UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-11756
PILLOWTEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-2147728
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
4111 Mint Way 75237
Dallas, Texas (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 333-3225
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1999
----- --------------------------------
Common Stock, $.01 par value 14,320,378
PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of January 2, 1999 and
October 2, 1999 3
Consolidated Statements of Operations for the three months
ended October 3, 1998 and October 2, 1999 4
Consolidated Statements of Operations for the nine months
ended October 3, 1998 and October 2, 1999 5
Consolidated Statements of Cash Flows for the nine months
ended October 3, 1998 and October 2, 1999 6
Notes to Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Index to Exhibits 25
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1999 AND OCTOBER 2, 1999
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
(Unaudited)
ASSETS 1998 1999
---- ----
Current assets:
Cash and cash equivalents $ 5,561 $ 7,669
Receivables:
Trade, less allowances of $21,117 and $27,911 in 1998
and 1999, respectively 246,348 325,033
Other 13,124 15,428
Inventories 434,281 460,824
Assets held for sale 4,058 4,481
Prepaid expenses 3,785 9,043
------------ -----------
Total current assets 707,157 822,478
Property, plant and equipment, less accumulated depreciation of
$98,737 and $134,937 in 1998 and 1999, respectively 629,205 646,643
Intangible assets, at cost, less accumulated amortization of $11,866 and
$17,528 in 1998 and 1999, respectively 289,829 291,056
Other assets 27,963 26,602
------------ -----------
$ 1,654,154 $ 1,786,779
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 127,575 183,741
Accrued expenses 96,250 81,311
Deferred income taxes 22,978 25,495
Current portion of long-term debt 12,421 19,512
Notes payable to banks - 12,200
Long-term debt currently being renegotiated (Note 6) - 626,082
------------ -----------
Total current liabilities 259,224 948,341
Long-term debt, less current portion (Note 6) 944,493 399,582
Deferred income taxes 96,013 90,256
Noncurrent liabilities 53,434 49,789
------------ -----------
Total liabilities 1,353,164 1,487,968
Series A redeemable convertible preferred stock, $0.01 par value; 65,000
shares issued and outstanding, including accrued dividends (Note 7) 63,057 72,199
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 20,000,000 shares;
only Series A issued - -
Common stock, $0.01 par value; authorized 55,000,000 shares;
14,126,595 and 14,320,378 shares issued and outstanding
in 1998 and 1999, respectively 141 142
Additional paid-in capital 155,811 157,067
Retained earnings 83,650 71,443
Currency translation adjustment (1,669) (1,160)
Deferred compensation - (880)
------------ -----------
Total shareholders' equity 237,933 226,612
------------ -----------
$ 1,654,154 $ 1,786,779
============ ===========
See accompanying notes to consolidated financial statements.
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(Unaudited)
1998 1999
---- ----
Net sales $ 419,799 $ 415,806
Cost of goods sold 342,062 371,555
Provision for inventory write-down (Note 4) - 4,900
------------ -----------
Gross profit 77,737 39,351
Selling, general and administrative expenses 34,171 33,220
Provision for asset impairments (Note 4) - 2,000
------------ -----------
Earnings from operations 43,566 4,131
Interest expense 19,122 21,263
------------ -----------
Earnings (loss) before income taxes 24,444 (17,132)
Income taxes 9,422 (6,053)
------------ -----------
Net earnings (loss) 15,022 (11,079)
Preferred dividends and accretion 540 9,526
------------ -----------
Earnings (loss) available for common shareholders $ 14,482 $ (20,605)
============ ===========
Basic earnings (loss) per common share $ 1.03 $ (1.45)
============ ===========
Weighted average common shares outstanding - basic 14,122 14,184
============ ===========
Diluted earnings (loss) per common share $ .87 $ (1.45)
============ ===========
Weighted average common shares outstanding - diluted 17,619 14,184
============ ===========
Dividends declared per common share $ .06 $ .06
============ ===========
See accompanying notes to consolidated financial statements.
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(Unaudited)
1998 1999
---- ----
Net sales $ 1,118,220 $ 1,146,781
Cost of goods sold 922,227 984,757
Provision for inventory write-down (Note 4) - 4,900
------------ -----------
Gross profit 195,993 157,124
Selling, general and administrative expenses 96,055 92,457
Provision for asset impairments (Note 4) - 2,000
Restructuring charge 1,539 -
------------ -----------
Earnings from operations 98,399 62,667
Interest expense 52,920 60,464
------------ -----------
Earnings before income taxes 45,479 2,203
Income taxes 17,731 1,255
------------ -----------
Net earnings 27,748 948
Preferred dividends and accretion 1,567 10,602
------------ -----------
Earnings (loss) available for common shareholders $ 26,181 $ (9,654)
============ ===========
Basic earnings (loss) per common share $ 1.86 $ (.68)
============ ===========
Weighted average common shares outstanding - basic 14,068 14,172
============ ===========
Diluted earnings (loss) per common share $ 1.63 $ (.68)
============ ===========
Weighted average common shares outstanding - diluted 17,672 14,172
============ ===========
Dividends declared per common share $ .18 $ .18
============ ===========
See accompanying notes to consolidated financial statements.
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 3, 1998 AND OCTOBER 2, 1999
(Dollars in thousands)
(Unaudited)
1998 1999
---------- ----------
Cash flows from operating activities:
Net earnings $ 27,748 $ 948
Adjustments to reconcile net earnings to net cash
Used in operating activities:
Depreciation and amortization........................................... 40,187 43,184
Deferred income taxes................................................... 23,581 1,825
Accretion on debt instruments........................................... 854 1,552
Provision for asset impairment - 2,000
Provision for doubtful accounts......................................... 1,264 873
Amortization of deferred compensation................................... - 312
Loss on disposal of property, plant and equipment....................... 52 65
Changes in operating assets and liabilities:
Trade receivables.................................................... (42,627) (79,605)
Other receivables.................................................... (10,082) 4,711
Inventories.......................................................... (37,562) (26,140)
Prepaids............................................................. 2,248 (3,797)
Other Assets......................................................... (6,950) 2,542
Accounts payable..................................................... 4,692 55,504
Accrued expenses..................................................... (13,500) (20,153)
Other assets and liabilities......................................... (1,878) (3,646)
---------- ----------
Net cash used in operating activities........................... (11,973) (19,829)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment......................... 2,779 472
Purchases of property, plant and equipment.................................. (89,660) (73,622)
Proceeds from disposal of assets held for sale.............................. 35,335 -
Payments for businesses purchased........................................... (90,029) -
---------- ----------
Net cash used in investing activities........................... (141,575) (73,150)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment................. (6,905) 599
Borrowings on revolving credit loans........................................ 369,100 346,098
Repayments of revolving credit loans........................................ (291,500) (233,928)
Proceeds from the issuance of other long-term debt.......................... 100,000 -
Retirement of long-term debt................................................ (13,205) (13,657)
Payments of debt issuance costs............................................. (1,617) (56)
Dividends paid (4,063) (4,011)
Proceeds from exercise of stock options..................................... 2,229 43
---------- ----------
Net cash provided by financing activities....................... 154,039 95,087
---------- ----------
Net change in cash and cash equivalents......................................... 491 2,108
Cash and cash equivalents at beginning of period................................ 4,604 5,561
---------- ----------
Cash and cash equivalents at end of period...................................... $ 5,095 $ 7,669
========== ==========
Supplemental disclosures of cash flow information: Cash paid (received) during
the period for:
Interest.................................................................. $ 47,835 $ 47,718
========== ==========
Income taxes $ (4,597) $ 812
========== ==========
See accompanying notes to consolidated financial statements.
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS)
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Pillowtex Corporation, which is referred to in this report as "Parent,"
and its subsidiaries, which are collectively with Parent, referred to
in this report as the "Company," include all adjustments, consisting
only of normal, recurring adjustments and accruals, which are, in the
opinion of management, necessary for fair presentation of the results
of operations and financial position. Results of operations for interim
periods may not be indicative of future results. The unaudited
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's
annual report on Form 10-K, as filed with the Securities and Exchange
Commission on March 30, 1999 for the fiscal year ended January 2, 1999.
The consolidated financial statements include the results of The
Leshner Corporation ("Leshner") from its date of acquisition, July 28,
1998. Certain reclassifications have been made to conform prior year
financial statements to the current period classifications.
The Company is organized by functional responsibilities and operates as
a single segment.
(2) COMPREHENSIVE INCOME
Comprehensive income consists of net earnings (loss) and foreign
currency translation adjustments and aggregates $14.4 million and $26.8
million for the three and nine month periods ended October 3, 1998,
respectively. For the three and nine month periods ended October 2,
1999 comprehensive income (loss) aggregates $(10.7) million and $1.5
million, respectively.
(3) INVENTORIES
Inventories consisted of the following at January 2, 1999 and October
2, 1999:
January 2 October 2
1998 1999
------------ ------------
Finished goods $ 218,439 $ 227,878
Work-in-process 134,428 150,714
Raw materials 58,306 55,935
Supplies 23,108 26,297
------------ ------------
$ 434,281 $ 460,824
============ ============
(4) PROVISION FOR INVENTORY AND OTHER IMPAIRMENTS
During the third quarter of 1999, the Company recorded a $4.9 million
pre-tax non-cash charge to reduce certain blanket inventory to net
realizable value. The Company also recorded a $2.0 million non-cash
charge to adjust the carrying value of the Opelika facility, which was
closed in the first quarter of 1999, to an estimated fair market value.
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS)
(UNAUDITED)
(5) EARNINGS PER SHARE
The following table reconciles the numerators and denominators of basic
and diluted earnings (loss) per share for the three and nine month
periods ended October 3, 1998 and October 2, 1999. The potentially
dilutive effects of stock options, convertible notes and convertible
preferred stock were excluded from the computation of diluted earnings
per share for the periods ended October 2, 1999 because inclusion would
have been antidilutive. Options to purchase 466,000 shares of common
stock at prices ranging from $33.50 to $46.50 were outstanding during
the three and nine month periods ending October 3, 1998 and were not
included in the computation of diluted earnings per share because their
inclusion would have been antidilutive.
Three Months Ended Nine Months Ended
October 3, 1998 October 3, 1998
----------------------- ---------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
Basic - earnings available for common shareholders $ 14,482 14,122 $ 26,181 14,068
Effect of dilutive securities:
Stock options - 155 - 232
Convertible debentures 256 633 1,106 663
Convertible preferred stock 540 2,709 1,567 2,709
---------- ------ ---------- ------
Diluted - earnings available for common shareholders $ 15,278 17,619 $ 28,854 17,672
========== ====== ========== ======
Three Months Ended Nine Months Ended
October 2, 1999 October 2, 1999
----------------------- ---------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
Basic - earnings (loss) available for common
shareholders $ (20,605) 14,184 $ (9,654) 14,173
Effect of dilutive securities:
Stock options - - - -
Convertible debentures - - - -
Convertible preferred stock - - - -
---------- ------ ---------- ------
Diluted - earnings available for common shareholders $ (20,605) 14,184 $ (9,654) 14,173
========== ====== ========== ======
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
January 2, October 2,
1999 1999
----------- -----------
Credit Facilities:
Revolving credit facility $ 182,800 $ 282,770
Tranche A term loan 125,000 121,250
Tranche B term loan 223,750 222,062
9% Senior subordinated notes 155,000 185,000
10% Senior subordinated notes 155,000 125,000
6% Convertible debentures (net of
unamortized discount of $14.5 million). 88,594 85,649
Industrial revenue bonds 17,218 17,949
Other Notes 9,552 5,496
----------- -----------
956,914 1,045,176
Less:
Long-term debt currently
being renegotiated - 626,082
Current portion of long-term debt 12,421 19,512
----------- -----------
$ 944,493 $ 399,582
=========== ===========
In December 1997, in connection with the Fieldcrest Cannon acquisition, the
Company entered into new senior Secured revolving credit and term loan
facilities (the "Facilities") with a group of financial and institutional
investors (the "Lending Group") for which Bank of America 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 October 2, 1999, $36.7 million of
letters of credit were outstanding. Subsequent to the end of the third fiscal
period, the Revolver was amended to permit the Company to use for working
capital purposes a $30.5 million portion of the Revolver previously held as a
contingency reserve, thereby increasing the availability under that facility.
Amounts outstanding under the Revolver and the Tranche A Term Loan bear
interest at a rate based upon the London Interbank Offered Rate plus 3.00%.
The Tranche B Term Loan bears interest on a similar basis to the Tranche A
Term Loan, plus an additional margin of 0.50%. These rates are subject to
increase or decrease based upon the Company's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"), as
measured on a trailing 12 month basis, at the end of each fiscal quarter. The
weighted average annual interest rate on outstanding borrowings under the
various senior credit facilities during the first three quarters of 1999 was
7.3% and the effective rate at October 2, 1999 was 7.5%.
The Facilities contain a number of financial affirmative and negative covenants
which, among other things, require maintenance
of a funded debt to EBITDA ratio and a fixed charge coverage ratio, 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.
On October 2, 1999, the Company was not in compliance with certain financial
covenants under the Facilities, as amended. The Company has obtained a waiver of
such non-compliance through December 7, 1999. The Company is currently in
discussions with the Lending Group to obtain a permanent waiver of such
non-compliance and to amend the financial covenants contained in the Facilities.
However, no assurance can be given that the Lending Group will grant a permanent
waiver or agree to a further extension of the temporary waiver or that the
Company will reach agreement with respect to any such amendment by the
expiration of the temporary waiver, or as to the terms of any such waiver or
amendment.
In the event that the Lending Group does not grant a permanent waiver or
further extend the existing waiver, there would exist an event of default
under the Facilities, and, as a result, the Lending Group would not be
obligated to make additional advances under the Revolver. Additionally, the
Lending Group would be entitled to declare all principal of and interest on
advances under the Facilities immediately due and payable and would have the
right to block payments on substantially all other long-term indebtednes of
the Company. Also, cross-defaults may occur under the instruments governing
substantially all of the Company's other long-term indebtedness.
As a result of the above circumstances, the Company has classified all of the
debt affected by the non-compliance and related waiver as current. At October
2, 1999, the long-term debt payable within one year was $19.5 million and the
debt which has been classified as current due to the term of the temporary
waiver totaled $626.1 million. If the Company obtains suitable amendments of
the financial covenants in the Facilities, then that portion of the debt due
after one year from the Company's next reported balance sheet date would be
reclassified as long-term on the Company's next reported financial statements.
As permitted under the terms of the Facilities, in May 1999, the Company entered
into a $20.0 million senior unsecured revolving credit facility in order to
obtain additional working capital availability. On July 27, 1999, the senior
unsecured facility was amended to increase the amount of funds available to
$35.0 million and to extend the original maturity date.
Availability under this bank line of credit was $22.8 million at October 2,
1999. On November 15, 1999, the senior unsecured facility was again amended to
further extend the maturity date to December 7, 1999. The senior unsecured
facility is guaranteed on a senior basis by the Company's domestic subsidiaries.
The Company is required to pay interest on any amounts borrowed under the senior
unsecured facility at a rate which is based upon the London Interbank Offered
Rate plus 4.0% or the prime rate plus 2.5%, at the Company's option. The senior
unsecured facility matures upon termination by the Company at any time or
otherwise at the earliest of: a) any increase in the commitment under the
Facilities, the issuance of any capital stock by the Company or its domestic
subsidiaries, or other specified events; or b) December 7, 1999. The Company is
currently in discussions with the lender under the unsecured revolving credit
facility to further extend the maturity date; however, no assurance can be given
that the Company and such Lender will reach agreement with respect to any such
amendment, or as to the terms of any such amendment.
As a result of the Fieldcrest Cannon acquisition, the $104.2 million
aggregate principal amount of 6% Convertible Subordinated Debentures due 2012
of Fieldcrest Cannon (the "Fieldcrest Debentures") outstanding at October 2,
1999, are convertible, at the option of the holder, into a combination of
cash and the Company's common stock. At October 2, 1999, if all outstanding
Fieldcrest Debentures were converted, the resulting cash component to be paid
to the debtholders would have been approximately $63.6 million. The Company
recently notified the holders of the Fieldcrest Debentures that, given the
current status of the Company's discussions with the Lending Group and
certain other matters, it is not practicable or prudent for payments to be made
in respect of the Fieldcrest Debentures at this time and have advised such
holders that they will be offered the opportunity to rescind their surrender
for conversion and regain possession of their Fieldcrest Debentures.
Based upon current and anticipated levels of operations, and aggressive
efforts to reduce inventories and accounts receivable, the Company
anticipates that its cash flow from operations, together with amounts
available under the Revolver and the unsecured revolving credit facility,
will be adequate to meet its anticipated cash requirements in the foreseeable
future if it is able to achieve appropriate waivers of amendments of its
senior credit facilities. In addition to cash requirements for operations,
cash requirements may increase to meet the potential payment obligations
under the Fieldcrest Debentures. If a substantial amount of the Fieldcrest
Debentures were presented to the Company, the Company may not have adequate
funds to meet this payment obligation. In the event that such amounts are not
sufficient for future cash requirements, the Company may be required to
reduce planned capital expenditures or seek additional financing. The Company
can provide no assurances that financing would be available or, if available,
offered on terms acceptable to the Company.
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Under the terms of the Company's Series A Redeemable Convertible Preferred Stock
("Series A Preferred Stock"), 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 will also be required
to pay a one-time cumulative dividend in 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
pre-determined targets. The Company has determined that it is probable that
earnings per share for the 1999 fiscal year will not meet the lowest
pre-determined target and that the dividend rate for the Series A Preferred
Stock will increase to 10% beginning January 1, 2000. Accordingly, the Company
recorded a one-time cumulative stock dividend of 8,980 Series A Preferred Shares
(or $9.0 million) for the quarter ended October 2, 1999 to effectively adjust
the dividend rate on the Series A Preferred Stock from the date of issuance
through the end of the third quarter. The Company expects to record incremental
preferred dividends in the fourth
quarter of 1999 of 1,145 preferred shares (or $1.1 million) on account of the
increase in the preferred dividend rate to 10%. Regularly scheduled quarterly
dividends on the Series A Preferred Stock may be paid in cash or in kind at
the Company's option through December 19, 2002, and thereafter may be paid
only in cash. The Company intends to pay the quarterly dividend due on
December 31, 1999 in additional Series A Preferred Stock.
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following table presents condensed consolidating financial
information for the Company, segregating the Parent and guarantor
subsidiaries from non-guarantor subsidiaries (in thousands). The
guarantor subsidiaries are wholly owned subsidiaries of the Parent and
the 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.
January 2, 1999
----------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------------- ------------- ------------ ------------ ------------
Assets:
- -------
Trade receivables $ - $ 240,909 $ 5,439 $ - $ 246,348
Receivable from affiliates 746,839 - - (746,839) -
Inventories - 424,563 9,718 - 434,281
Other current assets - 25,946 582 - 26,528
------------- ------------- ------------ ------------ ------------
Total current assets 746,839 691,418 15,739 (746,839) 707,157
Property, plant and equipment, net 565 627,114 1,526 - 629,205
Intangible, net 19,102 268,478 2,249 - 289,829
Other assets 382,558 17,898 - (372,493) 27,963
------------- ------------- ------------ ------------ ------------
Total assets $ 1,149,064 $ 1,604,908 $ 19,514 $ (1,119,332) $ 1,654,154
============= ============= ============ ============ ============
Liabilities and Shareholders' Equity:
- -------------------------------------
Accounts payable and accrued
liabilities $ 6,425 $ 212,823 $ 4,577 $ - $ 223,825
Payables to affiliates - 744,000 2,839 (746,839) -
Other current liabilities 8,318 27,002 79 - 35,399
------------- ------------- ------------ ------------ ------------
Total current liabilities 14,743 983,825 7,495 (746,839) 259,224
Noncurrent liabilities 833,331 260,082 527 - 1,093,940
------------- ------------- ------------ ------------ ------------
Total liabilities 848,074 1,243,907 8,022 (746,839) 1,353,164
Redeemable convertible preferred
Stock 63,057 - - - 63,057
Shareholders' equity 237,933 361,001 11,492 (372,493) 237,933
------------- ------------- ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 1,149,064 $ 1,604,908 $ 19,514 $ (1,119,332) $ 1,654,154
============= ============= ============ ============ ============
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
October 2, 1999
-----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
Assets:
- -------
Trade receivables $ - $ 319,361 $ 5,672 $ - $ 325,033
Receivable from affiliates 751,474 - - (751,474) -
Inventories - 445,803 15,021 - 460,824
Other current assets - 36,690 (69) - 36,621
----------- ----------- ----------- ------------- -----------
Total current assets 751,474 794,860 20,624 (751,474) 822,478
Property, plant and equipment, net 494 644,684 1,465 - 646,643
Intangible, net 16,805 271,968 2,283 - 291,056
Other assets 492,385 18,439 - (484,222) 26,602
----------- ----------- ----------- ------------- -----------
Total assets $ 1,261,158 $ 1,736,945 $ 24,372 $ (1,235,696) $ 1,786,779
=========== =========== =========== ============= ===========
Liabilities and Shareholders' Equity:
- -------------------------------------
Accounts payable and accrued
liabilities $ 13,895 $ 247,408 $ 3,914 $ - $ 265,052
Payables to affiliates - 744,000 7,474 (751,474) -
Other current liabilities 642,348 40,859 82 - 683,289
----------- ----------- ----------- ------------- -----------
Total current liabilities 656,243 1,032,102 11,470 (751,474) 948,341
Noncurrent liabilities 306,104 232,980 543 - 539,627
----------- ----------- ----------- ------------- -----------
Total liabilities 962,347 1,265,082 12,013 (751,474) 1,487,968
Redeemable convertible preferred
Stock 72,199 - - - 72,199
Shareholders' equity 226,612 471,863 12,359 (484,222) 226,612
----------- ----------- ----------- ------------- -----------
Total liabilities and
shareholders' equity $ 1,261,158 $ 1,736,945 $ 24,372 $ (1,235,696) $ 1,786,779
=========== =========== =========== ============= ===========
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Three Months Ended October 3, 1998
-----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - $ 414,387 $ 6,802 $ (1,390) $ 419,799
Cost of goods sold - 337,189 6,263 (1,390) 342,062
----------- ----------- ----------- ----------- -----------
Gross profit (loss) - 77,198 539 - 77,737
Selling, general and administrative (1,422) 35,232 361 - 34,171
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations 1,422 41,966 178 - 43,566
Equity in earnings of subsidiaries 14,216 - - (14,216) -
Interest expense 182 18,945 (5) - 19,122
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes 15,456 23,021 183 (14,216) 24,444
Income taxes 434 9,000 (12) - 9,422
----------- ----------- ----------- ----------- -----------
Net earnings (loss) 15,022 14,021 195 (14,216) 15,022
Preferred dividends 540 - - - 540
----------- ----------- ----------- ----------- -----------
Earnings (loss) available for
Common shareholders $ 14,482 $ 14,021 $ 195 $ (14,216) $ 14,482
=========== =========== =========== =========== ===========
Three Months Ended October 2, 1999
-----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - $ 410,720 $ 7,262 $ (2,176) $ 415,806
Cost of goods sold - 366,497 7,234 (2,176) 371,555
Provision for inventory write-down - 4,900 4,900
----------- ----------- ------------ ------------ ------------
Gross profit - 39,323 28 - 39,351
Selling, general and administrative (1,817) 34,801 236 - 33,220
Provision for asset impairment - 2,000 - - 2,000
----------- ----------- ------------ ------------ ------------
Earnings (loss) from operations 1,817 2,522 (208) - 4,131
Equity in earnings of subsidiaries (12,054) - - 12,054 -
Interest expense (income) 316 20,950 (3) - 21,263
----------- ----------- ------------ ------------ ------------
Earnings (loss) before income taxes (10,553) (18,428) (205) 12,054 (17,132)
Income taxes 526 (6,537) (42) - (6,053)
----------- ----------- ------------ ------------ ------------
Net earnings (loss) (11,079) (11,891) (163) 12,054 (11,079)
Preferred dividends 9,526 - - - 9,526
----------- ----------- ------------ ------------ ------------
Earnings (loss) available for
common shareholders $ (20,605) $ (11,891) $ (163) $ 12,054 $ (20,605)
=========== =========== ============ ============ ============
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Nine Months Ended October 3, 1998
-----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - $ 1,102,979 $ 18,087 $ (2,846) $ 1,118,220
Cost of goods sold - 907,542 17,531 (2,846) 922,227
----------- ------------ ------------ ------------ ------------
Gross profit - 195,437 556 - 195,993
Selling, general and administrative (3,294) 98,230 1,119 - 96,055
Restructuring charges - 1,539 - - 1,539
----------- ------------ ------------ ------------ ------------
Earnings (loss) from operations 3,294 95,668 (563) - 98,399
Equity in earnings of subsidiaries 25,759 - - (25,759) -
Interest expense 234 52,694 (8) - 52,920
----------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes 28,819 42,974 (555) (25,759) 45,479
Income taxes 1,071 16,778 (118) - 17,731
----------- ------------ ------------ ------------ ------------
Net earnings (loss) 27,748 26,196 (437) (25,759) 27,748
Preferred dividends 1,567 - - - 1,567
----------- ------------ ------------ ------------ ------------
Earnings (loss) available for
Common shareholders $ 26,181 $ 26,196 $ (437) $ (25,759) $ 26,181
=========== ============ ============ ============ ============
Nine Months Ended October 2, 1999
-----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - $ 1,130,107 $ 20,973 $ (4,299) $ 1,146,781
Cost of goods sold - 969,066 19,990 (4,299) 984,757
Provision for inventory write-down - 4,900 - - 4,900
----------- ------------ ------------ ------------ ------------
Gross profit - 156,141 983 - 157,124
Selling, general and administrative (3,904) 95,726 636 - 92,457
Provision for asset impairment - 2,000 - - 2,000
----------- ------------ ------------ ------------ ------------
Earnings from operations 3,904 58,415 347 - 62,667
Equity in earnings (loss) of
subsidiaries (1,852) - - 1,852 -
Interest expense (income) (403) 60,887 (20) - 60,464
----------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes 2,455 (2,472) 367 1,852 2,203
Income taxes 1,508 (262) 9 - 1,255
----------- ------------ ------------ ------------ ------------
Net earnings (loss) 947 (2,210) 358 1,852 948
Preferred dividends 10,601 - - - 10,601
----------- ------------ ------------ ------------ ------------
Earnings (loss) available for
common shareholders $ (9,654) $ (2,210) $ 358 $ 1,852 $ (9,654)
=========== ============ ============ ============ ============
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Nine Months Ended October 3, 1998
------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ------------ ------------ ------------ ------------
Cash provided by (used in)
Operating activities $ 20,371 $ (33,730) $ 1,386 $ - $ (11,973)
Cash provided by (used in)
Investing activities (112,767) (28,766) (42) - (141,575)
Cash provided by (used in)
Financing activities 92,396 62,993 (1,350) 154,039
----------- ------------ ------------ ------------ ------------
Net change in cash and cash
Equivalents - 497 (6) - 491
Cash and cash equivalents at
Beginning of year - 4,590 14 - 4,604
----------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
End of period $ - $ 5,087 $ 8 $ - $ 5,095
=========== ============ ============ ============ ============
Nine Months Ended October 2, 1999
------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in)
Operating activities $ 10,090 $ (26,038) $ (3,881) $ - $ (19,829)
----------- ------------ ------------ ------------ ------------
Cash provided by (used in)
Investing activities 71 (73,149) (72) - (73,150)
Cash provided by (used in)
Financing activities (10,161) 101,435 3,813 - 95,087
----------- ------------ ------------ ------------ ------------
Net change in cash and cash
Equivalents - 2,248 (140) - 2,108
Cash and cash equivalents at
Beginning of year - 5,554 7 - 5,561
----------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
End of period $ - $ 7,802 $ (133) $ - $ 7,669
=========== ============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended January 2, 1999.
RESULTS OF OPERATIONS
NET SALES. Net sales were $415.8 million for the three months ended October 2,
1999, representing a decrease of $4.0 million, or 1.0%, as compared to $419.8
million for the three months ended October 3, 1998. Net sales for the nine
months ended October 2, 1999 increased by $28.6 million, or 2.6%, to $1,146.8
million from $1,118.2 million for the same period of the prior year. The
increase in net sales due to the acquisition of Leshner on July 28, 1998 is
approximately $10.0 million and $56.0 million for the three and nine months
ended October 2, 1999, respectively.
GROSS PROFIT. Gross profit margins decreased to 9.5% for the three months
ended October 2, 1999 from 18.5% for the three months ended October 3, 1998.
Gross profit margin for the nine months ended October 2, 1999 decreased to
13.7% from 17.5% for the same period in the prior year. The declines in gross
profit margin are primarily due to higher costs, unabsorbed overhead expenses
related to the installation of new computer systems and equipment and a
charge of $4.9 million for inventory write-down. The earnings for the quarter
and year-to-date were negatively impacted by higher than planned costs
associated with certain marketing initiatives and by lower margin sales due
to a combination of higher costs, primarily in unabsorbed overhead, and to a
lower average selling price due to a change in sales mix pursuant to the
inventory reduction program.
The Company is critically reviewing all areas of its operations and taking
aggressive action to improve operating results. The Company has imposed
tighter control over sales and marketing programs which have adversely
affected profit margins in 1999, and will continue to focus on decreasing
inventory and accounts receivable and controlling operating costs
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses decreased $1.0
million to $33.2 million for the three months ended October 2, 1999, compared to
$34.2 million for the three months ended October 3, 1998. As a percentage of net
sales, SG&A expenses decreased to 8.0% for the three months ended October 2,
1999 from 8.1% for the three months ended October 3, 1998. SG&A expenses
decreased by $3.6 million from $96.1 million, or 8.6% of net sales, for the nine
months ended October 3, 1998 to $92.5 million, or 8.1% of net sales, for the
same period this year.
PROVISION FOR ASSET IMPAIRMENTS. During the third quarter of 1999, the
Company recorded a pre-tax $2.0 million non-cash charge to adjust the
carrying value of the Opelika facility, which was closed in the first quarter
of 1999, to an estimated fair market value.
INTEREST EXPENSE. Interest expense increased $2.2 million to $21.3 million
for the three months ended October 2, 1999, compared to $19.1 million for the
three months ended October 3, 1998. Interest expense for the nine month
period ended October 2, 1999 increased $7.5 million to $60.5 million from
$53.0 million for the nine month period ended October 3, 1998. The increase
is primarily due to additional debt incurred in connection with the Leshner
acquisition, capital expenditures in connection with the Company's plant
upgrades, higher working capital requirements, and the payment of waiver and
amendment fees to the Company's senior lenders aggregating $2.0 million.
Average interest rates for the three month period ended October 2, 1999
declined to 8.1% from 8.4% for the period ended October 3, 1998. Average
interest rates for the nine month period ended October 2, 1999 also declined
to 8.0% from 8.4% for the same period last year.
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 (the
"Lending Group") for which Bank of America 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 October 2, 1999, $36.7 million of letters of credit were
outstanding. Subsequent to the end of the third fiscal period, the Revolver
was amended to permit the Company to use for general working capital
purposes, a $30.5 million portion of the Revolver previously held as a
contingency reserve thereby increasing the availability under that facility.
Amounts outstanding under the Revolver and the Tranche A Term Loan bear
interest at a rate based upon the London Interbank Offered Rate plus 3.00%.
The Tranche B Term Loan bears interest on a similar basis to the Tranche A
Term Loan, plus an additional margin of .50%. These rates are subject to
increase or decrease based upon the Company's ratios of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA") at
the end of each fiscal quarter. The weighted average annual interest rate on
outstanding borrowings under the various senior credit facilities during the
first three quarters of 1999 was 7.3% and the effective rate at October 2,
1999 was 7.5%.
The Facilities contain a number of financial affirmative and negative
covenants which, among other things, require maintenance of a funded debt to
EBITDA ratio and a fixed charge coverage ratio, 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.
On October 2, 1999, the Company was not in compliance with certain financial
covenants under the Facilities, as amended. The Company has obtained a waiver
of such non-compliance through December 7, 1999. The Company is currently in
discussions with the Lending Group to obtain a permanent waiver of such
non-compliance and to amend the financial covenants contained in the
Facilities. However, no assurance can be given that the Lending Group will
grant a permanent waiver or agree to a further extension of the temporary
waiver or that the Company will reach agreement with respect to any such
amendment by the expiration of the existing waiver, or as to the terms of any
such waiver or amendment.
As a result of the above circumstances, the Company has classified all of the
debt affected by the non-compliance and related waiver as current. At October
2, 1999, the long-term debt payable within one year was $19.5 million and the
debt which has been classified as current due to the term of the temporary
waiver totaled $626.1 million. If the Company obtains suitable amendments of
the financial covenants in the Facilities, then that portion of the debt due
after one year from the Company's next reported balance sheet date would be
reclassified as long-term on the Company's next reported financial statements.
As permitted under the terms of the Facilities, in May 1999, the Company
entered into a $20.0 million senior unsecured revolving credit facility in
order to obtain additional working capital availability. On July 27, 1999,
the senior unsecured facility was amended to increase the amount of funds
available to $35.0 million and to extend the original maturity date.
Availability under this bank line of credit was $22.8 million at October 2,
1999. On November 15, 1999, the senior unsecured facility was again amended
to further extend the maturity date. The senior unsecured facility is
guaranteed on a senior basis by the Company's domestic subsidiaries. The
Company is required to pay interest on any amounts borrowed under the senior
unsecured facility at a rate which is based upon the London Interbank Offered
Rate plus 4.0% or the prime rate plus 2.5%, at the Company's option. The
senior unsecured facility matures upon termination by the Company at any time
or otherwise at the earliest of: a) any increase in the commitment under the
Facilities, the issuance of any capital stock by the Company or its domestic
subsidiaries, or other specified events; or b) December 7, 1999. The Company
is currently in discussions with the lender under the unsecured
revolving credit facility to further extend the maturity date; however, no
assurance can be given that the Company and such Lender will reach agreement
with respect to any such amendment, or as to the terms of any such amendment.
In the event that the Lending Group does not grant a permanent waiver or
further extend the existing waiver, there would exist an event of default
under the Facilities, and, as a result, the Lending Group would not be
obligated to make additional advances under the Revolver, and would be
entitled to declare all principal of and interest on advances under the
Facilities immediately due and payable and would have the right to block
payments on substantially all other long-term indebtednes of the Company. In
addition, there might also occur cross-defaults under the instruments
governing substantially all of the Company's other long-term indebtedness.
The debt outstanding under the Revolver as of October 2, 1999 was $23.2
million higher than at July 3, 1999. This increase was due primarily to the
net loss for the period of $11.1 million, and an increase in accounts
receivable of $58.4 million during the third fiscal quarter. The earnings for
the quarter were negatively impacted by higher than planned costs associated
with certain marketing initiatives and by lower margin sales due to a
combination of higher costs, primarily in unabsorbed overhead, and to a lower
average selling price due to a change in sales mix pursuant to the inventory
reduction program. Consolidated inventory was reduced by $43.5 million before
a charge of $4.9 million in the third fiscal quarter. The increase in
accounts receivable was due, in part, to a seasonal increase in sales, but
also due to a substantial increase in the number of day's sales in accounts
receivable, which is attributable to slower collections. As of October 2,
1999, the Company's total debt had increased approximately $89.7 million from
the period ending October 3, 1998 due primarily to higher inventory levels in
order to assure product supply during the production and warehousing system
implementations and to accelerated capital expenditure.projects. The Company
expects to reduce borrowings for working capital for the remainder of 1999
primarily by reducing inventory and accounts receivable; however, the Company
can give no assurance that it will be able to reduce inventory or receivables
as planned.
As a result of the Fieldcrest Cannon acquisition, the $100.0 million
aggregate principal amount of 6% Convertible Subordinated Debentures due 2012
of Fieldcrest Cannon (the "Fieldcrest Debentures") outstanding at October 2,
1999, are convertible, at the option of the holder, into a combination of
cash and the Company's common stock. At October 2, 1999, if all outstanding
Fieldcrest Debentures were converted, the resulting cash component to be paid
to the debtholders would have been approximately $61.0 million. The Company
recently notified the holders of the Fieldcrest Debentures that, given the
current status of the Company's discussions with the Lending Group and
certain other matters, it is not practicable or prudent for payments to be
made in respect of the Fieldcrest Debentures at this time and have advised
such holders that they will be offered the opportunity to rescind their
surrender for conversion and regain possession of their Fieldcrest Debentures.
Based upon current and anticipated levels of operations, and aggressive
efforts to reduce inventories and accounts receivable, the Company
anticipates that its cash flow from operations, together with amounts
available under the Revolver and the unsecured revolving credit facility,
will be adequate to meet its anticipated cash requirements in the foreseeable
future if it is able to achieve appropriate waivers of amendments of its
senior credit facilities. In addition to cash requirements for operations,
cash requirements may increase to meet the potential payment obligations
under the Fieldcrest Debentures. If a substantial amount of the Fieldcrest
Debentures were presented to the Company, the Company may not have adequate
funds to meet this payment obligation. In the event that such amounts are not
sufficient for future cash requirements, the Company may be required to
reduce planned capital expenditures or seek additional financing. The Company
can provide no assurances that financing would be available or, if available,
offered on terms acceptable to the Company.
On October 2, 1999, the Company's working capital position was adversely
affected by the reclassification of long-term debt required under EITF 86-30
(See Note 6). This reclassification resulted in the Company reporting a
working capital deficit of $125.9 million and a working capital ratio of 0.87
to 1 compared to working capital of $447.9 million and a working capital
ratio of 2.73 to 1 on July 3, 1999. This decrease in working capital is
mainly attributable to the previously mentioned re-classification of all its
debt as current (See Note 6). Net cash provided by operating activities has
decreased $7.8 million from a use of $12.0 million during the first nine
months of Fiscal 1998 to a use of ($19.8) million during the first nine
months of Fiscal 1999.
Under the terms of the Company's Series A Redeemable Convertible Preferred
Stock ("Series A Preferred Stock"), 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 will also
be required to pay a one-time cumulative dividend in 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 pre-determined targets. The Company has determined that it is
probable that earnings per share for the 1999 fiscal year will not meet the
lowest pre-determined target and that the dividend rate for the Series A
Preferred Stock will increase to 10% beginning January 1, 2000. Accordingly,
the Company recorded a one-time cumulative stock dividend of 8,980 Series A
Preferred Shares (or $9.0 million) for the quarter ended October 2, 1999 to
effectively adjust the dividend rate on the Series A Preferred Stock from the
date of issuance through the end of the third quarter. The Company expects to
record incremental preferred dividends in the fourth quarter of 1999 of 1,145
preferred shares (or $1.1 million) on account of the increase in the
preferred dividend rate to 10%. Regularly scheduled quarterly dividends on
the Series A Preferred Stock may be paid in cash or in kind at the Company's
option through December 19, 2002, and thereafter may be paid only in cash.
The Company intends to pay the quarterly dividend due on December 31, 1999 in
additional Series A Preferred Stock.
NEW ACCOUNTING STANDARDS
In June 1998, 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. As
amended by SFAS No. 137, the provisions of SFAS No. 133 are effective for
financial statements for fiscal years beginning after June 15, 2000, 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 incorrect
results by or at the Year 2000. This could disrupt the Company's operations
and those of its suppliers and customers. This "Year 2000" issue is believed
to affect virtually all companies and organizations, including the Company.
PILLOWTEX'S READINESS
SYSTEMS REPLACEMENT PROJECT. In 1995, the Company began a project to improve
its access to business information through common integrated computing and
reporting systems. In 1996, before the Company acquired Fieldcrest Cannon,
Fieldcrest Cannon had begun a similar project. Each of the Company and
Fieldcrest Cannon had decided to use systems using software applications
primarily developed by Oracle Corporation. These applications replace many of
the accounting, reporting, and manufacturing systems that are, or previously
had been, used at the Company and Fieldcrest Cannon. Also, the Company and
Fieldcrest Cannon have 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 for
these projects are Year 2000 compliant.
The Company's systems replacement project is expected to be completed toward
the end of 1999. The Oracle software development is complete. The financial
application was substantially completed in October 1998. The Company's
payroll conversion was completed during early 1999. The development and
implementation of the manufacturing and warehousing applications requires
unique customization to meet the specific needs of each plant. This process
has been completed at a substantial number of the Company's facilities and is
continuing at the remaining facilities into the fourth quarter of 1999.
YEAR 2000 PLAN. The Company has developed a specific plan to help ensure that
the Company is not negatively affected by Year 2000 problems. The plan is
divided into the following components:
(1) Information Technology Systems;
(2) Information Technology Infrastructure;
(3) Process Control and Instrumentation; and
(4) Third party suppliers and customers.
Each component includes 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.
The Company hired a consultant in 1999 to review the Company's Year 2000 plan
and suggest improvements. The Company identified the most important issues as
the safety of individuals, safety of property and the environment, and the
Company's ability to manufacture and ship its products. Recommendations
communicated to the Company in the second quarter of 1999 have been
implemented where appropriate.
The inventory and priority assessment phases were completed with respect to
each component of the Year 2000 plan in May 1998. As further described below,
the remainder of the Year 2000 plan with respect to each component was
substantially completed during the third quarter of 1999. However, the
Company will continue to monitor, review, and perform testing in each phase
through the end of 1999.
INFORMATION TECHNOLOGY SYSTEMS. Information Technology Systems include mostly
applications software. The Company is remediating its applications software
mostly through its systems replacement project. Other non-compliant
applications software is being converted internally through custom
programming or will be replaced by the software supplier. Except for the
Company's pillow and pad operations, the conversion phase of Information
Technology Systems was completed during the third quarter of 1999. The
conversion phase of information technology Systems for the Company's pillow
and pad operations is expected to be completed during the fourth quarter of
1999. The testing of converted software is ongoing and will continue through
the end of 1999. Vendor software replacements and upgrades were completed
during the second and third quarters of 1999 for the majority of the plant
conversions. The testing of converted software will be conducted as the
software is replaced and will continue through the end of the year.
Contingency planning with respect to Information Technology Systems is
ongoing, but the high level planning was completed during the second quarter
of 1999. Detailed refinement of these plans will continue into the fourth
quarter, as other system conversions are completed.
INFORMATION TECHNOLOGY INFRASTRUCTURE. Information Technology Infrastructure
includes hardware and systems software other than applications software. The
Year 2000 plan for Information Technology Infrastructure is on schedule.
Substantially all of the changes to Information Technology Infrastructure are
complete, and the Company is now in the testing phase which will continue
through the end of the year. Contingency planning with respect to Information
Technology Infrastructure is ongoing. Development and enhancement will
continue through the end of the year.
PROCESS CONTROL AND INSTRUMENTATION. The Process Control and Instrumentation
component involves the hardware, software, and associated embedded computer
chips that are used in the operation of the Company's facilities. The Year
2000 plan with respect to this component is in place. A significant portion
of the Process Control and Instrumentation vendors have responded to
questionnaires indicating their equipment is Year 2000 compliant. Less than
5% of those vendors who have responded have reported non-compliance. The
non-compliant systems are prioritized and have been, or will be, remediated.
The Company is following up with those vendors who have not responded to the
questionnaires. A significant portion of the contingency planning with
respect to this component was completed during the third quarter of 1999.
THIRD PARTY SUPPLIERS AND CUSTOMERS. The third party 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
important third parties are substantially completed. The Company is
developing contingency plans based upon these evaluations. Contingency
planning will continue with the Company's business partners throughout 1999.
The Company believes the development and implementation of this component of
the Year 2000 plan is on schedule.
COSTS TO ADDRESS THE BUSINESS SYSTEM REPLACEMENTS AND YEAR 2000
As of October 2, 1999, the Company's cumulative direct expenditures on the
systems replacement project were approximately $86.1 million. A portion of
these costs relate to expenditures made prior to the acquisition of
Fieldcrest Cannon. The Company estimates that direct expenditures will
approximate an additional $7.1 million to complete the systems replacement in
the fourth fiscal quarter of 1999. The installation of various manufacturing
components of the new Information Technology Systems required certain plant
shut-downs and generated substantial manufacturing inefficiencies resulting
in increased manufacturing costs, unabsorbed overhead costs and delayed,
missed, product shipments. These costs are difficult to quantify precisely
and are not included in the direct expenditures cited above. Expenses to
complete remediation are not expected to significantly impact the Company's
results of operations or financial position. The Company believes that it
will have sufficient operating cash flows for any remaining costs related to
the systems replacement project and the Year 2000 plan. The Company does not
expect that these costs will materially affect its liquidity or financial
condition; however, the Company can make no assurance that the actual costs
will not exceed those estimated above or that it will have available
liquidity to fund any such additional costs.
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. Therefore, the Company cannot be certain that
the Year 2000 issue will not have a material adverse effect on the Company
and its operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information available to,
the Company's management. Because such forward-looking statements are subject
to various risks and uncertainties, results may differ materially from those
expressed in or implied by such statements. Many of the factors that will
determine these results are beyond the Company's ability to control or
predict. Factors which could affect the Company's future results and could
cause results to differ materially from those expressed in or implied by such
forward-looking statements are discussed under the caption "Cautionary
Statement Regarding Forward-Looking Statements" in the Company's Annual
Report on Form 10-K for its fiscal year ended January 2, 1999.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Third Amendement to Term Credit Agreement dated as of
May 5, 1999
10.2 Fourth Amendment to Term Credit Agreement dated as of
October 8, 1999
10.3 Fourth Amendment to Amended and Restated Credit Agreement
dated as of October 8, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 16, 1999 PILLOWTEX CORPORATION
(Registrant)
/s/ John C. Macaulay
----------------------------------
John C. Macaulay
Senior Vice President - Finance
(Principal Financial Officer)
INDEX TO EXHIBITS
TO BE REVISED
Exhibit Method of Filing
------- -----------------------------------
10.1 Third Amendment to Term Credit Agreement dated as of May 5, 1999 Filed herewith electronically
10.2 Fourth Amendment to Term Credit Agreement dated as of October 8, 1999 Filed herewith electronically
10.3 Fourth Amendment to Amended and Restated Credit Agreement dated as of
October 8, 1999 Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically