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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ______
COMMISSION FILE NUMBER 1-11756
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2147728
(State of Incorporation) (I.R.S. Employer
Identification No.)
4111 MINT WAY, DALLAS, TEXAS 75237
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 333-3225
__________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
__________________
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 22, 1999 was $149,789,491.
As of March 22, 1999, Registrant had 14,183,852 shares of Common Stock
outstanding.
__________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by
reference in Part III hereof.
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UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" INCLUDE
PILLOWTEX CORPORATION AND ITS SUBSIDIARIES.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This report and other reports and statements, including those incorporated
by reference herein, filed by the Company from time to time with the Securities
and Exchange Commission (collectively, "Company SEC Filings") contain or may
contain certain forward-looking statements. Such statements are based upon the
beliefs and assumptions of, and on information available to, the Company's
management. Any statements preceded by, followed by, or that include the words
"anticipates," "believes" "expects," "estimates," "intends," or similar
expressions contained in Company SEC Filings, as well as any other statements
contained in Company SEC Filings regarding matters that are not historical
facts, are or may constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.
Because such forward-looking statements are subject to various risks and
uncertainties, results and values may differ materially from those expressed in
or implied by such statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict. The
Company's shareholders are cautioned not to place undue reliance on such
statements, which speak only as of the date of the document in which they are
contained.
The Company's shareholders should understand that the following important
factors, in addition to those discussed elsewhere in Company SEC Filings, could
affect the Company's future results and could cause results and values to differ
materially from those expressed in or implied by such forward-looking
statements: (i) the Company's significant leverage and debt service
obligations; (ii) the restrictive covenants contained in the instruments
governing the Company's indebtedness; (iii) the Company's ability to integrate
acquired operations successfully with existing operations; (iv) the price and
availability of raw materials used by the Company; (v) general retail industry
conditions; (vi) the Company's ability to renew key trademark licenses;
(vii) the goodwill associated with the brand names owned by the Company and the
Company's ability to protect its proprietary rights in such brand names; (viii)
the Company's ability to retain key customers; (ix) the Company's relationships
with both union and non-union employees; (x) the influence of significant
shareholders of the Company; (xi) the Company's dependence on key management
personnel; and (xii) the seasonality of the Company's business. The foregoing
factors are discussed herein in greater detail under the caption "Risk Factors"
beginning on page 9 hereof.
PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1954, the Company is one of the largest North American
designers, manufacturers, and marketers of home textile products. The Company's
extensive product offerings include a full line of utility and fashion bedding
and complimentary bedroom textile products, as well as a full line of bathroom
and kitchen textile products. As a leading supplier across all distribution
channels, the Company sells its products to most major mass merchants,
department stores, and specialty retailers, providing its customers with a
centralized "one-stop" source for their home textile merchandise. The Company
also markets its products to wholesale clubs, catalog merchants, institutional
distributors, and international customers.
The Company, through its operating subsidiaries, manufactures and
markets its products utilizing established and well-recognized Company-owned
brand names, including Royal Velvet-Registered Trademark-, Cannon-Registered
Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered
Trademark-, Charisma-Registered Trademark-, St. Mary's-Registered Trademark-,
Touch of Class-Registered Trademark-, Royal Velvet Big & Soft-Registered
Trademark-, and Beacon-Registered Trademark-. In addition, through licensing
agreements, the Company currently has rights to manufacture and, in some
instances, market certain bedding products under such well-known brand names as
Ralph Lauren, Comforel-Registered Trademark-, and Waverly-Registered Trademark-.
This diverse portfolio of premier brand names allows the Company to
differentiate its products from those of its competitors and provides distinct
brand names for different channels of retail distribution and for different
price points. The Company believes that this portfolio of brand names provides
it with a significant competitive advantage.
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COMPETITIVE STRENGTHS
The Company is one of the largest firms in the home textile industry and
has significant competitive strengths. The Company has one of the largest
market shares in North America in each of the bath towel, bed pillow, blanket,
and down comforter product segments and a significant market share in each of
the sheet, pillowcase, mattress pad, fashion bedding, bath rug and kitchen
textile product segments.
The Company's management team has successfully integrated acquisitions over
the last several years which have improved the Company's overall efficiency and
consistently produced a record of growth and profitability. The Company's
management team provides a breadth of expertise rivaling any in the industry.
The Company's management team believes the following competitive strengths
enhance the Company's position in the marketplace:
- INDUSTRY LEADING BRANDS: The Company owns some of the most
recognizable brand names in the industry, including Royal Velvet-Registered
Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-,
Royal Family-Registered Trademark-, Charisma-Registered Trademark-, St.
Mary's-Registered Trademark-, Touch of Class-Registered Trademark-, Royal
Velvet Big & Soft-Registered Trademark-, and Beacon-Registered Trademark-.
Furthermore, through licensing agreements, the Company currently has rights
to manufacture and, in some instances, market certain bedding products
under such well-known brand names as Ralph Lauren, Comforel-Registered
Trademark-, and Waverly-Registered Trademark-. This diverse portfolio of
premier brand names allows the Company to differentiate its products from
those of its competitors and provides distinct brand names for different
channels of retail distribution and for different price points. These
brand names also enable the Company to assist its customers in coordinating
their product offerings and differentiating such offerings from those of
their competitors.
- STRONG CUSTOMER RELATIONSHIPS: The Company has established
relationships with the top home textile retailers in North America. The
Company's broad product offerings provide its customers with the benefits
of a true "one-stop" source for bed and bath products. These strong
relationships create a stable base from which the Company can pursue
future business and new product introductions.
- CREATIVE MERCHANDISING STRATEGIES: Historically, the Company has
maintained creative partnerships with its customers, including extensive
merchandising programs, that have resulted in the creation of successful
new products, product mix strategies, point-of-sale concepts, and
advertising campaigns. Retail customers are increasingly demanding
exclusive or specially designed product lines to differentiate their
product offerings from those of other retailers and to implement price
tiering in order to achieve higher margins. The Company will continue this
collaboration with its retail customers to design products and marketing
programs responsive to individual customer's needs.
- LOW COST OPERATING CAPABILITIES: As a result of its continued
emphasis on cost-containment and capital expenditures to obtain greater
plant efficiencies, the Company is a low cost producer of bed pillows,
blankets, down comforters, and mattress pads in the home textile industry.
The Company has efficient, low cost towel and bath rug production
capabilities, including a new, state-of-the-art towel production facility.
In addition, the Company has emphasized a low cost of operations, creating
a competitive advantage by operating with one of the lowest percentages of
selling, general and administrative expenses relative to sales in the
industry.
BUSINESS STRATEGY
The Company's strategic objectives are to capitalize on its
industry-leading position by leveraging the strength of its brand names,
customer relationships, and operational capabilities across its comprehensive
array of product offerings. The Company's strategic focus is as follows:
- CAPITALIZE ON INDUSTRY LEADING POSITION: The Company focuses on
leveraging its market leadership by implementing sales and marketing
programs designed to facilitate a customer-driven "pull" strategy. By
cross-marketing its various products using the Company's strong brand
names, the Company seeks to create enhanced product value and facilitate
greater differentiation of its products from those of its competitors.
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- DEVELOP THE PREMIER "One-Stop Shop" for Home Textiles: The
Company's practice of offering broad product assortments across diverse
product lines provides it with a significant competitive advantage as it
can offer its retail customers a centralized "one-stop" purchasing source
for their home textile merchandise. The Company's extensive assortment of
home textile products includes fashion and utility bedding and
complimentary bedroom textile products, as well as a full line of bathroom
textile products.
- FURTHER STRENGTHEN CUSTOMER RELATIONSHIPS: The Company has a long
history of strong customer relationships with the top retailers in the
United States and Canada. The Company has developed these relationships
by providing value-added services, such as innovative marketing and
cross-merchandising capabilities. The Company believes that the value of
such services to retailers has been increased significantly by the
Company's expansion of its traditional bed pillow, blanket, down comforter,
and mattress pad product lines to include towel, bath rug, sheet, fashion
bedding, and kitchen textile product lines, creating a centralized
purchasing source and the ability to utilize established and
well-recognized Company-owned brand names across all such product lines.
The Company continues to increase the use of marketing and
cross-merchandising services to create opportunities for added sales and
to provide retailers with more opportunities to differentiate their
product offerings from those of their competitors.
- ENHANCE OPERATIONAL EFFICIENCIES: The Company continues to focus
on reducing its manufacturing cost structure by reviewing its current
operations and investing in automation, equipment modernization, process
improvements, and system controls throughout all aspects of its business.
The Company's management believes that significant opportunities exist to
improve production efficiency through capital investment, improved
operational logistics, selective outsourcing, and increased utilization of
information systems. The Company is currently in the middle of a
three-year program to make capital expenditures in excess of $275.0 million
by the end of 2000, principally to modernize certain acquired sheet and
towel manufacturing facilities through the addition of new machinery and
equipment. The Company anticipates that approximately $85.0 million in
capital expenditures will be made in fiscal 1999.
PRODUCTS
GENERAL
The Company has expanded its historic pillow operations largely through
strategic acquisitions. Most recently, on December 19, 1997, the Company
acquired Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), a designer, manufacturer
and marketer of a broad range of household textile products including towels,
bath rugs, sheets, and comforters, and on July 28, 1998, the Company acquired
The Leshner Corporation, a 91-year-old manufacturer and marketer of quality bath
and kitchen terry products. As a result of all such acquisitions, the Company's
extensive product offerings now include a full line of utility and fashion
bedding and complimentary bedroom textile products, as well as a full line of
bathroom and kitchen textile products.
BEDDING AND OTHER BEDROOM TEXTILE PRODUCTS
BED PILLOWS. The Company is a leading manufacturer and marketer of bed
pillows in North America. The Company produces and markets a broad line of
traditional bed pillows, as well as specially designed bed pillows such as body
pillows. The Company offers products at various levels of quality and price,
from synthetic pillows sold at relatively low retail prices to fine white goose
down pillows sold at much higher price levels.
The Company is a leading feather and down pillow manufacturer in North
America, offering products filled with quality goose and duck down, or blends
of feather and down, in a range of grades. These materials, known as "natural
fill," are noted for their loft and resiliency.
The Company also manufactures and markets a full line of bed pillows
featuring staple (cut and crimped), tow (continuous filament), and cluster
(individual ball) synthetic fiber fills. The Company is a leading supplier of
premium synthetic and latex bed pillows in North America.
BLANKETS. The Company is a leading producer of adult blankets in North
America, manufacturing woven and non-woven conventional and thermal weave
blankets and throws in a wide assortment of fibers, including cotton, wool
blend, acrylic, and polyester. The Company is the exclusive supplier in North
America of blankets for Ralph Lauren. The Company also has a strong presence
in the infant blanket market with products ranging from non-woven receiving
blankets to the finest Supima-Registered Trademark- cotton crib blankets.
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DOWN COMFORTERS. The Company was a pioneer in marketing down comforters
in the United States, and is now a leading manufacturer and marketer of down
comforters in North America. Down comforters have become increasingly popular
for both their insulation and fashion qualities, selling well in both warm and
cool climates. They are sold at department stores, specialty stores, and mass
merchants at a variety of prices. Increasingly popular higher-end comforters
typically offer more down fill, have higher thread count shells, and feature
more appealing "surface interest," such as damask dots, stripes, and checks.
MATTRESS PADS. The Company is a leading manufacturer and marketer of
mattress pads in North America, producing and marketing a complete line of
mattress pads, including sizes for adults and children, natural and synthetic
filled, flat, fitted, and stretch-to-fit mattress pads (adjustable fit mattress
pads made with Lycra-Registered Trademark-, a multidirectional stretch material
produced by E.I. DuPont de Nemours & Co. ("DuPont")). The Company's
stretch-to-fit mattress pads correctly fit a broad range of mattress
thicknesses, including pillow top mattresses.
SHEETS AND OTHER FASHION BEDDING. The Company produces a wide variety of
sheets, ranging from muslin to the finest 310-thread count, 100% pima cotton
sheets. Its principal brand names for this product line include
Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal
Velvet-Registered Trademark-, and Charisma-Registered Trademark-. Among the
Company's sheeting strengths are solid color sheets with coordinating decorative
bedding accessories. In addition to sheets, the Company's fashion bedding
products consist of matching synthetic fill comforters, comforter covers, and
pillow shams along with coordinated ruffled or pleated bed skirts. Retail
prices of the Company's sheets vary widely based on size, thread count, and
fabric type.
OTHER BEDROOM TEXTILES. The Company also offers a variety of other
complementary bedroom textile products, including featherbeds, pillow
protectors, decorative pillows, and window treatments. These products represent
a source of additional profitability as "add-on" sales for retailers.
BATHROOM TEXTILE PRODUCTS
TOWELS. The Company's bathroom textile products include bath, hand,
and fingertip towels, washcloths, and bath mats. Royal Velvet-Registered
Trademark-, Fieldcrest-Registered Trademark-, Cannon-Registered Trademark-,
Charisma-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-,
and St. Mary's-Registered Trademark- are well-known, high quality towel brand
names, providing the Company with a strong market position in substantially all
key sectors of the North American market. The Company is also recognized as
the color leader in the towel industry as it markets 40 colors in its Royal
Velvet-Registered Trademark- franchise. In the marketplace, the Company
differentiates its towels by using fine ring spun cotton yarns to produce Royal
Velvet-Registered Trademark- towels and pima cotton yarns for
Charisma-Registered Trademark- towels. The towel line includes solid colors,
woven stripes, and fancy jacquards, as well as printed towels. Retail prices
of the Company's towels range on a wide variety of price levels based on, among
other things, size, weight, and yarn type.
BATH RUGS. The Company also markets a variety of bath and accent rugs in
conjunction with its towel offering. Sizes range from 17-inches by 24-inches
to 48-inches by 72-inches. These products are marketed under the Royal
Velvet-Registered Trademark-, Cannon-Registered Trademark-,
Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, and
Charisma-Registered Trademark- brands, as well as private labels.
KITCHEN TEXTILE PRODUCTS
The Company is a leading manufacturer and marketer of kitchen textile
products in North America. The Company's kitchen products include terry towels,
terry dish cloths, waffle weave and flat woven dish cloths, bar mops, utility
cloths, pot holders, and oven mitts. A variety of constructions include
yarn-dye checks, stripes, and plaids coordinating with piece-dye solids as well
as printed fashion motifs. Most of the Company's kitchen ensembles are
accompanied by fabricated pot holders, oven mitts, and other coordinating
accessories.
MARKETING AND SALES
The Company markets its products to major mass merchants, department
stores, and specialty retail stores, as well as to wholesale clubs, catalog
merchants, institutional distributors, and international customers.
The Company's top ten customers accounted for approximately 61% of its
total net sales in fiscal year 1998. Wal-Mart Stores, Inc. (including Wal-Mart
and Sam's Club Stores) ("Wal-Mart") accounted for approximately 24% of the
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Company's total net sales in fiscal year 1998; no other customer accounted for
more than 10% of the Company's total net sales in fiscal year 1998. Consistent
with industry practice, the Company generally does not operate under long-term
written supply contracts with its customers.
The use of the Company's Fieldcrest portfolio of brand names is segmented
by distribution channel in order to solidify the perceived value of such brands
and maintain their integrity. Royal Velvet-Registered Trademark-, Charisma-
Registered Trademark-, Fieldcrest-Registered Trademark-, and Royal
Family-Registered Trademark- brand name bed and bath products are distributed
primarily to leading department stores, specialty home furnishing stores, and
catalog merchants. St. Mary's-Registered Trademark- and Cannon-Registered
Trademark- brand name bed and bath products are distributed through mass
merchants. The Company's Royal Velvet-Registered Trademark-,
Charisma-Registered Trademark-, and Cannon-Registered Trademark- brand names
are supported with national consumer advertising. The Company also utilizes
private brands through large chain stores and also sells a smaller amount of
unbranded products to institutional and government customers.
The Company's current international business is concentrated in Canada;
however, it also sells its products in other foreign markets, including Asia,
Australia, Europe, Mexico, and South America.
In order to maximize product exposure and increase sales, the Company
works closely with its major customers to assist them in merchandising and
promoting the Company's products to the consumer. In addition to frequent
personal consultation with the employees of such customers, the Company meets
periodically with the senior management of such customers to develop joint
merchandising programs, new products, product mix strategies, point-of-sale
concepts, and advertising campaigns specifically tailored to that customer's
needs. The Company also provides its customers merchandising assistance with
store layouts, fixture designs, point-of-sale displays, and advertising
materials.
The Company's electronic data interchange system allows customers to place,
and allows the Company to fill, track, and bill, orders by computer. This
system enables the Company to ship products on a "quick response" basis.
The Company's products are generally sold through its own salespeople, who
have many years of industry experience; however, certain Ralph Lauren products
are sold by the Ralph Lauren sales force.
TRADEMARKS AND LICENSE AGREEMENTS
The Company markets its products under its proprietary Company-owned
trademarks and trade names and under customer-owned private labels, as well as
under certain licensed trademarks and trade names. The Company uses trademarks,
trade names, and private labels as merchandising tools to assist its customers
in coordinating their product offerings and differentiating their products from
those of their competitors.
The Company owns various trademarks and trade names, including Royal
Velvet-Registered Trademark-, Cannon-Registered Trademark-,
Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-,
Charisma-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-,
St. Mary's-Registered Trademark-, Touch of Class-Registered Trademark-, and
Beacon-Registered Trademark-. The Company regards its trademarks and trade
names as valuable assets and vigorously protects them against infringement.
The Company holds the exclusive license for the highly regarded Ralph
Lauren trademark for pillows, blankets, down comforters, mattress pads, and bath
rugs in the United States and Canada. In addition, the Company holds a
non-exclusive license to manufacture, and in certain cases sell, a variety of
fashion bedding products under the Ralph Lauren trademark in the United States,
Canada, and Mexico. The Company's licenses with Polo/Ralph Lauren Corporation
expire on June 30, 2001. The Company has a long-standing relationship with
Polo/Ralph Lauren Corporation and has no reason to believe that such licenses
will not be renewed. However, there can be no assurance that, upon their
expiration, the Company will be able to renew such licenses on acceptable terms.
From time to time, the Company identifies product lines for which it is
more advantageous to the Company to license its brand names to third parties for
use in the manufacture and sale of such products. These license agreements
require royalty payments to the Company based upon product sales and generally
require payments of minimum annual royalties. In January 1998, the Company
entered into such a license agreement with Ex-Cell Home Fashions, Inc.
("Ex-Cell"), pursuant to which the Company granted Ex-Cell an exclusive license
to manufacture, sell, and distribute shower curtains and bath accessories under
certain of the Company's trademarks and trade names, including Royal
Velvet-Registered Trademark-, Cannon-Registered Trademark-,
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Fieldcrest-Registered Trademark-, Charisma-Registered Trademark-, and Touch of
Class-Registered Trademark-. In January 1999, the Company entered into another
such license agreement with Bardwil Industries, Inc. ("Bardwil"), pursuant to
which the Company granted Bardwil an exclusive license to manufacture, sell, and
distribute tablecloths and other table-top accessories under certain of the
Company's trademarks and trade names, including Royal Velvet-Registered
Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-,
Charisma-Registered Trademark-, and St. Mary's-Registered Trademark-. From time
to time, the Company also enters into selective international license agreements
to promote the sale of its products in specific regions of the world.
PRODUCT DEVELOPMENT
The Company's product development staff creates and develops products with
new or superior performance characteristics in cooperation with various outside
sources, including its suppliers and customers. The Company believes that the
ability to develop products responsive to individual customers' needs is an
important competitive advantage. As a result, the Company commits time and
resources to identifying new materials, designs, and products from a variety of
domestic and international vendors.
MANUFACTURING AND DISTRIBUTION
GENERAL
The Company operates an extensive network of facilities in Texas, Alabama,
California, Georgia, Illinois, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Virginia and Toronto, Canada in connection with
the manufacture and distribution of the Company's product lines. This
nationwide manufacturing and distribution network enables the Company to ship
its products cost effectively to all major cities in North America.
As a supplement to its primary distribution channels, the Company operates
retail outlet stores that sell certain of the Company's products directly to
customers. These stores sell both first quality merchandise and seconds or
"off-goods" at competitive retail prices. The Company believes that its retail
outlet stores provide an effective channel for the distribution of second
quality merchandise.
BEDDING AND OTHER BEDROOM TEXTILE PRODUCTS
BED PILLOWS. The hub of the network for bed pillows is located in Dallas,
Texas, where the Company operates what it believes to be the largest feather and
down processing facility in North America, producing significant economies of
scale. Feather and down are processed by state-of-the-art computerized washing
and sorting equipment and are sorted into a variety of mixtures and grades used
in manufacturing natural fill pillows and comforters. The raw materials are
shipped, along with imported products, to the Company's regional facilities for
final assembly and distribution to customers. The Company also operates an
automated sewing facility in Dallas, Texas, where high speed, computerized
machines cut and sew fabric into pillow shells.
Many of the Company's regional manufacturing facilities produce natural
fill and synthetic fill pillows. Natural fill pillows are assembled by blowing
processed feather and down into the pillow shell and sewing the open seam
closed. Synthetic fill pillows are produced on machines known as garnets that
pull, comb, and expand compressed polyester fibers. Once expanded, the fibers
are inserted into a pillow shell and the open seam is sewn shut.
BLANKETS. The Company produces blankets and spins yarn at manufacturing
facilities in North Carolina and South Carolina. These plants provide full
vertical production capability, including spinning, weaving, dyeing, and
finishing.
DOWN COMFORTERS. The Company's line of natural fill comforters are
manufactured by the Company at its California, Illinois, Mississippi,
Pennsylvania, and Toronto, Canada locations using processed down from the Dallas
facility.
MATTRESS PADS. Mattress pads are manufactured at the California,
Mississippi, Pennsylvania, and Toronto, Canada facilities by two automated
methods. The traditional quilt sewing method uses high speed equipment that
sews the top, bottom, and fill material together. The sonic method fuses the
top, bottom, and fill material together.
SHEETS AND OTHER FASHION BEDDING. Bed sheet products are produced in the
Company's facilities in Kannapolis, North Carolina, Concord, North Carolina, and
Union City, South Carolina. As with the Company's towel operations, these
facilities provide a full range of the Company's sheet products for
substantially all channels of distribution. Cotton and synthetic fibers are
spun into yarn and woven into greige cloth for finishing, dyeing, cutting, and
sewing. The Company produces synthetic fill comforters and other decorative
bedding products such as pillow shams and decorative pillows at its Eden, North
Carolina and Rocky Mount, North Carolina facilities. Finished cloth generally
6
is supplied by the Company's bed sheet operations. The cloth is cut, polyester
fiber-fill is inserted, and the product is sewn and packaged for shipment to
retail customers.
OTHER BEDROOM TEXTILES. Other complementary bedroom textile products
offered by the Company, such as featherbeds, pillow protectors, decorative
pillows, and window treatments, are manufactured at one or more of the
facilities described above.
BATHROOM TEXTILE PRODUCTS
TOWELS. The Company produces bath towels at its facilities in Alabama,
Georgia, North Carolina, and Virginia. Cotton and synthetic fibers are spun
into yarn utilizing the Company's spinning capacity and, subsequently, woven
into fabric or greige cloth. The greige cloth is finished, dyed, cut, and sewn
into finished towel products. The Company's Fieldale, Virginia facility
generally produces the higher quality, department and specialty stores'
products. The Columbus, Georgia, Phenix City, Alabama, and Hawkinsville,
Georgia facilities generally support the Company's mass merchant business
channel. The Kannapolis, North Carolina facility is capable of producing both
types of products and, as a result, is used to support both distribution
channels.
BATH RUGS. Bath rugs are produced in the Company's Scottsboro, Alabama
facility. Tufted yarn is punched into fabric and cut into a uniform height. A
latex coating is applied to the underside of the fabric to hold the fibers. The
product is dyed, cut, and finished.
KITCHEN TEXTILE PRODUCTS
The Company's kitchen textile products are manufactured at its facilities
in Phenix City, Alabama, Hawkinsville, Georgia and Kannapolis, North Carolina.
QUALITY CONTROL PROGRAMS
The Company has established quality control programs that are designed to
assure that its products meet predetermined quality standards established both
internally and by its customers. The Company devotes significant resources to
support its quality improvement efforts. Each manufacturing facility is staffed
with a quality control team that identifies and resolves quality issues. The
Company attempts to maintain close contact with customer quality control or
other appropriate personnel to assure that the Company understands the
customers' requirements. The Company also has programs with its major suppliers
to assure the consistency of purchased raw materials by imposing strict
standards and materials inspection, and requiring rapid response to the
Company's complaints.
RAW MATERIALS AND IMPORTS
GENERAL. The principal raw materials that the Company uses in
manufacturing its various product lines are: cotton; feather and down;
synthetic (polyester and acrylic) fibers; and cotton and polyester-cotton blend
fabrics. These materials are generally available from a wide variety of
sources, and no significant shortage of such materials is currently anticipated.
Management believes that its relationships with its suppliers are generally
good.
COTTON. Domestic cotton merchants are the Company's primary source of
cotton. The Company uses significant quantities of cotton, which is subject to
ongoing price fluctuations. To reduce the effect of potential price
fluctuations, the Company makes commitments from time to time for future
purchases of cotton.
FEATHERS AND DOWN. The Company imports feather and down from several
sources outside the United States. A majority of such purchases are from the
People's Republic of China ("China"), where feather and down are by-products
of ducks and geese raised for food. The Company is generally able to purchase
feather and down from its suppliers in China on open credit terms without
letters of credit. The Company also purchases some feather and down from
suppliers in Europe.
SYNTHETIC FIBERS. Domestic fiber producers are the Company's primary
source of synthetic fibers. The Company purchases synthetic fiber from, among
others, DuPont, Wellman, Inc., Monsanto Company, Cytec Industries Inc., Kosa,
and Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations,
the Company makes commitments from time to time for future purchases of
synthetic fibers.
7
FABRIC. The Company uses fabric purchased from third parties in the
production of pillow shells, comforter covers, and various other products.
Although the Company believes that fabric is a commodity-type product that is
available from numerous sources, the Company currently purchases large
quantities of pillow ticking fabric from a single supplier, Santee Print Works,
to control costs and assure quality. Consistent with industry practice, the
Company and Santee Print Works have not entered into a long-term supply
contract. However, to reduce the effect of potential price fluctuations, the
Company makes commitments from time to time for future purchases from Santee
Print Works. In addition, the Company imports the majority of its down
comforter shells from China and India.
OTHER. Certain of the Company's stretch-to-fit mattress pads utilize
Lycra-Registered Trademark- skirting. Because of DuPont's patent on
Lycra-Registered Trademark-, it is the exclusive supplier for this material.
The Company believes that the risk that DuPont will cease to manufacture and
sell Lycra-Registered Trademark- is minimal.
BACKLOG
The amount of the Company's backlog orders at any particular time is
affected by a number of factors, including seasonality and scheduling of the
manufacturing and shipment of products. In general, the Company's electronic
data interchange and "quick response" capabilities have resulted in shortened
lead times between submission of purchase orders and delivery and lowered the
level of backlog orders. Consequently, the Company believes that the amount of
its backlog is not an appropriate indicator of levels of future production.
EMPLOYEES
As of March 22, 1999, the Company had approximately 14,000 employees.
As of March 22, 1999, the Company was subject to the following collective
bargaining agreements:
Number of Number of
Eligible Covered
Union Location Covered Expiration Employees Employees
- ------------------------------------------------ ------------------------ -------------- ------------- -------------
Union of Needletrades, Industrial and Textile Columbus, Georgia 01/06/00 375 247
Workers
Union of Needletrades, Industrial and Textile Phenix City, Alabama 01/06/00 837 529
Workers
Union of Needletrades, Industrial and Textile Phenix City, Alabama; 09/30/01 490 214
Workers Hawkinsville, Georgia;
and Macon, Georgia
Union of Needletrades, Industrial and Textile Eden, North Carolina 01/06/00 507 236
Workers
Union of Needletrades, Industrial and Textile Fieldale, Virginia 01/06/00 1,024 350
Workers
Union of Needletrades, Industrial and Textile Toronto, Ontario, Canada 02/28/00 301 236
Workers
United Auto Workers Tunica, Mississippi 08/01/99 265 188
Warehouse, Mail Order, Office, Technical Chicago, Illinois 02/01/00 146 146
and Professional Employees (Teamsters)
Since 1991, the Union of Needletrades, Industrial and Textile Workers
("UNITE") has campaigned to organize approximately 5,500 additional hourly
workers at five of the Company's plants, including a significant manufacturing
facility in Kannapolis, North Carolina. The Company has opposed UNITE's
organizing efforts. Although a majority of employees at these plants has
previously voted not to select UNITE as a bargaining representative, the
results of the election have not been certified. UNITE may seek a new
election; however, there can be no assurances as to whether or when a new
election will be scheduled. It is impossible to predict the effect, if any,
that another lengthy organizing campaign will have on the productivity of
the Company's workforce.
The Company believes that its relationships with both its union and
non-union employees are generally good.
8
RISK FACTORS
The Company and its businesses are subject to a number of risks including
those enumerated below. Any or all of such risks could have a material adverse
effect on the business, financial condition, results of operations and prospects
of the Company and on the market price of the Company's Common Stock. See also
"Cautionary Statement Regarding Forward-Looking Statements" above.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company is highly leveraged. At January 2, 1999, the Company had total
outstanding long-term indebtedness (including the current portion of long-term
indebtedness) of approximately $956.9 million and total shareholders' equity of
approximately $237.9 million. In addition, subject to restrictions contained in
instruments governing its indebtedness, the Company and its subsidiaries may
incur additional indebtedness from time to time to finance acquisitions or
capital expenditures or for general corporate purposes.
The level of the Company's indebtedness could have important consequences
to the business activities of the Company, including: (i) a substantial portion
of the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for acquisitions, working capital,
capital expenditures, or research and development may be limited; and (iii) the
Company's level of indebtedness could limit its flexibility in reacting to
changes in its industry or economic conditions generally.
The Company's ability to service its debt obligations will depend upon its
future operating performance, which will be affected by prevailing economic
conditions and financial, business, and other factors, certain of which are
beyond its control, as well as the availability of borrowings under its $350.0
million revolving credit facility (the "Revolving Credit Facility", and,
together with the Company's $350.0 million term loan facility, the "Senior
Credit Facility") or any other credit arrangement. The Company will require
substantial amounts of cash to fund scheduled payments of principal and interest
on its outstanding indebtedness, as well as future capital expenditures and any
increased working capital requirements. If the Company is unable to meet its
cash requirements out of cash flow from operations and its available borrowings,
there can be no assurance that it will be able to obtain alternative financing
or that it will be permitted to do so under the terms of the Revolving Credit
Facility or its other indebtedness. In the absence of such financing, the
Company's ability to respond to changing business and economic conditions, to
make future acquisitions, to absorb adverse operating results, or to fund
capital expenditures or research and development costs may be adversely
affected. If the Company does not generate sufficient cash flow from operations
to repay its indebtedness at maturity, it could attempt to refinance such
indebtedness; however, no assurance can be given that such refinancing would be
available on terms acceptable to the Company, if at all.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
Certain instruments governing the Company's indebtedness restrict, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends or make certain other restricted
payments, incur liens to secure pari passu or subordinated indebtedness, sell
stock of subsidiaries, apply net proceeds from certain asset sales, merge or
consolidate with any other person, sell, assign, transfer, lease, convey, or
otherwise dispose of substantially all of the assets of the Company, enter into
certain transactions with affiliates, or incur indebtedness that is subordinate
in right of payment to the Senior Credit Facility and senior in right of payment
to the Company's senior subordinated notes.
The Senior Credit Facility requires the Company to maintain specified
financial ratios and satisfy certain financial condition tests. The Company's
ability to meet those financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those tests. The Senior Credit Facility also prohibits the Company from
prepaying other indebtedness before indebtedness under the Senior Credit
Facility. A breach of any of these covenants or other covenants contained in
the Senior Credit Facility could result in a default thereunder. Upon the
occurrence of an event of default under the Senior Credit Facility, the lenders
thereunder could elect to declare all amounts outstanding under the Senior
Credit Facility, including accrued interest or other obligations, to be
immediately due and payable or proceed against the collateral granted to them to
secure that indebtedness. If any other senior indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness and the other indebtedness of the
Company.
9
As a result of the covenants described above, the ability of the Company to
respond to changing business and economic conditions and to secure additional
financing, if needed, may be significantly restricted, and the Company may be
prevented from engaging in transactions that might otherwise be considered
beneficial to the Company.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company currently intends to continue to pay quarterly dividends of
$0.06 per share on its Common Stock. The Company's dividend policy will be
reviewed by the Company's Board of Directors from time to time in light of,
among other things, the Company's results of operations and financial position.
In addition, certain instruments governing the indebtedness of the Company and
the terms of the Company's Series A Redeemable Convertible Preferred Stock (the
"Series A Preferred Stock") restrict the Company's ability to pay dividends or
make other distributions to holders of Common Stock. Pursuant to terms of such
instruments, the ability of the Company to pay dividends or make other
distributions is subject to its ability to maintain certain financial ratios and
satisfy certain financial condition tests. For example, under the terms of the
indentures governing the Company's senior subordinated notes, the Company is
prohibited from paying dividends on its Common Stock or the Series A Preferred
Stock at any time when (i) an "event of default" exists, (ii) the Company's
"fixed charge coverage ratio" falls below 1.75 to 1, in the case of its 10%
Senior Subordinated Notes due 2006 (the "10% Notes"), or 2 to 1, in the case of
its 9% Senior Subordinated Notes due 2007, or (iii) the aggregate of such
dividends and certain other restricted payments exceeds an accumulated reference
amount which takes into account future earnings, equity offerings, conversions
of debt securities, and amortization of certain investments. Similarly, under
the terms of the Series A Preferred Stock the Company is prohibited from paying
dividends on the Common Stock at any time when (i) an "event of noncompliance"
exists, (ii) the Company's "fixed charge coverage ratio" falls below 1.75 to 1,
or (iii) the aggregate of such dividends and certain other restricted payments
exceeds an accumulated reference amount which takes into account future
earnings, equity offerings, and conversions of debt securities. The Senior
Credit Facility also contains restrictions on the Company's ability to pay
dividends, although these restrictions are generally less restrictive than those
contained in the documentation governing the 10% Notes.
As a result of the foregoing, there can be no assurance that the Company
will pay any dividends on the Common Stock in the future or, if dividends are
paid, as to the amount thereof.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company expects to continue a strategy of identifying and acquiring
companies with complementary products or services that may be expected to
enhance the Company's operations and profitability. There can be no assurances
that the Company will be able to integrate the operations of any acquired
company successfully with existing operations or that any of such acquisitions
will prove profitable.
DEPENDENCE ON RAW MATERIALS
Cotton is the primary raw material used in the Company's business. Cotton
is an agricultural product and, consequently, its availability is subject to
weather conditions and other factors affecting agricultural markets. There have
been historical periods of rapid and significant movement in the price of cotton
both upward and downward.
Other raw materials on which the Company is dependent include the raw
feather and down that the Company uses to produce natural fill pillows and down
comforters. China is currently the primary source of raw feather and down for
the Company. In fiscal year 1998, approximately 81%, based on cost, of the raw
feather and down that the Company used to produce natural fill pillows and down
comforters was imported from China. The Company's relationships with its
suppliers in China could be disrupted or adversely affected due to a number of
factors, including governmental regulation, fluctuation in exchange rates, and
changes in economic and political conditions in China. If the Company's supply
sources in China were disrupted for any reason, the Company believes, based on
existing market conditions, that it could establish alternative supply
relationships. However, because establishing these relationships involves
numerous uncertainties relating to delivery requirements, price, payment terms,
quality control, and other matters, the Company is unable to predict whether
such relationships would be on terms satisfactory to the Company. The
Company's relationships with its suppliers in China are also subject to risks
associated with changes in United States legislation and regulations relating
to imports, including quotas, duties, and taxes, and other charges or
restrictions on imports. Products that the Company imports from China
currently receive preferential tariff treatment accorded goods from countries
granted "most favored nation" status. Under the Trade Act of 1974, the
President of the United States is authorized, upon making specified findings,
10
to waive certain restrictions that would otherwise render China ineligible for
most favored nation treatment. The President has waived these provisions each
year since 1979. Most favored nation status was accordingly renewed in
June 1997 despite legislation pursued by Congress demanding that China desist
from certain trade and military activities. Congress will continue to monitor
these activities and may encourage the President to reconsider the renewal of
most favored nation status for China in the future, and no assurance can be
given that China will continue to enjoy this status in the future. Raw
materials and finished products entering the United States from China without
the benefit of most favored nation treatment would be subject to significantly
higher duty rates.
The raw materials used by the Company are generally available from a number
of sources, and no significant shortage of such materials is currently
anticipated. However, the Company uses significant quantities of such raw
materials, which are subject to price fluctuations, and there can be no
assurance that shortages of such materials will not occur in the future, which
could increase the cost of or delay the shipment of products. Moreover, there
can be no assurance that the Company will be able to pass on any increase in the
price of raw materials to its customers.
ADVERSE RETAIL INDUSTRY CONDITIONS
The Company sells its products to a number of department stores and other
major retailers who have experienced financial difficulties during the past
several years. Some of these retailers have recently emerged from the
protection of federal bankruptcy laws and some current retail customers of the
Company may seek protection under the federal bankruptcy laws or state
insolvency laws in the future. As a result of these financial difficulties and
bankruptcy and insolvency proceedings, the Company may be unable to collect some
or all amounts owed by these retail customers. Additionally, all or part of the
operations of a retail customer that seeks bankruptcy or other debtor protection
may be discontinued or sales of the Company's products to such a customer may be
curtailed or terminated as a result of bankruptcy or insolvency proceedings.
DEPENDENCE ON BRAND NAMES
In fiscal year 1998, a substantial portion of the Company's net sales were
from sales of products bearing the Company's principal proprietary brand names
of Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-,
Charisma-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-,
Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-,
Caldwell-Registered Trademark-, and St. Mary's-Registered Trademark-.
Accordingly, the Company's future success may depend in part upon the goodwill
associated with these brand names.
The Company's principal brand names are registered in the United States and
certain foreign countries. However, there can be no assurance that the steps
taken by the Company to protect its proprietary rights in such brand names will
be adequate to prevent the misappropriation thereof in the United States or
abroad. In addition, the laws of some foreign countries do not protect
proprietary rights in brand names to the same extent as do the laws of the
United States.
DEPENDENCE ON KEY LICENSES
The Company holds licenses with organizations such as Polo/Ralph Lauren
Corporation, DuPont, F. Schumacher & Co. and others, using such well-known
trademarks and trade names as Ralph Lauren, Comforel-Registered Trademark-, and
Waverly-Registered Trademark-. These licenses generally require the payment of
royalties based on net sales, including the payment of minimum annual royalties,
and expire at various dates through June 2001. No assurance can be given that
the Company will be able to renew these licenses on acceptable terms upon their
expiration or will be able to acquire new licenses to use other popular
trademarks.
The loss of one or more of the Company's other third-party licenses is
unlikely to have a material adverse effect on the business of the Company.
RISK OF LOSS OF MATERIAL CUSTOMERS
In fiscal year 1998, sales to Wal-Mart accounted for approximately 24% of
the Company's total net sales. No other single customer accounted for more than
10% of the Company's total net sales during such period.
11
Consistent with industry practice, the Company does not operate under a
long-term written supply contract with any of its customers. The business,
financial condition, and results of operations of the Company could be
materially adversely affected by the loss of Wal-Mart as a customer.
LABOR RELATIONS
As of March 22, 1999, the Company had approximately 14,000 employees,
approximately 26% of whom were eligible to elect to be covered by collective
bargaining agreements and 15% of which had elected to be covered by such
agreements. See "Business - Employees."
Since 1991, the UNITE has campaigned to organize approximately 5,500
additional hourly workers at five of the Company's plants, including a
significant manufacturing facility in Kannapolis, North Carolina. The Company
has opposed UNITE's organizing efforts. Although a majority of employees at
these plants has previously voted not to select UNITE as a bargaining
representative, the results of the election have not been certified. UNITE may
seek a new election; however, there can be no assurances as to whether or when a
new election will be scheduled. It is impossible to predict the effect, if any,
that another lengthy organizing campaign will have on the productivity of the
Company's workforce.
GOVERNMENT REGULATION
The Company is subject to various federal, state, and local environmental
laws and regulations governing the discharge, storage, handling, and disposal of
various substances. The Company is also subject to federal and state laws and
regulations that require certain of its products to bear product content labels
containing specified information, including their place of origin and fiber
content. In addition, the Company's operations are governed by a variety of
federal, state, local, and foreign laws and regulations relating to worker
safety and health, advertising, importing and exporting, and other matters
applicable to businesses in general. All laws and regulations are subject to
change, and the Company cannot predict what effect, if any, changes in laws and
regulations might have on its business.
INDUSTRY COMPETITION AND COMPETITIVE FACTORS
The Company participates in a highly competitive industry, competing with a
number of established manufacturers, importers, and distributors of home textile
furnishings, some of which have greater financial, distribution, manufacturing,
and marketing resources.
SEASONALITY OF BUSINESS
The Company's business is subject to a pattern of seasonal fluctuation.
The Company's sales and earnings from operations generated during the second
half of a given fiscal year generally are expected to be higher than sales and
earnings from operations generated during the first half of the year.
Accordingly, the Company's needs for working capital generally are expected to
increase in the second half of the year and, as a result, total debt levels
generally tend to peak in the third and fourth quarters, falling off again in
the first quarter of the following year. The amount of the Company's sales
generated during the second half of the year generally will depend upon a number
of factors, including the level of retail sales for home textile furnishings
during the fall and winter, weather conditions affecting the level of sales of
down comforters and blankets (which are sold in greater quantities in cold
weather), general economic conditions, and other factors beyond the Company's
control.
INFLUENCE BY SIGNIFICANT SHAREHOLDERS
As of March 22, 1999, Charles M. Hansen, Jr., Mary R. Silverthorne, the
John H. Silverthorne Marital Trust B, and the John H. Silverthorne Family Trust
A (for both of which trusts Ms. Silverthorne acts as trustee), owned, in the
aggregate, approximately 37% of the outstanding shares of Common Stock. These
shareholders exert significant influence over the direction and management of
the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the skills, experience, and
performance of certain key members of its management, including Charles M.
12
Hansen, Jr., the Company's Chairman of the Board and Chief Executive Officer,
and Jeffrey D. Cordes, the Company's President and Chief Operating Officer. The
Company believes that its future success will be highly dependent upon its
ability to attract and retain skilled managers and other personnel, including
Mr. Hansen and Mr. Cordes. The loss of Mr. Hansen's or Mr. Cordes' services
could have a material adverse effect on the Company.
MARKET RISK WITH RESPECT TO COMMON STOCK
The Company's Common Stock is listed for trading on the New York Stock
Exchange. The prices at which shares of the Company's Common Stock trade are
subject to fluctuation based on many factors, including general economic and
industry conditions and the performance of, and investor expectations for, the
Company. No assurance can be given that a holder of the Company's Common Stock
will be able to sell such securities at any particular price.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS, AND OTHER
AGREEMENTS
The Company's Restated Articles of Incorporation (the "Articles"), the
Company's Amended and Restated Bylaws (the "Bylaws"), and certain agreements to
which the Company is a party contain provisions that may have the effect of
delaying, deterring, or preventing a change in control of the Company. In
addition, the Articles authorize the issuance of up to 30,000,000 shares of
Common Stock and 20,000,000 shares of preferred stock of the Company. (The
Company's Board of Directors has recommended to the Company's shareholders for
approval at the Company's 1999 annual meeting of shareholders a proposal to
increase the number of authorized shares of Common Stock from 30,000,000 shares
to 55,000,000 shares.) The Company's Board of Directors will have the power to
determine the price and terms under which any additional capital stock may be
issued, and subject to the terms of any issued and outstanding preferred stock
(including without limitation the Series A Preferred Stock), to fix the terms of
such preferred stock, and existing shareholders will not have preemptive rights
with respect thereto.
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year in
the date field. These programs, if not corrected, could fail or create
erroneous results by or at the Year 2000, thereby causing disruptions in the
operations of the Company and its suppliers and customers. This "Year 2000"
issue is believed to affect virtually all companies and organizations, including
the Company. As part of its Year 2000 compliance program, the Company has
developed a specific plan to help ensure that the Company is not adversely
affected by the Year 2000 issue. The Company's failure to resolve Year 2000
issues on or before December 31, 1999 could result in system failures or
miscalculations causing disruption in operations, including, among other things,
a temporary inability to process transactions, send invoices, send and/or
receive e-mail and voice mail, or engage in similar normal business activities.
Additionally, failure of third parties, upon whom the Company's business relies,
to timely remediate their Year 2000 issues could result in disruption of the
Company's supply of materials and parts, late, missed or unapplied payments,
temporary disruptions in order processing and other general problems related to
the Company's daily operations. While the Company believes its Year 2000 plan
will adequately address the Company's internal Year 2000 issues, until the
Company receives responses from all significant business partners, the overall
risks associated with the Year 2000 issue remain difficult to accurately assess
and quantify, and there can be no assurances that the Year 2000 issue will not
have a material adverse effect on the Company and its operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Considerations."
13
ITEM 2. PROPERTIES
The following table summarizes certain information concerning certain of
the facilities used by the Company in connection with the manufacture and
distribution of its product lines:
Approx. Owned/
Location Principal Use Square Feet Leased
-------------------------- -------------------------------------------------------- ----------- ------
Dallas, Texas Headquarters and feather and down processing 104,000 Owned
Dallas, Texas Manufacturing, distribution and offices 150,000 Owned
Phenix City, Alabama Manufacturing and warehouse 777,681 Owned
Phenix City, Alabama Manufacturing 220,000 Owned
Scottsboro, Alabama Manufacturing and warehouse 272,800 Owned
Los Angeles, California Manufacturing and distribution 320,000 Leased
Columbus, Georgia Manufacturing and warehouse 727,246 Owned
Hawkinsville, Georgia Manufacturing and warehouse 260,000 Owned
Macon, Georgia Warehouse 220,000 Owned
Chicago, Illinois Manufacturing and distribution 121,000 Owned
Tunica, Mississippi Manufacturing and distribution 288,000 Owned
New York, New York Sales office and showroom 64,490 Leased
Asheville, North Carolina Warehouse 117,000 Leased
Asheville, North Carolina Warehouse 254,000 Leased
Concord, North Carolina Manufacturing 696,963 Owned
Eden, North Carolina Manufacturing and warehouse 529,273 Owned
Eden, North Carolina Warehouse 411,531 Owned
Eden, North Carolina Warehouse 27,241 Owned
Kannapolis, North Carolina Manufacturing 682,407 Owned
Kannapolis, North Carolina Manufacturing, warehouse and offices 5,863,041 Owned
Newton, North Carolina Manufacturing and distribution 297,000 Leased
Rockwell, North Carolina Manufacturing 98,240 Owned
Rocky Mount, North Carolina Manufacturing and distribution 139,000 Owned
Rocky Mount, North Carolina Manufacturing and distribution 78,000 Leased
Salisbury, North Carolina Manufacturing 229,361 Owned
China Grove, North Carolina Manufacturing and warehouse 567,000 Owned
Swannanoa, North Carolina Manufacturing, distribution, warehouse and office 1,425,000 Owned
Tarboro, North Carolina Manufacturing and warehouse 370,000 Owned
Hanover, Pennsylvania Manufacturing and distribution 291,000 Owned
Mauldin, South Carolina Warehouse and distribution 746,600 Owned
Union City, South Carolina Manufacturing 95,700 Owned
Westminster, South Carolina Manufacturing, distribution, warehouse and office 652,000 Owned
Westminster, South Carolina Warehouse 29,000 Leased
Fieldale, Virginia Manufacturing and warehouse 973,253 Owned
Martinsville, Virginia Warehouse 100,000 Leased
Toronto, Ontario, Canada Manufacturing and distribution 99,000 Leased
Toronto, Ontario, Canada Manufacturing and distribution 60,000 Leased
Toronto, Ontario, Canada Warehouse 106,000 Leased
In addition to the foregoing, the Company maintains warehousing and
distribution centers in the states where certain of its manufacturing facilities
are located and maintains small sales and marketing offices in certain other
states. The Company also owns various other properties, both developed and
undeveloped, which are unrelated to its manufacturing operations. Certain of
these properties were acquired by Fieldcrest Cannon throughout the years for
investment or ancillary to specific acquisitions. Some of such properties are
currently held for investment, some are listed for sale, and some are leased to
third parties.
The Company believes that its facilities are generally well maintained, in
good operating condition, and adequate for its current needs. The Company will
continue to emphasize improvements at these plants, upgrading the physical plant
and purchasing additional and newer machinery and equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits incidental to
its business; however, the outcome of such suits is not expected to have a
material adverse effect on the Company's financial position or results of
operations.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock, par value $0.01 per share ("Common Stock") is
traded on the New York Stock Exchange under the symbol "PTX." The following
table sets forth for the period indicated the high and low sales prices of the
Common Stock:
Fiscal Year: High Low
------------ ---------- ----------
1998
Fourth Quarter ................ $34 11/16 $23 9/16
Third Quarter ................. 45 7/8 23 7/8
Second Quarter ................ 50 7/8 37 13/16
First Quarter ................. 49 5/16 30 1/2
1997
Fourth Quarter ................ $34 7/8 $26 1/2
Third Quarter ................. 28 7/16 21
Second Quarter ................ 23 16 5/8
First Quarter ................. 18 3/8 15 7/8
At March 22, 1999, the Company had approximately 975 holders of record of
Common Stock.
The Company paid four quarterly dividends of $0.06 per share in each of the
fiscal years 1997 and 1998. The Company currently intends to continue to pay
quarterly dividends of $0.06 per share on the Common Stock. Certain instruments
governing the indebtedness of the Company and the terms of the Series A
Preferred Stock restrict the Company's ability to pay dividends or make other
distributions to holders of Common Stock. Accordingly, there can be no
assurance that the Company will pay any such dividends in the future or, if such
dividends are paid, as to the amount thereof. See "Item 1. Business - Risk
factors - Restrictions on Payments of Dividends."
15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The selected financial data presented below are derived from the Company's
consolidated financial statements for the five years ended January 2, 1999.
The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included elsewhere in this Annual Report.
YEAR ENDED
12/31/94(1) 12/30/95 12/28/96 01/03/98(2) 01/02/99(3)
-----------------------------------------------------------------------
STATEMENTS OF EARNINGS DATA:
Net sales $ 349,520 $ 474,899 $ 490,655 $ 579,999 $1,509,841
Cost of goods sold 294,714 395,922 411,048 485,679 1,228,463
---------- ---------- ---------- ---------- ----------
Gross profit 54,806 78,977 79,607 94,320 281,378
Selling, general and administrative
expenses 36,399 42,508 41,445 52,090 137,307
Restructuring charge - - - 5,986 1,539
---------- ---------- ---------- ---------- ----------
Earnings from operations 18,407 36,469 38,162 36,244 142,532
Interest expense 6,361 17,491 13,971 22,470 72,288
Other income (379) - - - -
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
extraordinary items 12,425 18,978 24,191 13,774 70,244
Income taxes 4,736 7,509 9,459 5,538 27,389
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary items 7,689 11,469 14,732 8,236 42,855
Extraordinary items, net - - (609) (919) -
---------- ---------- ---------- ---------- ----------
Net earnings 7,689 11,469 14,123 7,317 42,855
Preferred dividends and accretion - - - 85 2,097
---------- ---------- ---------- ---------- ----------
Earnings available for common
shareholders $ 7,689 $ 11,469 $ 14,123 $ 7,232 40,758
========== ========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Before extraordinary items $ .73 $ 1.08 $ 1.39 $ .75 $ 2.89
Extraordinary items - - (.06) (.08) -
---------- ---------- ---------- ---------- ----------
Basic earnings per common share $ .73 $ 1.08 $ 1.33 $ .67 $ 2.89
========== ========== ========== ========== ==========
Weighted average common shares
outstanding - basic 10,604 10,618 10,618 10,837 14,082
========== ========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Before extraordinary items $ .72 $ 1.08 $ 1.39 $ .74 $ 2.52
Extraordinary items - - (.06) (.08) -
---------- ---------- ---------- ---------- ----------
Diluted earnings per common share $ .72 $ 1.08 $ 1.33 $ .66 $ 2.52
========== ========== ========== ========== ==========
Weighted average common shares
outstanding - diluted 10,640 10,620 10,634 11,086 17,653
========== ========== ========== ========== ==========
OPERATING DATA:
Depreciation and amortization $ 6,365 $ 11,994 $ 12,775 $ 16,064 $ 54,021
Capital expenditures 10,538 12,448 21,040 20,567 133,620
Cash dividends 244 531 2,124 2,569 5,402
BALANCE SHEET DATA:
Working capital $ 122,738 $ 110,128 $ 150,506 $ 394,496 $ 447,933
Property, plant and equipment, net 81,187 84,567 94,267 488,841 629,205
Total assets 319,544 324,710 375,714 1,410,186 1,654,154
Long-term debt, net of current portion 177,149 153,472 194,851 785,383 944,493
Redeemable convertible preferred stock - - - 62,882 63,057
Shareholders' equity 76,478 87,990 100,004 196,707 237,933
(1) Amounts set forth in 1994 reflect the inclusion of Imperial Feather
Company from August 19, 1994 and Beacon Manufacturing Company
from December 1, 1994.
(2) Amounts set forth in 1997 reflect the results of operations for a
53-week period, and the inclusion of Fieldcrest Cannon, Inc. from
December 19, 1997.
(3) Amounts set forth in 1998 reflect the inclusion of The Leshner
Corporation from July 28, 1998.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company markets and manufactures home textile furnishings for the bedroom,
bathroom and kitchen. The Company operates a network of manufacturing,
purchasing and distribution facilities in the U.S. and Canada with
approximately 14,000 employees.
MERGERS AND ACQUISITIONS
On July 28, 1998, the Company acquired the net assets of The Leshner Corporation
("Leshner"), a 91 year-old manufacturer of towels and terry-related products,
for a purchase price of $41.8 million in cash (including acquisition costs). In
connection with the acquisition, the Company retired $32.5 million of
outstanding Leshner debt. The acquisition was accounted for using the purchase
method of accounting for business combinations. As such, the operating results
of Leshner for the period from the acquisition date through January 2, 1999 have
been included in fiscal year 1998 results.
On December 19, 1997 (the "Merger Date"), the Company acquired Fieldcrest
Cannon, Inc. ("Fieldcrest Cannon") for a combination of cash and stock valued at
approximately $409.0 million (the "Merger"). Additionally, the Company retired
approximately $199.0 million of existing Fieldcrest Cannon long-term debt. The
Merger was accounted for using the purchase method of accounting. Accordingly,
the operating results of Fieldcrest Cannon for the period from the Merger Date
through January 3, 1998 have been included in fiscal year 1997 results, and 1998
includes a full year of Fieldcrest Cannon operations.
RESULTS OF OPERATIONS
The following table presents certain historical statements of operations data
as a percentage of net sales for the periods indicated.
YEAR ENDED
------------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
---- ---- ----
Net sales................... 100.0% 100.0% 100.0%
Cost of goods sold.......... 83.8 83.7 81.4
----- ----- -----
Gross profit................ 16.2 16.3 18.6
Selling, general and
administrative expenses... 8.4 9.0 9.1
Restructuring charge........ - 1.0 0.1
----- ----- -----
Earnings from operations.... 7.8 6.3 9.4
Interest expense............ 2.8 3.9 4.8
----- ----- -----
Earnings before income taxes
and extraordinary items... 5.0% 2.4% 4.6%
===== ===== =====
The discussion below makes reference to pro forma fiscal year 1997 results. Pro
forma amounts include historical results of operations for Fieldcrest Cannon
from January 1, 1997 and Leshner from August 1, 1997. Lines of business exited
or sold since the acquisitions are not included in the pro forma fiscal year
1997 results of operations. Fiscal year 1997 results include a 53-week period as
compared to a 52-week period for fiscal year 1998.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
NET SALES. Net sales were $1.5 billion in fiscal year 1998, representing an
increase of $929.8 million, or 160.3%, as compared to $580.0 million in fiscal
year 1997. The $929.8 million increase in net sales is primarily due to the
inclusion of a full year of operations for Fieldcrest Cannon and the inclusion
of $34.6 million in Leshner net sales since its acquisition date. Net sales
decreased $84.1 million, or 5.3%, as compared to 1997 pro forma results.
17
Approximately $32.0 million of this decline is attributable to the 52-week
period in fiscal year 1998 versus the 53-week period in fiscal year 1997. Other
factors contributing to the decrease were lower sales of utility bedding and
bath towels. Utility bedding sales declined primarily due to lower volume in
jacquard blankets and decreases in Disney blanket sales due to the termination
of the Disney license. Bath towel sales were down due to several customers
adjusting inventory levels, thereby delaying orders. Additionally, two large
customers delayed promotional events and new product rollouts until 1999 which
were originally scheduled to be 1998 events. These declines were offset by
increases in fashion bedding sales, which were primarily due to the Royal
Velvet-Registered Trademark- sheet reintroduction program and initial rollouts
of bed-in-a-bag programs.
GROSS PROFIT. Gross profit margins increased to 18.6% in fiscal year 1998,
compared to 16.3% in fiscal year 1997. Increases in gross profit margins
resulted from lower raw material costs and the realization of significant
operating improvements, due in part to capital investment programs within the
bath and decorative bedding businesses. Gross profit for fiscal year 1998 was
$281.4 million, or 18.6% of net sales, up from pro forma results for the same
period in fiscal year 1997 of $246.8 million, or 15.5% of net sales. The
increase is attributable to an improving mix of business in bath towels and the
lower material costs and operating efficiencies discussed above.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A increased $85.2 million to
$137.3 million in fiscal year 1998, compared to $52.1 million in fiscal year
1997, and as a percentage of net sales, increased to 9.1% in fiscal year 1998
from 9.0% in fiscal year 1997. The increase in total SG&A expenses is primarily
due to a full year of expenses for Fieldcrest Cannon and the inclusion of
Leshner SG&A expenses since the acquisition date. SG&A expenses of $137.3
million in fiscal year 1998 is a decrease of $24.6 million as compared to fiscal
year 1997 pro forma amounts. This decline is primarily attributable to the
reductions in headcount at Fieldcrest Cannon and other cost control programs
begun in December 1997.
RESTRUCTURING CHARGE. The $1.5 million restructuring charge was related to
severance and other employee-related costs associated with the consolidation of
blanket production into facilities in Swannanoa, North Carolina and Westminster,
South Carolina.
INTEREST EXPENSE. Interest expense increased by $49.8 million to $72.3 million
in fiscal year 1998, compared to $22.5 million in fiscal year 1997. The
increase was primarily due to the additional debt incurred as a result of the
Merger and the purchase of Leshner. Average interest rates for fiscal year 1998
declined slightly from fiscal year 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NET SALES. Net sales were $580.0 million in fiscal year 1997, representing an
increase of $89.3 million, or 18.2%, as compared to $490.7 million in fiscal
year 1996. Excluding $40.0 million of Fieldcrest Cannon net sales since the
Merger Date, the $49.3 million increase in net sales is due to increases in
blanket sales of $30.8 million, as well as higher sales in bed pillows, mattress
pads and fashion bedding of $18.5 million. The increases are due in part to the
acquisition of the blanket operations of Fieldcrest Cannon in November 1996 and
the offering of new branded products introduced in early 1997.
GROSS PROFIT. Gross profit margins remained virtually flat at 16.3% in fiscal
year 1997, compared to 16.2% in fiscal year 1996. Increases in product margins
resulted primarily from lower raw material prices, which were offset by costs
associated with reconfiguring the Company's South Carolina distribution
facility, increases in obsolescence reserves, higher sales-related deductions,
and losses on sales of certain inventories to accommodate the consolidation of
the blanket facilities.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased $10.7 million to $52.1
million in fiscal year 1997, compared to $41.4 million in fiscal year 1996, and
as a percentage of net sales, increased to 9.0% in fiscal year 1997 from 8.4% in
fiscal year 1996. Excluding $3.5 million of Fieldcrest Cannon expenses since
the Merger Date, the $7.2 million increase resulted primarily from higher
personnel costs due in part to filling several management positions which were
vacant in 1996 and the payment of severance, increased travel expenses primarily
related to the Merger, and higher professional fees.
18
RESTRUCTURING CHARGE. The $6.0 million restructuring charge was related to
costs associated with the consolidation of blanket production into facilities in
Swannanoa, North Carolina and Westminster, South Carolina. The charge
represents costs associated with the write-down of certain assets and other
expenses.
INTEREST EXPENSE. Interest expense increased by $8.5 million to $22.5 million
in fiscal year 1997, compared to $14.0 million in fiscal year 1996. The
increase was primarily due to $3.5 million of interest on the additional debt
incurred as a result of the Merger, with the remaining increase due primarily to
interest on the $125.0 million aggregate principal amount of 10% Senior
Subordinated Notes due 2006 (the "10% Notes") issued by the Company in November
1996.
EXTRAORDINARY ITEM. An extraordinary loss of $0.9 million was recorded in
fiscal year 1997 related to the write-off of deferred debt issuance costs
associated with the Company's previous senior credit facility, which was
refinanced in connection with the Merger.
LIQUIDITY AND CAPITAL RESOURCES
In December 1997, in connection with the Fieldcrest Cannon acquisition, the
Company entered into new senior revolving credit and term loan facilities (the
"Facilities") with a group of financial and institutional investors for which
NationsBank of Texas, N.A. ("NationsBank") acts as the agent. The Facilities
consisted of a $350.0 million revolving credit facility (the "Revolver") and a
$250.0 million term loan facility (the "Term Loan"). The Term Loan consisted of
a $125.0 million Tranche A term loan (the "Tranche A Term Loan") and a $125.0
million Tranche B term loan (the "Tranche B Term Loan"). Effective July 28,
1998, the Company amended the Facilities by increasing the Tranche B Term Loan
to $225.0 million. The increase occurred in conjunction with the acquisition of
Leshner allowing the Company to fund the transaction and reduce borrowings under
the Revolver. The Revolver and the Tranche A Term Loan expire December 31,
2003, and the Tranche B Term Loan expires December 31, 2004. The Revolver
includes $55.0 million of availability for letters of credit. At January 2,
1999, $42.1 million of letters of credit were outstanding. Unused availability
under the Revolver was $125.1 million at January 2, 1999.
Amounts outstanding under the Revolver and the Tranche A Term Loan presently
bear interest at a rate based upon the London Interbank Offered Rate plus 2.00%.
The Tranche B Term Loan bears interest on a basis similar to the Tranche A Term
Loan, plus an additional margin of .50%. These rates are subject to decrease
based upon the Company's achievement of certain ratios of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"). The
weighted average annual interest rate on outstanding borrowings under the
various senior credit facilities during 1998 was 7.78% and the effective rate at
January 2, 1999 was 7.52%.
The Facilities are guaranteed by each of the domestic subsidiaries of the
Company, and are secured by first priority liens on all of the capital stock of
each domestic subsidiary of the Company and by 65% of the capital stock of the
Company's foreign subsidiaries. The Company has also granted a first priority
security interest in all of its presently unencumbered and future domestic
assets and properties, and all presently unencumbered and future domestic assets
and properties of each of its subsidiaries. The Term Loan is subject to
mandatory prepayment from all net cash proceeds of asset sales and debt
issuances of the Company (except as specifically provided), 50% of the net cash
proceeds of equity issuances by the Company or any of its subsidiaries, and 75%
of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro
rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the
remaining installments of principal.
The Facilities contain a number of financial, affirmative and negative covenants
which, among other things, require maintenance of certain ratios of funded debt
to EBITDA and certain cash flow coverage ratios, and require the Company to
maintain a minimum tangible net worth. Other covenants restrict, among other
things, the Company's ability to incur additional debt, grant liens, engage in
transactions with affiliates, make loans, advances and investments, pay
dividends and other distributions to shareholders, dispose of assets, effect
mergers, consolidations and dissolutions, and make certain changes in its
business. At January 2, 1999, the Company was in compliance with all covenants
under the Facilities.
In connection with the Merger, the Company issued $185.0 million of 9% Senior
Subordinated Notes due 2007 (the "9% Notes") in a private offering. In March
1998, the Company completed an offer to exchange the unregistered 9% Notes
previously sold in the private offering for an equal aggregate principal amount
of registered 9% Notes. The 9% Notes are due December 15, 2007, with interest
payable semiannually commencing June 15, 1998. The Company may at its option
19
redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at a
redemption price of 104.5%, which declines 1.5% annually through December 15,
2005 to 100%. The 9% Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness,
including borrowings under the Facilities and rank pari passu to the 10% Notes
described below.
On November 12, 1996, the Company issued the 10% Notes in a private offering.
The 10% Notes are due November 15, 2006, with interest payable semiannually
commencing May 15, 1997. The Company used the proceeds from such offering to
retire the outstanding indebtedness under the Company's previously existing term
loan, to finance the acquisition of certain assets of Fieldcrest Cannon's
blanket operations, to temporarily reduce indebtedness under the previous
revolving credit facility, and to acquire a warehouse facility. The Company may,
at its option, redeem the 10% Notes, in whole or in part, on or after November
15, 2001 at a redemption price of 105.0%, which declines 1.667% annually through
November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of
the Company, subordinated in right of payment to all existing and future senior
indebtedness, including borrowings under the Facilities. In March 1997, the
Company completed an offer to exchange the unregistered 10% Notes previously
sold in the private offering for an equal aggregate principal amount of
registered 10% Notes.
The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior
subordinated basis by each of the existing and future domestic subsidiaries of
the Company and each other subsidiary of the Company that guarantees the
Company's obligations under the Facilities described above. The guarantees are
subordinated in right of payment to all existing and future senior indebtedness
of the relevant guarantor. Upon a change in control, the Company will be
required to make an offer to repurchase all outstanding 9% Notes and 10% Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of repurchase.
The 9% Notes and the 10% Notes are subject to certain covenants which restrict,
among other things, the Company's ability to incur additional indebtedness and
issue preferred stock, grant liens to secure subordinated indebtedness, pay
dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, engage in certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any senior indebtedness
and senior in right of payment to the 9% Notes and the 10% Notes, merge or
consolidate with any other person, sell stock of subsidiaries or sell, assign,
transfer, lease, convey or otherwise dispose of substantially all of the assets
of the Company. At January 2, 1999, the Company was in compliance with all
covenants under the 9% Notes and the 10% Notes.
As a result of the Merger, the outstanding $104.2 million aggregate principal
amount of 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon
(the "Fieldcrest Debentures") are convertible, at the option of the holder, into
a combination of cash and the Company's common stock. At January 2, 1999, if all
outstanding Fieldcrest Debentures were converted, the resulting cash component
to be paid to the debtholders would be approximately $63.6 million. The Company
expects to utilize funds available under the Revolver to pay any cash payable
upon conversion of Fieldcrest Debentures.
The Company enters into interest rate swap agreements to modify the interest
characteristics of portions of its outstanding debt. The agreements entitle the
Company to receive or pay to the counterparty (a major bank), on a quarterly
basis, the amounts, if any, by which the Company's interest payments covered by
swap agreements differ from those of the counterparty. These amounts are
recorded as adjustments to interest expense. The fair value of the swap
agreements and changes in fair value as a result of changes in market interest
rates are not recognized in the consolidated financial statements. As of January
3, 1998, the Company had approximately $125.0 million of notional amounts
covered under interest rate swap agreements whereby the Company exchanged fixed
rates for floating rates. The weighted average fixed and floating rates were
10.0% and 9.5%, respectively. Subsequent to January 3, 1998, the Company
terminated the swap agreement covering approximately $125.0 million of
indebtedness resulting in a gain of approximately $1.0 million which has been
deferred and is being amortized as an adjustment to interest expense over the
remaining three-year term of the terminated swap agreement. As of January 2,
1999, the Company had approximately $345.0 million of notional amounts covered
under interest rate swap agreements whereby the Company exchanged floating rates
for fixed rates. The weighted average fixed and floating rates were 4.70% and
5.26%, respectively. The fair values of the swaps at January 3, 1998 and
January 2, 1999 were zero and $2.1 million, respectively. The fair value of
$2.1 million was in favor of the Company.
The Company anticipates that its principal uses of cash will be working capital
requirements, debt service requirements, payment of dividends (if permitted),
and capital expenditures, as well as expenditures relating to acquisitions and
20
integrating acquired businesses. Based upon current and anticipated levels of
operations, the Company believes that its cash flow from operations, together
with amounts available under the Revolver, will be adequate to meet its
anticipated cash requirements for fiscal year 1999. There can be no assurance,
however, that the Company's business will continue to generate sufficient cash
flow from operations in the future to service its debt, and the Company may be
required to refinance all or a portion of its existing debt or to obtain
additional financing. These increased borrowings may result in higher interest
payments. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing, if needed, could have a material adverse effect on the
Company.
The Company spent $133.6 million for capital expenditures in fiscal year 1998.
The majority of these funds were for the planned modernizations of the
Fieldcrest Cannon towel and sheet manufacturing facilities, upgrading
information systems and the purchase of a yarn spinning facility. In fiscal
year 1997, the Company spent $20.6 million for capital expenditures, including
$13.7 million in the blanket facilities, principally to complete the
installation of equipment purchased from Fieldcrest Cannon in November 1996.
The Company is currently in the middle of a three-year program to make capital
expenditures in excess of $275.0 million by the end of 2000, principally to
modernize certain acquired sheet and towel manufacturing facilities through the
addition of new machinery and equipment. The Company anticipates that
approximately $85.0 million in capital expenditures will be made in fiscal year
1999.
The Company currently anticipates that it will continue to pay a quarterly
dividend of $.06 per share on its common stock. Through December 31, 1999, the
Company anticipates that it will pay dividends on its preferred stock at a rate
per annum equal to 3%, or approximately $2.0 million per year. Thereafter, the
rate at which dividends will accrue on the preferred stock may increase to 7% or
10% depending on the Company's earnings per share for the 1999 fiscal year. The
Company's ability to pay dividends on the common stock and preferred stock is
restricted under the terms of the Facilities and the 9% Notes and the 10% Notes,
and, in the case of common stock dividends, under the terms of the preferred
stock. Accordingly, there can be no assurance that the Company will pay any
dividends in the future or, if dividends are paid, as to the amount thereof.
NEW ACCOUNTING STANDARD
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of SFAS No. 133 are
effective for fiscal years beginning after June 15, 1999, although early
adoption is allowed. The Company has not determined the financial impact of
adopting this SFAS and has not determined if it will adopt its provisions prior
to its effective date.
YEAR 2000 CONSIDERATIONS
GENERAL
Many existing computer programs use only two digits to identify a year in the
date field. These programs, if not corrected, could fail or create erroneous
results by or at the Year 2000, thereby causing disruptions in the operations of
the Company and its suppliers and customers. This "Year 2000" issue is believed
to affect virtually all companies and organizations, including the Company.
21
STATE OF READINESS
SYSTEMS REPLACEMENT PROJECT
In 1995, the Company began a project aimed at improving its access to business
information through common, integrated computing and reporting systems. In
1996, prior to the Company's acquisition of Fieldcrest Cannon in December 1997,
Fieldcrest Cannon began a similar systems replacement project. Each of the
Company and Fieldcrest Cannon, in connection with its systems replacement
project, elected to implement systems using software applications principally
developed by Oracle Corporation ("Oracle") to fulfill its business systems
replacement needs. Such software applications replace many of the accounting,
reporting and manufacturing systems that are or previously had been in place at
the Company and Fieldcrest Cannon. Additionally, each of the Company and
Fieldcrest Cannon, in connection with its systems replacement project,
identified certain other payroll, manufacturing and warehousing systems to be
replaced with software applications from other vendors. The Company believes
that the software applications purchased in connection with these business
replacement projects are Year 2000 compliant.
Following the acquisition of Fieldcrest Cannon, the independent systems
replacement projects of the Company and Fieldcrest Cannon were combined, and the
combined project (the "Systems Replacement Project") is ongoing with an
estimated completion date during the third quarter of fiscal year 1999. The
extension of the estimated completion date from the Company's previous estimate
of June 1999 is due primarily to acquisitions made in the latter half of fiscal
year 1998 as well as software customizations required at certain of the
Company's facilities, both of which have broadened the original scope of the
project. It is estimated that over 95% of the development of the Oracle
software applications is complete, with the implementation of the financial
application having been substantially completed as of October 1998. The
Company's payroll conversion was completed during the first quarter of fiscal
year 1999. The manufacturing and warehousing applications require unique
customization to meet the specific needs of each plant; therefore, the
development and implementation of this software is expected to continue into the
third quarter of fiscal year 1999.
YEAR 2000 PLAN
In addition to the Systems Replacement Project, the Company, as part of its Year
2000 compliance program, has developed a specific plan (the "Year 2000 Plan") to
help ensure that the Company is not adversely affected by the Year 2000 issue.
The Year 2000 Plan is divided into the following four major components (each, a
"Component"): (1) Information Technology Systems ("IT Systems"); (2)
Information Technology Infrastructure ("IT Infrastructure"); (3) Process Control
and Instrumentation ("PC&I"); and (4) third party suppliers and customers
("External Agents"). The Year 2000 Plan is being implemented with respect to
each Component in the following six general phases: (1) inventory Year 2000
items; (2) assign priorities to identified items; (3) assess the impact of items
determined not to be Year 2000 compliant; (4) convert or replace material items
that are determined not to be Year 2000 compliant; (5) test material items; and
(6) design and implement contingency and business continuation plans for each
location. Additionally, the Company retained an independent third party, in the
first quarter of fiscal year 1999, to review the Company's Year 2000 Plan and
make recommendations as needed. This study is underway with the results to be
provided to the Company during the second quarter of fiscal year 1999. For
purposes of the Year 2000 Plan, "material items" are those believed by the
Company to have a risk involving the safety of individuals, and that may cause
damage to property or the environment or significantly impair the Company's
ability to manufacture and ship its products.
The inventory and priority assessment phases were completed with respect to each
Component of the Year 2000 Plan in May 1998. The remainder of the Year 2000
Plan is ongoing, the majority of which will be completed during the third
quarter of fiscal year 1999. However, the Company will continue to monitor,
review and perform testing in each phase through the end of fiscal year 1999.
IT SYSTEMS. IT Systems are comprised primarily of applications software. The
Company's applications software is being remediated primarily through the
Systems Replacement Project. Applications software that is not remediated
through the Systems Replacement Project and is not Year 2000 compliant is being
converted internally through the use of custom programming or replaced by the
supplier of such software. The Company estimates that the conversion phase with
respect to IT Systems was approximately 90% complete as of February 1999 and the
remaining conversions will be completed during the third quarter of fiscal year
1999. The Company's estimate remains at 90% due to the software customizations
22
and the additional requirements in converting the newly acquired businesses
discussed above. The testing phase with respect to converted software is
ongoing and will continue through the end of fiscal year 1999. Vendor software
replacements and upgrades are on schedule for completion by June 1999 for the
majority of the plant conversions; however, certain vendor software upgrades
will not be complete until the third quarter of fiscal year 1999. The testing
phase with respect to replacement software is conducted as the software is
replaced and will continue through the end of the year. Contingency planning
with respect to IT Systems is ongoing with high level planning expected to be
completed during the second quarter of fiscal year 1999. Detailed refinement of
these plans will continue into the third and fourth quarters, as other system
conversions are completed.
IT INFRASTRUCTURE. IT Infrastructure consists of hardware and systems software
other than applications software. The implementation of the Year 2000 Plan with
respect to IT Infrastructure is on schedule, and the Company estimates that
approximately 90% of the scheduled activities with respect to IT Infrastructure
had been completed as of February 1999. As discussed above, the Company's
estimate remains at 90%, due to software customizations and acquisitions
broadening the scope of the project. This Component is expected to be
substantially complete during the third quarter of fiscal year 1999. The
testing phase will continue as the IT Infrastructure is remediated, upgraded or
replaced. Contingency planning with respect to IT Infrastructure is ongoing
with development and enhancement continuing through the end of the year.
PC&I. PC&I involves the hardware, software and associated embedded computer
chips that are used in the operation of the Company's facilities. Plans
detailing the tasks and resources required to implement the Year 2000 Plan with
respect to PC&I are in place. The Company estimates that over 80% of the PC&I
vendors have responded to questionnaires indicating their equipment is Year 2000
compliant, and 20% have reported non-compliance. The non-compliant systems have
been remediated or are undergoing remediation. However, the Company continues
to assess the needs of its newly acquired facilities and expects completion
during the third quarter of fiscal year 1999. Contingency planning with respect
to PC&I is ongoing and will be based primarily on the results of tests expected
to be completed by the end of the third quarter of fiscal year 1999.
EXTERNAL AGENTS. The External Agents Component of the Year 2000 Plan involves
identifying and prioritizing critical business partners at the direct interface
level and communicating with them about their plans and progress in addressing
the Year 2000 issue. Detailed evaluations of the most critical third parties
have been initiated. The Company is developing contingency plans based upon
these evaluations. Contingency planning will continue with the Company's
business partners throughout fiscal year 1999. The Company believes the
development and implementation of this Component of the Year 2000 Plan is on
schedule as of February 1999.
COSTS TO ADDRESS THE BUSINESS SYSTEM REPLACEMENTS AND YEAR 2000
To date, the Company estimates it has spent $61.4 million of capital on the
Systems Replacement Project of which a portion relates to expenditures made
prior to the Merger. It is estimated that an additional $16.0 million of
capital spending will be incurred in 1999 to complete the Systems Replacement
Project. Expenses incurred to complete remediation of the Year 2000 Plan are
not expected to have a material impact on the Company's results of operations or
financial position. The Company believes operating cash flows will be adequate
to fund any remaining expenditures related to the Systems Replacement Project
and the Year 2000 Plan and does not anticipate these needs having a material
effect on its liquidity or financial condition.
RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES
The Company's failure to resolve Year 2000 issues on or before December 31, 1999
could result in system failures or miscalculations causing disruption in
operations, including, among other things, a temporary inability to process
transactions, send invoices, send and/or receive e-mail and voice mail, or
engage in similar normal business activities. Additionally, failure of third
parties, upon whom the Company's business relies, to timely remediate their Year
2000 issues could result in disruption of the Company's supply of materials and
parts, late, missed or unapplied payments, temporary disruptions in order
processing and other general problems related to the Company's daily operations.
While the Company believes the Year 2000 Plan will adequately address the
Company's internal Year 2000 issues, until the Company receives responses from
all significant business partners, the overall risks associated with the Year
2000 issue remain difficult to accurately assess and quantify, and there can be
no assurances that the Year 2000 issue will not have a material adverse effect
on the Company and its operations.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. See additional disclosures about interest rate
swap agreements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations above. The Company's market risk sensitive
instruments are not entered into for trading purposes. The Company has not
experienced any significant changes in market risk since January 2, 1999.
The Company's exposure to interest rate risk consists of floating rate debt
based on the London Interbank Offered Rate plus an adjustable margin. To lower
or limit overall borrowing costs, the Company enters into interest rate swap
agreements to modify the interest characteristics of portions of its outstanding
debt. The interest rate swap agreements generally have one to two year terms.
The agreements entitle the Company to receive or pay to the counterparty (a
major bank), on a quarterly basis, the amounts, if any, by which the Company's
interest payments covered by swap agreements differ from those of the
counterparty. These amounts are recorded as adjustments to interest expense.
The fair value of the swap agreements and changes in fair value resulting from
changes in market interest rates are not recognized in the consolidated
financial statements. The annual impact on the Company's results of operations
of a 100 basis point interest rate change on the January 2, 1999 outstanding
balance of the variable rate debt would be approximately $5.3 million
irrespective of any swaps associated with this debt.
The Company's exposure to fluctuations in foreign currency exchange rates is due
primarily to a foreign subsidiary domiciled in Canada. The Company's Canadian
subsidiary uses the Canadian dollar as its functional currency. The Company
generally does not use financial derivative instruments to hedge foreign
currency exchange rate risks. The Canadian subsidiary is not material to the
Company's consolidated results of operations; therefore, the impact of a 10%
change in the exchange rate at January 2, 1999 would not have a significant
impact on the Company's results of operations or financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are set forth herein commencing on page F-1.
Schedule II to the financial statements is set forth herein on page S-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item 10 is set forth at pages 6 through 9
of the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders
(the "1999 Proxy Statement") under the captions "Director Proposals - Election
of Directors" and "Stock Ownership of Management and Certain Beneficial Owners
- --Section 16(a) Beneficial Ownership Reporting Compliance" and at page 12 of the
1999 Proxy Statement under the caption "Executive Officers," and incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth at pages 11 through
12 and pages 13 through 26 of the 1999 Proxy Statement under the captions
"Information Concerning the Board of Directors --Compensation of Directors" and
"Executive Compensation" (excluding the information set forth at pages 13
through 17 under the caption "Executive Compensation --Report of the
Compensation Committee on Executive Compensation") and incorporated herein by
reference.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth at pages 4 through 5
of the 1999 Proxy Statement under the caption "Stock Ownership of Management and
Certain Beneficial Owners" and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is set forth at pages 24 through
26 of the 1999 Proxy Statement under the captions "Executive Compensation
- --Employment Agreements" and "--Certain Transactions" and incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS: Page
Independent Auditors' Report....................................F-2
Consolidated Balance Sheets as of January 3, 1998
and January 2, 1999............................................F-3
Consolidated Statements of Earnings for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999.........F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 28, 1996, January 3, 1998 and
January 2, 1999................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999.........F-6
Notes to Consolidated Financial Statements......................F-7
2. FINANCIAL STATEMENT SCHEDULE. The following financial statement
schedule of the Company for the fiscal years ended December 28, 1996,
January 3, 1998 and January 2, 1999 is filed as part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of the Company:
Schedule II - Valuation and Qualifying Accounts.................S-1
3. Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 Agreement and Plan of Merger, dated as of September 10, 1997, by and
among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest
Cannon, Inc. (incorporated by reference to Appendix A to the Joint
Proxy Statement/Prospectus forming a part of Pillowtex Corporation's
Registration Statement on Form S-4 (No. 333-36663))
2.2 Amendment to Agreement and Plan of Merger, dated as of September 23,
1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc.,
25
and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A
to the Joint Proxy Statement/Prospectus forming a part of Pillowtex
Corporation's Registration Statement on Form S-4 (No. 333-36663))
3.1 Restated Articles of Incorporation of Pillowtex Corporation, as
amended (incorporated by reference to Exhibit 3.1 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))
3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended
(incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994)
4.1 Specimen of Certificate evidencing Common Stock (incorporated by
reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996)
4.2 Specimen of Certificate evidencing Series A Redeemable Convertible
Preferred Stock (incorporated by reference to Exhibit 4.2 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 3, 1998)
4.3 Indenture, dated November 12, 1996 (incorporated by reference to
Exhibit 4.1 to Pillowtex Corporation's Registration Statement on Form
S-4 (No. 333-17731))
4.4 Indenture, dated as of December 18, 1997, among Pillowtex Corporation,
the guarantors listed on the signature page thereto, and Norwest Bank
Minnesota, National Association, as Trustee (incorporated by reference
to Exhibit 4.1 to Pillowtex Corporation's Current Report on Form 8-K
dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))
4.5 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto, and
Norwest Bank Minnesota, National Association, as Trustee (incorporated
by reference to Exhibit 4.2 to Pillowtex Corporation's Current Report
on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A
(Amendment No. 1))
4.6 Second Supplemental Indenture, dated as of July 28, 1998, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Norwest Bank Minnesota, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's
Quarterly Report on Form 10-Q for the quarter ended July 4, 1998)
10.1 Amended and Restated Credit Agreement, dated as of December 19, 1997,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.1 to Pillowtex Corporation's Current Report
on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A
(Amendment No. 1))
10.2 First Amendment to Amended and Restated Credit Agreement, dated as of
June 19, 1998, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's
Quarterly Report on Form 10-Q dated July 4, 1998)
10.3 Second Amendment to Amended and Restated Credit Agreement, dated as of
July 28, 1998, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's
Quarterly Report on Form 10-Q dated July 4, 1998)
10.4 Third Amendment to Amended and Restated Credit Agreement, dated as of
March 12, 1999, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
26
10.5 Term Credit Agreement, dated as of December 19, 1997, among Pillowtex
Corporation, certain Lenders named herein, and NationsBank of Texas,
N.A., as Administrative Agent (incorporated by reference to Exhibit
10.2 to Pillowtex Corporation's Current Report on Form 8-K dated
December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))
10.6 First Amendment to Term Credit Agreement, dated as of June 19, 1998,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.5 to Pillowtex Corporation's Quarterly Report
on Form 10-Q dated July 4, 1998)
10.7 Second Amendment to Term Credit Agreement, dated as of July 28, 1998,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.6 to Pillowtex Corporation's Quarterly Report
on Form 10-Q dated July 4, 1998)
10.8 Preferred Stock Purchase Agreement, dated as of September 10, 1997, by
and among Pillowtex Corporation, Apollo Investment Fund III, L.P.,
Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P.
(incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's
Current Report on Form 8-K dated September 10, 1997, as amended by a
Form 8-K/A (Amendment No. 1))
10.9 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of
November 21, 1997, by and among Pillowtex Corporation, Apollo
Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and
Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit
10.1 to Pillowtex Corporation's Current Report on Form 8-K dated
November 21, 1997)
10.10 Purchase Agreement, dated December 15, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto, and
NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc.
(incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's
Current Report on Form 8-K dated December 19, 1997, as amended by a
Form 8-K/A (Amendment No. 1))
10.11 Purchase Agreement Supplement, dated December 19, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns
& Co. Inc. (incorporated by reference to Exhibit 10.6 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))
10.12 Registration Rights Agreement, dated as of December 18, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns
& Co. Inc. (incorporated by reference to Exhibit 10.7 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))
10.13 Registration Rights Agreement Supplement, dated as of December 19,
1997, among Pillowtex Corporation, the guarantors listed on the
signature page thereto, and NationsBank Montgomery Securities, Inc.
and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit
10.8 to Pillowtex Corporation's Current Report on Form 8-K dated
December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))
10.14 Registration Rights Agreement, dated as of November 12, 1996, by and
among Pillowtex Corporation, each domestic subsidiary of Pillowtex
Corporation, and NationsBanc Capital Markets, Inc. and Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (incorporated by reference to
Exhibit 10.59 to Pillowtex Corporation's Registration Statement on
Form S-4 (No. 333-17731))
10.15 Sublicense Agreement, dated as of July 1, 1998, between Pillowtex
Corporation and the Ralph Lauren Home Collection (incorporated by
reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report
on Form 10-Q for the quarter ended July 4, 1998)
27
10.16 Lease Agreement, dated as of September 18, 1995, between Pillowtex
Corporation and Sanwa Business Credit Corp. (incorporated by reference
to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form
10-Q, as amended, for the quarter ended September 30, 1995)
10.17 Agreement of Lease, dated May 23, 1995, between Ten Seventy One Joint
Venture and Pillowtex Corporation (incorporated by reference to
Exhibit 10.66 to Pillowtex Corporation's Annual Report on Form 10-K
for the fiscal year ended December 30, 1995)
10.18 Lease, dated as of November 26, 1996, by and among Torfeaco
Industries Limited and Standa Investment Limited (incorporated by
reference to Exhibit 10.14 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.19 Indemnity Agreement, dated as of November 26, 1996, between Torfeaco
Industries Limited and Standa Investment Limited (incorporated by
reference to Exhibit 10.15 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.20 Industrial Lease, dated as of November 23, 1992, between Angel and
Jean Echevarria and Pillowtex Corporation (incorporated by reference
to Exhibit 10.21 to Pillowtex Corporation's Registration Statement on
Form S-1 (No. 33-57314))
10.21 Second Amendment to Lease entered into in September 1997 between Angel
and Jean Echevarria and Pillowtex Corporation (incorporated by
reference to Exhibit 10.17 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.22 Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith,
Jr. and Pillowtex Corporation (incorporated by reference to Exhibit
10.23 to Pillowtex Corporation's Registration Statement on Form S-1
(No. 33-57314))
10.23 Agreement for Modification and Extension of Lease between Jimmie D.
Smith, Jr. and Pillowtex Corporation (incorporated by reference to
Exhibit 10.19 to Pillowtex Corporation's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998)
10.24 Form of Equipment Leasing Agreement between BTM Financial & Leasing
Corporation B-4 and Beacon Manufacturing Company, Manetta Home
Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as of June 14,
1996 (incorporated by reference to Exhibit 10 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996)
10.25* Employment Agreement dated as of January 1, 1993, between Pillowtex
Corporation and Charles M. Hansen, Jr. (incorporated by reference to
Exhibit 10.2 to Pillowtex Corporation's Registration Statement on Form
S-1 (No. 33-57314))
10.26* Amendment to Employment Agreement, dated as of July 26, 1993, between
Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by
reference to Exhibit 10.26 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
10.27* Amendment to Employment Agreement, dated as of January 20, 1998,
between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated
by reference to Exhibit 10.23 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998)
10.28* Form of Confidentiality and Noncompetition Agreement (incorporated by
reference to Exhibit 10.27 to Pillowtex Corporation's Registration
Statement on Form-S-1 (No. 33-57314))
10.29* Form of Director Indemnification Agreement (incorporated by reference
to Exhibit 10.36 to Pillowtex Corporation's Registration Statement on
Form S-1 (No. 33-57314))
28
10.30* Split Dollar Life Insurance Agreement between Pillowtex Corporation
and Charles M. Hansen, Jr. dated July 26, 1993 (incorporated by
reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
10.31* Pillowtex Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to Pillowtex Corporation's Proxy Statement for
its Annual Meeting of Shareholders held on May 8, 1997)
10.32* Form of Employment Agreement entered into between Pillowtex Management
Services Company and each of Jeffrey D. Cordes, and Scott E. Shimizu
(incorporated by reference to Exhibit 10.28 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 3, 1998)
10.33* Form of Employment Agreement entered into between Pillowtex Management
Services Company and Ronald M. Wehtje dated November 9, 1998
10.34* Form of Employment Agreement entered into between Fieldcrest Cannon,
Inc. and A. Allen Oakley, dated October 9, 1998
10.35* Form of Employment Agreement dated as of January 1, 1998, between
Pillowtex Management Services Company and Kevin M. Finlay
(incorporated by reference to Exhibit 10.29 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 3, 1998)
10.36* Pillowtex Corporation Supplemental Executive Retirement Plan,
effective as of January 1, 1997 (incorporated by reference to Exhibit
10.1.44 to Pillowtex Corporation's Registration Statement on Form S-4
(No. 33-36663) filed on September 29, 1997)
10.37* Pillowtex Corporation Management Incentive Plan (incorporated by
reference to Appendix B to Pillowtex Corporation's Proxy Statement for
its Annual Meeting of Shareholders held on May 8, 1997)
10.38* Pillowtex Corporation Deferred Compensation Plan, effective as of
February 9, 1998 (incorporated by reference to Exhibit 10.32 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year
ended January 3, 1998)
10.39* Pillowtex Corporation Executive Medical Expense Reimbursement Plan,
effective as of January 1, 1998 (incorporated by reference to Exhibit
10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the
quarter ended July 4, 1998)
10.40 Indenture, dated as of March 15, 1987, relating to the 6% Convertible
Subordinated Debentures Due 2012 (incorporated by reference to Exhibit
4.9 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3
(No. 33-12436))
10.41 Yarn Purchase Agreement between Parkdale Mills, Incorporated and
Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10 to
Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
21.1 List of Pillowtex Corporation's Principal Operating Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99.1 Consolidated Financial Statements of The Leshner Corporation as of and
for the fiscal years ended September 30, 1995, September 28, 1996 and
September 27, 1997
29
99.2 Consolidated Balance Sheets of The Leshner Corporation as of
June 28, 1998 and June 29, 1997 and the Related Consolidated
Statements of Operations and Earnings Retained in the Business
and Cash Flows for the Nine-Month Periods ended June 28, 1998
and June 29, 1997
- ----------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
(b) Reports On Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended January 2, 1999.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 1999.
PILLOWTEX CORPORATION
By /s/ Charles M. Hansen, Jr.
Charles M. Hansen, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 29, 1999.
Signatures Title
/s/ Charles M. Hansen, Jr. Chairman of the Board and Chief
- ------------------------------ Executive Officer; Director
Charles M. Hansen, Jr. (Principal Executive Officer)
/s/ Ronald M. Wehtje Senior Vice President and Chief Financial
- ------------------------------ Officer
Ronald M. Wehtje (Principal Financial and Accounting Officer)
/s/ Jeffrey D. Cordes Director
- ------------------------------
Jeffrey D. Cordes
/s/ Kevin M. Finlay Director
- ------------------------------
Kevin M. Finlay
/s/ Scott E. Shimizu Director
- ------------------------------
Scott E. Shimizu
/s/ Mary R. Silverthorne Director
- ------------------------------
Mary R. Silverthorne
/s/ William B. Madden Director
- ------------------------------
William B. Madden
/s/ M. Joseph McHugh Director
- ------------------------------
M. Joseph McHugh
/s/ Paul G. Gillease Director
- ------------------------------
Paul G. Gillease
/s/ Ralph W. La Rovere Director
- ------------------------------
Ralph W. La Rovere
/s/ Mark A. Petricoff Director
- ------------------------------
Mark A. Petricoff
31
PILLOWTEX CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedule
Independent Auditors' Report..............................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 3, 1998 and
January 2, 1999.....................................................F-3
Consolidated Statements of Earnings for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999..............F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 28, 1996, January 3, 1998 and January 2, 1999........F-5
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999..............F-6
Notes to Consolidated Financial Statements...........................F-7
Financial Statement Schedule for the years ended December 28, 1996,
January 3, 1998 and January 2, 1999:
Schedule II - Valuation and Qualifying Accounts......................S-1
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Pillowtex Corporation:
We have audited the consolidated financial statements of Pillowtex Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pillowtex
Corporation and subsidiaries as of January 3, 1998 and January 2, 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 2, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 9, 1999
F-2
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
January 3, 1998 and January 2, 1999
(Dollars in thousands, except for par value)
ASSETS 1997 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 4,604 $ 5,561
Receivables (note 11):
Trade, less allowances of $14,770 in 1997 and
$21,117 in 1998 221,185 246,348
Other 16,468 13,124
Inventories (notes 6 and 11) 359,751 434,281
Assets held for sale 32,614 4,058
Prepaid expenses 6,335 3,785
----------- -----------
Total current assets 640,957 707,157
Property, plant and equipment, net (notes 7 and 11) 488,841 629,205
Intangible assets, at cost less accumulated
amortization of $5,111 in 1997 and $11,866 in 1998 258,867 289,829
Other assets 21,521 27,963
----------- -----------
$1,410,186 $1,654,154
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (note 8) $ 111,202 $ 127,575
Accrued expenses (note 8) 113,575 96,250
Deferred income taxes (note 12) 16,068 22,978
Current portion of long-term debt (note 11) 5,616 12,421
----------- -----------
Total current liabilities 246,461 259,224
Long-term debt, net of current portion (note 11) 785,383 944,493
Deferred income taxes (note 12) 66,340 96,013
Noncurrent liabilities (note 10) 52,413 53,434
----------- -----------
Total liabilities 1,150,597 1,353,164
Series A redeemable convertible preferred stock,
$.01 par value; 65,000 shares issued and
outstanding (note 13) 62,882 63,057
Shareholders' equity (notes 11 and 14):
Preferred stock, $.01 par value; authorized
20,000,000 shares; only Series A issued - -
Common stock, $.01 par value; authorized 30,000,000
shares; 13,967,715 and 14,126,595 shares issued and
outstanding in 1997 and 1998, respectively 140 141
Additional paid-in capital 151,095 155,811
Retained earnings 46,328 83,650
Currency translation adjustment (856) (1,669)
----------- -----------
Total shareholders' equity 196,707 237,933
Commitments and contingencies (notes 9, 10 and 15)
----------- -----------
$1,410,186 $1,654,154
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 28, 1996, January 3, 1998 and January 2, 1999
(Amounts in thousands, except for per share data)
1996 1997 1998
---------- ---------- ----------
Net sales $ 490,655 $ 579,999 $1,509,841
Cost of goods sold 411,048 485,679 1,228,463
---------- ---------- ----------
Gross profit 79,607 94,320 281,378
Selling, general and administrative expenses 41,445 52,090 137,307
Restructuring charge (note 3) - 5,986 1,539
---------- ---------- ----------
Earnings from operations 38,162 36,244 142,532
Interest expense 13,971 22,470 72,288
---------- ---------- ----------
Earnings before income taxes and extraordinary
items 24,191 13,774 70,244
Income taxes (note 12) 9,459 5,538 27,389
---------- ---------- ----------
Earnings before extraordinary items 14,732 8,236 42,855
Extraordinary items, net of income tax
benefit of $391 and $613 in 1996 and
1997, respectively (note 11) (609) (919) -
---------- ---------- ----------
Net earnings 14,123 7,317 42,855
Preferred dividends and accretion (note 13) - 85 2,097
---------- ---------- ----------
Earnings available for common shareholders $ 14,123 $ 7,232 $ 40,758
========== ========== ==========
Basic earnings per common share (note 4):
Before extraordinary items $ 1.39 $ .75 $ 2.89
Extraordinary items (.06) (.08) -
---------- ---------- ----------
Basic earnings per common share $ 1.33 $ .67 $ 2.89
========== ========== ==========
Weighted average common shares outstanding -
basic 10,618 10,837 14,082
========== ========== ==========
Diluted earnings per common share (note 4):
Before extraordinary items $ 1.39 $ .74 $ 2.52
Extraordinary items (.06) (.08) -
---------- ---------- ----------
Diluted earnings per common share $ 1.33 $ .66 $ 2.52
========== ========== ==========
Weighted average common shares outstanding -
diluted 10,634 11,086 17,653
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 28, 1996, January 3, 1998 and January 2, 1999
(Dollars in thousands, except for per share data)
Common Stock
-------------------- Additional Currency Total
Number Par paid-in Retained translation shareholders'
of shares value capital earnings adjustment equity
------------ ----- --------- -------- -------- ---------
Balances at December 30, 1995 10,617,722 $106 $ 58,427 $29,666 $ (209) $ 87,990
Comprehensive income:
Net earnings - - - 14,123 - 14,123
Currency translation adjustment - - - - 15 15
---------
Total comprehensive income 14,138
---------
Common stock dividends declared ($.20 per share) - - - (2,124) - (2,124)
------------ ----- --------- -------- -------- ---------
Balances at December 28, 1996 10,617,722 106 58,427 41,665 (194) 100,004
Comprehensive income:
Net earnings - - - 7,317 - 7,317
Currency translation adjustment - - - - (662) (662)
---------
Total comprehensive income 6,655
---------
Issuance of common stock - acquisitions (note 5) 3,175,181 32 89,676 - - 89,708
Exercise of stock options, including tax
benefits of $517 (note 14) 174,812 2 2,992 - - 2,994
Preferred stock dividends (note 13) - - - (85) - (85)
Common stock dividends declared ($.24 per share) - - - (2,569) - (2,569)
------------ ----- --------- -------- -------- ---------
Balances at January 3, 1998 13,967,715 140 151,095 46,328 (856) $196,707
Comprehensive income:
Net earnings - - - 42,855 - 42,855
Currency translation adjustment - - - - (813) (813)
---------
Total comprehensive income 42,042
---------
Exercise of stock options, including tax
benefits of $1,637 (note 14) 154,458 1 4,545 - - 4,546
Issuance of common stock - convertible debentures 4,422 - 171 - - 171
Accretion of Series A Preferred Stock (note 13) - - - (216) - (216)
Preferred stock dividends (note 13) - - - (1,934) - (1,934)
Common stock dividends declared ($.24 per share) - - - (3,383) - (3,383)
------------ ----- --------- -------- -------- ---------
Balances at January 2, 1999 14,126,595 $141 $155,811 $83,650 $(1,669) $237,933
============ ===== ========= ======== ======== =========
See accompanying notes to consolidated financial statements.
F-5
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 28, 1996, January 3, 1998 and January 2, 1999
(Dollars in thousands)
1996 1997 1998
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 14,123 $ 7,317 $ 42,855
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 12,775 16,064 54,021
Extraordinary items 609 919 -
Restructuring charge - 5,986 -
Deferred income taxes 2,030 (2,320) 22,058
Loss (gain) on disposal of property, plant and
equipment 40 (1,052) 166
Changes in operating assets and liabilities, excluding
effects of businesses acquired:
Trade receivables (7,040) (8,173) (16,914)
Inventories (26,107) (3,900) (56,372)
Accounts payable 6,267 (6,236) 12,438
Other assets and liabilities (1,983) 8,781 (3,642)
---------- ---------- ----------
Net cash provided by operating activities 714 17,386 54,610
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 19 4,926 12,308
Purchases of property, plant and equipment (21,040) (20,567) (133,620)
Proceeds from disposal of assets held for sale - - 25,935
Payments for businesses purchased, net of cash acquired (4,112) (535,222) (106,746)
---------- ---------- ----------
Net cash used in investing activities (25,133) (550,863) (202,123)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in checks not yet presented
for payment (2,526) 6,583 (247)
Borrowings on revolving credit loans 62,000 200,600 470,400
Repayments of revolving credit loans (66,600) (146,600) (402,600)
Proceeds from the issuance of long-term debt 125,635 435,000 100,000
Retirement of long-term debt (89,357) (2,727) (14,127)
Payment of debt and equity issuance costs (3,000) (19,703) (1,849)
Proceeds from issuance of redeemable convertible
preferred stock - 65,000 -
Dividends paid (2,124) (2,569) (5,402)
Proceeds from exercise of stock options - 2,477 2,295
---------- ---------- ----------
Net cash provided by financing activities 24,028 538,061 148,470
---------- ---------- ----------
Net change in cash and cash equivalents (391) 4,584 957
Cash and cash equivalents at beginning of year 411 20 4,604
---------- ---------- ----------
Cash and cash equivalents at end of year $ 20 $ 4,604 $ 5,561
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(1) General
Pillowtex Corporation (the "Parent") and its subsidiaries (collectively,
with Parent, (the "Company")), is a North American designer, manufacturer
and marketer of home textile products, offering a full line of bed pillows,
blankets, sheets, pillow cases, mattress pads, down comforters, towels,
bath rugs, kitchen textiles and other home textile products. As a leading
supplier across all distribution channels, the Company sells its products
to most major mass merchants, wholesale clubs, department stores, specialty
retailers, catalogs, institutions and international customers.
On December 19, 1997, the Company and Fieldcrest Cannon, Inc. ("Fieldcrest
Cannon"), a textile manufacturer primarily involved in the production of
home furnishing products, principally towels and sheets, entered into a
merger agreement whereby a wholly owned subsidiary of the Company was
merged with and into Fieldcrest Cannon (the "Merger"). Following
consummation of the Merger, Fieldcrest Cannon became a wholly owned
subsidiary of the Company (see notes 5 and 11).
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of Pillowtex Corporation and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31.
Fiscal year 1996 ended December 28, 1996, fiscal year 1997 ended
January 3, 1998 and fiscal year 1998 ended January 2, 1999. Such
years include the results of operations for 52, 53 and 52 weeks,
respectively.
(c) Statements of Cash Flows
For purposes of reporting cash flows, the Company considers all
short-term investments with original maturities of three months or
less to be cash equivalents.
Supplemental disclosures of cash flow information for fiscal years
1996, 1997 and 1998 follow:
1996 1997 1998
--------- --------- ---------
Interest paid $ 15,234 $ 19,207 $ 73,223
========= ========= =========
Income taxes paid (received) $ 6,483 $ 7,533 $ (5,042)
========= ========= =========
F-7
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(d) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) and last-in,
first-out (LIFO) methods (see note 6).
(e) Derivative Financial Instruments
The Company enters into interest rate swap agreements to modify the
interest characteristics of portions of its outstanding debt. The
agreements entitle the Company to receive or pay to the counterparty
(a major bank), on a quarterly basis, the amounts, if any, by which
the Company's interest payments covered by swap agreements differ
from those of the counterparty. These amounts are recorded as
adjustments to interest expense. The fair value of the swap
agreements and changes in fair value as a result of changes in market
interest rates are not recognized in the consolidated financial
statements.
(f) Property, Plant and Equipment
Depreciation is provided generally using the straight-line method in
amounts sufficient to amortize the cost of the assets over their
estimated useful lives as follows:
Buildings and improvements 10-39 years
Machinery and equipment 5-15 years
Data processing equipment 5 years
Furniture and fixtures 5-8 years
Leasehold improvements are amortized over the lesser of the estimated
useful lives of the assets or the remaining term of the lease using
the straight-line method. Renewals and betterments are capitalized
and depreciated over the remaining life of the specific property unit.
(g) Intangibles
Intangible assets consist primarily of goodwill ($243.1 million and
$252.0 million net of accumulated amortization of $4.9 million and
$10.9 million as of January 3, 1998 and January 2, 1999, respectively)
recorded in connection with the Company's acquisitions (see note 5).
Goodwill represents the excess of purchase price over the fair value
of net identifiable tangible and intangible assets acquired.
Amortization is provided using the straight-line method principally
over an estimated useful life of 40 years.
Other intangible assets consist principally of trademarks and
deferred debt issuance costs. Trademarks are amortized using the
straight-line method over their useful lives which range from 5 to 40
years. Debt issuance costs are amortized using the interest method
over their useful lives which range from 6 to 12 years.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the asset balance over its remaining life
can be recovered through undiscounted future operating cash flows of
the acquired operation. The amount of impairment, if any, is
measured based on projected discounted future operating cash flows.
F-8
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
The Company believes no impairment of goodwill has occurred and that
no reduction of the estimated useful lives is warranted.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company reviews long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(i) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value (see note 11 regarding the
fair value of debt).
(j) Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Stock Option Plan
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", the
Company applies the accounting provisions of Accounting Principles
Board("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations and provides pro forma
net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value based method defined in
SFAS No. 123 had been applied. Compensation expense is recorded
only if the current market price of the underlying stock exceeds the
exercise price on the date of grant.
(l) Revenue Recognition
Revenue is recognized upon shipment of products. Reserves for
sales returns and allowances are recorded in the same accounting
period as the related revenues.
(m) Advertising Expenses
The Company expenses advertising costs as incurred. Advertising
F-9
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
expense was approximately $3.2 million, $3.8 million and
$19.9 million during fiscal years 1996, 1997 and 1998, respectively.
(n) Earnings Per Share
Basic earnings per share is computed by dividing earnings available
for common shareholders by the weighted average number of shares
outstanding during the period. Diluted earnings per share is
computed by dividing (i) earnings available for common shareholders
as adjusted to add back (if dilutive) convertible preferred dividends
and accretion and the after-tax interest recognized in the period
associated with convertible debt by (ii) the weighted average number
of shares outstanding plus the number of dilutive additional shares
that would have been outstanding if potentially dilutive securities
had been issued.
(o) Foreign Currency Translation and Transactions
The Company's foreign subsidiaries use the local currency as the
functional currency. The assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars using current
exchange rates. Revenues and expenses are translated at average
monthly exchange rates. The resulting translation adjustments are
recorded as a separate component of shareholders' equity. Foreign
currency transaction gains and losses are included in the
consolidated statements of earnings and were not material in any
of the years presented.
(p) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements,
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(q) Comprehensive Income
On January 4, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This Statement establishes standards for
reporting and presentation of comprehensive income and its components
in a full set of financial statements. Comprehensive income consists
of net earnings and foreign currency translation adjustments and is
presented in the consolidated statements of shareholders' equity.
The Statement requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position or results of operations. Prior year consolidated financial
statements have been conformed to the requirements of SFAS No. 130.
(3) Restructuring Charge
During the fourth quarter of 1997, the Company committed to a plan to
consolidate its blanket production into its facilities in Swannanoa, North
Carolina and Westminster, South Carolina. The aggregate cost of this
restructuring was estimated to be approximately $7.5 million, of which
F-10
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
approximately $6.0 million (associated with the write-down of certain
assets and other expenses) was accrued in fiscal year 1997, and the
remaining $1.5 million (associated with employee severance) was expensed
in the first quarter of fiscal year 1998. Expenditures related to the
restructuring are substantially complete as of the end of fiscal year 1998.
(4) Earnings Per Share
The following table reconciles the numerators and denominators of
basic and diluted earnings per share for fiscal years 1997 and 1998.
The only reconciling item for fiscal year 1996 was the approximately
16,000 share dilutive effect of stock options.
1997 1998
---------------- ----------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
Basic - earnings available
for common shareholders $ 7,232 10,837 $40,758 14,082
Effect of dilutive securities:
Stock options - 132 - 207
Convertible debentures - - 1,577 656
Convertible preferred stock 85 117 2,097 2,708
------- ------- ------- -------
Diluted - earnings available
for common shareholders plus
assumed conversions $ 7,317 11,086 $44,432 17,653
======= ====== ======= ======
For fiscal years 1996, 1997 and 1998, options to purchase 36,000 shares,
zero shares and 0.5 million shares, respectively, were not included in the
computations of diluted earnings per share because inclusion would have
been antidilutive for the respective periods.
(5) Acquisitions
Businesses Acquired
On July 28, 1998, the Company acquired the net assets of The Leshner
Corporation ("Leshner"), a 91 year-old manufacturer of towels and
terry-related products, for a purchase price of $41.8 million in cash
(including acquisition costs). In connection with the acquisition, the
Company retired $32.5 million of outstanding Leshner debt. The acquisition
and related debt retirement were financed through the term loan under the
senior credit facilities (see note 11). The purchase price exceeded the
fair value of net assets acquired by approximately $18.1 million, which is
being amortized on a straight line basis over 40 years. The pro forma
effects of such transaction, as if it had occurred at the beginning of
fiscal year 1997, are not significant.
On December 19, 1997, the Company acquired all of the outstanding common
and preferred stock of Fieldcrest Cannon in exchange for cash of $335.9
million (including acquisition costs) and approximately 3.2 million shares
F-11
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
of common stock of the Company. In connection with the Merger, the Company
retired $199.0 million and assumed $107.9 million of outstanding Fieldcrest
Cannon debt. The purchase price exceeded the fair value of net assets
acquired by approximately $184.8 million, which is being amortized on a
straight line basis over 40 years.
The acquisitions have been accounted for under the purchase method of
accounting and, accordingly, results of operations of Fieldcrest Cannon
and Leshner have been included in the consolidated statements of earnings
since their respective acquisition dates.
Unaudited consolidated condensed pro forma information for fiscal years
1996 and 1997, as if the Fieldcrest Cannon acquisition had occurred on the
first day of fiscal year 1996 follow:
1996 1997
----------- ----------
Net sales $1,522,000 $1,559,000
Earnings before extraordinary items 12,396 18,941
Net earnings 10,868 18,941
Basic earnings per share .65 1.22
Diluted earnings per share .64 1.13
The pro forma results of operations are presented pursuant to applicable
accounting rules relating to business combinations and are not necessarily
indicative of the actual results that would have been achieved had this
transaction occurred as of the beginning of fiscal year 1996, nor are they
indicative of future results of operations.
Assets Acquired
On November 18, 1996, the Company purchased certain assets of Fieldcrest
Cannon's blanket operations for $28.3 million in cash. The acquisition
included selected equipment ($6.3 million), inventory ($18.0 million) and
an exclusive long-term license for the use of certain trademarks and
tradenames ($4.0 million).
(6) Inventories
Inventories consist of the following at January 3, 1998 and
January 2, 1999:
1996 1997
---- ----
Finished goods $ 163,905 $218,439
Work-in-process 120,063 134,428
Raw materials 54,790 58,306
Supplies 20,993 23,108
--------- --------
$ 359,751 $434,281
========= ========
F-12
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
At January 3, 1998 and January 2, 1999, 40% and 51%, respectively, of
inventories were valued at LIFO which approximates current replacement
cost. The remaining inventories are valued at FIFO. Inventories
are net of related reserves of approximately $9.4 million and
$15.3 million at January 3, 1998 and January 2, 1999,respectively.
(7) Property, Plant and Equipment
Property, plant and equipment are stated at cost and consist of the
following at January 3, 1998 and January 2, 1999:
1996 1997
-------- --------
Land $ 10,050 $ 28,812
Buildings and improvements 171,857 182,414
Machinery and equipment 288,069 370,581
Data processing equipment 11,994 29,325
Furniture and fixtures 4,393 6,346
Leasehold improvements 2,434 4,020
Projects in progress 55,915 106,444
-------- --------
544,712 727,942
Less accumulated depreciation
and amortization (55,871) (98,737)
-------- --------
$488,841 $629,205
======== ========
Interest costs of $0.6 million and $4.7 million, incurred during
fiscal years 1997 and 1998, respectively, for the purchase and
construction of qualifying fixed assets, were capitalized and are
being amortized over the related assets' estimated useful lives.
(8) Accounts Payable and Accrued Expenses
Accounts payable includes $39.3 million and $39.1 million at
January 3, 1998 and January 2, 1999, respectively, of checks not
yet presented for payment on zero balance disbursement accounts.
Accrued expenses consist of the following at January 3, 1998 and
January 2, 1999:
1997 1998
-------- --------
Employee-related compensation and benefits $ 39,790 $ 24,974
Insurance and worker's compensation 19,916 24,794
Customer rebates 13,534 14,490
Interest and commitment fees 6,353 7,036
Advertising 4,361 4,435
Royalties and commissions 4,951 4,276
Accrued restructuring 5,484 -
Other accrued expenses 19,186 16,245
-------- --------
$113,575 $ 96,250
======== ========
F-13
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(9) Pension Plans
The Company has defined benefit pension plans covering substantially
all of its employees with certain union employees not covered under
these plans. The plans provide pension benefits based on the
employees' compensation and service. The Company's funding policy
provides for annual contributions of an amount between the minimum
required and maximum amount that can be deducted for federal income
tax purposes. Pension plan assets consist of investments in publicly
traded corporate common stocks and bonds, as well as U.S. government
obligations. Summarized information for the plans follows:
1997 1998
---------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 7,286 $ 306,950
Acquisitions 297,076 7,240
Service cost 1,058 7,730
Interest cost 1,414 21,070
Actuarial loss 1,118 13,869
Benefits paid (1,002) (18,920)
---------- ----------
Benefit obligation at end of year $ 306,950 $ 337,939
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of year $ 6,275 $ 307,772
Acquisitions 298,600 8,903
Actual return on plan assets 3,114 35,085
Employer contributions 785 3,802
Benefits paid (1,002) (18,920)
---------- ----------
Fair value of plan assets at end of year $ 307,772 $ 336,642
========== ==========
Funded status:
Benefit obligation $(306,950) $(337,939)
Fair value of plan assets 307,772 336,642
Unrecognized transition obligation (52) (43)
Unrecognized prior service cost 208 172
Unrecognized net actuarial (gain)/loss (186) 7,102
---------- ----------
Prepaid benefit cost $ 792 $ 5,934
========== ==========
F-14
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
1996 1997 1998
---------- ---------- ----------
Weighted average assumptions as
of December 28, 1996, January 3,
1998 and January 2, 1999:
Discount rate 7.75% 7.00% 6.75%
Expected return 8.50% 9.00-9.50% 9.00-9.50%
Compensation increase rate 4.00% 4.00-4.50% 4.00%
Components of net periodic pension
cost:
Service cost $ 766 $ 1,058 $ 7,730
Interest cost 523 1,414 21,070
Expected return on plan assets (458) (1,622) (28,503)
Amortization of transition
obligation (8) (8) (8)
Amortization of prior service
cost 35 35 35
---------- ---------- ----------
Net periodic pension cost $ 858 $ 877 $ 324
========== ========== ==========
The Company also sponsors employee savings plans which cover
substantially all employees. The Company's matching provisions
under these plans vary, with some matches being discretionary. The
matching formulas of certain plans can be changed annually. In
fiscal years 1996, 1997 and 1998, the Company incurred costs of
$0.5 million, $0.1 million and $3.5 million, respectively, to provide
matching contributions for plans with matching provisions.
F-15
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(10) Postretirement Benefits Other Than Pensions
The Company provides medical insurance premium assistance and life
insurance benefits to retired employees of Fieldcrest Cannon. The
medical and life insurance benefits provided under the plan are fixed
amounts determined at the time of retirement and, thus, are unaffected
by medical trend rates. Employees become eligible for these benefits
when they reach retirement age while working for the Company. The
plans are funded as benefits are paid.
1997 1998
--------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ - $ 39,348
Acquisitions 39,260 -
Service cost 35 709
Interest cost 114 2,466
Actuarial (gain)/loss 81 (538)
Benefits paid (142) (3,895)
--------- ---------
Benefit obligation at end of year $ 39,348 $ 38,090
========= =========
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ -
Acquisitions - -
Employer contributions 142 3,895
Benefits paid (142) (3,895)
--------- ---------
Fair value of plan assets at end of year $ - $ -
========= =========
Funded status:
Benefit obligation $(39,348) $(38,090)
Unrecognized net actuarial loss - (357)
--------- ---------
Accrued postretirement benefit cost included
in noncurrent liabilities $(39,348) $(38,447)
========= =========
Weighted average assumptions as of January 3,
1998 and January 2, 1999:
Discount rate 7.00% 6.75%
Expected return N/A N/A
Compensation increase rate 4.00% 4.00%
Net periodic postretirement benefit cost for fiscal year 1997
reflects only amounts from the Fieldcrest Cannon acquisition date
through January 3, 1998.
Components of net periodic postretirement cost:
Service cost $ 35 $ 709
Interest cost 114 2,465
Amortization of actuarial gain - (181)
------- -------
Net periodic postretirement benefit cost $ 149 $2,993
======= =======
F-16
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(11) Long-term Debt
Long-term debt consists of the following at January 3, 1998 and
January 2, 1999:
1997 1998
--------- ---------
Revolver $115,000 $182,800
Term loans 250,000 348,750
9% Senior Subordinated Notes due 2007 185,000 185,000
10% Senior Subordinated Notes due 2006 125,000 125,000
6% convertible subordinated sinking fund debentures due in 2012
(effective rate of 8.72%, net of $17.4 million and $15.6
million in unamortized discount at January 3, 1998 and
January 2, 1999, respectively) 95,126 88,594
Industrial revenue bonds with interest rates from 3.60% to 7.85%
and maturities from January 4, 1999 through July 1, 2021;
generally collateralized by land and buildings 18,050 19,528
Other debt 2,823 7,242
--------- ---------
790,999 956,914
Less current portion (5,616) (12,421)
--------- ---------
$785,383 $944,493
========= =========
In December 1997, in connection with the Fieldcrest Cannon
acquisition (see note 5), the Company entered into new senior
revolving credit and term loan facilities (the "Facilities") with a
group of financial and institutional investors for which NationsBank
of Texas, N.A. ("NationsBank") acts as the agent. The Facilities
consisted of a $350.0 million revolving credit facility (the
"Revolver") and a $250.0 million term loan facility (the "Term Loan").
The Term Loan consisted of a $125.0 million Tranche A term loan (the
"Tranche A Term Loan") and a $125.0 million Tranche B term loan (the
"Tranche B Term Loan"). Effective July 28, 1998, the Company amended
the Facilities by increasing the Tranche B Term Loan to $225.0
million. The increase occurred in conjunction with the acquisition of
Leshner allowing the Company to fund the transaction and reduce the
Revolver. The Revolver and the Tranche A Term Loan expire December
31, 2003, and the Tranche B Term Loan expires December 31, 2004. The
Revolver includes $55.0 million of availability for letters of credit.
At January 2, 1999, $42.1 million of letters of credit were
outstanding. Unused availability under the Revolver was $125.1
million at January 2, 1999.
As of January 2, 1999, amounts outstanding under the Revolver and
Tranche A Term Loan were subject to interest at a rate based, at the
Company's option, upon either (i) the London Interbank Offered Rate
plus a margin of up to 2.25% or (ii) NationsBank's Base Rate (as
defined) plus a margin of up to .75%. The Tranche B Term Loan bears
interest on a basis similar to the Tranche A Term Loan plus an
additional margin ranging from .50% to 1.25%. These rates are
subject to decrease based upon the Company's achievement of certain
ratios of funded debt to earnings before interest, taxes,
F-17
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
depreciation and amortization ("EBITDA"). The weighted average
annual interest rate on outstanding borrowings under the various
senior credit facilities during fiscal year 1998 was 7.78%, and the
effective rate at January 2, 1999 was 7.52%.
The Facilities are guaranteed by each of the domestic subsidiaries of
the Parent and are secured by first priority liens on all of the
capital stock of each domestic subsidiary of the Parent and by 65% of
the capital stock of the Parent's foreign subsidiaries. The Parent
has also granted a first priority security interest in all of its
presently unencumbered and future domestic assets and properties, and
all presently unencumbered and future domestic assets and properties
of each of its subsidiaries. The Term Loan is subject to mandatory
prepayment from all net cash proceeds of asset sales and debt
issuances of the Company (except as specifically provided), 50% of
the net cash proceeds of equity issuances by the Company or any of
its subsidiaries, and 75% of Excess Cash Flow (as defined). All
mandatory prepayments will be applied pro rata between the Tranche A
Term Loan and the Tranche B Term Loan to reduce the remaining
installments of principal.
The Facilities contain a number of financial, affirmative and negative
covenants which, among other things, require maintenance of certain
ratios of funded debt to EBITDA, and certain cash flow coverage
ratios, and require the Company to maintain a minimum tangible net
worth. Other covenants restrict, among other things, the Company's
ability to incur additional debt, grant liens, engage in transactions
with affiliates, make loans, advances and investments, pay dividends
and other distributions to shareholders, dispose of assets, effect
mergers, consolidations and dissolutions, and make certain changes in
its business. At January 2, 1999, the Company was in compliance with
all covenants under the Facilities.
In connection with the December 1997 change in the Facilities, the
Company's previous senior credit facility was extinguished and the
associated unamortized deferred debt issuance costs of $0.9 million,
net of related income tax benefit of $0.6 million, were charged to
expense resulting in an extraordinary loss on debt extinguishment.
In connection with the Merger, the Company issued $185.0 million of
9% Senior Subordinated Notes due 2007 (the "9% Notes") in a private
offering. In March 1998, the Company completed an offer to exchange
the unregistered 9% Notes previously sold in the private offering for
an equal aggregate principal amount of registered 9% Notes. The 9%
Notes are due December 15, 2007, with interest payable semiannually
commencing June 15, 1998. The Company may at its option redeem the
9% Notes, in whole or in part, on or after December 15, 2002 at a
redemption price of 104.5%, which declines 1.5% annually through
December 15, 2005 to 100%. The 9% Notes are general unsecured
obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness, including borrowings under
the Facilities and rank pari passu to the 10% Senior Subordinated
Notes described below.
On November 12, 1996, the Company issued $125.0 million aggregate
principal amount of 10% Senior Subordinated Notes due 2006 (the "10%
Notes") in a private offering. In March 1997, the Company completed
F-18
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
an offer to exchange the unregistered 10% Notes previously sold in
the private offering for an equal aggregate principal amount of
registered 10% Notes. The 10% notes are due November 15, 2006, with
interest payable semiannually commencing May 15, 1997. The Company
used the proceeds from such offering to retire the outstanding
indebtedness under the Company's previously existing term loan, to
finance the acquisition of certain assets of Fieldcrest Cannon's
blanket operations (see note 5), to temporarily reduce indebtedness
under the previous revolving credit facility, and to acquire a
warehouse facility. In connection with the retirement of the term
loan, the Company charged the related unamortized deferred debt
issuance costs to expense resulting in an extraordinary loss on debt
extinguishment of $0.6 million, net of related income taxes of $0.4
million.
The Company may, at its option, redeem the 10% Notes, in whole or in
part, on or after November 15, 2001 at a redemption price of 105.0%,
which declines 1.667% annually through November 15, 2004 to 100%.
The 10% Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior
indebtedness, including borrowings under the Facilities.
The 9% Notes and the 10% Notes are unconditionally guaranteed on a
senior subordinated basis by each of the existing and future domestic
subsidiaries of the Company and each other subsidiary of the Company
that guarantees the Company's obligations under the Facilities
described above (see note 19). The guarantees are subordinated in
right of payment to all existing and future senior indebtedness of
the relevant guarantor.
Upon a change in control, the Company will be required to make an
offer to repurchase all outstanding 9% Notes and 10% Notes at 101% of
the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of repurchase.
The 9% Notes and the 10% Notes are subject to certain covenants which
restrict, among other things, the Company's ability to incur
additional indebtedness and issue preferred stock, grant liens to
secure subordinated indebtedness, pay dividends or make certain other
restricted payments, apply net proceeds from certain asset sales,
engage in certain transactions with affiliates, incur indebtedness
that is subordinate in right of payment to any senior indebtedness
and senior in right of payment to the 9% Notes and the 10% Notes,
merge or consolidate with any other person, sell stock of subsidiaries
or sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company. At January 2, 1999,
the Company was in compliance with all covenants under the 9% Notes
and the 10% Notes.
As of January 3, 1998, the Company had approximately $125.0 million
of notional amounts covered under interest rate swap agreements
whereby the Company exchanged fixed rates for floating rates. The
weighted average fixed and floating rates were 10.0% and 9.5%,
respectively. As of January 2, 1999, the Company had approximately
$345.0 million of notional amounts covered under interest rate swap
agreements whereby the Company exchanged floating rates for fixed
rates. The weighted average fixed and floating rates were 4.70% and
F-19
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
5.26%, respectively. The fair values of the swaps at January 3, 1998
and January 2, 1999 were zero and $2.1 million, respectively. The
fair value of $2.1 million was in favor of the Company.
The interest rates on indebtedness other than the Facilities differ
from current market rates. The carrying and fair values of these
financial instruments, estimated by discounting the future cash flows
using rates currently available or obtaining market prices as of
January 3, 1998 and January 2, 1999 are shown below. The Facilities
are at current market rates; therefore, their carrying values
approximate fair value.
1997 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Revolver $115,000 $115,000 $182,800 $182,800
Term loans 250,000 250,000 348,750 348,750
9% Senior Subordinated Notes due 2007 185,000 185,000 185,000 189,625
10% Senior Subordinated Notes due 2006 125,000 132,645 125,000 132,500
6% convertible subordinated sinking
fund debentures due 2012 95,126 95,126 88,594 85,962
Industrial revenue bonds and other debt 20,873 20,888 26,770 24,120
Aggregate maturities of long-term debt for each of the five years
following January 2, 1999 and thereafter, assuming the unpaid
principal balance at January 2, 1999 under the Revolver remains
unchanged, are as follows:
Fiscal year Amount
----------- --------
1999 $ 12,421
2000 25,904
2001 37,474
2002 45,791
2003 53,970
Thereafter 796,955
(12) Income Taxes
The components of income tax expense, excluding the income tax
benefit related to extraordinary items, are as follows:
1996 1997 1998
-------- -------- --------
U.S. federal - current $ 6,604 $ 6,385 $ 3,916
U.S. federal - deferred 1,793 (1,478) 17,881
State and foreign taxes - current 825 1,473 1,415
State and foreign taxes - deferred 237 (842) 4,177
-------- -------- --------
$ 9,459 $ 5,538 $27,389
======== ======== ========
F-20
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
A reconciliation of income tax expense computed using the U.S. federal
statutory income tax rate of 35% of earnings before income taxes and
extraordinary loss to the actual provision for income taxes follows:
1996 1997 1998
-------- -------- --------
Expected tax at U.S. statutory rate $ 8,467 $ 4,821 $ 24,585
Amortization of goodwill 135 188 1,695
State and foreign taxes, net of federal benefit 555 477 933
Other 302 52 176
-------- -------- --------
$ 9,459 $ 5,538 $ 27,389
======== ======== ========
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
January 3, 1998 and January 2, 1999 are presented below:
1997 1998
---------- ----------
Net deferred tax assets:
Package design costs $ 351 $ 614
Accrued employee benefits 685 4,423
State deferred taxes 957 1,132
Accruals and allowances 24,537 23,527
Other 20,789 18,192
---------- ----------
Net deferred tax assets 47,319 47,888
---------- ----------
Deferred tax liabilities:
Inventory costs and reserves (42,716) (49,242)
Depreciable assets (79,508) (97,505)
State deferred income taxes (6,673) (8,901)
Trademarks - (10,500)
Goodwill (830) (731)
---------- ----------
Deferred tax liabilities (129,727) (166,879)
---------- ----------
Net deferred tax liabilities $ (82,408) $(118,991)
========== ==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Management considers
the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
The Company expects the deferred tax assets at January 2, 1999 to be
realized as a result of the reversal of existing taxable temporary
differences and the generation of taxable income.
F-21
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(13) Redeemable Convertible Preferred Stock
On December 19, 1997, the Company issued 65,000 shares of Series A
Redeemable Convertible Preferred Stock ("Series A Preferred Stock")
for $65.0 million less $2.1 million of issue costs. Accretion is
being recognized to increase the recorded amount to the redemption
amount over the period to the redemption date. Dividends accrue from
the issue date through December 31, 1999 at a 3% annual rate. Beginning
January 1, 2000, the rate at which dividends will accrue may increase to
7% or 10% depending on the Company's earnings per share for the 1999
fiscal year. The Company may also be required to pay a one-time
cumulative dividend in cash or Series A Preferred Stock, from the issue
date through December 31, 1999,equal to the difference between the
dividends calculated at the 3% rate and dividends calculated at either the
7% or 10% rate, if the fiscal year 1999 earnings per share are less than
the predetermined targets.
The Series A Preferred Stock is convertible, at any time at the
option of the holder, into common stock at a rate calculated by
dividing $1,000 plus unpaid dividends per share by $24.00 per share.
Each share of Series A Preferred Stock is subject to mandatory
redemption in ten and one-half years after the issue date at a
redemption price of $1,000 plus accrued and unpaid dividends. The
Company has the right after the fourth anniversary of the issue date
to call all or a portion of the Series A Preferred Stock at $1,000
per share plus accrued and unpaid dividends times a premium equal to
the dividend rate after the fourth anniversary date and declining
ratably to the mandatory redemption date. Holders of the Series A
Preferred Stock are entitled to limited voting rights only under
certain conditions.
(14) Stock Options
In 1993, the Company established a stock option plan under which
options may be granted to eligible employees and nonemployee
directors of the Company. Under the stock option plan, the Board of
Directors may grant either nonqualified stock options or incentive
stock options.
At January 2, 1999, there were 2.0 million shares available for grant
under the stock option plan. The per share weighted-average fair
value of stock options granted during fiscal years 1996, 1997 and
1998 was $4.65, $7.86 and $12.81, respectively, on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions:
1996 1997 1998
-------- -------- --------
Expected dividend yield 1.14% 1.41 1.06
Stock price volatility 38.82 38.94 36.87
Risk-free interest rate 5.99 6.15 5.48
Expected option term 5 years 5 years 5 years
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated
F-22
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
1996 1997 1998
-------- -------- --------
Earnings available for common shareholders:
As reported $ 14,123 $ 7,232 $ 40,758
Pro forma 13,986 6,720 39,280
Earnings per share:
As reported - basic 1.33 .67 2.89
As reported - diluted 1.33 .66 2.52
Pro forma - basic 1.32 .62 2.79
Pro forma - diluted 1.32 .61 2.43
Pro forma net earnings reflects only options granted after January 1,
1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma
net earnings amounts presented above because compensation cost is
reflected over the options' vesting period of four years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
All options are granted at an exercise price not less than the fair
market value of the common stock at the date of grant. The option
period may not be more than ten years from the date the option is
granted, and options generally vest over a four-year period.
A summary of option activity during fiscal years 1996, 1997 and
1998 follows:
Weighted average
Shares exercise price
------ ----------------
Outstanding at December 30, 1995
(131 shares exercisable) 437 $14.50
Granted 226 12.59
Canceled (152) 14.33
Outstanding at December 28, 1996 ------
(176 shares exercisable) 511 13.71
Granted 537 16.98
Exercised (175) 14.17
Canceled (131) 14.85
Outstanding at January 3, 1998 ------
(289 shares exercisable) 742 15.76
Granted 562 34.26
Exercised (154) 14.86
Canceled (251) 23.14
Outstanding at January 2, 1999 ------
(142 shares exercisable) 899 25.36
======
F-23
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
The 142,000 shares that are exercisable at January 2, 1999 have a
weighted average exercise price of $14.96. The table below provides
weighted average exercise prices and weighted average remaining
contractual life of options outstanding at January 2, 1999 segregated
based upon ranges of exercise prices.
Weighted
average
Weighted Weighted remaining
Number Number average average contractual
of options of options exercise price exercise price life
outstanding exercisable (outstanding) (exercisable) (outstanding)
--------------------------------------------------------------------------
$ 8.88 - $12.75 87 30 $11.67 $11.26 7.12
$14.00 - $19.00 296 106 15.75 15.54 7.46
$21.88 - $31.81 93 6 27.57 23.52 9.33
$33.50 - $44.38 423 - 34.40 - 9.12
(15) Commitments and Contingent Liabilities
Manufacturing facilities at certain locations, showrooms, sales
offices and warehouse space are leased under noncancelable operating
lease agreements. These leases generally require the Company to pay
all executory costs such as maintenance and taxes. Rental expense
for operating leases was approximately $5.3 million, $7.6 million and
$24.7 million during fiscal years 1996, 1997 and 1998, respectively.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year),
which expire at various dates through 2009, are as follows:
Fiscal year Amount
----------- --------
1999 $22,283
2000 20,966
2001 18,488
2002 16,568
2003 15,678
Thereafter 53,296
From time to time, the Company is a party to various legal proceedings
arising in the ordinary course of business. While any proceeding
or litigation has an element of uncertainty, management believes that
the final outcome of all matters currently pending will not have a
materially adverse effect on the Company's financial position, results
of operations or liquidity.
Louisville Bedding Company ("Louisville") filed a complaint for patent
infringement against the Company in 1994 alleging that certain of the
Company's mattress pad product lines infringed on certain of
Louisville's patents. The parties reached a settlement in April 1998,
allowing the Company to continue manufacturing and selling its
existing Adjust-A-Fit-Registered Trademark- mattress pad product lines
without further claims by Louisville.
F-24
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(16) Concentration of Credit Risk
The Company's customers are primarily retailers located throughout
the United States and Canada. Although the Company closely monitors
the creditworthiness of its customers, adjusting credit policies and
limits as needed, a customer's ability to pay is largely dependent
upon the retail industry's economic environment.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends and other information. The Company has trade receivables
which are due from certain customers who are experiencing financial
difficulties. However, in the opinion of management of the Company,
the allowance for doubtful accounts is adequate, and trade
receivables are presented at net realizable value.
Sales to the Company's two individual major customers, including
their affiliated entities, accounted for approximately 14% and 13%
each of net sales in fiscal years 1996 and 1997. These two customers
accounted for 24% and 7% each of net sales in fiscal year 1998.
(17) Segment Information
The Company is organized by functional responsibilities and operates
as a single segment. Net sales from bed and bath products were
$554.0 million and $26.0 million, respectively, in fiscal year 1997,
and $870.1 million and $639.7 million, respectively, in fiscal year
1998. All net sales in fiscal year 1996 related to bed products.
Net sales to customers domiciled in foreign countries were $35.1
million, $37.2 million and $118.8 million in fiscal years 1996, 1997
and 1998, respectively. At December 28, 1996, January 3, 1998 and
January 2, 1999, the Company had long-lived assets domiciled in
foreign countries of $5.6 million, $4.7 million and $3.8 million,
respectively. The Company's domestic long-lived assets (including
intangibles) at December 28, 1996, January 3, 1998 and January 2, 1999
were $148.5 million, $764.5 million and $943.2 million, respectively.
F-25
PILLOWTEX CORPORATION
Notes to Consolidated Financial Statements
January 3, 1998 and January 2, 1999
(Tables in thousands of dollars, except for per share data)
(18) Selected Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Company
for each quarter of fiscal years 1997 and 1998.
1997 quarter ended
-------------------------------------------------
March 29 June 28 September 27 January 3
-------- ------- ------------ ---------
Net sales $113,763 $104,894 $151,977 $209,365
Gross profit 18,706 19,701 26,552 29,361
Earnings (loss) before
extraordinary item 1,651 1,871 7,050 (2,336)
Net earnings (loss) 1,651 1,871 7,050 (3,255)
Earnings (loss) per
common share - basic .16 .18 .66 (.30)
Earnings (loss) per
common share - diluted .15 .17 .65 (.30)
1998 quarter ended
-------------------------------------------------
April 4 July 4 October 3 January 2
-------- ------- ------------ ---------
Net sales $366,375 $332,046 $419,799 $391,621
Gross profit 63,920 58,583 79,866 79,009
Net earnings 5,635 7,092 15,022 15,106
Earnings per common
share - basic .37 .47 1.03 1.03
Earnings per common
share - diluted .33 .42 .87 .89
F-26
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except for per share data)
(18) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information
for the Company, segregating the Parent and guarantor subsidiaries from
nonguarantor subsidiaries. The guarantor subsidiaries are wholly owned
subsidiaries of the Company and guarantees are full, unconditional and
joint and several. Separate financial statements of the guarantor
subsidiaries are not presented because management believes that these
financial statements would not provide relevant material additional
information to users of the financial statements.
January 3, 1998 January 2, 1999
------------------------------------------------- ----------------------------------------------------
Non- Non-
Guarantor Guarantor Guarantor Guarantor
Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli-
Financial Position Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated
- ------------------- ------ --------- --------- ------- -------- --------- --------- --------- ------- --------
ASSETS:
Trade receivables $ - 216,869 4,316 - 221,185 - 240,909 5,439 - 246,348
Receivable from affiliates 668,588 - - (668,588) - 746,839 - - (746,839) -
Inventories - 351,720 8,031 - 359,751 - 424,563 9,718 - 434,281
Other current assets - 58,650 1,371 - 60,021 - 25,946 582 - 26,528
-------- --------- ------ --------- ------- --------- --------- ------ ----------- ---------
Total current assets 668,588 627,239 13,718 (668,588) 640,957 746,839 691,418 15,739 (746,839) 707,157
Property, plant and
equipment, net 657 485,975 2,209 - 488,841 565 627,114 1,526 - 629,205
Intangibles, net 24,256 232,112 2,499 - 258,867 19,102 268,478 2,249 - 289,829
Other assets 241,173 19,564 - (239,216) 21,521 382,558 17,898 - (372,493) 27,963
-------- --------- ------ --------- --------- --------- --------- ------ ----------- ---------
Total assets $934,674 1,364,890 18,426 (907,804) 1,410,186 1,149,064 1,604,908 19,514 (1,119,332) 1,654,154
======== ========= ====== ========= ========= ========= ========= ====== =========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Accounts payable and
accrued liabilities $ 85 218,874 5,818 - 224,777 6,425 212,823 4,577 - 223,825
Payable to affiliates - 668,000 588 (668,588) - - 744,000 2,839 (746,839) -
Other current liabilities - 21,591 93 - 21,684 8,318 27,002 79 - 35,399
-------- --------- ------ --------- --------- --------- --------- ------ ----------- ---------
Total current
liabilities 85 908,465 6,499 (668,588) 246,461 14,743 983,825 7,495 (746,839) 259,224
Noncurrent liabilities 675,000 228,550 586 - 904,136 833,331 260,082 527 - 1,093,940
-------- --------- ------ --------- --------- --------- --------- ------ ----------- ---------
Total liabilities 675,085 1,137,015 7,085 (668,588) 1,150,597 848,074 1,243,907 8,022 (746,839) 1,353,164
Redeemable convertible
preferred stock 62,882 - - - 62,882 63,057 - - - 63,057
Shareholders' equity 196,707 227,875 11,341 (239,216) 196,707 237,933 361,001 11,492 (372,493) 237,933
-------- --------- ------ --------- --------- --------- --------- ------ ----------- ---------
Total liabilities and
shareholders' equity $934,674 1,364,890 18,426 (907,804) 1,410,186 1,149,064 1,604,908 19,514 (1,119,332) 1,654,154
======== ========= ====== ========= ========= ========= ========= ====== =========== =========
F-27
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except for per share data)
Years Ended
-----------------------------------------------------------------------------------------------------
December 28, 1996 January 3, 1998
------------------------------------------------- --------------------------------------------------
Non- Non-
Guarantor Guarantor Guarantor Guarantor
Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli-
Results from operations Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated
- ----------------------- ------ --------- --------- ------- -------- --------- --------- --------- ------- --------
Net sales $78,959 403,386 31,480 (23,170) 490,655 18,759 537,536 29,268 (5,564) 579,999
Cost of goods sold 60,215 345,269 28,734 (23,170) 411,048 11,523 453,149 26,571 (5,564) 485,679
-------- --------- ------ --------- --------- -------- --------- ------- ------- --------
Gross profit 18,744 58,117 2,746 - 79,607 7,236 84,387 2,697 - 94,320
Selling, general and
administrative expenses 8,831 30,938 1,676 - 41,445 3,990 46,624 1,476 - 52,090
Restructuring charges - - - - - - 5,986 - - 5,986
-------- --------- ------ --------- --------- -------- --------- ------- ------- --------
Earnings from operations 9,913 27,179 1,070 - 38,162 3,246 31,777 1,221 - 36,244
Equity in earnings of
subsidiaries 11,757 - - (11,757) - 5,951 - - (5,951) -
Interest expense (income) 5,017 8,973 (19) - 13,971 (764) 23,239 (5) - 22,470
-------- --------- ------ --------- --------- -------- --------- ------- ------- --------
Earnings before income
taxes and extraordinary
items 16,653 18,206 1,089 (11,757) 24,191 9,961 8,538 1,226 (5,951) 13,774
Income taxes 1,921 7,329 209 - 9,459 1,725 3,687 126 - 5,538
-------- --------- ------ --------- --------- -------- --------- ------- ------- --------
Earnings before
extraordinary items 14,732 10,877 880 (11,757) 14,732 8,236 4,851 1,100 (5,951) 8,236
Extraordinary loss (609) - - - (609) (919) - - - (919)
-------- --------- ------ --------- --------- -------- --------- ------- ------- --------
Net earnings 14,123 10,877 880 (11,757) 14,123 7,317 4,851 1,100 (5,951) 7,317
Preferred dividends
and accretion - - - - - 85 - - - 85
-------- --------- ------ --------- --------- -------- --------- ------- ------- --------
Earnings available for
common shareholders $14,123 10,877 880 (11,757) 14,123 7,232 4,851 1,100 (5,951) 7,232
======== ========= ====== ========= ========= ======== ========= ======= ======= ========
F-28
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except for per share data)
Years Ended
-------------------------------------------------
January 2, 1999
-------------------------------------------------
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consoli-
Results from operations Parent sidiaries sidiaries nations dated
- ----------------------- ------ --------- --------- ------- ----------
Net sales $ - 1,487,685 27,650 (5,494) 1,509,841
Cost of goods sold - 1,208,888 25,069 (5,494) 1,228,463
-------- --------- ------- --------- -----------
Gross profit - 278,797 2,581 - 281,378
Selling, general and
administrative expenses (5,035) 140,800 1,542 - 137,307
Restructuring charges - 1,539 - - 1,539
-------- --------- ------- --------- -----------
Earnings from operations 5,035 136,458 1,039 - 142,532
Equity in earnings of
subsidiaries 39,838 - - (39,838) -
Interest expense (income) 394 71,912 (18) - 72,288
-------- --------- ------- --------- -----------
Earnings before income
taxes and extraordinary
items 44,479 64,546 1,057 (39,838) 70,244
Income taxes 1,624 25,673 92 - 27,389
-------- --------- ------- --------- -----------
Earnings before
extraordinary items 42,855 38,873 965 (39,838) 42,855
Extraordinary loss - - - - -
-------- --------- ------- --------- -----------
Net earnings 42,855 38,873 965 (39,838) 42,855
Preferred dividends
and accretion 2,097 - - - 2,097
-------- --------- ------- --------- -----------
Earnings available for
common shareholders $40,758 38,873 965 (39,838) 40,758
======== ========= ======= ========= ===========
F-29
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tables in thousands, except for per share data)
Years Ended
-----------------------------------------------------------------------------------------------------
December 28, 1996 January 3, 1998
------------------------------------------------- --------------------------------------------------
Non- Non-
Guarantor Guarantor Guarantor Guarantor
Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli-
Cash Flows Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated
- ----------- ------ --------- --------- ------- -------- ------ --------- --------- ------- --------
Net cash provided by (used
in) operating activities $ (548) (4,977) 6,239 - 714 1,383 12,330 3,673 - 17,386
Net cash used in investing
activities (16,140) (8,421) (572) - (25,133) (157,858) (392,940) (65) - (550,863)
Net cash provided by (used
in) financing activities 16,286 13,406 (5,664) - 24,028 156,475 385,188 (3,602) - 538,061
--------- ------- -------- ------- ------- --------- --------- ------- ------ --------
Net change in cash and
cash equivalents (402) 8 3 - (391) - 4,578 6 - 4,584
Cash and cash equivalents
at beginning of period 402 4 5 - 411 - 12 8 - 20
--------- ------- -------- ------- ------- -------- --------- ------- ------ --------
Cash and cash equivalents
at end of period $ - 12 8 - 20 - 4,590 14 - 4,604
========= ======= ======== ======= ======= ======== ========= ======= ====== ========
--------------------------------------------------
January 2, 1999
--------------------------------------------------
Non-
Guarantor Guarantor
Sub- Sub- Elimi- Consoli-
Cash Flows Parent sidiaries sidiaries nations dated
- ----------- ------ --------- --------- ------- --------
Net cash provided by (used
in) operating activities $ 15,090 40,532 (1,012) - 54,610
Net cash used in investing
activities (93,964) (108,069) (90) - (202,123)
Net cash provided by (used
in) financing activities 78,874 68,501 1,095 - 148,470
--------- --------- --------- ------- ---------
Net change in cash and
cash equivalents - 964 (7) - 957
Cash and cash equivalents
at beginning of period - 4,590 14 - 4,604
--------- --------- --------- ------- ---------
Cash and cash equivalents
at end of period $ - 5,554 7 - 5,561
========= ========= ========= ======= =========
F-30
Schedule II
PILLOWTEX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 28, 1996, January 3, 1998 and January 2, 1999
(Dollars in thousands)
Additions Deductions
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Balance at Charged to Charged Balance
beginning costs and to other Write-offs/ at end
Description of period expenses accounts (recoveries) period
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Allowance for doubtful accounts:
Year ended December 28, 1996 $ 2,768 11,092 (89) 11,296 (1) 2,475
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Year ended January 3, 1998 $ 2,475 13,789 11,268 (2) 12,762 (1) 14,770
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Year ended January 2, 1999 $ 14,770 26,764 6,570 (2) 26,987 (1) 21,117
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Inventory reserves:
Year ended December 28, 1996 $ 2,525 2,130 - 1,370 3,285
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Year ended January 3, 1998 $ 3,285 4,337 3,168 (2) 1,378 9,412
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Year ended January 2, 1999 $ 9,412 11,034 2,908 (2) 8,039 15,315
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(1) Accounts written off, less recoveries.
(2) Includes reserves for acquired companies as of the date of acquisition.
S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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2.1 Agreement and Plan of Merger, dated as of September 10, 1997, by and
among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest
Cannon, Inc. (incorporated by reference to Appendix A to the Joint
Proxy Statement/Prospectus forming a part of Pillowtex Corporation's
Registration Statement on Form S-4 (No. 333-36663))
2.2 Amendment to Agreement and Plan of Merger, dated as of September 23,
1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc.,
and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A
to the Joint Proxy Statement/Prospectus forming a part of Pillowtex
Corporation's Registration Statement on Form S-4 (No. 333-36663))
3.1 Restated Articles of Incorporation of Pillowtex Corporation, as
amended (incorporated by reference to Exhibit 3.1 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))
3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended
(incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994)
4.1 Specimen of Certificate evidencing Common Stock (incorporated by
reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996)
4.2 Specimen of Certificate evidencing Series A Redeemable Convertible
Preferred Stock (incorporated by reference to Exhibit 4.2 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 3, 1998)
4.3 Indenture, dated November 12, 1996 (incorporated by reference to
Exhibit 4.1 to Pillowtex Corporation's Registration Statement on Form
S-4 (No. 333-17731))
4.4 Indenture, dated as of December 18, 1997, among Pillowtex Corporation,
the guarantors listed on the signature page thereto, and Norwest Bank
Minnesota, National Association, as Trustee (incorporated by reference
to Exhibit 4.1 to Pillowtex Corporation's Current Report on Form 8-K
dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))
4.5 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto, and
Norwest Bank Minnesota, National Association, as Trustee (incorporated
by reference to Exhibit 4.2 to Pillowtex Corporation's Current Report
on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A
(Amendment No. 1))
4.6 Second Supplemental Indenture, dated as of July 28, 1998, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Norwest Bank Minnesota, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's
Quarterly Report on Form 10-Q for the quarter ended July 4, 1998)
10.1 Amended and Restated Credit Agreement, dated as of December 19, 1997,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.1 to Pillowtex Corporation's Current Report
on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A
(Amendment No. 1))
10.2 First Amendment to Amended and Restated Credit Agreement, dated as of
June 19, 1998, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's
Quarterly Report on Form 10-Q dated July 4, 1998)
10.3 Second Amendment to Amended and Restated Credit Agreement, dated as of
July 28, 1998, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's
Quarterly Report on Form 10-Q dated July 4, 1998)
10.4 + Third Amendment to Amended and Restated Credit Agreement, dated as of
March 12, 1999, among Pillowtex Corporation, certain Lenders named
therein, and NationsBank of Texas, N.A., as Administrative Agent
10.5 Term Credit Agreement, dated as of December 19, 1997, among Pillowtex
Corporation, certain Lenders named herein, and NationsBank of Texas,
N.A., as Administrative Agent (incorporated by reference to Exhibit
10.2 to Pillowtex Corporation's Current Report on Form 8-K dated
December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))
10.6 First Amendment to Term Credit Agreement, dated as of June 19, 1998,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.5 to Pillowtex Corporation's Quarterly Report
on Form 10-Q dated July 4, 1998)
10.7 Second Amendment to Term Credit Agreement, dated as of July 28, 1998,
among Pillowtex Corporation, certain Lenders named therein, and
NationsBank of Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.6 to Pillowtex Corporation's Quarterly Report
on Form 10-Q dated July 4, 1998)
10.8 Preferred Stock Purchase Agreement, dated as of September 10, 1997, by
and among Pillowtex Corporation, Apollo Investment Fund III, L.P.,
Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P.
(incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's
Current Report on Form 8-K dated September 10, 1997, as amended by a
Form 8-K/A (Amendment No. 1))
10.9 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of
November 21, 1997, by and among Pillowtex Corporation, Apollo
Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and
Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit
10.1 to Pillowtex Corporation's Current Report on Form 8-K dated
November 21, 1997)
10.10 Purchase Agreement, dated December 15, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto, and
NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc.
(incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's
Current Report on Form 8-K dated December 19, 1997, as amended by a
Form 8-K/A (Amendment No. 1))
10.11 Purchase Agreement Supplement, dated December 19, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns
& Co. Inc. (incorporated by reference to Exhibit 10.6 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))
10.12 Registration Rights Agreement, dated as of December 18, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns
& Co. Inc. (incorporated by reference to Exhibit 10.7 to Pillowtex
Corporation's Current Report on Form 8-K dated December 19, 1997, as
amended by a Form 8-K/A (Amendment No. 1))
10.13 Registration Rights Agreement Supplement, dated as of December 19,
1997, among Pillowtex Corporation, the guarantors listed on the
signature page thereto, and NationsBank Montgomery Securities, Inc.
and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit
10.8 to Pillowtex Corporation's Current Report on Form 8-K dated
December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1))
10.14 Registration Rights Agreement, dated as of November 12, 1996, by and
among Pillowtex Corporation, each domestic subsidiary of Pillowtex
Corporation, and NationsBanc Capital Markets, Inc. and Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (incorporated by reference to
Exhibit 10.59 to Pillowtex Corporation's Registration Statement on
Form S-4 (No. 333-17731))
10.15 Sublicense Agreement, dated as of July 1, 1998, between Pillowtex
Corporation and the Ralph Lauren Home Collection (incorporated by
reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report
on Form 10-Q for the quarter ended July 4, 1998)
10.16 Lease Agreement, dated as of September 18, 1995, between Pillowtex
Corporation and Sanwa Business Credit Corp. (incorporated by reference
to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form
10-Q, as amended, for the quarter ended September 30, 1995)
10.17 Agreement of Lease, dated May 23, 1995, between Ten Seventy One Joint
Venture and Pillowtex Corporation (incorporated by reference to
Exhibit 10.66 to Pillowtex Corporation's Annual Report on Form 10-K
for the fiscal year ended December 30, 1995)
10.18 Lease, dated as of November 26, 1996, by and among Torfeaco
Industries Limited and Standa Investment Limited (incorporated by
reference to Exhibit 10.14 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.19 Indemnity Agreement, dated as of November 26, 1996, between Torfeaco
Industries Limited and Standa Investment Limited (incorporated by
reference to Exhibit 10.15 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.20 Industrial Lease, dated as of November 23, 1992, between Angel and
Jean Echevarria and Pillowtex Corporation (incorporated by reference
to Exhibit 10.21 to Pillowtex Corporation's Registration Statement on
Form S-1 (No. 33-57314))
10.21 Second Amendment to Lease entered into in September 1997 between Angel
and Jean Echevarria and Pillowtex Corporation (incorporated by
reference to Exhibit 10.17 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998)
10.22 Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith,
Jr. and Pillowtex Corporation (incorporated by reference to Exhibit
10.23 to Pillowtex Corporation's Registration Statement on Form S-1
(No. 33-57314))
10.23 Agreement for Modification and Extension of Lease between Jimmie D.
Smith, Jr. and Pillowtex Corporation (incorporated by reference to
Exhibit 10.19 to Pillowtex Corporation's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998)
10.24 Form of Equipment Leasing Agreement between BTM Financial & Leasing
Corporation B-4 and Beacon Manufacturing Company, Manetta Home
Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as of June 14,
1996 (incorporated by reference to Exhibit 10 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996)
10.25* Employment Agreement dated as of January 1, 1993, between Pillowtex
Corporation and Charles M. Hansen, Jr. (incorporated by reference to
Exhibit 10.2 to Pillowtex Corporation's Registration Statement on Form
S-1 (No. 33-57314))
10.26* Amendment to Employment Agreement, dated as of July 26, 1993, between
Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by
reference to Exhibit 10.26 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
10.27* Amendment to Employment Agreement, dated as of January 20, 1998,
between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated
by reference to Exhibit 10.23 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998)
10.28* Form of Confidentiality and Noncompetition Agreement (incorporated by
reference to Exhibit 10.27 to Pillowtex Corporation's Registration
Statement on Form-S-1 (No. 33-57314))
10.29* Form of Director Indemnification Agreement (incorporated by reference
to Exhibit 10.36 to Pillowtex Corporation's Registration Statement on
Form S-1 (No. 33-57314))
10.30* Split Dollar Life Insurance Agreement between Pillowtex Corporation
and Charles M. Hansen, Jr. dated July 26, 1993 (incorporated by
reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
10.31* Pillowtex Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to Pillowtex Corporation's Proxy Statement for
its Annual Meeting of Shareholders held on May 8, 1997)
10.32* Form of Employment Agreement entered into between Pillowtex Management
Services Company and each of Jeffrey D. Cordes, and Scott E. Shimizu
(incorporated by reference to Exhibit 10.28 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 3, 1998)
10.33*+ Form of Employment Agreement entered into between Pillowtex Management
Services Company and Ronald M. Wehtje dated November 9, 1998
10.34*+ Form of Employment Agreement entered into between Fieldcrest Cannon,
Inc. and A. Allen Oakley, dated October 9, 1998
10.35* Form of Employment Agreement dated as of January 1, 1998, between
Pillowtex Management Services Company and Kevin M. Finlay
(incorporated by reference to Exhibit 10.29 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 3, 1998)
10.36* Pillowtex Corporation Supplemental Executive Retirement Plan,
effective as of January 1, 1997 (incorporated by reference to Exhibit
10.1.44 to Pillowtex Corporation's Registration Statement on Form S-4
(No. 33-36663) filed on September 29, 1997)
10.37* Pillowtex Corporation Management Incentive Plan (incorporated by
reference to Appendix B to Pillowtex Corporation's Proxy Statement for
its Annual Meeting of Shareholders held on May 8, 1997)
10.38* Pillowtex Corporation Deferred Compensation Plan, effective as of
February 9, 1998 (incorporated by reference to Exhibit 10.32 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year
ended January 3, 1998)
10.39* Pillowtex Corporation Executive Medical Expense Reimbursement Plan,
effective as of January 1, 1998 (incorporated by reference to Exhibit
10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the
quarter ended July 4, 1998)
10.40 Indenture, dated as of March 15, 1987, relating to the 6% Convertible
Subordinated Debentures Due 2012 (incorporated by reference to Exhibit
4.9 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3
(No. 33-12436))
10.41 Yarn Purchase Agreement between Parkdale Mills, Incorporated and
Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10 to
Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
21.1 + List of Pillowtex Corporation's Principal Operating Subsidiaries
23.1 + Consent of KPMG LLP
23.2 + Consent of Deloitte & Touche LLP
27 + Financial Data Schedule
99.1 + Consolidated Financial Statements of The Leshner Corporation as of and
for the fiscal years ended September 30, 1995, September 28, 1996 and
September 27, 1997
99.2 + Consolidated Balance Sheets of The Leshner Corporation as of
June 28, 1998 and June 29, 1997 and the Related Consolidated
Statements of Operations and Earnings Retained in the Business
and Cash Flows for the Nine-Month Periods ended June 28, 1998
and June 29, 1997
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* Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
+ Filed herewith electronically