company has also established a formal "Y2K Steering Committee" to oversee the Company's Year 2000 efforts, including the efforts of the Project Office. The Company has also engaged Deloitte Consulting/ICS to assist with implementation of certain Year 2000 related Business Systems and the Gartner Group to assist with its Year 2000 efforts for Infrastructure Systems and Third Party Dependencies. The Company's State of Readiness Most of the Year 2000 issues arising with respect to the Business Systems of the Company are being addressed by replacement of the majority of those systems through implementation of SAP R/3 enterprise resource planning software. The SAP software was implemented and operating at the Company's corporate headquarters and in its U.S. baby diaper plants in early November of 1998 and is warranted to be Year 2000 compliant by its manufacturer. The Company currently anticipates that the November 1998 SAP implementation should help significantly minimize any Year 2000 related disruptions for approximately 80% of the Company's Business Systems at those locations. Overall, the Company expects that the November 1998 SAP implementation will address 60% of the Year 2000 exposures related to its Business Systems as a whole. The remaining systems are being addressed and are expected to be fully assessed, remediated or replaced, tested and implemented in a timely fashion. While there may be integration and process issues associated with implementation of the SAP system, the Company currently anticipates that the system will improve the Company's Business Systems and address the majority of the Business System Year 2000 problems. With respect to Business Systems that will not be addressed by the overall SAP implementation, the Company is investigating certain issues with certain of its desktop computer operating systems. While the remediation requirements are not clearly known at this time, it may be necessary to replace such workstations. If replacement of all possibly affected machines were necessary, the Company does not anticipate that such replacement would have a material adverse impact on the Company's financial position. Contingency planning, if necessary, for the Company's non-SAP related Business Systems will be developed prior to the end of the first quarter of 1999. The Company has engaged The Gartner Group to evaluate and analyze the Company's overall Year 2000 preparedness, concentrating specifically on the Company's Infrastructure Systems and Third Party Dependencies. The Company currently anticipates that it will receive The Gartner Group's formal report by the end of November 1998. The Company plans, if necessary, to initiate remediation/replacement procedures and testing and implementation of any remediated or replaced systems after issuance of the Gartner report. Contingency planning, if necessary, for Infrastructure Systems is currently scheduled to begin in the first quarter of 1999, but this may change depending on the contents of the Gartner report. The Company is in the process of evaluating its Infrastructure Systems for Year 2000 related problems. These systems include the manufacturing capacity for the Company's products and are therefore critical to the Company's ability to produce products and realize revenue from sales. The manufacturing capacity of the Company include any number of automated systems which may include embedded chips that are difficult to identify and remediate in the event of Year 2000 related problems. Security, heating and air conditioning and -22- 23 other commonly encountered real estate facilities and personal safety and security systems are also among the different types of systems included in the Company's assessment of its Infrastructure Systems. The Company is in the process of identifying and prioritizing its material Third Party Dependencies. Year 2000 problems with respect to certain material customers that prevented the taking or filling of orders for products or interfered with the collections process could have a material impact on the Company's revenues. Approximately 80% of the Company's orders for products are delivered via electronic data interchange facilities ("EDI"). The SAP implementation is designed to address Year 2000 related issues for Company systems required for these EDI exchanges, but the Company is not able to control the EDI facilities of its customers. The Company is in the process of surveying the EDI facilities of certain of its customers for Year 2000 preparedness. The Company is also in the process of preparing an inventory and assessment of those vendors, service providers and raw materials suppliers which may have a material impact on the Company in the event of Year 2000 problems. Currently, the Company anticipates that this inventory and assessment process will be substantially completed in the first quarter of 1999. The Company cannot predict how many of the vendors, service providers and raw materials suppliers will respond to the survey requests or the nature of their responses. The Company's current plan is to either resolve material Third Party Dependency issues known to it by the end of the first quarter of 1999 or develop a contingency plan to address problems with a particular Third Party Dependency, as necessary. Costs to Address the Company's Year 2000 Issues The total costs associated with required modifications to address Year 2000 related issues for the Company is expected to be material to the Company's financial position. The cost of the project through September 27, 1998 was $14.7 million, all of which was related to the SAP implementation. It is not possible to identify what portion of the total SAP cost is attributable to the Year 2000 remediation. The Company planned to implement an enterprise resource planning system for its Business Systems, regardless of Year 2000 issues with respect to its former Business Systems. The future cost of the Year 2000 project is estimated to be approximately $14 million. The Company is still in the process of assessing what, if any, additional costs may be required to remediate or replace its remaining Business Systems, its Infrastructure Systems or to address Third Party Dependencies. All of the costs are expected to be funded through operating cash flow and/or bank borrowings. Risks Presented by Year 2000 Issues The Year 2000 presents a number of risks and uncertainties that could affect the Company. These include, but are not limited to, failure of the SAP implementation to address a material issue with the Company's Business Systems, failure of the Company to identify and address material issues associated with non-SAP related Business Systems or with its Infrastructure Systems, failure or inability of customers to place orders for Year 2000 related reasons, failure of necessary raw materials manufacturers to deliver their products to the Company in a timely fashion and the inability of either the Company to collect its receivables or its customers to process payments for goods. In addition, any combination of the foregoing which would not in and of itself constitute a material adverse event may, in the aggregate, materially and adversely affect the Company's results of operations, liquidity and overall financial position. Moreover, problems in public utilities and infrastructure systems such as power supply, telecommunications, transportation and other possible disturbances related to the Year 2000 in the United States and abroad may have unexpected, material impacts on the Company's ability to do business in the normal course and therefore may also have a material adverse impact on the Company's results of operations and financial position. The Company currently anticipates that the SAP implementation and completion of the Year 2000 project as scheduled will reduce the incidence and severity of Year 2000 related disturbances in systems that are within the control of the Company. In addition, the Company currently anticipates that it will be able to address those Year 2000 issues for internal business processes not addressed by the SAP implementation which the Company anticipates may have a material impact on the Company or its results of operation. RISKS AND UNCERTAINTIES As a result of the adverse judgment in the P&G patent litigation, the Company was required to modify its current diaper design. Pursuant to an agreement with P&G, the Company had until July 6, 1998 to complete the conversion to a new diaper design. The Company completed its conversion to a new diaper design in accordance with the requirements of the conversion agreement with P&G. The Company has been advised by independent patent counsel that the new diaper design does not infringe any valid U.S. patent. The Company -23- 24 also paid P&G a royalty of approximately $4.5 million, which represents 2 percent of net sales of the previous diapers manufactured during the conversion period. This 2 percent royalty had a material adverse effect on the results of operations during the first three quarters of 1998. On September 22, 1998, P&G filed a motion in the Delaware District Court seeking to have the Court find Paragon in contempt of the injunction entered in the case on account of Paragon's manufacture and sale of its new, single-cuff diaper product. P&G asserts in its claim that Paragon's new diaper design (i) is no more than just colorably different from the design found to infringe the P&G patents at issue in the case and (ii) also infringes such patents. The Company has opposed P&G's motion. Based on the advice of counsel, the Company believes that P&G's motion is without merit and intends to vigorously contest it. If the motion was granted, however, the Company would be forced to discontinue the manufacture and sale of the new design. In addition, P&G has asked that the Court order the Company to send letters to all of its customers advising them that the continued resale by them of the new design would also constitute patent infringement. Consequently, the Company believes that if the motion was granted, it would have a material adverse effect on the Company's financial condition and results of operations and would seriously jeopardize the Company's future viability. See "PART II. OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS." The ability of the Company to effect a successful reorganization will depend, in significant part, upon the Company's ability to formulate a Plan of Reorganization that is approved by the Bankruptcy Court and meets the standards for plan confirmation under the Bankruptcy Code. In a Chapter 11 reorganization plan, the rights of the Company's creditors and shareholders may be altered. Investment in stock of the Company, therefore, should be regarded as highly speculative. As a result of the Chapter 11 filing, the Company will incur significant costs for professional fees as the reorganization plan is developed. The Company is also required to pay certain expenses of the Official Committee of Unsecured Creditors and the Committee of Equity Security Holders including professional fees, to the extent allowed by the Bankruptcy Court. The Company is unable to predict at this time when it will emerge from Chapter 11 protection. The Company faces risks and uncertainties raised by the Year 2000 Issue with respect to its Business Systems, Infrastructure System and Third Party Dependencies described above under "Year 2000 - Risks Presented by Year 2000 Issues" which could have a material adverse effect on the Company if not addressed. The Company is taking steps to address these Year 2000 Issues as outlined above. 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." 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: the Company's Chapter 11 filing; patent litigation; Year 2000 issues; increased raw material prices; new product and packaging introductions by competitors; increased price and promotion pressure from competitors; and new competitors in the market, are described in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, 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 Effective December 29, 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires the display of comprehensive income and its components in the financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. -24- 25 The Company has not determined the timing of or method of adoption of Statement 133. As the Company currently does not utilize derivatives, adoption of Statement 133 is not expected to have any impact on the financial statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Procter & Gamble Company v. Paragon Trade Brands, Inc. - P&G filed a claim in January 1994 in the District Court for the District of Delaware that the Company's "Ultra" disposable baby diaper products infringe two of P&G's inner-leg gather patents. The lawsuit sought injunctive relief, lost profit and royalty damages, treble damages and attorneys' fees and costs. The Company denied liability under the patents and counterclaimed for patent infringement and violation of antitrust laws by P&G. In March 1996, the District Court granted P&G's motion for summary judgment to dismiss the Company's antitrust counterclaim. The trial was completed in February 1997, the parties submitted post-trial briefs and closing arguments were conducted on October 22, 1997. Legal fees and costs for this litigation have been and will continue to be significant. On December 30, 1997, the Delaware District Court issued a Judgment and Opinion finding that P&G's patents are 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 District Court on June 2, 1998. At the same time, the District Court entered injunctive relief agreed upon by P&G and the Company. The Company had previously filed with the District Court a motion under Rule 59 for a new trial or to alter or amend the Judgment. The District Court denied Paragon's motion by order entered August 4, 1998. The District Court also denied a motion by P&G seeking to recover attorneys' fees it expended in defending itself against Paragon's patent infringement counterclaim. On August 4, 1998, the Company filed with the Federal Circuit Court of Appeals its amended notice of appeal, appealing of the Delaware District Court's December 30, 1997 Judgment, money judgment, injunction and denial of Paragon's Rule 59 motion. The appeal has now been fully briefed; argument has not yet been scheduled. On September 22, 1998, P&G filed a motion in the Delaware District Court seeking to have the Court find Paragon in contempt of the injunction entered in the case on account of Paragon's manufacture and sale of its new, single-cuff diaper product. P&G asserts in its claim that Paragon's new diaper design (i) is no more than just colorably different from the design found to infringe the P&G patents at issue in the case and (ii) also infringes such patents. The Company has opposed P&G's motion. Based on the advice of counsel, the Company believes that P&G's motion is without merit and intends to vigorously contest it. If the motion was granted, however, the Company would be forced to discontinue the manufacture and sale of the new design. In addition, P&G has asked that the Court order the Company to send letters to all of its customers advising them that the continued resale by them of the new design would also constitute patent infringement. Consequently, the Company believes that if the motion was granted it would have a material adverse effect on the Company's financial condition and results of operations and would seriously jeopardize the Company's future viability. The Judgment has 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. P&G has asserted alleged claims against the Company regarding similar patent claims on diaper products sold in other countries. The Company has reviewed such claims and believes them to be without merit. See "--In Re Paragon Trade Brands, Inc." below. The Company continues to pursue settlement of the P&G claim as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of such settlement will be subject to Bankruptcy Court approval. -25- 26 Kimberly-Clark Corporation v. Paragon Trade Brands, Inc. -- On October 26, 1995, 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 inner-leg gathers. The lawsuit seeks injunctive relief, royalty damages, treble damages and attorneys' fees and costs. The Company denied liability under the patents and counterclaimed for patent infringement and violation of antitrust laws by K-C. Several pre-trial motions were filed by each party, including a motion for summary judgment filed by K-C with respect to the Company's antitrust counterclaim and a motion for summary judgment filed by the Company on one of the patents asserted by K-C. In addition, K-C sued the Company on another patent issued to K-C which is based upon a further continuation of one of the K-C patents asserted in the case. That action was consolidated with the pending action. The Court appointed a special master to rule on the various pending motions. Legal fees and costs in connection with this litigation have been and will be significant. As a result of the Company's Chapter 11 filing, the proceedings in the K-C litigation have been stayed. The Bankruptcy Court issued an order on April 10, 1998 permitting, among other things, a partial lifting of the stay to allow the issuance of the special master's report on the items under his consideration. K-C filed with the Bankruptcy Court a motion for reconsideration of the Bankruptcy Court's April 10 order, which was denied on June 15, 1998. K-C has appealed this denial of reconsideration to the Federal District Court for the Northern District of Georgia. The Company objected to K-C's Appeal and has sought to have it dismissed. K-C has also filed a motion, now pending, with the District Court in Atlanta to withdraw the reference of its proof of claim from the jurisdiction of the Bankruptcy Court. On October 27, 1998, the District Court dismissed without prejudice the appeal, the withdrawal of the reference and the Company's motion to dismiss the appeal and instructed the parties to refile their respective pleadings in sixty days if the parties had not by then resolved their dispute. See "--In Re Paragon Trade Brands, Inc." below. On May 26, 1998, the special master issued his report on the majority of the motions pending before him. His report included a finding, among other things, that Paragon, as the successor-in-interest to the disposable diaper business of Pope & Talbot, Inc. ("Pope & Talbot"), has a fully paid-up license to one of the three asserted K-C inner-leg gather patents, which license runs from the date of the acquisition by the Company of Pope & Talbot. Pope & Talbot had previously obtained the license from K-C. The special master also found that K-C should be held to the narrow interpretation of its patent applied by Judge Dwyer in the Western District of Washington in earlier litigation between P&G and K-C on the patent. In addition, the special master also recommended that the Company's antitrust counterclaim and any discovery-related matters in connection therewith be dismissed. Effective September 1 1998, the K-C case was reassigned to Judge Lindsey, a newly-appointed judge on the Dallas Federal District Court bench. Judge Lindsey has asked the parties to report on the status of the case and the likelihood of settlement, and has indicated that he will set a trial date shortly if settlement does not appear likely. Should K-C prevail on its claims, award of all or a substantial portion of the relief requested by K-C could have a material adverse effect on the Company's financial condition and its results of operations. Based on the advice of patent counsel, the Company believes that the Company's products do not infringe any valid patent asserted by K-C. K-C filed alleged claims ranging from approximately $893 million (without trebling) to $2.3 billion (with trebling). The Company continues to believe that it does not infringe any valid claim of any K-C patent. The Company further believes that K-C's attempt to inflate its bankruptcy claims well beyond its claims in the Dallas District Court is inconsistent with law and procedure. See "--In Re Paragon Trade Brands, Inc.," below. The Company continues to pursue settlement of the K-C claim as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of such settlement will be subject to Bankruptcy Court approval. -26- 27 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 which found, in essence, two of P&G's diaper patents to be 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 adjudicated by the District Court at that time, the Company estimated that the damages were approximately $200 million. The amount of the damages award resulted in violation of certain covenants under the Company's bank loan agreements. As a result, the entry of the Judgment and the uncertainty it created caused an immediate and critical liquidity issue for the Company which necessitated the Chapter 11 filing. Subsequently, damages of approximately $178.4 million were entered against Paragon by the District Court on May 28, 1998. At the same time, the 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 and affords the Company the opportunity to resolve liquidated and unliquidated claims against the Company which arose prior to the Chapter 11 filing, thereby protecting all stakeholders' interests. The Company is currently operating as a debtor in possession under the Bankruptcy Code. The bar date for the filing of proofs of claim (apparently excluding administrative claims) by creditors was June 5, 1998. P&G filed alleged claims ranging from approximately $2.3 billion (without trebling) to $6.4 billion (with trebling), which included a claim of $178.4 million for the Delaware judgment. See "--The Procter & Gamble Company v. Paragon Trade Brands, Inc.," above. The remaining claims include claims for alleged patent infringement by the Company in foreign countries where it has operations. The Company has reviewed such additional claims and believes them to be without merit. K-C filed alleged claims ranging from approximately $893 million (without trebling) to $2.3 billion (with trebling), including claims related to the litigation in the Dallas District Court described above. See "--Kimberly-Clark Corporation v. Paragon Trade Brands, Inc.," above. K-C's claims in the Bankruptcy case include an attempt to recover alleged lost profits for infringement of the patents asserted in the Dallas District Court, despite the fact that a lost profits theory of damages was not pursued by K-C in the Dallas District Court. The Company continues to believe that it does not infringe any valid claim of the asserted K-C patents. The Company further believes that K-C's attempt to inflate its bankruptcy claims well beyond its claims in the Dallas District Court is inconsistent with applicable law and procedure. On October 19, 1998, the Company, P&G, K-C and the Creditors' Committee stipulated to an extension of the Company's exclusivity period to November 18, 1998 and for an additional thirty (30) days to December 18, 1998 unless any of the parties files an objection to such additional extension by November 12, 1998. On November 2, 1998, the U.S. Trustee appointed a Committee of Equity Security Holders in the Company's Chapter 11 case. The Company continues to pursue settlement of the K-C and P&G claims as an alternative to litigation. As of early November, the Company believes considerable progress has been made. If settlement is reached, the terms of each such settlement will be subject to Bankruptcy Court approval. On January 30, 1998, the Company received Bankruptcy Court approval of a $75 million financing facility with The Chase Manhattan Bank. This facility supplements the Company's cash on hand and operating cash flow and permits the Company to continue to operate its business in the ordinary course. Legal fees and costs in connection with the Chapter 11 filing will be significant. See "Note 11 of the Notes to Financial Statements." The Company is unable to predict at this time when it will emerge from Chapter 11 protection. Other -- The Company is also a party to other legal activities generally incidental to its activities. Although the final outcome of any legal proceeding or dispute is subject to a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate liability resulting from any or all legal proceedings or disputes to which it is a party, except for the Chapter 11 filing and the P&G and K-C matters discussed above, will not have a material adverse effect on its financial condition or results of operations. -27- 28 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. See "Note 11 of Notes to Financial Statements." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4) Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5) Exhibit 4.1 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(1) Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson and Johnson, as amended(1) Exhibit 10.6 Critical Supply Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of October 22, 1997(9) Exhibit 10.7* Stock Option Plan for Non-Employee Directors(1) Exhibit 10.8* Annual Incentive Compensation Plan(1) Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan(1) Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron
-28- 29 Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick) Jezzi Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain Exhibit 10.15* Employment Agreement, dated as of August 11 1998, between Paragon and Catherine O. Hasbrouck Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins Exhibit 10.17* 1995 Incentive Compensation Plan(5) Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7) Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement, dated as of February 6, 1996(8) Exhibit 10.20 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc., a Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower Named Herein, as Guarantors, the Banks Party hereto, and Chase Manhattan Bank, as Agent, dated as of January 7, 1998, as Amended (Conformed to Reflect the First Amendment to the Revolving Credit and Guaranty Agreement dated as of January 30, 1998, the Third Amendment to the Revolving Credit and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment to Revolving Credit and Guaranty Agreement dated as of April 15, 1998)(10) Exhibit 10.21 Security and Pledge Agreement, dated as of January 7, 1998(10) Exhibit 10.22 Revolving Canadian Credit Facility and Parent Guarantee(2) Exhibit 10.23 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(1) Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical Bank, as Rights Agent(3) Exhibit 10.25 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. (6) Exhibit 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(11) Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 11 Computation of Per Share Earnings (See Note 9 to Financial Statements) Exhibit 27 Financial Data Schedule (for SEC use only)
29 30 (b) No reports on Form 8-K were filed during the quarter ended September 27, 1998. - -------------------------- *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, 1993. (2) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 26, 1994. (3) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of December 14, 1994. (4) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 25, 1994. (5) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 25, 1995. (6) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996. (7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (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 From 10-K for the fiscal year ended December 28, 1997. (10)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 29, 1998. (11)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 1998. -30- 31 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAGON TRADE BRANDS, INC. By /s/ Alan J. Cyron ------------------------ Alan J. Cyron Chief Financial Officer November 12, 1998 -31- 32 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- Exhibit 3.1 Certificate of Incorporation of Paragon Trade Brands, Inc.(4) Exhibit 3.2 By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5) Exhibit 4.1 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(1) Exhibit 10.2 Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.3 License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.4 Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.5 Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson and Johnson, as amended(1) Exhibit 10.6 Critical Supply Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1) Exhibit 10.6.1 Letter Supply Agreement between Weyerhaeuser and Paragon dated as of October 22, 1997(9) Exhibit 10.7* Stock Option Plan for Non-Employee Directors(1) Exhibit 10.8* Annual Incentive Compensation Plan(1) Exhibit 10.9* 1993 Long-Term Incentive Compensation Plan(1) Exhibit 10.10* Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham Exhibit 10.11* Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole Exhibit 10.12* Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron Exhibit 10.13* Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick) Jezzi Exhibit 10.14* Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain Exhibit 10.15* Employment Agreement, dated as of August 11 1998, between Paragon and Catherine O. Hasbrouck
-32- 33 Exhibit 10.16* Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins Exhibit 10.17* 1995 Incentive Compensation Plan(5) Exhibit 10.18* Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary Plan Description Exhibit 10.19 Amended and Restated Credit Agreement, dated as of February 6, 1996(7) Exhibit 10.19.1 Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement, dated as of February 6, 1996(8) Exhibit 10.20 Revolving Credit and Guaranty Agreement Among Paragon Trade Brands, Inc., a Debtor-in-Possession, as Borrower, the Subsidiaries of the Borrower Named Herein, as Guarantors, the Banks Party hereto, and Chase Manhattan Bank, as Agent, dated as of January 7, 1998, as Amended (Conformed to Reflect the First Amendment to the Revolving Credit and Guaranty Agreement dated as of January 30, 1998, the Third Amendment to the Revolving Credit and Guaranty Agreement dated as of March 23, 1998, and the Third Amendment to Revolving Credit and Guaranty Agreement dated as of April 15, 1998)(10) Exhibit 10.21 Security and Pledge Agreement, dated as of January 7, 1998(10) Exhibit 10.22 Revolving Canadian Credit Facility and Parent Guarantee(2) Exhibit 10.23 Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts(1) Exhibit 10.24 Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical Bank, as Rights Agent(3) Exhibit 10.25 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.(6) Exhibit 10.26** Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and Paragon Trade Brands, Inc.(7) Exhibit 10.26.1** Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade Brands, Inc.(11) Exhibit 10.27 Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc., dated as of October 1, 1996(8) Exhibit 11 Computation of Per Share Earnings (See Note 9 to Financial Statements) Exhibit 27 Financial Data Schedule (for SEC use only)
- -------------------------- *Management contract or compensatory plan or arrangement. **Confidential treatment has been requested as to a portion of this document. -33- 34 (1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 26, 1993. (2) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 26, 1994. (3) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of December 14, 1994. (4) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 25, 1994. (5) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 25, 1995. (6) Incorporated by reference from Paragon Trade Brands, Inc.'s Current Report on Form 8-K, dated as of February 8, 1996. (7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (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 From 10-K for the fiscal year ended December 28, 1997. (10)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 29, 1998. (11)Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 1998. -34- EX-10.10 2 EMPLOYMENT AGREEMENT - BOBBY V ABRAHAM 1 EXHIBIT 10.10 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT Chief Executive Officer This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and Bobby V. Abraham ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Chief Executive Officer of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a)faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the Chief Executive Officer of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the Chief Executive Officer of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 2 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b) Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. 2 3 (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or 3 4 (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 4 5 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b) If to Employee: Bobby V. Abraham 435 River Glen Trace Atlanta, GA 30328 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ CATHERINE O. HASBROUCK By: /S/ ALAN J. CYRON - -------------------------- ---------------------- BOBBY V. ABRAHAM /S/ BOBBY V. ABRAHAM -------------------- Bobby V. Abraham 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ CATHERINE O. HASBROUCK /S/ BOBBY V. ABRAHAM - -------------------------- -------------------- Witness Bobby V. Abraham PARAGON TRADE BRANDS, INC. Accepted: 8/25/98 By /S/ ALAN J. CYRON ------- -------------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.11 3 EMPLOYMENT AGREEMENT - DAVID W COLE 1 EXHIBIT 10.11 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT President, Sales and Marketing This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and David W. Cole ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as President, Sales and Marketing of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a) faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the President, Sales and Marketing of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the President, Sales and Marketing of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: 2 (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b) Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) 2 3 above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. 3 4 Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 4 5 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b) If to Employee: David W. Cole 1152 Brookgate Way Atlanta, GA 30319 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ MELANIE Y. ZELLER By: /S/ ALAN J. CYRON - --------------------- ---------------------- DAVID W. COLE /S/ DAVID W. COLE ----------------- David W. Cole 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ MELANIE Y. ZELLER /S/ DAVID W. COLE - --------------------- ----------------- Witness David W. Cole PARAGON TRADE BRANDS, INC. Accepted: 8/11/98 By /S/ ALAN J. CYRON ------- -------------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.12 4 EMPLOYMENT AGREEMENT - ALAN CYRON 1 EXHIBIT 10.12 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT Executive Vice President and Chief Financial Officer This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and Alan J. Cyron ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Executive Vice President and Chief Financial Officer of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a) faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the Executive Vice President and Chief Financial Officer of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the Executive Vice President and Chief Financial Officer of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: 2 (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b) Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) 2 3 above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. 3 4 Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 4 5 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b) If to Employee: Alan J. Cyron 4770 Paran Valley NW Atlanta, GA 30327 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ MELANIE Y. ZELLER By: /S/ DAVID W. COLE - --------------------- ---------------------- ALAN J. CYRON /S/ ALAN J. CYRON ----------------- Alan J. Cyron 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ MELANIE Y. ZELLER /S/ ALAN J. CYRON - --------------------- ----------------- Witness Alan J. Cyron PARAGON TRADE BRANDS, INC. Accepted: 8/11/98 By /S/ DAVID W. COLE ------- -------------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.13 5 EMPLOYMENT AGREEMENT - ARRIGO D (RICK) JEZZI 1 EXHIBIT 10.13 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT Executive Vice President - Operations, Technology and International This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and Arrigo D. Jezzi ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Executive Vice President-Operations, Technology and International of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a) faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the Executive Vice President - Operations, Technology and International of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the Executive Vice President - Operations, Technology and International of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 2 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b) Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. 2 3 (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or 3 4 (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its 4 5 and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b) If to Employee: Arrigo D. Jezzi 28 Avery Drive NE Atlanta, GA 30309 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ MELANIE Y. ZELLER By: ALAN J. CYRON - --------------------- ------------------ ARRIGO D. JEZZI /S/ A.D. JEZZI -------------- Arrigo D. Jezzi 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ MELANIE Y. ZELLER /S/ A.D. JEZZI - --------------------- -------------- Witness Arrigo D. Jezzi PARAGON TRADE BRANDS, INC. Accepted: 8/11/98 By /S/ ALAN J. CYRON ------- ----------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.14 6 EMPLOYMENT AGREEMENT - ROBERT E MCCLAIN 1 EXHIBIT 10.14 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT Executive Vice President - Sales and Marketing This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and Robert E. McClain ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Executive Vice President - Sales and Marketing of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a) faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the Executive Vice President - Sales and Marketing of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the Executive Vice President-Sales and Marketing of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 2 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b)Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. 2 3 (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or 3 4 (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its 4 5 and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b)If to Employee: Robert E. McClain 196 North Salem Road Cross River, NY 10518 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ MELANIE Y. ZELLER By: /S/ DAVID W. COLE - --------------------- ---------------------- Robert E. McClain /S/ ROBERT E. MCCLAIN --------------------- Robert E. McClain 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ MELANIE Y. ZELLER /S/ ROBERT E. MCCLAIN - --------------------- --------------------- Witness Robert E. McClain PARAGON TRADE BRANDS, INC. Accepted: 8/11/98 By /S/ DAVID W. COLE ------- -------------------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.15 7 EMPLOYMENT AGREEMENT - CATHERINE O HASBROUCK 1 EXHIBIT 10.15 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT Vice President, General Counsel and Secretary This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and Catherine O. Hasbrouck ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Vice President, General Counsel and Secretary of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a) faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the Vice President, General Counsel and Secretary of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the Vice President, General Counsel and Secretary of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 2 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b)Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. 2 3 (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or 3 4 (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its 4 5 and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b)If to Employee: Catherine O. Hasbrouck 1876 Durand Mill Drive Atlanta, GA 30307 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ MELANIE Y. ZELLER By: /S/ DAVID W. COLE - --------------------- ---------------------- CATHERINE O. HASBROUCK /S/ CATHERINE O. HASBROUCK -------------------------- Catherine O. Hasbrouck 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ MELANIE Y. ZELLER /S/ CATHERINE O. HASBROUCK - --------------------- -------------------------- Witness Catherine O. Hasbrouck PARAGON TRADE BRANDS, INC. Accepted: 8/11/98 By /S/ DAVID W. COLE ------- -------------------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.16 8 EMPLOYMENT AGREEMENT-KEVIN P HIGGINS 1 EXHIBIT 10.16 PARAGON TRADE BRANDS, INC. EMPLOYMENT AGREEMENT Vice President - Treasurer This Agreement is made as of the 11th day of August, 1998, by and between Paragon Trade Brands, Inc., a Delaware corporation (the "Company"), and Kevin P. Higgins ("Employee"). WITNESSETH: WHEREAS, the Company and the Employee have previously entered into an employment relationship with the other; and whereas, the Company has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code that requires certain changes in that relationship; and whereas, the Company and the Employee each deem it necessary and desirable, for their mutual protection, to execute a written document setting forth the terms and conditions of their relationship; NOW, THEREFORE, in consideration of continued employment of Employee by the Company, of the premises and mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Vice President Treasurer of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. Except as otherwise noted in this Agreement, the term of this Agreement shall commence on the Effective Date and shall expire on the date which the Employee's employment by the Company terminates. For purposes of this Agreement, the term "Effective Date" means the later of the date first written above or the date this Agreement or its terms receive approval, if necessary, by the Bankruptcy Court. 3. DUTIES. Employee will, during the term hereof: (a) faithfully, diligently and capably do and perform all such acts and duties, and furnish such services as are customary for the Vice President - Treasurer of a publicly held company, and do and perform all related acts in the ordinary course of the Company's business (subject to such limitations as the Board of Directors of the Company may prescribe) necessary and conducive to the Company's best interests; (b) devote such time, energy and skill to the business of the Company and to the promotion of the Company's best interests as is reasonably required of an individual whose employment as the Vice President - Treasurer of the Company is the individual's principal occupation and employment; and (c) comply with any and all Company announced policies and procedures governing conduct in the workplace. 2 4. COMPENSATION. (a) The Company shall compensate Employee for all services to be performed by Employee during the term of this Agreement as follows: (i) pay salary at a salary rate to be determined annually by the compensation committee of the board of directors of the Company ("Base Salary") in periodic installments in accordance with Company practices for other executive employees, but no less than the Base Salary paid to Employee upon the Effective Date of this Agreement; and (ii) provide such additional or special compensation as the board of directors of the Company shall approve after receipt of recommendations from the compensation committee of the board of directors, it being understood by Employee that Employee's compensation by the Company shall be only such compensation as shall have been approved by the board of directors of the Company; and (iii) subject to the approval of the Bankruptcy Court, Employee shall be eligible to participate in the Confirmation Retention Plan for Top Eight Executives of the Company (the "Confirmation Retention Plan"). A copy of the Confirmation Retention Plan is attached to this Agreement as Schedule B. (iv) Employee shall be eligible to participate in the 1998 Bonus Plan that is available to other salaried employees of the Company. (b)Employee shall be entitled to participate in such life insurance, medical, dental, pension, retirement and other benefits plans as are made available from time to time by the Company for the benefit of its salaried employees generally. 5. TERMINATION OF EMPLOYMENT. (a) For purposes of this Agreement: (i) Employee's employment by the Company shall terminate (A) by reason of Employee's death, voluntary resignation, retirement or disability (as the terms "retirement" and "disability" are defined in Article 1 of the Paragon Trade Brands, Inc. Deferred Compensation Plan adopted effective April 1, 1997), or (B) at the request of the Company's board of directors ("Board Requested Termination"); or (C) for cause; and (ii) "cause" shall be deemed to exist if (a) Employee engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) Employee engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the Employee because of such act; (c) Employee breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of this Employment Agreement; or (d) Employee is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this subparagraph, "Board" shall mean the Board excluding any members of the Board who are parties to this same form of Employment Agreement with the Company. 2 3 (b) If Employee's employment with the Company is terminated by reason of Employee's death, retirement or disability, the Company's obligations hereunder shall be satisfied by providing the benefits to which a beneficiary is entitled under the plans described in paragraphs 4(a)(iv) and 4(b) above, and to the compensation and benefits under the plan described in paragraph 4(a)(iii) above if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. If a termination by reason of death, retirement, or disability occurs more than three (3) months before the confirmation of a plan of reorganization, the Board of Directors of the Company shall, in its discretion, award Employee a PRO RATA share of the compensation and benefits described in paragraph 4(a)(iii) above, in addition to the full benefits described in paragraphs 4(a)(iv) and 4(b) above. (c) If Employee's employment with the Company is terminated for cause or by Employee's voluntary resignation, all obligations of the Company under this Agreement shall terminate with such termination of employment, and Employee shall not be entitled to any compensation under this Agreement except for: (i) compensation fully earned and unpaid, and vested benefits under stock options and restricted stock granted Employee as of the date of termination of employment, and vested company contributions under the Paragon Retirement Incentive Savings Management Plan ("PRISM"); and (ii) severance pay, Confirmation Bonus, and benefits to the extent available under the Confirmation Retention Plan. 6. RESTRICTIVE COVENANT. During Employee's employment with the Company, and for a period of two (2) years following termination of Employee's employment with the Company for any reason, as long as the Company meets its obligations under this Agreement, Employee shall not, (a) directly or indirectly be employed or retained by, serve as an officer or director of, act as a consultant or advisor to, engage in, or be financially interested in, any person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship that competes, directly or indirectly, with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (b) assist financially or in any other manner, directly or through any other person or persons, firm, association, venture, entity, partnership, corporation or sole proprietorship, whether as a partner, shareholder in excess of 5% of the issued and outstanding shares, agent, owner, advisor or material financial backer, any person or entity to enter into, develop, or carry on any business that competes with the Company, or any business of the Company, to the extent the Company is operating or planning to operate its business at the time of termination of his employment; or (c) recruit or hire, or attempt to recruit or hire, directly or indirectly, any person who is employed by the Company at the time of termination of Employee's employment; or (d) directly or indirectly, orally or in writing, disparage the Company, its products or employees in any way, or interfere to the detriment of the Company with any existing business relationship of the Company and any of its employees, customers, agents or representatives; or 3 4 (e) directly or indirectly divert or attempt to divert from the Company any business in which the Company is engaged. Any breach of this restrictive covenant by Employee shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee agrees to enter into a confidentiality agreement, in the form attached as Schedule A (the "Confidentiality Agreement"), concurrently with execution of this Agreement. (b) Any breach by Employee of the Confidentiality Agreement shall effect a forfeiture of Employee's rights hereunder and terminate the Company's obligations under this Agreement and the Confirmation Retention Plan, and Employee shall not be entitled to any compensation contemplated by this Agreement or the Confirmation Retention Plan, whether or not earned or vested as of the date of termination of the Company's obligations under this Agreement. 8. ADDITIONAL REMEDIES. Employee recognizes that irreparable injury will result to the Company and to its business and properties in the event of any breach by Employee of any of the provisions of Sections 6 and 7 or the Confidentiality Agreement and that Employee's continued employment is predicated on the covenants made by him pursuant thereto. In the event of any breach by Employee of his obligations under Sections 6 and 7 or the Confidentiality Agreement, the Company shall be entitled, in addition to any other remedies and damages available, to injunctive relief to restrain any such breach by Employee or by any person or persons acting for or with Employee in any capacity whatsoever. 9. NONASSIGNMENT. This Agreement is personal to Employee and shall not be assigned by Employee. Employee shall not hypothecate, delegate, encumber, alienate, transfer or otherwise dispose of Employee's rights and duties hereunder. This Agreement shall not be assigned by the Company without the prior written consent of Employee. 10. WAIVER. The waiver by a party of a breach by the other party of any provision of this Agreement shall not be construed as a waiver by such party of any subsequent breach by the other party. 11. SEVERABILITY. If any clause, phrase, provision or portion of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of this Agreement and shall not affect the application of any clause, provision or portion hereof to other persons or circumstances. 12. BENEFIT. The provisions of this Agreement shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon the Company and Employee, its 4 5 and Employee's respective heirs, personal representatives, successors, and assigns, including without limitation Employee's estate and the executors, administrators, or trustees of such estate. 13. RELEVANT LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. 14. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or facsimile transmission, or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee: (a) If to the Company: Paragon Trade Brands, Inc. Attn: Corporate Secretary 180 Technology Parkway Norcross, Georgia 30092 Facsimile: (678) 969-4959 (b) If to Employee: Kevin P. Higgins 3784 Vermont Road Atlanta, GA 30319 15. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements, arrangements, and communications, whether oral or written, pertaining to the subject matter hereof, and this Agreement shall not be modified or amended except by written agreement of the Company and Employee. Without limiting the foregoing, this Agreement supersedes any prior Employment Agreement Employee had with the Company, and all such agreements are hereby null and void. Employee acknowledges that he is not eligible to participate in any bonus plans, incentive compensation, or severance pay plans unless expressly specified in this Agreement. 16. BANKRUPTCY COURT APPROVAL. This Agreement will not be effective until the Agreement or a form of its terms have been approved by the Bankruptcy Court having jurisdiction over the Company's petition for reorganization. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. PARAGON TRADE BRANDS, INC. Attest: /S/ MELANIE Y. ZELLER By: /S/ DAVID W. COLE - --------------------- ---------------------- KEVIN P. HIGGINS /S/ KEVIN P. HIGGINS -------------------- Kevin P. Higgins 6 7 Schedule A PARAGON TRADE BRANDS, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT In consideration of the compensation paid to me by my employer (my employer can be Paragon Trade Brands, Inc. or any of its majority owned subsidiaries) and my continued employment as an employee in a position where my duties include the possession of or access to my employees trade secrets*, I hereby agree on behalf of myself, my executors, legal representatives, and assigns that: 1. I will not at any time, either during or after my employment by my employer, disclose to those not confidentially bound to my employer, or use for their or my own benefit, any of my employees trade secrets without written consent from my employer. 2. I will upon termination of my employment with my employer or upon prior request, deliver to my employer any and all objects, materials, devices, or substances including any writing, recording, drawing, sample, specimen, prototype model, photography, blueprint or map which describes, depicts, contains, constitutes, reflects or records my employer's trade secrets, and all copies thereof in my possession; and 3. I consent to my employer's notification to any future employer that I may have of the existence of this agreement. /S/ MELANIE Y. ZELLER /S/ KEVIN P. HIGGINS - --------------------- -------------------- Witness Kevin P. Higgins PARAGON TRADE BRANDS, INC. Accepted: 8/11/98 By /S/ DAVID W. COLE ------- -------------------- (Date) *"Trade Secret" means the whole or any portion or phase of any scientific or technical or business information, design, process, procedure, formula or improvement, any future plans, customer lists, market studies, cost and price studies, or similar business information which is secret and of value. A "trade secret" shall be presumed to be secret when the employer takes measures to prevent it from becoming available to persons other than those selected by the employer to have access thereto for limited purposes. It shall be presumed to be of value if money has been spent in its development, if it gives the employer an opportunity to obtain an advantage over competitors who do not know or use it, or if it is salable. EX-10.18 9 CONFIRMATION RETENTION PLAN 1 EXHIBIT 10.18 PARAGON TRADE BRANDS, INC. CONFIRMATION RETENTION PLAN FOR TOP EIGHT EXECUTIVES AND SUMMARY PLAN DESCRIPTION WHEREAS, Paragon Trade Brands, Inc. (the "Company") has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code; and WHEREAS, the continued employment of executives of a company attempting to reorganize under Chapter 11 can be uncertain and unsettling; and WHEREAS, the Board of Directors of the Company has determined that it is essential and in the best interest of the Company, its creditors, and its shareholders to retain the services of certain executive employees of the Company and to ensure their continued dedication and efforts without undue concern for their personal financial and employment security; and WHEREAS, the Board of Directors of the Company has determined that it is in the best interest of the Company, its creditors, and its shareholders to provide additional financial incentive for certain executives of the Company to work toward and achieve a successful reorganization of the Company, and that a successful reorganization will only be achieved with substantial effort and time spent by certain executives of the Company; NOW, THEREFORE, in order to fulfill the above purposes, the following Confirmation Retention Plan has been developed and is hereby adopted. I. ESTABLISHMENT OF PLAN As of the Effective Date, the Company hereby establishes a plan to provide compensation to its top eight executives upon a successful reorganization and severance pay upon the loss of employment, known as the Confirmation Retention Plan for Top Eight Executives (the "Confirmation Retention Plan") as set forth in this document. This document shall also be the Summary Plan Description of the Confirmation Retention Plan. II. DEFINITIONS As used herein, the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise. 2.1 BOARD. The Board of Directors of Paragon Trade Brands, Inc. or its legal successor. 2.2 BASE SALARY. The amount Executive is entitled to receive as salary on an annualized basis, excluding any incentive compensation, bonuses, or other benefits. In any calculation in this Plan in which Base Salary is used, the Base Salary shall be that of the Executive as of the date of calculation or as of the Effective Date, whichever is greater. 2 2.3 BANKRUPTCY COURT. The United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division or such other Court as shall take jurisdiction over the Company's petition for reorganization. 2.4 BOARD REQUESTED TERMINATION. An involuntary termination of employment of an Executive at the determination of the Board when Cause does not exist. 2.5 CONFIRMATION BONUS FUNDS. The Confirmation Bonus Funds shall be determined individually for each Executive eligible to participate in this Confirmation Retention Plan. For each Executive, the Confirmation Bonus Funds shall be determined pursuant to the following formula: a. The Executive's Base Salary shall be added to any amounts for which the Executive qualified under the Company's 1998 Bonus Plan, after consideration of Company performance in meeting the 1998 Bonus criteria, but before consideration of individual Executive performance for the 1998 Bonus Plan. This sum shall be called the "Earned Confirmation Bonus." b. The Earned Confirmation Bonus shall be subject to enhancement based on the date the Bankruptcy Court confirms a plan of reorganization for the Company. The target date for such plan of reorganization is May 15, 1999. If a plan of reorganization is confirmed on or before May 15, 1999, the Earned Confirmation Bonus shall multiplied by a factor of 1.25. For each full month prior to May 15, 1999 that a plan of reorganization is confirmed by the Bankruptcy Court, the enhancement shall be increased by Ten Percent (10%), as shown below: 2 3
---------------------------- --------------------------- DATE OF CONFIRMATION OF MULTIPLYING FACTOR FOR PLAN OF REORGANIZATION EARNED CONFIRMATION BONUS ---------------------------- --------------------------- March 16, 1999 through 1.35 April 15, 1999 ---------------------------- --------------------------- February 16, 1999 through 1.45 March 15, 1999 ---------------------------- --------------------------- January 16, 1999 through 1.55 February 15, 1999 ---------------------------- --------------------------- December 15, 1998 1.65 through January 15 1999 ---------------------------- --------------------------- November 16, 1998 1.75 through December 15, 1998 ---------------------------- --------------------------- October 16, 1998 through 1.85 November 15, 1998 ---------------------------- --------------------------- September 16, 1998 1.95 through October 15, 1998 ---------------------------- --------------------------- August 16, 1998 through 2.05 September 15, 1998
c. If a plan of reorganization is confirmed by the Bankruptcy Court after May 15, 1999, the Earned Confirmation Bonus shall be multiplied by the following factors:
---------------------------- --------------------------- DATE OF CONFIRMATION OF MULTIPLYING FACTOR FOR PLAN OF REORGANIZATION EARNED CONFIRMATION BONUS ---------------------------- --------------------------- May 16, 1999 through June 1.15 15, 1999 ---------------------------- --------------------------- June 16, 1999 through July 1.05 15, 1999 ---------------------------- --------------------------- On or after July 16, 1999 1.0
3 4 d. After application of the multiplying factor, the bonus funds shall be called the "Confirmation Bonus." 2.6 CAUSE. With respect to termination of an Executive's employment, "Cause" shall exist if (a) the Executive engages in an act of dishonesty or fraud in connection with rendering services to the Company; (b) the Executive engages in an act constituting willful misconduct or gross negligence and the Board, by two thirds (2/3) vote, terminates the employment of the Executive because of such act; (c) the Executive breaches a material obligation contained in Section 6 (Restrictive Covenant) or Section 7 (Nondisclosure of Confidential Information) of the Executive's Employment Agreement, or (d) the Executive is convicted of a criminal act that the Board, by two thirds (2/3) vote, determines constitutes Cause. As used in this paragraph, "Board" shall mean the Board excluding any members of the Board who are participants in this Confirmation Retention Plan. 2.7 COMPANY. Paragon Trade Brands, Inc. or its legal successor. 2.8 EFFECTIVE DATE. The adoption of this Plan by a majority of the Board or the approval of this Confirmation Retention Plan by the Bankruptcy Court, whichever is later. 2.9 EXECUTIVE(S). The Executives participating in this Confirmation Retention Plan are: Bobby Abraham Chief Executive Officer Dave Cole President, Sales and Marketing Alan Cyron Executive Vice President and Chief Financial Officer Rick Jezzi Executive Vice President -- Operations, Technology and International Bob McClain Executive Vice President -- Sales and Marketing Catherine Hasbrouck Vice President, General Counsel and Secretary Kevin Higgins Vice President -- Treasurer In addition, this Confirmation Retention Plan shall include a Chief Operating Officer to be subsequently hired and designated by the Board. 2.10 PERMANENT DISABILITY. An Executive shall be deemed to have become permanently disabled for purposes of this Confirmation Retention Plan if the Board finds, upon the basis of medical evidence reasonably satisfactory to it, that the Executive is totally disabled, whether due to physical or mental condition, so as to be prevented from 4 5 engaging in further employment by the Company and that such disability will be permanent and continuous during the remainder of the Executive's life. 2.11 TARGET BONUS. As used herein, for each Executive, a sum equal to the following percentage of the Executive's Base Salary: Bobby Abraham: 60% Chief Operating Officer: 50% Dave Cole: 50% Alan Cyron: 50% Rick Jezzi: 50% Bob McClain: 50% Catherine Hasbrouck: 40% Kevin Higgins: 40% 2.12 RESIGNATION FOR GOOD REASON. A Resignation for Good Reason shall occur when the Executive resigns from employment after the occurrence of any of the following: a. a change in the Executive's status, title, position or responsibilities (including reporting responsi- bilities) which, in the Executive's reasonable judgment, represents a substantial reduction of the status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with the Executive's Employment Agreement; or any action by the Company initiating removal of the Executive from or failure to reappoint or reelect him to positions the Executive occupies, except in connection with the termination of his employment for Cause, Permanent Disability, as a result of the Executive's Death, or as the result of a Board Requested Termination: b. a reduction in the Executive's Base Salary; c. the Company's requiring the Executive (without the Executive's consent) to be based at any place outside a thirty-five (35) mile radius of the Executive's current place of employment, excluding any reasonably required travel on the Company's business; 5 6 d. the failure of the Company to (A) continue in effect any material compensation or benefit plan in which the Executive is participating as of the time of the adoption of this Plan (except for any changes to or termination of this Plan as provided herein); or (B) provide the Executive with compensation and benefits at least equal (in terms of benefit levels and reward opportunities) to those provided for under each employee benefit plan, program and practice in effect as of the time of the adoption of this Plan (except for any changes to or termination of this Plan as provided herein); e. any material breach by the Company of this Plan; f. any purported termination of the Executive's employment for Cause for which Cause does not exist. III. CONFIRMATION BONUS BENEFITS 3.1 PARTICIPATION. Each of the Executives shall be entitled to participate in the Confirmation Bonus portion of this Confirmation Retention Plan. 3.2 PAYMENT OF THE CONFIRMATION BONUS. The Company shall be obligated to pay the Confirmation Bonus to the Executives upon confirmation of a reorganization plan by the Bankruptcy Court. In order to receive any Confirmation Bonus, the Executive (i) must be an active employee of the Company on the date of the confirmation of a reorganization plan by the Bankruptcy Court; and (ii) must not have been terminated for Cause or have voluntarily resigned from employment on or before the date such Confirmation Bonus is paid. Notwithstanding the foregoing, if an Executive's employment with the Company is terminated by reason of death, retirement, or disability, as described in paragraph 5(b) of the Executive's Employment Agreement, or if the Executive is terminated by the Company for other than Cause, the Executive shall receive the Confirmation Bonus if such termination occurs no earlier than three (3) months before the confirmation of a plan of reorganization. Further, if the Executive's employment is terminated by reason of death, disability, or retirement, or if the Executive is terminated by the Company for other than Cause, more than three (3) months before the confirmation of a plan of reorganization, the Board shall award Executive, in its discretion, A pro rata share of the Confirmation Bonus. The minimum aggregate Confirmation Bonus of Two Million Dollars ($2,000,000.00) shall be immediately paid in cash upon the consummation of the plan of reorganization. If the aggregate of all the Executives' Confirmation Bonuses exceeds Two Million Dollars ($2,000,000.00), the Board shall pay any or all of the aggregate amount in excess of Two Million Dollars ($2,000,000.00) in common stock in the Company, unless the Board determines, in its complete discretion, that it is fair and prudent to pay such amount in cash and elects to pay such amount in cash. The Board must make such election within ten (10) days following the consummation of the plan of 6 7 reorganization, and shall thereafter distribute the remaining portions of the Confirmation Bonuses, in cash or stock, within twenty (20) days after the consummation of the plan of reorganization. The plan of reorganization shall provide for the authorization of the shares which may be issued under this clause and provide for the escrowing of cash sufficient to pay the Confirmation Bonus if the Board chose, in its discretion, to pay such amount in cash. If any portions of the Confirmation Bonuses are paid in stock: a. Such stock shall immediately vest in the Executive, and shall be subject to the least restrictive limitations and restrictions on transfer, if any, that are imposed on stock issued pursuant to the confirmed plan of reorganization; b. The stock will be distributed among the Executives in proportion to the amounts of their Confirmation Bonuses, so that each Executive receives an equal proportion of cash and stock; and c. The Company shall provide a loan program to assist recipients of the restricted stock with tax liabilities arising from the vesting of the shares. Any such loans shall be secured only by the shares issued, and shall be for a term of at least twelve months. The remaining terms and conditions of such loan program shall be within the reasonable discre- tion of the Board, and shall require repayment on a pro rata basis upon sale of the stock by the Executive. IV. SEVERANCE BENEFITS 4.1 RIGHT TO SEVERANCE BENEFITS. An Executive shall be entitled to receive severance benefits from the Company upon a Board Requested Termination, Resignation for Good Reason, or upon a termination based on Permanent Disability or death of the Executive. No severance benefits shall be paid upon a termination for Cause or upon another voluntary termination of employment for any reason, except as described in paragraph 4.2 below. 4.2 RIGHT TO SEVERANCE BENEFITS UPON EXECUTIVE INITIATED TERMINATION. The Executive shall be entitled to Severance Benefits if he or she initiates termination from employment only upon any of the following circumstances: a. If the Company does not make an offer to the Executive of continued employment of at least one additional year during the tenth month after confirmation of a plan of reorganization; the Executive gives notice of intent to voluntarily terminate employment during the twelfth month after confirmation of a plan of reorganization; and the Executive's employment actually terminates no less than four weeks after giving such notice. b. If the Company makes an offer to the Executive of continued employment of at least one additional year during the tenth month 7 8 after confirmation of a plan of reorganization, but such offer contains terms that would provide the Executive with the option to Resign for Good Reason if accepted, the Executive declines such offer no later than one year after the confirmation of the plan of reorganization; and the Executive's employment actually terminates no less than four weeks after declining the offer. c. If the Company makes an offer to the Executive of continued employment of at least one additional year during the tenth month after confirmation of a plan of reorganization, and such offer contains terms of compensation, duties, or location of work that would not provide the Executive with the option to Resign for Good Reason if accepted; the Executive declines such offer no later than one year after the confirmation of the plan of reorganization; and the Executive's employment actually terminates no less than four weeks after declining the offer. d. a Resignation for Good Reason. 4.3 AMOUNT OF SEVERANCE BENEFITS. When eligible under this Agreement, an Executive shall receive severance benefits in the amount of two times the Executive's Base Salary. However, if the Executive becomes eligible for severance benefits under paragraph 4.2(c) above, the Executive shall not receive, in the aggregate, Confirmation Bonus benefits under Article III above and severance benefits in excess of the sum of three times the aggregate of Base Salary plus the Target Bonus. 4.4 PAYMENT OF THE SEVERANCE BENEFITS. Severance benefits shall be paid in a lump sum upon the last day of employment. However, if the Executive becomes eligible for severance benefits under paragraph 4.2(c) above, the Executive shall receive in a lump sum only the amount equal to one times the Executive's Base Salary upon termination of employment. The remainder of the severance benefits shall be paid in 12 equal installments, commencing no later than the last day of the first month after termination of employment, and such monthly payments shall each be reduced in an amount equal to the salary compensation received by the Executive due to other employment or independent consulting relationships during that month. In such circumstances, Executive shall report to the Company, on a monthly basis, the amount of salary compensation received due to other employment or independent consulting relationships. 4.5 BENEFITS. If the Executive receives severance benefits, the Executive and the Executive's dependents shall be permitted to participate in the Company's life insurance, disability, medical, dental, and hospitalization benefits to the same extent, and at the same cost as, such benefits are available to other salaried employees of the Company, for two years following termination of employment. 8 9 V. DURATION, AMENDMENT AND PLAN TERMINATION 5.1 DURATION AND TERMINATION. This Confirmation Retention Plan shall continue in effect until terminated by the Board, provided, however, that no termination of the Plan may be made that would result in a financial detriment to any of the Executives. 5.2 AMENDMENT. The Plan may be amended by the Board, provided, however, that no amendment of the Plan may be made that would result in a financial detriment to any of the Executives. The form of amendment shall be a written instrument signed by a duly authorized officer of the Company, certifying that the amendment has been approved by the Board. VI. MISCELLANEOUS 6.1 INDEMNIFICATION. If an Executive institutes any legal action in seeking to obtain or enforce any right provided by this Confirmation Retention Plan, and if the Executive is successful, the Company shall pay for all reasonable legal fees and expenses incurred by the Executive, provided that the Executive has given the Board thirty (30) days' written notice of intent to file the legal action. 6.2 NO CONTRACT. This Plan does not constitute a contract of employment or impose on the Company any obligation to retain any of the Executives as an employee, to change the status of Executive's employment, or to change any employment policies of the Company. 6.3 SEVERABILITY. The invalidity or unenforceability of any provision of this Confirmation Retention Plan shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 6.4 CHOICE OF LAW. The validity, interpretation, construction and performance of this Confirmation Retention Plan shall in all respects be governed by the laws of the State of Georgia. 6.5 CHOICE OF FORUM. Any action to enforce this Confirmation Retention Plan shall be brought in any state or federal court located in Atlanta, Georgia. VII. PLAN PROVISIONS 7.1 ADMINISTRATOR. The Plan is administered by the Compensation Committee of the Board of Directors of the Company (the "Plan Administrator"). The Plan Administrator is the named fiduciary under the Plan. In exercising fiduciary responsibilities, the Plan Administrator will have discretionary authority (a) to determine whether and to what extent Participants and beneficiaries are entitled to Plan benefits, and (b) to construe the Plan terms. The Plan Administrator will be deemed to have properly 9 10 exercised such discretionary authority unless the Plan Administrator has abused its discretion hereunder by acting arbitrarily and capriciously. 7.2 INQUIRIES. Inquiries to the Plan Administrator should be addressed to: Compensation Committee Paragon Trade Brands, Inc. 180 Technology Parkway Norcross, Georgia 30092 7.3 PLAN SPONSOR. The sponsor of this Plan is Paragon Trade Brands, Inc. (the "Company"). The Company's employer identification number assigned by the Internal Revenue Service is 91-1554663. The Plan Number is 505. 7.4 PLAN YEAR. The Plan Year ends on December 31. All records of the Plan are maintained on this Plan Year. 7.5 TYPE OF PLAN. This is an employee welfare plan which provides severance pay benefits to eligible participants and their beneficiaries. The Confirmation Retention Plan is an unfunded plan. When severance pay benefits are payable under the terms of this Confirmation Retention Plan, the benefits are paid from the general assets of the Company. All Confirmation Retention Plan benefits are paid by the Company and no Participant contributions are required, except to continue participation in certain insurance benefits of the Company, as described in paragraph 4.5 above. 7.6 LEGAL SERVICE. Any legal notices regarding this Plan should be sent to the Plan Administrator, who is the Chairman of the Company's Compensation Committee, at Paragon Trade Brands, Inc. 180 Technology Parkway Norcross, Georgia 30092. 7.7 CLAIMS PROCEDURE. An Executive may make a claim for benefits or participation to the Plan Administrator. This claim should be in the form of a letter stating why the Executive believes benefits should be paid and should include all facts and information the Executive wants the Plan Administrator to consider. The Executive will be advised of the acceptance or rejection of his or her claim within 90 days after the claim is received, unless special circumstances require an extension of time for processing the claim. If the Plan Administrator requires an extension, written notice of the extension will be furnished to the Participant prior to the end of the initial 90-day period. The extension will not exceed an dditional period of 90 days. The extension notice from the Plan Administrator will state the special circumstances requiring the extension of time and the date by which the Plan Administrator expects to make a final decision. 10 11 In the event the Executive's claim is denied, it must be denied in writing and the denial must state in detail the specific reasons for the denial, the specific plan provisions upon which the denial is based, any additional material or information which the Executive may provide which would entitle him or her to the benefits claimed, and an explanation of why such material or information is necessary. The notice of denial must also explain the steps to be taken if the Executive or his or her beneficiary wishes to submit a claim for review. If notice of denial of the initial claim is not furnished within the time period allowed above, the Executive's claim will be deemed denied and the Executive may proceed to request a review of the denied claim. If the Executive chooses to submit a claim for review by the Plan Administrator, then within 60 days after the date the claim is denied, the Executive or his or her authorized representative must make a written request to the Plan Administrator for review. The Executive's request for review of a denied claim should include a statement of the reasons the claim should be allowed. The Executive or his or her representative may examine any documents the Plan Administrator has in its files and will use in reaching a decision, and the Executive may also submit additional written comments to the Plan Administrator which support the Executive's claim. The Plan Administrator will advise the Executive of the decision in writing within 60 days following receipt of the Executive's request for review, unless special circumstances require an extension of time for processing. If an extension is necessary, a decision will be made as soon as possible, but not later than 120 days after the Plan Administrator receives the Executive's request for review. If an extension of time for review is required because of special circumstances, written notice of the extension and the Plan Administrator's reasons for needing more time will be furnished to the Executive prior to the commencement of the extension. The decision on review will be in writing and will include specific reasons for the decision, as well as specific references to the plan provisions upon which the decision is based. The decision of the Plan Administrator will be final and will be subject to no further appeal or review. 7.8 ERISA RIGHTS. This statement of ERISA rights is required by federal law and regulation. An Executive in this Plan is entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all plan participants shall be entitled to: a. Examine, without charge, at the Company's office and at other locations, such as worksites, all Plan documents, and copies of all documents filed by the Plan with the U.S. Department of Labor, such as annual reports and plan descriptions. b. Obtain copies of all Plan documents and other Plan information upon written request to the Plan Administrator. The Plan Administrator may make a reasonable charge for the copies. 11 12 c. Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each Participant with a copy of this summary financial report. d. Obtain a statement of your total Plan benefits. This statement must be requested in writing and is not required to be given more than once a year. The Plan must provide the statement free of charge. In addition to creating rights for Plan Participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of Plan Participants and beneficiaries. No one, including the Company or any other person, may fire an Executive or otherwise discriminate against an Executive in any way to prevent the Executive from obtaining a Plan benefit or exercising rights under ERISA. If the Executive's claim for a Plan benefit is denied in whole or in part, the Executive must receive a written explanation of the reason for the denial. The Executive has the right to have the Plan review and reconsider his or her claim. Under ERISA, there are steps an Executive can take to enforce the above rights. For instance, if an Executive requests materials from the Plan and does not receive them within 30 days, the Executive may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay the Executive up to $110 a day until the Executive receives the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If the Executive has a claim for benefits which is denied or ignored, in whole or in part, the Executive may file suit in a state or federal court. If it should happen that plan fiduciaries misuse the Plan's money, or if an Executive is discriminated against for asserting his or her rights, the Executive may seek assistance from the U.S. Department of Labor, or may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the Executive is successful, the court may order the person the Executive has sued to pay these costs and fees. If the Executive loses, the court may order the Executive to pay these costs and fees, for example, if it finds the claim is frivolous. If an Executive has any questions about the Plan, the Executive should contact the Plan Administrator. If the Executive has any questions about this statement or about his or her rights under ERISA, the Executive should contact the nearest area Field Office of the Pension and Welfare Benefits Administration, Department of Labor, noted in your telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210. 12 EX-27 10 FINANCIAL DATA SCHEDULE
5 EXHIBIT 27 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q OF PARAGON TRADE BRANDS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-27-1998 DEC-29-1997 SEP-27-1998 35,676 0 82,811 8,757 47,507 162,798 272,010 168,605 427,929 79,182 0 0 0 124 17,094 427,929 402,281 402,281 322,224 322,224 0 0 0 14,625 1,226 13,399 0 0 0 13,399 1.12 1.12
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