UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-11756
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2147728
(State of incorporation) (IRS Employer Identification No.)
4111 Mint Way 75237
Dallas, Texas (Zip Code)
(Address of principal executive offices)
(214) 333-3225
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 4, 2001
----- --------------------------
Common Stock, $.01 par value 14,250,892
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2001,
April 1, 2000 and December 30, 2000 3
Consolidated Statements of Operations for the three months
ended March 31, 2001 and April 1, 2000 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and April 1, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
Index to Exhibits 34
2
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for par value)
ASSETS March 31, April 1, December 30,
2001 2000 2000
---------------- --------------- ----------------
(unaudited) (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 34,907 19,332 32,157
Receivables:
Trade, less allowances of $26,819 as of March 31, 2001, $32,471
as of April 1, 2000 and $43,249 as of December 30, 2000 193,003 249,047 212,727
Other 6,030 11,176 6,261
Inventories 268,704 442,205 278,807
Assets held for sale 6,064 1,599 5,281
Prepaid expenses 5,096 9,806 5,323
---------------- --------------- ----------------
Total current assets 513,804 733,165 540,556
Property, plant and equipment, net 524,242 644,785 535,391
Intangible assets, at cost less accumulated amortization of 230,332 285,779 233,480
$29,533 as of March 31, 2001, $27,989 as of April 1, 2000
and $27,802 as of December 30, 2000
Other assets 29,394 28,930 29,444
---------------- --------------- ----------------
Total assets $1,297,772 1,692,659 1,338,871
================ =============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 40,694 113,370 34,909
Accrued expenses 68,331 88,050 58,458
Deferred income taxes - 37,219 -
Current portion of long-term debt - 91,508 -
Current portion of long-term debt in default 679,591 - 33,229
Long-term debt in default 13,405 - 660,790
---------------- --------------- -------------
Total current liabilities 802,021 330,147 787,386
Long-term debt, less current portion - 977,045 -
Deferred income taxes - 62,388 -
Noncurrent liabilities 39,775 52,305 40,016
---------------- --------------- -------------
Total liabilities not subject to compromise 841,796 1,421,885 827,402
Liabilities subject to compromise 484,989 - 492,093
---------------- ---------------- -------------
Total liabilities 1,326,785 1,421,885 1,319,495
Series A redeemable convertible preferred stock, $.01 par value;
81,411, 77,517 and 81,411 shares issued and outstanding for
March 31, 2001, April 1, 2000, and December 30, 2000,
respectively 86,526 75,844 82,827
Shareholders' equity (deficit):
Preferred stock, $.01 par value; authorized 20,000,000 shares;
only Series A issued - - -
Common stock, $.01 par value; authorized 55,000,000 shares;
14,250,892 as of March 31, 2001, 14,232,269 as of April 1, 2000
and 14,252,069 as of December 30, 2000 shares issued and
outstanding 143 142 143
Additional paid-in capital 160,120 159,654 160,120
Retained earnings (accumulated deficit) (273,993) 37,599 (222,067)
Currency translation adjustment (1,809) (1,754) (1647)
Deferred compensation - (711) -
---------------- --------------- -------------
Total shareholders' equity (deficit) (115,539) 194,930 (63,451)
Commitments and contingencies ---------------- --------------- -------------
Total liabilities and shareholders' equity (deficit) $1,297,772 1,692,659 1,338,871
================ =============== =============
See accompanying notes to consolidated financial statements.
3
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2001 and April 1, 2000
(Dollars in thousands, except for per share data)
(unaudited)
2001 2000
------------------ --------------------
Net sales $ 289,766 345,160
Cost of goods sold 285,349 306,065
------------------ --------------------
Gross profit 4,417 39,095
Selling, general and administrative expenses 24,120 26,939
Restructuring charge 1,977 -
------------------ --------------------
Earnings (loss) from operations (21,680) 12,156
Interest expense (contractual interest of $27,488 in 2001) 18,922 27,844
------------------ --------------------
Loss before reorganization items and
income taxes (40,602) (15,688)
Reorganization items 7,625 -
------------------ --------------------
Loss before income taxes (48,227) (15,688)
Income tax benefits - (5,961)
------------------ --------------------
Net loss (48,227) (9,727)
Preferred dividends and accretion 3,699 1,943
------------------ --------------------
Loss applicable to common shareholders $ (51,926) (11,670)
================== ====================
Loss per common share -
Basic and diluted $ (3.64) (.82)
================== ====================
Weighted average common shares outstanding -
Basic and diluted 14,251 14,228
================== ====================
See accompanying notes to consolidated financial statements.
4
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and April 1, 2000
(Dollars in thousands)
(unaudited)
2001 2000
---------------- -----------------
Cash flows from operating activities:
Net loss $ (48,227) (9,727)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 14,007 15,886
Deferred income taxes - (5,961)
Changes in assets and liabilities:
Trade receivables 19,724 19,452
Inventories 10,103 (19,153)
Accounts payable and accrued expenses 11,234 1,061
Other assets and liabilities (415) 2,867
---------------- -----------------
Net cash provided by operating activities 6,426 4,425
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment - 1,326
Purchases of property, plant and equipment (1,950) (14,790)
---------------- -----------------
Net cash used in investing activities (1,950) (13,464)
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment (703) 7,273
Borrowings on revolving credit loans - 107,300
Repayments of revolving credit loans - (81,100)
Retirement of long-term debt (1,023) (9,956)
---------------- -----------------
Net cash provided by (used in) financing activities (1,726) 23,517
Net change in cash and cash equivalents 2,750 14,478
Cash and cash equivalents at beginning of period 32,157 4,854
---------------- -----------------
Cash and cash equivalents at end of period $ 34,907 19,332
================ =================
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 21,734 18,149
================ =================
Income taxes $ 91 (3,302)
================ =================
See accompanying notes to consolidated financial statements.
5
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(1) General
The accompanying unaudited consolidated financial statements of Pillowtex
Corporation, which is referred to in this report as "Parent," and its
subsidiaries, which are collectively with Parent, referred to in this report as
the "Company," include all adjustments, consisting only of normal, recurring
adjustments and accruals, which are, in the opinion of management, necessary for
fair presentation of the results of operations and financial position. Results
of operations for interim periods may not be indicative of future results. The
unaudited consolidated financial statement should be read in conjunction with
the audited consolidated financial statements included in the Company's annual
report on Form 10-K, as filed with the Securities and Exchange Commission for
the fiscal year ended December 30, 2000.
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. 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.
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.
6
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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 requested and received from the Bankruptcy
Court an extension to the exclusive period through July 16, 2001. The Bankruptcy
Court also granted an extension on the solicitation period, through September
14, 2001. If the Debtors fail to file a plan of reorganization by July 16, 2001
or, after such plan has been filed, the Debtors fail to obtain acceptance of
such plan from the requisite impaired classes of creditors by September 14,
2001, 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.
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 Company's unaudited consolidated financial statements 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 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 is subject to substantial
uncertainty.
7
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
The Company's unaudited consolidated financial statements 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 the Company'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, the Company's ability to
comply with the terms of the DIP Financing Facility, and the Company's ability
to generate sufficient cash flow from operations and financing arrangements to
meet its obligations.
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 assets amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.
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 approved 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) Comprehensive Loss
Comprehensive loss consists of net loss and foreign currency translation
adjustments and aggregates $48.4 million and $9.7 million for the three month
periods ended March 31, 2001 and April 1, 2000, respectively.
8
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(3) Inventories
Inventories consisted of the following at March 31, 2001, April 1, 2000, and
December 30, 2000:
March 31, April 1, December 30,
2001 2000 2000
-------------------- ------------------- --------------------
Finished goods $ 139,477 234,198 130,841
Work-in-process 71,824 137,436 93,967
Raw materials 43,791 46,254 41,706
Supplies 13,612 24,317 12,293
-------------------- ------------------- --------------------
$ 268,704 442,205 278,807
==================== =================== ====================
(4) Loss Per Share
There were no reconciling items between basic loss per share and diluted loss
per share because the effects of the conversion of preferred convertible stock
and convertible debentures or assumed exercise of stock options would have been
anti-dilutive for both the three months ended March 31, 2001 and April 1, 2000.
(5) Long-Term Debt and Liquidity
Long-term debt consists of the following:
March 31, April 1, December 30,
2001 2000 2000
----------------- ---------------- --------------
Revolver $ 390,825 285,661 373,135
Overline Credit Facility 34,738 35,000 34,738
Term loans 250,400 334,403 268,090
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 14,633 16,437 14,925
9% Senior Subordinated Notes due 2007 185,000 185,000 185,000
10% Senior Subordinated Notes due 2006 125,000 125,000 125,000
6% Convertible Subordinated Sinking Fund Debentures due in
2012 (effective rate of 8.72%, net of $14.0 million in
unamortized discount at April 1, 2000) 90,417 83,770 90,417
Other debt 2,400 3,282 3,131
----------------- ---------------- ---------------
Total debt 1,093,413 1,068,553 1,094,436
Less:
Current portion of long-term debt - (91,508) -
Current portion of long-term debt in default (679,591) - (33,229)
Long-term debt in default (13,405) - (660,790)
Liabilities subject to compromise (400,417) - (400,417)
----------------- ---------------- ---------------
Total long-term debt $ - 977,045 -
================= ================ ===============
9
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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
$14.6 million as of March 31, 2001, 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 March 31, 2001, the Company had $17.1 million in letters of credit
outstanding under the DIP Financing Facility. No cash borrowings were
outstanding on the DIP Financing Facility at March 31, 2001. Availability under
the DIP Financing Facility as of March 31, 2001, was approximately $72.1
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.
10
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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 March 31, 2001, the Company had $14.1 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 the first quarter of 2001 was 10.0%. 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.
11
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Overline Facility
In May 1999, the Company entered into a $20.0 million senior unsecured revolving
credit facility (the "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 December 7, 1999, the Company
agreed to certain amendments to the Overline Facility, resulting in the Overline
Facility being secured by the same 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 9% Senior Subordinated Notes due 2005 (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 10% Senior
Subordinated Notes due 2006 (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
Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6%
Convertible Debentures") are convertible, at the option of the holders, into a
combination of cash and Common Stock. As of March 31, 2001, approximately $90.4
million aggregate principal amount of the 6% Convertible Debentures remained
outstanding. 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.
12
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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 certain 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 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 notes
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 March
31, 2001, the aggregate principal amount of the outstanding Cash Claimant Notes
was $5.2 million.
The 6% Convertible Debentures and Cash Claimant Notes are general unsecured
obligations of Fieldcrest Cannon.
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 March 31, 2001, $14.6 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
13
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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.
Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of
approximately $485.0 million as of March 31, 2001, 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. Such rejections could result in
additional liabilities subject to compromise.
(6) 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.
The components of liabilities subject to compromise at March 31, 2001 and
December 30, 2000 are as follows:
March 31, December 30,
2001 2000
------------------ -----------------
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 2012 90,417 90,417
------------------ -----------------
Total long-term debt 400,417 400,417
------------------ -----------------
Interest accrued on above notes and debentures 14,074 14,448
Accounts payable 52,477 55,322
Nonqualified pension plan liability 11,673 11,673
Other accrued expenses 6,348 10,233
------------------ -----------------
$ 484,989 492,093
================== =================
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 $8.6 million on
14
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
prepetition unsecured obligations has not been accrued in the three months ended
March 31, 2001. Since the Petition Date, the Company has not accrued interest of
$12.6 million on prepetition unsecured obligations.
(7) 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 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 March 31, 2001. 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 or 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.
As a result of the amount of prepetition indebtedness and the availability of
the "cram down" provision of the Bankruptcy Code described above, the holders of
the Series A Preferred Stock may receive no value for their interest under a
plan of reorganization.
(8) 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, as well as 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 as described in the Company's annual
report on Form 10-K for the year ended December 30, 2000. The Company evaluates
division performance based on gross profit. Interdivisional sales are not
material.
15
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Information about the Company's divisions is presented below:
Three Months Ended
March 31, 2001
-----------------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Blanket Other Total
-----------------------------------------------------------------------------
Net sales $ 210,892 63,326 10,840 4,708 (1) 289,766
Gross profit (loss) 10,361 7,879 (3,074) (10,749) (1) 4,417
Depreciation and amortization 10,188 824 229 2,766 14,007
Capital expenditures 820 - - 1,130 1,950
Total assets 890,324 135,391 51,334 220,723 (2) 1,297,772
Three Months Ended
April 1, 2000
-----------------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Blanket Other Total
-----------------------------------------------------------------------------
Net sales $ 252,414 65,745 20,742 6,259 (1) 345,160
Gross profit (loss) 38,315 13,649 (2,135) (10,734) (1) 39,095
Depreciation and amortization 10,324 992 1,859 2,711 15,886
Capital expenditures 9,331 279 115 5,065 14,790
Total assets 1,154,151 144,223 181,198 213,087 (2) 1,692,659
(1) Includes retail stores and miscellaneous Corporate activities, including
the Company's central information technology, human resources and
purchasing departments.
(2) Corporate amounts include primarily data processing equipment and software
and other enterprise-wide assets not allocated to the segments.
(9) Restructuring Charge
During the first quarter of 2001, the Company incurred a charge of $2.0 million
associated with the closure of the Company's towel manufacturing facility
located in Hawkinsville, Georgia. The Hawkinsville facility closed in March
2001, and its operations have been relocated to the Company's facilities in
Kannapolis, North Carolina, Fieldale, Virginia and Columbus, Georgia.
Approximately 380 employees were terminated as a result of the closure. The
restructuring charge consists principally of severance and benefits, which the
Company anticipates to pay during the second and third quarters of 2001. At
March 31, 2001, the Company had approximately $1.8 million reflected in accrued
expenses related to the restructuring charge. The Company had previously
recorded a $3.4 million impairment charge for the fixed assets at the
Hawkinsville facility in the year ended December 30, 2000.
16
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(10) Reorganization Items
During the first quarter of 2001, the Company recognized the following items as
reorganization items in the statement of operations (in thousands):
Professional fees and other costs
associated with the filing of
the Chapter 11 Cases $6,311
Retention Incentive Plan 1,902
Interest income on investments (588)
--------
$7,625
========
During the three months ended March 31, 2001, the Company paid approximately
$1.5 million in professional fees associated with the filing of the Chapter 11
Cases.
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 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
concerns regarding potential key employee attrition during the Company's
financial restructuring process.
Under the Retention Incentive Plan, eligible employees are to earn a specified
retention incentive payment (a "Retention Incentive Payment"), based upon a
percentage of their salary determined by the Company's management, payable on
the following four dates if the employee remains actively employed by the
Company on such 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
anniversary date of the filing of the Chapter 11 Cases (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 following confirmation of a plan of reorganization.
The Company currently estimates the total cost of the Retention Incentive Plan
to be approximately $6.1 million. In addition, a discretionary retention pool of
$500,000 is available for non-union employees not already included in the
Retention Incentive Plan. On April 9, 2001, the Company paid the first
installment of the Retention Incentive Plan for approximately $1.5 million.
The Emergence Performance Bonus Plan provides an additional incentive 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. Since the two factors are
currently not known, the Company has not reflected any expense associated with
the Emergence Performance Bonus Plan in its results of operations for the three
months ended March 31, 2001. The Emergence Performance Bonus Plan currently
includes eight members of the Company's senior management.
The purpose of the Severance Plan is to integrate all severance agreements
existing prior to the Petition Date into one plan, which supersedes all prior
severance plans and the severance provisions of executives' employment
arrangements. The Severance Plan covers all full-time employees of the Company,
the majority of which are not eligible to participate in any other components of
the Retention Program. With certain exceptions, employees who are terminated
after the Petition Date for reasons other than death, disability, retirement or
cause, will be eligible to receive severance benefits equal to one week's salary
for each completed year of service, with a minimum of two
17
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
weeks salary and a maximum of 26 weeks salary. In addition, eligible employees
will be entitled to receive medical insurance, life insurance and certain other
benefits.
(11) Income Taxes
The Company's management, in assessing the realizability of deferred tax assets
must consider whether it is more likely than not that part or all of the
deferred tax asset may not be realized. This assessment includes consideration
for the scheduled reversal of temporary taxable differences, projected future
taxable income and tax planning strategies. As a result of this assessment, the
Company did not recognize an income tax benefit for the loss incurred for the
three months ended March 31, 2001. Instead, the increase in net deferred tax
assets as a result of the loss was offset by an equal increase in the valuation
allowance. As of March 31, 2001, the Company's management also concluded that
deferred tax assets, net of the valuation allowance, can be realized as a result
of the reversal of existing temporary taxable differences.
At March 31, 2001, the Company has $316 million of federal and state operating
loss carryforward expiring 2006 through 2021, $1.9 million of general business
tax credit carryforward expiring 2005 through 2020 and a $6.7 million unused
alternative minimum tax credit carryforward that does not expire.
(12) Recently Adopted Accounting Standard
During June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of SFAS No. 133, as
amended by SFAS 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 adoption of SFAS No. 133, as amended, did not have any impact on
its financial position or results of operations.
(13) Subsequent Event
On April 24, 2001, the Company announced the closure of its blanket yarn
manufacturing facility in Newton, North Carolina and its cut-and-sew bedding
facility in Rocky Mount, North Carolina. Most of the impact from these closures,
which will affect approximately 290 employees, are expected to occur prior to
June 30, 2001. However, certain employees will remain at the Rocky Mount
facility for several months past the June closing date to satisfy existing
commitments to customers.
The Company currently estimates the restructuring charge resulting from the
closures will be approximately $1 million to $2 million. The Company had
previously reflected a $1.3 million impairment charge for the fixed assets at
the Rocky Mount facility in the year ended December 30, 2000. The Rocky Mount
facility manufactures decorative bedding exclusively under a license agreement,
which expires on June 30, 2001. The Company decided to close the Newton facility
as a result of its evaluation of its strategic options relating to the Blanket
Division. The Company had incurred an impairment charge of $88.3 million
relating to the fixed assets and goodwill associated with the Blanket Division
in the year ended December 30, 2000.
18
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(14) Supplemental Condensed Consolidating Financial Information
The following table presents condensed consolidating financial information for
the Company, segregating the Parent and guarantor subsidiaries from
non-guarantor subsidiaries. The guarantor subsidiaries are wholly owned
subsidiaries of the Parent and the guarantees are full, unconditional and joint
and several. Separate financial statements of the guarantor subsidiaries are not
presented because management believes that these financial statements would not
provide relevant material additional information.
March 31, 2001
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
Assets:
- -------
Trade receivables $ - 187,223 5,780 - 193,003
Receivable from affiliates 763,785 - - (763,785) -
Inventories - 262,186 6,518 - 268,704
Other current assets 738 51,233 126 - 52,097
-------------- --------------- -------------- ---------------- ---------------
Total current assets 764,523 500,642 12,424 (763,785) 513,804
Property, plant and equipment, net 10 523,140 1,092 - 524,242
Intangibles, net 5,059 223,084 2,189 - 230,332
Other assets 213,948 10,326 - (194,880) 29,394
-------------- --------------- -------------- ---------------- ---------------
Total assets $ 983,540 1,257,192 15,705 (958,665) 1,297,772
============== =============== ============== ================ ===============
Liabilities and shareholders' equity (deficit):
-----------------------------------------------
Liabilities not subject to
compromise:
Accounts payable and accrued
liabilities $ 13,103 94,466 1,456 - 109,025
Payables to affiliates - 755,968 7,817 (763,785) -
Long-term debt in default 675,963 17,033 - - 692,996
-------------- --------------- -------------- ---------------- ---------------
Total current liabilities 689,066 867,467 9,273 (763,785) 802,021
Noncurrent liabilities - 39,775 - - 39,775
-------------- --------------- -------------- ---------------- ---------------
Total liabilities not
subject to compromise 689,066 907,242 9,273 (763,785) 841,796
Liabilities subject to compromise 323,487 161,502 - - 484,989
Redeemable convertible preferred
stock 86,526 - - - 86,526
Shareholders' equity (deficit) (115,539) 188,448 6,432 (194,880) (115,539)
-------------- --------------- -------------- ---------------- ---------------
Total liabilities and
shareholders' equity
(deficit) $ 983,540 1,257,192 15,705 (958,665) 1,297,772
============== =============== ============== ================ ===============
19
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(14) Supplemental Condensed Consolidating Financial Information
December 30, 2000
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations 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, net 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):
-----------------------------------------------
Liabilities not subject to
compromise:
Accounts payable and accrued
liabilities $ 4,151 86,335 2,881 - 93,367
Payables to affiliates - 779,207 8,383 (787,590) -
Other current liabilities 984 32,369 (124) - 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 not
subject to compromise 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
============= =============== ============== ================ ================
20
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(14) Supplemental Condensed Consolidating Financial Information
Three Months Ended March 31, 2001
--------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - 294,984 3,660 (8,878) 289,766
Cost of goods sold - 291,082 3,145 (8,878) 285,349
-------------- -------------- --------------- --------------- ---------------
Gross profit - 3,902 515 - 4,417
Selling, general and administrative 226 22,298 1,596 - 24,120
Restructuring charges - 1,977 - - 1,977
-------------- -------------- --------------- --------------- ---------------
Earnings (loss) from
operations (226) (20,373) (1,081) - (21,680)
Equity in loss of subsidiaries (43,733) - - 43,733 -
Interest expense (3,945) 22,848 19 - 18,922
-------------- -------------- --------------- --------------- ---------------
Loss before reorganization items
and income taxes (40,014) (43,221) (1,100) 43,733 (40,602)
Reorganization items 8,213 (588) - - 7,625
-------------- -------------- --------------- --------------- ---------------
Earnings (loss) before
income taxes (48,227) (42,633) (1,100) 43,733 (48,227)
Income taxes - - - - -
-------------- -------------- --------------- --------------- ---------------
Net earnings (loss) (48,227) (42,633) (1,100) 43,733 (48,227)
Preferred dividends 3,699 - - - 3,699
-------------- -------------- --------------- --------------- ---------------
Loss applicable to
common shareholders $ (51,926) (42,633) (1,100) 43,733 (51,926)
============== ============== =============== =============== ===============
21
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(14) Supplemental Condensed Consolidating Financial Information
Three Months Ended April 1, 2000
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - 337,707 7,453 - 345,160
Cost of goods sold - 299,593 6,472 - 306,065
-------------- --------------- -------------- ---------------- ---------------
Gross profit - 38,114 981 - 39,095
Selling, general and administrative (1,099) 27,862 176 - 26,939
-------------- --------------- -------------- ---------------- ---------------
Earnings from operations 1,099 10,252 805 - 12,156
Equity in loss of subsidiaries (9,205) - - 9,205 -
Interest expense 1,902 25,733 209 - 27,844
-------------- --------------- -------------- ---------------- ---------------
Earnings (loss) before income
taxes (10,008) (15,481) 596 9,205 (15,688)
Income taxes (281) (5,680) - - (5,961)
-------------- --------------- -------------- ---------------- ---------------
Net earnings (loss) (9,727) (9,801) 596 9,205 (9,727)
Preferred dividends 1,943 - - - 1,943
-------------- --------------- -------------- ---------------- ---------------
Earnings (loss) applicable to
common shareholders $ (11,670) (9,801) 596 9,205 (11,670)
============== =============== ============== ================ ===============
22
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(14) Supplemental Condensed Consolidating Financial Information
Three Months Ended March 31, 2001
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in)
Operating activities $ (4,041) 9,743 724 - 6,426
Cash used in Investing
activities - (1,792) (158) - (1,950)
Cash provided by (used in)
Financing activities 4,041 (5,201) (566) - (1,726)
------------- -------------- --------------- --------------- ---------------
Net change in cash and cash
equivalents - 2,750 - - 2,750
Cash and cash equivalents at
Beginning of year - 32,157 - - 32,157
------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents at
End of period $ - 34,907 - - 34,907
============= ============== =============== =============== ===============
Three Months Ended April 1, 2000
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in)
Operating activities $ 9,684 $ (5,113) $ (146) $ - $ 4,425
Cash used in Investing
activities - (13,434) (30) - (13,464)
Cash provided by (used in)
Financing activities (9,684) 33,025 176 - 23,517
------------- -------------- --------------- --------------- ---------------
Net change in cash and cash
equivalents - 14,478 - - 14,478
Cash and cash equivalents at
Beginning of year - 4,854 - - 4,854
------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents at
End of period $ - $ 19,332 $ - $ - $ 19,332
============= ============== =============== =============== ===============
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended December 30, 2000.
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 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.
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. Such rejections could result in additional liabilities subject to
compromise.
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 requested and received from the Bankruptcy
Court an extension to the exclusive period through July 16, 2001. The Bankruptcy
Court also granted an extension on the solicitation period,
24
through September 14, 2001. If the Debtors fail to file a plan of reorganization
by July 16, 2001 or, after such plan has been filed, the Debtors fail to obtain
acceptance of such plan from the requisite impaired classes of creditors by
September 14, 2001, 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.
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 assets amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.
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.
25
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 approved 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.
Results of Operations
- ---------------------
Net Sales. Net sales were down from $345.2 million in the first quarter of 2000
to $289.8 million in the first quarter of 2001, a decrease of $55.4 million or
16.1%. Net sales for the Company's operating segments for each quarter are shown
below (in thousands):
Net Sales
Three Months Ended
-------------------------------------------
March 31, April 1,
2001 2000
----------------- ------------------
Bed and Bath $ 210,892 $ 252,414
Pillow and Pad 63,326 65,745
Blanket 10,840 20,742
Other (a) 4,708 6,259
----------------- ------------------
Total $ 289,766 $ 345,160
================= ==================
(a) Includes retail stores
Approximately $38.9 million of the decrease in sales for the first quarter of
2001 is attributable to the loss of a specific customer, affecting the Company's
three major Divisions. This, combined with the continued slow down in the U.S.
economy and increased competition from imports, was responsible for the
Company's decline in sales volume in the first quarter of 2001.
Gross Profit. Gross profit decreased $34.7 million from $39.1 million in the
first quarter of 2000 to $4.4 million in the first quarter of 2001. Gross profit
(loss) by operating segment is as follows (in thousands):
Gross Profit (Loss)
Three Months Ended
-------------------------------------------------------
March 31, April 1,
2001 2000
-------------------------- --------------------------
Bed and Bath $ 10,361 $ 38,315
Pillow and Pad 7,879 13,649
Blanket (3,074) (2,135)
Other (a) (10,749) (10,734)
-------------------------- --------------------------
Total $ 4,417 $ 39,095
========================== ==========================
(a) Includes retail stores and corporate charges
26
In the first quarter of 2001, the Company continued to focus on reducing working
capital by improving receivable collections and lowering inventory levels and
matching production to sales more closely. Although this has had a positive
impact on the Company's working capital, it has put additional pressure on gross
profits primarily due to higher unabsorbed overhead costs of approximately $20.0
million, and increased costs for utilities and chemicals. Currently, management
is assessing ways to cut costs and examining strategic alternatives for
increasing the Company's long-term profitability.
Selling, General and Administrative ("SG&A"). SG&A expenses in the first quarter
of 2001 decreased $2.8 million to $24.1 million from the first quarter of 2000
of $26.9 million. These savings are primarily the result of management's
continued focus on cost controls.
Restructuring Charge. During the first quarter of 2001, the Company incurred a
charge of approximately $2.0 million related to the closure of the Company's
manufacturing facility in Hawkinsville, Georgia. The charge principally consists
of severance and related benefits. The Company had previously recorded a $3.4
million impairment charge for the fixed assets at the Hawkinsville facility in
the year ended December 30, 2000. The Company currently anticipates that the
closure will result in annual cost savings of approximately $3 million to $4
million.
Interest Expense. Interest expense decreased $8.9 million to $18.9 million for
the three months ended March 31, 2001, compared to $27.8 million for the three
months ended April 1, 2000. The average interest rate in the first quarter of
2001 was approximately 10.0%, compared to approximately 9.3% in the first
quarter of 2000. The primary reason for the decrease in interest expense results
from the Company's filing of the Chapter 11 Cases, which enabled the Company to
cease the payment and accrual of interest on all unsecured prepetition debt. The
interest on that unsecured prepetition debt was approximately $8.6 million in
the first quarter of 2001.
Reorganization Items. During the first quarter of 2001, the Company recognized
$7.6 million of reorganization items associated with the Chapter 11 Cases. The
charge consists of approximately $6.3 million of fees payable to professionals
retained to assist with the filing of the Chapter 11 Cases and approximately
$1.9 million for a retention incentive bonus plan for the Company's management
team and other key employees, offset by interest income of $0.6 million.
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
$14.6
27
million as of March 31, 2001, 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 March 31, 2001, the Company had $17.1 million in letters of credit
outstanding under the DIP Financing Facility. No cash borrowings were
outstanding on the DIP Financing Facility at March 31, 2001. Availability under
the DIP Financing Facility as of March 31, 2001, was $72.1 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 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.
28
As of March 31, 2001, the Company had $14.1 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 the first quarter of 2001 was approximately 10.0%. 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 the $20.0 million
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 December 7, 1999, the Company agreed to certain
amendments to the Overline Facility, resulting in the Overline Facility being
secured by the same 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. No principal
or interest payment will be made on the 9% Notes or the 10% Notes during the
pendency of the Chapter 11 Cases.
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
29
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 March 31, 2001,
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 certain 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 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 notes
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 March
31, 2001, 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. No principal or interest payment will be made on the 6% Convertible
Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases.
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 March 31, 2001, $14.6 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
30
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 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 a plan
of reorganization could materially change the amounts reported in the
consolidated financial statements.
Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of
approximately $485.0 million as of March 31, 2001, 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.
Cautionary Statement Regarding Forward-Looking Statements
- ---------------------------------------------------------
This filing contains certain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information available to, the
Company's management. Because such forward-looking statements are subject to
various risks and uncertainties, results may differ materially from those
expressed in or implied by such statements. Many of the factors that will
determine these results are beyond the Company's ability to control or predict.
Factors which could affect the Company's future results and could cause results
to differ materially from those expressed in or implied by such forward-looking
statements include, among others: (a) the significant challenges faced in
connection with the Chapter 11 Cases; (b) the substantial doubt as to whether
the Company will continue as a going concern; (c) the restrictions on the
conduct of the Company's business as a result of the Chapter 11 Cases and
provisions contained in the DIP Financing Facility; (d) the Company's dependence
on specific raw materials; (e) the effects of adverse retail industry
conditions; (f) the Company's dependence on specific brand names; (g) the risks
related to the loss of key licenses; (h) the risks related to loss of material
customers; (I) the risks related to organized labor; (j) the seasonality of
the Company's businesses; (k) the difficulties in attracting and retaining
personnel; and (l) the substantial effort of management required in connection
with the Chapter 11 Cases. For further discussion of such risks, see "Cautionary
Statement Regarding Forward-Looking Statements" and "Risk Factors" in the
Company's Annual Report on Form 10-K for its fiscal year ended December 30,
2000.
31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Resignation, Appointment and Acceptance, dated March 23,
2001, by and among Pillowtex Corporation, as Issuer, U.S.
Bank National Association, as Resigning Trustee, and HSBC
Bank USA, as Successor Trustee
10.1 Second Amendment to Post-Petition Credit Agreement dated as
of January 30, 2001, among Pillowtex Corporation and
certain of its Subsidiaries, certain Lenders named therein,
and Bank of America, N.A., as Administrative Agent
10.2* Employment Agreement entered into between Pillowtex
Corporation and an executive officer, dated as of March 19,
2001
(b) Reports on Form 8-K
None
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 14, 2001 PILLOWTEX CORPORATION
(Registrant)
/s/ Michael R. Harmon
-----------------------------------------
Michael R. Harmon
Executive Vice President and Chief
Financial Officer
33
Index to Exhibits
Exhibit Method of Filing
4.1 Resignation, Appointment and Acceptance, dated March 23, 2001, by and Filed herewith electronically
among Pillowtex Corporation, as Issuer, U.S. Bank National
Association, as Resigning Trustee, and HSBC Bank USA, as Successor
Trustee
10.1 Second Amendment to Post-Petition Credit Agreement dated as of Filed herewith electronically
January 30, 2001, among Pillowtex Corporation and certain of its
Subsidiaries, certain Lenders named therein, and Bank of America,
N.A., as Administrative Agent
10.2* Employment Agreement entered into between Pillowtex Corporation and Filed herewith electronically
an executive officer, dated as of March 19, 2001
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
35