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 30, 2002
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.)
One Lake Circle Drive
Kannapolis, North Carolina 28081
(Address of principal executive offices) (Zip Code)
(704) 939-2000
(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 10, 2002
----- ---------------------------
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 30, 2002,
March 31, 2001 and December 29, 2001 2
Consolidated Statements of Operations for the three months
ended March 30, 2002 and March 31, 2001 3
Consolidated Statements of Cash Flows for the three months
ended March 30, 2002 and March 31, 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 37
Signature 38
1
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for par value)
March 30, March 31, December 29,
2002 2001 2001
----------- ----------- ------------
(unaudited) (unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of $4,724 as of
March 30, 2002 and $3,861 as of December 29, 2001) $ 28,400 34,645 40,388
Receivables:
Trade, less allowances of $8,329 as of March 30, 2002, $25,534
as of March 31, 2001 and $9,276 as of December 29, 2001 146,057 177,663 144,727
Other 9,504 5,996 4,478
Inventories 189,888 248,427 200,578
Assets held for sale 5,121 6,064 6,075
Prepaid expenses 4,474 4,982 3,604
Net assets of discontinued operations 395 41,736 1,358
---------- --------- ---------
Total current assets 383,839 519,513 401,208
Property, plant and equipment, less accumulated depreciation of $172,410
as of March 30, 2002, $165,147 as of March 31, 2001 and
$172,938 as of December 29, 2001 418,587 515,072 453,440
Intangible assets, at cost less accumulated amortization of
$41,495 as of March 30, 2002, $29,533 as of March 31, 2001
and $40,899 as of December 29, 2001 221,318 230,332 221,729
Other assets 11,046 29,341 11,250
---------- --------- ---------
Total assets $1,034,790 1,294,258 1,087,627
========== ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 34,190 38,775 35,119
Accrued expenses 55,048 66,735 59,837
Current portion of long-term debt 843 -- 356
Current portion of long-term debt in default 660,191 679,591 660,893
Long-term debt in default 10,920 13,405 10,920
---------- --------- ---------
Total current liabilities 761,192 798,506 767,125
Long-term debt, less current portion 3,049 -- 645
Noncurrent liabilities 49,847 39,777 48,950
---------- --------- ---------
Total liabilities not subject to compromise 814,088 838,283 816,720
Liabilities subject to compromise 499,812 484,989 500,840
---------- --------- ---------
Total liabilities 1,313,900 1,323,272 1,317,560
Series A redeemable convertible preferred stock, $.01 par value;
81,411 shares issued and outstanding for
March 30, 2002, March 31, 2001 and December 29, 2001 103,760 86,526 99,185
Shareholders' 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 shares issued and outstanding as of March 30, 2002,
March 31, 2001 and December 29, 2001 143 143 143
Additional paid-in capital 160,120 160,120 160,120
Accumulated deficit (514,915) (273,993) (461,186)
Accumulated other comprehensive loss (28,218) (1,810) (28,195)
---------- --------- ---------
Total shareholders' deficit (382,870) (115,540) (329,118)
Commitments and contingencies
---------- --------- ---------
Total liabilities and shareholders' deficit $1,034,790 1,294,258 1,087,627
========== ========= =========
See accompanying notes to consolidated financial statements
2
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 30, 2002 and March 31, 2001
(Dollars in thousands, except for per share data)
(unaudited)
March 30, March 31,
2002 2001
--------- ---------
Net sales $240,925 273,842
Cost of goods sold 231,564 271,433
-------- -------
Gross profit 9,361 2,409
Selling, general, and administrative expenses 16,117 19,075
Impairment of long-lived assets 30,919 --
Restructuring charges 3,032 1,977
-------- -------
Loss from operations (40,707) (18,643)
Interest expense (contractual interest of $18,867 in 2002 and $27,488
in 2001) 10,301 18,922
-------- -------
Loss from continuing operations before
reorganization items and income taxes (51,008) (37,565)
Reorganization items 5,303 7,625
-------- -------
Loss from continuing operations before income taxes (56,311) (45,190)
Income tax benefit (7,157) --
-------- -------
Net loss from continuing operations (49,154) (45,190)
Loss from discontinued operations -- 3,037
-------- -------
Net loss (49,154) (48,227)
Preferred dividends and accretion 4,575 3,699
-------- -------
Loss applicable to common shareholders $(53,729) (51,926)
======== =======
Basic and diluted loss per common share -
Loss from continuing operations applicable to common shareholders $ (3.77) (3.43)
======== =======
Loss applicable to common shareholders $ (3.77) (3.64)
======== =======
Weighted average common shares outstanding -
Basic and diluted 14,251 14,251
======== =======
See accompanying notes to consolidated financial statements.
3
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 30, 2002 and March 31, 2001
(Dollars in thousands)
(unaudited)
March 30, March 31,
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $(49,154) (48,227)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss from discontinued operations -- 3,037
Depreciation and amortization 11,300 13,777
Impairment of long-lived assets 30,919 --
Changes in assets and liabilities, net of effects of the
divestiture of the Blanket Division:
Trade receivables (878) 11,401
Inventories 10,690 13,718
Accounts payable and accrued expenses (8,122) 8,843
Other assets and liabilities (4,285) 1,579
-------- -------
Net cash provided by (used in) operating activities (9,530) 4,128
Net cash provided by discontinued operations 510 2,011
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 954 --
Purchases of property, plant and equipment (4,150) (1,950)
-------- -------
Net cash used in investing activities (3,196) (1,950)
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment 1,159 (703)
Retirement of long-term debt (931) (1,023)
-------- -------
Net cash provided by (used in) financing activities 228 (1,726)
Net change in cash and cash equivalents (11,988) 2,463
Cash and cash equivalents at beginning of year 40,388 32,182
-------- -------
Cash and cash equivalents at end of period $ 28,400 34,645
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,280 21,734
======== =======
Income taxes $ 88 91
======== =======
Supplemental disclosure of noncash financing information:
During the three months ended March 30, 2002, the Company converted two
operating leases into capital lease obligations of $3,120.
See accompanying notes to consolidated financial statements.
4
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" or "Pillowtex," include all adjustments, consisting only of
normal, recurring adjustments and accruals, which are, in the opinion of
management, necessary for fair presentation of the results of operations and
financial position. Results of operations for interim periods may not be
indicative of future results. The unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission for the fiscal year ended December 29, 2001.
The March 31, 2001 consolidated financial statements have been restated to
present the Blanket Division as a discontinued operation (see note 13).
The Company adopted the provisions of EITF No. 00-25 (as defined in note 12) on
December 30, 2001. As a result, $5.1 million of selling, general, and
administrative expenses have been reclassified as a reduction to net sales in
the three months ended March 31, 2001.
Proceedings Under Chapter 11 of the Bankruptcy Code
On November 14, 2000 (the "Petition Date"), Parent 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.
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 continuing to review their executory contracts
and unexpired leases and have received approval from the Bankruptcy Court to
reject certain contracts and leases. The Debtors cannot presently determine the
ultimate liability for all contracts and leases that will be approved by the
Bankruptcy Court for rejection. During the three months ended March 30, 2002,
the Company accrued $0.2 million for the estimated prepetition liability for
those contracts and leases the Bankruptcy Court has already approved for
rejection. The Company expects to accrue additional liabilities as more
contracts and leases are approved for rejection by the Bankruptcy Court. In
addition to rejecting certain contracts and leases, the Company is in the
process of renegotiating certain operating leases and expects that these leases
will be classified as capital in accordance with their renegotiated terms.
During the three months ended March 30, 2002, the Company converted two
operating leases into capital lease obligations of $3.1 million.
On December 28, 2001, the Debtors filed with the Bankruptcy Court a Joint Plan
of Reorganization and related Disclosure Statement. On February 26, 2002, the
Debtors filed with the Bankruptcy Court a First Amended Joint Plan of
Reorganization and related Disclosure Statement. On March 1, 2002, the Debtors
filed with the Bankruptcy Court a Second Amended Joint Plan of Reorganization
and related Disclosure Statement, which the Bankruptcy Court had approved as
containing "adequate information" for creditors of the Debtors in accordance
with section 1125 of the Bankruptcy Code on February 28, 2002. On March 11,
2002, the Debtors filed with the Bankruptcy
5
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Court a revised version of the Second Amended Joint Plan of Reorganization and
related Disclosure Statement (as so revised, the "Disclosure Statement")
incorporating certain nonmaterial clarifications and modifications to reflect,
among other things, events subsequent to March 1, 2002. On or about March 11,
2002, the Debtors commenced delivery of copies of the Disclosure Statement to
parties in interest as required pursuant to the Bankruptcy Code. Following the
solicitation period, which ended on April 19, 2002, the Bankruptcy Court
confirmed the Second Amended Joint Plan of Reorganization, with certain
modifications (as so modified, the "Plan"), at a confirmation hearing held on
May 1, 2002.
The primary objectives of the Plan are to: (a) alter the Debtors' debt and
equity structures to permit the Debtors to emerge from the Chapter 11 Cases with
viable capital structures; (b) maximize the value of the ultimate recoveries to
all creditor groups on a fair and equitable basis; and (c) settle, compromise,
or otherwise dispose of certain claims and interests on terms that the Debtors
believe to be fair and reasonable and in the best interests of their respective
estates, creditors, and equity holders. The Plan provides for, among other
things:
. the cancellation of certain indebtedness in exchange for cash, common
stock in reorganized Parent (the "New Common Stock"), and/or warrants
to purchase shares of New Common Stock ("New Warrants");
. the cancellation of "Designated Post-Petition Loans" (as such term is
defined in the Plan) having an aggregate principal amount of $150
million in exchange for the issuance by reorganized Parent of $150
million aggregate principal amount of notes under a new secured term
loan (the "Exit Term Loan");
. the cancellation without consideration of Parent's common stock and
preferred stock that was issued and outstanding immediately prior to
the Petition Date;
. the assumption, assumption and assignment, or rejection of executory
contracts or unexpired leases to which any Debtor is a party;
. the reinstatement of approximately $11.4 million principal amount of
industrial revenue bonds;
. the selection of boards of directors of the reorganized Debtors;
. the merger of Parent with and into a new Delaware corporation, with
the new Delaware corporation as the surviving corporation; and
. the corporate restructuring of certain of Parent's subsidiaries to
simplify the Company's corporate structure.
The Debtors currently anticipate that the Plan will become effective prior to
June 30, 2002. However, under the terms of the Plan, there are significant
conditions precedent to the effectiveness of the Plan. Conditions to the
effectiveness of the Plan include, among others, the execution and delivery of
the documentation effectuating a revolving credit facility (the "Exit Financing
Revolver Facility") and the execution and delivery of the documentation
effectuating the Exit Term Loan. There can be no assurance that these conditions
will be satisfied, and accordingly, there can be no assurance as to when or if
the Plan will become effective.
It is presently anticipated that the Exit Financing Revolver Facility will be
obtained on substantially the terms described below. In connection with the
confirmation of the Plan, Parent obtained a commitment from an asset-based
lender for the Exit Financing Revolver Facility (the "Exit Lender"). Under the
Exit Financing Revolver Facility, the Exit Lender would make available to
reorganized Parent a three-year senior asset-based nonamortizing revolving
credit facility in the amount of $200 million, including a $60 million letter of
credit sub-facility. Parent and certain of its domestic subsidiaries will be
borrowers under the Exit Financing Revolver Facility, and Parent's other
domestic and Canadian subsidiaries will be guarantors thereunder. The
availability of borrowings
6
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
under the Exit Financing Revolver Facility generally would be based on the
amount of eligible accounts receivable, the value of eligible inventory, and at
the borrower's option, the value of certain real property and equipment. The
Exit Financing Revolver Facility would be secured by a first priority lien on
the accounts receivable, inventory, and trademarks, as well as certain real
property and equipment, of the reorganized Debtors and a second priority lien on
the primary collateral that secures the Exit Term Loan. All borrowings under the
Exit Financing Revolver Facility would bear interest at an annual rate equal to,
at reorganized Parent's option, the Exit Lender's prime rate or an adjusted
Eurodollar rate, in either case plus a specified margin determined based on the
amount of excess availability and reorganized Parent's leverage ratio. In
addition to the fees paid or payable to the Exit Lender in connection with the
commitment and the closing of the Exit Financing Revolver Facility, reorganized
Parent would pay an unused commitment fee of either 3/8% of 1/2% per annum
(depending on excess availability and the leverage ratio), a servicing fee of
$5,000 per month, an early termination fee of 1/2% per annum of the maximum
credit if the Exit Financing Revolver Facility is terminated prior to the end of
its term, and a letter of credit fee of 2 1/2% per annum on the daily
outstanding balance of letters of credit. The Exit Lender's commitment is
subject to various conditions, and accordingly, there can be no assurance as to
whether, or the terms upon which, the Exit Financing Revolver Facility will
actually be made available.
Pursuant to the terms of the Plan, the Exit Term Loan will be a $150 million
senior five-year term loan secured by a first priority lien on certain real
estate, plant, and equipment and a second priority lien on the primary
collateral that secures that Exit Financing Revolver Facility. Reorganized
Parent will be the borrower under the Exit Term Loan and substantially all of
its subsidiaries will be guarantors thereunder. The Exit Term Loan will bear
interest at a rate of 10% per annum, payable on the last day of March, June,
September and December, commencing on September 30, 2002. In addition to
scheduled prepayments of principal on the last day of June and December,
commencing December 31, 2002, reorganized Parent will be required to prepay the
Exit Term Loan with the net cash proceeds from the sale of certain assets and,
commencing March 31, 2004 and on each March 31 thereafter, with 50% of the
excess cash flow, if any, for the preceding fiscal year. The principal amount of
the Exit Term Loan may be immediately reduced by up to $50 million utilizing
borrowings under the Exit Financing Revolver Facility depending on borrowing
base availability thereunder. Under the Exit Term Loan, reorganized Parent will
pay an annual administrative fee of $150,000 on the effective date and each
anniversary thereof.
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 (a) satisfy
the conditions precedent to the effectiveness of the Plan or effect another plan
of reorganization, (b) comply with the DIP Financing Facility (see note 5) and
(c) generate sufficient cash from operations and financing sources to meet
future obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of these uncertainties.
The amounts reported on the consolidated balance sheets could materially change
because of changes in business strategies and the effects of the Plan or another
plan or reorganization.
In the Chapter 11 Cases, substantially all unsecured liabilities and
under-secured liabilities as of the Petition Date are subject to compromise or
other treatment under the Plan. For financial reporting purposes, those
liabilities and obligations whose treatment and satisfaction are dependent on
the outcome of the Chapter 11 Cases have been segregated and classified as
liabilities subject to compromise in the accompanying consolidated balance
sheets.
7
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Generally, all actions to enforce or otherwise effect repayment of pre-petition
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
the terms of the Plan.
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, pension equity adjustments and foreign
currency translation adjustments and aggregated $49.2 million and $48.4 million
for the three months ended March 30, 2002 and March 31, 2001, respectively.
(3) Inventories
Inventories consist of the following:
March 30, March 31, December 29,
2002 2001 2001
--------- --------- ------------
Finished goods $ 96,318 114,436 104,532
Work-in-process 43,817 61,100 40,832
Raw materials and supplies 43,250 62,054 46,828
In-transit and off-site 6,503 10,837 8,386
-------- ------- -------
$189,888 248,427 200,578
======== ======= =======
(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 convertible preferred stock
and convertible debentures would have been anti-dilutive for the three months
ended March 30, 2002 and March 31, 2001, respectively. Because the exercise
price for outstanding options for the three months ended March 30, 2002 and
March 31, 2001 was greater than the average market price, no options were
assumed to be exercised. For the three months ended March 30, 2002, convertible
preferred stock was convertible into approximately 4.3 million shares of common
stock, convertible debentures were convertible into approximately 0.5 million
shares of common stock, and options to purchase approximately 1.1 million shares
of common stock were outstanding. For the three months ended March 31, 2001,
convertible preferred stock was convertible into approximately 3.6 million
shares of common stock, convertible debentures were convertible into
approximately 0.5 million shares of stock, and options to purchase approximately
1.1 million shares of common stock were outstanding.
8
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSf
(Tables in thousands)
(unaudited)
(5) Long-Term Debt and Liquidity
Long-term debt consists of the following:
March 30, March 31, December 29,
2002 2001 2001
---------- --------- ------------
Revolver less portion to be treated as postpetition debt $ 232,722 240,825 233,051
Term loans less portion to be treated as postpetition debt 241,631 250,400 242,004
Portion of revolver and term loans to be treated as
postpetition debt 150,000 150,000 150,000
Overline Credit Facility 34,738 34,738 34,738
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, buildings and a letter of credit 13,185 14,633 13,185
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 Debentures due
2012 inclusive of Cash Claimant Notes in the principal
amount of $5.2 million 90,417 90,417 90,417
Other debt 4,997 2,400 2,106
---------- --------- ---------
Total debt 1,077,690 1,093,413 1,075,501
Less:
Current portion of long-term debt (843) -- (356)
Current portion of long-term debt in default (660,191) (679,591) (660,893)
Long-term debt in default (10,920) (13,405) (10,920)
Liabilities subject to compromise (402,687) (400,417) (402,687)
---------- --------- ---------
Total long-term debt $ 3,049 -- 645
========== ========= =========
DIP Financing Facility
On December 12, 2000, the Bankruptcy Court entered an order (the "DIP Financing
Order") authorizing the Debtors to enter into a $150.0 million
debtor-in-possession financing facility, including a $60.0 million letter of
credit sub-facility, (the "DIP Financing Facility") with Bank of America, N.A.
as agent for a syndicate of financing 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. Under the DIP Financing Order, the Debtors
were required to remit (or were deemed to have remitted) to the prepetition
lenders as payment in respect of the prepetition senior debt facilities
described below all cash collateral constituting proceeds of the prepetition
collateral up to $150 million. All such cash collateral so remitted (or deemed
remitted) was required to be re-advanced (or was deemed re-advanced) to the
Debtors on a postpetition basis as the Designated Post-Petition Loans.
On March 6, 2001, the DIP Financing Facility was amended to, among other things,
reduce the size of the facility to $125.0 million, including the $60.0 million
letter of credit sub-facility. The Company obtained the reduction in the size of
the DIP Financing 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.
On August 13, 2001, the Debtors and the lenders under the DIP Financing Facility
entered into an amendment to the facility providing for, among other things, the
(a) modification and addition of certain reporting requirements, (b)
9
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
modification of the financial covenant requiring maintenance of an asset
coverage ratio, (c) elimination of the financial covenant requiring maintenance
of a minimum operating cash flow, (d) addition of a financial covenant requiring
maintenance of a minimum level of earnings before interest, taxes, depreciation,
and amortization ("EBITDA"), and (e) elimination of a nine-month extension
provision.
On November 21, 2001, the Bankruptcy Court entered an order authorizing the
Debtors to enter into another amendment to the facility, dated as of November
14, 2001, pursuant to which, (a) the scheduled termination date of the DIP
Financing Facility was extended to June 30, 2002, (b) certain covenants were
modified based on the Debtors' three-year strategic plan, (c) a new covenant was
added limiting the incurrence of costs for relocation of equipment and costs
associated with facility closures, (d) the commitment under the DIP Financing
Facility was reduced from $125 million to $100 million, and (e) certain events
of default were added relating to the Debtors' progress toward emergence from
bankruptcy, which required the Debtors to file on or prior to December 31, 2001
a feasible plan of reorganization and disclosure statement, to obtain the
Bankruptcy Court's approval of a disclosure statement on or prior to March 1,
2002, and to obtain confirmation of a plan of reorganization on or prior to May
15, 2002 and further requires the Debtors to cause a plan of reorganization to
become effective on or prior to June 30, 2002.
The Debtors and the lenders under the DIP Financing Facility entered into an
amendment to the facility, dated as of February 8, 2002, to allow the Company to
proceed with certain aspects of its business plan. The amendment provided for,
among other things, the (a) further modification of the financial covenant
relating to the asset coverage ratio, (b) modification of the covenant limiting
the incurrence of costs for relocation of equipment and costs associated with
facility closures, and (c) modification of the covenant relating to the level of
capital expenditures.
The DIP Financing Facility will expire on the earliest to occur of (a) June 30,
2002, (b) the date on which the Plan or another 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.
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 4.00% or
Bank of America's Base Rate (which is the higher of the Federal Funds Rate or
Prime Rate plus, in either case, 0.50%) plus 1.50%. In addition to a facility
fee and an underwriting fee of 0.50% each, there is an unused commitment fee of
0.75%, a letter of credit fee of 4.00%, 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, a junior lien on certain plant
and equipment that secure three of the industrial revenue bond facilities
described below, and a first priority lien on all post-petition real and
personal assets of the Company. The documentation evidencing the DIP Financing
Facility contains financial covenants requiring maintenance of an asset coverage
ratio and a minimum level of EBITDA, as well as other covenants that limit,
among other things, the incurrence of costs for relocation of equipment and
costs associated with facility closures, indebtedness, liens, sales of assets,
capital expenditures and investments, and prohibit dividend payments. The net
proceeds of certain asset sales outside the ordinary course of business will
reduce prepetition indebtedness under the senior secured credit facilities;
otherwise, the net proceeds of asset sales outside the ordinary course of
business will be applied as a reduction of the DIP Financing Facility.
No cash borrowings were outstanding on the DIP Financing Facility at March 30,
2002. Availability under the DIP Financing Facility is based upon the balances
of eligible assets, reduced by outstanding debt and letters of credit.
Availability under the DIP Financing Facility as of March 30, 2002 was
approximately $12.9 million. As of March 30, 2002, the Company had $28.4 million
in cash and cash equivalents, including $4.8 million in cash which was being
held by the lenders under the DIP Financing Facility as collateral for
outstanding letter of credit. As of March 30, 2002, the Company had $25.2
million in letters of credit outstanding under the DIP Financing Facility. As
prepetition letters of credit expire under the Company's senior secured
revolving credit facility described below, to
10
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
the extent they are renewed, they will be reissued under the DIP Financing
Facility or, assuming consummation of the Plan in accordance with its terms, the
Exit Financing Revolver Facility.
Assuming consummation of the Plan in accordance with its terms, holders of
claims in respect of the DIP Financing Facility other than those relating to
Designated Post-Petition Loans will be paid cash in an amount equal to such
claim, and holders of claims relating to Designated Post-Petition Loans will
receive a note under the Exit Term Loan in an amount equal to the amount of such
holder's Designated Post-Petition Loans. In addition, letters of credit issued
under the DIP Financing Facility will be replaced with letters of credit issued
under the Exit Financing Revolver 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 The
Leshner Corporation ("Leshner"), allowing the Company to fund the transaction
and reduce borrowings under the revolving credit facility.
As of March 30, 2002, (a) outstanding prepetition borrowings under the revolving
credit facility were $232.7 million, (b) outstanding prepetition borrowings
under the term loan facility were $241.6 million in the aggregate, and (c)
outstanding letters of credit under the revolving credit facility were the $10.9
million in the aggregate. Pursuant to the DIP Financing Order, $150 million of
prepetition borrowings under the senior debt facilities had become subject to
treatment as postpetition debt. As prepetition letters of credit expire, to the
extent they are renewed, they will be reissued under the DIP Financing Facility
or, assuming consummation of the Plan in accordance with its terms, the Exit
Financing Revolver 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 prepetition senior
credit facilities for the three months ended March 30, 2002 was 5.35%. The
prepetition senior debt facilities expired 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.
Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company
to make scheduled interest payments on the prepetition senior debt facilities.
Even though these payments are being made, the Company remains in default under
the prepetition senior debt facilities.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the senior debt facilities will be cancelled and, in exchange therefore,
holders of claims in respect of the senior debt facilities will become entitled
to receive New Common Stock.
Overline Facility
In May 1999, the Company entered into a $20.0 million senior unsecured revolving
credit facility (the "Overline Facility") to obtain additional working capital
availability. On July 27, 1999, the Overline Facility was amended to
11
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
increase the amount of funds available to $35.0 million and to secure it with
the same assets securing the senior debt facilities described above. As of March
30, 2002, outstanding borrowings under the Overline Facility were $34.7 million.
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 matured on January 31, 2002.
Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company
to make scheduled interest payments on the Overline Facility. Even though these
payments are being made, the Company remains in default under the Overline
Facility.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the Overline Facility will be cancelled and, in exchange therefor, holders
of claims in respect of the Overline Facility will become entitled to receive
New Common Stock and New Warrants.
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. As of March 30, 2002, all of the 9% Notes remained
outstanding.
On November 12, 1996, the Company issued $125.0 million aggregate principal
amount 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. As of March 30, 2002, all of the 10% Notes remained outstanding.
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.
The Company is in default under the indentures governing both the 9% Notes and
the 10% Notes. No principal or interest payment has been or will be made on the
9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the 9% Notes and the 10% Notes will be cancelled and, in exchange
therefor, holders of claims in respect of 9% Notes or 10% Notes will become
entitled to receive New Common Stock and New Warrants.
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 30, 2002, approximately $85.2
million aggregate principal amount of the 6% Convertible Debentures remain
outstanding. If all such outstanding 6% Convertible Debentures were converted at
such date, the resulting cash component of the conversion consideration would
have been approximately $57.2 million.
Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest
bearing subordinated promissory notes (the "Cash Claimant Notes") in respect of
the unpaid cash portion of the conversion consideration owing to certain holders
of the 6% Convertible Debentures who had surrendered their debentures for
conversion, but had not been
12
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
paid the cash portion of the conversion consideration. As of March 30, 2002, the
aggregate 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. Fieldcrest Cannon is in default under the
indenture governing the 6% Convertible Debentures and the Cash Claimant Notes.
No principal or interest payment has been or will be made on the 6% Convertible
Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the 6% Convertible Debentures will be cancelled and, in exchange therefor,
holders of claims in respect of the 6% Convertible Debentures will become
entitled to receive New Warrants, and the indebtedness under the Cash Claimant
Notes will be cancelled and, in exchange therefor, holders of claims in respect
of the Cash Claimant Notes will become entitled to receive New Common Stock and
New Warrants.
Industrial Revenue Bonds
The Company presently has obligations in respect of two industrial revenue bond
facilities (the "IRB Facilities"). One of the IRB Facilities is secured by liens
on specified plants and equipment and by a letter of credit. The other IRB
Facility is secured by a letter of credit. As of March 30, 2002, $13.2 million
of bonds in the aggregate were outstanding under the IRB Facilities.
On February 6, 2001, the Bankruptcy Court authorized the Company to make
scheduled principal and interest payments on the IRB Facilities. Even though
these payments are being made, the Company remains in default of its obligations
under each of the IRB Facilities.
Assuming consummation of the Plan in accordance with its terms, the IRB
Facilities will be reinstated and the letters of credit issued in respect
thereof under the senior debt facilities described above will be replaced,
substituted, or otherwise satisfied with equivalent letters of credit to be
issued under the Exit Financing Revolver Facility.
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, Pillowtex has
incurred, and will continue to incur, significant professional fees and other
restructuring costs in connection with the Chapter 11 Cases and the
restructuring of its business operations. However, based on current and
anticipated levels of operations and continued efforts to reduce inventories,
and assuming consummation of the Plan prior to June 30, 2002, Pillowtex's
management believes that Pillowtex's cash flow from operations, together with
amounts available under the DIP Financing Facility, will be adequate to meet its
anticipated cash requirements during the pendency of the Chapter 11 Cases. The
DIP Financing Facility is currently scheduled to terminate on June 30, 2002, and
accordingly, if the Plan is not consummated in accordance with its terms prior
to such date, Pillowtex would be required to obtain a further extension of the
DIP Financing Facility or alternative financing. Pillowtex can provide no
assurance that such an extension would be granted or that alternative financing
would be available on acceptable terms. As a result of the Chapter 11 Cases and
the circumstances leading to the filing thereof, Pillowtex's access to
alternative financing in such a scenario would be very limited. Furthermore, in
the event that cash flows, together with available borrowings under the DIP
Financing Facility or alternative financing arrangements, are not sufficient to
meet the Company's cash requirements, Pillowtex may be required to reduce
planned capital expenditures; however, Pillowtex can provide no assurance that
such reductions would be sufficient to cover any cash shortfalls. Management of
the Debtors believes that, assuming consummation of the Plan in accordance with
its terms and achievement of the Debtors' business plan and strategy,
reorganized Parent will have sufficient liquidity for the reasonably foreseeable
future to service post-reorganization indebtedness and conduct its business as
contemplated by the Debtors' business plan and strategy.
13
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(6) Liabilities Subject to Compromise
Liabilities subject to compromise consist of prepetition liabilities that
management believes will be impaired as a result of the Chapter 11 Cases. 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
filed with the Bankruptcy Court. Obligations classified as liabilities subject
to compromise 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.
The Debtors are continuing to review their executory contracts and unexpired
leases and have received approval from the Bankruptcy Court to reject certain
contracts and leases. The Debtors cannot presently determine the ultimate
liability for all contracts and leases that will be approved by the Bankruptcy
Court for rejection. The estimated prepetition liability for those contracts and
leases the Bankruptcy Court has already approved for rejection is $16.1 million.
The Company may be required to accrue additional liabilities as more contracts
and leases are approved for rejection by the Bankruptcy Court.
The components of liabilities subject to compromise are as follows:
March 30, March 31, December 29,
2002 2001 2001
--------- --------- ------------
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 2012 85,217 85,217 85,217
Cash Claimant Notes 5,200 5,200 5,200
Other 2,270 -- 2,270
-------- ------- -------
Total long-term debt 402,687 400,417 402,687
-------- ------- -------
Interest accrued on above notes and debentures 14,018 14,074 14,018
Accounts payable 50,812 52,477 51,266
Nonqualified pension plan liability 11,673 11,673 11,673
Rejected contracts and leases 16,059 -- 15,841
Other accrued expenses 4,563 6,348 5,355
-------- ------- -------
$499,812 484,989 500,840
======== ======= =======
As a result of the filing of the Chapter 11 Cases, no principal or interest
payments have been or will be made on unsecured prepetition debt without
Bankruptcy Court approval or until the Plan or another plan of reorganization
becomes effective. Therefore, interest aggregating $46.8 million on prepetition
unsecured obligations has not been accrued since the Petition Date.
(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
14
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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 30, 2002. The commencement of the Chapter 11
Cases constitutes an "Event of Noncompliance" under the terms of the Series A
Preferred Stock. The terms of the Series A Preferred Stock provide that upon the
occurrence of an Event of Noncompliance, the dividend rate on such stock will
increase immediately to the lesser of 18% per annum and the maximum rate
permitted by law. Accordingly, as of the Petition Date, dividends on the Series
A Preferred Stock began accruing at 18% per year, compounding quarterly.
The Series A Preferred Stock is convertible, at any time at the option of the
holder, into common stock of the Parent 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.
Assuming consummation of the Plan in accordance with its terms, the Series A
Preferred Stock will be cancelled without consideration.
(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 two major divisions that it considers operating segments: (1) Bed and Bath
and (2) 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 Pillow and Pad Division manufactures and sells bed
pillows, down comforters, and mattress pads. Other includes the Company's retail
stores, corporate activities, and the remaining assets associated with the
Blanket Division (see note 13).
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 29, 2001. 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 30, 2002
--------------------------------------------
Bed Pillow
and and
Bath Pad Other Total
--------------------------------------------
Net sales $180,649 55,708 4,568 (1) 240,925
Gross profit (loss) 10,773 5,938 (7,350)(1) 9,361
Depreciation and amortization 7,447 790 3,063 11,300
Capital expenditures 2,111 354 1,685 4,150
Total assets 790,162 112,396 132,232 (2) 1,034,790
Three Months Ended
March 31, 2001
--------------------------------------------
Bed Pillow
and and
Bath Pad Other Total
--------------------------------------------
Net sales $207,042 62,092 4,708 (1) 273,842
Gross profit (loss) 6,511 6,646 (10,748)(1) 2,409
Depreciation and amortization 10,188 824 2,765 13,777
Capital expenditures 820 -- 1,130 1,950
Total assets 890,324 135,391 268,543 (2) 1,294,258
(1) Includes retail stores and miscellaneous Corporate activities, including
the Company's central information technology, manufacturing, human
resources, and purchasing departments.
(2) Corporate amounts include primarily data processing equipment and software,
other enterprise-wide assets not allocated to the segments, and the net
assets associated with the Blanket Division.
(9) Restructuring Charges and Impairment of Long-lived Assets
During the first quarter of 2002, the Company incurred a charge of $3.0 million
associated with the closure of three facilities. The towel finishing operations
in Columbus, Georgia and Phenix City, Alabama are currently expected to be
closed in June 2002 and will impact approximately 980 employees. The majority of
the goods finished at the plants will be finished at an existing facility in
Kannapolis, North Carolina, and the remaining items will be purchased from other
suppliers. The automated sewing facility in Dallas, Texas is anticipated to be
closed by May 31, 2002 and will impact approximately 99 employees. The
facility's operations will be consolidated into the Company's other pillow and
pad facilities. The restructuring charge consists principally of severance and
benefits, which the Company anticipates it will pay during the second and third
quarters of 2002.
The Company also incurred a charge for impairment of long-lived assets of $30.9
million during the first quarter of 2002 for assets located at the Columbus,
Georgia and Phenix City, Alabama facilities. The charge consists of $9.0 million
for real property and $21.9 million for machinery and equipment. The impairment
charge reflects management's estimate of the fair market value based upon
appraisals and the expected future cash flows to be
16
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
generated by the assets, including their ultimate disposition. Once these
facilities have closed, the assets will be reclassified to assets held for sale.
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 and Fieldale, Virginia. Approximately 380 employees
were terminated as a result of the closure.
Activity in the reserve established for the restructuring charges is presented
below:
Balance, December 30, 2001 $ 1,063
Restructuring charge 3,032
Payments (1,090)
-------
Balance, March 30, 2002 $ 3,005
=======
In conjunction with the closure of the Columbus, Georgia and Phenix City,
Alabama facilities, the Company will curtail its defined benefit pension plans
for its hourly and salaried employees at these locations. A curtailment is an
event that significantly reduces the expected years of future service of present
employees or eliminates for a significant number of employees the accrual of
defined benefits for some or all of their future services. The effect of the
curtailment on the Company's consolidated financial statements is currently
being evaluated and cannot be determined at this time. The financial statement
impact of such curtailment will be recorded in the second quarter of 2002.
(10) Reorganization Items
The Company recognized the following items as reorganization items in the
statements of operations:
Three Months Three Months
Ended Ended
March 30, 2002 March 31, 2001
-------------- --------------
Professional fees and other costs
associated with the
Chapter 11 Cases $4,428 6,311
Retention incentive plan 791 1,902
Rejected contracts and lease
agreements 218 --
Interest income on investments (134) (588)
------ -----
$5,303 7,625
====== =====
Professional Fees. During the three months ended March 30, 2002 and March 31,
2001, the Company paid approximately $4.2 million and $1.5 million,
respectively, in professional fees associated with the Chapter 11 Cases.
Key Employee Retention Program. To stabilize employee relations, the Company
developed a key employee retention plan (the "Retention Plan"), which the
Bankruptcy Court approved on March 6, 2001. The Retention Plan is designed to,
among other things, ensure that the employees most critical to the Company's
reorganization efforts are provided with sufficient economic incentives and
protections to remain with the Company and fulfill their responsibilities
through the successful conclusion of the Chapter 11 Cases. The Retention Plan
consists of three separate components: (a) a retention incentive plan (the
"Retention Incentive Plan"), (b) an emergence performance bonus plan, (the
"Emergence Performance Bonus Plan"), and (c) an employee severance plan (the
"Severance Plan").
Under the Retention Incentive Plan, each eligible employee earns a specified
retention incentive payment (the "Retention Incentive Payment"), based upon a
percentage of his or her salary as determined by the Company's management, if
the employee remains actively employed by the Company on the specified dates.
Under the Retention Incentive Plan: (a) 25% of the total Retention Incentive
Payment (approximately $1.5 million) was paid on April 9, 2001, (b) 25% of the
total Retention Incentive Payment (approximately $1.5 million) was paid on
November 14, 2001, (c) 25% of the total Retention Incentive Payment is to be
paid on May 14, 2002, and (d) 25%
17
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
of the total Retention Incentive Payment is to 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 $0.5 million is available for
non-union employees not included in the Retention Incentive Plan.
The Emergence Performance Bonus Plan provided an additional incentive payment to
certain management employees considered essential to the implementation of the
Company's restructuring to encourage them to remain with the Company through the
plan of reorganization negotiation and confirmation process. Payments under the
Emergence Performance Bonus Plan were tied directly to the amount of the
distribution made under a confirmed plan of reorganization to unsecured
creditors and length of the Reorganization Cases. Under the current
circumstances, the Company does not anticipate making any payments of emergence
bonuses under the Retention Plan.
The purpose of the Severance Plan is to consolidate all severance agreements
existing prior to the Petition Date into one severance 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 whom are not eligible to participate in any other components of
the Retention Plan. With certain exceptions, under the Severance Plan, employees
who are terminated for reasons other than death, disability, retirement, or
cause are eligible to receive severance benefits equal to one week's salary for
each completed year of service, with a minimum benefit of two weeks' salary and
a maximum of 26 weeks' salary. In addition, eligible employees are entitled to
receive medical insurance, life insurance, and certain other benefits.
Rejected Contracts and Leases. The Debtors are continuing to review their
executory contracts and unexpired leases and have received approval from the
Bankruptcy Court to reject certain contracts and leases. The Debtors cannot
presently determine the ultimate liability for all contracts and leases that
will be approved by the Bankruptcy Court for rejection. During the three months
ended March 30, 2002, the Company accrued $0.2 million for the estimated
prepetition liability for those contracts and leases the Bankruptcy Court has
already approved for rejection. The Company expects to accrue additional
liabilities as more contracts and leases are approved for rejection by the
Bankruptcy Court. In addition to rejecting certain contracts and leases, the
Company is in the process of renegotiating certain operating leases. The Company
expects that these leases will be classified as capital in accordance with their
renegotiated terms. During the three months ended March 30, 2002, the Company
converted two operating leases into capital lease obligations of $3.1 million.
(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 losses incurred for the
three months ended March 30, 2002 and March 31, 2001. Instead, the increase in
net deferred tax assets as a result of the losses was offset by an equal
increase in the valuation allowance. For the first quarter of 2002, the increase
of the valuation allowance was partially offset by a $7.2 million reduction in
the valuation allowance for the 2001 net operating losses. The reduction of the
valuation allowance for 2001 net operating losses resulted from a provision in
Congress' economic stimulus package enacted during the first quarter of 2002
that changed the period for carrybacks of net operating losses. This change
allows the Company to carry back a portion of the 2001 net operating losses for
five years, rather than two years under the previous law. As of March 30, 2002,
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 30, 2002, the Company has $577 million of federal and state operating
loss carryforwards expiring 2006 through 2022, $2 million of general business
tax credit carryforwards expiring 2005 through 2022, and a $6.1 million unused
alternative minimum tax credit carryforward that does not expire.
18
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(12) Recently Issued or Adopted Accounting Standards
The Emerging Issues Task Force (the "EITF") of the Financial Accounting
Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to be Delivered in the Future", and EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" (collectively, the "EITFs"), which address various
aspects of accounting for consideration given by a vendor to a customer or a
reseller of products. The Company adopted the provisions of the EITFs as of the
beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require
the Company to classify all consideration paid to customers as a reduction to
net sales. Prior to December 30, 2001, the Company classified amounts paid to
customers for co-operative advertising and marketing in selling, general, and
administrative expenses. As a result, $5.1 million of selling, general, and
administrative expenses have been reclassified as a reduction to net sales for
the three months ended March 31, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Intangible assets with definite
useful lives will be amortized over such lives to their estimated residual
values. The Company adopted SFAS No. 142 as of December 30, 2001. The Company
has completed the first step of the transitional impairment test for intangible
assets with indefinite lives and has determined that no potential impairment
exists. The Company is also required to complete the first step of the
transitional impairment test for goodwill within six months of adoption of SFAS
No. 142 and to complete the final step of the transitional impairment test by
the end of the calendar year. As of March 30, 2002 and December 29, 2001, the
Company had intangible assets other than goodwill of $27.7 million and $28.1
million, respectively.
Pro forma loss from continuing operations applicable to common shareholders and
loss applicable to common shareholders and related per share amounts for the
three months ended March 31, 2001, adjusted to eliminate historical amortization
of goodwill and intangibles with indefinite lives, are as follows:
Loss from continuing operations applicable to common
shareholders - as reported $(51,926)
========
Loss from continuing operations applicable to common
shareholders - pro forma $(50,345)
========
Basic and diluted loss per common share:
- ----------------------------------------
Loss from continuing operations applicable to common
shareholders - as reported $ (3.64)
========
Loss from continuing operations applicable to common
shareholders - pro forma $ (3.53)
========
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supercedes both SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in Opinion 30). SFAS No. 144 also retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to
present
19
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142.
The Company adopted the provisions of SFAS No. 144 as of December 30, 2001. The
adoption of SFAS No. 144 for long-lived assets held for use did not have a
material impact on the Company's financial statements because the impairment
assessment requirements under SFAS No. 144 are largely unchanged from SFAS No.
121.
(13) Discontinued Operations
On September 6, 2001, the Company sold the majority of the inventory and fixed
assets associated with its Blanket Division to Beacon Acquisition Corporation
for approximately $13.4 million. The purchase price consisted of approximately
$12.1 million in cash ($0.6 million of which was placed in escrow to secure
post-closing obligations) and a three-year promissory note in a principal amount
of approximately $1.3 million. The promissory note is secured by a pledge of
100% of the stock of the purchaser, a second lien on the majority of the assets
being sold (excluding the Blanket Division's real property located in Swannanoa,
North Carolina and Westminister, South Carolina), and a third lien on the
Blanket Division's real property located in Swannanoa, North Carolina. The sale
resulted in a net loss of $3.3 million. The net cash proceeds of $11.2 million
from the sale were applied to pay down the Company's senior debt facilities.
The results of operations and net assets of the Blanket Division have been
accounted for as a discontinued operation. As a result, the March 31, 2001
consolidated financial statements have been restated to reflect the Blanket
Division as a discontinued operation. The net assets of the Blanket Division
remaining as of March 30, 2002 primarily include accounts receivable and accrued
expenses. The loss from discontinued operations was $3.0 million for the three
months ended March 31, 2001.
(14) Subsequent Events
As discussed in note 1, the Bankruptcy Court approved the Plan on May 1, 2002.
The unaudited pro forma consolidated balance sheet below includes the
adjustments needed to reflect confirmation of the Plan as if the Plan's
effective date was March 30, 2002. These adjustments include the transactions
contemplated by the Plan, such as the settlement of various liabilities and
related securities issuances, cash payments and borrowings, and "fresh start"
accounting adjustments required under SOP 90-7 to restate the assets,
liabilities and equity accounts of the reorganized entity. The Debtors currently
anticipate that the Plan will become effective prior to June 30, 2002. However,
under the terms of the Plan, there are significant conditions precedent to the
effectiveness of the Plan. Conditions to the effectiveness of the Plan include,
among others, the execution and delivery of the documentation effectuating the
Exit Financing Revolver Facility and the execution and delivery of the
documentation effectuating the Exit Term Loan. There can be no assurance that
these conditions will be satisfied, and accordingly, there can be no assurance
as to when or if the Plan will become effective.
The unaudited pro forma consolidated balance sheet is presented for
informational purposes only and is not necessarily indicative of the future
financial position of the Company as if the Plan had been effective on March 30,
2002. The unaudited pro forma consolidated balance sheet and accompanying notes
should be read in conjunction with the Second Amended Joint Plan of
Reorganization and related Disclosure Statement included in the Current Report
on Form 8-K dated March 11, 2002.
20
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(14) Subsequent Events (continued)
March 30,
2002 March 30,
Historical Exit New Fresh 2002
(unaudited) Costs (a) Financing (b) Start (c) Pro forma
----------- --------- ------------- ---------- ---------
Assets:
- -------
Current assets $ 383,839 -- -- (9,074) 374,765
Property, plant and
equipment, net 418,587 -- 42,530 (303,998) 157,119
Intangibles, net 221,318 -- -- (178,616) 42,702
Other assets 11,046 -- -- (6,878) 4,168
---------- ------- -------- ---------- -------
Total assets $1,034,790 -- 42,530 (498,566) 578,754
========== ======= ======== ========== =======
Liabilities and shareholders'
- -----------------------------
equity (deficit):
-----------------
Liabilities not subject to
compromise:
Accounts payable
and accrued liabilities $ 89,238 (6,504) -- 3,643 86,377
Long-term debt 3,892 23,453 206,893 -- 234,238
Long-term debt in default 671,111 -- -- (671,111) --
Noncurrent liabilities 49,847 -- -- -- 49,847
---------- ------- -------- ---------- -------
Total liabilities not
subject to compromise 814,088 16,949 206,893 (667,468) 370,462
Liabilities subject to
compromise 499,812 (10,199) -- (489,613) --
---------- ------- -------- ---------- -------
Total liabilities 1,313,900 6,750 206,893 (1,157,081) 370,462
Redeemable convertible
preferred stock 103,760 -- -- (103,760) --
Shareholders' equity (deficit) (382,870) (6,750) (164,363) 762,275 208,292
---------- ------- -------- ---------- -------
Total liabilities and
shareholders' equity
(deficit) $1,034,790 -- 42,530 (498,566) 578,754
========== ======= ======== ========== =======
Notes:
(a) Represents payment of accrued professional fees, retention bonus,
financing fees and certain claims.
(b) Represents borrowings on the Exit Term Loan, Exit Financing Revolver,
the reinstatement of industrial revenue bonds and capital lease
obligations and related assets.
(c) Represents adjustments necessary under "fresh start" reporting
principles set forth in SOP 90-7.
21
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) 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 30, 2002
---------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ --------- ------------ ------------ ------------ ------------
Assets:
- ------
Trade receivables $ -- 144,729 1,328 -- 146,057
Receivables from affiliates 778,041 -- -- (778,041) --
Inventories -- 186,669 3,219 -- 189,888
Other current assets -- 46,303 1,591 -- 47,894
--------- --------- ----- -------- ---------
Total current assets 778,041 377,701 6,138 (778,041) 383,839
Property, plant and equipment, net 31 418,117 439 -- 418,587
Intangibles, net 736 218,444 2,138 -- 221,318
Other assets (20,250) 4,290 -- 27,006 11,046
--------- --------- ----- -------- ---------
Total assets $ 758,558 1,018,552 8,715 (751,035) 1,034,790
========= ========= ===== ======== =========
Liabilities and shareholders' equity (deficit):
- ----------------------------------------------
Liabilities not subject to
compromise:
Accounts payable and accrued
liabilities $ 45,890 42,821 527 -- 89,238
Payables to affiliates -- 772,166 5,875 (778,041) --
Current portion of long-term
debt -- 843 -- -- 843
Long-term debt in default 659,090 12,021 -- -- 671,111
--------- --------- ----- -------- ---------
Total current liabilities 704,980 827,851 6,402 (778,041) 761,192
Noncurrent liabilities -- 52,896 -- -- 52,896
--------- --------- ----- -------- ---------
Total liabilities not
subject to compromise 704,980 880,747 6,402 (778,041) 814,088
Liabilities subject to compromise 332,688 167,124 -- -- 499,812
Redeemable convertible
preferred stock 103,760 -- -- -- 103,760
Shareholders' equity (deficit) (382,870) (29,319) 2,313 27,006 (382,870)
--------- --------- ----- -------- ---------
Total liabilities and
shareholders' equity
(deficit) $ 758,558 1,018,552 8,715 (751,035) 1,034,790
========= ========= ===== ======== =========
22
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
December 29, 2001
---------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ --------- ------------ ------------ ------------ ------------
Assets:
- ------
Trade receivables $ -- 140,489 4,238 -- 144,727
Receivables from affiliates 773,297 -- -- (773,297) --
Inventories -- 197,167 3,411 -- 200,578
Other current assets -- 55,427 476 -- 55,903
--------- --------- ------ -------- ---------
Total current assets 773,297 393,083 8,125 (773,297) 401,208
Property, plant and equipment, net 38 452,714 688 -- 453,440
Intangibles, net 1,131 218,460 2,138 -- 221,729
Other assets 29,691 4,305 -- (22,746) 11,250
--------- --------- ------ -------- ---------
Total assets $ 804,157 1,068,562 10,951 (796,043) 1,087,627
========= ========= ====== ======== =========
Liabilities and shareholders' equity (deficit):
- ----------------------------------------------
Liabilities not subject to
compromise:
Accounts payable and accrued
liabilities $ 41,859 52,775 322 -- 94,956
Payables to affiliates -- 765,228 8,069 (773,297) --
Other current liabilities -- 356 -- -- 356
Long-term debt in default 659,793 12,020 -- -- 671,813
--------- --------- ------ -------- ---------
Total current liabilities 701,652 830,379 8,391 (773,297) 767,125
Noncurrent liabilities -- 49,595 -- -- 49,595
--------- --------- ------ -------- ---------
Total liabilities not
subject to compromise 701,652 879,974 8,391 (773,297) 816,720
Liabilities subject to compromise 332,438 168,402 -- -- 500,840
Redeemable convertible
preferred stock 99,185 -- -- -- 99,185
Shareholders' equity (deficit) (329,118) 20,186 2,560 (22,746) (329,118)
--------- --------- ------ -------- ---------
Total liabilities and
shareholders' equity
(deficit) $ 804,157 1,068,562 10,951 (796,043) 1,087,627
========= ========= ====== ======== =========
23
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
Three Months Ended March 30, 2002
--------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- -------- ------------ ------------ ------------ ------------
Net sales $ -- 243,860 3,248 (6,183) 240,925
Cost of goods sold -- 234,433 3,314 (6,183) 231,564
-------- ------- ----- ------ -------
Gross profit (loss) -- 9,427 (66) -- 9,361
Selling, general and
administrative expenses (2,519) 18,504 132 -- 16,117
Impairment of long-lived assets -- 30,919 -- -- 30,919
Restructuring charges -- 3,032 -- -- 3,032
-------- ------- ----- ------ -------
Earnings (loss) from continuing
operations 2,519 (43,028) (198) -- (40,707)
Equity in loss of subsidiaries (49,752) -- -- 49,752 --
Interest expense (income) (3,390) 13,642 49 -- 10,301
-------- ------- ----- ------ -------
Loss from continuing
operations before
reorganization
items and income taxes (43,843) (56,670) (247) 49,752 (51,008)
Reorganization items 4,988 315 -- -- 5,303
-------- ------- ----- ------ -------
Loss from continuing
operations before income
taxes (48,831) (56,985) (247) 49,752 (56,311)
Income taxes 323 (7,480) -- -- (7,157)
-------- ------- ----- ------ -------
Net loss (49,154) (49,505) (247) 49,752 (49,154)
Preferred dividends 4,575 -- -- -- 4,575
-------- ------- ----- ------ -------
Loss applicable to
common shareholders $(53,729) (49,505) (247) 49,752 (53,729)
======== ======= ===== ====== =======
24
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
Three Months Ended March 31, 2001
--------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- -------- ------------ ------------ ------------ ------------
Net sales $ -- 279,060 3,660 (8,878) 273,842
Cost of goods sold -- 277,166 3,145 (8,878) 271,433
-------- ------- ------ ------ -------
Gross profit -- 1,894 515 -- 2,409
Selling, general and
administrative expenses 226 17,253 1,596 -- 19,075
Restructuring charges -- 1,977 -- -- 1,977
-------- ------- ------ ------ -------
Loss from operations (226) (17,336) (1,081) -- (18,643)
Equity in loss of subsidiaries (43,733) -- -- 43,733 --
Interest expense (income) (3,945) 22,848 19 -- 18,922
-------- ------- ------ ------ -------
Loss from continuing
operations before
reorganization items and
income taxes (40,014) (40,184) (1,100) 43,733 (37,565)
Reorganization items 8,213 (588) -- -- 7,625
-------- ------- ------ ------ -------
Loss from continuing
operations before income
taxes (48,227) (39,596) (1,100) 43,733 (45,190)
Income taxes -- -- -- -- --
-------- ------- ------ ------ -------
Net loss from continuing
operations (48,227) (39,596) (1,100) 43,733 (45,190)
Loss from discontinued
operations -- 3,037 -- -- 3,037
-------- ------- ------ ------ -------
Net 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)
======== ======= ====== ====== =======
25
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
Three Months Ended March 30, 2002
-------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------- ------------ ------------ ------------ ------------
Cash provided by (used in)
operating activities $ 4,117 (13,647) -- -- (9,530)
Cash provided by discontinued
operations -- 510 -- -- 510
Cash provided by (used in)
investing activities (4,117) 921 -- -- (3,196)
Cash provided by financing
activities -- 228 -- -- 228
------- ------- --- --- -------
Net change in cash and cash
equivalents -- (11,988) -- -- (11,988)
Cash and cash equivalents at
beginning of year -- 40,388 -- -- 40,388
------- ------- --- --- -------
Cash and cash equivalents at
end of period $ -- 28,400 -- -- 28,400
======= ======= === === =======
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) 7,445 724 -- 4,128
Cash provided by discontinued
operations -- 2,011 -- -- 2,011
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 -- 2,463 -- -- 2,463
Cash and cash equivalents at
beginning of year -- 32,182 -- -- 32,182
------- ------ ---- --- ------
Cash and cash equivalents at
end of period $ -- 34,645 -- -- 34,645
======= ====== ==== === ======
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included elsewhere in this
Quarterly Report, and with the Company's audited consolidated financial
statements and notes thereto for the fiscal year ended December 29, 2001.
Proceedings Under Chapter 11 of the Bankruptcy Code
On November 14, 2000, Pillowtex Corporation and substantially all of its
domestic subsidiaries filed voluntary petitions for reorganization under chapter
11 of the United States Bankruptcy Code. For further discussion of the Chapter
11 Cases, see note 1 to the Company's unaudited consolidated financial
statements included elsewhere in this Quarterly Report.
Since the Petition Date, the Debtors have conducted business in the ordinary
course. The Bankruptcy Court confirmed the Debtors' Second Amended Joint Plan of
Reorganization, with certain modifications, at a hearing held on May 1, 2002.
The Debtors currently anticipate that the Plan will become effective prior to
June 30, 2002. However, there are significant conditions precedent to the
effectiveness of the Plan, and accordingly, there can be no assurance as to when
or if the Plan will become effective. For a brief overview of the Plan and the
conditions to the effectiveness thereof, see note 1 to the Company's unaudited
consolidated financial statements included elsewhere in this Quarterly Report.
The Debtors are continuing to review their executory contracts and unexpired
leases and have received approval from the Bankruptcy Court to reject certain
contracts and leases. The Debtors cannot presently determine the ultimate
liability for all contracts and leases that will be approved by the Bankruptcy
Court for rejection. During the three months ended March 30, 2002, the Company
accrued $0.2 million for the estimated prepetition liability for those contracts
and leases the Bankruptcy Court has already approved for rejection. The Company
expects to accrue additional liabilities as more contracts and leases are
approved for rejection by the Bankruptcy Court. In addition to rejecting certain
contracts and leases, the Company is in the process of renegotiating certain
operating leases. The Company expects that these leases will be classified as
capital in accordance with their renegotiated terms.
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.
Basis of Presentation
The unaudited consolidated financial statements included elsewhere in this
Quarterly Report 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, the Company's ability to (a) satisfy the conditions
precedent to the effectiveness of the Plan or effect another plan of
reorganization, (b) comply with the terms of the DIP Financing Facility, and (c)
generate sufficient cash from operations and financing sources to meet its
future obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result from the resolution of these uncertainties.
The amounts reported on the consolidated balance sheets could materially change
because of changes in business strategies and the effects of the Plan or another
plan of reorganization.
In the Chapter 11 Cases, substantially all unsecured and under-secured
liabilities as of the Petition Date are subject to compromise or other treatment
under the Plan. Generally, all actions to enforce or otherwise effect repayment
of pre-petition liabilities, as well as all pending litigation against the
Debtors, are stayed while the Debtors continue their business operations as
debtors-in-possession. The last date by which claims against the Company had to
be
27
filed in the Bankruptcy Court if the claimants wished to receive any
distribution in the Chapter 11 Cases, i.e., the bar date, was July 23, 2001.
Differences between amounts shown by the Debtors and claims filed by creditors
will be investigated and amicably resolved, adjudicated before the Bankruptcy
Court, or resolved through another dispute resolution process. The ultimate
amount of and settlement terms for liabilities subject to compromise are subject
to the terms of the Plan.
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.
Critical Accounting Policies
Management considers certain accounting policies related to sales returns and
allowances, inventory, and impairment of long-lived assets to be "critical"
because they have a significant impact in portraying the Company's financial
condition and results of operations and require management's most difficult,
subjective, and complex judgments due to the need to make estimates about the
effects of matters that are inherently uncertain.
Sales returns and allowances require management to estimate the eventual expense
of all returns and other sales allowances for products shipped and recorded in
net sales each period. Management bases its estimate of the expense to be
recorded each period on historical returns and allowance levels. At March 30,
2002, a reserve of $8.3 million was recorded and included as an allowance
against trade accounts receivable. This allowance includes $2.1 million for
returns and allowances not yet claimed by customers, but which management
believes is necessary based on historical deductions levels. Management does not
believe the likelihood is significant that materially higher deduction levels
will result given its experience with the sales and returns deduction activities
of its customers in the past few years.
Inventory requires management to estimate the net realizable value of the
Company's obsolete and slow moving inventory at the end of each period.
Management bases its net realizable value estimate on the actual proceeds
received for similar inventory items in the most recent three-month period in
the Company's Bed and Bath Division and a review of the age of inventory on hand
in its Pillow and Pad Division. The Company's determination of the net
realizable value of inventory assumes that approximately 35% of the cost of
obsolete and slow moving inventory is recovered. Given the Company's experiences
in the past few years with selling obsolete and slow moving inventory to various
promotional and alternative markets, management does not believe the likelihood
is significant that materially higher inventory write-downs due to obsolescence
are required.
If the assumptions made by management in estimating sales returns and allowances
and inventory obsolescence do not reflect the actual expenses to be incurred,
net sales and gross profit could be reduced significantly.
When management determines that a long-lived asset has been impaired, an
estimate of the fair value is required. The methodology used to determine fair
value depends on whether the asset will continue to be used in the business or
will be sold. The impairment charges recorded by the Company in the three months
ended March 30, 2002 primarily relate to assets that will be sold. Assets held
for sale are recorded at their estimated fair values. Management bases its
estimate of the fair value on available information from the sale of similar
assets in similar locations and appraisals. Given the significant number of
recent plant closures in the textile industry in the geographic areas where the
Company operates, the likelihood is remote that historical sales levels will be
achieved, and management attempts to take this into consideration when
determining fair values. Management continually reviews its fair value estimates
and records further impairment charges for assets held for sale when management
determines, based on new and reliable information, that such charges are
appropriate. At March 30, 2002, the Company has $5.1 million in assets held for
sale, of which $3.3 million relates to real property and $1.8 million relates to
machinery and equipment. While management has exercised its good faith business
judgment in determining such amounts, based on the fluctuations in fair values
for transactions completed in 2001 and the first quarter of 2002 and the
adjustments recorded by the Company during fiscal 2001, management believes it
is reasonably possible that the Company will not fully recover these balances
and that additional impairment charges may be required in subsequent periods.
28
Results of Operations
As a result of the sale of the Blanket Division on September 6, 2001, the
results of operations of the Blanket Division have been accounted for as a
discontinued operation. The results of operations for the three months ended
March 31, 2001 have been restated to reflect the Blanket Division as a
discontinued operation.
The Company began classifying amounts paid to vendors for co-operative
advertising and marketing as a reduction to net sales on December 30, 2001.
Prior to fiscal 2002, the Company classified these amounts in selling, general,
and administrative expenses. The Company has reclassified $5.1 million from
selling, general, and administrative expenses as a reduction to net sales in the
first quarter of 2001 to conform to the 2002 presentation. See "New Accounting
Standards" below.
The operating results of the Company's segments are disclosed in note 8 to the
consolidated financial statements included in this Quarterly Report.
Net Sales. Net sales were $240.9 million in the first quarter of 2002, a
- ---------
decrease of $32.9 million or 12.0% from the first quarter of 2001. Approximately
$18.0 million of the decrease is due to the loss of the Company's Ralph Lauren
licensing agreement, which expired on June 30, 2001. The remaining decrease is
primarily attributable to the one-time inventory liquidation in 2001. The
Company had taken a charge in December 2000 to reduce certain inventories to net
realizable value. Sales of these products were approximately $17.0 million in
the first quarter of 2001.
Gross Profit. Gross profit increased $7.0 million from $2.4 million in the first
- ------------
quarter of 2001 to $9.4 million in the first quarter ended 2002. Gross margin
increased from 0.9% in the first quarter of 2001 to 3.9% in the first quarter of
2002. This increase is attributable to lower overhead costs resulting from the
Company's manufacturing rationalization plan and reduced material costs and
natural gas prices. These savings have been partially offset by operating
inefficiencies experienced due to the relocation of certain manufacturing
operations required by the recently announced facility closures. The Company
announced the closure of the towel finishing operations in Columbus, Georgia and
Phenix City, Alabama and the Pillow and Pad automated sewing line facility in
Dallas, Texas in the first quarter of 2002. The operations at these facilities
have begun to be transferred to existing facilities.
Selling, General, and Administrative ("SG&A"). SG&A expenses decreased $3.0
- ---------------------------------------------
million from $19.1 million in the three months ended March 31, 2001 to $16.1
million in the three months ended March 30, 2002. The Company adopted SFAS No.
142 on December 30, 2001 which requires that goodwill and intangible assets with
indefinite lives no longer be amortized (see "New Accounting Standards" below).
As a result, the Company has not recorded any amortization on its goodwill and
trademarks during the first quarter of 2002, which contributed approximately
$1.6 million to the decrease in SG&A expenses. The remaining decrease is
primarily composed of lower salaries and professional fees and services,
resulting from the Company's cost-cutting efforts initiated in 2001. These
decreases have been partially offset by higher advertising expense due to the
Company's implementation of a national advertising campaign in 2002.
Restructuring Charges. The Company recorded a restructuring charge of $3.0
- ---------------------
million for severance and related benefits for the approximately 1,079 employees
impacted by the closures of the facilities discussed above. The facilities are
expected to close during May and June. During the first quarter of 2001, the
Company incurred a charge of $2.0 million for severance and related benefits
associated with the closure of the Company's towel facility in Hawkinsville,
Georgia.
In conjunction with the closure of the Columbus, Georgia and Phenix City,
Alabama facilities, the Company will curtail its defined benefit pension plans
for its hourly and salaried employees at these locations. A curtailment is an
event that significantly reduces the expected years of future service of present
employees or eliminates for a significant number of employees the accrual of
defined benefits for some or all of their future services. The effect of the
curtailment on the Company's consolidated financial statements is currently
being evaluated and cannot be determined at this time. The financial statement
impact of such curtailment will be recorded in the second quarter of 2002.
Impairment of Long-lived Assets. The Company incurred a charge for impairment of
- -------------------------------
long-lived assets of $30.9 million during the first quarter of 2002 for assets
located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge
consists of $9.0 million for real property and $21.9 million for machinery and
equipment.
Interest Expense. Interest expense decreased $8.6 million from $18.9 million in
- ----------------
the first quarter of 2001 to $10.3 million in the first quarter of 2002. The
decrease is primarily due to a decrease in the average interest rate from 10.0%
in the first quarter of 2001 to 5.3% for the first quarter of 2002.
29
Reorganization Items. The Company incurred $5.3 million of reorganization items
- --------------------
in the first quarter of 2002, compared to $7.6 million in the first quarter of
2001. The decrease is due to lower professional fees and retention bonus
expense.
Discontinued Operations. During the first quarter of 2001, the Blanket Division
- -----------------------
incurred a loss from operations of $3.0 million. The Blanket Division was sold
on September 6, 2001.
Liquidity and Capital Resources
DIP Financing Facility
On December 12, 2000, the Bankruptcy Court entered an order (i.e., the DIP
Financing Order) authorizing the Debtors to enter into a $150.0 million
debtor-in-possession financing facility, including a $60.0 million letter of
credit sub-facility, (i.e., the DIP Financing Facility) with Bank of America,
N.A. as agent for a syndicate of financing 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. Under the DIP Financing Order, the Debtors
were required to remit (or were deemed to have remitted) to the prepetition
lenders as payment in respect of the prepetition senior debt facilities
described below all cash collateral constituting proceeds of the prepetition
collateral up to $150 million. All such cash collateral so remitted (or deemed
remitted) was required to be re-advanced (or was deemed re-advanced) to the
Debtors on a postpetition basis as the Designated Post-Petition Loans.
On March 6, 2001, the DIP Financing Facility was amended to, among other things,
reduce the size of the facility to $125.0 million, including the $60.0 million
letter of credit sub-facility. The Company obtained the reduction in the size of
the DIP Financing 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.
On August 13, 2001, the Debtors and the lenders under the DIP Financing Facility
entered into an amendment to the facility providing for, among other things, the
(a) modification and addition of certain reporting requirements, (b)
modification of the financial covenant requiring maintenance of an asset
coverage ratio, (c) elimination of the financial covenant requiring maintenance
of a minimum operating cash flow, (d) addition of a financial covenant requiring
maintenance of a minimum level of EBITDA, and (e) elimination of a nine-month
extension provision.
On November 21, 2001, the Bankruptcy Court entered an order authorizing the
Debtors to enter into another amendment to the facility, dated as of November
14, 2001, pursuant to which, (a) the scheduled termination date of the DIP
Financing Facility was extended to June 30, 2002, (b) certain covenants were
modified based on the Debtors' three-year strategic plan, (c) a new covenant was
added limiting the incurrence of costs for relocation of equipment and costs
associated with facility closures, (d) the commitment under the DIP Financing
Facility was reduced from $125 million to $100 million, and (e) certain events
of default were added relating to the Debtors' progress toward emergence from
bankruptcy, which required the Debtors to file on or prior to December 31, 2001
a feasible plan of reorganization and disclosure statement, to obtain the
Bankruptcy Court's approval of a disclosure statement on or prior to March 1,
2002, and to obtain confirmation of a plan of reorganization on or prior to May
15, 2002 and further requires the Debtors to cause a plan of reorganization to
become effective on or prior to June 30, 2002.
The Debtors and the lenders under the DIP Financing Facility entered into an
amendment to the facility, dated as of February 8, 2002, to allow the Company to
proceed with certain aspects of its business plan. The amendment provided for,
among other things, the (a) further modification of the financial covenant
relating to the asset coverage ratio, (b) modification of the covenant limiting
the incurrence of costs for relocation of equipment and costs associated with
facility closures, and (c) modification of the covenant relating to the level of
capital expenditures.
The DIP Financing Facility will expire on the earliest to occur of (a) June 30,
2002, (b) the date on which the Plan or another 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)
30
consummation of a sale of substantially all of the assets of the Company
pursuant to an order of the Bankruptcy Court.
Amounts borrowed under the DIP Financing Facility bear interest at the option of
the Company at the rate of LIBOR plus 4.00% or Bank of America's Base Rate
(which is the higher of the Federal Funds Rate or Prime Rate plus, in either
case, 0.50%) plus 1.50%. In addition to a facility fee and an underwriting fee
of 0.50% each, there is an unused commitment fee of 0.75%, a letter of credit
fee of 4.00%, 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, a junior lien on certain plant and equipment that
secure three of the industrial revenue bond facilities described below, and a
first priority lien on all post-petition real and personal assets of the
Company. The documentation evidencing the DIP Financing Facility contains
financial covenants requiring maintenance of an asset coverage ratio and a
minimum level of EBITDA, as well as other covenants that limit, among other
things, the incurrence of costs for relocation of equipment and costs associated
with facility closures, indebtedness, liens, sales of assets, capital
expenditures and investments, and prohibit dividend payments. The net proceeds
of certain asset sales outside the ordinary course of business will reduce
prepetition indebtedness under the senior secured credit facilities; otherwise,
the net proceeds of asset sales outside the ordinary course of business will be
applied as a reduction of the DIP Financing Facility.
No cash borrowings were outstanding on the DIP Financing Facility at March 30,
2002. Availability under the DIP Financing Facility is based upon the balances
of eligible assets, reduced by outstanding debt and letters of credit.
Availability under the DIP Financing Facility as of March 30, 2002 was
approximately $12.9 million. As of March 30, 2002, the Company had $28.4 million
in cash and cash equivalents, including $4.8 million in cash which was being
held by the lenders under the DIP Financing Facility as collateral for
outstanding letter of credit. As of March 30, 2002, the Company had $25.2
million in letters of credit outstanding under the DIP Financing Facility. 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 or, assuming consummation of
the Plan in accordance with its terms, the Exit Financing Revolver Facility.
Assuming consummation of the Plan in accordance with its terms, holders of
claims in respect of the DIP Financing Facility other than those relating to
Designated Post-Petition Loans will be paid cash in an amount equal to such
claim, and holders of claims relating to Designated Post-Petition Loans will
receive a note under the Exit Term Loan in an amount equal to the amount of such
holder's Designated Post-Petition Loans. In addition, letters of credit issued
under the DIP Financing Facility will be replaced with letters of credit issued
under the Exit Financing Revolver 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.
As of March 30, 2002, (a) outstanding prepetition borrowings under the revolving
credit facility were $232.7 million, (b) outstanding prepetition borrowings
under the term loan facility were $241.6 million in the aggregate, and (c)
outstanding letters of credit under the revolving credit facility were the $10.9
million in the aggregate. Pursuant to the DIP Financing Order, $150 million of
prepetition borrowings under the senior debt facilities had become subject to
treatment as postpetition debt. As prepetition letters of credit expire, to the
extent they are renewed, they will be reissued under the DIP Financing Facility
or, assuming consummation of the Plan in accordance with its terms, the Exit
Financing Revolver 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
31
Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average
annual interest rate on outstanding borrowings under the various prepetition
senior credit facilities for the three months ended March 30, 2002 was 5.35%.
The prepetition senior debt facilities expired 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.
Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company
to make scheduled interest payments on the prepetition senior debt facilities.
Even though these payments are being made, the Company remains in default under
the prepetition senior debt facilities.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the senior debt facilities will be cancelled and, in exchange therefor,
holders of claims in respect of the senior debt facilities will become entitled
to receive New Common Stock.
Overline Facility
In May 1999, the Company entered into a $20.0 million senior unsecured revolving
credit facility (i.e., the Overline Facility) 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 and to secure it with
the same assets securing the senior debt facilities described above. As of March
30, 2002, outstanding borrowings under the Overline Facility were $34.7 million.
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 matured on January 31, 2002.
Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company
to make scheduled interest payments on the Overline Facility. Even though these
payments are being made, the Company remains in default under the Overline
Facility.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the Overline Facility will be cancelled and, in exchange therefor, holders
of claims in respect of the Overline Facility will become entitled to receive
New Common Stock and New Warrants.
Senior Subordinated Debt
In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0
million aggregate principal amount of 9% Senior Subordinated Notes due 2005
(i.e., 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. As of March 30, 2002,
all of the 9% Notes remained outstanding.
On November 12, 1996, the Company issued $125.0 million aggregate principal
amount of 10% Senior Subordinated Notes due 2006 (i.e., 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. As of March 30, 2002, all of the 10% Notes remained outstanding.
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.
32
The Company is in default under the indentures governing both the 9% Notes and
the 10% Notes. No principal or interest payment has been or will be made on the
9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the 9% Notes and the 10% Notes will be cancelled and, in exchange
therefor, holders of claims in respect of 9% Notes or 10% Notes will become
entitled to receive New Common Stock and New Warrants.
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 Common Stock. As of March 30, 2002, approximately $85.2
million aggregate principal amount of the 6% Convertible Debentures remain
outstanding. If all such outstanding 6% Convertible Debentures were converted at
such date, the resulting cash component of the conversion consideration would
have been approximately $57.2 million.
Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest
bearing subordinated promissory notes (i.e., the Cash Claimant Notes) in respect
of the unpaid cash portion of the conversion consideration owing to certain
holders of the 6% Convertible Debentures who had surrendered their debentures
for conversion, but had not been paid the cash portion of the conversion
consideration. As of March 30, 2002, the aggregate 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. Fieldcrest Cannon is in default under the
indenture governing the 6% Convertible Debentures and the Cash Claimant Notes.
No principal or interest payment has been or will be made on the 6% Convertible
Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases.
Assuming consummation of the Plan in accordance with its terms, the indebtedness
under the 6% Convertible Debentures will be cancelled and, in exchange therefor,
holders of claims in respect of 6% Convertible Debentures will become entitled
to receive New Warrants, and the indebtedness under the Cash Claimant Notes will
be cancelled and, in exchange therefore, holders of claims in respect of the
Cash Claimant Notes will become entitled to receive New Common Stock and New
Warrants.
Industrial Revenue Bonds
The Company presently has obligations in respect of two industrial revenue bond
facilities (i.e., the IRB Facilities). One of the IRB Facilities is secured by
liens on specified plants and equipment and by a letter of credit. The other IRB
Facility is secured by a letter of credit. As of March 30, 2002, $13.2 million
of bonds in the aggregate were outstanding under the IRB Facilities.
On February 6, 2001, the Bankruptcy Court authorized the Company to make
scheduled principal and interest payments on the IRB Facilities. Even though
these payments are being made, the Company remains in default of its obligations
under each of the IRB Facilities.
Assuming consummation of the Plan in accordance with its terms, the IRB
Facilities will be reinstated and the letters of credit issued in respect
thereof will be replaced, substituted, or otherwise satisfied with equivalent
letters of credit to be issued under the Exit Financing Revolver Facility.
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, Pillowtex has
incurred, and will continue to incur, significant professional fees and other
restructuring costs in connection with the Chapter 11 Cases and the
restructuring of its business operations. However, based on current and
anticipated levels of operations and continued efforts to reduce inventories,
and assuming consummation of the Plan prior to June 30, 2002, Pillowtex's
management believes that Pillowtex's cash flow from operations, together with
amounts available
33
under the DIP Financing Facility, will be adequate to meet its anticipated cash
requirements during the pendency of the Chapter 11 Cases. The DIP Financing
Facility is currently scheduled to terminate on June 30, 2002, and accordingly,
if the Plan is not consummated in accordance with its terms prior to such date,
Pillowtex would be required to obtain a further extension of the DIP Financing
Facility or alternative financing. Pillowtex can provide no assurance that such
an extension would be granted or that alternative financing would be available
on acceptable terms. As a result of the Chapter 11 Cases and the circumstances
leading to the filing thereof, Pillowtex's access to alternative financing in
such a scenario would be very limited. Furthermore, in the event that cash
flows, together with available borrowings under the DIP Financing Facility or
alternative financing arrangements, are not sufficient to meet the Company's
cash requirements, Pillowtex may be required to reduce planned capital
expenditures; however, Pillowtex can provide no assurance that such reductions
would be sufficient to cover any cash shortfalls. Management of the Debtors
believes that, assuming consummation of the Plan in accordance with its terms
and achievement of the Debtors' business plan and strategy, reorganized Parent
will have sufficient liquidity for the reasonably foreseeable future to service
post-reorganization indebtedness and conduct its business as contemplated by the
Debtors' business plan and strategy.
In addition, the amounts reported in the unaudited consolidated financial
statements included elsewhere in this Quarterly Report do not reflect
adjustments to the carrying value of assets or the amount and classification of
liabilities that ultimately may be necessary as the result of the Plan or
another plan of reorganization. Adjustments necessitated by the confirmation of
the Plan or another 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 $483.7 million as of March 30, 2002, 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 continuing to
review their executory contracts and unexpired leases and have received approval
from the Bankruptcy Court to reject certain contracts and leases. The Debtors
cannot presently determine what the ultimate liability will be for all contracts
and leases approved by the Bankruptcy Court for rejection, but the estimated
prepetition liability for those the Bankruptcy Court has already approved is
approximately $16.1 million. The Company expects to accrue additional
liabilities as more contracts and leases are approved for rejection by the
Bankruptcy Court.
New Accounting Standards
The Emerging Issues Task Force of the Financial Accounting Standards Board
issued EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or Services
to be Delivered in the Future", and EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products",
which address various aspects of accounting for consideration given by a vendor
to a customer or a reseller of products. The Company adopted the provisions of
the EITFs as of the beginning of fiscal 2002, which commenced December 30, 2001.
The EITFs require the Company to classify all consideration paid to customers as
a reduction to net sales. Prior to December 30, 2001, the Company classified
amounts paid to customers for co-operative advertising and marketing in selling,
general, and administrative expenses. As a result, $5.1 million of selling,
general, and administrative expenses have been reclassified as a reduction to
net sales for the three months ended March 31, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives
34
no longer be amortized, but instead tested for impairment at least annually.
Intangible assets with definite useful lives will be amortized over such lives
to their estimated residual values. The Company adopted SFAS No. 142 as of
December 30, 2001. The Company has completed the first step of the transitional
impairment test for intangible assets with indefinite lives and has determined
that no potential impairment exists. The Company is also required to complete
the first step of the transitional impairment test for goodwill within six
months of adoption of SFAS No. 142 and to complete the final step of the
transitional impairment test by the end of the calendar year. As of March 30,
2002 and December 29, 2001, the Company had intangible assets other than
goodwill of $27.7 million and $28.1 million, respectively.
Pro forma loss from continuing operations applicable to common shareholders and
loss applicable to common shareholders and related per share amounts for the
three months ended March 31, 2001, adjusted to eliminate historical amortization
of goodwill and intangibles with indefinite lives, are as follows:
Loss from continuing operations applicable to common
shareholders - as reported $(51,926)
========
Loss from continuing operations applicable to common
shareholders - pro forma $(50,345)
========
Basic and diluted loss per common share:
- ---------------------------------------
Loss from continuing operations applicable to common
shareholders - as reported $ (3.64)
========
Loss from continuing operations applicable to common
shareholders - pro forma $ (3.53)
========
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supercedes both SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in Opinion 30). SFAS No. 144 also retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142.
The Company adopted the provisions of SFAS No. 144 as of December 30, 2001. The
adoption of SFAS No. 144 for long-lived assets held for use did not have a
material impact on the Company's financial statements because the impairment
assessment requirements under SFAS No. 144 are largely unchanged from SFAS No.
121.
35
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 loss of material customers; (h) the risks related to organized labor;
(i) the seasonality of the Company's businesses; (j) the difficulties in
attracting and retaining personnel; and (k) 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 29, 2001.
36
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(a) Reports on Form 8-K
During the quarter ended March 30, 2002, Pillowtex filed the following
Current Reports on Form 8-K:
Current Report on Form 8-K dated February 26, 2002 and filed
February 26, 2002, reporting information under "Item 5. Other
Events" regarding the filing of the Company's first amended plan
of reorganization.
Current Report on Form 8-K, dated February 27, 2002 and filed
March 4, 2002, reporting information under "Item 5. Other Events"
regarding the approval of the Company's disclosure statement by
the Bankruptcy Court.
Current Report on Form 8-K, dated March 11, 2002 and filed March
11, 2002, reporting information under "Item 5. Other Events"
regarding the filing of the Company's second amended plan of
reorganization.
37
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 13, 2002 PILLOWTEX CORPORATION
(Registrant)
/s/ Michael R. Harmon
----------------------------------------------------
Michael R. Harmon
Executive Vice President and Chief Financial Officer
38