UNITED STATES
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 1, 2000
_____ 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
------------------- -------------------
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 __
---
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 20, 2000 was $36,194,929.
As of March 20, 2000, Registrant had 14,232,269 shares of Common Stock
outstanding.
__________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
Unless the context otherwise requires, references to the "Pillowtex" or 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 Pillowtex from time to time with the Securities and
Exchange Commission contain or may contain certain forward-looking statements.
Such statements are based upon the beliefs and assumptions of, and on
information available to, Pillowtex's management. Any statements preceded by,
followed by, or that include the words "anticipates," "believes" "expects,"
"estimates," "intends," or similar expressions contained in Pillowtex's SEC
filings, as well as any other statements contained in Pillowtex's 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 Pillowtex's ability to control or predict.
Pillowtex'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.
Pillowtex's shareholders should understand that the following important
factors, in addition to those discussed elsewhere in Pillowtex's SEC filings,
could affect Pillowtex's future results and could cause results and values to
differ materially from those expressed in or implied by such forward-looking
statements: (i) Pillowtex's significant leverage and debt service obligations;
(ii) the restrictive covenants contained in the instruments governing
Pillowtex's indebtedness; (iii) Pillowtex's ability to address the matters
giving rise to the adverse changes to results of operations experienced by
Pillowtex in 1999; (iv) the price and availability of raw materials used by
Pillowtex; (v) general retail industry conditions; (vi) Pillowtex's ability to
renew key trademark licenses; (vii) the goodwill associated with the brand names
owned by Pillowtex and Pillowtex's ability to protect its proprietary rights in
such brand names; (viii) Pillowtex's ability to retain key customers; (ix)
Pillowtex's relationships with both union and non-union employees; (x) the
influence of significant shareholders of Pillowtex; (xi) Pillowtex's dependence
on key management personnel; and (xii) the seasonality of Pillowtex's business.
The foregoing factors are discussed herein in greater detail under the caption
"Risk Factors" beginning on page 10 hereof.
PART I
ITEM 1. BUSINESS
--------
General
Founded in 1954, Pillowtex is one of the largest North American designers,
manufacturers, and marketers of home textile products. Pillowtex's extensive
product offerings include a full line of utility and fashion bedding and
complementary bedroom textile products, as well as a full line of bathroom and
kitchen textile products. As a leading supplier across all distribution
channels, Pillowtex sells its products to most major mass merchants, department
stores, and specialty retailers. It provides its customers with a centralized
"one-stop" source for their home textile merchandise. Pillowtex also markets
its products to wholesale clubs, catalog merchants, institutional distributors,
and international customers and on the Internet.
Pillowtex, through its operating subsidiaries, manufactures and markets its
products utilizing established and well-recognized Pillowtex-owned brand names.
In addition, through licensing agreements, Pillowtex currently has rights to
manufacture and, in some instances, market bedding products under other well-
known brand names. Pillowtex also manufactures products for customers under
their own brand names.
Pillowtex's diverse portfolio of top brand names allows it to differentiate
Pillowtex's products from those of its competitors. Pillowtex also provides
distinct brand names for different channels of retail distribution and for
different price points.
2
Competitive Strengths
Pillowtex is one of the largest firms in the home textile industry and has
significant competitive strengths. Pillowtex has:
. one of the largest market shares in North America in bath towel, bed
pillow, blanket, and down comforter products; and
. a significant market share in each of the sheet, pillowcase, mattress pad,
fashion bedding, bath rug, and kitchen textile products.
Pillowtex's management team believes the following competitive strengths
enhance Pillowtex's position in the marketplace:
. Pillowtex Owns Industry Leading Brands. Pillowtex owns some of the most
recognizable brand names in the industry, including Royal Velvet(R), Cannon(R),
Fieldcrest(R), Royal Family(R), Charisma(R), St. Mary's(R), Touch of Class(R),
Royal Velvet Big & Soft(R), and Beacon(R). Furthermore, through licensing
agreements, Pillowtex currently has rights to manufacture and, in some
instances, market certain bedding products under such well-known brand names as
Ralph Lauren and Comforel(R). This diverse portfolio of top brand names enables
Pillowtex to assist its customers in coordinating their product offerings and
differentiating such offerings from those of their competitors.
. Pillowtex Has Established Strong Customer Relationships. Pillowtex has
established relationships with substantially all of the 50 top home textile
retailers in North America. These strong relationships create a stable base
from which Pillowtex can pursue future business and new product introductions.
. Pillowtex Has Developed Creative Merchandising Strategies. Through
partnerships with its customers, Pillowtex has developed extensive merchandising
programs. These partnerships 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. Pillowtex will continue to collaborate with its retail customers to
design products and marketing programs responsive to individual customer's
needs.
. Pillowtex Has Maintained Low Cost Operating Capabilities. Despite the
operational inefficiencies experienced in 1999, Pillowtex believes that it is
one of the lowest cost producers of bath towels, bath rugs, sheets and other
decorative bedding products, bed pillows, blankets, down comforters, and
mattress pads in the home textile industry. Pillowtex has achieved this status
as a result of its continued emphasis on cost-containment and capital
expenditures to obtain greater plant efficiencies. Pillowtex has efficient, low
cost towel and bath rug production capabilities, including a new, state-of-the-
art towel production facility. This strategy has given Pillowtex a competitive
advantage allowing it to operate with percentages of selling, general, and
administrative expenses relative to sales that are among the lowest in the
industry.
Business Strategy
Pillowtex's strategic objectives include the following:
. Pillowtex Will Continue To Capitalize On Its Industry Leading Position.
Pillowtex will continue to leverage its market leadership by implementing sales
and marketing programs designed to facilitate a customer- driven "pull"
strategy. In addition, Pillowtex will continue to enhance product value and
facilitate greater product differentiation by cross-marketing both bed and bath
products using Pillowtex's strong brand names.
. Pillowtex Will Continue To Develop The Top "One-Stop Shop" For Home
Textiles. Pillowtex will continue to expand its broad product assortments
across diverse product lines in order to offer its retail customers a
centralized "one-stop" purchasing source for their home textile merchandise,
giving it a significant competitive advantage. Pillowtex will continue to
broaden its product assortment through the expansion of the products offered
under its existing brand names, new product development, and licensing
agreements. Pillowtex's extensive assortment of home textile products includes
fashion and utility bedding and complementary bedroom textile products, as well
as a full line of bathroom textile products.
3
. Pillowtex Will Continue To Strengthen Customer Relationships. Pillowtex
has a long history of strong customer relationships with the top retailers in
the United States and Canada. Pillowtex will continue to develop these
relationships by providing value-added services, such as innovative marketing
and cross-merchandising opportunities. Pillowtex has significantly increased
the value of its services to retailers by expanding its traditional product
lines. Aside from its traditional bed pillow, blanket, down comforter, and
mattress pad product lines, Pillowtex has now added towel, bath rug, sheet,
fashion bedding, and kitchen textile product lines. With this expansion,
Pillowtex has created a centralized purchasing source. As a result, Pillowtex
has successfully used established and well-recognized Pillowtex-owned brand
names across all such product lines. Pillowtex continues to increase the use of
marketing and cross-merchandising services to create opportunities for added
sales. At the same time, Pillowtex provides retailers with more opportunities
to differentiate their product offerings from those of their competitors.
. Pillowtex Will Continue To Enhance Operational Efficiencies. Pillowtex
will continue to focus on reducing its manufacturing cost structure. Pillowtex
continually reviews its current operations and investments in automation,
equipment modernization, process improvements, and system controls throughout
all aspects of its business. Significant opportunities exist to improve
production efficiency through capital investment, improved operational
logistics, selective outsourcing, and increased utilization of information
systems. Pillowtex will complete during fiscal year 2000, a three-year program
of capital expenditures in excess of $275.0 million. As of March 4, 2000,
approximately $233.5 million had been spent under this program. Pillowtex has
used these capital expenditures principally to modernize certain acquired sheet
and towel manufacturing facilities through the addition of new machinery and
equipment. Pillowtex anticipates that approximately $50 million in capital
expenditures will be made in fiscal year 2000.
Products
General
Pillowtex has expanded beyond its traditional pillow operations largely
through strategic acquisitions, including the 1997 acquisition of Fieldcrest
Cannon and the 1998 acquisition of Leshner. As a result of all these
acquisitions, Pillowtex's extensive product offerings now include a full line of
utility and fashion bedding and complementary bedroom textile products, as well
as a full line of bathroom and kitchen textile products.
Bedding and Other Bedroom Textile Products
Bed Pillows. Pillowtex is a leading manufacturer and marketer of bed pillows
in North America. Pillowtex produces and markets a broad line of traditional
bed pillows, as well as specially designed bed pillows such as body pillows.
Pillowtex offers products at various levels of quality and price. Pillowtex's
products range from synthetic pillows sold at relatively low retail prices to
fine white goose down pillows sold at much higher price points.
Pillowtex is a leading feather and down pillow manufacturer in North America.
These products contain quality goose and duck down, or blends of feather and
down, in a range of grades. These materials, known as "natural fill," have
gained popularity for their loft and resiliency.
Pillowtex 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. Pillowtex is a leading supplier of premium
synthetic and latex bed pillows in North America.
Blankets. Pillowtex is a leading producer of adult blankets in North America.
It manufactures woven and non-woven conventional and thermal weave blankets and
throws in a wide assortment of fibers, including cotton, wool blend, acrylic,
and polyester. Pillowtex is the exclusive North American supplier of blankets
to Ralph Lauren. Pillowtex also markets infant blankets with products ranging
from non-woven receiving blankets to the finest Supima(R) cotton crib blankets.
Down Comforters. Pillowtex 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.
4
Mattress Pads. Pillowtex is a leading manufacturer and marketer of mattress
pads in North America. It produces and markets 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(R), a multidirectional stretch material produced by DuPont).
Pillowtex's stretch-to-fit mattress pads correctly fit a broad range of mattress
thicknesses, including pillow top mattresses.
Sheets and Other Fashion Bedding. Pillowtex produces a wide variety of
sheets, ranging from muslin to the finest 360-thread count 100% pima cotton
sheets. Its principal brand names for this product line include Cannon(R),
Fieldcrest(R), Royal Velvet(R), and Charisma(R). Pillowtex's sheeting strengths
include solid color sheets with coordinating decorative bedding accessories. In
addition to sheets, Pillowtex'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 Pillowtex's sheets
vary widely based on size, thread count, and fabric type.
Other Bedroom Textiles. Pillowtex 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. Pillowtex's bathroom textile products include bath, hand, and
fingertip towels, washcloths, and bath mats. Royal Velvet(R), Fieldcrest(R),
Cannon(R), Charisma(R), Royal Velvet Big & Soft(R), and St. Mary's(R) are well-
known, high quality towel brand names. These brand names provide Pillowtex with
a strong market position in substantially all key sectors of the North American
market. Pillowtex is also recognized as the color leader in the towel industry
as it markets 40 colors in its Royal Velvet(R) franchise. In the marketplace,
Pillowtex differentiates its towels by using fine ring spun cotton yarns to
produce Royal Velvet(R) towels and pima cotton yarns for Charisma(R) towels.
The towel line includes solid colors, woven stripes, and fancy jacquards, as
well as printed towels. Retail prices of Pillowtex's towels range widely based
on, among other things, size, weight, and yarn type.
Bath Rugs. Pillowtex also markets a variety of bath and accent rugs in
conjunction with its towel offerings. These products come in a variety of sizes
and are marketed under the Royal Velvet(R), Cannon(R), Fieldcrest(R), Royal
Family(R), and Charisma(R) brands, as well as under private labels.
Kitchen Textile Products
Pillowtex is a leading manufacturer and marketer of kitchen textile products
in North America. Pillowtex'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. Fabricated pot holders, oven mitts, and other coordinating
accessories accompany most of Pillowtex's kitchen ensembles.
Marketing And Sales
Pillowtex 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.
Pillowtex's top ten customers accounted for approximately 49.5% of its total
net sales in 1999. Wal-Mart (including Sam's Club Stores) accounted for
approximately 20.5% of Pillowtex's total net sales in 1999. No other customer
accounted for more than 10% of Pillowtex's total net sales in 1999. Consistent
with industry practice, Pillowtex generally does not operate under long-term
written supply contracts with its customers.
Pillowtex segments its Fieldcrest portfolio of brand names by distribution
channel in order to solidify the perceived value of such brands and maintain
their integrity. Royal Velvet(R), Charisma(R), Fieldcrest(R), and Royal
Family(R) brand name bed and bath products are distributed primarily through
leading department stores, specialty home furnishing stores, and catalog
merchants. St. Mary's(R) and Cannon(R) brand name bed and bath products are
distributed through mass merchants. Pillowtex's Royal Velvet(R), Charisma(R),
and Cannon(R) brand names receive national consumer advertising. Pillowtex
sells private brands primarily through large chain stores. It also sells a
smaller amount of unbranded products to institutional and government customers.
5
Pillowtex's current international business is concentrated in Canada.
However, Pillowtex also sells its products in other foreign markets, including
Asia, Australia, Europe, Mexico, and South America. Sales outside the United
States accounted for approximately 6.0% of total sales in 1999, 7.8% in 1998 and
6.4% in 1997. During the last three years less than 5% of the Pillowtex's
assets have been located outside the United States.
In order to maximize product exposure and increase sales, Pillowtex works
closely with its major customers to assist them in merchandising and promoting
Pillowtex's products to the consumer. In addition to frequent personal
consultation with the employees of such customers, Pillowtex meets periodically
with the senior management of these customers. Pillowtex assists them in
developing joint merchandising programs, new products, product mix strategies,
point-of-sale concepts, and advertising campaigns specifically tailored to that
customer's needs. Pillowtex also provides its customers merchandising
assistance with store layouts, fixture designs, point-of-sale displays, and
advertising materials.
Pillowtex's electronic data interchange system allows customers to place, and
Pillowtex to fill, track, and bill, orders by computer. This system enables
Pillowtex to ship products on a "quick response" basis.
Pillowtex's experienced sales people generally sell Pillowtex's products.
However, the Ralph Lauren sales force sells some of the Ralph Lauren products
manufactured by Pillowtex.
Trademarks And License Agreements
Pillowtex manufactures products:
. under its proprietary Pillowtex-owned trademarks and trade names;
. under some licensed trademarks and trade names; and
. under customer-owned private labels.
Pillowtex regards its trademarks and trade names as valuable assets and
vigorously protects them against infringement. Pillowtex 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.
Pillowtex 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, Pillowtex 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. Pillowtex's licenses with Polo/Ralph Lauren Corporation expire on June
30, 2001. Upon their expiration, there can be no assurance that Pillowtex will
be able to renew the licenses on acceptable terms.
Pillowtex manufactures products for some customers under the customer's
private labels. Products manufactured under customer-owned private labels are
marketed by the customer. Pillowtex currently manufactures products for Kmart
under the MARTHA STEWART EVERYDAY(R) brand name.
Pillowtex occasionally identifies product lines for which it is more
advantageous for Pillowtex to license third parties to use its brand names for
use in the manufacture and sale of these products. These license agreements
require third parties to pay royalties to Pillowtex based upon product sales and
generally require payments of minimum annual royalties. In January 1998,
Pillowtex entered into a license agreement with Ex-Cell Home Fashions, Inc.
whereby Pillowtex granted Ex-Cell an exclusive license to manufacture, sell, and
distribute shower curtains and bath accessories under some of Pillowtex's
trademarks and trade names. In January 1999, Pillowtex entered into a license
agreement with Bardwil Industries, Inc. under which Pillowtex granted Bardwil
an exclusive license to manufacture, sell, and distribute tablecloths and other
table-top accessories under some of Pillowtex's trademarks and trade names.
See "Risk Factors - Pillowtex Is Dependent On Specific Brand Names" and "-
Pillowtex Is Dependent On Specific Key Licenses."
6
Product Development
Pillowtex'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. Pillowtex's ability to develop
products responsive to individual customers' needs is an important competitive
advantage. As a result, Pillowtex commits time and resources to identifying new
materials, designs, and products from a variety of domestic and international
vendors.
Manufacturing And Distribution
General
Pillowtex 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 Pillowtex's product lines. This nationwide
manufacturing and distribution network enables Pillowtex to ship its products
cost effectively to all major cities in North America.
In addition, Pillowtex operates 45 retail outlet stores that sell certain of
Pillowtex's products directly to customers. These stores sell both first
quality merchandise and seconds or "off-goods" at competitive retail prices.
Pillowtex 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 Pillowtex operates one of the largest feather and down processing
facilities in North America. State-of-the-art computerized washing and sorting
equipment process feather and down. Pillowtex later sorts these products into a
variety of mixtures and grades used in manufacturing natural fill pillows and
comforters. Pillowtex ships raw materials, along with imported products, to its
regional facilities for final assembly and distribution to customers. Pillowtex
also operates an automated sewing facility in Dallas, Texas, where high speed
computerized machines cut and sew fabric into pillow shells.
Many of Pillowtex's regional manufacturing facilities produce natural fill and
synthetic fill pillows. Pillowtex assembles natural fill pillows by blowing
processed feather and down into the pillow shell and sewing the open seam
closed. Pillowtex produces synthetic fill pillows on machines known as garnets.
Garnets pull, comb, and expand compressed polyester fibers. Once expanded,
Pillowtex inserts the fibers into a pillow shell and sews the open seam shut.
Blankets. Pillowtex spins yarn and produces blankets at manufacturing
facilities in North Carolina and South Carolina. These plants provide full
vertical production capability, including spinning, weaving, dyeing, and
finishing.
Down Comforters. Pillowtex manufactures its line of natural fill comforters
at its California, Illinois, Mississippi, Pennsylvania, and Toronto, Canada
locations using processed down from the Dallas facility.
Mattress Pads. Pillowtex manufactures mattress pads 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. Pillowtex produces bed sheet products at
its facilities in Kannapolis and Concord, North Carolina, and Union City, South
Carolina. These facilities provide a full range of Pillowtex's sheet products
for substantially all channels of distribution. Pillowtex spins cotton and
synthetic fibers into yarn and weaves the yarn into greige cloth for finishing,
dyeing, cutting, and sewing. Pillowtex 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. The
product is later packaged for shipment to retail customers.
Other Bedroom Textiles. Pillowtex manufactures other complementary bedroom
textile products, such as featherbeds, pillow protectors, decorative pillows,
and window treatments, at one or more of the facilities described above.
7
Bathroom Textile Products
Towels. Pillowtex produces bath towels at its facilities in Alabama, Georgia,
North Carolina, and Virginia. Cotton and synthetic fibers are spun into yarns,
and then woven into fabric or greige cloth. The fabric is then finished, dyed,
cut, and sewn into finished towel products. Pillowtex's Fieldale, Virginia
facility generally produces the higher quality products for department and
specialty stores. The Columbus, Georgia, Phenix City, Alabama, and
Hawkinsville, Georgia facilities generally support Pillowtex's mass merchant
business channel. The Kannapolis, North Carolina facility produces both types
of products and, as a result, supports both distribution channels.
Bath Rugs. Pillowtex produces bath rugs in its Scottsboro, Alabama facility.
Pillowtex punches tufted yarn into fabric and cuts it to a uniform height.
Pillowtex then applies a latex coating to the underside of the fabric to hold
the fibers. Finally, the product is dyed, cut, and finished.
Kitchen Textile Products
Pillowtex manufactures its kitchen textile products at its facilities in
Phenix City, Alabama, Hawkinsville, Georgia, and Kannapolis, North Carolina.
Quality Control Programs
Pillowtex has quality control programs in place to ensure that its products
meet quality standards established both internally and by its customers.
Pillowtex devotes significant resources to support its quality improvement
efforts. Each manufacturing facility has a quality control team that identifies
and resolves quality issues. Pillowtex attempts to maintain close contact with
customer quality control or other appropriate personnel to ensure that Pillowtex
understands the customers' requirements. Pillowtex also has programs with its
major suppliers to ensure the consistency of purchased raw materials by imposing
strict standards and materials inspection, and by requiring rapid response to
Pillowtex's complaints.
Raw Materials And Imports
General
The principal raw materials that Pillowtex uses in manufacturing its various
product lines are:
. cotton;
. feather and down;
. synthetic (polyester and acrylic) fibers; and
. cotton and polyester-cotton blend fabrics.
A wide variety of sources offer these materials and Pillowtex currently expects
no significant shortage of these materials. Management believes that its
relationships with its suppliers are generally good. See "Risk Factors-
Pillowtex Is Dependent On Specific Raw Materials."
Cotton
Domestic cotton merchants are Pillowtex's primary source of cotton.
Pillowtex uses significant quantities of cotton. To reduce the effect of
potential price fluctuations in cotton prices, Pillowtex makes commitments for a
portion of its anticipated future purchases of cotton.
Feathers and Down
Pillowtex imports feather and down from several sources outside the United
States. Pillowtex purchases a majority of these products from China, where
feather and down are by-products of ducks and geese raised for food. Pillowtex
generally purchases feather and down from its suppliers in China on open credit
terms without letters of credit. Pillowtex also purchases some feather and down
from suppliers in Europe.
8
Synthetic Fibers
Domestic fiber producers are Pillowtex's primary source of synthetic
fibers. Pillowtex purchases synthetic fiber from, among others, E.I. DuPont de
Nemours & Co., Wellman, Inc., Solutia, Cytec Industries Inc., Kosa, and
Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations,
Pillowtex makes commitments for a portion of its anticipated future purchases of
synthetic fibers.
Fabric
Pillowtex 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, it 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,
Pillowtex and Santee Print Works have not entered into a long-term supply
contract. However, to reduce the effect of potential price fluctuations, the
Company occasionally makes commitments for future purchases from Santee Print
Works. In addition, Pillowtex imports the majority of its down comforter shells
from China and India.
Other
Some of Pillowtex's stretch-to-fit mattress pads use Lycra(R) skirting.
Because of DuPont's patent on Lycra(R), it is the exclusive supplier of this
material. Management believes that the risk that DuPont will cease to
manufacture and sell Lycra(R) is minimal.
Competition
Pillowtex participates in a highly competitive industry. It competes with a
number of established manufacturers, importers, and distributors of home textile
furnishings, some of which have greater financial, distribution, and marketing
resources than does the Company. Pillowtex competes on the basis of price,
quality, brand names, and service. See "-Competitive Strengths" and "-Business
Strategy" above.
Government Regulation
Pillowtex must comply with various federal, state, and local environmental
laws and regulations governing the discharge, storage, handling, and disposal of
various substances. The Company must also comply with 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, a variety of federal, state, local, and foreign
laws and regulations relating to worker safety and health, advertising,
importing and exporting, and other general business matters, govern Pillowtex's
operations. Laws and regulations may change, and Pillowtex cannot predict what
effect, if any, changes in various laws and regulations might have on its
business.
Backlog
A number of factors affect the amount of Pillowtex's backlog orders at any
particular time. These factors include seasonality and scheduling of the
manufacturing and shipment of products. In addition, in 1999, Pillowtex
experienced disruptive operational difficulties in connection with the
installation of new production and warehousing computer systems and new
production equipment that affected the level of backlog orders. See "-Risk
Factors - Pillowtex Experienced Adverse Changes In Its Results of Operations For
Its 1999 Fiscal Year." In general however, Pillowtex's electronic data
interchange and "quick response" capabilities have resulted in shortened lead
times between submission of purchase orders and delivery and have lowered the
level of backlog orders. Consequently, Pillowtex believes that the amount of
its backlog is not an appropriate indicator of levels of future production.
9
Employees
As of March 24, 2000, Pillowtex had approximately 14,000 employees.
As of March 24, 2000, Pillowtex and/or its subsidiaries had entered into the
following collective bargaining agreements:
Approximate
Number of
Bargaining Unit
Union Location Covered Expiration Employees
------ -------------------------------- ----------- ---------------
Union of Needletrades, Industrial and Textile Workers Phenix City, Alabama; 02/01/03 7,915
Columbus, Georgia;
Concord, North Carolina;
Eden, North Carolina;
Kannapolis, North Carolina;
Salisbury, North Carolina;
and Fieldale, Virginia
Union of Needletrades, Industrial and Textile Workers Phenix City, Alabama; 10/01/01 426
Hawkinsville, Georgia; and
Macon, Georgia
Union of Needletrades, Industrial and Textile Workers Toronto, Ontario, Canada 03/31/00* 194
United Auto Workers Tunica, Mississippi 07/31/03 333
Warehouse, Mail Order, Office, Technical Chicago, Illinois 01/31/03 168
and Professional Employees (Teamsters)
*This agreement is currently being re-negotiated and is
operating under a month to month letter of extension.
As of March 24, 2000, approximately 39% of Pillowtex's employees had chosen to
have union dues deducted from their pay checks.
Since 1991, the Union of Needletrades, Industrial and Textile Workers (UNITE)
had campaigned to organize hourly workers at Pillowtex plants in Concord, North
Carolina, Kannapolis, North Carolina and Salisbury, North Carolina. In June
1999, UNITE was elected as a bargaining representative for hourly workers at
those plants. In February 2000, Pillowtex and UNITE entered into a contract
covering employees at those plants, as well as the employees represented by
UNITE at Pillowtex's plants in Eden, North Carolina; Phenix City, Alabama;
Columbus, Georgia; and Fieldale, Virginia.
Pillowtex believes that it has good relationships with both its union and non-
union employees generally.
Risk Factors
Pillowtex 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 or prospects of
Pillowtex or on the market price of Pillowtex's Common Stock. See also
"Cautionary Statement Regarding Forward-Looking Statements" above.
Pillowtex Has Significant Leverage And Liquidity Concerns
Leverage. Pillowtex is highly leveraged. At January 1, 2000, Pillowtex had
total outstanding long-term debt (including the current portion of long-term
debt) of $1,051.1 million and total shareholders' equity of $207.4 million as
compared to total outstanding long-term debt (including the current portion of
long-term debt) of $956.9 million and total shareholders' equity of $237.9
million at January 2, 1999. This increase in indebtedness is primarily due to :
. increased accounts receivables due to slower collections resulting in part
from the conversion to new production and warehousing computer systems and
increased customer deductions;
. capital expenditure projects; and
. net losses experienced in the third and fourth quarters (see "-Pillowtex
Has Experienced Adverse Changes In Its Results of Operations For Its 1999
Fiscal Year").
10
The level of Pillowtex's debt could have important consequences to its business
activities, including:
. substantially all of Pillowtex's cash flow from operations must be
dedicated to scheduled debt service and capital expenditures and
accordingly, will not be available for other purposes;
. Pillowtex's level of debt could make it difficult to obtain additional debt
financing in the future, even if needed for working capital or capital
expenditures; and
. Pillowtex's level of debt could limit its flexibility in reacting to
changes in its industry or general economic conditions.
Liquidity. Pillowtex's ability to service its debt and other obligations will
depend upon its future operating performance. Prevailing economic conditions
and financial, business, and other factors will affect Pillowtex's future
operating performance. See "-Pillowtex Experienced Adverse Changes In Its
Results of Operations For Its 1999 Fiscal Year." Because a significant portion
of Pillowtex's debt bears interest at a floating rate, Pillowtex's ability to
service its debt and other obligations will also depend on prevailing interest
rates and general financial conditions.
The availability of borrowings under Pillowtex's senior secured revolving
credit facility will also affect Pillowtex's future operating performance and
its ability to service debt and other obligations. The revolving credit facility
includes $55.0 million of availability for letters of credit. At March 24, 2000,
$37.4 million of letters of credit were outstanding. At March 24, 2000,
Pillowtex had $43.2 million available for borrowing under the senior secured
revolving credit facility.
As a result of Pillowtex's acquisition of Fieldcrest Cannon, the outstanding
6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon are
convertible, at the option of the holders, into a combination of cash and
Pillowtex's Common Stock. During the fourth quarter of 1999, Pillowtex notified
the holders of the 6% Convertible Debentures that it was not practicable or
prudent for the Company to make payments in respect of the conversion of the 6%
Convertible Debentures. The Company advised holders that had given notice of
conversion and surrendered their 6% Convertible Debentures that they could
rescind their notice of conversion. As of March 24, 2000, the cash component
due in respect of the 6% Convertible Debentures that had been surrendered
without subsequent rescission was $9.1 million. In addition, as of March 24,
2000, $96.5 million aggregate principal amount of the 6% Convertible Debentures
remained outstanding. If all such outstanding 6% Convertible Debentures were
converted at such date, the resulting cash component to be paid to the holders
of the 6% Convertible Debentures would have been approximately $61.0 million.
Pillowtex is currently prohibited under the terms of its senior subordinated
debt from making payments in respect of the 6% Convertible Debentures except for
interest and at maturity or pursuant to sinking fund obligations. Pillowtex has
initiated discussions with certain holders of its 6% Convertible Debentures
regarding a potential restructuring of the 6% Convertible Debentures. Any
comprehensive restructuring of the 6% Convertible Debentures involving cash
payments (other than pursuant to sinking fund obligations) would likely require
the consent of the holders of Pillowtex's senior subordinated debt. The Company
cannot guarantee that it will be able to restructure the 6% Convertible
Debentures nor can it predict the terms of any potential restructuring of that
debt. See "Risk Factors - Pillowtex Faces Restrictions Imposed By Terms Of Its
Debt."
In any event, Pillowtex will require substantial amounts of cash to fund-
scheduled payments of principal and interest on its outstanding debt, 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 available borrowings, it cannot be certain that it will be able to obtain
alternative financing. In the absence of such financing, the Company could be
limited in its ability to:
. respond to changing business and economic conditions generally;
. absorb adverse operating results; or
. fund capital expenditures, if any.
Effective as of March 31, 2000, the maturity date of Pillowtex's senior
secured debt was shortened to January 31, 2002. Pillowtex cannot guarantee that
it will be able to extend such maturity date or refinance such debt on
acceptable terms on or prior to January 31, 2002.
11
Pillowtex Faces Restrictions Imposed By Terms Of Its Debt
Instruments governing Pillowtex's debt restricts, among other things, the
Company's ability, and the ability of its subsidiaries, to:
. incur additional debt;
. pay dividends or make other restricted payments (including payment on
subordinated debt);
. incur liens to secure equal or subordinated debt;
. make investments, loans or advances;
. make capital expenditures;
. sell stock of subsidiaries;
. make asset sales and utilize net proceeds from permitted asset sales;
. merge or consolidate with any other person;
. sell, assign, transfer, lease, convey, or otherwise dispose of
substantially all of its assets;
. enter into transactions with affiliates; and
. incur debt that is subordinate in right of payment to any debt and senior
in right of payment to its senior subordinated debt.
At the end of its 1999 fiscal year, Pillowtex was not in compliance with
certain financial covenants under its senior secured credit facilities. The
Company obtained a series of temporary waivers of this non-compliance and, on
March 31, 2000, obtained a permanent waiver of this non-compliance and an
amendment that eliminated or modified the financial covenants in its senior
secured credit facilities effective for the January 1, 2000 measurement date, as
well as all future measurement dates. The Company believes that it will be able
to comply with the amended financial covenants in the future; however, there can
be no assurance of such compliance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources."
A breach of any of the covenants contained in the senior secured credit
facilities could result in a default or event of default under the terms of
these facilities. Upon the occurrence of an event of default: the senior lenders
would not be obligated to make additional advances under the revolving credit
facility; the senior lenders would be entitled to declare all amounts
outstanding under the senior secured credit facilities, including accrued
interest or other obligations, to be immediately due and payable; the senior
lenders would have the rights to block payment on substantially all of
Pillowtex's other long-term debt; and the senior lenders would be entitled to
proceed against the collateral granted to them to secure the senior debt. In
these circumstances, cross defaults could occur making substantially all of
Pillowtex's other long-term debt due. If any senior debt were to be accelerated,
the Company cannot be certain that its assets would be sufficient to repay in
full that debt and its other debt.
Pillowtex Experienced Adverse Changes In Its Results Of Operations For Its
1999 Fiscal Year
Pillowtex had a net loss applicable to common shareholders of $31.8 million
for its 1999 fiscal year, as compared to net earnings available to common
shareholders of $40.8 million in its 1998 fiscal year. The net loss for 1999
was attributable primarily to :
. Plant disruptions and operating inefficiencies related to the installation
of new production and warehousing computer systems and equipment;
. Non-cash charges associated with the payment of a special catch-up dividend
to the holders of Pillowtex's preferred stock as a result of the Company's
failure to meet specified earnings levels for the 1999 fiscal year;
. Higher interest expense due to higher level of debt and waiver fees;
. Higher than planned costs associated with marketing initiatives;
12
. Inventory write-downs, primarily relating to blanket inventory;
. Unabsorbed overhead costs attributable to the idling of selected operations
as part of an inventory reduction initiative and installation of new
computer systems and equipment; and
. Lower average selling prices and therefore, margins attributable to a
change in sales mix as part of the inventory reduction initiative.
While Pillowtex completed the installation of its new computer systems in late
1999, the installation of major pieces of new equipment under the Company's
ongoing three-year capital improvement program will continue in 2000. Pillowtex
believes that its plants are now running more efficiently and that the accuracy
and timeliness of its shipments and its billing and collection procedures have
improved. However, the Company cannot be certain that it will not encounter
during the 2000 fiscal year or subsequent periods further disruptions or
inefficiencies or that it will not experience an adverse impact on its results
of operations as a result thereof.
Pillowtex Is Unlikely To Pay Dividends On Its Common Stock For The Foreseeable
Future
Under the terms of its senior secured credit agreements and senior
subordinated debt and its Series A Redeemable Convertible Preferred Stock,
Pillowtex currently is prohibited from paying dividends to or making other
distributions to holders of its Common Stock. Accordingly, Pillowtex's Board of
Directors has suspended its policy of paying quarterly dividends on its Common
Stock commencing with the fourth quarter of 1999. It is uncertain whether, or
when, the Company will recommence payment of dividends on its Common Stock in
the future or, if dividends are paid on the Common Stock in the future, as to
the amount thereof.
Pillowtex Is Dependent On Specific Raw Materials
Cotton is the primary raw material used in Pillowtex's business. Cotton is an
agricultural product and, as a result, its availability is subject to weather
conditions and other factors affecting agricultural markets. Historically,
there have been periods of rapid and significant movement in the price of cotton
both upward and downward.
Other raw materials on which Pillowtex is dependent include the raw feathers
and down that it uses to produce natural fill pillows and down comforters.
China is currently Pillowtex's primary source of raw feather and down. In
fiscal year 1999, approximately 95%, based on cost, of the raw feathers and down
that Pillowtex used to produce natural fill pillows and down comforters was
imported from China.
Pillowtex'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 Pillowtex's supply sources in China were disrupted for
any reason, Pillowtex 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 satisfactory
terms. Pillowtex's relationship 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 Pillowtex imports from China currently receive normal,
nondiscriminatory tariff treatment accorded goods from countries granted "normal
trade" status. Under the Trade Act of 1974, the President of the United States
is authorized, upon making specified findings, to waive certain restrictions
that would otherwise render China ineligible for normal trade relations
treatment. The President has waived these provisions each year since 1979.
Normal trade status was accordingly renewed in June 1999. Congress will continue
to monitor these activities and may encourage the President to reconsider the
renewal of normal trade status for China in the future. Pillowtex cannot be
certain 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 normal trade relations would be subject to significantly higher
tariffs.
13
The raw materials used by Pillowtex are generally available from a number of
sources. No significant shortage of these materials is currently anticipated.
However, Pillowtex uses significant quantities of these raw materials, which are
subject to price fluctuations. The Company cannot be certain that shortages of
these materials will not occur in the future, which could increase the cost or
delay the shipment of its products. Moreover, the Company cannot be certain
that it will be able to pass on any increase in the price of raw materials to
its customers.
Pillowtex May Be Affected By Adverse Retail Industry Conditions
Pillowtex sells its products to a number of department stores and other major
retailers who have experienced financial difficulties during past years. Some
of these retailers have previously sought the protection of federal bankruptcy
laws. In addition, some of Pillowtex's current retail customers 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, Pillowtex may be unable to collect some or all amounts
owed by these retail customers.
In addition, all or part of the operations of a retail customer that seeks
bankruptcy or other debtor protection may be discontinued or sales of
Pillowtex's products to the customer may be curtailed or terminated as a result
of bankruptcy or insolvency proceedings.
Pillowtex Is Dependent On Specific Brand Names
In fiscal year 1999, sales of products bearing Pillowtex's principal
proprietary brand names of Royal Velvet(R), Cannon(R), Charisma(R), Royal Velvet
Big & Soft(R), Fieldcrest(R), Royal Family(R), Caldwell(R), and St. Mary's(R)
made up a substantial portion of its net sales. Accordingly, Pillowtex's future
success may depend in part upon the goodwill associated with these brand names.
Pillowtex's principal brand names are registered in the United States and
certain foreign countries. However, the Company cannot be certain that the
steps taken by it to protect its proprietary rights in such brand names will be
adequate to prevent their misappropriation 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.
Pillowtex Is Dependent On Specific Key Licenses
Pillowtex holds licenses with organizations such as Polo/Ralph Lauren
Corporation, E.I. DuPont de Nemours & Co., and others. These organizations own
such well-known trademarks and trade names as Ralph Lauren and Comforel(R).
These licenses generally require the payment of royalties based on net sales,
including the payment of minimum annual royalties. They expire at various dates
through June 2001. The Company cannot be certain that it will be able to renew
these licenses on acceptable terms upon their expiration or that it will be able
to acquire new licenses to use other popular trademarks.
Pillowtex Faces Risks Of Loss Of Material Customer
In fiscal year 1999, net sales to Wal-Mart Stores, Inc. (including Sam's Club
Stores) accounted for approximately 20.5% of Pillowtex's total net sales. No
other single customer accounted for more than 10% of total net sales during this
period. Consistent with industry practice, Pillowtex does not operate under a
long-term written supply contract with Wal-Mart or any of its other customers.
The loss of Wal-Mart as a customer could materially affect Pillowtex's business,
assets, financial condition, results of operations, and prospects.
Pillowtex Faces Risks Related To Organized Labor
As of March 17, 2000, Pillowtex had approximately 14,000 employees. As of
that date, approximately 65% of Pillowtex's employees were in bargaining units
covered by collective bargaining agreements and approximately 39% of Pillowtex's
employees had chosen to have union dues deducted from their pay checks. See
"Business-Employees."
14
Since 1991, the Union of Needletrades, Industrial and Textile Workers (UNITE)
had campaigned to organize hourly workers of Pillowtex plants in Concord, North
Carolina, Kannapolis, North Carolina, and Salisbury, North Carolina. In June
1999, UNITE was elected as a bargaining representative for hourly workers at
those plants. In February 2000, Pillowtex and UNITE entered into a contract
covering employees at those plants, as well as the employees represented by
UNITE at Pillowtex's plants in Eden, North Carolina; Phenix City, Alabama;
Columbus, Georgia; and Fieldale, Virginia.
The Company cannot be certain that it will not face similar campaigns at other
plants in the future or as to the effect that any such campaign would have on
the productivity of its workforce or labor costs.
Pillowtex Faces Risks Associated With Acquisitions
Pillowtex has grown largely through strategic acquisitions of companies with
complementary products, most notably Fieldcrest Cannon in 1997 and Leshner in
1998. Pillowtex continues to strive to achieve synergies, including cost
savings, with respect to these acquisitions; however, the Company cannot be
certain that it will be able to achieve these synergies or to otherwise
successfully integrate the operations of these acquired companies with its
previously existing operations in an efficient or profitable manner.
Pillowtex's Business Is Seasonal
Pillowtex's business is subject to a pattern of seasonal fluctuation. 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. 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 Pillowtex'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 sales of down comforters and blankets, general economic
conditions, and other factors beyond the Company's control.
Certain Of Pillowtex's Shareholders Exert Significant Control
As of March 20, 2000, Charles M. Hansen, Jr., Pillowtex's Chief Executive
Officer and Chairman of the Board, 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 Pillowtex's Common Stock. These
shareholders exert significant influence over Pillowtex's direction and
management.
Pillowtex Is Dependent On Its Key Managers
Pillowtex believes that its success is largely dependent on the skills,
experience, and performance of key members of its management, including Charles
M. Hansen, Jr., the Chairman of the Board and Chief Executive Officer.
Pillowtex believes that its future success will be highly dependent upon its
ability to attract and retain skilled managers and other personnel, including
Mr. Hansen.
Market Risk With Respect to Common Stock
Pillowtex Common Stock is listed for trading on the New York Stock Exchange.
The prices at which the Company's shares of Common Stock trade are subject to
fluctuations based on many factors, including general economic and industry
conditions and the Company's actual and expected sales and earnings performance.
The Company cannot be certain that any holder of its Common Stock will be able
to sell those shares at any particular price.
Certain Provisions of Pillowtex's Articles of Incorporation, Bylaws, and Other
Agreements
Pillowtex's Restated Articles of Incorporation, Pillowtex's Bylaws, and
some agreements to which Pillowtex is a party contain provisions that may have
the effect of delaying, deferring, or preventing a change in control of
Pillowtex. In addition, the Restated Articles authorize the issuance of up to
55,000,000 shares of Common Stock and 20,000,000 shares of Preferred Stock.
Pillowtex'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 the Series A
Redeemable Convertible Preferred Stock), to fix the terms of that Preferred
Stock. Existing shareholders have no preemptive rights.
15
ITEM 2. PROPERTIES
----------
The following table summarizes certain information concerning certain of
the facilities used by Pillowtex 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 locations listed above, Pillowtex maintains warehousing and
distribution centers in the states where its manufacturing facilities are
located. It also maintains approximately 45 retail outlets and small sales and
marketing offices in other states. Pillowtex also owns various other
properties, both developed and undeveloped, which are unrelated to its
manufacturing operations. Fieldcrest Cannon acquired these properties
throughout the years for investment or as part of specific acquisitions.
Pillowtex holds some of these properties for investment, has listed some for
sale, and has leased others to third parties.
Pillowtex believes that its facilities are generally well maintained, in good
operating condition, and adequate for its current needs. Subject to the
availability of working capital, Pillowtex will continue to make improvements at
these plants, upgrading the physical plant and purchasing additional and newer
machinery and equipment.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Pillowtex 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 Pillowtex's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
-------------------------------------------------------------
MATTERS
-------
Pillowtex's Common Stock, par value $0.01 per share, 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:
High Low
--------------- ---------------
Fiscal Year:
1999
Fourth Quarter....................... $ 7 1/4 $ 2 3/4
Third Quarter........................ 17 5/8 6 3/4
Second Quarter....................... 19 7/16 11 9/16
First Quarter........................ 28 3/8 11 3/8
1998
Fourth Quarter....................... $ 34 1/4 $ 23 9/16
Third Quarter........................ 45 5/8 23 7/8
Second Quarter....................... 50 7/8 37 13/16
First Quarter........................ 49 5/16 30 1/2
At March 20, 2000, Pillowtex had approximately 1,053 holders of record of
Common Stock.
Pillowtex paid quarterly dividends of $0.06 per share in each quarter of
fiscal year 1998 and the first three quarters of fiscal year 1999. Under the
terms of its senior secured credit agreements and senior subordinated debt and
its Series A Redeemable Convertible Preferred Stock, Pillowtex currently is
prohibited from paying dividends to or making other distributions to holders of
its Common Stock. Accordingly, Pillowtex's Board of Directors has suspended its
policy of paying quarterly dividends on its Common Stock commencing with the
fourth quarter of 1999. It is uncertain whether, or when, the Company will
recommence payment of dividends on its Common Stock in the future or, if
dividends are paid on the Common Stock in the future, as to the amount thereof.
17
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The selected financial data presented below are derived from Pillowtex's
consolidated financial statements for the five years ended January 1, 2000. 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
12/30/95 12/28/96 01/03/98/(1)/ 01/02/99/(2)/ 01/01/00
-------------------------------------------------------------
Statements of Earnings Data:
Net sales......................................... $ 474,899 $ 490,655 $ 579,999 $ 1,509,841 $1,552,068
Cost of goods sold................................ 395,922 411,048 485,679 1,237,085 1,358,966
--------- --------- ----------- ----------- ----------
Gross profit...................................... 78,977 79,607 94,320 272,756 193,102
Selling, general and administrative expenses...... 42,508 41,445 52,090 128,685 131,256
Provisions for assets............................. -- -- 5,986 1,539 2,000
--------- --------- ----------- ----------- ----------
Earnings from operations.......................... 36,469 38,162 36,244 142,532 59,846
Interest expense.................................. 17,491 13,971 22,470 72,288 87,279
--------- --------- ----------- ----------- ----------
Earnings(loss) before income taxes and
extraordinary items.......................... 18,978 24,191 13,774 70,244 (27,433)
Income taxes...................................... 7,509 9,459 5,538 27,389 (7,901)
--------- --------- ----------- ----------- ----------
Earnings(loss) before extraordinary items......... 11,469 14,732 8,236 42,855 (19,532)
Extraordinary items, net.......................... -- ( 609) (919) -- --
--------- --------- ----------- ----------- ----------
Net earnings(loss)................................ 11,469 14,123 7,317 42,855 (19,532)
Preferred dividends and accretion................. -- -- 85 2,097 12,294
--------- --------- ----------- ----------- ----------
Earnings(loss) available for common shareholders.. $ 11,469 $ 14,123 $ 7,232 $ 40,758 $ (31,826)
========= ========= =========== =========== ==========
Basic earnings(loss) per common share:
Before extraordinary items........................ $ 1.08 $ 1.39 $ .75 $2.89 $(2.25)
Extraordinary items............................... -- (.06) (.08) -- --
--------- --------- ----------- ----------- ----------
Basic earnings(loss) per common share............. $ 1.08 $ 1.33 $ .67 $2.89 $(2.25)
========= ========= =========== =========== ==========
Weighted average common shares
outstanding - basic............................ 10,618 10,618 10,837 14,082 14,154
========= ========= =========== =========== ==========
Diluted earnings(loss) per common share:
Before extraordinary items........................ $ 1.08 $ 1.39 $ .74 $2.52 $(2.25)
Extraordinary items............................... -- (.06) (.08) -- --
--------- --------- ----------- ----------- ----------
Diluted earnings(loss) per common share........... $ 1.08 $ 1.33 $ .66 $2.52 $(2.25)
========= ========= =========== =========== ==========
Weighted average common shares
outstanding - diluted.......................... 10,620 10,634 11,086 17,653 14,154
========= ========= =========== =========== ==========
Operating Data:
Depreciation and amortization..................... $ 11,994 $ 12,775 $ 16,064 $ 54,021 $ 60,074
Capital expenditures.............................. 12,448 21,040 20,567 133,620 89,737
Preferred Stock cash dividends.................... -- -- -- 2,019 1,456
Common Stock cash dividends....................... 531 2,124 2,569 3,383 2,555
Balance Sheet Data:
Working capital................................... $ 110,128 $ 150,506 $ 394,496 $ 447,933 $ 404,732
Property, plant and equipment, net................ 84,567 94,267 488,841 629,205 644,821
Total assets...................................... 324,710 375,714 1,410,186 1,654,154 1,683,389
Long-term debt, net of current portion............ 153,472 194,851 785,383 944,493 965,323
Redeemable convertible preferred stock............ -- -- 62,882 63,057 73,898
Shareholders' equity.............................. 87,990 100,004 196,707 237,933 207,389
(1) 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.
(2) Amounts set forth in 1998 reflect the inclusion of The Leshner Corporation
from July 28, 1998.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
Pillowtex manufactures and markets home textile furnishings for the bedroom,
bathroom, and kitchen. Pillowtex 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, Pillowtex acquired the stock of The Leshner Corporation, 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, Pillowtex 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, Pillowtex acquired Fieldcrest Cannon, Inc. for a
combination of cash and stock valued at approximately $409.0 million.
Additionally, Pillowtex retired approximately $199.0 million of existing
Fieldcrest Cannon long-term debt. This merger was accounted for using the
purchase accounting method. Accordingly, the operating results of Fieldcrest
Cannon for the period from December 19, 1997 through January 3, 1998 have been
included in fiscal year 1997 results.
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
------------------------------------
January 3, January 2, January 1,
1998 1999 2000
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold................... 83.7 81.9 87.6
----- ----- -----
Gross profit......................... 16.3 18.1 12.4
Selling, general and
administrative expenses.......... 9.0 8.6 8.6
Restructuring charge................. 1.0 0.1 -
----- ----- -----
Earnings from operations............. 6.3 9.4 3.8
Interest expense..................... 3.9 4.8 5.6
----- ----- -----
Earnings (loss) before income taxes
and extraordinary items.......... 2.4% 4.6% (1.8)%
===== ===== =====
Fiscal Year 1999 Compared to Fiscal Year 1998
Net sales. Sales lagged behind the prior year in the first half of fiscal
1999 because of shipping delays caused by the installation of new production and
warehousing computer systems. For fiscal 1999, net sales were $1.55 billion, an
increase of $42.2 million, or 2.8%, compared to $1.51 billion in fiscal 1998.
However, approximately $56.0 million of this increase is attributable to the
inclusion of a full year of Leshner, which was acquired on July 28, 1998.
Excluding Leshner sales, the resulting $13.8 million decrease in 1999 from 1998
is primarily the result of lower blanket sales caused by an unusually warm
winter in North America and increased deductions from gross sales for
promotional sales programs.
19
Gross profit. Gross profit margins dropped to 12.4% in fiscal 1999 from
18.1% in fiscal 1998. This decrease was primarily the result of higher cost of
goods sold generated from unabsorbed overhead expenses related to the
installation of new computer systems and equipment, Inventory write-downs, the
idling of certain manufacturing equipment, and a change in the sales mix
generated by Pillowtex's inventory reduction program, which reduced product
margins.
Pillowtex is reviewing all areas of its operations and taking aggressive
action to improve operating results. Tighter management controls have been
imposed on sales and marketing programs that adversely affected gross profit
margins in 1999 and the Company is continuing to focus on reducing inventory and
accounts receivable, as well as on controlling operating costs.
Selling, general, and administrative. SG&A increased slightly to $131.3
million in fiscal year 1999, compared to $128.7 million in fiscal year 1998, but
remained unchanged from last year as a percent of sales at approximately 8.6%.
Impairment. During the third quarter of 1999, Pillowtex recorded a $2.0
million non-cash pre-tax charge to adjust the carrying value of the Opelika
facility, which was closed in the first quarter of 1999, to its estimated fair
value.
Restructuring charge. There were no restructuring charges recorded in
1999. The $1.5 million recorded in 1998 related to the severance and other
employee-related cost associated with the consolidation of blanket production
into the Company's facilities in Swannanoa, North Carolina and Westminster,
South Carolina.
Interest expense. Interest expense increased by $15.0 million to $87.3
million in fiscal 1999, compared to $72.3 million in fiscal 1998. The increase
is primarily the result of additional debt incurred in connection with the
Leshner acquisition, capital expenditures for plant upgrades, higher working
capital requirements, and the payment of waiver and amendment fees to
Pillowtex's senior lenders. Pillowtex's average interest rate for the year was
down slightly from 8.4% in 1998 to approximately 8.2% in 1999. Interest expense
is expected to increase for fiscal year 2000, since amounts outstanding under
the revolving credit facility and the Tranche A Term Loan will bear interest at
a rate based upon the London Interbank Offered Rate plus 3.50% and the Tranche B
Term Loan will bear interest on a similar basis to the Tranche A Term Loan, plus
an additional margin of .50%.
Preferred dividends. Under the terms of the Company's Series A Redeemable
Convertible Preferred Stock, beginning January 1, 2000, the rate at which
dividends will accrue increased to 10% as a result of the Company's earnings per
share for the 1999 fiscal year falling below predetermined targets. The Company
is also 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 the
10% rate. Charges in the aggregate amount of $10.1 million were recorded in the
third and fourth quarters of 1999.
Fiscal Year 1998 Compared to Fiscal Year 1997
The discussion below makes reference to pro forma fiscal 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 1997
results of operations. Fiscal 1997 results include a 53-week period as compared
to a 52-week period for fiscal 1998.
Net sales. Net sales were $1.51 billion in fiscal 1998, representing an
increase of $929.8 million, or 160.3%, as compared to $580.0 million in fiscal
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.
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 pillows and mattress
pads and bath towels. Pillows and pads sales declined primarily due to lower
volume in jacquard blankets and to 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 for 1998. These declines were offset by
increases in fashion bedding sales, primarily the Royal Velvet sheet
reintroduction program and initial rollouts of bed-in-a-bag programs.
20
Gross profit. Gross profit margins increased to 18.1% 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
$272.8 million, or 18.1% 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 increased $76.6 million to
$128.7 million in fiscal year 1998, compared to $52.1 million in fiscal year
1997, and as a percentage of net sales, decreased to 8.6% 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 $128.7
million in fiscal year 1998 decreased $33.2 million compared to fiscal year 1997
pro forma amounts. This decline is primarily attributable to the reductions in
personnel 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 the Company's 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
Fieldcrest Cannon merger and the purchase of Leshner. Average interest rates
for fiscal year 1998 declined slightly from fiscal year 1997.
Liquidity and Capital Resources
Senior Debt Facilities. In December 1997, in connection with the
Fieldcrest Cannon acquisition, Pillowtex entered into new senior secured
revolving credit and term loan facilities with a group of financial and
institutional investors for which Bank of America acts as the agent. These
facilities consisted of a $350.0 million revolving credit facility and a $250.0
million term loan facility. The term loan facility consisted of a $125.0
million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective
July 28, 1998, Pillowtex amended these facilities by increasing the Tranche B
Term Loan to $225.0 million. The increase occurred in conjunction with the
acquisition of Leshner, allowing Pillowtex to fund the transaction and reduce
borrowings under the revolving credit facility. Effective March 12, 1999, the
revolving credit facility was amended to permit Pillowtex to use for working
capital one-half of a $61.0 million portion of the facility held as contingency
reserve for cash payments required upon conversion of the Fieldcrest Cannon 6%
Convertible Subordinated Debentures due 2012, thereby increasing availability
under that facility. Effective October 1, 1999, the revolving credit facility
was further amended to permit Pillowtex to use the other half of the contingency
reserve for working capital, thereby increasing availability under that
facility. At the end of the third and fourth quarters of its 1999 fiscal year,
Pillowtex was not in compliance with certain financial covenants under its
senior debt facilities. The Company obtained a series of temporary waivers of
this non-compliance. Effective as of December 7, 1999, the Company agreed to
certain amendments to the senior debt facilities, principally related to cash
management, adjustments to restrictive covenants, and borrowings under, and uses
of proceeds from, the revolving credit facility. Effective as of March 31,
2000, the Company obtained a permanent waiver of its prior non-compliance with
financial covenants and the senior debt facilities were further amended to
shorten terms to maturity to eliminate the contingency reserve requirement
referred to above, to increase the applicable interest rate margins (subject to
reduction if the Company's earnings before interest, taxes, depreciation and
amortization (EBITDA) exceeds a specified level for the 2000 fiscal year), to
add a covenant requiring that EBITDA must exceed specified levels for future
fiscal periods and to eliminate all other financial covenants, to modify certain
restrictive covenants, to limit borrowings under the revolving credit facility
based on a formula tied to 45% of eligible inventory plus 80% of eligible
accounts receivable, and to provide for a series of reductions in the commitment
under the revolving credit facility. As of March 24, 2000, amounts outstanding
under the revolver, as amended on March 31, 2000, would have been $306.8 million
and would not have been limited under the borrowing base calculation.
The revolving credit facility includes $55.0 million of availability for
letters of credit. At January 1, 2000, $35.2 million of letters of credit were
outstanding.
21
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon the London
Interbank Offered Rate plus 3.50% (9.63% at March 24, 2000). The Tranche B Term
Loan bears interest on a similar basis to the Tranche A Term Loan, plus an
additional margin of .50%. The weighted average annual interest rate on
outstanding borrowings under the various senior credit facilities for 1999 was
7.7%. The senior debt facilities now expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of Pillowtex, and are secured by first priority liens on all of the
capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital
stock of Pillowtex's foreign subsidiaries. Pillowtex 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
facility is subject to mandatory prepayment from all net cash proceeds of asset
sales and debt issuances of Pillowtex (except as specifically provided), 50% of
the net cash proceeds of equity issuances by Pillowtex 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 senior debt facilities contain a number of negative covenants, which
covenants restrict, among other things, Pillowtex's ability to incur additional
debt, pay dividends or make other restricted payments, sell stock of
subsidiaries, grant liens, make capital expenditures, engage in transactions
with affiliates, make loans, advances and investments, dispose of assets, effect
mergers, consolidations and dissolutions, and make certain changes in its
business. See "Risk Factors - Pillowtex Faces Restrictions Imposed By Terms Of
Its Debt" included in Item 1 above.
A breach of any of the covenants contained in the senior debt facilities
could result in a default under the terms of the facilities. Upon the occurrence
of an event of default: the senior lenders would not be obligated to make
additional advances under the revolving credit facility; the senior lenders
would be entitled to declare all amounts outstanding under the senior debt
facilities, including accrued interest or other obligations, to be immediately
due and payable; the senior lenders would have the rights to block payment on
substantially all of Pillowtex's other long-term debt; and the senior lenders
would be entitled to proceed against the collateral granted to them to secure
the senior debt. In these circumstances, cross defaults could occur making
substantially all of Pillowtex's other long-term debt due. If any senior debt
were to be accelerated, the Company cannot be certain that its assets would be
sufficient to repay in full that debt and its other debt. See "Risk Factors -
Pillowtex Faces Restrictions Imposed By Terms Of Its Debt" included in Item 1
above.
As a result of the covenants described above, Pillowtex's ability to respond
to changing business and economic conditions and to secure additional financing,
if needed, is significantly restricted. See "Risk Factors - Pillowtex Has
Significant Leverage And Liquidity Concerns" included in Item 1 above.
Overline Facility. In May 1999, Pillowtex entered into a $20.0 million
senior unsecured revolving credit facility (overline facility) in order to
obtain additional working capital availability. On July 27, 1999, this facility
was amended to increase the amount of funds available to $35.0 million. At the
end of the third and fourth quarters of its 1999 fiscal year, Pillowtex was not
in compliance with certain financial covenants under this facility, the
covenants of which are established by reference to the senior debt facilities
described above. The Company obtained a series of temporary waivers of this
non-compliance and extensions of the maturity date. Effective as of December 7,
1999, the Company agreed to certain amendments to this facility, resulting in
the facility being secured by the assets securing the senior debt facilities
described above. Effective as of March 31, 2000, the Company obtained a
permanent waiver of its prior non-compliance and the facility was amended to
lengthen its term to maturity, to impose an amortization schedule for the
repayment of principal, and to increase the applicable interest rate margins
(subject to reduction if the Company's EBITDA exceeds a specified level for the
2000 fiscal year).
This facility is guaranteed on a senior basis by Pillowtex's domestic
subsidiaries. Pillowtex is currently required to pay interest on any amounts
borrowed under the facility at a rate which is based upon the London Interbank
Offered Rate plus 4.5% or the base rate plus 3.0%, at Pillowtex's option. This
facility matures upon termination by Pillowtex at any time or otherwise at the
earliest of: a) any increase in the commitment under the senior debt facilities
described above, the issuance of any capital stock by Pillowtex or its domestic
subsidiaries, or other specified events; or b) January 31, 2002.
Senior Subordinated Debt. In connection with the Fieldcrest Cannon merger,
Pillowtex issued $185.0 million of 9% Senior Subordinated Notes due 2007 in a
private offering. In March 1998, Pillowtex 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.
Pillowtex 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 Pillowtex, are subordinated in right of payment to all existing
and future senior indebtedness, and rank pari passu to the 10% Notes described
below.
22
On November 12, 1996, Pillowtex issued the 10% Senior Subordinated Notes
due 2006 in a private offering. In March 1997, Pillowtex 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 10% Notes are
due November 15, 2006, with interest payable semiannually commencing May 15,
1997. Pillowtex used the proceeds from such offering to retire the outstanding
indebtedness under Pillowtex'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. Pillowtex 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 Pillowtex, and are
subordinated in right of payment to all existing and future senior indebtedness.
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
Pillowtex and each other subsidiary of Pillowtex that guarantees Pillowtex's
obligations under the senior debt 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, Pillowtex 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.
Fieldcrest Cannon Convertible Debentures. As a result of Pillowtex's
acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Subordinated
Debentures due 2012 of Fieldcrest Cannon are convertible, at the option of the
holders, into a combination of cash and Pillowtex's Common Stock. During the
fourth quarter of 1999, Pillowtex notified the holders of the 6% Convertible
Debentures that it was not practicable or prudent for payments to be made in
respect of the conversion of the 6% Convertible Debentures and advised holders
that had given notice of conversion and surrendered their 6% Convertible
Debentures that they could rescind their notice of conversion, return to
Pillowtex any Pillowtex Common Stock that had been issued to them and have their
6% Convertible Debentures reinstated. As of March 24, 2000, the cash component
due in respect of the 6% Convertible Debentures that had been surrendered
without subsequent rescission was $9.1 million. In addition, as of March 24,
2000, $96.5 million aggregate principal amount of the 6% Convertible Debentures
remained outstanding. If all such outstanding 6% Convertible Debentures were
converted at such date, the resulting cash component to be paid to the holders
of the 6% Convertible Debentures would have been approximately $61.0 million
(classified as a current liability at January 1, 2000). Pillowtex is currently
prohibited under the terms of its senior subordinated debt from making payments
in respect of the 6% Convertible Debentures except for interest and at maturity
or pursuant to sinking fund obligations. Pillowtex has initiated discussions
with certain holders of its 6% Convertible Debentures regarding a potential
restructuring of the 6% Convertible Debentures. Currently any comprehensive
restructuring of the 6% Convertible Debentures involving cash payments (other
than pursuant to sinking fund obligations) would likely require the consent of
the holders of Pillowtex's senior subordinated debt. The Company cannot
guarantee that it will be able to restructure the 6% Convertible Debentures nor
can it predict the terms of any potential restructuring of that debt. See "Risk
Factors - Pillowtex Faces Restrictions Imposed By Terms Of Its Debt."
Swap Agreements. Pillowtex enters into interest rate swap agreements to
modify the interest characteristics of portions of its outstanding debt. These
agreements entitle the Company's 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 2, 1999, Pillowtex had approximately $345.0
million of notional amounts covered under interest rate swap agreements whereby
Pillowtex exchanged floating rates for fixed rates. The weighted average fixed
and floating rates were 4.70% and 5.26%, respectively. As of January 1, 2000,
Pillowtex had approximately $345.0 million of notional amounts covered under
interest rate swap agreements whereby Pillowtex exchanged floating rates for
fixed rates. The weighted average fixed and floating rates were 4.70% and
5.96%, respectively. The fair values of the swaps at January 2, 1999 and
January 1, 2000 were $2.1 million and $4.0 million, respectively in favor of
Pillowtex.
23
Adequacy of Capital Resources. Cash flow from operations for fiscal year
1999 decreased approximately $44 million from the prior year due primarily to
the comparative lower earnings of the Company. Based upon current and
anticipated levels of operations, and aggressive efforts to reduce inventories
and accounts receivable, Pillowtex anticipates that its cash flow from
operations, together with amounts available under its revolving credit facility,
will be adequate to meet its anticipated cash requirements in the foreseeable
future (assuming no significant cash payments are required to be made in respect
of the 6% Convertible Debentures other than scheduled interest payments and
payments related to satisfaction of the sinking fund obligations). In the event
that cash flows and available borrowings under the revolving credit facility are
not sufficient to meet future cash requirements, Pillowtex may be required to
reduce planned capital expenditures or seek additional financing. Pillowtex can
provide no assurances that reductions in planned capital expenditures would be
sufficient to cover shortfalls in available cash or that additional financing
would be available or, if available, offered on terms acceptable to the Company.
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, as
amended by SFAS 137, are effective for fiscal years beginning after June 15,
2000, although early adoption is allowed. Pillowtex 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Pillowtex 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 "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.
Pillowtex'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 Pillowtex'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 1, 2000 outstanding
balance of the variable rate debt would be approximately $6.4 million
irrespective of any swaps associated with this debt. This same calculation for
fiscal year 1998 was $5.3 million.
Pillowtex's exposure to fluctuations in foreign currency exchange rates is
due primarily to a foreign subsidiary domiciled in Canada. Pillowtex's Canadian
subsidiary uses the Canadian dollar as its functional currency. Pillowtex
generally does not use financial derivative instruments to hedge foreign
currency exchange rate risks. The Canadian subsidiary is not material to
Pillowtex's consolidated results of operations; therefore, the impact of a 10%
change in the exchange rate at January 1, 2000 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
--------------------
Not applicable.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
The information required by this Item 10 is set forth at pages 5 through 7
of Pillowtex's Proxy Statement for its 2000 Annual Meeting of Shareholders (the
"2000 Proxy Statement") under the captions "Board of Directors - Election of
Directors" and "Stock Ownership of Management and Certain Beneficial Owners --
Section 16(a) Beneficial Ownership Reporting Compliance" and at page 9 of the
2000 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 page 8 and pages
10 through 21 of the 2000 Proxy Statement under the captions "Information
Concerning the Board of Directors --Compensation of Directors" and "Executive
Compensation" (excluding the information set forth at pages 10 through 13 under
the caption "Executive Compensation --Board Compensation Committee Report on
Executive Compensation") and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item 12 is set forth at pages 3 through 5
of the 2000 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 19 through
21 of the 2000 Proxy Statement under the captions "Executive Compensation --
Employment Agreements" and incorporated herein by reference.
25
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:
Page
1. Consolidated Financial Statements:
---------------------------------
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of January 2, 1999 and
January 1, 2000...................................................... F-3
Consolidated Statements of Operations for the years ended
January 3, 1998, January 2, 1999 and January 1, 2000................. F-4
Consolidated Statements of Shareholders' Equity for the
years ended January 3, 1998, January 2, 1999 and January 1, 2000..... F-5
Consolidated Statements of Cash Flows for the years ended
January 3, 1998, January 2, 1999 and January 1, 2000................. F-6
Notes to Consolidated Financial Statements........................... F-7
2. Financial Statement Schedule. The following financial statement
----------------------------
schedule of Pillowtex for the fiscal years ended January 3, 1998,
January 2, 1999 and January 1, 2000 is filed as part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of Pillowtex:
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.,
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 Quarterly Report on Form 10-Q for the quarter ended July
3, 1999)
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)
26
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, among Pillowtex Corporation, the
guarantors listed on the signature page thereto, and Bank One,
Columbus, N.A., as Trustee (incorporated by reference to Exhibit 4.1
to Pillowtex Corporation's Registration Statement on Form S-4 (No.
333-17731))
4.4 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex
Corporation, the guarantors listed on the signature page thereto, and
Bank One, N.A. (formerly known as Bank One, Columbus, N.A.), as
Trustee
4.5 Second Supplemental Indenture, dated as of July 28, 1998, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and Bank One, N.A. (formerly known as Bank One, Columbus,
N.A.), as Trustee
4.6 Resignation, Appointment and Acceptance Agreement, dated as of January
19, 2000, by and among Bank One, N.A. (formerly known as Bank One,
Columbus, N.A.), as prior Trustee, U.S. Bank National Association, as
successor Trustee, and Pillowtex Corporation, as Issuer
4.7 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))
4.8 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))
4.9 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 for the quarter ended 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 for the quarter ended 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
(incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 2, 1999)
10.5 Fourth Amendment to Amended and Restated Credit Agreement, dated as of
October 8, 1999, among Pillowtex Corporation, certain Lenders named
therein, and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent (incorporated by reference to Exhibit 10.3 to
Pillowtex Corporation's Quarterly Report on Form 10-Q for the
Quarterly period ended October 2, 1999)
27
10.6 Waiver and Fifth Amendment to Amended and Restated Credit Agreement,
dated as of December 9, 1999, to be effective as of December 7, 1999,
among Pillowtex Corporation, certain Lenders named therein, and Bank
of America N.A. (formerly NationsBank, N.A.), as Administrative Agent
(incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's
Current Report on Form 8-K dated December 7, 1999)
10.7 Sixth Amendment and Waiver to Amended and Restated Credit Agreement,
dated as of February 15, 2000, among Pillowtex Corporation, certain
Lenders named therein, and Bank of America N.A. (formerly NationsBank,
N.A.), as Administrative Agent
10.8 Waiver and Seventh Amendment to Amended and Restated Credit Agreement,
dated as of March 31, 2000, among Pillowtex Corporation, certain
Lenders named therein, and Bank of America N.A. (formerly NationsBank,
N.A.), as Administrative Agent
10.9 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))
10.10 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 for the quarter ended July 4, 1998)
10.11 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 for the quarter ended July 4, 1998)
10.12 Third Amendment to Term Credit Agreement, dated as of May 5, 1999,
among Pillowtex Corporation, certain Lenders named therein, and Bank
of America N.A. (formerly NationsBank, N.A.), as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's
Quarterly Report on Form 10-Q for the Quarterly period ended October
2, 1999)
10.13 Fourth Amendment to Term Credit Agreement, dated as of October 8,
1999, among Pillowtex Corporation, certain Lenders named therein, and
Bank of America N.A. (formerly NationsBank, N.A.), as Administrative
Agent (incorporated by reference to Exhibit 10.2 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the Quarterly period
ended October 2, 1999)
10.14 Waiver and Fifth Amendment to Term Credit Agreement, dated as of
December 9, 1999, to be effective as of December 7, 1999, among
Pillowtex Corporation, certain Lenders named therein, and Bank of
America N.A. (formerly NationsBank, N.A.), as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's
Current Report on Form 8-K dated December 7, 1999)
10.15 Sixth Amendment and Waiver to Term Credit Agreement, dated as of
February 15, 2000 among Pillowtex Corporation, certain Lenders named
therein, and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent
10.16 Waiver and Seventh Amendment to Term Credit Agreement, dated as of
March 31, 2000 among Pillowtex Corporation, certain Lenders named
therein, and Bank of America N.A. (formerly NationsBank, N.A.), as
Administrative Agent
10.17 Promissory Note dated May 4, 1999 by and between NationsBank, N.A., as
Lender, and Pillowtex Corporation, as Borrower, in the amount of
$20,000,000 (incorporated by reference to Exhibit 10.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the Quarterly period
ended July 3, 1999)
28
10.18 First Amendment, dated July 27, 1999, to the Promissory Note dated May
4, 1999 by and between Bank of America N.A. (formerly NationsBank,
N.A.), as Lender, and Pillowtex Corporation, as Borrower (incorporated
by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly
Report on Form 10-Q for the Quarterly period ended July 3, 1999)
10.19 Third Amendment, dated as of December 7, 1999, to the Promissory Note
dated May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as Borrower
(incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's
Current Report on Form 8-K dated December 7, 1999)
10.20 Fourth Amendment, dated as of February 15, 2000, to the Promissory
Note dated May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as Borrower
10.21 Fifth amendment dated as of March 31, 2000 to the Promissory Note
dated May 4, 1999 by and between Bank of America N.A. (formerly
NationsBank, N.A.), as Lender, and Pillowtex Corporation, as Borrower
10.22 Consent dated as of December 7, 1999, by and between Bank of America
N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex
Corporation, as Borrower (incorporated by reference to Exhibit 10.4 to
Pillowtex Corporation's Current Report on Form 8-K dated December 7,
1999)
10.23 Consent dated as of February 15, 2000, by and between Bank of America
N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex
Corporation, as Borrower
10.24 Consent dated as of March 31, 2000, by and between Bank of America
N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex
Corporation, as Borrower
10.25 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))
10.26 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)
10.27 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))
10.28 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))
10.29 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))
29
10.30 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))
10.31 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))
10.32 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)
10.33 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)
10.34 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)
10.35 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)
10.36 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))
10.37 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)
10.38 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))
10.39 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)
10.40 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)
10.41* 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))
10.42* 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)
10.43* 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)
30
10.44* 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))
10.45* 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))
10.46* 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)
10.47* 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)
10.48* Form of Employment Agreement entered into between Pillowtex Management
Services Company 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)
10.49* Form of Employment Agreement entered into between Fieldcrest Cannon,
Inc. and A. Allen Oakley, dated October 9, 1998 (incorporated by
reference to Exhibit 10.34 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999)
10.50* 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)
10.51* Form of Employment Agreement entered into between Fieldcrest Cannon,
Inc. and Richard A Grissinger
10.52* 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)
10.53* 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)
10.54* 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)
10.55* 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)
10.56 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))
10.57 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
27 Financial Data Schedule
_______________
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.
31
(b) Reports On Form 8-K.
-------------------
During the quarter ended January 1, 2000, Pillowtex filed a Current Report
on Form 8-K, dated December 7, 1999 and filed on December 14, 1999, reporting
information under "Item 5. Other Events" regarding certain waivers and
amendments with respect to Pillowtex's senior secured credit agreements.
32
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 31, 2000.
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 and in the capacities indicated on March 31, 2000.
Signatures Title
---------- -----
/s/ Charles M. Hansen, Jr. Chairman of the Board and Chief Executive
- ------------------------------- Officer; Director (Principal Executive
Charles M. Hansen, Jr. Officer)
/s/ John A. Macaulay Senior Vice President - Finance
- ------------------------------- (Principal Accounting Officer)
John A. Macaulay
/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
33
PILLOWTEX CORPORATION AND SUBSIDIARIES
Independent Auditors' Report.................................................. F-2
Consolidated Financial Statements:
- ---------------------------------
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000... F-3
Consolidated Statements of Operations for the fiscal years ended
January 3, 1998, January 2, 1999 and January 1, 2000..................... F-4
Consolidated Statements of Shareholders' Equity for the fiscal
years ended January 3, 1998, January 2, 1999 and January 1, 2000......... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
January 3, 1998, January 2, 1999 and January 1, 2000..................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule for the fiscal years ended
January 3, 1998, January 2, 1999 and January 1, 2000
Schedule II - Valuation and Qualifying
Accounts................................................................. S-1
PILLOWTEX CORPORATION AND SUBSIDIARIES
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 2, 1999 and January 1, 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 1, 2000, 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 15, 2000, except for Note 11, as
to which the date is March 31, 2000
F-2
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
January 2, 1999 and January 1, 2000
(Dollars in thousands, except for par value)
1998 1999
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,561 4,854
Receivables (note 11):
Trade, less allowances of $21,117 in 1998 and $33,351 in 1999 246,348 268,499
Other 13,124 17,923
Inventories (notes 6 and 11) 434,281 423,052
Assets held for sale 4,058 1,595
Prepaid expenses 3,785 5,502
----------------- ----------------
Total current assets 707,157 721,425
Property, plant and equipment, net (notes 7 and 11) 629,205 644,821
Intangible assets, at cost less accumulated amortization of
$15,577 in 1998 and $26,355 in 1999 289,829 288,856
Other assets 27,963 28,287
----------------- ----------------
Total assets $ 1,654,154 1,683,389
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (note 8) $ 127,575 119,848
Accrued expenses (note 8) 96,250 73,238
Deferred income taxes (note 12) 22,978 37,848
Current portion of long-term debt (note 11) 12,421 85,759
----------------- ----------------
Total current liabilities 259,224 316,693
Long-term debt, net of current portion (note 11) 944,493 965,323
Deferred income taxes (note 12) 96,013 67,720
Noncurrent liabilities (note 10) 53,434 52,366
----------------- ----------------
Total liabilities 1,353,164 1,402,102
Series A redeemable convertible preferred stock, $.01 par value;
65,475 shares issued and outstanding (note 13) 63,057 73,898
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 55,000,000 shares;
14,126,595 and 14,261,856 shares issued and outstanding in
1998 and 1999, respectively 141 142
Additional paid-in capital 155,811 160,515
Retained earnings 83,650 49,269
Currency translation adjustment (1,669) (1,730)
Deferred compensation -- (807)
----------------- ----------------
Total shareholders' equity 237,933 207,389
Commitments and contingencies (notes 9, 10, and 15) ----------------- ----------------
Total liabilities and shareholders' equity $ 1,654,154 1,683,389
================= ================
See accompanying notes to consolidated financial statements.
F-3
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended January 3, 1998, January 2, 1999 and January 1, 2000
(Amounts in thousands, except for per share data)
1997 1998 1999
---------------- ---------------- ----------------
Net sales $ 579,999 $ 1,509,841 $ 1,552,068
Cost of goods sold 485,679 1,237,085 1,358,966
---------------- ---------------- ----------------
Gross profit 94,320 272,756 193,102
Selling, general and administrative expenses 52,090 128,685 131,256
Provision for asset impairment (note 7) -- -- 2,000
Restructuring charge (note 3) 5,986 1,539 --
---------------- ---------------- ----------------
Earnings from operations 36,244 142,532 59,846
Interest expense 22,470 72,288 87,279
---------------- ---------------- ----------------
Earnings (loss) before income taxes
and extraordinary items 13,774 70,244 (27,433)
Income taxes (benefits) (note 12) 5,538 27,389 (7,901)
---------------- ---------------- ----------------
Earnings (loss) before extraordinary items 8,236 42,855 (19,532)
Extraordinary items, net of income tax benefit of $613
(note 11) 919 -- --
---------------- ---------------- ----------------
Net earnings (loss) 7,317 42,855 (19,532)
Preferred dividends and accretion (note 13) 85 2,097 12,294
---------------- ---------------- ----------------
Earnings (loss) available for common shareholders $ 7,232 $ 40,758 $ (31,826)
================ ================ ================
Basic earnings (loss) per common share (note 4):
Before extraordinary items $ 0.75 $ 2.89 $ (2.25)
Extraordinary items (0.08) -- --
---------------- ---------------- ----------------
Basic earnings (loss) per common share $ 0.67 $ 2.89 $ (2.25)
================ ================ ================
Weighted average common shares outstanding - basic 10,837 14,082 14,154
Diluted earnings (loss) per common share (note 4):
Before extraordinary items $ 0.74 $ 2.52 $ (2.25)
Extraordinary items (0.08) -- --
---------------- ---------------- ----------------
Diluted earnings (loss) per common share $ 0.66 $ 2.52 $ (2.25)
================ ================ ================
Weighted average common shares outstanding - diluted 11,086 17,653 14,154
See accompanying notes to consolidated financial statements.
F-4
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended January 3, 1998, January 2, 1999 and January 1, 2000
(in thousands of dollars, except for per share data)
Common Stock
---------------------- Additional Currency Total
Number Par paid-in Retained Deferred translation shareholders'
of shares value capital earnings compensation adjustment equity
----------- ------- ------------ ---------- -------------- ------------- ---------------
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
adjustments (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)
------------ ------- ---------- ---------- ------------ ----------- -----------
Balance 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
adjustments (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)
------------ ------- ---------- ---------- ------------ ----------- -----------
Balance at January 2, 1999 14,126,595 $ 141 $ 155,811 $ 83,650 $ -- $ (1,669) $ 237,933
Comprehensive loss:
Net loss (19,532) (19,532)
Currency translation
adjustments (61) (61)
-----------
Total comprehensive loss (19,593)
-----------
Exercise of stock options,
Including tax benefits
of $6 (note 14) 3,375 49 49
Issuance of restricted stock- 46,398 1,190 (807) 383
Issuance of common stock -
convertible debentures 85,518 1 3,465 3,466
Accretion of Series A
Preferred Stock (note 13) (216) (216)
Preferred stock dividends
(note 13) (12,078) (12,078)
Common stock dividends
declared ($.18 per share) (2,555) (2,555)
------------ ------- ---------- ---------- ------------ ----------- -----------
Balance at January 1, 2000 14,261,886 $ 142 $ 160,515 $ 49,269 $ (807) $ (1,730) $ 207,389
============ ======= ========== ========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended January 3, 1998, January 2, 1999 and January 1, 2000
(Dollars in thousands)
Cash flows from operating activities: 1997 1998 1999
----------- ----------- -----------
Net earnings (loss) $ 7,317 $ 42,855 $ (19,532)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 16,064 54,021 60,074
Extraordinary items 919 -- --
Restructuring and asset impairment 5,986 1,539 2,000
Deferred income taxes (2,320) 22,058 (8,356)
Loss (gain) on disposal of property, plant and equipment (1,052) 166 65
Changes in assets and liabilities
excluding effects of businesses acquired:
Trade receivables (8,173) (16,914) (23,240)
Inventories (3,900) (56,372) 10,632
Accounts payable and accrued expenses (6,236) 12,438 (12,641)
Other assets and liabilities 8,781 (5,181) 532
---------- ---------- ----------
Net cash provided by operating activities 17,386 54,610 9,534
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 4,926 12,308 472
Purchases of property, plant and equipment (20,567) (133,620) (89,737)
Proceeds from disposal of assets held for sale -- 25,935 5,679
Payments for businesses purchased (535,222) (106,746) --
---------- ---------- ----------
Net cash used in investing activities (550,863) (202,123) (83,586)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment 6,583 (247) (18,592)
Borrowings on revolving credit loans 200,600 470,400 383,028
Repayments of revolving credit loans (146,600) (402,600) (271,028)
Proceeds from the issuance of other long-term debt 435,000 100,000 --
Retirement of long-term debt (2,727) (14,127) (16,095)
Payments of debt and equity issuance costs (19,703) (1,849) --
Proceeds from issuance of redeemable convertible preferred 65,000 -- --
stock
Dividends paid (2,569) (5,402) (4,011)
Proceeds from exercise of stock options 2,477 2,295 43
---------- ---------- ----------
Net cash provided by financing activities 538,061 148,470 73,345
---------- ---------- ----------
Net change in cash and cash equivalents 4,584 957 (707)
Cash and cash equivalents at beginning of period 20 4,604 5,561
---------- ---------- ----------
Cash and cash equivalents at end of period $ 4,604 $ 5,561 $ 4,854
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(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 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.
(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 1997 ended January 3, 1998, fiscal year 1998 ended January
2, 1999 and fiscal year 1999 ended January 1, 2000. Such years include
the results of operations for 53, 52 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
1997, 1998 and 1999 follow:
1997 1998 1999
--------------- --------------- ---------------
Interest paid $ 19,207 73,223 87,906
=============== =============== ===============
Income taxes paid (refunded) $ 7,533 (5,042) 769
=============== =============== ===============
(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.
(Continued)
F 7
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(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 ($252.0 million and
$261.9 million net of accumulated amortization of $10.9 million and
$17.5 million as of January 2, 1999 and January 1, 2000, 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 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 effective interest method over
the terms of the related debt 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. The
discount rate used will be based on the Company's cost of capital. 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 and interest rate swaps).
(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 deffered taxes of a change in tax rates is recognized
income in the period that includes the enactment date.
(Continued)
F 8
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(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 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
expense was approximately $3.8 million, $19.9 million and $24.9
million during fiscal years 1997, 1998 and 1999, 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 and translate their assets and liabilities 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 operations 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
Comprehensive income consists of net earnings and foreign currency
translation adjustments and is presented in the consolidated
statements of shareholders' equity.
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
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 were substantially complete
as of the end of fiscal year 1998.
(Continued)
F 9
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(4) Earnings Per Share
The following table reconciles the numerators and denominators of
basic and diluted earnings per share for fiscal years 1997, 1998, and 1999.
In 1997 and 1998 options to purchase 0 and 500,000 shares respectively were
not included in the computation of diluted earnings because including them
would have been anti-dilutive. All potentially dilutive securities in 1999
were considered anti-dilutive, therefore basic and diluted loss per share
are the same.
1997 1998 1999
------------------- -------------------- --------------------
Earnings
Earnings Shares Earnings Shares (loss) Shares
------------------- -------------------- ---------------------
Basic - earnings (loss) available for
common shareholders $ 7,232 10,837 $ 40,758 14,082 $ (31,826) 14,154
Effect of dilutive securities:
Stock options - 132 - 207 - -
Convertible debentures - - 1,577 656 - -
Convertible preferred stock 85 117 2,097 2,708 - -
------------------- -------------------- ---------------------
Diluted - earnings (loss) available
for common shareholders plus
assumed conversions $ 7,317 11,086 $ 44,432 17,653 $ (31,826) 14,154
=================== ==================== =====================
(5) 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 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 $27.8 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 Inc. ("Fieldcrest Cannon")
in exchange for cash of $335.9 million (including acquisition costs) and
approximately 3.2 million shares of common stock of the Company ("the
Merger"). 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 operations
since their respective acquisition dates.
(Continued)
F 10
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(6) Inventories
Inventories consist of the following at January 2, 1999 and January 1,
2000:
1998 1999
---- ----
Finished goods $ 218,439 218,381
Work-in-process 134,428 136,924
Raw materials 58,306 44,424
Supplies 23,108 23,323
---------- ---------
$ 434,281 423,052
========== =========
At January 2, 1999 and January 1, 2000, 51% and 57%, 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 $15.3 million and $17.2 million at
January 2, 1999 and January 1, 2000, respectively.
(7) Property, Plant and Equipment
Property, plant and equipment are stated at cost and consist of the
following at January 2, 1999 and January 1, 2000:
1998 1999
---- ----
Land $ 28,812 29,912
Buildings and improvements 182,414 196,048
Machinery and equipment 370,581 405,495
Data processing equipment 29,325 95,866
Furniture and fixtures 6,346 6,673
Leasehold improvements 4,020 4,090
Projects in progress 106,444 57,120
---------- ---------
727,942 795,204
Less accumulated depreciation and amortization (98,737) (150,383)
---------- ---------
$ 629,205 644,821
========== =========
Interest costs of $4.7 million and $5.6 million, incurred during
fiscal years 1998 and 1999, respectively, for the purchase and construction
of qualifying fixed assets, were capitalized and are being amortized over
the related assets' estimated useful lives. During 1999 a $2.0 million
impairment was recorded to reduce the carrying value of the Opelika
facility, which was closed in the first quarter of 1999, to its estimated
fair value.
(Continued)
F 11
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(8) Accounts Payable and Accrued Expenses
Accounts payable includes $39.1 million and $20.5 million at January
2, 1999 and January 1, 2000, respectively, of checks not yet presented for
payment on zero balance disbursement accounts.
Accrued expenses consist of the following at January 2, 1999 and January 1,
2000:
1998 1999
------------------ ------------------
Employee-related compensation and benefits $ 24,974 18,313
Insurance and worker's compensation 24,794 15,812
Customer rebates 14,490 14,162
Interest and commitment fees 7,036 6,972
Advertising 4,435 795
Royalties and commissions 4,276 4,115
Other accrued expenses 16,245 13,069
------------------ ------------------
$ 96,250 73,238
================== ==================
(9) Pension Plans
The Company has defined benefit pension plans covering substantially
all of its employees except certain union employees who are not covered
under these plans. The plans provide pension benefits based on the
employees' compensation and years of 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:
1998 1999
-------------------- --------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 306,950 337,939
Acquisitions 7,240 -
Service cost 7,730 7,615
Plan amendments - 773
Interest cost 21,070 21,892
Actuarial (gain) loss 13,869 (48,420)
Benefits paid (18,920) (22,910)
--------------------- --------------------
Benefit obligation at end of year $ 337,939 296,889
===================== ====================
Change in plan assets:
Fair value of plan assets at beginning of year $ 307,772 336,642
Acquisitions 8,903 -
Actual return on plan assets 35,085 57,108
Employer contributions 3,802 -
Benefits paid (18,920) (22,910)
--------------------- --------------------
Fair value of plan assets at end of year $ 336,642 370,840
===================== ====================
Funded status:
Benefit obligation $ (337,939) (296,889)
Fair value of plan assets 336,642 370,840
Unrecognized transition asset (43) (35)
Unrecognized prior service cost 172 909
Unrecognized net actuarial (gain) loss 7,102 (64,044)
--------------------- --------------------
Prepaid benefit cost $ 5,934 10,781
===================== ====================
F 12 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
1997 1998 1999
------------ ------------ ------------
Weighted average assumptions as of January 3, 1998,
January 2, 1999 and January 1, 2000:
Discount rate 7.00% 6.75% 8.00%
Expected return 9.00-9.50% 9.00-9.50% 9.00-10.50%
Compensation increase rate 4.00-4.50% 4.00% 4.00%
Components of net periodic pension cost:
Service cost $ 1,058 7,730 7,615
Interest cost 1,414 21,070 21,892
Expected return on plan assets (1,622) (28,503) (34,379)
Recognized net actuarial (gain) loss - - (2)
Amortization of transition asset (8) (8) (8)
Amortization of prior service cost 35 35 35
------------ ------------ ------------
Net periodic pension cost $ 877 324 (4,847)
============ ============ ============
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 1997, 1998 and 1999,
the Company incurred costs of $0.1 million, $3.5 million and $3.2 million
respectively, to provide matching contributions for plans with matching
provisions.
(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.
1998 1999
-------------------- --------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 39,348 38,090
Service cost 709 582
Interest cost 2,466 2,430
Actuarial (gain) loss (538) (3,947)
Benefits paid (3,895) (2,737)
-------------------- --------------------
Benefit obligation at end of year $ 38,090 34,418
==================== ====================
Change in plan assets:
Fair value of plan assets at beginning of year $ -- --
Employer contributions 3,895 2,737
Benefits paid (3,895) (2,737)
-------------------- --------------------
Fair value of plan assets at end of year $ -- --
==================== ====================
Funded status:
Benefit obligation $ (38,090) (34,418)
Unrecognized net actuarial (gain) loss (357) (4,275)
-------------------- --------------------
Accrued postretirement benefit cost included in
noncurrent liabilities $ (38,447) (38,693)
==================== ====================
F 13 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
1997 1998 1999
----------- ----------- -----------
Weighted average assumptions as of January 3 1998, January 2, 1999
and January 1, 2000:
Discount rate 7.00% 6.75% 8.00%
Compensation increase rate 4.00% 4.00% 4.00%
Components of net periodic postretirement cost:
Service cost $ 35 709 582
Interest cost 114 2,465 2,430
Amortization of actuarial gain -- (181) (28)
-----------------------------------
Net periodic postretirement benefit cost $ 149 2,993 2,984
===================================
(11) Long-term Debt and Liquidity
Long-term debt consists of the following at January 2, 1999 and
January 1, 2000:
1998 1999
----------------- -----------------
Revolver $ 182,800 259,800
Overline Credit Facility -- 35,000
Term loans 348,750 341,500
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 $15.6 million and $14.3 million
in unamortized discount at January 2, 1999 and January 1, 2000,
respectively) 88,594 82,205
Industrial revenue bonds with interest rates from 3.60% to 7.85% and
maturities through July 1, 2021; generally collateralized by land and
buildings 19,528 16,814
Other debt 7,242 5,763
----------------- -----------------
956,914 1,051,082
Less:
Current portion 12,421 85,759
----------------- -----------------
Total long-term debt $ 944,493 965,323
================= =================
In December 1997, in connection with the Fieldcrest Cannon acquisition,
Pillowtex entered into new senior secured revolving credit and term loan
facilities with a group of financial and institutional investors for which Bank
of America acts as the agent. These facilities consisted of a $350.0 million
revolving credit facility and a $250.0 million term loan facility. The term
loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0
million Tranche B Term Loan. Effective July 28, 1998, Pillowtex amended these
facilities by increasing the Tranche B Term Loan to $225.0 million. The
increase occurred in conjunction with the acquisition of Leshner, allowing
Pillowtex to fund the transaction and reduce borrowings under the revolving
credit facility. Effective March 12, 1999, the revolving credit facility was
amended to permit Pillowtex to use for working capital one-half of a $61.0
million portion of the facility held as contingency reserve for cash payments
required upon conversion of the Fieldcrest Cannon 6% Convertible Subordinated
Debentures due 2012, thereby increasing availability under that facility.
Effective October 1, 1999, the revolving credit facility was further amended to
permit Pillowtex to use the other half of the contingency reserve for working
capital, thereby increasing availability under that facility. At the end of the
third and fourth quarters of its 1999 fiscal year, Pillowtex was not in
compliance with certain financial covenants under its senior debt facilities.
The Company obtained a series of temporary waivers of this non-compliance.
Effective as of December 7, 1999, the Company agreed to certain amendments to
the senior debt facilities, principally related to cash management, adjustments
to restrictive covenants, and borrowings under, and uses of proceeds from, the
revolving credit facility. Effective as of March 31, 2000, the Company obtained
a permanent waiver of its prior non-compliance with financial covenants and the
senior debt
F 14 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
facilities were further amended to shorten their terms to maturity and
accelerate the related amortization schedules for the repayment of principal, to
increase the applicable interest rate margins (subject to reduction if the
Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) exceeds a specified level for the 2000 fiscal year), to add a covenant
requiring that EBITDA must exceed specified levels for future fiscal periods and
to eliminate all other financial covenants, to modify certain restrictive
covenants, to limit borrowings under the revolving credit facility based on a
formula tied to 45% of eligible inventory plus 80% of eligible accounts
receivable, and to provide for a series of reductions in the commitment under
the revolving credit facility. The Company believes that it will be able to
comply with the amended financial covenants in the future; however, there can be
no assurance of such compliance.
The revolving credit facility includes $55.0 million of availability for
letters of credit. At January 1, 2000, $35.2 million of letters of credit were
outstanding.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon the London
Interbank Offered Rate plus 3.50% (9.63% at March 24, 2000). The Tranche B Term
Loan bears interest on a similar basis to the Tranche A Term Loan, plus an
additional margin of .50%. The weighted average annual interest rate on
outstanding borrowings under the various senior credit facilities for 1999 was
7.7%. The senior debt facilities now expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of Pillowtex, and are secured by first priority liens on all of the
capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital
stock of Pillowtex's foreign subsidiaries. Pillowtex 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
facility is subject to mandatory prepayment from all net cash proceeds of asset
sales and debt issuances of Pillowtex (except as specifically provided), 50% of
the net cash proceeds of equity issuances by Pillowtex 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 senior debt facilities contain a number of negative covenants, which
covenants restrict, among other things, Pillowtex's ability to incur additional
debt, pay dividends or make other restricted payments, sell stock of
subsidiaries, grant liens, make capital expenditures, engage in transactions
with affiliates, make loans, advances and investments, dispose of assets, effect
mergers, consolidations and dissolutions, and make certain changes in its
business.
A breach of any of the covenants contained in the senior debt facilities
could result in a default under the terms of the facilities. Upon the occurrence
of an event of default: the senior lenders would not be obligated to make
additional advances under the revolving credit facility; the senior lenders
would be entitled to declare all amounts outstanding under the senior debt
facilities, including accrued interest or other obligations, to be immediately
due and payable; the senior lenders would have the rights to block payment on
substantially all of Pillowtex's other long-term debt; and the senior lenders
would be entitled to proceed against the collateral granted to them to secure
the senior debt. In these circumstances, cross defaults could occur making
substantially all of Pillowtex's other long-term debt due. If any senior debt
were to be accelerated, the Company cannot be certain that its assets would be
sufficient to repay in full that debt and its other debt.
As a result of the covenants described above, Pillowtex's ability to
respond to changing business and economic conditions and to secure additional
financing, if needed, is significantly restricted.
In May 1999, Pillowtex entered into a $20.0 million senior unsecured
revolving credit facility (overline facility) in order to obtain additional
working capital availability. On July 27, 1999, this facility was amended to
increase the amount of funds available to $35.0 million. At the end of the
third and fourth quarters of its 1999 fiscal year, Pillowtex was not in
compliance with certain financial covenants under this facility, the covenants
of which are established by reference to the senior debt facilities described
above. The Company obtained a series of temporary waivers of this non-
compliance and extensions of the maturity date. Effective as of December 7,
1999, the
F 15 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Company agreed to certain amendments to this facility, resulting in the facility
being secured by the assets securing the senior debt facilities described above.
Effective as of March 31, 2000, the Company obtained a permanent waiver of its
prior non-compliance and the facility was amended to lengthen its term to
maturity, to impose an amortization schedule for the repayment of principal, and
to increase the applicable interest rate margins (subject to reduction if the
Company's EBITDA exceeds a specified level for the 2000 fiscal year).
This facility is guaranteed on a senior basis by Pillowtex's domestic
subsidiaries. Pillowtex is currently required to pay interest on any amounts
borrowed under the facility at a rate which is based upon the London Interbank
Offered Rate plus 4.5% or the base rate plus 3.0%, at Pillowtex's option. This
facility matures upon termination by Pillowtex at any time or otherwise at the
earliest of: a) any increase in the commitment under the senior debt facilities
described above, the issuance of any capital stock by Pillowtex or its domestic
subsidiaries, or other specified events; or b) January 31, 2002.
In connection with the Fieldcrest Cannon merger, Pillowtex issued $185.0
million of 9% Senior Subordinated Notes due 2007 in a private offering. In
March 1998, Pillowtex 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. Pillowtex 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 Pillowtex, are
subordinated in right of payment to all existing and future senior indebtedness,
and rank pari passu to the 10% Notes described below.
On November 12, 1996, Pillowtex issued the 10% Senior Subordinated Notes
due 2006 in a private offering. In March 1997, Pillowtex 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 10% Notes are
due November 15, 2006, with interest payable semiannually commencing May 15,
1997. Pillowtex used the proceeds from such offering to retire the outstanding
indebtedness under Pillowtex'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. Pillowtex 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 Pillowtex, and are
subordinated in right of payment to all existing and future senior indebtedness.
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
Pillowtex and each other subsidiary of Pillowtex that guarantees Pillowtex's
obligations under the senior debt 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, Pillowtex 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.
As a result of Pillowtex's acquisition of Fieldcrest Cannon, the
outstanding 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon
are convertible, at the option of the holders, into a combination of cash and
Pillowtex's Common Stock. During the fourth quarter of 1999, Pillowtex notified
the holders of 6% Convertible Debentures that it was not practicable or prudent
for payments to be made in respect of the conversion of 6% Convertible
Debentures and advised holders that had surrendered 6% Convertible Debentures
that, with limited exceptions, they could rescind their notice of conversion,
return to Pillowtex any Pillowtex Common Stock that had been issued to them and
regain possession of their 6% Convertible Debentures. As of March 24, 2000, the
cash component due in respect of 6% Convertible Debentures that had been
surrendered without subsequent rescission of that surrender was $9.1 million. In
addition, as of March 24, 2000, $96.5 million aggregate principal amount of 6%
Convertible Debentures remained outstanding. If all such outstanding 6%
Convertible Debentures were converted at such date, the resulting cash component
to be paid to the holders of 6% Convertible Debentures would have been
approximately $61.0 million (classified as current portion of long-term debt
at January 1, 2000). Pillowtex is currently prohibited under the terms of its
senior subordinated debt from making payments in respect of the 6% Convertible
Debentures except for interest and at maturity or pursuant to sinking fund
obligations. Pillowtex has initiated discussions with certain holders of its 6%
Convertible Debentures regarding a potential restructuring of the 6% Convertible
Debentures. Currently, it is anticipated that any comprehensive restructuring of
the 6% Convertible Debentures involving cash payments (other than pursuant to
sinking
F 16 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
fund obligations) would likely require the consent of the holders of Pillowtex's
senior subordinated debt.
As of January 2, 1999, Pillowtex had approximately $345.0 million of
notional amounts covered under interest rate swap agreements whereby Pillowtex
exchanged floating rates for fixed rates. The weighted average fixed and
floating rates were 4.70% and 5.26%, respectively. As of January 1, 2000,
Pillowtex had approximately $345.0 million of notional amounts covered under
interest rate swap agreements whereby Pillowtex exchanged floating rates for
fixed rates. The weighted average fixed and floating rates were 4.70% and
6.05%, respectively. The fair values of the swaps at January 2, 1999 and
January 1, 2000 were $2.1 million and $4.0 million, respectively in favor of
Pillowtex.
Under the terms of its senior secured credit agreements and senior
subordinated debt and its Series A Redeemable Convertible Preferred Stock,
Pillowtex currently is prohibited from paying cash dividends or making other
distributions to Holders of its Common Stock.
Based upon current and anticipated levels of operations, and aggressive
efforts to reduce inventories and accounts receivable, Pillowtex anticipates
that its cash flow from operations, together with amounts available under its
revolving credit facility, will be adequate to meet its anticipated cash
requirements in the foreseeable future (assuming no significant cash payments
are required to be made in respect of the 6% Convertible Debentures other than
scheduled interest payments and payments related to satisfaction of the sinking
fund obligations). In the event that cash flows and available borrowings under
the revolving credit facility are not sufficient to meet future cash
requirements, Pillowtex may be required to reduce planned capital expenditures
or seek additional financing. Pillowtex can provide no assurances that
reductions in planned capital expenditures would be sufficient to cover
shortfalls in available cash or that additional financing would be available or,
if available, offered on terms acceptable to the Company.
The interest rates on indebtedness other than the senior credit 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 2, 1999 and
January 1, 2000, are shown below. The senior credit facilities are at current
market rates; therefore, their carrying values approximate fair value.
1998 1999
---------------------------------------- -----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------------ ------------------ ------------------
Revolver $ 182,800 182,800 259,800 259,800
Overline Credit Facility -- -- 35,000 35,000
Term loans 348,750 348,750 341,500 341,500
9% Senior Subordinated
Notes due 2007 185,000 189,625 185,000 64,750
10% Senior Subordinated
Notes due 2006 125,000 132,500 125,000 45,000
6% convertible
subordinated sinking
fund debentures due
2012 88,594 85,962 82,205 28,785
Industrial revenue bonds and other debt 26,770 24,120 22,577 20,064
F 17
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Aggregate maturities of long-term debt for each of the five years following
January 1, 2000 and thereafter, assuming the unpaid principal balance at
January 1, 2000 under the revolving credit facility remains unchanged and
reflecting the revised terms of the senior debt facilities described above,
are as follows:
Fiscal year Amount
-------------
2000 $ * 24,755
2001 37,683
2002 600,451
2003 8,978
2004 6,710
Thereafter 375,953
* The amount for 2000 excludes the current portion of long-term debt
related to the 6% Convertible Debentures of approximately $61.0 million.
This amount is included in the Thereafter amount.
(12) Income Taxes
The components of income tax expense (benefit), excluding the income tax
benefit related to extraordinary items, are as follows:
1997 1998 1999
---------------- ---------------- -----------------
U.S. federal - current $ 6,385 3,916 (600)
U.S. federal - deferred (1,478) 17,881 (6,362)
State and foreign taxes - current 1,473 1,415 200
State and foreign taxes - deferred (842) 4,177 (1,139)
---------------- ---------------- -----------------
$ 5,538 27,389 (7,901)
================ ================ =================
A reconciliation of income tax expense (benefit) computed using the U.S.
federal statutory income tax rate of 35% of earnings/(loss) before income
taxes and extraordinary items to the actual provision for income taxes
follows:
1997 1998 1999
---------------- ---------------- -----------------
Expected tax at U.S. statutory rate $ 4,821 24,585 (9,602)
Amortization of goodwill 188 1,695 2,308
State and foreign taxes, net of federal effect 477 933 (610)
Other 52 176 3
---------------- ---------------- -----------------
$ 5,538 27,389 (7,901)
================ ================ =================
F 18
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of January 2, 1999
and January 1, 2000 are presented below:
1998 1999
-------------------- --------------------
Deferred tax assets:
Package design costs $ 614 1,114
Accrued employee benefits 4,423 390
State deferred income taxes 1,132 899
Accruals and allowances 23,527 21,006
Operating losses and credit carryforwards 16,524 26,293
Other 1,668 10,182
-------------------- --------------------
Deferred tax assets 47,888 59,884
-------------------- --------------------
Deferred tax liabilities:
Inventory costs and reserves (49,242) (45,870)
Depreciable assets (97,505) (97,787)
State deferred income taxes (8,901) (9,333)
Trademarks (10,500) (12,128)
Goodwill (731) (334)
-------------------- --------------------
Deferred tax liabilities (166,879) (165,452)
-------------------- --------------------
Net deferred tax liabilities $ (118,991) (105,568)
==================== ====================
At January 1, 2000, the Company has a $49.4 million federal net operating
loss carryforward expiring 2006 through 2019, $1.8 million general business
tax credit carryforwards expiring 2005 through 2019 and $6.7 million unused
alternative minimum tax credit carryforwards that do not expire.
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 1, 2000 to be realized as a result of the
reversal of existing taxable temporary differences.
(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 increases to 10% as a result of the
Company's earnings per share for 1999 falling below predetermined targets.
The Company is also required to pay a one-time cumulative dividend on the
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 the 10% rate, or 10,135 shares of Series A
Preferred Stock , which were accrued in the third and fourth quarter of
1999 and which will be issued in fiscal year 2000. Dividends can be paid in
cash or additional shares of preferred stock until December 2002, at which
time they must be paid in cash. The Company's ability to pay dividends on
the common stock and preferred stock is restricted under the terms of its
senior credit facilities, senior subordinated debt and, in the case of
common stock dividends, under the terms of the preferred stock.
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.
F 19
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(14) Stock Options
In 1993, the Company established a stock option plan under which
options may be granted to eligible employees and non-employee 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 1, 2000, there were 698 thousand shares available for grant
under the stock option plan. The per share weighted-average fair value of
stock options granted during fiscal years 1997, 1998 and 1999 was $7.86,
$12.81 and $6.46 respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1997 1998 1999
----------- ----------- ---------
Expected dividend yield 1.41% 1.06% 0.0%
Stock price volatility 38.94 36.87 46.53
Risk-free interest rate 6.15 5.48 5.35
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 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:
1997 1998 1999
------------ ----------- -----------
Earnings (loss) available for common shareholders:
As reported $ 7,232 40,758 (31,826)
Pro forma 6,720 39,280 (33,410)
Earnings (loss) per share:
As reported - basic $ .67 2.89 (2.25)
As reported - diluted .66 2.52 (2.25)
Pro forma - basic .62 2.79 (2.36)
Pro forma - diluted .61 2.43 (2.36)
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.
F 20
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in Thousands of dollars, except for per share data)
A summary of option activity during fiscal years 1997, 1998 and 1998
follows:
Weighted average
Shares exercise price
---------------- -------------------------
Outstanding at December 31, 1997
(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
Granted 418 14.32
Exercised (3) 12.72
Canceled (272) 22.00
----------------
Outstanding at January 1, 2000
(296 shares exercisable) 1,042 20.80
================
Approximately 296 thousand shares that are exercisable at January 1,
2000 have a weighted average exercise price of $20.72. The table below
provides weighted average exercise prices and weighted average remaining
contractual life of options outstanding at January 1, 2000, 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)
--------------------------------------------------------------------------------
$ 4.31 - $14.69 300 89 $ 8.19 $12.87 6.81
$14.88 - $24.44 390 116 19.11 16.89 7.43
$27.50 - $33.50 327 85 32.58 32.42 8.19
$44.38 25 6 44.38 44.38 8.32
(15) Commitments and Contingent Liabilities
Manufacturing facilities at certain locations, showrooms, sales
offices and warehouse space are leased under non-cancelable 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 $7.6 million, $24.7 million and $36.4 million during
fiscal years 1997, 1998 and 1999, respectively.
F 21 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in Thousands of dollars, except for per share data)
Future minimum lease payments under non-cancelable 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
-----------
2000 $28,097
2001 25,254
2002 23,494
2003 22,580
2004 21,959
Thereafter 54,362
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.
(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 13.5% and 12.6% each of
net sales in fiscal 1997 and approximately 23.6% and 6.9% each of net sales
in fiscal 1998. These two customers accounted for approximately 20.5% and
9.6% each of net sales in fiscal year 1999.
(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 1997 and $870.1 million and
$639.7 million, respectively, in fiscal year 1998, and $856.0 million and
$696.1 million, respectively, in fiscal year 1999
Net sales to customers domiciled in foreign countries were $37.2
million, $118.8 million and $93.3 million in fiscal years 1997, 1998 and
1999, respectively. At January 3, 1998, January 2, 1999 and January 1,
2000, the Company had long-lived assets domiciled in foreign countries of
$4.7 million, $3.8 million and $3.8 million, respectively. The Company's
domestic long-lived assets (including intangibles) at January 3, 1998,
January 2, 1999 and January 1, 2000 were $764.5 million, $943.2 million and
$929.2 million, respectively.
F 22 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(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 1998 and 1999.
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
1999 quarter ended
------------------------------------------------------------------------------------
April 3 July 3 October 2 January 1
----------------- ---------------- ----------------------- --------------------
Net sales $ 368,508 362,468 415,806 405,286
Gross profit 56,214 61,560 39,351 35,977
Net earnings (loss) 5,253 6,773 (11,079) (20,479)
Earnings (loss) per common
share - basic .33 .44 (1.45) (1.57)
Earnings (loss) per common
share - diluted .31 .40 (1.45) (1.57)
The gross profit for the quarter ended January 1, 2000 includes
charges for unabsorbed overhead resulting from idling plants and lower
average selling prices, both of which were related to initiatives to reduce
inventories. The net loss includes the effects of the items previously
described and higher interest costs and bank fees associated with the
amendments and waivers to the senior credit facility.
F 23 (continued)
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Supplemental Condensed Consolidating Financial Information
The following is summarized condensed consolidating financial information for
Pillowtex, segregating the Parent and guarantor subsidiaries from non-guarantor
subsidiaries. The Guarantor subsidiaries are wholly owned subsidiaries of
Pillowtex 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 2, 1999
---------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination 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
Intangibles 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 - 233,825
Payable 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' 1,149,064 1,604,908 19,514 (1,119,332) 1,654,154
Equity
=========== =========== =========== =========== ============
January 1, 2000
-------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------
Assets:
Trade receivables - 260,870 7,629 - 268,499
Receivable from Affiliates 747,324 - - (747,324) -
Inventories - 406,801 16,251 - 423,052
Other current assets - 29,769 105 - 29,874
----------- ---------- --------- ----------- -----------
Total current assets 747,324 697,440 23,985 (747,324) 721,425
Property, plant and equipment, net 467 642,833 1,521 - 644,821
Intangibles 16,831 269,710 2,315 - 288,856
Other assets 493,579 18,930 - (484,222) 28,287
----------- ---------- --------- ----------- -----------
Total assets 1,258,201 1,628,913 27,821 (1,231,546) 1,683,389
=========== ========== ========= =========== ===========
Liabilities and shareholders' equity:
Accounts payable and accrued liabilities 6,482 182,218 4,386 - 193,086
Payable to affiliates - 736,720 10,604 (747,324) -
Other current liabilities 85,579 37,951 77 - 123,607
----------- ---------- --------- ----------- -----------
Total current liabilities 92,061 956,889 15,067 (747,324) 316,693
Noncurrent liabilities 884,852 200,446 110 - 1,085,409
----------- ---------- --------- ----------- -----------
Total liabilities 976,914 1,157,335 15,177 (747,324) 1,402,102
Redeemable convertible preferred stock 73,898 - - - 73,898
Shareholders' equity 207,389 471,578 12,644 (484,222) 207,389
----------- ---------- --------- ----------- -----------
Total Liabilities and Shareholders'
Equity 1,258,201 1,628,913 27,821 (1,231,546) 1,683,389
=========== ========== ========= =========== ===========
(Continued)
F 24
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 3, 1998, January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
January 3, 1998
--------------------------------------------------------------
Guarantor Non-
Subsidi- Guarantor Elimin- Consoli-
Results of operations Parent aries Subsidiaries ations dated
- ------------------------------- --------------------------------------------------------------
Net sales 18,759 537,536 29,268 (5,564) 579,999
Cost of goods sold 11,523 453,149 26,571 (5,564) 485,679
-------------------------------------------------------------
Gross Profit 7,236 84,387 2,697 - 94,320
Selling, general and
administrative expenses 3,990 46,624 1,476 - 52,090
Restructuring Charges - 5,986 - - 5,986
Impairments - - - - -
-------------------------------------------------------------
Earnings from operations 3,246 31,777 1,221 - 36,244
Equity in earnings(loss)
of subsidiaries 5,951 - - (5,951) -
Interest expense (income) (764) 23,239 (5) - 22,470
-------------------------------------------------------------
Earnings(loss) before income
tax and extraordinary items 9,961 8,538 1,226 (5,951) 13,774
Income taxes 1,725 3,687 126 - 5,538
-------------------------------------------------------------
Earnings(loss) before
extraordinary items 8,236 4,851 1,100 (5,951) 8,236
Extraordinary loss (919) - - - (919)
-------------------------------------------------------------
Net earnings(loss) 7,317 4,851 1,100 (5,951) 7,317
Preferred dividends and accretion 85 - - - 85
-------------------------------------------------------------
Earnings(loss) available for
common shareholders 7,232 4,851 1,100 (5,951) 7,232
=============================================================
January 2, 1999
----------------------------------------------------------------
Guarantor Non-
Subsidi- Guarantor Elimin- Consoli-
Results of operations Parent aries Subsidiaries ations 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
Impairments - - - - -
----------------------------------------------------------------
Earnings from operations 5,035 136,458 1,039 - 142,532
Equity in earnings(loss)
of subsidiaries 39,838 - - (39,838) -
Interest expense (income) 394 71,912 (18) - 72,288
----------------------------------------------------------------
Earnings(loss) before income tax 44,479 64,546 1,057 (39,838) 70,244
and extraordinary items
Income taxes 1,624 25,673 92 - 27,389
----------------------------------------------------------------
Earnings(loss) before
extraordinary items 42,855 38,873 965 (39,838) 42,855
Extraordinary loss - - - - -
----------------------------------------------------------------
Net earnings(loss) 42,855 38,873 965 (39,838) 42,855
Preferred dividends and accretion 2,097 - - - 2,097
----------------------------------------------------------------
Earnings(loss) available for
common shareholders 40,758 38,873 965 (39,838) 40,758
===============================================================
(Continued)
January 1, 2000
---------------------------------------------------------------
Guarantor Non-
Subsidi- Guarantor Elimin- Consoli-
Results of operations Parent aries Subsidiaries ations dated
- ----------------------------------- ---------------------------------------------------------------
Net sales - 1,534,272 25,902 (8,106) 1,552,068
Cost of goods sold - 1,342,163 24,909 (8,106) 1,358,966
---------------------------------------------------------------
Gross Profit - 192,109 993 - 193,102
Selling, general and administrative
expenses (5,477) 135,877 856 - 131,256
Restructuring Charges - - - - -
Impairments - 2,000 - - 2,000
---------------------------------------------------------------
Earnings from operations 5,477 54,232 137 - 59,846
Equity in earnings(loss)
of subsidiaries (21,793) - - 21,793 -
Interest expense (income) 1,998 85,301 (20) - 87,279
---------------------------------------------------------------
Earnings(loss) before income
tax and extraordinary items (18,314) (31,069) 157 21,793 (27,433)
Income taxes 1,218 (9,042) (77) - (7,901)
---------------------------------------------------------------
Earnings(loss) before
extraordinary items (19,532) (22,027) 234 21,793 (19,532)
Extraordinary loss - - - - -
---------------------------------------------------------------
Net earnings(loss) (19,532) (22,027) 234 21,793 (19,532)
Preferred dividends and accretion 12,294 - - - 12,294
---------------------------------------------------------------
Earnings(loss) available for
common shareholders (31,826) (22,027) 234 21,793 (31,826)
===============================================================
(Continued)
F 25
PILLOWTEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 3, 1998, January 2, 1999 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Years ended
------------------------------------------------------------------------------------------------------
January 3, 1998 January 2, 1999
------------------------------------------------- ---------------------------------------------------
Cash Flows Non- Non-
Guarantor Guarantor Guarantor Guarantor
Subsidi- Subsidi- Elimin- Consoli- Subsidi- Subsidi- Elimin- Consoli
Parent aries aries ations date Parent aries aries ations -dated
------------------------------------------------------------------------------------------------------
Net cash Provided by
(used in) operating
activities 1,383 12,330 3,673 -- 17,386 15,090 40,532 (1,012) -- 54,610
Net cash used
in investing
activities (157,858) (392,940) (65) -- (550,863) (93,964) (108,069) (90) -- (202,123)
Net cash Provided by
(used in) financing
activities 156,475 385,188 (3,602) -- 538,061 78,874 68,501 1,095 -- 148,470
----------------------------------------------- -------------------------------------------------
Net change in cash
and cash equivalents -- 4,578 6 -- 4,584 -- 964 (7) -- 957
Cash and
cash equivalents
at beginning of period -- 12 8 -- 20 -- 4,590 14 -- 4,604
----------------------------------------------- -------------------------------------------------
Cash and cash
equivalents
end of period -- 4,590 14 -- 4,604 -- 5,554 7 -- 5,561
=============================================== =================================================
---------------------------------------------------
January 1, 2000
---------------------------------------------------
Cash Flows Non-
Guarantor Guarantor
Subsidi- Subsidi- Elimin- Consoli
Parent aries aries ations -dated
---------------------------------------------------
Net cash Provided by
(used in) operating
activities (32,752) 50,172 (7,886) -- 9,534
Net cash used in investing
activities 98 (83,569) (115) -- (83,586)
Net cash Provided by
(used in) financing
activities 32,654 32,697 7,994 -- 73,345
--------------------------------------------------
Net change in cash
and cash equivalents -- (700) (7) -- (707)
Cash and
cash equivalents
at beginning of period -- 5,554 7 -- 5,561
--------------------------------------------------
Cash and
cash equivalents
end of period -- 4,854 -- -- 4,854
==================================================
F 26
Schedule II
PILLOWTEX CORPORATION
Valuation and Qualifying Accounts
Years ended January 3, 1998, January 2, 1999 and January 1, 2000
(Dollars in Thousands)
Additions Deductions
-------------------------------------- ---------------
Balance at beginning Charged to Other Write-offs/ Balance at end
of period Charged to Expense Accounts Recoveries of period
------------------------ -------------------- ----------------- --------------- --------------------
Allowance for:
Returns & Allowances
and Doubtful Accounts
Year ended 1997 2,475 13,789 11,268 (2) 12,762 (1) 14,770
============ =========== =========== ============ ================
Year ended 1998 14,770 26,764 6,570 (2) 26,987 (1) 21,117
============ =========== =========== ============ ================
Year ended 1999 21,117 22,748 - 10,514 (1) 33,351
============ =========== =========== ============ ================
Inventory reserves:
Year ended 1997 3,285 4,337 3,168 (2) 1,378 9,412
============ =========== =========== ============ ================
Year ended 1998 9,412 11,034 2,908 (2) 8,039 15,315
============ =========== =========== ============ ================
Year ended 1999 15,315 14,302 - 12,410 17,207
============ =========== =========== ============ ================
(1) Accounts written off, less recoveries
(2) Includes reserves for acquired companies as of the date of acquisition
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.
S 1