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 December 30, 2000
or
Transition Report Pursuant to Section 13 or 15(d) of the
- ------- Securities Exchange Act of 1934
For the Transition Period from ____ To ______
Commission File 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 None
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, 2001 was $2,260,389.
As of March 20, 2001, Registrant had 14,250,892 shares of Common Stock
outstanding.
__________________
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
Unless the context otherwise requires, references to "Pillowtex" or the
"Company" include Pillowtex Corporation and its subsidiaries.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements include
statements identified by the use of the words "will," "would," "could,"
"should," "anticipates," "believes," "expects," "estimates," "intends" or
similar expressions and other statements that are not historical facts. Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those expressed in or
implied by such statements. Factors which could cause the Company's actual
results in future periods to differ materially from those expressed in or
implied by such statements include, but are not limited to, the following:
- - The cash generated by the Company from operations and cash available from
borrowing under its debtor-in-possession financing facility may not be
sufficient to fund the operations of the Company until such time as the
Company is able to propose a plan of reorganization that will be acceptable
to creditors and other parties in interest and confirmed by the Bankruptcy
Court.
- - Actions may be taken by creditors or other parties in interest that may
have the effect of preventing or unduly delaying confirmation of a plan of
reorganization in connection with the Company's bankruptcy proceedings.
- - The Bankruptcy Court may not confirm the Company's plan of reorganization,
when proposed.
- - The plan of reorganization proposed by the Company and approved by the
Bankruptcy Court may not be viable.
- - The Company's senior management may be required to expend a substantial
amount of time and effort structuring a plan of reorganization, which could
have a disruptive impact on management's ability to focus on the operation
of the Company's business.
- - The Company may not be able to obtain sufficient financing to meet future
obligations.
- - The Company's access to capital markets will likely be limited for the
foreseeable future.
- - The Company may have difficulty in attracting and retaining customers, top
management and other key personnel and labor as a result of the Company's
bankruptcy proceedings.
- - The Company may have difficulty in maintaining existing or creating new
relationships with suppliers or vendors as a result of its pending
bankruptcy proceedings; suppliers to the Company may stop providing
supplies or services to the Company or provide such supplies or services
only on "cash on delivery," "cash on order" or other terms that could have
an adverse impact on the Company's cash flow.
- - The Company faces significant competitive pressures.
- - The price and availability of certain raw materials used by the Company are
subject to rapid and significant change.
- - The Company may be affected by changes in general retail industry
conditions.
- - The Company's success may depend in part on the goodwill associated with
and protection of the brand names owned by the Company.
Certain of these factors, as well as other such factors, are discussed
herein in greater detail under "Item 1. Business - Risk Factors" below. In
making these forward-looking statements, the Company does not undertake to
update them in any manner except as may be required by law.
1
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 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.
Pillowtex is organized into three major operating divisions: Bed and Bath
Division; Pillow and Pad Division; and Blanket Division. The Bed and Bath
Division manufactures and sells sheets and other fashion bedding textiles,
towels, bath rugs and kitchen textile products. The Pillow and Pad Division
manufactures and sells bed pillows, down comforters and mattress pads. The
Blanket Division manufactures and sells blanket products. See footnote 18 of the
notes to the Company's consolidated financial statements for additional
information regarding segments.
Proceedings Under Chapter 11 of the Bankruptcy Code
On November 14, 2000 (the "Petition Date"), Pillowtex Corporation and
substantially all of its domestic subsidiaries (collectively, the "Debtors"),
including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary
petitions for reorganization under chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). The chapter 11 cases pending for
the Debtors (the "Chapter 11 Cases") are being jointly administered for
procedural purposes.
In conjunction with the commencement of the Chapter 11 Cases, the Debtors
sought and obtained several orders from the Bankruptcy Court which were intended
to enable the Debtors to operate in the normal course of business during the
Chapter 11 Cases. The most significant of these orders (i) permit the Debtors to
operate their consolidated cash management system during the Chapter 11 Cases in
substantially the same manner as it was operated prior to the commencement of
the Chapter 11 Cases, (ii) authorize payment of prepetition employee salaries,
wages, and benefits and reimbursement of prepetition employee business expenses,
(iii) authorize payment of prepetition sales, payroll, and use taxes owed by the
Debtors, (iv) authorize payment of certain prepetition obligations to customers,
and (v) authorize payment of certain prepetition obligations to critical vendors
to aid the Debtors in maintaining operation of their business.
On December 6, 2000, the Bankruptcy Court also entered an order (the "DIP
Financing Order") authorizing the Debtors to enter into a $150.0 million debtor-
in-possession financing facility (the "DIP Financing Facility") with Bank of
America, N.A. as agent for a syndicate of financial institutions comprised of
certain of the Company's prepetition senior secured lenders, and to grant first
priority priming liens and mortgages, security interests, liens (including
priming liens), and superiority claims on substantially all of the assets of the
Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP
Financing Facility was amended to, among other things, reduce the amount of the
facility to $125.0 million. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
below for a further discussion regarding the DIP Financing Facility.
The Debtors are currently operating their businesses as debtors-in-
possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code,
prepetition obligations of the Debtors, including obligations under debt
instruments, generally may not be enforced against the Debtors, and any actions
to collect prepetition indebtedness are automatically stayed, unless the stay is
lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the
Debtors have the right, subject to Bankruptcy Court approval and certain other
limitations, to assume or reject executory contracts and unexpired leases. In
this context, "assumption" means that the Debtors agree to perform their
obligations and cure all existing defaults under the contract or lease, and
"rejection" means that the Debtors are relieved from their obligations to
perform further under the contract or lease, but are subject to a claim for
damages for the breach thereof. Any damages resulting from rejection of
executory contracts and unexpired leases will be treated as general unsecured
claims in the Chapter 11 Cases unless such claims had been secured on a
prepetition basis prior to the Petition Date. The Debtors are in the process of
reviewing their executory contracts and unexpired leases to determine which, if
any, they will reject. The
2
Debtors cannot presently determine or reasonably estimate the ultimate liability
that may result from rejecting contracts or leases or from the filing of claims
for any rejected contracts or leases, and no provisions have yet been made for
these items.
The United States trustee for the District of Delaware has appointed an
Official Committee of Unsecured Creditors in accordance with the provisions of
the Bankruptcy Code.
The Bankruptcy Code provides that the Debtors have exclusive periods during
which only they may file and solicit acceptances of a plan of reorganization.
The exclusive period of the Debtors to file a plan for reorganization expired on
March 14, 2001; however, the Debtors have requested the Bankruptcy Court to
extend such exclusive period until July 16, 2001. A hearing regarding the
extension is scheduled for April 6, 2001. If the Debtors fail to file a plan of
reorganization during the exclusive period or, after such plan has been filed,
if the Debtors fail to obtain acceptance of such plan from the requisite
impaired classes of creditors and equity holders during the exclusive
solicitation period, any party in interest, including a creditor, an equity
holder, a committee of creditors or equity holders, or an indenture trustee, may
file their own plan of reorganization for the Debtors.
After a plan of reorganization has been filed with the Bankruptcy Court,
the plan, along with a disclosure statement approved by the Bankruptcy Court,
will be sent to all creditors and equity holders. Following the solicitation
period, the Bankruptcy Court will consider whether to confirm the plan. In order
to confirm a plan of reorganization, the Bankruptcy Court, among other things,
is required to find that (i) with respect to each impaired class of creditors
and equity holders, each holder in such class has accepted the plan or will,
pursuant to the plan, receive at least as much as such holder would receive in a
liquidation, (ii) each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as described in the following
sentence), and (iii) confirmation of the plan is not likely to be followed by a
liquidation or a need for further financial reorganization of the Debtors or any
successors to the Debtors unless the plan proposes such liquidation or
reorganization. If any impaired class of creditors or equity holders does not
accept the plan and, assuming that all of the other requirements of the
Bankruptcy Code are met, the proponent of the plan may invoke the "cram down"
provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may confirm a plan notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity holders if certain requirements of the Bankruptcy
Code are met. These requirements may, among other things, necessitate payment in
full for senior classes of creditors before payment to a junior class can be
made. As a result of the amount of prepetition indebtedness and the availability
of the "cram down" provisions, the holders of the Company's capital stock may
receive no value for their interests under the plan of reorganization. Because
of such possibility, the value of the Company's outstanding capital stock is
highly speculative. See "- Risk Factors - The Value Of Pillowtex's Capital Stock
Is Highly Speculative" below.
Since the Petition Date, the Debtors have conducted business in the
ordinary course. Management is in the process of stabilizing the business of the
Debtors and evaluating their operations as part of the development of a plan of
reorganization. After developing a plan of reorganization, the Debtors will seek
the requisite acceptance of the plan by impaired creditors and equity holders
and confirmation of the plan by the Bankruptcy Court, all in accordance with the
applicable provisions of the Bankruptcy Code.
During the pendency of the Chapter 11 Cases, the Debtors may, with
Bankruptcy Court approval, sell assets and settle liabilities, including for
amounts other than those reflected in the financial statements. The Debtors are
in the process of reviewing their operations and identifying assets for
disposition.
The administrative and reorganization expenses resulting from the Chapter
11 Cases will unfavorably affect the Debtors' results of operations. Future
results of operations may also be adversely affected by other factors related to
the Chapter 11 Cases.
See "- Risk Factors - Pillowtex Faces Significant Challenges in Connection
With Its Bankruptcy Reorganization," "- Risk Factors - Pillowtex Faces
Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited
Access to Additional Financing," and "- Risk Factors - Pillowtex Is Subject To
Restrictions On The Conduct Of Its Business" below.
3
Competitive Strengths
Notwithstanding the foregoing, 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). 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. Notwithstanding the Chapter 11 Cases,
Pillowtex expects these relationships to remain strong and create a stable base
from which Pillowtex can pursue future business and new product introductions.
However, no assurance can be given in this regard. See "- Risk Factors -
Pillowtex Faces Risk Of Loss Of Material Customers" below.
. 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. Pillowtex will continue to collaborate with its retail
customers to design products and marketing programs responsive to individual
customer's needs.
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 The Leshner Corporation ("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.
Bed and Bath and Other Textile Products
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.
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
4
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 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.
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.
Pillows and Pads
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 products 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 bed pillows in North America.
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.
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 manufactured by E.I. DuPont de
Nemours & Co.).
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 also markets infant blankets with products ranging from
non-woven receiving blankets to the finest Supima(R) cotton crib blankets.
Marketing And Sales
Pillowtex markets its products to mass merchants, department stores, and
specialty retail stores, as well as to wholesale clubs, catalog merchants,
institutional distributors, and international customers and on the internet.
5
Pillowtex's top ten customers accounted for approximately 61.9% of its
total net sales in 2000. Wal-Mart Stores, Inc. (including Sam's Club stores)
accounted for approximately 24.5% of Pillowtex's total net sales in 2000. No
other customer accounted for more than 10% of Pillowtex's total net sales in
2000. Consistent with industry practice, Pillowtex does not operate under long-
term written supply contracts with its customers. See "- Risk Factors -Pillowtex
Faces Risk Of Loss Of Material Customers" below.
Pillowtex segments its Fieldcrest Cannon 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.
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 4.9% of total sales in 2000, 6.0% in 1999 and
7.8% in 1998. During each of 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 sells products under its Royal Velvet(R) brand name over the
Internet at www.royalvelvet.com. In addition, Pillowtex operates an online
-------------------
outlet store at www.cannonoutlet.com.
--------------------
Trademarks And License Agreements
Pillowtex manufactures and markets 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. See "- Risk Factors - Pillowtex
Is Dependent On Specific Brand Names" below. 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.
From time to time, Pillowtex enters into license agreements with third
parties for the use of third party trademarks and trade names on products
manufactured by Pillowtex. These licenses generally require the payment of
royalties based on net sales. Pillowtex currently holds a license to manufacture
and, in certain cases, sell certain of its products under the Ralph Lauren
trademark in the United States, Canada and, in certain cases, Mexico.
Pillowtex's license with Polo/Ralph Lauren Corporation expires on June 30, 2001
and will not be renewed. See "- Risk Factors - Pillowtex Faces Risks Related To
Loss Of A Key License" below.
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 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
6
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.
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 38 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.
Bed, Bath and Other Textile Products
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.
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 and Phenix City, Alabama facilities
generally support Pillowtex's mass merchant business. 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 Products. Pillowtex manufactures its kitchen textile products at
its facilities in Phenix City, Alabama and Kannapolis, North Carolina.
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.
Pillows and Pads
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
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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.
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.
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.
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, notwithstanding the Chapter
11 Cases. See "- Risk Factors-Pillowtex Is Dependent On Specific Raw Materials"
below.
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. At December 30, 2000, the
Company had $119.3 million in outstanding commitments for the 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
8
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.
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. ("DuPont"), Wellman, Inc., Solutia, Inc. 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 quality,
brand names, price and service. See "-Competitive Strengths" 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 general, 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 1, 2001, Pillowtex had approximately 12,500 employees.
As of March 1, 2001, Pillowtex Corporation and/or certain of 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 6,427
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; 10/01/01 386
Hawkinsville, Georgia; and
Macon, Georgia
Union of Needletrades, Industrial and Textile Workers Toronto, Ontario, Canada 08/31/03 112
Union of Needletrades, Industrial and Textile Workers Scottsboro, Alabama 12/01/04 239
United Auto Workers Tunica, Mississippi 07/31/03 319
Warehouse, Mail Order, Office, Technical Chicago, Illinois 01/31/03 143
And Professional Employees (Teamsters)
As of March 1, 2001, approximately 53% of Pillowtex's employees had chosen
to have union dues deducted from their paychecks.
As of June 16, 2000, the Union of Needletrades, Industrial and Textile
Workers (UNITE) was certified as bargaining agent for 155 of the Company's
employees at its Rocky Mount, North Carolina facility. However, as of March 20,
2001, no collective bargaining agreement covering this facility had been
finalized.
Pillowtex believes that it generally has good relationships with both its
union and non-union employees.
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. See also "Cautionary Statement Regarding Forward-Looking
Statements" above.
Pillowtex Faces Significant Challenges In Connection With Its Bankruptcy
Reorganization
On November 14, 2000, Pillowtex Corporation and substantially all of its
domestic subsidiaries, including Fieldcrest Cannon, filed voluntary petitions
for reorganization under chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. The Chapter 11 Cases are being
jointly administered for procedural purposes. Since the Petition Date, the
Debtors have been operating their business as debtors-in-possession pursuant to
the Bankruptcy Code.
Pillowtex management is continuing the process of stabilizing the
businesses of the Debtors and evaluating the Debtors' operations before
beginning the development of a plan of reorganization. As described above, after
a plan of reorganization is filed with the Bankruptcy Court, the plan, along
with a disclosure statement approved by the Bankruptcy Court, will be sent to
creditors and equity holders in order to solicit acceptance of the plan and,
following such solicitation, the Bankruptcy Court will consider whether to
confirm the plan. When proposed, the Company's plan of reorganization may not
receive the requisite acceptance by creditors and equity holders or the
Bankruptcy Court may not confirm the proposed plan. Moreover, even if a plan of
reorganization receives the requisite acceptance by creditors and equity holders
and is approved by the Bankruptcy Court, the plan may not be viable.
In addition, due to the nature of the reorganization process, actions may
be taken by creditors or other parties in interest that may have the effect of
preventing or unduly delaying confirmation of a plan of reorganization in
connection
10
with the Chapter 11 Cases. Accordingly, Pillowtex can provide no assurance as to
whether or when a plan of reorganization may be confirmed in the Chapter 11
Cases.
Pillowtex's Financial Statements Assume It Will Continue As A "Going
Concern" Even Though There Is Substantial Doubt In This Regard
Pillowtex's consolidated financial statements included elsewhere in this
Annual Report have been prepared assuming Pillowtex will continue as a "going
concern." Because of the Chapter 11 Cases and the circumstances leading to the
filing thereof, there is substantial doubt about Pillowtex's ability to continue
as a "going concern." The continuation of the Company as a "going concern" is
dependent upon, among other things, confirmation of a plan of reorganization,
Pillowtex's ability to comply with the terms of DIP Financing Facility and
Pillowtex's ability to generate sufficient cash from operations and financing
arrangements to meet its obligations. If the "going concern" basis was not
appropriate for Pillowtex's consolidated financial statements, then significant
adjustments would be necessary in the carrying value of assets and liabilities,
the revenues and expenses reported, and the balance sheet classifications used.
In addition, the amounts reported in the consolidated financial statements
included elsewhere in this Annual Report do not reflect adjustments to the
carrying value of assets or the amount and classification of liabilities that
ultimately may be necessary as the result of a plan of reorganization.
Adjustments necessitated by a plan of reorganization could materially change the
amounts reported in the consolidated financial statements included elsewhere in
this Annual Report.
Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources
And Has Limited Access To Additional Financing
In addition to the cash requirements necessary to fund ongoing operations,
Pillowtex anticipates that it will incur significant professional fees and other
restructuring costs in connection with the Chapter 11 Cases and the
restructuring of its business operations. However, as a result of the
uncertainty surrounding Pillowtex's current circumstances, it is difficult to
predict Pillowtex's actual liquidity needs at this time. Although, based on
current and anticipated levels of operations, and efforts to reduce inventories
and accounts receivable, Pillowtex's management believes that Pillowtex's cash
flow from operations, together with amounts available under the DIP Financing
Facility, will be adequate to meet its anticipated cash requirements during the
pendency of the Chapter 11 Cases, ultimately such amounts may not be sufficient
to fund operations until such time as Pillowtex is able to propose a plan of
reorganization that will receive the requisite acceptance by creditors and
equity holders and be confirmed by the Bankruptcy Court. In the event that cash
flows and available borrowings under the DIP Financing 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 assurance that reductions in planned capital expenditures would be sufficient
to cover shortfalls or that additional financing would be available or, if
available, offered on acceptable terms. As a result of the Chapter 11 Cases and
the circumstances leading to the filing thereof, Pillowtex's access to
additional financing is, and for the foreseeable future will likely continue to
be, very limited. As the foregoing indicates, Pillowtex's long-term liquidity
requirements and the adequacy of its capital resources are difficult to predict
at this time, and ultimately cannot be determined until a plan of reorganization
has been developed and is confirmed by the Bankruptcy Court in the Chapter 11
Cases.
Pillowtex Is Subject To Restrictions On The Conduct Of Its Business
The Debtors are operating their businesses as debtors-in-possession
pursuant to the Bankruptcy Code. Under applicable bankruptcy law, during the
pendency of the Chapter 11 Cases, the Debtors will be required to obtain the
approval of the Bankruptcy Court prior to engaging in any transaction outside
the ordinary course of business. In connection with any such approval, creditors
and other parties in interest may raise objections to such approval and may
appear and be heard at any hearing with respect to any such approval.
Accordingly, although the Debtors may sell assets and settle liabilities
(including for amounts other than those reflected on the Debtors' financial
statements), with the approval of the Bankruptcy Court, there can be no
assurance that the Bankruptcy Court will approve any sales or settlements
proposed by the Debtors. The Bankruptcy Court also has the authority to oversee
and exert control over the Debtors' ordinary course operations.
In addition, the DIP Financing Facility contains financial covenants
requiring maintenance of an asset coverage ratio and a minimum operating cash
flow, as well as other covenants that limit, among other things, indebtedness,
liens, sales of assets, capital expenditures, and investments and prohibit,
among other things, dividend payments. The DIP Financing Facility provides that
the net proceeds of
11
certain asset sales outside the ordinary course of business will be applied to
reduce prepetition indebtedness under Pillowtex's senior secured credit
facilities and that the net proceeds of other asset sales outside the ordinary
course of business will be applied as a permanent reduction of the DIP Financing
Facility.
As a result of the restrictions described above, the ability of Pillowtex
to respond to changing business and economic conditions may be significantly
restricted and Pillowtex may be prevented from engaging in transactions that
might otherwise be considered beneficial to Pillowtex.
The Value Of Pillowtex's Capital Stock Is Highly Speculative
As a result of the amount of prepetition indebtedness and the availability
of the "cram down" provisions of the Bankruptcy Code described above, the
holders of Pillowtex's capital stock may receive no value for their interests
under a plan of reorganization. Because of such possibility, the value of
Pillowtex's capital stock is highly speculative and any investment in such
capital stock would pose a high degree of risk. Potential investors in
Pillowtex's capital stock should consider the highly speculative nature of
Pillowtex's capital stock prior to making any investment decision with respect
to such capital stock.
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 2000, based on cost, approximately 88.5% of the raw
feathers and down that Pillowtex used to produce natural fill pillows and down
comforters was imported from China.
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. Pillowtex 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, Pillowtex cannot be certain that
it will be able to pass on any increase in the price of raw materials to its
customers.
Pillowtex may have difficulty in maintaining existing or creating new
relationships with suppliers or vendors as a result of the Chapter 11 Cases.
Pillowtex's suppliers and vendors may stop providing supplies or services to
Pillowtex or provide such supplies or services only on "cash on delivery," "cash
on order," or other terms that could have an adverse impact on Pillowtex's
short-term cash flow.
In addition, 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, Pillowtex is unable to predict whether such relationships would
be on satisfactory terms. Pillowtex's relationships with its suppliers in China
are also subject to risks associated with changes in United States legislation
and regulation 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 2000. Pursuant to legislation enacted in October 2000 (P.L. 106-286), the
President can grant permanent normal trade relations treatment to the products
of China after China joins the World Trade Organization. However, until that
occurs, China will continue to undergo the annual Congressional renewal process
of its normal trade relations status. Congress will continue to monitor these
activities and could 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.
12
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 protection under the Bankruptcy
Code. In addition, some of Pillowtex's current retail customers may seek
protection under the Bankruptcy Code 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 2000, 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, Pillowtex 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 Faces Risk Related To Loss Of Key License
Pillowtex's license to manufacture and, in certain cases, sell certain of
its products under the Ralph Lauren trademark expires on June 30, 2001 and will
not be renewed. The Company has made provision for an orderly transition out of
the license; however, there can be no assurance that the loss of this license
will not have an adverse effect on the business, financial condition, results of
operations, or prospects of the Company.
Pillowtex Faces Risks Of Loss Of Material Customers
In fiscal year 2000, Pillowtex's top ten customers accounted for
approximately 61.9% of its total net sales and net sales to Wal-Mart Stores,
Inc. (including Sam's Club stores) accounted for approximately 24.5% of its
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. As a result of the Chapter 11 Cases, Pillowtex may have
added difficulty retaining its customers such as Wal-Mart. The loss of Wal-Mart
as a customer could have a materially adverse effect on Pillowtex's business,
financial condition, results of operations, or prospects.
Pillowtex Faces Risks Related To Organized Labor
As of March 1, 2001, Pillowtex had approximately 12,500 employees. As of
that date, approximately 61% of Pillowtex's employees were in bargaining
units covered by collective bargaining agreements and approximately 53% 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 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. Pillowtex 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.
13
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, Pillowtex'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 Pillowtex's control.
Pillowtex May Have Difficulty Attracting And Retaining Personnel
Pillowtex believes that its future success will be highly dependent upon
its ability to attract and retain skilled managers and other personnel. While it
has experienced no problems to date, as a result of the Chapter 11 Cases,
Pillowtex may have added difficulty attracting such personnel in the future.
Pillowtex's Reorganization Will Require Substantial Effort By Management
Pillowtex's senior management may be required to expend a substantial
amount of time and effort structuring a plan of reorganization, which could have
a disruptive impact on management's ability to focus on the operation of
Pillowtex's business.
14
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.
Square Owned/
Location Principal Use Feet Leased
- -------- ------------- ---- ------
Dallas, Texas Headquarters and feather and down processing for Pillow and Pad Division 104,000 Owned
Dallas, Texas Manufacturing and distribution for Pillow and Pad Division 150,000 Owned
Phenix City, Alabama Manufacturing and warehouse for Bed and Bath Division 777,681 Owned
Phenix City, Alabama Manufacturing for Bed and Bath Division 220,000 Owned
Scottsboro, Alabama Manufacturing and warehouse for Bed and Bath Division 272,800 Owned
Los Angeles, California Manufacturing and distribution for Pillow and Pad Division 320,000 Leased
Columbus, Georgia Manufacturing and warehouse for Bed and Bath Division 727,246 Owned
Hawkinsville, Georgia Manufacturing and warehouse for Bed and Bath Division 260,000 Owned
Macon, Georgia Warehouse for Bed and Bath Division 220,000 Owned
Chicago, Illinois Manufacturing and distribution for Pillow and Pad Division 121,000 Owned
Tunica, Mississippi Manufacturing and distribution for Pillow and Pad Division 288,000 Owned
New York, New York Sales office and showroom for all divisions 64,490 Leased
Asheville, North Carolina Warehouse for Blanket Division 117,000 Leased
Concord, North Carolina Manufacturing for Bed and Bath Division 696,963 Owned
Eden, North Carolina Manufacturing and warehouse for Bed and Bath Division 529,273 Owned
Eden, North Carolina Warehouse for Bed and Bath Division 411,531 Owned
Eden, North Carolina Warehouse for Bed and Bath Division 27,241 Owned
Kannapolis, North Carolina Manufacturing for Bed and Bath Division 682,407 Owned
Kannapolis, North Carolina Manufacturing and warehouse for Bed and Bath Division and offices
for all divisions 5,863,041 Owned
Newton, North Carolina Manufacturing and distribution for Blanket Division 297,000 Leased
Rockwell, North Carolina Manufacturing for Bed and Bath Division 98,240 Owned
Rocky Mount, North Carolina Manufacturing and distribution for Bed and Bath Division 139,000 Owned
Rocky Mount, North Carolina Manufacturing and distribution for Bed and Bath Division 78,000 Leased
Salisbury, North Carolina Manufacturing for Bed and Bath Division 229,361 Owned
China Grove, North Carolina Manufacturing and warehouse for Bed and Bath Division 567,000 Owned
Swannanoa, North Carolina Manufacturing, distribution, warehouse and office for Blanket Division 1,425,000 Owned
Tarboro, North Carolina Manufacturing and warehouse for Bed and Bath Division 370,000 Owned
Hanover, Pennsylvania Manufacturing and distribution for Pillow and Pad Division 291,000 Owned
Mauldin, South Carolina Warehouse and distribution for Blanket Division 746,600 Owned
Union City, South Carolina Manufacturing for Bed and Bath Division 95,700 Owned
Westminster, South Carolina Manufacturing, distribution, warehouse and office for Blanket Division 652,000 Owned
Westminster, South Carolina Warehouse for Blanket Division 29,000 Leased
Fieldale, Virginia Manufacturing and warehouse for Bed and Bath Division 973,253 Owned
Martinsville, Virginia Warehouse for Bed and Bath Division 100,000 Leased
Toronto, Ontario, Canada Manufacturing and distribution for Pillow and Pad Division 60,000 Leased
Toronto, Ontario, Canada Manufacturing, distribution, warehouse and office for Pillow and Pad Division 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 38 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 has listed some of
these properties 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.
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.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock, par value $0.01 per share ("Common Stock"), was
traded on the New York Stock Exchange (the "NYSE") under the symbol "PTX" until
the NYSE suspended trading of the Common Stock on November 14, 2000. The
following table sets forth for the periods indicated the high and low sales
prices on the NYSE of the Common Stock:
Fiscal Year: High Low
---- ---
2000
Fourth Quarter (through 11/13/00)........... $ 2 15/16 $ 1/2
Third Quarter............................... 5 1 1/4
Second Quarter.............................. 6 7/16 3 1/2
First Quarter............................... 6 2/16 3 14/16
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
After the NYSE suspended trading in the Common Stock, the Common Stock
began trading on the over-the-counter electronic bulletin board (the "OTCBB")
under the symbol "PTEXQ.OB." During the period from the time trading commenced
on the OTCBB to the last day of Pillowtex's fiscal year 2000, the reported bid
price for the Common Stock on the OTCBB ranged from a high of $0.625 to a low of
$0.25. The quotations reflect inter-dealer prices without retail mark-up, mark-
down or commission and may not represent actual transactions.
As of March 20, 2001, Pillowtex had approximately 1,043 holders of record
of Common Stock.
Pillowtex paid quarterly dividends of $0.06 per share of Common Stock in
each of the first three quarters of fiscal year 1999 and has paid no dividends
on the Common Stock since the third quarter of fiscal year 1999. Under the terms
of the DIP Financing Facility, Pillowtex is prohibited from paying dividends on
the Common Stock. See "Item 1. Business - Risk Factors -Pillowtex Is Subject To
Restrictions On The Conduct Of Its Business." Pillowtex does not expect to pay
dividends on the Common Stock for the foreseeable future.
16
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
SELECTED FINANCIAL DATA
(In thousands of dollars, except per share data)
The selected financial data presented below are derived from Pillowtex's
consolidated financial statements for the five years ended December 30, 2000.
The data should be read in conjunction with "Item 7. 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
Statement of Operations Data: 2000 1999 1998 (1) 1997 (2) 1996
Net sales $ 1,349,627 $ 1,552,068 $ 1,509,841 $ 579,999 $ 490,655
Cost of goods sold 1,349,259 1,371,790 (3) 1,246,449 (3) 485,679 411,048
---------- ---------- ---------- ---------- ---------
Gross profit 368 180,278 263,392 94,320 79,607
Selling, general and administrative expenses 128,396 118,432 119,321 52,090 41,445
Impairments of long-lived assets
and restructuring charges 112,711 2,000 1,539 5,986 -
---------- ---------- ---------- ---------- ---------
Earnings (loss) from operations (240,739) 59,846 142,532 36,244 38,162
Interest expense 107,061 87,279 72,288 22,470 13,971
---------- ---------- ---------- ---------- ---------
Earnings(loss) before reorganization items,
income taxes and extraordinary items (347,800) (27,433) 70,244 13,774 24,191
Reorganization items 19,368 - - - -
---------- ---------- ---------- ---------- ---------
Earnings(loss) before income taxes and
extraordinary items (367,168) (27,433) 70,244 13,774 24,191
Income tax expense (benefit) (104,760) (7,901) 27,389 5,538 9,459
---------- ---------- ---------- ---------- ---------
Earnings(loss) before extraordinary items (262,408) (19,532) 42,855 8,236 14,732
Extraordinary items, net - - - (919) (609)
---------- ---------- ---------- ---------- ---------
Net earnings(loss) (262,408) (19,532) 42,855 7,317 14,123
Preferred dividends and accretion 8,928 12,294 2,097 85 -
Earnings(loss) available for common shareholders $ (271,336) $ (31,826) $ 40,758 $ 7,232 $ 14,123
========== ========== ========= ========== =========
Basic earnings(loss) per common share:
Before extraordinary items $ (19.04) $ (2.25) $ 2.89 $ 0.75 $ 1.39
Extraordinary items - - - (0.08) (0.06)
---------- ---------- --------- ---------- ---------
Basic earnings(loss) per common share $ (19.04) $ (2.25) $ 2.89 $ 0.67 $ 1.33
========== ========== ========= ========== =========
Weighted average common shares
outstanding - basic 14,252 14,154 14,082 10,837 10,618
========== ========== ========= ========== =========
Diluted earnings(loss) per common share:
Before extraordinary items $ (19.04) $ (2.25) $ 2.52 $ 0.74 $ 1.39
Extraordinary items - - - (0.08) (0.06)
---------- ---------- --------- ---------- ---------
Diluted earnings(loss) per common share $ (19.04) $ (2.25) $ 2.52 $ 0.66 $ 1.33
========== ========== ========= ========== =========
Weighted average common shares
outstanding - diluted 14,252 14,154 17,653 11,086 10,634
========== ========== ========= ========== =========
Operating Data:
Depreciation and amortization $ 65,965 $ 60,074 $ 54,021 $ 16,064 $ 12,775
Capital expenditures 33,197 89,737 133,620 20,567 21,040
Preferred Stock cash dividends - 1,456 2,019 - -
Common Stock cash dividends - 2,555 3,383 2,569 2,124
Balance Sheet Data:
Working capital $ (246,830) (4) $ 404,732 $ 447,933 $ 394,496 $ 150,506
Property, plant and equipment, net 535,391 644,821 629,205 488,841 94,267
Total assets 1,338,871 1,683,389 1,654,154 1,410,186 375,714
Long-term debt, net of current portion - 965,323 944,493 785,383 194,851
Redeemable convertible preferred stock 82,827 73,898 63,057 62,882 -
Shareholders' equity (deficit) (63,451) 207,389 237,933 196,707 100,004
(1) Amounts set forth in 1998 reflect the inclusion of The Leshner Corporation
from July 28, 1998.
(2) Amounts set forth in 1997 reflect the results of operations for a 53-week
period, and the inclusion of Fieldcrest Cannon, Inc. from December 19, 1997
(3) Information technology costs associated with the Company's manufacturing
systems of $12.8 million and $9.4 million have been reclassified from
selling, general and administrative expense to cost of goods sold in the
1999 and 1998 consolidated statements of operations to conform with the
2000 presentation.
(4) Includes long-term debt in default of $660.8 million.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
Pillowtex is one of the largest North American designers, manufacturers,
and marketers of home textile products. 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 12,500 employees. Pillowtex markets its products
to mass merchants, department stores, and specialty retailers as well as
wholesale clubs, catalog merchants, institutional distributors, and
international customers and over the Internet.
The Company is organized into three major manufacturing divisions that it
considers operating segments: Bed and Bath Division, Blanket Division, and
Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets
and other fashion bedding, towels, bath rugs, and kitchen products. The Blanket
Division manufactures and sells blanket products. The Pillow and Pad Division
manufactures and sells bed pillows, down comforters, and mattress pads.
Proceedings Under Chapter 11 of the Bankruptcy Code
On November 14, 2000, Pillowtex Corporation and substantially all of its
domestic subsidiaries filed voluntary petitions for reorganization under chapter
11 of the United States Bankruptcy Code. For further discussion of the Chapter
11 Cases, see "Item 1. Proceedings Under Chapter 11 of the Bankruptcy Code"
above and Notes to Consolidated Financial Statements included elsewhere in this
Annual Report.
The Debtors are currently operating their business as debtors-in-possession
pursuant to the Bankruptcy Code. Since the Petition Date, the Debtors have
continued to conduct business in the ordinary course. Management is in the
process of stabilizing the business of the Debtors and evaluating their
operations in connection with the development of a plan of reorganization. After
developing a plan of reorganization, the Debtors will seek the requisite
acceptance of the plan by impaired creditors and equity holders and confirmation
of the plan by the Bankruptcy Court, all in accordance with the applicable
provisions of the Bankruptcy Code.
During the pendency of the Chapter 11 cases, the Debtors may, with
Bankruptcy Court approval, sell assets and settle liabilities, including for
amounts other than those reflected on the Debtors' financial statements. The
Debtors are in the process of reviewing their operations and identifying assets
for disposition.
The Debtors are in the process of reviewing their executory contracts and
unexpired leases to determine which, if any, they will reject as permitted by
the Bankruptcy Code. The Debtors cannot presently or reasonably estimate the
ultimate liability that may result from rejecting contracts or leases or from
the filing of claims for any rejected contracts or leases, and no provisions
have yet been made for these items.
The administrative and reorganization expenses resulting from the Chapter
11 Cases will unfavorably affect the Debtors' results of operations. Future
results of operations may also be affected by other factors related to the
Chapter 11 Cases.
Basis of Presentation
Pillowtex's consolidated financial statements included elsewhere in this
Annual Report have been prepared on a "going concern" basis in accordance with
United States generally accepted accounting principles. The "going concern"
basis of presentation assumes that Pillowtex will continue in operation for the
foreseeable future and will be able to realize upon its assets and discharge its
liabilities in the normal course of business. Because of the Chapter 11 Cases
and the circumstances leading to the filing thereof, there is substantial doubt
about the appropriateness of the use of the "going concern" assumption.
Pillowtex's ability to realize the carrying value of its assets and discharge
its liabilities are subject to substantial uncertainty.
Pillowtex's consolidated financial statements included elsewhere in this
Annual Report do not reflect adjustments that would be necessary if the "going
concern" basis was not appropriate. If the "going concern" basis was not
appropriate for Pillowtex's consolidated financial statements, then significant
adjustments would be necessary in the carrying value of assets and liabilities,
the revenues and expenses reported, and the balance sheet classifications used.
The appropriateness of the "going concern" basis is dependent upon, among other
things, confirmation of a plan of reorganization, Pillowtex's ability to comply
with the terms of the DIP Financing Facility, and Pillowtex's ability to
18
generate sufficient cash flow from operations and financing arrangements to meet
its obligations.
Results of Operations
The following table presents certain historical statements of operations
data as a percentage of net sales for the periods indicated.
Year Ended
--------------------------------------
December 30, January 1, January 2,
2000 2000 1999
---- ---- ----
Net sales............................ 100.0% 100.0% 100.0%
Cost of goods sold................... 94.9 88.1 82.6
Inventory write-downs................ 5.1 0.3 -
------ ----- -----
Gross profit......................... 0.0 11.6 17.4
Selling, general and
administrative expenses.......... 9.5 7.6 7.9
Impairment of long-lived assets
and restructuring charge......... 8.4 0.2 0.1
------ ----- -----
Earnings (loss) from operations...... (17.9) 3.8 9.4
Interest expense..................... 7.9 5.6 4.8
Reorganization items................. 1.4 - -
------ ----- -----
Earnings (loss) before income taxes.. (27.2)% (1.8)% 4.6%
====== ===== =====
19
Fiscal Year 2000 Compared to Fiscal Year 1999
Net Sales. Net sales were down from $1,552.1 million in 1999 to $1,349.6
---------
million in 2000, a decrease of $202.5 million or 13.0%. Net sales for the
Company's operating segments are below (in millions):
Net Sales
------------------------------
2000 1999
---------- ----------
Bed and Bath $ 942.6 $1,095.4
Pillow and Pad 286.7 304.0
Blanket 90.6 119.6
Other (a) 29.7 33.1
---------- ----------
Total $1,349.6 $1,552.1
========== ==========
(a) Includes retail stores
The general slow down in the U.S. economy in the last quarter of 2000, and
Pillowtex's filing of the Chapter 11 Cases were the primary contributors to the
sharp decline in sales volume for the fourth quarter of 2000 across all
segments. Other factors that adversely affected sales in earlier quarters of
2000 were increased competition from imports, higher inventory levels held by
many of our customers and an unexpected softening in demand in the Company's
institutional and regional discount markets. In addition, approximately $53.0
million of the sales decrease is attributable to the loss of a specific customer
during 2000 affecting all three segments.
Gross Profit. Gross profit decreased $179.9 million from $180.3 million in
------------
1999 to $0.4 million in 2000. Gross profit by operating segment is as follows
(in millions):
Gross Profit (Loss)
------------------------------
2000 1999
--------- ---------
Bed and Bath $ 7.4 $122.0
Pillow and Pad 22.3 57.7
Blanket (37.8) (10.2)
Other (a) 8.5 10.8
--------- ---------
Total $ 0.4 $180.3
========= =========
(a) Includes retail stores
During the fourth quarter of 2000, the Company recorded a charge for
inventory write-downs of $69.2 million to reduce certain inventories to net
realizable value. This charge resulted from a number of factors, including a
slow down in the retail environment and increased pressure due to the filing of
the Chapter 11 Cases to liquidate excess, obsolete and distressed inventory in a
shorter time frame than in the past. In 1999, the Company recorded a charge for
inventory write-downs of $4.9 million to reduce certain inventory at the Blanket
Division to net realizable value.
Excluding the impairment charges, gross margin decreased to 5.1% in 2000,
compared to 11.9% in 1999. In response to declines in sales volume, the Company
reduced production levels, including idling several plants in the Bed and Bath
and Blanket divisions in the fourth quarter. This resulted in higher unabsorbed
overhead expenses of approximately $43.0 million in 2000. In addition, the
Company experienced higher raw material costs, principally chemicals, packaging,
feathers and cotton. The Company's gross margin continues to experience downward
pressure from the slowing U.S. economy, and increased competition from abroad.
Selling, General and Administrative ("SG&A"). SG&A expenses for fiscal
--------------------------------------------
year 2000 increased $10.0 million to $128.4 million from $118.4 million in 1999.
This increase is due to higher bad debt expense in 2000 resulting from the
deteriorating creditworthiness of certain of the Company's customers, severance
payments made to the Company's former chief executive officer and higher
professional fees related to the Company's financial difficulties prior to the
Petition Date, partially offset by strict cost controls.
20
Impairment of Long-Lived Assets. During the fourth quarter of 2000, the
-------------------------------
Company decided to permanently idle and sell certain manufacturing facilities
and equipment and as a result determined that the carrying value of such assets
was impaired. The Company also determined that given the expected future
operating results of the Blanket Division, the carrying value of its long-lived
assets and goodwill was also impaired. The Company recorded an asset impairment
charge of $112.7 million to reduce the carrying value of these assets to their
estimated fair values. This impairment charge consisted of approximately $38.3
million for goodwill associated with the Company's Blanket Division and $74.4
million for the impairment of property, plant and equipment.
The impairment consists of the following (in millions):
Fixed Assets:
Blanket Division impairment $ 50.0
Facilities and equipment permanently idled
as a result of management's rationalization
of production capacity:
Facilities 4.6
Equipment 18.1
Miscellaneous corporate assets 1.7
------
Total fixed assets 74.4
Goodwill 38.3
------
Total $112.7
======
During the fourth quarter of 2000 the Blanket Division experienced reduced
customer order levels and increased pressure from competitors attempting to gain
market share. As a result of these factors and the current financial condition
of the Company, management decided that it should review its strategic options
with respect to this business, including the possible sale of this business. The
impairment reflects management's estimate of the fair value of the assets as
determined by the present value of expected future cash flows to be generated by
the assets, including their ultimate disposition.
The impairment of the other manufacturing facilities and equipment resulted
from management's rationalization of production capacity in connection with
filing of the Chapter 11 Cases. The impairment reflects management's estimate of
the fair value of the assets as determined by the present value of expected
future cash flows to be generated by the assets, including their ultimate
disposition.
As the reorganization process continues, it is possible that additional
asset impairments may be required and that these impairments may be material to
the Company's financial position and results of operations.
Certain of the permanently idled facilities and equipment are included in
assets held for sale in the accompanying balance sheet as of December 30, 2000,
at a carrying value of $5.3 million. Management expects to sell these assets
during the second and third quarters of 2001.
Management expects to incur certain exit costs to close certain of the
idled facilities in 2001. These costs include severance, equipment relocation
costs and facility closure costs. The costs are estimated to total approximately
$5.0 million and will be incurred and recognized in the second and third
quarters of 2001.
Interest Expense. Interest expense increased $19.8 million to $107.1
----------------
million in 2000, compared to $87.3 million in 1999. This increase in interest
expense was the result of an approximately $69 million increase in average
outstanding debt, additional fees, expenses and higher interest rates from
restructuring the Company's debt and approximately $2.9 million in interest cost
related to purchase commitments on certain cotton contracts. The Company's
average interest rate increased from 8.2% in 1999 to 10.1% for 2000. Interest
expense excludes approximately $4.0 million related to the Company's debt that
is subject to compromise for the period from the Petition Date through December
30, 2000.
Reorganization Items. During the fourth quarter of 2000, Pillowtex
--------------------
recognized a $19.4 million charge associated with filing of the Chapter 11
Cases. Approximately $17.6 million of this charge relates to the non-cash write-
off of the unamortized discount on the Fieldcrest Cannon, Inc. 6% Convertible
Subordinated Sinking Fund Debentures due 2012 (the "6% Convertible Debentures")
and the non-cash write-off of deferred financing costs associated with other
unsecured debt classified as subject to compromise. In addition, the Company
incurred $1.8 million in fees payable to professionals retained to assist with
the Chapter 11 Cases.
21
Preferred Dividends. Under the terms of the Company's Series A Redeemable
-------------------
Convertible Preferred Stock, the rate at which dividends accrue increased to 18%
on November 14, 2000 as a result of the filing of the Chapter 11 Cases.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net Sales. For fiscal 1999, net sales were $1,552.1 million, an increase
---------
of $42.2 million, or 2.8%, compared to $1,509.8 million in fiscal 1998. Sales
for the Company's operating segments are as follows (in millions):
Net Sales
--------------------------------
1999 1998
----------- -----------
Bed and Bath $1,095.4 $1,035.9
Pillow and Pad 304.0 297.5
Blanket 119.6 140.9
Other (a) 33.1 35.5
----------- -----------
Total $1,552.1 $1,509.8
=========== ===========
(a) Other includes retail stores
The increase in Bed and Bath Division sales is principally attributable to
the inclusion of a full year of operations of Leshner, which was acquired on
July 28, 1998. Excluding the increase in the Bed and Bath Division, the
resulting $14.1 million decrease in 1999 from 1998 was primarily the result of
lower blanket sales caused by an unusually warm winter in North America.
Gross Profit. Gross profit decreased $83.1 million from $263.4 million to
------------
$180.3 million. Gross profit by operating segment is as follows (in millions):
Gross Profit (Loss)
1999 1998
--------------------------------
Bed and Bath $122.0 $192.7
Pillow and Pad 57.7 54.8
Blanket (10.2) 3.1
Other (a) 10.8 12.8
---------- ----------
Total $180.3 $263.4
========== ==========
(a) Includes retail stores
Excluding an inventory write-down in the Blanket division of $4.9 million
in 1999, gross profit margin dropped to 11.6% in fiscal 1999 from 17.4% 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, the idling of certain manufacturing equipment,
and a change in the sales mix generated by Pillowtex's inventory reduction
program, which reduced product margins.
Selling, General, and Administrative. SG&A decreased $0.9 million to
------------------------------------
$118.4 million in 1999, compared to $119.3 million in 1998. The decrease is
primarily due to the lower professional fees and other costs associated with the
settlement of a lawsuit in early 1998.
Impairment of Long-Lived Assets. 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
22
million in fiscal 1998. The increase is primarily the result of additional debt
incurred in connection with the Leshner acquisition, capital expenditures for
plant and computer system 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.
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
was also required to pay a one-time cumulative dividend in Series A Redeemable
Convertible 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.
Liquidity and Capital Resources
DIP Financing Facility
On December 6, 2000, the Bankruptcy Court entered the DIP Financing Order
authorizing the Debtors to enter into the $150.0 million DIP Financing Facility
and to grant first priority primary liens, mortgages, security interests, liens
(including priming liens), and superiority claims on substantially all of the
assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001,
the DIP Financing Facility was amended to, among other things, reduce the amount
of the facility to $125.0 million. The Company obtained the reduction in the
amount of the facility based upon its determination that, as a result of its
improved liquidity position, it did not need as much availability as originally
provided by the facility and its desire to reduce the amount of its monthly
unused commitment fee.
Under the terms of the DIP Financing Facility, as amended, a $125.0 million
revolving credit facility, including up to $60.0 million for postpetition
letters of credit, is available to the Company until the earliest of (a)
November 14, 2001, (b) the date on which the plan of reorganization becomes
effective, (c) any material non-compliance with any of the terms of the DIP
Financing Order, (d) any event of default that shall have occurred under the DIP
Financing Facility, or (e) consummation of a sale of substantially all of the
assets of the Company pursuant to an order of the Bankruptcy Court shall have
occurred. Upon the satisfaction of certain conditions, the November 14, 2001
maturity date could be extended for an additional period of six months upon
payment of an extension fee equal to 0.50% of the portion of the DIP Financing
Facility being extended. Amounts borrowed under the DIP Financing Facility bear
interest at the option of the Company at the rate of London Interbank Offered
Rate ("LIBOR") plus 3.50% or Bank of America's Base Rate (which is the higher of
Federal Funds Rate or Prime Rate plus, in either case, 0.05%) plus 1.00%. In
addition to a facility fee and an underwriting fee of 0.50% each, there is an
unused commitment fee of 0.50%, a letter of credit fee of 3.50%, and a letter of
credit fronting fee of 0.20%. The DIP Financing Facility is secured by a first
priority priming lien on the real and personal assets of the Company that also
secure the prepetition senior secured credit facilities described below and a
junior lien on certain plant and equipment that secure six industrial revenue
bond facilities described below (the "IRB Facilities") aggregating approximately
$14.9 million as of December 30, 2000, and certain obligations to the Pension
Benefit Guaranty Corporation. The documentation evidencing the DIP Financing
Facility contains financial covenants requiring maintenance of an asset coverage
ratio and a minimum operating cash flow, as well as other covenants that limit,
among other things, indebtedness, liens, sales of assets, capital expenditures,
investments, and prohibit dividend payments. The net proceeds of certain asset
sales outside the ordinary course of business reduce prepetition indebtedness
under the senior secured credit facilities; otherwise, the net proceeds of asset
sales outside the ordinary course of business are applied as a permanent
reduction of the DIP Financing Facility.
As of December 30, 2000, the Company had $17.9 million in letters of credit
outstanding under the DIP Financing Facility. Availability under the DIP
Financing Facility as of December 30, 2000, was $107.1 million. As prepetition
letters of credit expire under the Company's senior secured revolving credit
facility described below, to the extent they are renewed, they will be reissued
under the DIP Financing Facility.
Senior Debt Facilities
In December 1997, in connection with the Fieldcrest Cannon acquisition, the
Company entered into senior secured revolving credit and term loan facilities
with a group of financial and institutional investors for which Bank of America,
N.A. acts as the administrative and collateral 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, the
Company amended these facilities by increasing the Tranche B Term Loan to $225.0
million. The increase occurred in conjunction with the acquisition of
23
Leshner, allowing the Company to fund the transaction and reduce borrowings
under the revolving credit facility. Effective March 12, 1999, the revolving
credit facility was amended to permit the Company 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 6% Convertible Debentures,
thereby increasing availability under that facility. Effective October 1, 1999,
the revolving credit facility was further amended to permit the Company 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, the Company 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, additional collateral, 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 their terms to maturity
and accelerate the related amortization schedule for repayment of principal, to
eliminate reinstatement of 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") exceeded a specified level for the 2000 fiscal year), to add a
covenant requiring that EBITDA must exceed specified levels for future fiscal
periods and 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. On September 30, 2000, and prior to the
Petition Date, the Company was not in compliance with its EBITDA financial
covenant under the senior debt facilities. The Company obtained from its senior
lenders a temporary waiver of such non-compliance through November 7, 2000,
during which time the Company engaged in active discussions with its senior
lenders to obtain an extended or permanent waiver of such non-compliance. The
Company was unable to reach such an agreement with its senior lenders and the
waiver expired on November 7, 2000. On November 8, 2000, the agent for the
senior lenders delivered a notice of default to the Company that declared an
event of default under the senior debt facilities based upon such non-compliance
with its EBITDA financial covenant. The senior lenders did, however, forbear
from exercising rights and remedies under the senior debt facilities and agreed
to continue to make available to the Company the unused credit capacity under
the revolving credit facility until December 7, 2000. In addition, on November
8, 2000, the senior lenders issued a Payment Blockage Notice to the Company and
the indenture trustee for the Company's 10% Senior Subordinated Notes due 2006
(the "10% Notes") prohibiting payment by the Company of the semi-annual interest
payment in the aggregate amount of approximately $6.25 million due to the
holders of the 10% Notes on November 15, 2000. In addition, the Company was
obligated to make a semi-annual interest payment on its 9% Senior Subordinated
Notes due 2007 (the "9% Notes") on December 15, 2000 aggregating $8.3 million,
which payment the senior lenders likewise indicated they would also block. As a
result of the circumstances confronting the Company and its inability to
refinance the senior debt facilities or obtain additional capital, the Debtors
filed the Chapter 11 Cases on November 14, 2000.
As of December 30, 2000, the Company had $14.6 million in letters of credit
outstanding under the prepetition revolving credit facility. As these
prepetition letters of credit expire, to the extent they are renewed, they will
be reissued under the DIP Financing Facility.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus
3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche
A Term Loan, plus an additional margin of 0.50%. The weighted average annual
interest rate on outstanding borrowings under the various senior credit
facilities for fiscal year 2000 was 9.8%. The senior debt facilities expire on
January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of the Company, and are secured by first priority liens on all of
the capital stock of each domestic subsidiary of the Company and by 65% of the
capital stock of the Company's foreign subsidiaries. The Company has also
granted a first priority security interest in all of its presently unencumbered
and future domestic assets and properties, and all presently unencumbered and
future domestic assets and properties of each of its subsidiaries.
Overline Facility
In May 1999, the Company 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, the overline 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, the Company was not in
compliance with certain financial covenants under the overline facility, the
covenants of which are incorporated by reference to the senior debt facilities
described above. The Company obtained a series of temporary
24
waivers of this non-compliance and extensions of the maturity date. Effective as
of December 7, 1999, the Company agreed to certain amendments to the overline
facility, resulting in the overline 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 overline 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 EBITDA exceeded a
specified level for the 2000 fiscal year).
The overline facility is guaranteed on a senior basis by the Company's
domestic subsidiaries. Amounts borrowed under the overline facility bear
interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the
Company's option. The overline facility matures upon termination by the Company
at any time or otherwise at the earliest of: (i) any increase in the commitment
under the senior debt facilities described above, the issuance of any capital
stock by the Company or its domestic subsidiaries, or other specified events; or
(ii) January 31, 2002.
For the reasons discussed above with respect to the default under the
senior debt facilities, the Company is also in default under the overline
facility.
Senior Subordinated Debt
In connection with the Fieldcrest Cannon acquisition, the Company issued
$185.0 million of the 9% Notes, with interest payable semiannually commencing
June 15, 1998. The 9% Notes are general unsecured obligations of the Company,
are subordinated in right of payment to all existing and future senior
indebtedness, and rank pari passu with the 10% Notes described below.
On November 12, 1996, the Company issued $125.0 million of the 10% Notes,
with interest payable semiannually commencing May 15, 1997. The 10% Notes are
general unsecured obligations of the Company, are subordinated in right of
payment to all existing and future senior indebtedness, and rank pari passu with
the 9% Notes.
The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior
subordinated basis by each of the existing and future domestic subsidiaries of
the Company and each other subsidiary of the Company that guarantees the
Company's obligations under the senior debt facilities described above. The
guarantees are subordinated in right of payment to all existing and future
senior indebtedness of the relevant guarantor.
As a result of the filing of the Chapter 11 Cases, the Company is in
default under the indentures governing both the 9% Notes and the 10% Notes.
Fieldcrest Cannon 6% Convertible Debentures
As a result of the Company's acquisition of Fieldcrest Cannon, the
outstanding 6% Convertible Debentures are convertible, at the option of the
holders, into a combination of cash and the Common Stock. During the fourth
quarter of 1999, the Company 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 the
Company any Common Stock that had been issued to them, and have their 6%
Convertible Debentures reinstated. Although many holders did rescind and return
their Common Stock, other holders could not rescind because they had already
sold their Common Stock. As of September 30, 2000, the cash component remaining
to be paid in respect of the 6% Convertible Debentures that had been surrendered
without subsequent rescission was approximately $5.2 million. Including the cash
component just mentioned, as of September 30, 2000, approximately $90.4 million
aggregate principal amount of the 6% Convertible Debentures remained
outstanding, including 6% Convertible Debentures that had been surrendered
without subsequent rescission. If all such outstanding 6% Convertible Debentures
were converted at such date, including those surrendered without subsequent
rescission, the resulting cash component to be paid to the holders of the 6%
Convertible Debentures would have been approximately $57.2 million.
Prior to the Petition Date, the Company was prohibited under the terms of
the indentures governing the 9% Notes and the 10% Notes from making payments in
respect of the 6% Convertible Debentures except for interest payments and
payments at maturity or pursuant to sinking fund obligations. In an effort to
address both (i) the unpaid cash portion of the conversion consideration owing
to those holders of 6% Convertible Debentures who had surrendered their
debentures for conversion but had not been paid the cash portion of the
conversion consideration (the "Cash Claimants") and (ii) the cash payment
prohibition in respect of any future conversions, the Company initiated
discussions with certain holders of the 6% Convertible Debentures regarding a
potential restructuring of the 6% Convertible Debentures. Notwithstanding
25
months of effort, the parties to those discussions were unable to agree upon a
mutually satisfactory comprehensive restructuring of the 6% Convertible
Debentures and amounts owing to the Cash Claimants. In September 2000, the
Company notified the holders of the 6% Convertible Debentures of its plan for
making payments to the Cash Claimants. Pursuant to the plan, the Company agreed
to pay out as a "scheduled payment" cash in the amount of approximately $3.8
million annually to the Cash Claimants, which is the amount of cash sufficient
to complete the conversion of $6.25 million principal amount of the 6%
Convertible Debentures annually and utilize such converted 6% Convertible
Debentures as a credit to satisfy its annual sinking fund obligation under the
indenture governing the 6% Convertible Debentures. As part of the plan and in
accordance with the terms of the indenture governing the 6% Convertible
Debentures, the Company agreed to pay out cash to the Cash Claimants in order to
complete and finalize Debenture conversions and utilize such converted
Debentures as credits to satisfy its annual sinking fund obligations as follows:
(i) approximately $3.8 million on September 28, 2000, (ii) approximately $3.8
million on March 16, 2001, and (iii) the balance owing to Cash Claimants on
March 18, 2002. Under the plan, these cash payments would be made by the Company
to the Cash Claimants in the order the 6% Convertible Debentures were presented
for conversion, i.e., on a first to convert, first to be paid basis. The unpaid
cash portion for each Cash Claimant would be evidenced by a non-interest bearing
subordinated promissory note executed by Fieldcrest Cannon (the "Cash Claimant
Notes"). Pursuant to the plan, the Company made the first scheduled payment on
September 28, 2000. As of December 30, 2000, the aggregate principal amount of
the outstanding Cash Claimant Notes was $5.2 million.
As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in
default under the indenture governing the 6% Debentures and the Cash Claimant
Notes.
Industrial Revenue Bonds
The Company has obligations in respect of six industrial revenue bond
facilities. The IRB Facilities are secured by liens on specified plants and
equipment. As of December 30, 2000, $14.9 million of bonds in the aggregate were
outstanding under the IRB Facilities.
As a result of the default on the senior debt facilities and the filing of
the Chapter 11 Cases, the Company is in default of its obligations under each of
the IRB Facilities.
Adequacy of Capital Resources
As discussed above, the Debtors are operating their businesses as debtors-
in-possession under chapter 11 of the Bankruptcy Code. In addition to the cash
requirements necessary to fund ongoing operations, the Company anticipates that
it will incur significant professional fees and other restructuring costs in
connection with the Chapter 11 Cases and the restructuring of its business
operations. As a result of the uncertainty surrounding Pillowtex's current
circumstances, it is difficult to predict the Company's actual liquidity needs
at this time. However, based on current and anticipated levels of operations,
and efforts to reduce inventories and accounts receivable, the Company
anticipates that its cash flow from operations, together with amounts available
under the DIP Financing Facility, will be adequate to meet its anticipated cash
requirements during the pendency of the Chapter 11 Cases. In the event that cash
flows and available borrowings under the DIP Financing Facility are not
sufficient to meet future cash requirements, the Company may be required to
reduce planned capital expenditures or seek additional financing. The Company
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 acceptable terms. As a result of
the Chapter 11 Cases and the circumstances leading to the filing thereof,
Pillowtex's access to additional financing is, and for the foreseeable future
will likely continue to be, very limited. The Company's long-term liquidity
requirements and the adequacy of the Company's capital resources are difficult
to predict at this time, and ultimately cannot be determined until a plan of
reorganization has been developed and confirmed by the Bankruptcy Court in
connection with the Chapter 11 Cases.
In addition, the amounts reported in the consolidated financial statements
included elsewhere in this Annual Report do not reflect adjustments to the
carrying value of assets or the amount and classification of liabilities that
ultimately may be necessary as the result of a plan of reorganization.
Adjustments necessitated by the confirmation of plan of reorganization could
materially change the amounts reported in the consolidated financial statements
included elsewhere in this Annual Report.
Pursuant to the Bankruptcy Code, approximately $492.1 million of
prepetition obligations of the Debtors, including obligations under debt
instruments, generally may not be enforced against the Debtors, and any actions
to collect prepetition indebtedness are automatically stayed, unless the stay is
lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the
Debtors have the right, subject to Bankruptcy Court approval and certain other
limitations, to assume or reject executory contracts and unexpired leases. In
this context, "assumption" means that the Debtors agree to perform their
obligations and cure all existing defaults under the contract or lease, and
"rejection" means that the Debtors are relieved from their obligations to
perform further under the contract or lease, but are subject to a claim for
damages for the breach thereof. Any damages resulting from rejection of
executory contracts and unexpired leases will be treated as general unsecured
claims in the Chapter 11 Cases unless such claims had been secured on a
prepetition basis prior to the Petition Date. The Debtors are in the process of
reviewing their executory contracts and unexpired leases to determine which, if
any, they will reject. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting contracts or
leases or from the filing of claims for any rejected contracts or leases, and no
provisions have yet been made for these items.
New Accounting Standard
During June 1998, Statement of Financial Accounts 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 Nos. 137 and 138, are effective for fiscal years beginning after
June 15, 2000. The Company adopted the provisions of the Standards on December
31, 2000. The Company's management has reviewed the terms of material contracts
and financial instruments and determined that the adoption of SFAS No. 133, as
amended, did not have a material impact on its financial position or results of
operations.
26
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. Pillowtex's exposure to interest rate risk
consists of floating rate debt based on the LIBOR plus an adjustable margin. To
lower or limit overall borrowing costs, the Company often 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. Pillowtex had no swap agreements in place at December 30,
2000. The annual impact on the Company's results of operations of a 100 basis
point interest rate change on the December 30, 2000 outstanding balance of the
variable rate debt would be approximately $6.8 million. This same calculation
for 1999 was $6.4 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 December 30, 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.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
DIRECTORS OF THE REGISTRANT
The following is a list of directors, their ages, positions and business
experience as of March 20, 2001.
Name and Position Age Experience
- ----------------- --- ----------
Ralph W. LaRovere 65 Mr. LaRovere became a director of the Company in
May 1997. He has served as Chairman of the Board of
the Company since November 2000. He retired from
J.C. Penney Company, Inc. after a 36-year career
having served as Vice President and Director of
Merchandising for the Home and Leisure Division. He
also served in various management positions in New
York, Los Angeles, and Dallas.
Paul G. Gillease 68 Mr. Gillease became a director of the Company in
October 1993. From 1989 until retiring in late
1993, Mr. Gillease was Vice President and General
Manager of DuPont Textiles, a division of E.I.
DuPont de Nemours & Company. He also served in a
variety of marketing and business management
positions with DuPont. Mr. Gillease is a member of
the Board of Galey & Lord, Inc. and Guilford Mills,
Inc.
William B. Madden 62 Mr. Madden became a director of the Company in
February 1993. He has been the President of Madden
Securities Corporation, a general securities and
investment banking firm, located in Dallas, Texas,
since 1986. Mr. Madden is also Chairman of the
Board of Mercantile Bank and Trust and a director
of E. W. Blanch Holdings, Inc.
M. Joseph McHugh 63 Mr. McHugh became a director of the Company in
February 1993. He acted as interim Chief Financial
Officer of the Company from November 1999 through
April 2000. Mr. McHugh retired in December 1998
from Triangle Pacific Corp., a manufacturer and
distributor of hardwood flooring and kitchen and
bathroom cabinets, where he served as a Director
and as President and Chief Operating Officer from
November 1994 until his retirement. From 1981 until
November 1994, he served as Senior Executive Vice
President and Chief Financial Officer of Triangle
Pacific Corp.
A. Allen Oakley 47 Mr. Oakley has been a director of the Company since
May 2000. He joined Fieldcrest Mills in 1976 and
served in various managerial capacities before
being elected Executive Vice President -
Manufacturing of the Company in May 2000.
Mark A. Petricoff 62 Mr. Petricoff was elected a director of the Company
in November 1998 to fill a vacancy. He was a 39-
year employee and former President and Chief
Executive Officer of The Leshner Corporation, a
towel manufacturer acquired by the Company in July
1998.
Scott E. Shimizu 47 Mr. Shimizu served as a member of the Board of
Directors from May 1994 to May 1995 and was re-
elected in February 1996 to fill a vacancy. He has
served as Executive Vice President since 1988 and
since 1992 he has served as Executive Vice
President - Sales & Marketing.
28
Mary R. Silverthorne 65 Mrs. Silverthorne has been a director of the
Company since December 1992. She has for many years
been actively involved in charitable and civic
activities and is a director of the Retina
Foundation of the Southwest (Dallas), the
Foundation Fighting Blindness, Reading and Radio
Resources and the Assistance League of Dallas. She
has not been engaged in business activities during
the past five years.
Anthony T. Williams 54 Mr. Williams has been a director of the Company
since August 2000. He joined the Company in May
2000 as Executive Vice President and Chief
Financial Officer and was elected President and
Chief Operating Officer in November 2000. From
November 1995 until December 1998, Mr. Williams was
Vice President Finance of LucasVarity Light Vehicle
Braking Systems, the world's second largest
independent manufacturer of braking systems to the
automotive industry.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company, their ages,
position and business experience as of March 20, 2001.
Name and Position (1) Age Experience
- ----------------- --- ----------
Ralph W. LaRovere 65 See "Item 10. Directors and Executive Officers of
the Registrant -Directors of the Registrant" above.
Anthony T. Williams 54 See "Item 10. Directors and Executive Officers of
the Registrant -Directors of the Registrant" above.
Scott E. Shimizu 47 See "Item 10. Directors and Executive Officers of
the Registrant -Directors of the Registrant" above.
Michael R. Harmon 53 Mr. Harmon joined the Company in March 2001 as
Executive Vice President and Chief Financial
Officer. Prior to joining the Company, Mr. Harmon
spent 13 years at Galey & Lord, Inc., a $1 billion
manufacturer of textiles, where he last served as
Executive Vice President and Chief Financial
Officer.
Robert F. Haase 57 Mr. Haase joined the Company as Executive Director -
Operations in January 2001. Prior to joining the
Company, he was Chief Engineer and Operations
Director for the electronics division of Ford Motor
Company where he managed the engineering and
manufacturing operations of a 13,000-employee
division with seven manufacturing plants located
throughout the world. Mr. Haase was with Ford Motor
Company for 32 years.
A. Allen Oakley 47 See "Item 10. Directors and Executive Officers of
the Registrant -Directors of the Registrant" above.
Richard A. Grissinger 57 Mr. Grissinger joined Fieldcrest Cannon, Inc. in
1995 as Business Manager of the Bath Division.
Following the acquisition of Fieldcrest Cannon,
Inc. by the Company in 1997, he became Vice
President of Marketing for Department Store
Specialty Business. In 1998, he was promoted to
Senior Vice President of Marketing - Bath and in
March 2000 he became Senior Vice President of
Marketing.
29
Richard L. Dennard 52 Mr. Dennard joined the Company as Vice President of
Purchasing for Utility Bedding in January 1996. The
following year, his responsibilities increased as
Vice President for Blankets and Utility Bedding. In
1998, following the acquisition by the Company of
Fieldcrest Cannon, Inc., he assumed responsibility
of purchasing for the entire operation and in
August 1999, he was promoted to Senior Vice
President - Purchasing and Logistics.
Deborah G. Poole 46 Ms. Poole joined the Company in February 1999 as
Vice President and Chief Information Officer. From
1991 until she joined the Company, she was
Corporate Vice President, Information Services with
Guilford Mills, Inc., a textile manufacturer.
Donald Mallo 51 Mr. Mallo joined the Company in September 2000 as
Vice President of Human Resources. Prior to joining
the Company, Mr. Mallo served from 1998 through
1999 as the Senior Vice President Human Resources
of Grove Worldwide LLC, a leading manufacturer of
construction cranes and aerial work platforms. From
1993 to 1998, Mr. Mallo was the Executive Vice
President Human Resources and Counsel for Foamex
International, Inc., a large manufacturer of
polyurethane foam products for the automotive,
furniture, bedding and medical supply industries.
From 1985 until its acquisition by Foamex in 1993,
Mr. Mallo was Vice President - Employee Relations
for General Felt Industries, Inc., a manufacturer
of carpet cushions and related products.
John F. Sterling 37 Mr. Sterling joined the Company in May 1997 as
Associate General Counsel and was promoted to Vice
President and General Counsel in November 1999. For
eight years prior to joining the Company, he was an
attorney with the law firm of Thompson & Knight.
Henry T. Pollock 60 Mr. Pollock served the Company from June 2000 to
November 2000 as a consultant in finance and
treasury. In November 2000, he joined the Company
full-time and in March 2001, he became Vice
President and Treasurer of the Company. Prior to
his service to the Company, Mr. Pollock was
assistant treasurer for Varity Corporation, a $2.5
billion world-wide manufacturer of brake systems
and diesel engines.
Brenda A. Sanders 50 Ms. Sanders, Corporate Secretary, joined the
Company in August 1997. In 1996, she was Director
of Corporate Governance and Assistant Corporate
Secretary for Amre, Inc., a home remodeling
company. From 1991 through 1995, she was Director
of Corporate Securities Administration and
Assistant Corporate Secretary for E-Systems, Inc.,
a defense electronics company.
___________________________
(1) All Executive Officers serve at the pleasure of the Board of Directors.
30
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors and
officers of the Company, and persons who own more than 10 percent of the Common
Stock, to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of such stock.
Directors, officers and beneficial owners of more than 10 percent of the Common
Stock are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that all Section 16(a) filing requirements applicable to its
directors, officers and beneficial owners of more than 10 percent of its Common
Stock were met during the year ended December 30, 2000.
31
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Summary Compensation Table
The following table sets forth the compensation paid or accrued by the
Company to the Chief Executive Officer and each of the four other most highly
compensated executive officers for their services in 2000, 1999 and 1998.
Long Term
Annual Compensation Compensation
- ----------------------------------------------------------------------------------------------------------
Other Restricted Securities All Other
Name and Annual Stock Under- Compen-
Principal Position Year Salary Bonus Compen- Awards lying sation
($) ($) sation ($) ($) Options ($)
(2) (3) (#) (4)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Charles M.Hansen, Jr.(1) 2000 750,000 - 170,267 - 100,000 5,026,805
- ----------------------------------------------------------------------------------------------------------
Former Chairman of the 1999 900,000 - 131,783 237,842 - 8,858
- ----------------------------------------------------------------------------------------------------------
Board, Chief Executive 1998 900,000 - 155,114 - - 7,100
- ----------------------------------------------------------------------------------------------------------
Officer & Chief Opera-
- ----------------------------------------------------------------------------------------------------------
ting Officer
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Scott E. Shimizu 2000 375,000 - - - - 6,271
- ----------------------------------------------------------------------------------------------------------
Executive Vice President- 1999 375,000 - - 63,426 50,000 3,041
- ----------------------------------------------------------------------------------------------------------
Sales & Marketing 1998 375,000 - - - 22,000 5,139
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
A. Allen Oakley 2000 300,000 - - - - 8,004
- ----------------------------------------------------------------------------------------------------------
Executive Vice President- 1999 300,000 12,000 - 52,844 62,000 844
- ----------------------------------------------------------------------------------------------------------
Manufacturing 1998 217,000 50,000 - - 23,000 -
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Richard A. Grissinger 2000 275,000 - - - 7,500 5,627
- ----------------------------------------------------------------------------------------------------------
Senior Vice President - 1999 275,000 - - 26,422 - 2,678
- ----------------------------------------------------------------------------------------------------------
Marketing 1998 200,000 - - - 20,000 -
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Richard L. Dennard 2000 275,000 - - - 40,000 5,302
- ----------------------------------------------------------------------------------------------------------
Senior Vice President - 1999 225,000 35,000 - - 11,000 -
- ----------------------------------------------------------------------------------------------------------
Purchasing and Logistics 1998 200,000 75,000 - - 12,000 -
- ----------------------------------------------------------------------------------------------------------
FOOTNOTES:
(1) Mr. Hansen resigned from all positions held with the Company and its
subsidiaries effective October 26, 2000. Since Mr. Hansen's departure, the
Company has not elected or appointed an individual to replace him as the
Company's Chief Executive Officer; however, the Board of Directors has appointed
a Management Committee consisting of Ralph W. LaRovere, M. Joseph McHugh, Mark
A. Petricoff, Anthony T. Williams, and Scott E. Shimizu to fulfil the duties of
the Chief Executive Officer. No additional compensation is paid to the members
for their participation on the Management Committee. Mr. LaRovere acts as
Chairman of the Management Committee.
(2) Certain of the Company's executive officers receive personal benefits
in addition to salary and cash bonuses. In 2000, the amount for Mr. Hansen
includes $105,545 for personal use of the company airplane, $14,605 for car
allowance, and $50,117 for income tax reimbursement. The amount of personal
benefits has been omitted from the table for each named executive officer for
whom the aggregate amount of any benefits did not exceed the lesser of $50,000
or 10% of the total of the annual salary and bonus reported for the named
executive officer. Personal benefit amounts paid that do not exceed 25% of the
total personal benefits received have been omitted from this footnote.
(3) Based on the closing bid price of the Common Stock on December 29,
2000, the aggregate number and value of all restricted stock holdings on such
date were: 1,441 shares and $403 for Mr. Shimizu; 1,201 shares and $336 for Mr.
Oakley; 600 shares and $168 for Mr. Grissinger; and 841 shares and $235 for Mr.
Dennard. No dividends were paid on the restricted stock in 2000. Restrictions on
restricted stock awards lapse with respect to one-half of the shares on each of
the first and second anniversary dates of the award. The restricted stock was
issued on February 8, 1999; accordingly, one-half of the shares awarded vested
on February 8, 2000 and one-half vested on February 8, 2001. The unvested
portion of Mr. Hansen's restricted stock award was forfeited as a result of his
resignation.
32
(4) For 2000, the amount for Mr. Shimizu includes $1,687 for medical
insurance and $1,350 for group term life insurance; the amount for Mr. Oakley
includes $3,440 for medical insurance and $1,014 for group term life insurance;
and the amounts for Mr. Dennard and Mr. Grissinger include $690 and $1,969,
respectively, for group term life insurance. The amount indicated in 2000 for
Mr. Hansen includes $16,105 for a payout under the Company's Supplemental
Executive Retirement Plan made to Mr. Hansen upon his departure from the Company
in accordance with the terms of the Supplemental Executive Retirement Plan,
$10,475 for group term life and medical insurance, $4,850,000 paid upon his
departure from the Company pursuant to terms of a separation agreement entered
into between the Company and Mr. Hansen, $69,231 for earned but unused vacation
and $75,392 for the portion of the cash surrender value of a split dollar life
insurance policy which Mr. Hansen was entitled to following the cancellation of
the policy after his departure from the Company. The amounts for 2000 also
include company contributions to the Pillowtex Corporation 401(k) Plan, a
qualified ERISA plan ($5,602 for Mr. Hansen; $3,234 for Mr. Shimizu; $3,550 for
Mr. Oakley; $3,658 for Mr. Grissinger; and $4,612 for Mr. Dennard).
Option Grants in Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term(1)
- --------------------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price Expiration 5% 10%
Name Granted(#) Year ($/Sh) Date ($) ($)
(2)
- --------------------------------------------------------------------------------------------------------
Charles M. Hansen, Jr.(3) 100,000 20.5 4.3125 6/28/2010 - -
Scott E. Shimizu - - - - - -
A. Allen Oakley - - - - - -
Richard A. Grissinger 7,500 1.5 4.3125 6/28/2010 20,341 51,548
Richard L. Dennard 40,000 8.2 4.3125 6/28/2010 108,484 274,920
FOOTNOTES:
(1) The values shown are based on the indicated assumed annual rates of
appreciation compounded annually. Actual gains realized, if any, on stock option
exercises and Common Stock holdings are dependent on the future performance of
the Common Stock and overall stock market conditions. There can be no assurance
that the values shown in this table will be achieved.
(2) 25% of the option award vests on each of the first four anniversary
dates of the grant. If a "change in control" of the Company occurs, the options
become exercisable in full. The definition of "change in control" for this
purpose is the same as in the Company's Supplemental Executive Retirement Plan
and is more fully described under "Item 11. Executive Compensation -Supplemental
Executive Retirement Plan" below.
(3) All option awards granted to Mr. Hansen in 2000 were forfeited upon
his resignation from the Company.
33
Aggregated Option Exercises In Fiscal 2000 and Option Values at December 30,
2000
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options Options at
at December 30, 2000 December 30, 2000
(#) ($)
--------------------------------------------------------------------
Shares
Acquired Value
Name on Realized Exercisable Unexercisable Exercisable Unexercisable
Exercise
(#) ($)
- -------------------------------------------------------------------------------------------------------------------------------
Charles M. Hansen, Jr. - - - - - -
Scott E. Shimizu - - 55,000 54,000 - -
A. Allen Oakley - - 27,000 28,000 - -
Richard A. Grissinger - - 10,000 17,500 - -
Richard L. Dennard - - 20,000 56,125 - -
Pension Plan
The Company maintains defined benefit pension plans covering substantially
all of its employees, other than employees of the Company's Canadian subsidiary,
Pillowtex Canada Inc., and other employees subject to collective bargaining
agreements. The Company funds the pension plans through annual contributions in
an amount between the minimum required and the maximum amount that can be
deducted for federal income taxes. Prior to January 1, 2000, the Company
maintained a pension plan for qualified employees in its Pillow and Pad
Division, as well as separate pension plans for qualified employees of two of
its subsidiaries, Fieldcrest Cannon, Inc. and The Leshner Corporation. On
January 1, 2000, the Company merged the pension plans into two new plans
covering all of the qualified salaried and hourly employees of the Company.
Certain of the named executive officers have always been subject to the
surviving plan; however, prior to January 1, 2000, Charles M. Hansen, Jr., Scott
E. Shimizu, and Richard L. Dennard were subject to one of the plans that was
merged out of existence (the Prior Pillowtex Plan). Pursuant to the terms of the
new consolidated plan, such participants' benefits for their years of service
prior to January 1, 2000 will continue to be determined using the benefit
provisions of the Prior Pillowtex Plan. Accordingly, a separate table is
presented to determine the annual benefits available to Mr. Hansen, Mr. Shimizu,
and Mr. Dennard for their years of service prior to January 1, 2000.
34
The following tables present certain information concerning annual benefits
provided under the pension plans.
For Years of Service Under Prior Plan Formula (1)
- ------------------------------------------------------------------------------------------------------------------------
Years of Service
Average ------------------------------------------------------------------------------------------------
Compensation*(2) 5 10 15 20 25 30 35 40
- ------------------------
$125,000 $5,373 $10,745 $16,118 $21,490 $26,863 $32,235 $37,608 $42,980
$150,000 $6,623 $13,245 $19,868 $26,490 $33,113 $39,735 $46,358 $52,980
$175,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980
$200,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980
$250,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980
$275,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980
$300,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980
___________________________
*Average Compensation is equal to the average of the highest five years of
compensation out of the last ten years of employment.
For Years of Service Under Current Plan Formula (1)
- ------------------------------------------------------------------------------------------------------------------------
Years of Service
Career Average ------------------------------------------------------------------------------------------------
Compensation**(2) 5 10 15 20 25 30 35 40
- ------------------------
$125,000 $ 9,375 $18,750 $28,125 $37,500 $42,188 $46,875 $51,563 $56,250
$150,000 $11,250 $22,500 $33,750 $45,000 $50,625 $56,250 $61,875 $67,500
$175,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$200,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$250,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$275,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
$300,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
___________________________
**Career Average Compensation is equal to the average of all years of
compensation, where years before 1991 are considered to equal 1991 compensation.
FOOTNOTES:
(1) Estimated years of service as of January 1, 2001 for the named
executive officers are as follows:
Years of Service
------------------------------------------------------------------
Name Prior Formula Current Formula
-----------------------------
Charles M. Hansen, Jr. 35 1
Scott E. Shimizu 18 1
A. Allen Oakley 0 25
Richard A. Grissinger 0 7
Richard L. Dennard 4 1
(2) An employee's compensation for purposes of determining pension
benefits is calculated on substantially the same basis as the employee's cash
compensation set forth in the Summary Compensation Table. The Internal Revenue
Service maximum compensation allowed for benefits for the 2000 plan year is
$170,000. Therefore, fiscal 2000 compensation for all employees would be limited
to $170,000.
Benefits under the pension plan are integrated with Social Security and are
computed as straight life annuities. The benefits shown are not offset by any
other Company benefits or by Social Security.
35
Supplemental Executive Retirement Plan
The Supplemental Executive Retirement Plan (SERP) provides supplemental
retirement income to executive employees of the Company who are selected by the
Compensation Committee of the Board of Directors.
Scott E. Shimizu and A. Allen Oakley are covered by the SERP. When combined
with the pension plan and social security benefits, the SERP is designed to
provide a targeted retirement benefit equal to 50% of an executive's final
average compensation. However, the executive's actual benefit will be determined
solely by the vested balance of the executive's account balance under the SERP.
Final average compensation is the projected total cash compensation for the five
consecutive years of service with the Company ending at age 65.
An amount is credited each year to a retirement account that will
accumulate a balance sufficient to pay the supplemental retirement benefit when
the participant reaches age 65, assuming each credited amount earns 12% per year
compounded. On the date of the contribution each year, the annual accrual amount
is divided by the market value per share of Common Stock on that date to produce
a number of hypothetical shares. Each participant's supplemental retirement
account is deemed to be invested solely in hypothetical shares of Common Stock
and the balance of a participant's account as of any date can be determined by
multiplying the number of hypothetical shares credited to the participant's
account by the market value of Common Stock on that date. In the event of a
change in control of the Company, the balance of each participant's account will
be converted from hypothetical shares to a hypothetical fixed-income investment
earning 12% per annum. In general, a "change in control" occurs when (i) the
Company is no longer an independent publicly owned corporation or sells or
disposes of all or substantially all of its assets; (ii) a person becomes the
beneficial owner of 35% or more of the Company's voting stock; (iii) the Company
does not survive a merger or consolidation; or (iv) during any consecutive two-
year period, at least a majority of the incumbent directors are not directors
who have served continuously since the beginning of the two-year period unless
the election of directors, or nomination by the Company's shareholders, was
approved by a vote of at least two-thirds of the incumbent directors who have
been in office continuously since the beginning of the two-year period.
Vesting under the SERP occurs at the same rate as vesting under the
Company's pension plan. Immediate vesting in both plans occurs in the event of a
participant's disability or a change in control of the Company.
Payments under the SERP will be made in a single lump-sum cash payment
unless the participant elects in advance to receive installment payments. If a
participant dies before benefits are scheduled to begin, benefits will be paid
to the beneficiary designated by the participant, or, if no beneficiary was
designated, to the surviving spouse or to the participant's estate if there is
no surviving spouse.
The SERP may be amended or discontinued at any time by the Compensation
Committee of the Board of Directors or by the full Board. Any amendment may
reduce prospectively the earnings factor to be applied to a participant's
account, or may change the hypothetical investment of account balances from
hypothetical shares of Common Stock to any other hypothetical investment but may
not decrease a participant's account balance as of the date of the amendment. In
the event of a change in control, the SERP may not be amended in a way that
would adversely affect a participant's existing or future benefit without the
participant's written consent.
Assuming retirement at age 65, the estimated annual accrual amounts for the
SERP participants are as follows:
Scott E. Shimizu $16,436
A. Allen Oakley $10,750
The SERP is unfunded. All benefits payable to a participant under the SERP
will be paid from the general assets of the Company. As a result of the filing
of the Chapter 11 Cases, each participant has the status of a general unsecured
creditor with respect to the obligation of the Company to make payments under
the SERP relating to prepetition contributions. The Compensation Committee may
change the discount rates and actuarial assumptions that are used to calculate
credits and targeted benefits under the SERP.
36
Employment Agreements
On January 1, 1998, the Company entered into a new employment agreement
with Scott E. Shimizu, Executive Vice President - Sales and Marketing. This
employment agreement replaced a previously existing agreement and provides for
an initial base salary of $375,000. On October 9, 1998, the Company entered into
an employment agreement with A. Allen Oakley, Executive Vice President of
Manufacturing, for an initial base salary of $300,000. On September 1, 1999, the
Company entered into an employment agreement with Richard L. Dennard, Senior
Vice President - Purchasing and Logistics, for an initial base salary of
$225,000. Each of these employment agreements contains the following provisions:
. Participation in the incentive bonus plans of the Company, as well as,
in case of Messrs. Shimizu and Oakley, the Supplemental Executive
Retirement Plan;
. An initial employment term of three years with an automatic extension
of one year on each anniversary date beginning with the second
anniversary date so that the term will have a remaining duration of
two years upon each and every anniversary. The automatic extensions
will terminate if either party gives the other written notice at least
15 months prior to the anniversary date of its intent not to extend
the agreement.
. Payment of base salary through the remaining employment term, but not
less than for a two-year period, and certain benefits under the
incentive bonus plans if the Company terminates the executive's
employment without cause.
. Payment of certain amounts, including severance payments, on the
occurrence of termination of employment by the executive for "good
reason" or termination by the Company without "cause" following a
"change in control."
On December 15, 1999, the Company entered into an employment agreement with
Richard A. Grissinger, Senior Vice President - Marketing, for an initial base
salary of $275,000. Mr. Grissinger's employment agreement provides for an
initial two year term with an automatic extension of one year unless terminated
by either party giving the other at least six months written notice prior to the
end of the initial term or any extension of the term. The employment agreement
also provides for Mr. Grissinger's participation in the Company's incentive
bonus plans and the payment of certain amounts on the occurrence of termination
of employment by Mr. Grissinger for "good reason" or termination by the Company
without "cause" following a "change in control."
Each employment agreement also includes certain noncompetition,
nondisclosure, and nonsolicitation provisions.
It is currently contemplated that each of the Company's executives who
currently has an employment agreement, including Messrs. Dennard, Grissinger,
Oakley, and Shimizu, will enter into a new employment agreement that supersedes
the prior agreement and which provides for benefits that are consistent with
those provided in the Company's Key Employee Retention Program described below.
In connection with Mr. Hansen's resignation, the Company and Mr. Hansen
entered into a Separation Agreement dated as of October 26, 2000. Pursuant to
the terms of the Separation Agreement, the Company paid Mr. Hansen a lump sum
payment of $4.85 million upon his resignation from all positions held with the
Company and its subsidiaries, which payment was in full satisfaction of all
amounts owed by the Company to Mr. Hansen under the terms of his employment
agreement with the Company. In addition, Mr. Hansen released the Company from
any claims he may have had against the Company prior to the date of the
Separation Agreement. Pursuant to the terms of the Separation Agreement, certain
obligations of Mr. Hansen under his employment agreement, including the
noncompetition provision, remain in effect.
Key Employee Retention Program
On March 6, 2001, the Bankruptcy Court entered an order authorizing the
Company to implement a key employee retention program consisting of (i) a
retention incentive plan (the "Retention Incentive Plan"), (ii) an emergence
performance bonus plan (the "Emergence Performance Bonus Plan"); and (iii) an
employee severance plan (the "Severance Plan") (collectively, the "Retention
Program"). The purpose of the Retention Program is to provide the incentives
necessary for the Company to retain its management team and other key employees
and to otherwise address
37
concerns regarding potential key employee attrition during the Company's
financial restructuring process. The Retention Program is designed to provide
the Company's key employees with competitive financial incentives to, among
other things, (a) remain in their current positions with the Company through the
effective date of a plan or plans of reorganization in the Chapter 11 Cases
("Emergence"), (b) assume the additional administrative and operational burdens
imposed on the Company by the Chapter 11 Cases and (c) use their best efforts to
improve the Company's financial performance and facilitate the Company's
successful reorganization.
The Retention Incentive Plan is designed for the purpose of retaining key
management employees through Emergence. Under the Retention Incentive Plan,
eligible employees are classified into one of four "groups" based on the
determination of the Company's management as to the importance of each
employee's contributions to the continued operations and successful
restructuring of the Company's business. Depending on the group, each employee
is eligible to earn a specified retention incentive payment (a "Retention
Incentive Payment"), payable on the following four dates (collectively, the
"Vesting Dates") if the employee remains actively employed by the Company on
such Vesting Dates: (i) 25% of the total Retention Incentive Payment will be
paid in the month following the Bankruptcy Court's approval of the Retention
Program, (ii) 25% of the total Retention Incentive Payment will be paid on the
first anniversary of the Petition Date (i.e., November 14, 2001); (iii) 25% of
----
the total Retention Incentive Payment will be paid on the earlier of (a) six
months after the second payment is made or (b) confirmation of a plan of
reorganization, and (iv) 25% of the total Retention Incentive Payment will be
paid 30 days after confirmation of a plan of reorganization; provided, however,
that the final payment to Group 1 participants will be adjusted downward if
cumulative EBITDA (as defined in the DIP Financing Facility) for the 12 months
preceding the confirmation of a plan or reorganization is less than $50 million.
In general, an eligible employee must be employed by the Company on a Vesting
Date to earn and receive a Retention Incentive Payment (or the applicable
portion of a Retention Incentive Payment). If, however, an eligible employee is
terminated by the Company without cause, the employee will receive his or her
entire Retention Incentive Payment, which will be paid on the same schedule as
if the employee had not been terminated. Group 1 participants, which include the
President and five other senior executives, will be eligible for a retention
payment equal to 60% of their base pay. Group 2 participants will be eligible
for a retention payment equal to 50% of their base pay. Group 3 participants
will be eligible for a retention payment equal to 35% of their base pay. Group 4
participants will be eligible for a retention payment equal to 20% of their base
pay. In addition, a discretionary retention pool of $500,000 will be available
for non-union employees not included in Groups 1 through 4. Messrs. Dennard,
Oakley and Shimizu each participate in the Retention Incentive Plan and is a
member of Group 1. Mr. Grissinger participates in the Retention Incentive Plan
and is a member of Group 2.
The Emergence Performance Bonus Plan provides for an additional incentive
payment (the "Emergence Payment") to certain management employees who are
particularly essential to the implementation of the Company's restructuring to
remain with the Company through the plan negotiation and confirmation process.
Payments under the Emergence Performance Bonus plan are tied directly to two
factors: the amount of the distribution made under a confirmed plan of
reorganization to unsecured creditors and the length of the Chapter 11 Cases,
both of which are of primary importance to the Company's creditors. The
employees eligible for participation in the Emergence Performance Bonus Plan
currently consists of eight members of the Company's senior management. The
amount of the Emergence Payment paid to a participant under the Emergence
Performance Bonus Plan is determined by multiplying the participant's base
salary by two factors. The first factor (the "Recovery Multiplier") equals the
percentage of all consideration to be received by the unsecured creditors on all
of their unsecured claims, as reasonably estimated as of the date of
confirmation of the plan of reorganization. Accordingly, the Recovery Multiplier
ranges from 0% to 100%. The second factor (the "Speed Multiplier") is based upon
the length of the Chapter 11 Cases, and is calculated by dividing 18 by the
number of months the Company is in bankruptcy. Regardless of this calculation,
the Speed Multiplier cannot be less than one or more than two. The Emergence
Payment is payable 30 days after confirmation of a plan. The participants are
entitled to receive payment if they are terminated without cause prior to
confirmation of a plan. Messrs. Dennard, Oakley and Shimizu each participates in
the Emergence Performance Bonus Plan.
As a complement to the Retention Incentive Plan, the Severance Plan was
adopted to continue a modified version of the Company's prepetition severance
program (the "Prepetition Severance Program"). Under the Prepetition Severance
Program, the Company provided severance benefits under three separate policies,
including through employment agreements with certain senior executives. The
purpose of the Severance Plan is to integrate all these severance arrangements
into one plan that will supersede prior plans and the severance provisions of
the executives' employment agreements. The Severance Plan is designed to ensure
basic financial security notwithstanding possible job loss by providing
eligibility for severance benefits ("Severance Benefits") for employees at all
levels. The Severance Plan covers all full-time employees of the Company. The
majority of the covered employees are not eligible to participate in any other
components of the Retention Program. Under the Severance Plan, the Company will
pay Severance Benefits to eligible employees whose employment is involuntarily
terminated after the Petition Date for reasons other than death,
38
disability, retirement or cause. With certain exceptions set forth below,
employees will be eligible to receive Severance Benefits equal to 1 week's
salary for each completed year of service, with a minimum of two-weeks salary
and a maximum of 26 weeks salary. Moreover, all employees will be entitled to
receive medical insurance, life insurance and other benefits currently provided
under the Prepetition Severance Policy. Executives in Group 2 of the Retention
Incentive Plan will be entitled to receive the greater of their contractual
severance amount (except as provided below with respect to executives with two-
year severance agreements), the formula amount or 16 weeks salary. Executives
with employment agreements that provide for a severance payment equal to two
years salary will have their severance payment offset by the amount of the
Retention Incentive Payment received by the employee, and a portion of the total
severance payment will be subject to certain mitigation requirements. In all
cases where employees currently have employment contracts, the change in control
provisions contained in those agreements will be standardized so that a benefit
is payable only in the event a change-in-control detrimentally affects the
employee.
Restricted Stock Awards
In February 1999, the Board of Directors, on the recommendation of the
Compensation Committee, approved the grant of restricted stock awards to certain
key employees of the Company. Upon the award of restricted stock, the Company
makes an immediate transfer to the executive of a specific number of shares, and
no payment from the executive is required. Restricted stock will be forfeited by
the executive if the executive voluntarily terminates employment during the
restriction period, or if the executive is terminated for poor performance or
other "cause." Restrictions on the awards lapse with respect to one-half of the
shares on each of the first and second anniversary dates of the awards. Stock
representing the award is issued and held in custody by the Company or an agent
until the restrictions lapse. During the restriction period, holders of the
awards are entitled to receive dividends declared on the Common Stock and have
voting rights but they may not sell or transfer the Common Stock representing
the restricted award. In the event of a change in control of the Company (as
such term is used in the Company's Supplemental Executive Retirement Plan), all
restrictions lapse. The restrictions also lapse if the executive's employment is
involuntarily terminated for a reason other than poor performance or other
"cause." All of the named executive officers, including the Chief Executive
Officer, received restricted stock awards. The restricted stock was issued on
February 8, 1999; accordingly, one-half of the shares awarded vested on February
8, 2000 and one-half vested on February 8, 2001.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists entirely of non-employee directors. Mr.
Madden, Mr. Petricoff, Mrs. Silverthorne, Mr. Gillease and Mr. LaRovere, until
his appointment as Chairman of the Board in November 2000, served on the
Compensation Committee during 2000.
Compensation of Directors
Directors who are not officers of the Company or any of its subsidiaries
receive an annual fee of $35,000. For each committee meeting attended, committee
members are paid a fee of $1,000 and committee chairmen are paid a fee of
$2,500. The Company also reimburses directors for travel, lodging and related
expenses they incur in attending Board and committee meetings. The Company
provides no retirement benefits to non-employee directors. Directors who are
also employees of the Company receive no additional compensation from the
Company for services rendered in their capacity as directors.
The 1993 Pillowtex Corporation Stock Option Plan (the "Stock Option Plan")
allows for the grant of nonqualified stock options to directors who are not
employees. Under the Stock Option Plan, the exercise price of options granted
thereunder may not be less than 100% of the fair market value per share of
Common Stock on the date the option is granted. As of December 29, 2000, Messrs.
Madden and Gillease had each been granted options to purchase a total of 17,072
shares of Common Stock and Mr. Petricoff 7,500 shares, all at prices ranging
from $5.0625 to $33.50. Mr. McHugh has been granted options to purchase a total
of 67,072 shares of Common Stock at prices ranging from $4.5625 to $33.50 per
share. All options granted under the Stock Option Plan, including those granted
to directors who are not employees, vest 25% on the first through the fourth
anniversary dates of the grant and terminate on the tenth anniversary date. Mrs.
Silverthorne does not participate in the Stock Option Plan.
From November 1999 through April 2000, Mr. McHugh performed the duties of
interim chief financial officer of the Company. Mr. McHugh was paid a consulting
fee of $1,500 per day and reimbursement of travel and entertainment expenses.
Mr. McHugh was also granted options to purchase 50,000 shares of Common Stock at
the option price of $4.5625 per share. The Company paid Mr. McHugh a total of
$103,500 under this arrangement during 2000.
39
Following the resignation of Mr. Hansen as Chairman, President, and Chief
Executive Officer in October 2000, Mr. LaRovere was hired by the Company to
perform the duties of Chairman of the Board. Mr. LaRovere is paid a salary of
$20,000 per month, as well as a monthly car allowance of $1,000. He receives no
additional compensation as a member of the Board of Directors. As of December
29, 2000, Mr. LaRovere had been granted a total of 13,572 shares at prices
ranging from $5.0625 to $33.50.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table lists certain information concerning the beneficial
ownership of the Company's Common Stock, as of March 20, 2001, by the following
persons:
. Each person known by the Company to own beneficially more than 5% of
the outstanding Common Stock;
. The executive officers whose names appear in the table set forth under
"Item 11. Executive Compensation - Summary Compensation Table" above;
. Each director of the Company; and
. All executive officers and directors as a group.
Except as otherwise indicated, the Company believes that the owners named
below have sole voting and investment power of the shares of Common Stock
listed.
Number of Shares
Name Beneficially Owned Percent of Class
- -----------------------------------------------------------------------------------------------------------
Charles M. Hansen, Jr. (1) 2,643,410 18.5%
John H. Silverthorne Marital
Trust B(2) 2,268,893 15.9%
Mary R. Silverthorne (2) 634,241 4.4%
Paul G. Gillease (3) 16,571 *
Ralph W. LaRovere (3) 33,354 *
William B. Madden (3) 15,947 *
M. Joseph McHugh (3) 28,947 *
Mark A. Petricoff (3) 2,540 *
Anthony T. Williams (3) 10,000 *
Scott E. Shimizu (3) 67,441 *
A. Allen Oakley (3) 34,951 *
Richard A. Grissinger (3) 16,201 *
Richard L. Dennard (3) 26,375 *
Jeffrey M. Hollander (4) 3,393,375 19.2%
Dimensional Fund Advisors Inc.(5) 888,246 6.2%
All executive officers and directors
as a group (18 persons) (3) 3,175,594 21.9%
__________
* Less than 1%.
FOOTNOTES:
(1) Mr. Hansen's last published address is 4111 Mint Way, Dallas, Texas 75237.
Mr. Hansen's stock ownership is based on his most recent Statement of
Beneficial Changes of Ownership on Form 4, which was filed with the SEC by
Mr. Hansen on October 31, 2000.
(2) The address of the John H. Silverthorne Marital Trust B and Mrs.
Silverthorne is 4111 Mint Way, Dallas, Texas 75237. Under the rules and
regulations of the SEC, Mrs. Silverthorne may be deemed the beneficial
owner of the shares held by the John H. Silverthorne Marital Trust B
because she is its independent trustee. In addition, Mrs. Silverthorne, in
her capacity as trustee, may be deemed the beneficial owner of 42,857
shares held by the John H. Silverthorne Family Trust A. Mrs. Silverthorne
disclaims beneficial ownership of any shares other than 591,384 shares she
holds of record.
40
(3) Includes options which are currently exercisable or become exercisable
within 60 days after March 20, 2001 to purchase the number of shares of
Common Stock indicated for the following persons: Mr. Dennard (26,375); Mr.
Gillease (11,447); Mr. Madden (11,447); Mr. McHugh (23,947); Mr. LaRovere
(7,054); Mr. Petricoff (2,500); Mr. Williams (10,000); Mr. Shimizu
(66,000); Mr. Oakley (33,750); and Mr. Grissinger (15,000).
(4) The address of Jeffrey M. Hollander is 6560 W. Rogers Circle, Suite 19,
Boca Raton, Florida 33487. As reported in Schedule 13D filed by Mr.
Hollander with the SEC on February 23, 2001, Mr. Hollander is the holder of
81,441 shares of the Company's Series A Redeemable Convertible Preferred
Stock (the "Series A Preferred Stock"). As of March 20, 2001, the shares of
Series A Preferred Stock held by Mr. Hollander are convertible into a total
of 3,393,375 shares of Common Stock As reported in Schedule 13D filed by
Mr. Hollander with the SEC on February 23, 2001.
(5) The address of Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, Santa
Monica, California 90401. As reported in a Schedule 13G filed by
Dimensional Fund Advisors, Inc. with the SEC on February 2, 2001,
Dimensional Fund Advisors, Inc. beneficially owned and had sole voting and
dispositive power with respect to the shares indicated.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
From November 1999 through April 2000, M. Joseph McHugh, a director of the
Company, performed the duties of interim chief financial officer. Mr. McHugh was
paid a consulting fee of $1,500 per day plus reimbursement of travel and
entertainment expenses. He was paid a total of $103,500 by the Company under
this arrangement during 2000.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements: Page
---------------------------------
Independent Auditors' Report................................................. F-2
Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000...... F-3
Consolidated Statements of Operations for the years ended
December 30, 2000, January 1, 2000 and January 2, 1999....................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 30, 2000, January 1, 2000 and January 2, 1999........... F-5
Consolidated Statements of Cash Flows for the years ended
December 30, 2000, January 1, 2000 and January 2, 1999....................... 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 December 30, 2000, January 1, 2000 and
January 2, 1999 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
4.1 Specimen of Certificate evidencing Common Stock (incorporated by
reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996)
4.2 Specimen of Certificate evidencing Series A Redeemable Convertible
Preferred Stock (incorporated by reference to Exhibit 4.2 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998)
42
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 (incorporated by reference to Exhibit 4.4 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended
January 1, 2000)
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 (incorporated by reference to Exhibit 4.5 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year
ended January 1, 2000)
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 (incorporated
by reference to Exhibit 4.6 to Pillowtex Corporation's Annual Report
on Form 10-K for the fiscal year ended January 1, 2000)
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)
4.10 Resignation, Appointment and Acceptance Agreement dated April 14, 2000
by and among Pillowtex Corporation, as Issuer, Norwest Bank Minnesota,
as Resigning Trustee, and U.S. Bank National Association, as Successor
Trustee, (incorporated by reference to Exhibit 4.1 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended
April 1, 2000)
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
43
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)
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 (incorporated by reference to Exhibit
10.7 to Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000)
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 (incorporated by reference to Exhibit
10.8 to Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000)
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 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 (incorporated by reference to
Exhibit 10.15 to Pillowtex Corporation's Annual Report on Form 10-K
for the fiscal year ended January 1, 2000)
44
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 (incorporated by reference to Exhibit 10.16
to Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000)
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)
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
(incorporated by reference to Exhibit 10.20 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 1, 2000)
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
(incorporated by reference to Exhibit 10.21 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended January 1, 2000)
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 (incorporated by reference to Exhibit 10.23
to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)
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 (incorporated by reference to Exhibit 10.24
to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)
10.25 Post-Petition Credit Agreement dated as of November 14, 2000, among
Pillowtex Corporation and certain of its Subsidiaries, certain
Lenders named therein, and Bank of America, N.A., as Administrative
Agent
10.26 First Amendment to Post-Petition Credit Agreement dated as of March 6,
2001, among Pillowtex Corporation and certain of its Subsidiaries,
certain Lenders named therein, and Bank of America, N.A., as
Administrative Agent
10.27 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))
10.28 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)
45
10.29 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))
10.30 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))
10.31 Registration Rights Agreement, dated as of December 18, 1997, among
Pillowtex Corporation, the guarantors listed on the signature page
thereto, and NationsBanc Montgomery Securities, Inc. and Bear,
Stearns & Co. Inc. (incorporated by reference to Exhibit 10.7 to
Pillowtex Corporation's Current Report on Form 8-K dated December 19,
1997, as amended by a Form 8-K/A (Amendment No. 1))
10.32 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))
10.33 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))
10.34 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)
10.35 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)
10.36 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* 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))
46
10.42* 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))
10.43* 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)
10.44* 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)
10.45* 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)
10.46* 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)
10.47* Form of Employment Agreement entered into between Fieldcrest Cannon,
Inc. and Richard A Grissinger (incorporated by reference to Exhibit
10.51 to Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000)
10.48* 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)
10.49* 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)
10.50* 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)
10.51* 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)
10.52* Separation Agreement dated as of October 26, 2000 by and between
Pillowtex Corporation and Charles M. Hansen, Jr.
10.53 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))
10.54 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
47
b) Reports On Form 8-K.
-------------------
During the quarter ended December 30, 2000, Pillowtex filed the following
Current Reports on Form 8-K:
Current Report on Form 8-K, dated November 14, 2000 and filed November 16,
2000, reporting information under "Item 3. Bankruptcy or Receivership"
regarding the filing of the Chapter 11 Cases.
Current Report on Form 8-K, dated December 6, 2000 and filed on December
12, 2000, reporting information under "Item 5. Other Events" regarding the
approval by the Bankruptcy Court of the DIP Financing Facility.
_______________
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.
48
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 30, 2001.
PILLOWTEX CORPORATION
By /s/ Anthony T. Williams
-------------------------------------
Anthony T. Williams
President and Chief Operating 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 30, 2001.
Signatures Title
---------- -----
/s/ Ralph W. LaRovere Chairman of the Board; Director
- ------------------------
Ralph W. LaRovere
/s/ Anthony T. Williams President and Chief Operating Officer; Director
- ------------------------ (Principal Executive and Financial Officer)
Anthony T. Williams
/s/ Paul G. Gillease Director
- ------------------------
Paul G. Gillease
/s/ William B. Madden Director
- ------------------------
William B. Madden
/s/ M. Joseph McHugh Director
- ------------------------
M. Joseph McHugh
/s/ A. Allen Oakley Director
- ------------------------
A. Allen Oakley
/s/ Mark A. Petricoff Director
- ------------------------
Mark A. Petricoff
/s/ Scott E. Shimizu Director
- ------------------------
Scott E. Shimizu
/s/ Mary R. Silverthorne Director
- ------------------------
Mary R. Silverthorne
/s/ Stephen D. Chanslor Controller
- ------------------------ (Principal Accounting Officer)
Stephen D. Chanslor
49
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Independent Auditors' Report............................................... F-2
Consolidated Financial Statements:
- ---------------------------------
Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000.. F-3
Consolidated Statements of Operations for years ended
December 30, 2000, January 1, 2000 and January 2, 1999................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
years ended December 30, 2000, January 1, 2000 and January 2, 1999...... F-5
Consolidated Statements of Cash Flows for years ended
December 30, 2000, January 1, 2000 and January 2, 1999................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule for years ended
December 30, 2000, January 1, 2000 and January 2, 1999
Schedule II - Valuation and Qualifying Accounts......................... S-1
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Pillowtex Corporation:
We have audited the consolidated financial statements of Pillowtex Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 December 30, 2000 and January 1, 2000, and
the results of their operations and their cash flows for the each of the years
in the three-year period ended December 30, 2000 in conformity with accounting
principles generally accepted in the United States of America. 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.
The accompanying consolidated financial statements have been prepared assuming
Pillowtex Corporation will continue as a going concern. As discussed in the Note
1 to the consolidated financial statements, on November 14, 2000, Pillowtex
Corporation, and substantially all of its subsidiaries (collectively, the
Companies) filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code (Chapter 11). The Companies are currently operating their
business under the jurisdiction of Chapter 11 and the United States Bankruptcy
Court in Delaware (the Bankruptcy Court), and continuation of the Company as a
going concern is contingent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of the requisite parties under
the United States Bankruptcy Code and confirmation by the Bankruptcy Court, the
ability to comply with the debtor-in-possession financing facility, and the
ability to generate sufficient cash from operations and obtain financing
arrangements to meet future obligations. In addition, the Companies have
experienced operating losses and negative operating cash flows and are currently
in default under all of their pre-petition debt agreements. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result from
the outcome of these uncertainties.
(signed) KPMG LLP
Dallas, Texas
February 22, 2001, except
as to the second paragraph
of note 11 which is as
of March 6, 2001
F-2
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Balance Sheets
December 30, 2000 and January 1, 2000
(in thousands of dollars, except for par value)
ASSETS (note 11) 2000 1999
------------------ --------------------
Current assets:
Cash and cash equivalents $ 32,157 4,854
Receivables (note 17):
Trade, less allowances of $43,249 in 2000 and $33,351 in 1999 212,727 268,499
Other 6,261 17,923
Inventories (note 6) 278,807 423,052
Assets held for sale (note 3) 5,281 1,595
Prepaid expenses 5,323 5,502
------------------ --------------------
Total current assets 540,556 721,425
Property, plant and equipment, net (notes 3 and 7) 535,391 644,821
Intangible assets, at cost less accumulated amortization of
$27,802 in 2000 and $26,355 in 1999 (note 2) 233,480 288,856
Other assets 29,444 28,287
------------------ --------------------
Total assets $ 1,338,871 1,683,389
================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable (note 8) $ 34,909 119,848
Accrued expenses (note 8) 58,458 73,238
Deferred income taxes (note 13) - 37,848
Current portion of long-term debt (note 11) 33,229 85,759
Long-term debt in default (note 11) 660,790 -
------------------ --------------------
Total current liabilities 787,386 316,693
Long-term debt, net of current portion (note 11) - 965,323
Deferred income taxes (note 13) - 67,720
Noncurrent liabilities (note 10) 40,016 52,366
------------------ --------------------
Total liabilities not subject to compromise 827,402 1,402,102
Liabilities subject to compromise (note 12) 492,093 -
------------------ --------------------
Total liabilities 1,319,495 1,402,102
Series A redeemable convertible preferred stock, $.01 par value;
81,411 and 65,475 shares issued and outstanding for 2000 and 1999
respectively (note 14) 82,827 73,898
Shareholders' equity (deficit) (notes 11 and 15):
Preferred stock, $.01 par value; authorized 20,000,000 shares;
only Series A issued - -
Common stock, $.01 par value; authorized 55,000,000 shares;
14,252,069 and 14,261,886 shares issued and outstanding in
2000 and 1999, respectively 143 143
Additional paid-in capital 160,120 160,515
Retained earnings (accumulated deficit) (222,067) 49,269
Currency translation adjustment (1,647) (1,731)
Deferred compensation - (807)
------------------ --------------------
Total shareholders' equity (deficit) (63,451) 207,389
------------------ --------------------
Commitments and contingencies (notes 9, 10 and 16)
Total liabilities and shareholders' equity (deficit) $ 1,338,871 1,683,389
================== ====================
See accompanying notes to consolidated financial statements.
F-3
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Operations
Years ended December 30, 2000, January 1, 2000 and January 2, 1999
(in thousands of dollars, except for per share data)
2000 1999 1998
----------- ----------- -----------
Net sales $ 1,349,627 $ 1,552,068 $ 1,509,841
Cost of goods sold (including inventory write-downs of
$69,193 and $4,900 in 2000 and 1999 respectively) 1,349,259 1,371,790 1,246,449
----------- ----------- -----------
Gross profit 368 180,278 263,392
Selling, general and administrative expenses 128,396 118,432 119,321
Impairment of long-lived assets (note 3) 112,711 2,000 -
Restructuring charge (note 3) - - 1,539
----------- ----------- -----------
Earnings (loss) from operations (240,739) 59,846 142,532
Interest expense (contractual interest of $111,061 in 2000) 107,061 87,279 72,288
----------- ----------- -----------
Earnings (loss) before reorganization items and
income taxes (347,800) (27,433) 70,244
Reorganization items (note 20) 19,368 - -
----------- ----------- -----------
Earnings (loss) before income taxes (367,168) (27,433) 70,244
Income tax expense (benefits) (note 13) (104,760) (7,901) 27,389
----------- ----------- -----------
Net earnings (loss) (262,408) (19,532) 42,855
Preferred dividends and accretion (note 14) 8,928 12,294 2,097
----------- ----------- -----------
Earnings (loss) available for common shareholders $ (271,336) $ (31,826) $ 40,758
=========== =========== ===========
Earnings (loss) per common share (note 4):
Basic $ (19.04) $ (2.25) $ 2.89
=========== =========== ===========
Diluted $ (19.04) $ (2.25) $ 2.52
=========== =========== ===========
Weighted average common shares outstanding (note 4)
Basic 14,252 14,154 14,082
=========== =========== ===========
Diluted 14,252 14,154 17,653
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Shareholders' Equity (Deficit)
Years ended December 30, 2000, January 1, 2000 and January 2, 1999
(in thousands of dollars, except for per share data)
Common Stock Retained Total
------------------- Additional earnings Currency shareholders'
Number Par paid-in (accumulated Deferred translation equity
of shares value capital deficit) compensation adjustment (deficit)
------------ ------- ------------- ------------- -------------- ----------- ---------------
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 $1,637 (note 15) 154,458 1 4,545 - - - 4,546
Issuance of common stock -
convertible debentures 4,422 - 171 - - - 171
Accretion of Series A
Preferred Stock (note 14) - - - (216) - - (216)
Preferred stock dividends
(note 14) - - - (1,934) - - (1,934)
Common stock dividends
declared ($.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 - (62) (62)
-------------
Total comprehensive loss - - - - - - (19,594)
-------------
Exercise of stock options,
Including tax benefits 3,375 - 49 - - - 49
of $6 (note 15)
Issuance of restricted stock 46,398 - 1,190 - (807) - 383
Issuance of common stock -
convertible debentures 85,518 2 3,465 - - - 3,467
Accretion of Series A
Preferred
Stock (note 14) - - - (216) - - (216)
Preferred stock dividends
(note 14) - - - (12,078) - - (12,078)
Common stock dividends
declared ($.18 per share) - - - (2,555) - - (2,555)
---------- ------- ------------ ------------ ------------ ---------- -------------
Balance at January 1, 2000 14,261,886 143 160,515 49,269 (807) (1,731) 207,389
Comprehensive loss:
Net loss (262,408) (262,408)
Currency translation
adjustments 84 84
-------------
Total comprehensive loss - - - - - - (262,324)
-------------
Restricted stock -
amortization and
forfeitures (15,469) - (586) - 807 - 221
Issuance of common stock -
convertible debentures 5,652 - 191 - - - 191
Accretion of Series A
Preferred Stock
(note 14) - - - (216) - - (216)
Preferred stock dividends
(note 14) - - - (8,712) - - (8,712)
---------- ------- ------------ ------------ ------------ ---------- -------------
Balance at December 30, 2000 14,252,069 $ 143 $ 160,120 $ (222,067) $ - $ (1,647) $ (63,451)
========== ======= ============ ============ ============ ========== =============
See accompanying notes to consolidated financial statements.
F-5
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Cash Flows
Years ended December 30, 2000, January 1, 2000 and January 2, 1999
(in thousands of dollars)
2000 1999 1998
------------- ------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ (262,408) $ (19,532) $ 42,855
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 65,965 60,074 54,021
Long-lived asset impairment 112,711 2,000 -
Write-down of inventory 69,193 4,900 -
Reorganization items 17,528 - -
Deferred income taxes (104,760) (8,356) 22,058
Other, net 1,403 65 1,705
Changes in assets and liabilities
excluding effects of businesses acquired:
Trade receivables 51,111 (23,240) (16,914)
Inventories 75,052 5,732 (56,372)
Accounts payable and accrued expenses (11,638) (12,641) 12,438
Other assets and liabilities 20,808 532 (5,181)
---------- ---------- ----------
Net cash provided by operating activities 34,965 9,534 54,610
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 4,523 472 12,308
Purchases of property, plant and equipment (33,197) (89,737) (133,620)
Proceeds from disposal of assets held for sale 402 5,679 25,935
Payments for businesses purchased - - (106,746)
---------- ---------- ----------
Net cash used in investing activities (28,272) (83,586) (202,123)
---------- ---------- ----------
Cash flows from financing activities:
Decrease in checks not yet presented for payment (8,427) (18,592) (247)
Borrowings on revolving credit loans 849,413 383,028 470,400
Repayments of revolving credit loans (736,078) (271,028) (402,600)
Proceeds from the issuance of other long-term debt - - 100,000
Retirement of long-term debt (82,198) (16,095) (14,127)
Payments of debt and equity issuance costs (2,100) - (1,849)
Dividends paid - (4,011) (5,402)
Proceeds from exercise of stock options - 43 2,295
---------- ---------- ----------
Net cash provided by financing activities 20,610 73,345 148,470
---------- ---------- ----------
Net change in cash and cash equivalents 27,303 (707) 957
Cash and cash equivalents at beginning of period 4,854 5,561 4,604
---------- ---------- ----------
Cash and cash equivalents at end of period $ 32,157 $ 4,854 $ 5,561
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(1) General
Pillowtex Corporation ("Parent") together with its subsidiaries
(collectively, with Parent, the "Company"), is a North American designer,
manufacturer and marketer of home textile products, offering 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 supplier
across all distribution channels, the Company sells its products to mass
merchants, department stores, specialty retailers, catalog merchants,
institutions and international customers and on the internet. The Company is
organized into three major divisions: Bed and Bath, Blanket and Pillow and
Pad and Other.
On November 14, 2000 (the "Petition Date"), Pillowtex Corporation and
substantially all of its domestic subsidiaries (collectively, the "Debtors"),
including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary
petitions for reorganization under chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). The chapter 11 cases pending
for the Debtors (the "Chapter 11 Cases") are being jointly administered for
procedural purposes.
In conjunction with the commencement of the Chapter 11 Cases, the Debtors
sought and obtained several orders from the Bankruptcy Court which were
intended to enable the Debtors to operate in the normal course of business
during the Chapter 11 Cases. The most significant of these orders (i) permit
the Debtors to operate their consolidated cash management system during the
Chapter 11 Cases in substantially the same manner as it was operated prior to
the commencement of the Chapter 11 Cases, (ii) authorize payment of
prepetition employee salaries, wages, and benefits and reimbursement of
prepetition employee business expenses, (iii) authorize payment of
prepetition sales, payroll, and use taxes owed by the Debtors, (iv) authorize
payment of certain prepetition obligations to customers, and (v) authorize
payment of certain prepetition obligations to critical vendors to aid the
Debtors in maintaining operation of their business.
On December 6, 2000, the Bankruptcy Court also entered an order (the "DIP
Financing Order") authorizing the Debtors to enter into a $150.0 million
debtor-in-possession financing facility (the "DIP Financing Facility") with
Bank of America, N.A. as agent for a syndicate of financial institutions
comprised of certain of the Company's prepetition senior secured lenders, and
to grant first priority priming liens and mortgages, security interests,
liens (including priming liens), and superiority claims on substantially all
of the assets of the Debtors to secure the DIP Financing Facility. See Note
11.
The Debtors are currently operating their businesses as debtors-in-
possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code,
prepetition obligations of the Debtors, including obligations under debt
instruments, generally may not be enforced against the Debtors, and any
actions to collect prepetition indebtedness are automatically stayed, unless
the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-
possession, the Debtors have the right, subject to Bankruptcy Court approval
and certain other limitations, to assume or reject executory contracts and
unexpired leases. In this context, "assumption" means that the Debtors agree
to perform their obligations and cure all existing defaults under the
contract or lease, and "rejection" means that the Debtors are relieved from
their obligations to perform further under the contract or lease, but are
subject to a claim for damages for the breach thereof. Any damages resulting
from rejection of executory contracts and unexpired leases will be treated as
general unsecured claims in the Chapter 11 Cases unless such claims had been
secured on a prepetition basis prior to the Petition Date. The Debtors are
in the process of reviewing their executory contracts and unexpired leases to
determine which, if any, they will reject. The Debtors cannot presently
determine or reasonably estimate the ultimate liability that may result from
rejecting contracts or leases or from the filing of claims for any rejected
contracts or leases, and no provisions have yet been made for these items.
The United States trustee for the District of Delaware has appointed an
Official Committee of Unsecured Creditors in accordance with the provisions
of the Bankruptcy Code.
The Bankruptcy Code provides that the Debtors have exclusive periods
during which only they may
F-7
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
file and solicit acceptances of a plan of reorganization. The exclusive
period of the Debtors to file a plan for reorganization expired on March 14,
2001; however, the Debtors have requested the Bankruptcy Court to extend such
exclusive period until July 16, 2001. A hearing regarding the extension is
scheduled for April 6, 2001. If the Debtors fail to file a plan of
reorganization during the exclusive period or, after such plan has been
filed, if the Debtors fail to obtain acceptance of such plan from the
requisite impaired classes of creditors and equity holders during the
exclusive solicitation period, any party in interest, including a creditor,
an equity holder, a committee of creditors or equity holders, or an indenture
trustee, may file their own plan of reorganization for the Debtors.
After a plan of reorganization has been filed with the Bankruptcy Court,
the plan, along with a disclosure statement approved by the Bankruptcy Court,
will be sent to all creditors and equity holders. Following the solicitation
period, the Bankruptcy Court will consider whether to confirm the plan. In
order to confirm a plan of reorganization, the Bankruptcy Court, among other
things, is required to find that (i) with respect to each impaired class of
creditors and equity holders, each holder in such class has accepted the plan
or will, pursuant to the plan, receive at least as much as such holder would
receive in a liquidation, (ii) each impaired class of creditors and equity
holders has accepted the plan by the requisite vote (except as described in
the following sentence), and (iii) confirmation of the plan is not likely to
be followed by a liquidation or a need for further financial reorganization
of the Debtors or any successors to the Debtors unless the plan proposes such
liquidation or reorganization. If any impaired class of creditors or equity
holders does not accept the plan and, assuming that all of the other
requirements of the Bankruptcy Code are met, the proponent of the plan may
invoke the "cram down" provisions of the Bankruptcy Code. Under these
provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-
acceptance of the plan by an impaired class of creditors or equity holders if
certain requirements of the Bankruptcy Code are met. These requirements may,
among other things, necessitate payment in full for senior classes of
creditors before payment to a junior class can be made. As a result of the
amount of prepetition indebtedness and the availability of the "cram down"
provisions, the holders of the Company's capital stock may receive no value
for their interests under the plan of reorganization.
Since the Petition Date, the Debtors have conducted business in the
ordinary course. Management is in the process of stabilizing the business of
the Debtors and evaluating their operations as part of the development of a
plan of reorganization. After developing a plan of reorganization, the
Debtors will seek the requisite acceptance of the plan by impaired creditors
and equity holders and confirmation of the plan by the Bankruptcy Court, all
in accordance with the applicable provisions of the Bankruptcy Code.
During the pendency of the Chapter 11 Cases, the Debtors may, with
Bankruptcy Court approval, sell assets and settle liabilities, including for
amounts other than those reflected in the financial statements. The Debtors
are in the process of reviewing their operations and identifying assets for
disposition.
The administrative and reorganization expenses resulting from the Chapter
11 Cases will unfavorably affect the Debtors' results of operations. Future
results of operations may also be adversely affected by other factors related
to the Chapter 11 Cases.
The accompanying consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code" (SOP 90-7) assuming that the Company will continue as a
going concern. The Company is currently operating under the jurisdiction
of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and
continuation of the Company as a going concern is contingent upon, among
other things, its ability to formulate a plan of reorganization which will
gain approval of the requisite parties under the Bankruptcy Code and
confirmation by the Bankruptcy Court, its ability to comply with the DIP
Financing Facility, its ability to return to profitability, generate
sufficient cash flows from operations and obtain financing sources to meet
future obligations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might result from the outcome
of these uncertainties.
F-8
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
While under the protection of Chapter 11, the Company may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements.
Additionally, the amounts reported on the consolidated balance sheet could
materially change because of changes in business strategies and the effects
of any proposed plan of reorganization.
In the Chapter 11 Cases, substantially all unsecured liabilities as of
the Petition Date are subject to compromise or other treatment under a plan
of reorganization which must be confirmed by the Bankruptcy Court after
submission to any required vote by affected parties. For financial reporting
purposes, those liabilities and obligations whose treatment and satisfaction
is dependent on the outcome of the Chapter 11 Cases, have been segregated
and classified as liabilities subject to compromise in the accompanying
consolidated balance sheet. Generally, all actions to enforce or otherwise
effect repayment of pre-Chapter 11 liabilities as well as all pending
litigation against the Debtors are stayed while the Debtors continue their
business operations as debtors-in-possession. The ultimate amount of and
settlement terms for such liabilities are subject to an approval plan of
reorganization and accordingly are not presently determinable.
Pursuant to SOP 90-7, professional fees associated with the Chapter 11
Cases are expensed as incurred and reported as reorganization items.
Interest expense is reported only to the extent that it will be paid during
the Chapter 11 Cases or that it is probable that it will be an allowed
claim.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the financial statements
of Parent 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 1998 ended January 2, 1999, fiscal year 1999 ended January
1, 2000 and fiscal year 2000 ended December 30, 2000. Each year
includes the results of operations for 52 weeks.
(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 years 2000, 1999
and 1998 follow:
2000 1999 1998
--------- --------- ---------
Interest paid $ 87,535 87,906 73,223
========= ========= =========
Income taxes paid (refunded) $ (2,706) 769 (5,042)
========= ========= =========
(d) 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 and Hedging Activities
During June 1998, Statement of Financial Accounts 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 Nos. 137 and 138,
are effective for fiscal years beginning after June 15, 2000. The
Company adopted the provisions of the Standards on December 31, 2000.
The Company's management has reviewed the terms of material contracts
and financial instruments and determined that the adoption of SFAS No.
133, as amended, did not have a material impact on its financial
position or results of operations.
The Company enters into interest rate swap agreements to modify the
interest characteristics of portions of its outstanding debt. The
agreements entitle the Company to receive or pay to the counterparty (a
major bank), on a quarterly basis, the amounts, if any, by which the
Company's interest payments covered by swap agreements differ from
those of the counterparty. These amounts are recorded as adjustments to
interest expense. The fair value of the swap agreements and changes in
fair value as a result of changes in market interest rates are not
recognized in the consolidated financial statements.
F-9
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 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 and software 5-10 years
Furniture and fixtures 5-8 years
Leasehold improvements are amortized over the shorter 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 ($199.1 million and
$244.4 million, net of accumulated amortization of $16.8 million and
$17.5 million as of December 30, 2000 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 (see note 20).
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. Other than the
impairment described in note 3, 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. The fair value of other
financial instruments are included in note 11.
(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
F-10
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Stock Option Plan
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, the Company applies the
accounting provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations
and provides pro forma net income and 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 Expense
The Company expenses advertising costs as incurred. Advertising expense
was approximately $24.9 million, $24.9 million and $19.9 million during
2000, 1999 and 1998, respectively.
(n) Earnings Per Share
Basic earnings per share is computed by dividing earnings available for
common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share is computed by dividing
(i) earnings available for common shareholders as adjusted to add back
(if dilutive) convertible preferred dividends and accretion and the
after-tax interest recognized in the period associated with convertible
debt by (ii) the weighted average number of shares outstanding plus the
number of dilutive additional shares that would have been outstanding if
potentially dilutive securities had been issued.
(o) Foreign Currency Translation and Transactions
The Company's foreign subsidiaries use the local currency as the
functional currency 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
(deficit). 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. See notes 1, 3, 12 and 16 for
significant estimates, assumptions and unresolved uncertainties as a
result of the Chapter 11 Cases.
F-11
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(q) Comprehensive Income
Comprehensive income consists of net earnings (loss) and foreign
currency translation adjustments and is presented in the consolidated
statements of shareholders' equity (deficit).
(r) Reclassifications
Approximately $12.8 million and $9.4 million of information technology
expenses associated with the Company's manufacturing systems have been
reclassified in 1999 and 1998 from selling, general and administrative
expenses to cost of goods sold to conform with the presentation used in
2000.
3) Impairment of Long-lived Assets and Restructuring Charge
Impairment of Long-Lived Assets - During the fourth quarter of 2000, the
Company decided to permanently idle and sell certain manufacturing facilities
and equipment and as a result determined that the carrying value of such
assets was impaired. The Company also determined that given the expected
future operations of the Blanket Division, the carrying value of its long-
lived assets and goodwill was also impaired. The Company recorded an asset
impairment charge of $112.7 million to reduce the carrying value of these
assets to their fair values. This impairment charge consisted of $38.3
million for goodwill associated with the Company's Blanket Division and $74.4
million for the impairment of property, plant and equipment.
The impairment of long-lived assets consists of the following:
Fixed Assets:
Blanket Division impairment $ 50,000
Facilities and equipment permanently idled
as a result of management's rationalization
of production capacity:
Facilities 4,600
Equipment 18,100
Miscellaneous corporate assets 1,700
--------
Total fixed assets 74,400
Goodwill 38,311
--------
Total $112,711
========
During the fourth quarter of 2000 the Blanket Division experienced
reduced customer order levels and increased pressures from competitors
attempting to gain market share. As a result of these factors and the current
financial condition of the Company, management decided that it should review
its strategic options with respect to this business, including the possible
sale of this business. The impairment reflects management's estimate of the
fair value of the assets as determined by the present value of expected
future cash flows to be generated by the assets, including their ultimate
disposition.
The impairment of the other manufacturing facilities and equipment
resulted from management's rationalization of production capacity in
connection with filing of the Chapter 11 Cases. The impairment reflects
management's estimate of the fair value of the assets as determined by the
present value of expected future cash flows to be generated by the assets,
including their ultimate disposition.
As the reorganization process continues, it is possible that additional
asset impairments may be required and that these impairments may be material
to the Company's financial position and results of operations.
Certain of the permanently idled facilities and equipment were included
in the assets held for sale in
F-12
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
the accompanying balance sheet as of December 30, 2000, at a carrying value
of $5.3 million. Management expects to sell these assets during the second
and third quarters of 2001.
Management expects to incur certain exit costs to close certain of the
idled facilities in 2001. These costs include severance, equipment
relocation costs and facility closure costs. The costs are estimated to
total approximately $5.0 million and will be incurred and recognized in the
second and third quarters of 2001.
During 1999, a $2.0 million impairment charge 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.
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 impairment of certain
assets and other expenses) was recognized in 1997, and the remaining $1.5
million (associated with employee severance) was expensed in the first
quarter of 1998. Expenditures related to the restructuring were substantially
complete as of the end of 1998.
(4) Earnings Per Share
The following table reconciles the numerators and denominators of basic
and diluted earnings per share for 2000, 1999 and 1998. In 2000 and 1999,
losses rendered all potentially dilutive securities anti-dilutive, therefore
basic and diluted per share losses for those years are the same. In 1998,
options for 500,000 shares were not included in the computation of diluted
earnings per share because including them would have been anti-dilutive.
2000 1999 1998
--------------------- --------------------- --------------------
Loss Shares Loss Shares Earnings Shares
--------------------- --------------------- --------------------
Basic - earnings (loss) available for
common shareholders $ (271,336) 14,252 $ (31,826) 14,154 $ 40,758 14,082
Effect of dilutive securities:
Stock options - - - - - 207
Convertible debentures - - - - 1,577 656
Convertible preferred stock - - - - 2,097 2,708
--------------------- --------------------- --------------------
Diluted - earnings (loss) available for
common shareholders plus assumed
conversions $ (271,336) 14,252 $ (31,826) 14,154 $ 44,432 17,653
===================== ===================== ====================
(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 acquisition has been accounted for
under the purchase method of accounting, and, accordingly, results of
operations of Leshner have been included in the consolidated statements of
operations since the acquisition date.
F-13
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(6) Inventories
Inventories consist of the following at December 30, 2000 and January 1,
2000:
2000 1999
----------- -----------
Finished goods $ 130,841 218,381
Work-in-process 93,967 136,924
Raw materials 41,706 44,424
Supplies 12,293 23,323
----------- -----------
$ 278,807 423,052
=========== ===========
At December 30, 2000 and January 1, 2000 and, 71% 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 $74.7 million and $17.2 million at December
30, 2000 and January 1, 2000, respectively.
During the fourth quarter of 2000 the Company recorded a $69.2 million
write-down of excess, obsolete and distressed inventory. This charge was
reflected in cost of goods sold and resulted from (i) a slow down in the
retail environment, (ii) the impact of the filing of the Chapter 11 Cases on
November 14, 2000 and (iii) the decision to review the Company's strategic
alternatives with respect to the Blanket Division. The Chapter 11 Cases
have increased the pressure on the Company to liquidate its excess, obsolete
and distressed inventory in a shorter timeframe than in the past. As a
result, the Company estimates it will receive lower prices when selling such
inventory and have less flexibility to pursue alternative uses for such
inventory.
During 1999, the Company recorded a $4.9 million write-down to reduce
certain inventory at the Blanket Division to its net realizable value.
(7) Property, Plant and Equipment
Property, plant and equipment are stated at cost and consist of the
following at December 30, 2000 and January 1, 2000:
2000 1999
--------- ---------
Land $ 27,671 29,912
Buildings and improvements 167,143 196,048
Machinery and equipment 376,254 405,495
Data processing equipment and software 100,782 95,866
Furniture and fixtures 5,991 6,673
Leasehold improvements 2,567 4,090
Projects in progress 8,562 57,120
--------- ---------
688,970 795,204
Less accumulated depreciation and amortization (153,579) (150,383)
--------- ---------
$ 535,391 644,821
========= =========
The significant components of the decrease in property, plant and
equipment at December 30, 2000 are impairments and reclassifications to
assets held for sale of $79.6 million, disposals of $4.8 million, and
depreciation of $58.2 million, all of which are partially offset by capital
expenditures of $33.2 million.
Interest costs of $0.9 million, $5.6 million and $4.7 million, incurred
during 2000, 1999 and 1998, respectively, for the purchase and construction
of qualifying fixed assets, were capitalized and are being amortized over the
related assets' estimated useful lives.
F-14
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(8) Accounts Payable and Accrued Expenses
Accounts payable includes $12.1 million and $20.5 million at December 30,
2000 and January 1, 2000, respectively, of checks not yet presented for
payment on zero balance disbursement accounts.
Accrued expenses consist of the following at December 30, 2000 and
January 1, 2000:
2000 1999
------------ ------------
Employee-related compensation and benefits $ 10,658 18,313
Insurance and worker's compensation 12,428 15,812
Customer rebates 8,692 14,162
Interest and commitment fees 3,731 6,972
Advertising 7,699 795
Royalties and commissions 306 4,115
Other accrued expenses 14,944 13,069
------------ ------------
$ 58,458 73,238
============ ============
At December 30, 2000, certain accrued expenses have been classified as
liabilities subject to compromise (see note 12).
(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:
F-15
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
2000 1999
-------------- -------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 296,889 337,939
Service cost 6,667 7,615
Plan amendments - 773
Interest cost 22,740 21,892
Actuarial (gain) loss 4,973 (48,420)
Benefits paid $ (20,770) (22,910)
-------------- -------------
Benefit obligation at end of year $ 310,499 296,889
============== =============
Change in plan assets:
Fair value of plan assets at beginning of year $ 370,840 336,642
Actual return on plan assets 15,283 57,108
Benefits paid (20,770) (22,910)
-------------- -------------
Fair value of plan assets at end of year $ 365,353 370,840
============== =============
Funded status:
Benefit obligation $ (310,499) (296,889)
Fair value of plan assets 365,353 370,840
Unrecognized transition asset (26) (35)
Unrecognized prior service cost 805 909
Unrecognized net actuarial gain (37,285) (64,044)
-------------- -------------
Prepaid benefit cost $ 18,348 10,781
============== =============
2000 1999 1998
----------- --------- -----------
Weighted average assumptions as of December 30, 2000,
January 1, 2000 and January 2, 1999:
Discount rate 7.75% 8.00% 6.75%
Expected return 9.00-9.50% 9.00-10.50% 9.00-9.50%
Compensation increase rate 3.50% 4.00% 4.00%
Components of net periodic pension cost:
Service cost $ 6,667 7,615 7,730
Interest cost 22,740 21,892 21,070
Expected return on plan assets (34,272) (34,379) (28,503)
Recognized net actuarial (gain) (2,798) (2) -
Amortization of transition asset (8) (8) (8)
Amortization of prior service cost 104 35 35
---------- --------- ---------
Net periodic pension cost $ (7,567) (4,847) 324
========== ========= =========
The Company also sponsors employee savings plans that 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 2000, 1999 and 1998, the Company incurred
costs of $3.0 million, $3.2 million and $3.5 million respectively, to provide
matching contributions for those plans with matching provisions.
F-16
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(10) Postretirement Benefits Other Than Pensions
The Company provides medical insurance premium assistance and life
insurance benefits to retired employees of Fieldcrest Cannon. The medical
and life insurance benefits provided under the plan are fixed amounts
determined at the time of retirement and, thus, are unaffected by medical
trend rates. Employees become eligible for these benefits when they reach
retirement age while working for the Company. The plans are funded as
benefits are paid.
2000 1999
------------------------ --------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 34,418 38,090
Service cost 497 582
Interest cost 2,311 2,430
Actuarial gain (3,361) (3,947)
Benefits paid (2,218) (2,737)
----------------------- --------------------
Benefit obligation at end of year $ 31,647 34,418
======================= ====================
Change in plan assets:
Fair value of plan assets at beginning of year $ - -
Employer contributions 2,218 2,737
Benefits paid (2,218) (2,737)
----------------------- --------------------
Fair value of plan assets at end of year $ - -
======================= ====================
Funded status:
Benefit obligation $ (31,647) (34,418)
Unrecognized net actuarial gain (7,294) (4,275)
----------------------- --------------------
Accrued postretirement benefit cost included in
accrued expenses and noncurrent liabilities $ (38,941) (38,693)
======================= ====================
2000 1999 1998
----------------------------------------------------
Weighted average assumptions as of December 30, 2000,
January 1, 2000 and, January 2, 1999:
Discount rate 7.75% 8.00% 6.75%
Compensation increase rate 3.50% 4.00% 4.00%
Components of net periodic postretirement cost:
Service cost $ 497 582 709
Interest cost 2,311 2,430 2,465
Amortization of actuarial gain (342) (28) (181)
---------------------------------------------------
Net periodic postretirement benefit cost $ 2,466 2,984 2,993
===================================================
F-17
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(11) Long-term Debt and Liquidity
Long-term debt consists of the following at December 30, 2000 and January
1, 2000:
2000 1999
----------------- -----------------
Revolver $ 373,398 259,800
Overline Credit Facility 35,000 35,000
Term loans 268,090 341,500
DIP Financing Facility - -
Industrial revenue bonds with interest rates from 3.60% to 7.85% and maturities
through July 1, 2021; generally collateralized by land and buildings 14,925 16,814
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%, $14.3 million in unamortized discount at January 1, 2000) 90,417 82,205
Other debt 2,606 5,763
----------------- -----------------
Total debt 1,094,436 1,051,082
Less:
Current portion (33,229) (85,759)
Long-term debt in default (660,790) -
Liabilities subject to compromise (see note 12) (400,417) -
----------------- -----------------
Total long-term debt $ - 965,323
================= =================
DIP Financing Facility
On December 6, 2000, the Bankruptcy Court entered the DIP Financing
Order authorizing the Debtors to enter into the $150.0 million DIP
Financing Facility and to grant first priority primary liens, mortgages,
security interests, liens (including priming liens), and superiority claims
on substantially all of the assets of the Debtors to secure the DIP
Financing Facility. On March 6, 2001, the DIP Financing Facility was
amended to, among other things, reduce the amount of the facility to $125.0
million.
Under the terms of the DIP Financing Facility, as amended, a $125.0
million revolving credit facility, including up to $60.0 million for
postpetition letters of credit, is available to the Company until the
earliest of (a) November 14, 2001, (b) the date on which the plan of
reorganization becomes effective, (c) any material non-compliance with any
of the terms of the DIP Financing Order, (d) any event of default that
shall have occurred under the DIP Financing Facility, or (e) consummation
of a sale of substantially all of the assets of the Company pursuant to an
order of the Bankruptcy Court shall have occurred. Upon the satisfaction
of certain conditions, the November 14, 2001 maturity date could be
extended for an additional period of six months upon payment of an
extension fee equal to 0.50% of the portion of the DIP Financing Facility
being extended. Amounts borrowed under the DIP Financing Facility bear
interest at the option of the Company at the rate of London Interbank
Offered Rate ("LIBOR") plus 3.50% or Bank of America's Base Rate (which is
the higher of Federal Funds Rate or Prime Rate plus, in either case, 0.05%)
plus 1.00%. In addition to a facility fee and an underwriting fee of 0.50%
each, there is an unused commitment fee of 0.50%, a letter of credit fee of
3.50%, and a letter of credit fronting fee of 0.20%. The DIP Financing
Facility is secured by a first priority priming lien on the real and
personal assets of the Company
F-18
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
that also secure the prepetition senior secured credit facilities described
below and a junior lien on certain plant and equipment that secure six
industrial revenue bond facilities described below (the "IRB Facilities")
aggregating approximately $14.9 million as of December 30, 2000, and
certain obligations to the Pension Benefit Guaranty Corporation. The
documentation evidencing the DIP Financing Facility contains financial
covenants requiring maintenance of an asset coverage ratio and a minimum
operating cash flow, as well as other covenants that limit, among other
things, indebtedness, liens, sales of assets, capital expenditures,
investments, and prohibit dividend payments. The net proceeds of certain
asset sales outside the ordinary course of business reduce prepetition
indebtedness under the senior secured credit facilities; otherwise, the net
proceeds of asset sales outside the ordinary course of business are applied
as a permanent reduction of the DIP Financing Facility.
As of December 30, 2000, the Company had $17.9 million in letters of
credit outstanding under the DIP Financing Facility. Availability under
the DIP Financing Facility as of December 30, 2000, was $107.1 million. As
prepetition letters of credit expire under the Company's senior secured
revolving credit facility described below, to the extent they are renewed,
they will be reissued under the DIP Financing Facility.
Senior Debt Facilities
In December 1997, in connection with the Fieldcrest Cannon acquisition,
the Company entered into senior secured revolving credit and term loan
facilities with a group of financial and institutional investors for which
Bank of America, N.A. acts as the administrative and collateral 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, the Company 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 the
Company to fund the transaction and reduce borrowings under the revolving
credit facility. Effective March 12, 1999, the revolving credit facility
was amended to permit the Company 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 6% Convertible Debentures, thereby
increasing availability under that facility. Effective October 1, 1999,
the revolving credit facility was further amended to permit the Company 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, the Company 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,
additional collateral, 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 their terms to maturity and accelerate the
related amortization schedule for repayment of principal, to eliminate
reinstatement of 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") exceeded a specified level for the 2000 fiscal year), to add a
covenant requiring that EBITDA must exceed specified levels for future
fiscal periods and 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. On
September 30, 2000, and prior to the Petition Date, the Company was not in
compliance with its EBITDA financial covenant under the senior debt
facilities. The Company obtained from its senior lenders a temporary
waiver of such non-compliance through November 7, 2000, during which time
the Company engaged in active discussions with its senior lenders to obtain
an extended or permanent waiver of such non-compliance. The Company was
unable to reach such an agreement with its senior lenders and the waiver
expired on November 7, 2000. On November 8, 2000, the agent for the senior
lenders delivered a notice of default to the Company that declared an event
of default under the senior debt facilities based upon such non-compliance
with its EBITDA financial covenant. The senior lenders did, however,
forbear from
F-19
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
exercising rights and remedies under the senior debt facilities and agreed
to continue to make available to the Company the unused credit capacity
under the revolving credit facility until December 7, 2000. In addition, on
November 8, 2000, the senior lenders issued a Payment Blockage Notice to
the Company and the indenture trustee for the Company's 10% Senior
Subordinated Notes due 2006 (the "10% Notes") prohibiting payment by the
Company of the semi-annual interest payment in the aggregate amount of
approximately $6.25 million due to the holders of the 10% Notes on November
15, 2000. In addition, the Company was obligated to make a semi-annual
interest payment on its 9% Senior Subordinated Notes due 2007 (the "9%
Notes") on December 15, 2000 aggregating $8.3 million, which payment the
senior lenders likewise indicated they would also block. As a result of the
circumstances confronting the Company and its inability to refinance the
senior debt facilities or obtain additional capital, the Debtors filed the
Chapter 11 Cases on November 14, 2000.
As of December 30, 2000, the Company had $14.6 million in letters of
credit outstanding under the prepetition revolving credit facility. As
these prepetition letters of credit expire, to the extent they are renewed,
they will be reissued under the DIP Financing Facility.
As amended, amounts outstanding under the revolving credit facility and
the Tranche A Term Loan currently bear interest at a rate based upon LIBOR
plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to
the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted
average annual interest rate on outstanding borrowings under the various
senior credit facilities for 2000 was 10.1%. The senior debt facilities
expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of the Company, and are secured by first priority liens on all
of the capital stock of each domestic subsidiary of the Company and by 65%
of the capital stock of the Company's foreign subsidiaries. The Company has
also granted a first priority security interest in all of its presently
unencumbered and future domestic assets and properties, and all presently
unencumbered and future domestic assets and properties of each of its
subsidiaries.
Overline Facility
In May 1999, the Company 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, the overline 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, the Company
was not in compliance with certain financial covenants under the overline
facility, the covenants of which are incorporated 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 the overline facility, resulting in the overline 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 overline 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 EBITDA exceeded a specified level for the
2000 fiscal year).
The overline facility is guaranteed on a senior basis by the Company's
domestic subsidiaries. Amounts borrowed under the overline facility bear
interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%,
at the Company's option. The overline facility matures upon termination by
the Company at any time or otherwise at the earliest of: (i) any increase
in the commitment under the senior debt facilities described above, the
issuance of any capital stock by the Company or its domestic subsidiaries,
or other specified events; or (ii) January 31, 2002.
For the reasons discussed above with respect to the default under the
senior debt facilities, the Company is also in default under the overline
facility.
F-20
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Senior Subordinated Debt
In connection with the Fieldcrest Cannon acquisition, the Company issued
$185.0 million of the 9% Notes, with interest payable semiannually
commencing June 15, 1998. The 9% Notes are general unsecured obligations
of the Company, are subordinated in right of payment to all existing and
future senior indebtedness, and rank pari passu with the 10% Notes
described below.
On November 12, 1996, the Company issued $125.0 million of the 10%
Notes, with interest payable semiannually commencing May 15, 1997. The 10%
Notes are general unsecured obligations of the Company, are subordinated in
right of payment to all existing and future senior indebtedness, and rank
pari passu with the 9% Notes.
The 9% Notes and the 10% Notes are unconditionally guaranteed on a
senior subordinated basis by each of the existing and future domestic
subsidiaries of the Company and each other subsidiary of the Company that
guarantees the Company's obligations under the senior debt facilities
described above. The guarantees are subordinated in right of payment to
all existing and future senior indebtedness of the relevant guarantor.
As a result of the filing of the Chapter 11 Cases, the Company is in
default under the indentures governing both the 9% Notes and the 10% Notes.
See Note 12.
Fieldcrest Cannon 6% Convertible Debentures
As a result of the Company's acquisition of Fieldcrest Cannon, the
outstanding 6% Convertible Debentures are convertible, at the option of the
holders, into a combination of cash and the Common Stock. During the
fourth quarter of 1999, the Company 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 the Company any Common Stock that had been issued to
them, and have their 6% Convertible Debentures reinstated. Although many
holders did rescind and return their Common Stock, other holders could not
rescind because they had already sold their Common Stock. As of September
30, 2000, the cash component remaining to be paid in respect of the 6%
Convertible Debentures that had been surrendered without subsequent
rescission was approximately $5.2 million. Including the cash component
just mentioned, as of September 30, 2000, approximately $90.4 million
aggregate principal amount of the 6% Convertible Debentures remained
outstanding, including 6% Convertible Debentures that had been surrendered
without subsequent rescission. If all such outstanding 6% Convertible
Debentures were converted at such date, including those surrendered without
subsequent rescission, the resulting cash component to be paid to the
holders of the 6% Convertible Debentures would have been approximately
$57.2 million.
Prior to the Petition Date, the Company was prohibited under the terms
of the indentures governing the 9% Notes and the 10% Notes from making
payments in respect of the 6% Convertible Debentures except for interest
payments and payments at maturity or pursuant to sinking fund obligations.
In an effort to address both (i) the unpaid cash portion of the conversion
consideration owing to those holders of 6% Convertible Debentures who had
surrendered their debentures for conversion but had not been paid the cash
portion of the conversion consideration (the "Cash Claimants") and (ii) the
cash payment prohibition in respect of any future conversions, the Company
initiated discussions with certain holders of the 6% Convertible Debentures
regarding a potential restructuring of the 6% Convertible Debentures.
Notwithstanding months of effort, the parties to those discussions were
unable to agree upon a mutually satisfactory comprehensive restructuring of
the 6% Convertible Debentures and amounts owing to the Cash Claimants. In
September 2000, the Company notified the holders of the 6% Convertible
Debentures of its plan for making payments to the Cash Claimants. Pursuant
to the plan, the Company agreed to pay out as a "scheduled payment" cash in
the amount of approximately $3.8 million annually to the Cash Claimants,
which is the amount of cash sufficient to complete the conversion of $6.25
million principal amount of the 6% Convertible Debentures annually and
utilize such converted 6% Convertible Debentures as a credit to satisfy its
annual sinking fund obligation under the indenture governing the 6%
Convertible Debentures. As part of the plan and in accordance with the
terms of the indenture governing the 6% Convertible
F-21
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Debentures, the Company agreed to pay out cash to the Cash Claimants in
order to complete and finalize Debenture conversions and utilize such
converted Debentures as credits to satisfy its annual sinking fund
obligations as follows: (i) approximately $3.8 million on September 28,
2000, (ii) approximately $3.8 million on March 16, 2001, and (iii) the
balance owing to Cash Claimants on March 18, 2002. Under the plan, these
cash payments would be made by the Company to the Cash Claimants in the
order the 6% Convertible Debentures were presented for conversion, i.e., on
a first to convert, first to be paid basis. The unpaid cash portion for
each Cash Claimant would be evidenced by a non-interest bearing
subordinated promissory note executed by Fieldcrest Cannon (the "Cash
Claimant Notes"). Pursuant to the plan, the Company made the first
scheduled payment on September 28, 2000. As of December 30, 2000, the
aggregate principal amount of the outstanding Cash Claimant Notes was $5.2
million.
As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is
in default under the indenture governing the 6% Debentures and the Cash
Claimant Notes. See note 12.
Industrial Revenue Bonds
The Company has obligations in respect of six industrial revenue bond
facilities. The IRB Facilities are secured by liens on specified plants
and equipment. As of December 30, 2000, $14.9 million of bonds in the
aggregate were outstanding under the IRB Facilities.
As a result of the default on the senior debt facilities and the filing
of the Chapter 11 Cases, the Company is in default of its obligations under
each of the IRB Facilities.
Adequacy of Capital Resources
As discussed above, the Debtors are operating their businesses as
debtors-in-possession under chapter 11 of the Bankruptcy Code. In addition
to the cash requirements necessary to fund ongoing operations, the Company
anticipates that it will incur significant professional fees and other
restructuring costs in connection with the Chapter 11 Cases and the
restructuring of its business operations. As a result of the uncertainty
surrounding Pillowtex's current circumstances, it is difficult to predict
the Company's actual liquidity needs at this time. However, based on
current and anticipated levels of operations, and efforts to reduce
inventories and accounts receivable, the Company anticipates that its cash
flow from operations, together with amounts available under the DIP
Financing Facility, will be adequate to meet its anticipated cash
requirements during the pendency of the Chapter 11 Cases. In the event
that cash flows and available borrowings under the DIP Financing Facility
are not sufficient to meet future cash requirements, the Company may be
required to reduce planned capital expenditures or seek additional
financing. The Company 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 acceptable terms. As a result of the Chapter 11
Cases and the circumstances leading to the filing thereof, Pillowtex's
access to additional financing is, and for the foreseeable future will
likely continue to be, very limited. The Company's long-term liquidity
requirements and the adequacy of the Company's capital resources are
difficult to predict at this time, and ultimately cannot be determined
until a plan of reorganization has been developed and confirmed by the
Bankruptcy Court in connection with the Chapter 11 Cases.
Fair Value
The carrying and fair values of the Company's financial instruments,
estimated by discounting the future cash flows using rates currently
available or obtaining market prices as of December 30, 2000 and January 1,
2000, are shown below.
F-22
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
2000 1999
------------------------------------- --------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ----------------- ------------------ ---------------
Revolver $ 373,398 233,374 259,800 259,800
Overline Credit Facility 35,000 21,875 35,000 35,000
Term loans 268,090 167,556 341,500 341,500
Industrial revenue bonds and other debt 17,531 10,957 22,577 20,064
9% Senior Subordinated Notes due 2007 185,000 9,250 185,000 64,750
10% Senior Subordinated Notes due 2006 125,000 6,625 125,000 45,000
6% convertible
subordinated sinking fund
debentures due 2012 90,417 3,617 82,205 28,785
---------------- ----------------- ------------------ ----------------
Total $ 1,094,436 453,254 1,051,082 794,899
================ ================= ================== ===============
As of January 1, 2000, the Company had approximately $345.0 million of
notional amounts covered under interest rate swap agreements whereby the
Company exchanged floating rates for fixed rates. The weighted average
fixed and floating rates were 4.70% and 5.96%, respectively. As of
December 30, 2000, the Company had no swap agreements in place. The fair
value of the swap agreements at January 1, 2000 was $4.0 million.
Scheduled Maturities
Aggregate maturities of long-term debt for each of the five years
following December 30, 2000 and thereafter, assuming the unpaid principal
balance at December 30, 2000 under the revolving credit facilities remains
unchanged and based on the contractual terms of the instruments prior to
the filing of the Chapter 11 Cases, are as follows:
Year Amount
----------
2001 $ 37,043
2002 655,255
2003 6,710
2004 6,710
2005 6,250
Thereafter 382,468
(12) Liabilities Subject to Compromise
The principal categories of obligations classified as liabilities subject
to compromise under the Chapter 11 Cases are identified below. The amounts
set forth below may vary significantly from the stated amounts of proofs of
claim that may be filed with the Bankruptcy Court and may be subject to
future adjustments depending on Bankruptcy Court action, further developments
with respect to potential disputed claims, determination as to the value of
any collateral securing claims, or other events. In addition, other claims
may arise from the rejection of additional leases and executory contracts by
the Debtors.
F-23
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
9% Senior Subordinated Notes due 2007 185,000
10% Senior Subordinated Notes due 2006 125,000
6% Convertible Subordinated Sinking Fund Debentures due 2012 90,417
-----------------
Total long-term debt 400,417
-----------------
Interest accrued on above notes and debentures 14,448
Accounts payable 55,322
Nonqualified pension plan liability 11,673
Other accrued expenses 10,233
-----------------
$ 492,093
=================
As a result of the filing of the Chapter 11 Cases, no principal or
interest payments will be made on unsecured prepetition debt without
Bankruptcy Court approval or until a plan of reorganization providing for the
repayment terms has been confirmed by the Bankruptcy Court and becomes
effective. Therefore, interest of $4.0 million on prepetition unsecured
obligations has not been accrued after the Petition Date.
(13) Income Taxes
The components of income tax expense (benefit) are as follows:
2000 1999 1998
--------------- --------------- ----------------
U.S. federal - current $ - (600) 3,916
U.S. federal - deferred (96,326) (6,362) 17,881
State and foreign taxes - current - 200 1,415
State and foreign taxes - deferred (8,434) (1,139) 4,177
--------------- --------------- ----------------
$ (104,760) (7,901) 27,389
=============== =============== ================
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 to the actual provision for income taxes is as follows:
2000 1999 1998
--------------- --------------- ----------------
Expected tax at U.S. statutory rate $ (128,508) (9,602) 24,585
Amortization of goodwill 1,956 2,308 1,695
State and foreign taxes, net of federal effect (11,597) (610) 933
Change in valuation allowance 32,666 - -
Other 723 3 176
--------------- --------------- ----------------
$ (104,760) (7,901) 27,389
=============== =============== ================
F-24
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 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 1, 2000
and December 30, 2000 are presented below:
2000 1999
------------------- -------------------
Deductible temporary differences & carryforwards:
Package design costs $ 72 1,114
Accrued employee benefits 11,865 390
State deferred income taxes 18,613 899
Accruals and allowances 19,363 21,006
Operating losses and credit carryforwards 98,774 26,293
Other 5,236 10,182
------------------- -------------------
Total gross deferred tax assets 153,923 59,884
Less valuation allowance (32,666) -
------------------- -------------------
Net deferred tax assets 121,257 59,884
------------------- -------------------
Taxable temporary differences:
Inventory costs and reserves (25,561) (45,870)
Depreciable assets (72,338) (97,787)
State deferred income taxes (13,613) (9,333)
Trademarks (9,745) (12,128)
Goodwill - (334)
------------------- -------------------
Total gross deferred tax liabilities (121,257) (165,452)
------------------- -------------------
Net deferred tax liabilities $ - (105,568)
=================== ===================
At December 30, 2000, the Company has $262.8 million of federal and state
operating loss carryforwards expiring 2006 through 2020, $1.9 million general
business tax credit carryforward expiring 2005 through 2020 and $6.7 million
unused alternative minimum tax credit carryforward that does 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, net of the valuation allowance, at December 30, 2000 to
be realized as a result of the reversal of existing taxable temporary
differences.
As part of the above analysis, a $32.6 million valuation allowance was
established during the year ended December 30, 2000.
(14) 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 accrued from the issue date through December 31,
1999 at a 3% annual rate. Beginning January 1, 2000, the rate increased to
10% as a result of the Company's earnings per share for 1999 falling below
predetermined targets. During the third and fourth quarters of 1999, the
Company accrued and paid in kind 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.
Under the terms of the Series A Preferred Stock, dividends can be paid in
cash or additional shares of Series A Preferred Stock until December 2002, at
which time they must be paid in cash. Under the DIP Financing Facility, the
Company is
F-25
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
prohibited from paying any dividends on the Series A Preferred Stock. A total
of 81,411 shares of Series A Preferred Stock were outstanding as of December
30, 2000. The commencement of the Chapter 11 Cases constitutes an "Event of
Noncompliance" under the terms of the Series A Preferred Stock. The terms of
the Series A Preferred Stock provide that upon the occurrence of an Event of
Noncompliance, the dividend rate on such stock will increase immediately to
the lesser of 18% per annum and the maximum rate permitted by law.
Accordingly, as of the Petition date, dividends on the Series A Preferred
Stock began accruing at 18% per year, compounding quarterly.
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.
(15) 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 December 30, 2000, there were 541,000 shares available for grant under
the stock option plan. The per share weighted-average fair value of stock
options granted during 2000, 1999 and 1998 was $2.52, $6.46 and $12.81
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions:
2000 1999 1998
-------------------- -------------------- --------------
Expected dividend yield 0.0% 0.0% 1.06%
Stock price volatility 60.51 46.53 36.87
Risk-free interest rate 6.33 5.35 5.48
Expected option term 5 years 5 years 5 years
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan and, accordingly, no compensation cost
has been recognized for its stock options in the consolidated 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:
2000 1999 1998
----------------- ------------------- ---------------
Earnings (loss) available for common shareholders:
As reported $ (271,336) (31,826) 40,758
Pro forma (272,951) (33,410) 39,280
Earnings (loss) per share:
As reported - basic $ (19.04) (2.25) 2.89
As reported - diluted (19.04) (2.25) 2.52
Pro forma - basic (19.15) (2.36) 2.79
Pro forma - diluted (19.15) (2.36) 2.43
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-26
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
A summary of option activity during 1998, 1999 and 2000 follows:
Weighted average
Shares exercise price
---------------- -------------------------
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 1,042 20.80
(296 shares exercisable)
Granted 506 4.38
Canceled (408) 5.44
Outstanding at December 30, 2000 ----------------
(387 shares exercisable) 1,140 15.03
================
The table below provides weighted average exercise prices and weighted
average remaining contractual life of options outstanding at December 30,
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)
--------------------------------------------------------------------------------
$2.56 - $4.32 392 25 $ 4.18 $ 4.31 9.11
$4.56 - $15.63 245 109 8.73 12.13 6.89
$15.88 - $31.81 290 146 20.58 19.59 6.91
$33.50 - $44.38 213 107 34.71 34.71 6.92
(16) Commitments and Contingent Liabilities
Manufacturing equipment and 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 $37.8 million, $36.4 million and $24.7 million
during 2000, 1999 and 1998, respectively.
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:
Year Amount
----------
2001 $ 24,685
2002 21,819
2003 20,735
2004 19,856
2005 17,064
Thereafter 22,151
F-27
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
At December 30, 2000, the Company had $119.3 million in outstanding
cotton purchase commitments.
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.
As described in note 1, as debtors-in-possession, the Debtors have the
right to assume or reject executory contracts and leases. The Debtors are in
the process of reviewing their executory contracts and leases to determine
which, if any, they will reject. The Debtors cannot presently determine or
reasonably estimate the ultimate liability that may result from rejecting
contracts or leases or from the filing of claims for any rejected contracts
or leases, and no provisions have yet been made for these items. Such
rejections could result in additional liabilities subject to compromise.
(17) Concentration of 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, each accounted for approximately 26.5% and 8.4% of net
sales in 2000. These two customers each accounted for approximately 20.5%
and 9.6% of net sales in 1999 and 23.6% and 6.9% of net sales in 1998. As a
result of the Chapter 11 Cases, the Company may have added difficulty
retaining its customers, such as these major customers.
Pillowtex may have difficulty in maintaining existing or creating new
relationships with suppliers or vendors as a result of the Chapter 11 Cases.
Pillowtex's suppliers and vendors may stop providing supplies or services to
Pillowtex or provide such supplies or services only on "cash on delivery,"
"cash on order," or other terms that could have an adverse impact on
Pillowtex's short-term cash flow.
(18) Segment Information
The Company manufactures textile products for the bedroom, bathroom and
kitchen and markets them to department stores, discount stores, specialty
shops and certain institutional customers and over the internet. The Company
is organized into three major divisions that it considers operating segments:
Bed and Bath, Blanket, and Pillow and Pad. The Bed and Bath Division
manufactures and sells sheets and other fashion bedding textiles, towels,
bath rugs and kitchen textile products. The Blanket Division manufactures
and sells blanket products. The Pillow and Pad Division manufactures and
sells bed pillows, down comforters and mattress pads. Other includes the
Company's retail stores and corporate activities.
The accounting policies of the divisions are the same as those described
in the Summary of Significant Accounting Policies. The Company evaluates
division performance based on gross profit. Interdivisional sales are not
material.
F-28
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
Information about the Company's divisions is presented below:
Year Ended December 30, 2000
----------------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Blanket Other(1) Total
--------------- ------------- ------------ ------------ -------------
Net sales $ 942,604 286,666 90,623 29,734 1,349,627
Gross profit (2) 7,370 22,252 (37,785) 8,531 368
Depreciation & amortization (3) 42,122 4,414 6,168 13,261 65,965
Total assets 1,005,071 118,268 47,830 167,702 1,338,871
Capital expenditures 22,884 899 733 8,681 33,197
Year Ended January 1, 2000
----------------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Blanket Other(1) Total
--------------- ------------- ------------ ------------ -------------
Net sales $ 1,095,344 303,969 119,634 33,121 1,552,068
Gross profit (4) 121,967 57,690 (10,235) 10,856 180,278
Depreciation & amortization (3) 40,809 5,081 7,763 6,421 60,074
Total assets 1,170,803 146,920 191,119 174,547 1,683,389
Capital expenditures 46,815 5,670 6,230 31,022 89,737
Year Ended January 2, 1999
----------------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Blanket Other(1) Total
--------------- ------------- ------------ ------------ -------------
Net sales $ 1,035,932 297,473 140,924 35,512 1,509,841
Gross profit 192,687 54,829 3,096 12,780 263,392
Depreciation & amortization (3) 38,115 5,300 8,133 2,473 54,021
Total assets 1,123,693 160,434 216,474 153,553 1,654,154
Capital expenditures 81,445 3,784 10,647 37,744 133,620
(1) Includes retail stores and miscellaneous Corporate activities. Corporate
amounts include primarily data processing equipment and software and other
enterprise-wide assets not allocated to the segments.
(2) Includes inventory write-downs of $39.8 million in the Bed and Bath
Division, $8.2 million in the Pillow and Pad Division, $19.7 million in the
Blanket Division and $1.5 million in Other
(3) Depreciation and amortization expense for the Bed and Bath division
includes approximately $5.5 million of amortization expense in 2000, 1999
and 1998 related to goodwill included in segment assets that is excluded
from gross profit. The amounts included for Other consists primarily of
Corporate activity depreciation and amortization that is included in
selling, general and administrative expense in the Company's consolidated
statement of operations.
(4) Includes inventory write-downs of $4.9 million in the Blanket Division.
F-29
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
The Company's principal geographic market is North America, primarily the
United States. During the three years ended December 30, 2000, more than 90%
of the Company's net sales were derived from within the United States. In
addition, more than 90% of the Company's long-lived assets are domiciled
within the United States.
(19) Selected Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Company for
each quarter of 2000 and 1999.
2000 quarter ended
---------------------------------------------------------------------------------------
April 1 July 1 September 30 December 30
---------------- --------------- -------------------- -------------------
Net sales $ 345,160 341,940 357,436 305,091
Gross profit (loss) 39,095 39,512 29,472 (107,711)
Net loss (9,727) (6,118) (16,268) (230,295)
Loss per common share - basic (.82) (.57) (1.29) (16.36)
Loss per common share - diluted (.82) (.57) (1.29) (16.36)
1999 quarter ended
-------------------------------------------------------------------------------------
April 3 July 3 October 2 January 1
---------------- --------------- -------------------- -------------------
Net sales $ 368,508 362,468 415,806 405,286
Gross profit 52,465 56,257 35,579 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 December 30, 2000, includes
charges for inventory write-downs of $69.2 million, along with 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, a charge for
impairment of long-lived assets of $112.7 million, higher interest costs
and bank fees associated with the amendments and waivers to the senior credit
facility and professional fees and other costs associated with the filing of
the Chapter 11 Cases.
(20) Reorganization Items
During the fourth quarter of 2000, Pillowtex recognized a $19.4 million
charge associated with the Chapter 11 Cases. Approximately $17.6 million of
this charge relates to the non-cash write-off of the unamortized discount on
the 6% Convertible Debentures and the non-cash write-off of deferred
financing fees associated with other unsecured debt classified as subject to
compromise. In addition, the Company incurred $1.8 million for fees payable
to professionals retained to assist with the filing of the Chapter 11 Cases.
F-30
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 30, 2000 and January 1, 2000
(Tables in thousands of dollars, except for per share data)
(21) 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. The
combined parent and guarantor subsidiaries information shown below approximates
the financial information of the Debtors.
December 30, 2000
---------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
---------------------------------------------------------------------------------------
Assets:
Trade receivables - 204,836 7,891 - 212,727
Receivable from Affiliates $ 787,590 - - (787,590) -
Inventories - 271,919 6,888 - 278,807
Other current assets - 48,213 809 - 49,022
----------- --------- ---------- ---------- -----------
Total current assets 787,590 524,968 15,588 (787,590) 540,556
Property, plant and equipment, net 320 534,087 984 - 535,391
Intangibles 6,622 224,652 2,206 - 233,480
Other assets 214,090 53,967 - (238,613) 29,444
----------- --------- ---------- ---------- -----------
Total assets $ 1,008,622 1,337,674 18,778 (1,026,203) 1,338,871
=========== ========= ========== ========== ===========
Liabilities and shareholders'
equity (deficit):
Accounts payable and accrued
liabilities $ 4,151 86,335 2,881 - 93,367
Payable to affiliates - 779,207 8,383 - -
Other current liabilities 984 32,369 (124) (787,590) 33,229
Long-term debt in default 660,790 - - - 660,790
---------- --------- ---------- ---------- -----------
Total current liabilities 665,925 897,911 11,140 (787,590) 787,386
Noncurrent liabilities - 39,910 106 40,016
---------- --------- ---------- ---------- -----------
Total liabilities 665,925 937,821 11,246 (787,590) 827,402
Liabilities subject to compromise 323,321 168,772 - - 492,093
Redeemable convertible preferred stock 82,827 - - - 82,827
Shareholders' equity (deficit) (63,451) 231,081 7,532 (238,613) (63,451)
---------- --------- ---------- ---------- -----------
Total Liabilities and
Shareholders' Equity (Deficit) $1,008,622 1,337,674 18,778 (1,026,203) 1,338,871
========== ========= ========== ========== ===========
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
========== ========= ========== ========== ===========
F-31
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
January 1, 2000 and December 30, 2000
(Tables in thousands of dollars, except for per share data)
December 30, 2000
----------------------------------------------------------
Guarantor Non-
Subsidi- Guarantor Elimin- Consoli-
Results of operations Parent aries Subsidiaries ations dated
- ------------------------------- -----------------------------------------------------------
Net sales - 1,361,783 26,236 (38,392) 1,349,627
Cost of goods sold - 1,358,287 29,364 (38,392) 1,349,259
-----------------------------------------------------------
Gross Profit - 3,496 (3,128) - 368
Selling, general and administrative
expenses (2,306) 129,770 932 - 128,396
Impairments of long-lived assets - 112,711 - - 112,711
-----------------------------------------------------------
Earnings (loss) from operations 2,306 (238,985) (4,060) - (240,739)
Equity in earnings(loss)
of subsidiaries (245,609) - - 245,609 -
Interest expense 15,259 90,750 1,052 - 107,061
-----------------------------------------------------------
Earnings(loss) before reorganization
items and income tax (258,562) (329,735) (5,112) 245,609 (347,800)
Reorganization items 8,380 10,988 - - 19,368
-----------------------------------------------------------
Earnings (loss) before income taxes (266,942) (340,723) (5,112) 245,609 (367,168)
Income taxes (4,534) (100,226) - - (104,760)
-----------------------------------------------------------
Net earnings (loss) (262,408) (240,497) (5,112) 245,609 (262,408)
Preferred dividends and accretion 8,928 - - - 8,928
-----------------------------------------------------------
Earnings(loss) available for
common shareholders (271,336) (240,497) (5,112) 245,609 (271,336)
===========================================================
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 - 1,354,987 24,909 (8,106) 1,371,790
-----------------------------------------------------------
Gross Profit - 179,285 993 - 180,278
Selling, general and administrative
expenses (5,477) 135,877 856 - 131,256
Impairments of long-lived assets - 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 (18,314) (31,069) 157 21,793 (27,433)
Income taxes 1,218 (9,042) (77) - (7,901)
-----------------------------------------------------------
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)
===========================================================
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 - 1,226,874 25,069 (5,494) 1,246,449
-----------------------------------------------------------
Gross Profit - 260,811 2,581 - 263,392
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
Income taxes 1,624 25,673 92 - 27,389
-----------------------------------------------------------
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
===========================================================
F-32
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
January 1, 2000 and December 30, 2000
(Tables in thousands of dollars, except for per share data)
Years ended
-----------------------------------------------------------------------------------------------------------
December 30, 2000 January 1, 2000
-----------------------------------------------------------------------------------------------------------
Cash Flows Non- Non-
Guarantor Guarantor Guarantor Guarantor
Subsidi- Subsidi- Elimin- Consoli- Subsidi- Subsidi- Elimin- Consoli-
Parent aries aries ations dated Parent aries aries ations dated
-----------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) operating
activities $ (15,259) 49,993 231 - 34,965 $(32,752) 50,172 (7,886) - 9,534
Net cash provided by
(used in) investing
activities - (28,045) (227) - (28,272) 98 (83,569) (115) - (83,586)
Net cash provided by
(used in) financing
activities 15,259 5,355 (4) - 20,610 32,654 32,697 7,994 - 73,345
------------------------------------------------------ -----------------------------------------------
Net change in cash
and cash equivalents - 27,303 - - 27,303 - (700) (7) - (707)
Cash and
cash equivalents
at beginning of period - 4,854 - - 4,854 - 5,554 7 - 5,561
------------------------------------------------------ -----------------------------------------------
Cash amd cash
equivalents
end of period $ - 32,157 - - 32,157 $ - 4,854 - - 4,854
====================================================== ===============================================
Years ended
--------------------------------------------------------
January 2, 1999
--------------------------------------------------------
Cash Flows Non-
Guarantor Guarantor
Subsidi- Subsidi- Elimin- Consoli-
Parent aries aries ations dated
--------------------------------------------------------
Net cash provided by
(used in) operating
activities $ 15,090 40,532 (1,012) - 54,610
Net cash used
in investing
activities (93,964) (108,069) (90) - (202,123)
Net cash provided by
(used in) financing
activities 78,874 68,501 1,095 - 148,470
----------------------------------------------------
Net change in cash
and cash equivalents - 964 (7) - 957
Cash and
cash equivalents
at beginning of period - 4,590 14 - 4,604
----------------------------------------------------
Cash amd cash
equivalents
end of period $ - 5,554 7 - 5,561
====================================================
F-33
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
January 1, 2000 and December 30, 2000
(Tables in thousands of dollars, except for per share data)
Valuation and Qualifying Accounts
Years ended December 30, 2000, January 1, 2000 and January 2, 1999
Additions Deductions
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Balance at
beginning of Charged to Charged to Write-offs/ Balance at
period Expense Other Recoveries end
Accounts of period
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Allowance for:
Returns & Allowances
and Doubtful Accounts
Year ended 2000 33,351 52,381 - 42,483 (1) 43,249
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Year ended 1999 21,117 45,355 - 33,121 (1) 33,351
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Year ended 1998 14,770 26,764 6,570 (2) 26,987 (1) 21,117
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Inventory reserves:
Year ended 2000 17,207 81,218 - 23,705 74,720
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Year ended 1999 15,315 14,302 - 12,410 17,207
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Year ended 1998 9,412 11,034 2,908 (2) 8,039 15,315
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(1) Accounts written off, less recoveries
(2) Includes reserves for acquired company as of the date of acquisition
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