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 September 29, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-11756
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2147728
(State of incorporation) (IRS Employer Identification No.)
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 November 9, 2001
----- -------------------------------
Common Stock, $.01 par value 14,250,892
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of September 29, 2001,
September 30, 2000 and December 30, 2000 3
Consolidated Statements of Operations for the three months
ended September 29, 2001 and September 30, 2000 4
Consolidated Statements of Operations for the nine months
ended September 29, 2001 and September 30, 2000 5
Consolidated Statements of Cash Flows for the nine months 6
ended September 29, 2001 and September 30, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 29
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 37
Signature 38
2
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for par value)
ASSETS September 29, September 30, December 30,
2001 2000 2000
---------------- --------------- ----------------
(unaudited) (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 23,414 3,675 32,182
Receivables:
Trade, less allowances of $14,770 as of September 29,
2001, $26,537 as of September 30, 2000 and $40,897 as
of December 30, 2000 183,332 210,758 189,064
Other 6,193 9,951 6,192
Inventories 205,198 371,508 262,145
Assets held for sale 6,889 1,257 5,281
Prepaid expenses 5,774 11,758 5,260
Net assets of discontinued operations 9,406 173,523 46,784
---------------- --------------- ----------------
Total current assets 440,206 782,430 546,908
Property, plant and equipment, less accumulated depreciation of
$170,273 as of September 30, 2001, $155,664 as of September 30,
2000 and $153,579 as of December 30, 2000 474,469 566,809 525,990
Intangible assets, at cost less accumulated amortization of $37,521 as of
September 29, 2001, $25,544 as of September 30, 2000
and $27,802 as of December 30, 2000 224,619 241,100 233,480
Other assets 33,678 29,885 29,391
---------------- --------------- ----------------
Total assets $ 1,172,972 1,620,224 1,335,769
================ =============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 47,138 100,856 33,083
Accrued expenses 63,321 57,535 57,182
Deferred income taxes - 37,350 -
Current portion of long-term debt 322 87,534 -
Current portion of long-term debt in default 667,447 - 33,229
Long-term debt in default 12,429 637,539 660,790
---------------- --------------- ----------------
Total current liabilities 790,657 920,814 784,284
Long-term debt, less current portion 658 345,877 -
Deferred income taxes - 51,567 -
Noncurrent liabilities 38,595 52,720 40,016
---------------- --------------- ----------------
Total liabilities not subject to compromise 829,910 1,370,978 824,300
Liabilities subject to compromise 496,465 - 492,093
---------------- --------------- ----------------
Total liabilities 1,326,375 1,370,978 1,316,393
Series A redeemable convertible preferred stock, $.01 par value;
81,411, 79,455 and 81,411 shares issued and outstanding
for September 29, 2001, September 30, 2000, and December 30,
2000, respectively 94,827 79,875 82,827
Shareholders' equity (deficit):
Preferred stock, $.01 par value; authorized 20,000,000 shares;
only Series A issued - - -
Common stock, $.01 par value; authorized 55,000,000 shares;
14,250,892 as of September 29, 2001, 14,240,889 as of September
30, 2000 and 14,252,069 as of December 30, 2000
shares issued and outstanding 143 142 143
Additional paid-in capital 160,120 160,707 160,120
Retained earnings (accumulated deficit) (406,659) 11,179 (222,067)
Currency translation adjustment (1,834) (2,099) (1,647)
Accumulated other comprehensive loss - (558) -
---------------- --------------- ----------------
Total shareholders' equity (deficit) (248,230) 169,371 (63,451)
Commitments and contingencies
---------------- --------------- ----------------
Total liabilities and shareholders' equity (deficit) $ 1,172,972 1,620,224 1,335,769
================ =============== ================
See accompanying notes to consolidated financial statements.
3
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 29, 2001 and September 30, 2000
(Dollars in thousands, except for per share data)
(unaudited)
September 29, September 30,
2001 2000
----------------- ----------------
Net sales $ 271,395 330,391
Cost of goods sold 258,962 300,009
----------------- ----------------
Gross profit 12,433 30,382
Selling, general and administrative expenses 21,323 23,884
Impairment of long-lived assets 3,085 -
Restructuring charge 26 -
----------------- ----------------
Earnings (loss) from operations (12,001) 6,498
Interest expense (contractual interest of $23,509 in 2001) 14,942 27,657
----------------- ----------------
Loss from continuing operations before
reorganization items and income taxes (26,943) (21,159)
Reorganization items 4,590 -
----------------- ----------------
Loss from continuing operations before income taxes (31,533) (21,159)
Income tax benefit - (6,225)
----------------- ----------------
Net loss from continuing operations (31,533) (14,934)
Discontinued operations:
Loss from operations, net of income tax benefit of $702 in 2000 (8,899) (1,334)
Loss on disposal (3,256) -
----------------- ----------------
Loss from discontinued operations (12,155) (1,334)
----------------- ----------------
Net loss (43,688) (16,268)
Preferred dividends and accretion 4,604 2,040
----------------- ----------------
Loss applicable to common shareholders $ (48,292) (18,308)
================= ================
Basic and diluted loss per common share -
Loss from continuing operations applicable to common shareholders $ (2.54) (1.19)
================= ================
Loss applicable to common shareholders $ (3.39) (1.29)
================= ================
Weighted average common shares outstanding -
Basic and diluted 14,251 14,241
================= ================
See accompanying notes to consolidated financial statements.
4
PILLOWTEX CORPORAION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 29, 2001 and September 30, 2000
(Dollars in thousands, except for per share data)
(unaudited)
September 29, September 30,
2001 2000
-------------- ---------------
Net sales $ 787,455 978,678
Cost of goods sold 769,033 866,051
-------------- ---------------
Gross profit 18,422 112,627
Selling, general and administrative expenses 65,865 72,323
Impairment of long-lived assets 23,170 --
Restructuring charge 6,491 --
-------------- ---------------
Earnings (loss) from operations (77,104) 40,304
Interest expense (contractual interest of $76,016 in 2001) 50,318 81,469
-------------- ---------------
Loss from continuing operations before
reorganization items and income taxes (127,422) (41,165)
Reorganization items 25,755 --
-------------- ---------------
Loss from continuing operations before income taxes (153,177) (41,165)
Income tax benefit -- (13,497)
-------------- ---------------
Net loss from continuing operations (153,177) (27,668)
Discontinued operations:
Loss from operations, net of income tax benefit of $2,341 in 2000 (16,158) (4,445)
Loss on disposal (3,256) --
-------------- ---------------
Loss from discontinued operations (19,414) (4,445)
-------------- ---------------
Net loss (172,591) (32,113)
Preferred dividends and accretion 12,000 5,977
-------------- ---------------
Loss applicable to common shareholders $ (184,591) (38,090)
============== ===============
Basic and diluted loss per common share -
Loss from continuing operations applicable to common shareholders $ (11.59) (2.36)
============== ===============
Loss applicable to common shareholders $ (12.95) (2.68)
============== ===============
Weighted average common shares outstanding -
Basic and diluted 14,251 14,232
============== ===============
See accompanying notes to consolidated financial statements.
5
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 29, 2001 and September 30, 2000
(Dollars in thousands)
(unaudited)
September 29, September 30,
2001 2000
---------------- -----------------
Cash flows from operating activities:
Net loss $(172,591) (32,113)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss from discontinued operations 19,414 4,445
Depreciation and amortization 40,750 43,232
Impairment of long-lived assets 23,170 --
Deferred income taxes -- (15,839)
Changes in assets and liabilities, net of effects of the
divestiture of the Blanket Division:
Trade receivables 5,732 30,338
Inventories 56,100 (8,524)
Accounts payable and accrued expenses 27,785 (20,927)
Other assets and liabilities 1,267 3,323
--------- ---------
Net cash provided by operating activities 1,627 3,935
Net cash provided by discontinued operations 1,943 4,102
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 3,161 4,569
Proceeds from sale of Blanket Division 11,153 --
Purchases of property, plant and equipment (8,888) (30,407)
--------- ---------
Net cash provided by (used in) investing activities 5,426 (25,838)
Cash flows from financing activities:
Decrease in checks not yet presented for payment (2,820) (2,152)
Borrowings on revolving credit loans -- 680,034
Repayments of revolving credit loans -- (637,298)
Payment of debt issuance costs (753) --
Retirement of long-term debt (14,191) (23,966)
--------- ---------
Net cash provided by (used in) financing activities (17,764) 16,618
Net change in cash and cash equivalents (8,768) (1,183)
Cash and cash equivalents at beginning of period 32,182 4,858
--------- ---------
Cash and cash equivalents at end of period $ 23,414 3,675
========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 64,467 72,991
========= =========
Income taxes $ 122 (3,011)
========= =========
Supplemental disclosure of noncash financing information:
During the nine months ended September 29, 2001, the Company entered into a
capital lease obligation of $1,065.
See accompanying notes to consolidated financial statements.
6
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(1) General
The accompanying unaudited consolidated financial statements of Pillowtex
Corporation, which is referred to in this report as "Parent," and its
subsidiaries, which are collectively with Parent, referred to in this report as
the "Company," include all adjustments, consisting only of normal, recurring
adjustments and accruals, which are, in the opinion of management, necessary for
fair presentation of the results of operations and financial position. Results
of operations for interim periods may not be indicative of future results. The
unaudited consolidated financial 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 30, 2000.
The September 30, 2000 and December 30, 2000 consolidated financial statements
have been restated to present the Blanket Division as a discontinued operation
(see note 13). Certain reclassifications have also been made to the September
30, 2000 and December 30, 2000 inventory categories in note 3 to conform with
the presentation used in 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 in the process of reviewing 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 and nine months
ended September 29, 2001, the Company accrued $5.5 million and $14.4 million,
respectively, for the estimated prepetition liability for those contracts and
leases the Bankruptcy Court has already approved for rejection. Approximately
$0.5 million and $9.5 million, respectively, of the prepetition liability
relating to the rejected contracts and leases have been reflected as
reorganization items, and the remaining $5.0 million has been included in the
loss from discontinued operations in the accompanying statements of operations
for the three and nine months ended September 29, 2001. The Company may be
required to accrue additional liabilities as more contracts and leases are
approved for rejection by the Bankruptcy Court.
The United States trustee for the District of Delaware has appointed an Official
Committee of Unsecured Creditors in accordance with the provisions of the
Bankruptcy Code.
The Bankruptcy Code provides that the Debtors have exclusive periods during
which only they may file and solicit acceptances of a plan of reorganization.
The exclusive period for the Debtors to file a plan of reorganization originally
would have expired on March 14, 2001, but was extended by the Bankruptcy Court
until July 16, 2001. The Debtors requested and received from the Bankruptcy
Court another extension of the exclusive periods to file a plan of
reorganization and solicit acceptances thereof through November 16, 2001 and
January 15, 2002,
7
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
respectively. The Debtors will file by November 16, 2001 a motion in the
Bankruptcy Court requesting another extension of the exclusive periods to file a
plan of reorganization and solicit acceptances thereof. Under the local rules of
the Bankruptcy Court, the exclusive period for filing a plan of reorganization
will automatically be extended from November 16, 2001 until such time as the
Bankruptcy Court rules on the motion, which is currently expected to be
presented at a Bankruptcy Court hearing scheduled for December 18, 2001. Unless
such periods are again extended by the Bankruptcy Court, if the Debtors fail to
file a plan of reorganization by the relevant expiration date or, after such
plan has been filed, if the Debtors fail to obtain acceptance of such plan from
the requisite impaired classes of creditors by the relevant expiration date, any
party in interest, including a creditor, an equity holder, a committee of
creditors or equity holders, or an indenture trustee, may file their own plan of
reorganization for the Debtors.
After a plan of reorganization has been filed with the Bankruptcy Court, the
plan, along with a disclosure statement approved by the Bankruptcy Court, will
be sent to all creditors and equity holders. Following the solicitation period,
the Bankruptcy Court will consider whether to confirm the plan. To confirm a
plan of reorganization, the Bankruptcy Court, among other things, is required to
find that (i) with respect to each impaired class of creditors and equity
holders, each holder in such class has accepted the plan or will, pursuant to
the plan, receive at least as much as such holder would receive in a
liquidation, (ii) each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as described in the following
sentence), and (iii) confirmation of the plan is not likely to be followed by a
liquidation or a need for further financial reorganization of the Debtors or any
successors to the Debtors unless the plan proposes such liquidation or
reorganization. If any impaired class of creditors or equity holders does not
accept the plan and, assuming that all of the other requirements of the
Bankruptcy Code are met, the proponent of the plan may invoke the "cram down"
provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may confirm a plan notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity holders if certain requirements of the Bankruptcy
Code are met. These requirements may, among other things, necessitate payment in
full for senior classes of creditors before payment to a junior class can be
made. As a result of the amount of prepetition indebtedness and the availability
of the "cram down" provisions, it is presently anticipated that the holders of
the Company's capital stock will receive no value for their interests under the
plan of reorganization.
Since the Petition Date, the Debtors have conducted business in the ordinary
course. Management is in the process of developing a plan of reorganization and
will seek the acceptance of the plan by impaired creditors and equity holders
and confirmation of the plan by the Bankruptcy Court, all in accordance with the
applicable provisions of the Bankruptcy Code.
During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy
Court approval, sell assets and settle liabilities, including for amounts other
than those reflected in the financial statements. The Debtors are continuing to
review their operations and to identify assets for disposition. On September 6,
2001, the Company sold the majority of the inventory and fixed assets associated
with its Blanket Division (see note 13).
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. Additionally, the amounts reported on the consolidated balance
sheet could materially change because of changes in business strategies and the
effects of any proposed plan of reorganization.
The accompanying consolidated financial statements are presented in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" (SOP 90-7), assuming that the Company will continue as a going concern.
The Company is currently operating under the jurisdiction of Chapter 11 of the
Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a
going concern is contingent upon, among other things, its ability to formulate a
plan of reorganization which will gain approval of the requisite parties under
the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to
comply with the debtor-in-possession financing facility, and its ability to
return to profitability, generate sufficient cash flows from operations, and
obtain financing sources to meet future obligations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The
8
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
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.
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 a plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. Generally, all
actions to enforce or otherwise effect repayment of prepetition 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 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 an approved plan of reorganization and
accordingly are not presently determinable.
Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Cases are
expensed as incurred and reported as reorganization items. Interest expense is
reported only to the extent that it will be paid during the Chapter 11 Cases or
that it is probable that it will be an allowed claim.
(2) Comprehensive Loss
Comprehensive loss consists of net loss and foreign currency translation
adjustments and aggregated $43.7 million and $172.8 million for the three and
nine months ended September 29, 2001, respectively. For the three and nine
months ended September 30, 2000, comprehensive loss aggregated $16.4 million and
$32.5 million, respectively.
(3) Inventories
Inventories consisted of the following at September 29, 2001, September 30,
2000, and December 30, 2000:
September 29, September 30, December 30,
2001 2000 2000
------------- ------------- ------------
Finished goods $ 101,122 153,137 116,212
Work-in-process 43,824 136,666 75,465
Raw materials and supplies 50,666 67,546 53,258
In-transit and off-site 9,586 14,159 17,210
------------- ------------- ------------
$ 205,198 371,508 262,145
============= ============= ============
(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 and nine
months ended September 29, 2001 and September 30, 2000, respectively. Because
the exercise price for outstanding options for the three and nine months ended
September 29, 2001 and September 30, 2000, was greater than the average market
price, no options were assumed to be exercised. For the three and nine months
ended September 29, 2001, convertible preferred stock was convertible into
approximately 4.0 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 and nine months ended September 30, 2000 convertible preferred stock
was convertible into approximately 3.3 million shares of
9
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
common stock, convertible debentures were convertible into approximately 0.5
million shares of common stock and options to purchase approximately 1.3 million
shares of common stock were outstanding.
(5) Long-Term Debt and Liquidity
Long-term debt consists of the following:
September 29, September 30, December 30,
2001 2000 2000
------------- ------------- ------------
Revolver less portion to be treated as postpetition debt $ 235,659 302,538 255,956
Term loans less portion to be treated as postpetition debt 244,412 324,752 268,090
Portion of revolver and term loans to be treated as
postpetition debt 150,000 - 117,179
Overline Credit Facility 34,738 35,000 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 13,400 15,456 14,925
9% Senior Subordinated Notes due 2007 185,000 185,000 185,000
10% Senior Subordinated Notes due 2006 125,000 125,000 125,000
6% Convertible Subordinated Debentures due
2012 (effective rate of 8.72%, net of $11.1 million in
unamortized discount at September 30, 2000), inclusive of
Cash Claimant Notes in the principal amount of $5.2 million 90,417 79,296 90,417
Other debt 2,684 3,908 3,131
------------ ---------- ----------
Total debt 1,081,310 1,070,950 1,094,436
Less:
Current portion of long-term debt (322) (87,534) -
Current portion of long-term debt in default (667,447) - (33,229)
Long-term debt in default (12,429) (637,539) (660,790)
Liabilities subject to compromise (400,454) - (400,417)
------------ ---------- ----------
Total long-term debt $ 658 345,877 -
============ ========== ==========
DIP Financing Facility
On December 6, 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. 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
10
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
requiring maintenance of a minimum level of earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), and (e) elimination of a nine-month
extension provision.
The Debtors and lenders under the DIP Financing Facility have entered into
another amendment to the facility, dated as of November 14, 2001, providing for,
among other things, (a) an extension of the termination date until June 30, 2002
(subject to earlier termination as described below), (b) a reduction in the size
of the facility to $100.0 million, including a $60.0 million letter of credit
sub-facility, (c) an increase in the interest rate and certain other fees on the
facility, (d) modification of the financial covenants requiring the maintenance
of an asset coverage ratio and a minimum level of EBITDA and limiting capital
expenditures, and (e) an additional financial covenant limiting operational
restructuring costs.
The amendment also requires the Company to (a) file on or prior to December 31,
2001 a feasible plan of reorganization and disclosure statement, substantially
complete in form and substance, that complies with all applicable provisions of
chapter 11 of the Bankruptcy Code and provides for the cash payment in full of
all outstanding loans under the DIP Financing Facility, the replacement or
liquidation of all letters of credit, and the cash payment of all administrative
expenses, (b) obtain Bankruptcy Court approval of a disclosure statement on or
prior to March 1, 2002, (c) obtain confirmation from the Bankruptcy Court of a
plan of reorganization on or prior to May 15, 2002, and (d) cause a plan of
reorganization to become effective on or prior to June 30, 2002. The
effectiveness of the amendment is subject to, among other things, Bankruptcy
Court approval. The Company has filed a motion to have the amendment approved at
the Bankruptcy Court hearing scheduled for November 16, 2001. However, no
assurance can be given that the amendment will be approved by the Bankruptcy
Court. The amendment also, in effect, extends the currently scheduled
termination date of the DIP Financing Facility by two days, from November 14,
2001 to November 16, 2001. If the Bankruptcy Court does not approve the
amendment, the DIP Financing Facility will terminate on November 16, 2001.
The DIP Financing Facility, as amended as of November 14, 2001, will expire on
the earliest to occur of (a) June 30, 2002, (b) the date on which the plan of
reorganization becomes effective, (c) any material non-compliance with any of
the terms of the DIP Financing Order, (d) any event of default that shall have
occurred under the DIP Financing Facility, or (e) the 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, as amended as of November 14,
2001, 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, as
amended, will be 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
certain obligations to the Pension Benefit Guaranty Corporation, and a first
priority lien on all post-petition real and personal assets of the Company. The
documentation evidencing the DIP Financing Facility, as amended as of November
14, 2001, 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, operational restructuring costs, 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 permanent reduction of the DIP Financing
Facility.
As of September 29, 2001, the Company had $13.9 million in letters of credit
outstanding under the DIP Financing Facility. No cash borrowings were
outstanding on the DIP Financing Facility at September 29, 2001. 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 September 29, 2001 was approximately $48.8
11
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
million. As prepetition letters of credit expire under the Company's senior
secured revolving credit facility described below, to the extent they are
renewed, they will be reissued under the DIP Financing Facility.
Senior Debt Facilities
In December 1997, in connection with the Fieldcrest Cannon acquisition, the
Company entered into senior secured revolving credit and term loan facilities
with a group of financial and institutional investors for which Bank of America,
N.A. acts as the administrative and collateral agent. These facilities consisted
of a $350.0 million revolving credit facility and a $250.0 million term loan
facility. The term loan facility consisted of a $125.0 million Tranche A Term
Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, the
Company amended these facilities by increasing the Tranche B Term Loan to $225.0
million. The increase occurred in conjunction with the acquisition of The
Leshner Corporation ("Leshner"), allowing the Company to fund the transaction
and reduce borrowings under the revolving credit facility.
As of September 29, 2001, the Company had $10.4 million in letters of credit
outstanding under the prepetition revolving credit facility. As these
prepetition letters of credit expire, to the extent they are renewed, they will
be reissued under the DIP Financing Facility.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus
3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche
A Term Loan, plus an additional margin of 0.50%. The weighted average annual
interest rate on outstanding borrowings under the various prepetition senior
credit facilities for the three and nine months ended September 29, 2001 was
7.2% and 8.4%, respectively. The prepetition senior debt facilities expire on
January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic subsidiaries
of the Company, and are secured by first priority liens on all of the capital
stock of each domestic subsidiary of the Company and by 65% of the capital stock
of the Company's foreign subsidiaries. The Company has also granted a first
priority security interest in all of its presently unencumbered and future
domestic assets and properties, and all presently unencumbered and future
domestic assets and properties of each of its subsidiaries.
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.
As of September 29, 2001, $150.0 million of the $630.1 million of the senior
debt facilities had become subject to treatment as postpetition debt rather than
prepetition debt, as authorized by the DIP Financing Order.
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 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. The Overline
Facility is guaranteed on a senior basis by the Company's domestic subsidiaries.
Amounts borrowed under the Overline Facility bear interest at a rate based upon
LIBOR plus 4.5% or the base rate plus 3.0%, at the Company's option. The
Overline Facility matures upon termination by the Company at any time or
otherwise at the earliest of: (i) any increase in the commitment under the
senior debt facilities described above, the issuance of any capital stock by the
Company or its domestic subsidiaries, or other specified events or (ii) January
31, 2002.
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.
12
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Senior Subordinated Debt
In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0
million of 9% Senior Subordinated Notes due 2005 (the "9% Notes"), with interest
payable semiannually commencing June 15, 1998. The 9% Notes are general
unsecured obligations of the Company, are subordinated in right of payment to
all existing and future senior indebtedness, and rank pari passu with the 10%
Notes described below.
On November 12, 1996, the Company issued $125.0 million 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.
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.
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 September 29, 2001, 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 paid the cash portion of the conversion
consideration. As of September 29, 2001, 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.
Industrial Revenue Bonds
The Company has obligations in respect of four industrial revenue bond
facilities (the "IRB Facilities"). Three of the IRB Facilities are secured by
liens on specified plants and equipment and one is secured by a letter of credit
issued under the senior debt facilities described above. As of September 29,
2001, $13.4 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.
13
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Adequacy of Capital Resources
As discussed above, the Debtors are operating their businesses as
debtors-in-possession under chapter 11 of the Bankruptcy Code. In addition to
the cash requirements necessary to fund ongoing operations, the Company
anticipates that it will incur significant professional fees and other
restructuring costs in connection with the Chapter 11 Cases and the
restructuring of its business operations. As a result of the uncertainty
surrounding the Company's current circumstances, it is difficult to predict the
Company's actual liquidity needs at this time. However, based on current and
anticipated levels of operations and efforts to reduce inventories and accounts
receivable and assuming that the amendment to the DIP Financing Facility
described above is approved by the Bankruptcy Court, the Company anticipates
that its cash flow from operations, together with amounts available under the
DIP Financing Facility, will be adequate to meet its anticipated cash
requirements during the pendency of the Chapter 11 Cases. In the event that cash
flows and available borrowings under the DIP Financing Facility are not
sufficient to meet future cash requirements, the Company may be required to
reduce planned capital expenditures or seek additional financing. The Company
can provide no assurances that reductions in planned capital expenditures would
be sufficient to cover shortfalls in available cash or that additional financing
would be available or, if available, offered on acceptable terms. As a result of
the Chapter 11 Cases and the circumstances leading to the filing thereof, the
Company's access to additional financing is, and for the foreseeable future will
likely continue to be, very limited. The Company's long-term liquidity
requirements and the adequacy of its capital resources are difficult to predict
at this time and ultimately cannot be determined until a plan of reorganization
has been developed and confirmed by the Bankruptcy Court in connection with the
Chapter 11 Cases.
(6) Liabilities Subject to Compromise
Liabilities subject to compromise are comprised 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 in the process of reviewing 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
$14.4 million. The Company may be required to accrue additional liabilities as
more contracts and leases are approved for rejection by the Bankruptcy Court.
14
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
The components of liabilities subject to compromise at September 29, 2001 and
December 30, 2000 are as follows:
September 29, December 30,
2001 2000
------------------ -----------------
9% Senior Subordinated Notes due 2007 $ 185,000 185,000
10% Senior Subordinated Notes due 2006 125,000 125,000
6% Convertible Subordinated Sinking Fund Debentures due 2012 85,217 85,217
Cash Claimant Notes 5,200 5,200
Other 37 -
------------------ -----------------
Total long-term debt 400,454 400,417
------------------ -----------------
Interest accrued on above notes and debentures 14,018 14,448
Accounts payable 50,139 55,322
Nonqualified pension plan liability 11,673 11,673
Rejected contracts and leases 14,451 -
Other accrued expenses 5,730 10,233
------------------ -----------------
$ 496,465 492,093
================== =================
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 a plan of reorganization providing for the
repayment terms has been confirmed by the Bankruptcy Court and becomes
effective. Therefore, interest aggregating $25.7 million on prepetition
unsecured obligations has not been accrued for the nine months ended September
29, 2001. Since the Petition Date, the Company has not accrued interest
aggregating $30.2 million on prepetition unsecured obligations.
(7) Redeemable Convertible Preferred Stock
On December 19, 1997, the Company issued 65,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Preferred Stock") for $65.0 million less
$2.1 million of issue costs. Accretion is being recognized to increase the
recorded amount to the redemption amount over the period to the redemption date.
Dividends accrued from the issue date through December 31, 1999 at a 3% annual
rate. Beginning January 1, 2000, the rate increased to 10% as a result of the
Company's earnings per share for 1999 falling below predetermined targets.
During the third and fourth quarters of 1999, the Company accrued and paid in
kind a one-time cumulative dividend on the Series A Preferred Stock, from the
issue date through December 31, 1999, equal to the difference between the
dividends calculated at the 3% rate and dividends calculated at the 10% rate, or
10,135 shares of Series A Preferred Stock. Under the terms of the Series A
Preferred Stock, dividends can be paid in cash or additional shares of Series A
Preferred Stock until December 2002, at which time they must be paid in cash.
Under the DIP Financing Facility, the Company is prohibited from paying any
dividends on the Series A Preferred Stock. A total of 81,411 shares of Series A
Preferred Stock were outstanding as of September 29, 2001. The commencement of
the Chapter 11 Cases constitutes an "Event of Noncompliance" under the terms of
the Series A Preferred Stock. The terms of the Series A Preferred Stock provide
that upon the occurrence of an Event of Noncompliance, the dividend rate on such
stock will increase immediately to the lesser of 18% per annum or the maximum
rate permitted by law. Accordingly, as of the Petition Date, dividends on the
Series A Preferred Stock began accruing at 18% per year, compounding quarterly.
The Series A Preferred Stock is convertible, at any time at the option of the
holder, into Common Stock at a rate calculated by dividing $1,000 plus accrued
and unpaid dividends per share by $24.00 per share. Each share of
15
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Series A Preferred Stock is subject to mandatory redemption in ten and one-half
years after the issue date at a redemption price of $1,000 plus accrued and
unpaid dividends. The Company has the right after the fourth anniversary of the
issue date to call all or a portion of the Series A Preferred Stock at $1,000
per share plus accrued and unpaid dividends times a premium equal to the
dividend rate after the fourth anniversary date and declining ratably to the
mandatory redemption date. Holders of the Series A Preferred Stock are entitled
to limited voting rights only under certain conditions.
As a result of the amount of prepetition indebtedness and the availability of
the "cram down" provisions of the Bankruptcy Code described above, it is
presently anticipated that the holders of the shares of Series A Preferred Stock
will receive no value for such shares or accrued and unpaid dividends thereon
under a plan of reorganization.
(8) Segment Information
The Company manufactures textile products for the bedroom, bathroom, and kitchen
and markets them to department stores, discount stores, specialty shops and
certain institutional customers and over the Internet. The Company is organized
into 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. On September 6, 2001, the Company
sold the majority of the inventory and fixed assets associated with its Blanket
Division, which manufactured and sold blanket products (see note 13). Other
includes the Company's retail stores, corporate activities, and the remaining
assets associated with the Blanket Division.
The accounting policies of the divisions are the same as those described in the
Summary of Significant Accounting Policies as described in the Company's annual
report on Form 10-K for the year ended December 30, 2000. The Company evaluates
division performance based on gross profit. Interdivisional sales are not
material.
Information about the Company's divisions is presented below:
Three Months Ended
September 29, 2001
----------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other Total
----------------------------------------------------------------
Net sales $ 197,736 68,199 5,460 (1) 271,395
Gross profit (loss) 13,162 6,747 (7,476) (1) 12,433
Depreciation and amortization 9,210 937 3,019 13,166
Capital expenditures 1,616 148 744 2,508
Total assets 916,077 139,125 117,770 (2) 1,172,972
16
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
Three Months Ended
September 30, 2000
----------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other Total
----------------------------------------------------------------
Net sales $ 237,540 78,911 13,940 (1) 330,391
Gross profit (loss) 27,361 10,560 (7,539) (1) 30,382
Depreciation and amortization 10,583 897 3,267 14,747
Capital expenditures 11,999 239 1,237 (3) 13,475
Total assets 1,107,240 137,395 375,589 (2) 1,620,224
Nine Months Ended
September 29, 2001
----------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other Total
----------------------------------------------------------------
Net sales $ 584,951 187,286 15,218 (1) 787,455
Gross profit (loss) 28,278 21,111 (30,967) (1) 18,422
Depreciation and amortization 29,305 2,693 8,752 40,750
Capital expenditures 3,477 550 4,861 8,888
Total assets 916,077 139,125 117,770 (2) 1,172,972
Nine Months Ended
September 30, 2000
----------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other Total
----------------------------------------------------------------
Net sales $ 738,859 212,154 27,665 (1) 978,678
Gross profit (loss) 106,975 35,872 (30,220) (1) 112,627
Depreciation and amortization 31,428 2,841 8,963 43,232
Capital expenditures 21,168 861 8,378 (3) 30,407
Total assets 1,107,240 137,395 375,589 (2) 1,620,224
(1) Includes retail stores and miscellaneous Corporate activities,
including the Company's central information technology, human resources,
and purchasing departments.
(2) Corporate amounts include primarily data processing equipment and
software, other enterprise-wide assets not allocated to the segments, and
the net assets associated with the Blanket Division.
(3) Includes capital expenditures of $0.7 million associated with the Blanket
Division.
17
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(9) Restructuring Charges and Impairment of Long-lived Assets
During the first quarter of 2001, the Company incurred a charge of $2.0 million
associated with the closure of the Company's towel manufacturing facility
located in Hawkinsville, Georgia. The Hawkinsville facility closed in March
2001, and its operations have been relocated to the Company's facilities in
Kannapolis, North Carolina, Fieldale, Virginia, and Columbus, Georgia.
Approximately 380 employees were terminated as a result of the closure. During
the second quarter of 2001, the Company revised its estimate of benefits to be
provided after termination and reduced the restructuring reserve for
Hawkinsville by $0.5 million.
During the second quarter of 2001, the Company announced the closure of several
facilities. Production ceased at a cut-and-sew bedding facility in Rocky Mount,
North Carolina on June 30, 2001, but the Company currently estimates that
certain warehousing and shipping employees will remain through the end of the
year to satisfy existing commitments to customers. The Rocky Mount facility
manufactured decorative bedding exclusively under a license agreement, which
expired on June 30, 2001. A sheet manufacturing facility in Kannapolis, North
Carolina was closed on July 15, 2001, and its production was relocated to an
existing facility in China Grove, North Carolina. A towel yarn manufacturing
operation and cotton warehouse in Columbus, Georgia were closed on July 15,
2001, and production was relocated to the Company's existing yarn manufacturing
operations in Kannapolis, North Carolina and Tarboro, North Carolina. A towel
warehouse and distribution center in Phenix City, Alabama was closed in August
2001, and its operations were transferred to an existing distribution center in
Macon, Georgia. In addition, the Company announced plans to scale back towel
production at another facility in Kannapolis, which the Company completed during
the third quarter of 2001. As a result of these closures, the Company incurred a
restructuring charge of $5.0 million in the second quarter of 2001, primarily
consisting of employee severance and benefits. Included in the loss from
operations from discontinued operations for the nine months ended September 29,
2001 is a $0.4 million restructuring charge, primarily consisting of employee
severance and benefits associated with employees at a blanket yarn manufacturing
plant in Newton, North Carolina. The facility was closed on June 30, 2001 as a
result of the Company's decision to sell the Blanket Division. The Company
currently expects that the majority of the remaining severance and benefits will
be paid during the fourth quarter of 2001. As of September 29, 2001,
approximately 930 employees had been terminated in conjunction with the closures
described above. When completed, these closures will affect approximately 980
employees.
Activity in the reserve established for the restructuring charges is presented
below:
First quarter restructuring charge $ 1,977
Second quarter restructuring charge 5,437
Adjustments to Hawkinsville reserve (550)
Payments (4,973)
-----------
Balance, September 29, 2001 $ 1,891
===========
The Company also recognized charges for impairment of long-lived assets of $23.2
million during the nine months ended September 29, 2001, consisting of $20.1
million in the second quarter and $3.1 million in the third quarter.
Approximately $21.7 million of the charge relates to assets located at the
facilities discussed above, consisting of a $3.6 million write-down for real
property and a $18.1 million write-down for machinery and equipment.
Approximately $1.1 million relates to assets located in existing facilities. In
addition, the Company evaluated the carrying values of certain machinery and
equipment classified in assets held for sale and recorded a write-down of $0.4
million. The impairment charges reflect management's estimate of the fair market
value based upon appraisals and the expected future cash flows to be generated
by the assets, including their ultimate disposition. Management expects to sell
these assets during the next twelve months.
18
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(10) Reorganization Items
Through the third quarter of 2001, the Company recognized the following items as
reorganization items in the statement of operations:
Three Months Nine Months
Ended Ended
September 29, September 29,
2001 2001
--------------- ---------------
Professional fees and other costs
associated with the
Chapter 11 Cases $ 3,089 13,199
Retention incentive plan 1,206 4,314
Rejected contracts and lease
agreements 528 9,464
Interest income on investments (233) (1,222)
--------------- --------------
$ 4,590 25,755
=============== ==============
Professional Fees. During the three and nine months ended September 29, 2001,
the Company paid approximately $2.8 million and $10.7 million, respectively, in
professional fees associated with the Chapter 11 Cases.
Key Employee Retention Program. On March 6, 2001, the Bankruptcy Court entered
an order authorizing the Company to implement a key employee retention program
consisting of (i) a retention incentive plan (the "Retention Incentive Plan"),
(ii) an emergence performance bonus plan (the "Emergence Bonus Plan"), and (iii)
an employee severance plan (the "Severance Plan") (collectively, the "Retention
Program"). The purpose of the Retention Program is to provide the incentives
necessary for the Company to retain its management team and other key employees
and to otherwise address concerns regarding potential key employee attrition
during the Company's reorganization.
Under the Retention Incentive Plan, eligible employees are to earn a specified
retention incentive payment (a "Retention Incentive Payment"), based upon a
percentage of their salary determined by the Company's management, payable on
the following four dates if the employee remains actively employed by the
Company on such dates: (i) 25% of the total Retention Incentive Payment was
payable paid in the month following the Bankruptcy Court's approval of the
Retention Program (i.e., April 2001), (ii) 25% of the total Retention Incentive
Payment is payable on the first anniversary date of the filing of the Chapter 11
Cases (i.e., November 14, 2001), (iii) 25% of the total Retention Incentive
Payment is payable on the earlier of (a) six months after the second payment is
made or (b) confirmation of a plan of reorganization, and (iv) 25% of the total
Retention Incentive Payment is payable 30 days following confirmation of a plan
of reorganization. The Company currently estimates the total cost of the
Retention Incentive Plan to be approximately $6.1 million. In addition, a
discretionary retention pool of $500,000 is available for non-union employees
not already included in the Retention Incentive Plan. On April 9, 2001, the
Company paid approximately $1.5 million for the first installment of the
Retention Incentive Plan.
The Emergence Performance Bonus Plan provides an additional incentive payment to
certain management employees who are particularly essential to the
implementation of the Company's restructuring to remain with the Company through
the plan negotiation and confirmation process. Payments under the Emergence
Performance Bonus Plan are tied directly to two factors: the amount of the
distribution made under a confirmed plan of reorganization to unsecured
creditors and the length of the Chapter 11 Cases. Since the two factors are
currently not known, the Company has not reflected any expense associated with
the Emergence Performance Bonus Plan in its results of operations for the three
and nine months ended September 29, 2001.
19
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
The purpose of the Severance Plan is to integrate all severance arrangements
existing prior to the Petition Date into one plan, which supersedes all prior
severance plans and the severance provisions of executives' employment
arrangements. The Severance Plan covers all full-time employees of the Company,
the majority of which are not eligible to participate in any other components of
the Retention Program. With certain exceptions, employees who are terminated
after the Petition Date for reasons other than death, disability, retirement, or
cause will be eligible to receive severance benefits equal to one week's salary
for each completed year of service, with a minimum of two weeks salary and a
maximum of 26 weeks salary. In addition, eligible employees will be entitled to
receive medical insurance, life insurance, and certain other benefits.
Rejected Contracts and Leases. The Debtors are in the process of reviewing 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 and
nine months ended September 29, 2001, the Company accrued $5.5 million and $14.4
million, respectively, for the estimated prepetition liability for those
contracts and leases the Bankruptcy Court has already approved for rejection.
Approximately $0.5 million and $9.5 million, respectively, of the prepetition
liability relating to the rejected contracts and leases have been reflected as
reorganization items, and the remaining $5.0 million has been included in the
loss from discontinued operations in the accompanying statements of operations
for the three and nine months ended September 29, 2001. The Company may be
required to accrue additional liabilities as more contracts and leases are
approved for rejection by the Bankruptcy Court.
(11) Income Taxes
The Company's management, in assessing the realizability of deferred tax assets,
must consider whether it is more likely than not that part or all of the
deferred tax asset may not be realized. This assessment includes consideration
for the scheduled reversal of temporary taxable differences, projected future
taxable income, and tax planning strategies. As a result of this assessment, the
Company did not recognize an income tax benefit for the loss incurred for the
three and nine months ended September 29, 2001. Instead, the increase in net
deferred tax assets as a result of the loss was offset by an equal increase in
the valuation allowance. As of September 29, 2001, the Company's management also
concluded that deferred tax assets, net of the valuation allowance, can be
realized as a result of the reversal of existing temporary taxable differences.
At September 29, 2001, the Company has $445 million of federal and state
operating loss carryforwards expiring 2006 through 2021, $2.0 million of general
business tax credit carryforwards expiring 2005 through 2021, and a $7.8 million
unused alternative minimum tax credit carryforward that does not expire.
(12) Recently Issued or Adopted Accounting Standards
During June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of SFAS No. 133, as
amended by SFAS Nos. 137 and 138, were effective for fiscal years beginning
after June 15, 2000. The Company adopted the provisions of the standards on
December 31, 2000. The adoption of SFAS No. 133, as amended, did not have any
impact on its financial position or results of operations. The Company enters
into fixed-price contracts for purchases of raw material cotton and natural gas
from its suppliers. SFAS No. 133, as amended, requires the Company to evaluate
its commodity contracts to determine whether the contracts are "normal purchases
or normal sales." The Company has concluded and documented that these contracts
meet the definition of "normal purchases or normal sales," and therefore are not
considered derivative instruments subject to the provisions of SFAS No. 133, as
amended.
In May 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) issued EITF No. 00-14, "Accounting for Certain Sales Incentives"
(EITF No. 00-14). EITF No. 00-14 addresses the recognition, measurement and
income statement classification for certain types of sales incentives offered by
vendors to their
20
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
customers. The Company is required to adopt the provisions of EITF No. 00-14 at
the beginning of fiscal 2002, which commences December 30, 2001. The Company is
currently analyzing the impact of adopting EITF No. 00-14 on its financial
position and results of operations.
In July 2001, the Financial Accounting Standards Board 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. Under SFAS No. 142, beginning in fiscal 2002, which commences December
30, 2001, the Company will no longer amortize goodwill and intangible assets
with indefinite lives, but instead will test those assets for impairment at
least annually. Intangible assets with definite useful lives will be amortized
over such lives to their estimated residual values. The Company is required to
adopt SFAS No. 142 on December 30, 2001. The Company is currently evaluating the
provisions of SFAS Nos. 141 and 142 and has not yet determined the effects of
these changes on the Company's financial position or results of operations.
(13) Sale of Blanket Division
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 September 30, 2000
and December 30, 2000 consolidated financial statements have been restated to
reflect the Blanket Division as a discontinued operation. The net assets of the
Blanket Division remaining after the sale primarily include accounts receivable,
a warehouse facility in Mauldin, South Carolina (which the purchaser is
currently leasing from the Company under a five-month lease), accounts payable,
and accrued expenses. The loss from discontinued operations was $16.2 million
and $4.4 million for the nine months ended September 29, 2001 and September 30,
2000, respectively, and $8.9 million and $1.3 million for the three months ended
September 29, 2001 and September 30, 2000, respectively.
(14) Subsequent Events
On October 22, 2001, the Company implemented an enhanced early retirement plan.
Salaried employees age 59 or older having at least five years of service were
eligible to participate in the plan. Of the 135 employees eligible, 76 accepted.
The Company is also continuing to implement a reduction in force (the "RIF")
among its salaried employees. This RIF began in the third quarter of 2001 and is
expected to be fully implemented by the end of 2001. The net personnel reduction
resulting from the early retirement plan and the RIF is expected to be
approximately 150 employees. The Company currently expects to recognize a
restructuring charge of approximately $4.5 million to $5.0 million in the fourth
quarter of 2001 relating to the early retirement plan and the RIF.
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.
September 29, 2001
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
Assets:
- -------
Trade receivables $ - 179,275 4,057 - 183,332
Receivables from affiliates 761,619 - - (761,619) -
Inventories - 201,216 3,982 - 205,198
Other current assets 143 46,265 5,268 - 51,676
-------------- --------------- -------------- ---------------- ---------------
Total current assets 761,762 426,756 13,307 (761,619) 440,206
Property, plant and equipment, net 38 473,479 952 - 474,469
Intangibles, net 2,463 220,001 2,155 - 224,619
Other assets 104,636 4,439 - (75,397) 33,678
-------------- --------------- -------------- ---------------- ---------------
Total assets $ 868,899 1,124,675 16,414 (837,016) 1,172,972
============== =============== ============== ================ ===============
Liabilities and shareholders' equity (deficit):
- -----------------------------------------------
Liabilities not subject to
compromise:
Accounts payable and accrued
liabilities $ 25,055 84,138 1,266 - 110,459
Payables to affiliates - 749,567 12,052 (761,619) -
Current portion of long-term
debt - 322 - - 322
Current portion of long-term
debt in default 664,809 2,638 - - 667,447
Long-term debt in default - 12,429 - - 12,429
-------------- --------------- -------------- ---------------- ---------------
Total current liabilities 689,864 849,094 13,318 (761,619) 790,657
Noncurrent liabilities - 39,253 - - 39,253
-------------- --------------- -------------- ---------------- ---------------
Total liabilities not
subject to compromise 689,864 888,347 13,318 (761,619) 829,910
Liabilities subject to compromise 332,438 164,027 - - 496,465
Redeemable convertible
preferred stock 94,827 - - - 94,827
Shareholders' equity (deficit) (248,230) 72,301 3,096 (75,397) (248,230)
-------------- --------------- -------------- ---------------- ---------------
Total liabilities and
shareholders' equity
(deficit) $ 868,899 1,124,675 16,414 (837,016) 1,172,972
============== =============== ============== ================ ===============
22
(15) Supplemental Condensed Consolidating Financial Information (continued)
December 30, 2000
-------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
Assets:
- -------
Trade receivables $ - 181,173 7,891 - 189,064
Receivables from affiliates 787,590 - - (787,590) -
Inventories - 255,257 6,888 - 262,145
Other current assets - 94,890 809 - 95,699
------------- --------------- -------------- ---------------- ----------------
Total current assets 787,590 531,320 15,588 (787,590) 546,908
Property, plant and equipment, net 320 524,686 984 - 525,990
Intangibles, net 6,622 224,652 2,206 - 233,480
Other assets 214,090 53,914 - (238,613) 29,391
------------- --------------- -------------- ---------------- ----------------
Total assets $1,008,622 1,334,572 18,778 (1,026,203) 1,335,769
============= =============== ============== ================ ================
Liabilities and shareholders' equity (deficit):
- -----------------------------------------------
Liabilities not subject to
compromise:
Accounts payable and accrued
liabilities $ 4,151 83,233 2,881 - 90,265
Payables to affiliates - 779,207 8,383 (787,590) -
Other current liabilities 984 32,369 (124) - 33,229
Long-term debt in default 660,790 - - - 660,790
------------- --------------- -------------- ---------------- ----------------
Total current liabilities 665,925 894,809 11,140 (787,590) 784,284
Noncurrent liabilities - 39,910 106 - 40,016
------------- --------------- -------------- ---------------- ----------------
Total liabilities not
subject to compromise 665,925 934,719 11,246 (787,590) 824,300
Liabilities subject to compromise 323,321 168,772 - - 492,093
Redeemable convertible
preferred stock 82,827 - - - 82,827
Shareholders' equity (deficit) (63,451) 231,081 7,532 (238,613) (63,451)
------------- --------------- -------------- ---------------- ----------------
Total liabilities and
shareholders equity (deficit) $1,008,622 1,334,572 18,778 (1,026,203) 1,335,769
============= =============== ============== ================ ================
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 September 29, 2001
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - 273,236 5,340 (7,181) 271,395
Cost of goods sold - 259,250 6,893 (7,181) 258,962
-------------- --------------- -------------- ---------------- ---------------
Gross profit (loss) - 13,986 (1,553) - 12,433
Selling, general and
administrative expenses (2,138) 23,205 256 - 21,323
Impairment of long-lived assets - 3,085 - - 3,085
Restructuring charge - 26 - - 26
-------------- --------------- -------------- ---------------- ---------------
Earnings (loss) from
operations 2,138 (12,330) (1,809) - (12,001)
Equity in loss of subsidiaries (46,176) - - 46,176 -
Interest expense (income) (4,940) 19,820 62 - 14,942
-------------- --------------- -------------- ---------------- ---------------
Loss from continuing
operations before
reorganization
items and income taxes (39,098) (32,150) (1,871) 46,176 (26,943)
Reorganization items 4,590 - - - 4,590
-------------- --------------- -------------- ---------------- ---------------
Loss from continuing
operations before income
taxes (43,688) (32,150) (1,871) 46,176 (31,533)
Income taxes - - - - -
-------------- --------------- -------------- ---------------- ---------------
Net loss from continuing
operations (43,688) (32,150) (1,871) 46,176 (31,533)
Loss from discontinued
operations - (12,155) - - (12,155)
-------------- --------------- -------------- ---------------- ---------------
Net loss (43,688) (44,305) (1,871) 46,176 (43,688)
Preferred dividends 4,604 - - - 4,604
-------------- --------------- -------------- ---------------- ---------------
Loss applicable to
common shareholders $ (48,292) (44,305) (1,871) 46,176 (48,292)
============== =============== ============== ================ ===============
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 September 30, 2000
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - 327,889 7,348 (4,846) 330,391
Cost of goods sold - 296,948 7,907 (4,846) 300,009
-------------- --------------- -------------- ---------------- ---------------
Gross profit (loss) - 30,941 (559) - 30,382
Selling, general and
administrative expenses (2,315) 26,044 155 - 23,884
-------------- --------------- -------------- ---------------- ---------------
Earnings (loss) from
operations 2,315 4,897 (714) - 6,498
Equity in loss of subsidiaries (10,909) - - 10,909 -
Interest expense 8,129 19,143 385 - 27,657
-------------- --------------- -------------- ---------------- ---------------
Loss from continuing
operations before income
taxes (16,723) (14,246) (1,099) 10,909 (21,159)
Income taxes (455) (5,770) - - (6,225)
-------------- --------------- -------------- ---------------- ---------------
Net loss from continuing
operations (16,268) (8,476) (1,099) 10,909 (14,934)
Loss from discontinued
operations - (1,334) - - (1,334)
-------------- --------------- -------------- ---------------- ---------------
Net loss (16,268) (9,810) (1,099) 10,909 (16,268)
Preferred dividends 2,040 - - - 2,040
-------------- --------------- -------------- ---------------- ---------------
Loss applicable to common
shareholders $ (18,308) (9,810) (1,099) 10,909 (18,308)
============== =============== ============== ================ ===============
25
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
Nine Months Ended September 29, 2001
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - 794,891 12,209 (19,645) 787,455
Cost of goods sold - 773,428 15,250 (19,645) 769,033
-------------- --------------- -------------- ---------------- ---------------
Gross profit (loss) - 21,463 (3,041) - 18,422
Selling, general and
administrative expenses (2,608) 67,362 1,111 - 65,865
Impairment of long-lived assets - 23,170 - - 23,170
Restructuring charge - 6,491 - - 6,491
-------------- --------------- -------------- ---------------- ---------------
Earnings (loss) from
operations 2,608 (75,560) (4,152) - (77,104)
Equity in loss of subsidiaries (163,216) - - 163,216 -
Interest expense (income) (13,772) 63,806 284 - 50,318
-------------- --------------- -------------- ---------------- ---------------
Loss from continuing
operations before
reorganization
items and income taxes (146,836) (139,366) (4,436) 163,216 (127,422)
Reorganization items 25,755 - - - 25,755
-------------- --------------- -------------- ---------------- ---------------
Loss from continuing
operations before income
taxes (172,591) (139,366) (4,436) 163,216 (153,177)
Income taxes - - - - -
-------------- --------------- -------------- ---------------- ---------------
Net loss from continuing
operations (172,591) (139,366) (4,436) 163,216 (153,177)
Loss from discontinued
operations - (19,414) - - (19,414)
-------------- --------------- -------------- ---------------- ---------------
Net loss (172,591) (158,780) (4,436) 163,216 (172,591)
Preferred dividends 12,000 - - - 12,000
-------------- --------------- -------------- ---------------- ---------------
Loss applicable to
common shareholders $ (184,591) (158,780) (4,436) 163,216 (184,591)
============== =============== ============== ================ ===============
26
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
Nine Months Ended September 30, 2000
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
Net sales $ - 977,756 21,120 (20,198) 978,678
Cost of goods sold - 865,568 20,681 (20,198) 866,051
-------------- --------------- -------------- ---------------- ---------------
Gross profit - 112,188 439 - 112,627
Selling, general and
administrative expenses (5,295) 77,139 479 - 72,323
-------------- --------------- -------------- ---------------- ---------------
Earnings (loss) from
operations 5,295 35,049 (40) - 40,304
Equity in loss of subsidiaries (27,286) - - 27,286 -
Interest expense 11,536 69,144 789 - 81,469
-------------- --------------- -------------- ---------------- ---------------
Loss from continuing
operations before income
taxes (33,527) (34,095) (829) 27,286 (41,165)
Income taxes (1,414) (12,083) - - (13,497)
-------------- --------------- -------------- ---------------- ---------------
Net loss from continuing
operations (32,113) (22,012) (829) 27,286 (27,668)
Loss from discontinued
operations - (4,445) - - (4,445)
-------------- --------------- -------------- ---------------- ---------------
Net loss (32,113) (26,457) (829) 27,286 (32,113)
Preferred dividends 5,977 - - - 5,977
-------------- --------------- -------------- ---------------- ---------------
Loss applicable to common
shareholders $ (38,090) (26,457) (829) 27,286 (38,090)
============== =============== ============== ================ ===============
27
PILLOWTEX CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(unaudited)
(15) Supplemental Condensed Consolidating Financial Information (continued)
Nine Months Ended September 29, 2001
-------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in)
operating activities $ 4,117 (3,214) 724 - 1,627
Cash provided by discontinued
operations - 1,943 - 1,943
Cash used in investing
activities (4,117) 9,701 (158) - 5,426
Cash used in financing
activities - (17,198) (566) - (17,764)
------------- -------------- --------------- --------------- ---------------
Net change in cash and cash
equivalents - (8,768) - - (8,768)
Cash and cash equivalents at
beginning of year - 32,182 - - 32,182
------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents at
end of period $ - 23,414 - - 23,414
============= ============== =============== =============== ===============
Nine Months Ended September 30, 2000
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in)
operating activities $ (13,014) $ 11,374 $ 5,575 $ - $ 3,935
Cash provided by discontinued
operations - 4,102 4,102
Cash provided by (used in)
investing activities 432 (26,043) (227) - (25,838)
Cash provided by (used in)
financing activities 12,582 9,384 (5,348) - 16,618
------------- -------------- --------------- --------------- ---------------
Net change in cash and cash
equivalents - (1,183) - - (1,183)
Cash and cash equivalents at
beginning of year - 4,858 - - 4,858
------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents at
end of period $ - $ 3,675 $ - $ - $ 3,675
============= ============== =============== =============== ===============
28
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 30, 2000.
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 the Notes to Consolidated Financial Statements included elsewhere
in this Quarterly Report.
Since the Petition Date, the Debtors have conducted business in the ordinary
course. Management is in the process of developing a plan of reorganization and
will seek the acceptance of the plan by impaired creditors and equity holders
and confirmation of the plan by the Bankruptcy Court, all in accordance with the
applicable provisions of the Bankruptcy Code.
During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy
Court approval, sell assets and settle liabilities, including for amounts other
than those reflected in the financial statements. The Debtors are continuing to
review their operations and to identify assets for disposition. On September 6,
2000, the Company sold the majority of the inventory and fixed assets associated
with its Blanket Division.
The Debtors are in the process of reviewing 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 and nine months ended September
29, 2001, the Company accrued $5.5 million and $14.4 million, respectively, for
the estimated prepetition liability for those contracts and leases the
Bankruptcy Court has already approved for rejection. Approximately $0.5 million
and $9.5 million, respectively, of the prepetition liability relating to the
rejected contracts and leases have been reflected as reorganization items, and
the remaining $5.0 million has been included in the loss from discontinued
operations in the accompanying statements of operations for the three and nine
months ended September 29, 2001. The Company may be required to accrue
additional liabilities as more contracts and leases are approved for rejection
by the Bankruptcy Court.
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 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, its ability to formulate a plan of reorganization which will gain
approval of the requisite parties under the Bankruptcy Code and confirmation by
the Bankruptcy Court, its ability to comply with the DIP Financing Facility, and
its ability to return to profitability, generate sufficient cash flows from
operations, and obtain financing sources to meet future obligations. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The 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.
While under the protection of chapter 11 of the Bankruptcy Code, the Company may
sell or otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements.
29
Additionally, the amounts reported on the consolidated balance sheet could
materially change because of changes in business strategies and the effects of
any proposed plan of reorganization.
In the Chapter 11 Cases, substantially all unsecured and under-secured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. Generally, all
actions to enforce or otherwise effect repayment of prepetition 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 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 an approved plan of reorganization and
accordingly are not presently determinable.
Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Cases are
expensed as incurred and reported as reorganization items. Interest expense is
reported only to the extent that it will be paid during the Chapter 11 Cases or
that it is probable that it will be an allowed claim.
Recent Developments
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.
On October 22, 2001, the Company implemented an enhanced early retirement plan.
Salaried employees age 59 or older having at least five years of service were
eligible to participate in the plan. Of the 135 employees eligible, 76 accepted.
The Company is also continuing to implement a reduction in force (the "RIF")
among its salaried employees. This RIF began in the third quarter of 2001 and is
expected to be fully implemented by the end of 2001. The net personnel reduction
resulting from the early retirement plan and the RIF is expected to be
approximately 150 employees. The Company currently expects to recognize a
restructuring charge of approximately $4.5 million to $5.0 million in the fourth
quarter of 2001 relating to the early retirement plan and the RIF. The annual
savings expected to be realized by the early retirement plan and the RIF is
approximately $7 million to $8 million.
Results of Operations
As a result of the sale of the Blanket Division, the results of operations of
the Blanket Division have been accounted for as a discontinued operation. The
results of operations for the three and nine months ended September 30, 2000
have been restated to reflect the Blanket Division as a discontinued operation.
Net Sales. Net sales were $271.4 million for the three months ended September
- ---------
29, 2001, a decrease of $59.0 million or 17.9% from the comparable three months
ended September 30, 2000. Net sales for the nine months ended September 29, 2001
were $787.5 million, down $191.2 million or 19.5% from the comparable nine
months ended September 30, 2000. Net sales for the Company's operating segments
for each period are shown below (in thousands):
30
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Bed and Bath $ 197,736 $ 237,540 $ 584,951 $ 738,859
Pillow and Pad 68,199 78,911 187,286 212,154
Other (a) 5,460 13,940 15,218 27,665
------------- ------------- ------------- -------------
Total $ 271,395 $ 330,391 $ 787,455 $ 978,678
============= ============= ============= =============
(a) Includes retail stores
Approximately $21 million and $86 million of the decreases in net sales for the
three and nine months ended September 29, 2001, respectively, is attributable to
the loss of a specific customer in August 2000, which affected the Company's two
major divisions. In addition, the Company's license agreement with Ralph Lauren,
which expired on June 30, 2001, contributed approximately $19 million to the
sales decreases experienced in 2001. Excluding the impact of these decreases,
net sales decreased 6.5% and 9.9%, respectively, for the three and nine months
ended September 29, 2001, as compared to the corresponding 2000 periods. These
decreases are due to a continued slow down in the US economy and increased
competition from imports.
Gross Profit. In the three months ended September 29, 2001, gross profit was
$12.4 million, a decrease of $17.9 million from $30.4 million for the comparable
three months ended September 30, 2000. Gross profit for the nine months ended
September 29, 2001 was $18.4 million, down $94.2 million from $112.6 million for
the comparable nine months ended September 30, 2000. Gross profit (loss) by
operating segment is as follows (in thousands):
Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Bed and Bath $ 13,162 $ 27,361 $ 28,278 $ 106,975
Pillow and Pad 6,747 10,560 21,111 35,872
Other (a) (7,476) (7,539) (30,967) (30,220)
------------- ------------- ------------- -------------
Total $ 12,433 $ 30,382 $ 18,422 $ 112,627
============= ============= ============= =============
(a) Includes retail stores and corporate charges
The decrease in gross profit in the three months ended September 29, 2001 from
the comparable 2000 period is primarily due to the decline in sales volume,
partially offset by reduced material costs. The decrease in gross profit in the
nine months ended September 29, 2001 from the comparable 2000 period is
attributable to the decline in sales volume, increased unabsorbed overhead costs
(primarily occurring in the first half of 2001) due to inventory reduction
initiatives and increased levels of customer deductions.
Selling, General, and Administrative ("SG&A"). SG&A expenses for the three
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months ended September 29, 2001, decreased $2.6 million to $21.3 million from
$23.9 million for the comparable three months ended September 30, 2000. For the
nine months ended September 29, 2001, SG&A expenses decreased $6.5 million to
$65.9 million from $72.3 million for the comparable nine months ended September
30, 2000. These savings are primarily the result of management's continued focus
on cost controls. The combined savings from these efforts in travel, salaries,
and wages and general fees and services for SG&A for the nine months ended
September 29, 2001 were approximately $7.7 million when compared to the nine
months ended September 30, 2000, partially offset by an increase in advertising
expense.
Restructuring Charge. During the second quarter of 2001, the Company incurred a
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net restructuring charge of $4.5 million associated with the closure of
operations in Rocky Mount, North Carolina; Columbus, Georgia;
31
Kannapolis, North Carolina; and Phenix City, Alabama. The Company had incurred a
restructuring charge of $2.0 million during the first quarter of 2001 related to
the closure of the Company's facility in Hawkinsville, Georgia. The Company
currently estimates that such closures will result in net annual cost savings of
approximately $15.0 million to $20.0 million.
Impairment of Long-lived Assets. During the nine months ended September 29,
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2001, the Company recognized charges for impairment of long-lived assets of
$23.2 million, consisting of a $20.1 million charge in the second quarter and
$3.1 million in the third quarter. The charges include $21.7 million for real
property and equipment at the facilities closed during 2001, $1.1 million for
equipment at existing operating facilities, and $0.4 million related to
revisions in the Company's estimates of the fair value of certain items included
in assets held for sale.
Interest Expense. Interest expense decreased $12.7 million to $14.9 million for
- -----------------
the three months ended September 29, 2001, compared to $27.7 million for the
three months ended September 30, 2000. For the nine months ended September 29,
2001, interest expense decreased $31.2 million to $50.3 million from $81.5
million for the comparable nine months ended September 30, 2000. The primary
reason for the decreases in interest expense result from the Company's filing of
the Chapter 11 Cases, which enabled the Company to cease the payment and accrual
of interest on all unsecured prepetition debt. The interest on such unsecured
prepetition debt was approximately $8.6 million and $25.7 million, respectively,
for the three and nine months ended September 29, 2001. In addition, the average
interest rates have decreased in comparison to 2000. The average interest rate
for the third quarter of 2001 was approximately 7.2%, compared to approximately
10.1% in the third quarter of 2000. The average interest rate for the nine
months ended September 29, 2001 was approximately 8.4%, compared to
approximately 9.9% in the comparable 2000 period.
Reorganization Items. Through the third quarter of 2001, the Company recognized
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$25.8 million of reorganization items associated with the Chapter 11 Cases. The
charge consists of approximately $13.2 million of fees payable to professionals
retained to assist with the Chapter 11 Cases, approximately $9.5 million for
rejected contracts and leases, and approximately $4.3 million for a key employee
retention program for the Company's management team and other key employees,
offset by interest income of approximately $1.2 million.
Discontinued Operations. The loss from operations of the Blanket Division was
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$8.9 million and $1.3 million for the three months ended September 29, 2001 and
September 30, 2000, respectively. The loss from operations of the Blanket
Division was $16.2 million and $4.4 million for the nine months ended September
29, 2001 and September 30, 2000, respectively. The loss on disposal of the
Blanket Division incurred in September 2001 was $3.3 million.
Liquidity and Capital Resources
DIP Financing Facility. On December 6, 2000, the Bankruptcy Court entered an
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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 (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. 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 EBITDA, and (e) elimination of a nine-month
extension provision.
32
The Debtors and lenders under the DIP Financing Facility have entered into
another amendment to the facility, dated as of November 14, 2001, providing for,
among other things, (a) an extension of the termination date until June 30, 2002
(subject to earlier termination as described below), (b) a reduction in the size
of the facility to $100.0 million, including a $60.0 million letter of credit
sub-facility, (c) an increase in the interest rate and certain other fees on the
facility, (d) modification of the financial covenants requiring the maintenance
of an asset coverage ratio and a minimum level of EBITDA and limiting capital
expenditures, and (e) an additional financial covenant limiting operational
restructuring costs.
The amendment also requires the Company to (a) file on or prior to December 31,
2001 a feasible plan of reorganization and disclosure statement, substantially
complete in form and substance, that complies with all applicable provisions of
chapter 11 of the Bankruptcy Code and provides for the cash payment in full of
all outstanding loans under the DIP Financing Facility, the replacement or
liquidation of all letters of credit, and the cash payment of all administrative
expenses, (b) obtain Bankruptcy Court approval of a disclosure statement on or
prior to March 1, 2002, (c) obtain confirmation from the Bankruptcy Court of a
plan of reorganization on or prior to May 15, 2002, and (d) cause a plan of
reorganization to become effective on or prior to June 30, 2002. The
effectiveness of the amendment is subject to, among other things, Bankruptcy
Court approval. The Company has filed a motion to have the amendment approved at
the Bankruptcy Court hearing scheduled for November 16, 2001. However, no
assurance can be given that the amendment will be approved by the Bankruptcy
Court. The amendment also, in effect, extends the currently scheduled
termination date of the DIP Financing Facility by two days, from November 14,
2001 to November 16, 2001. If the Bankruptcy Court does not approve the
amendment, the DIP Financing Facility will terminate on November 16, 2001.
The DIP Financing Facility, as amended as of November 14, 2001, will expire on
the earliest to occur of (a) June 30, 2002, (b) the date on which the plan of
reorganization becomes effective, (c) any material non-compliance with any of
the terms of the DIP Financing Order, (d) any event of default that shall have
occurred under the DIP Financing Facility, or (e) the 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, as amended as of November 14,
2001, 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, as
amended, will be 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 equipmdent
that secure three of the industrial revenue bond facilities described below, and
certain obligations to the Pension Benefit Guaranty Corporation, and a first
priority lien on all post-petition real and personal assets of the Company. The
documentation evidencing the DIP Financing Facility, as amended as of November
14, 2001, 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, operational restructuring costs, 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 permanent reduction of the DIP Financing
Facility.
As of September 29, 2001, the Company had $13.9 million in letters of credit
outstanding under the DIP Financing Facility. No cash borrowings were
outstanding on the DIP Financing Facility at September 29, 2001. 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 September 29, 2001 was approximately $48.8 million. As
prepetition letters of credit expire under the Company's senior secured
revolving credit facility described below, to the extent they are renewed, they
will be reissued under the DIP Financing Facility.
33
Senior Debt Facilities. In December 1997, in connection with the Fieldcrest
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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 September 29, 2001, the Company had $10.4 million in letters of credit
outstanding under the prepetition revolving credit facility. As these
prepetition letters of credit expire, to the extent they are renewed, they will
be reissued under the DIP Financing Facility.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus
3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche
A Term Loan, plus an additional margin of 0.50%. The weighted average annual
interest rate on outstanding borrowings under the various prepetition senior
credit facilities for the three and nine months ended September 29, 2001 was
7.2% and 8.4%, respectively. The prepetition senior debt facilities expire on
January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic subsidiaries
of the Company, and are secured by first priority liens on all of the capital
stock of each domestic subsidiary of the Company and by 65% of the capital stock
of the Company's foreign subsidiaries. The Company has also granted a first
priority security interest in all of its presently unencumbered and future
domestic assets and properties, and all presently unencumbered and future
domestic assets and properties of each of its subsidiaries.
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.
As of September 29, 2001, $150.0 million of the $630.1 million of the senior
debt facilities had become subject to treatment as postpetition debt rather than
prepetition debt, as authorized by the DIP Financing Order.
Overline Facility. In May 1999, the Company entered into the $20.0 million
- ------------------
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. The Overline Facility is guaranteed on a
senior basis by the Company's domestic subsidiaries. Amounts borrowed under the
Overline Facility bear interest at a rate based upon LIBOR plus 4.5% or the base
rate plus 3.0%, at the Company's option. The Overline Facility matures upon
termination by the Company at any time or otherwise at the earliest of: (i) any
increase in the commitment under the senior debt facilities described above, the
issuance of any capital stock by the Company or its domestic subsidiaries, or
other specified events, or (ii) January 31, 2002.
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.
Senior Subordinated Debt. In connection with the Fieldcrest Cannon acquisition,
- -------------------------
the Company issued $185.0 million aggregate principal amount of 9% Notes, with
interest payable semiannually commencing June 15, 1998. The 9% Notes are general
unsecured obligations of the Company, are subordinated in right of payment to
all existing and future senior indebtedness, and rank pari passu with the 10%
Notes described below.
On November 12, 1996, the Company issued $125.0 million aggregate principal
amount of 10% Notes, with interest payable semiannually commencing May 15, 1997.
The 10% Notes are general unsecured obligations of the Company, are subordinated
in right of payment to all existing and future senior indebtedness, and rank
pari passu with the 9% Notes.
The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior
subordinated basis by each of the existing and future domestic subsidiaries of
the Company and each other subsidiary of the Company that guarantees
34
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.
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 September 29, 2001, 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, for the
unpaid cash portion of the conversion consideration owed 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 September 29, 2001, the aggregate principal amount of the
outstanding Cash Claimant Notes was $5.2 million.
The 6% Convertible Debentures and Cash Claimant Notes are general unsecured
obligations of Fieldcrest Cannon. 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.
Industrial Revenue Bonds. The Company has obligations in respect of four
- -------------------------
industrial revenue bond facilities. Three of the IRB Facilities are secured by
liens on specified plants and equipment and one is secured by a letter of credit
issued under the senior debt facilities described above. As of September 29,
2001, $13.4 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.
Adequacy of Capital Resources. As discussed above, the Debtors are operating
- ------------------------------
their businesses as debtors-in-possession under chapter 11 of the Bankruptcy
Code. In addition to the cash requirements necessary to fund ongoing operations,
the Company anticipates that it will continue to incur significant professional
fees and other restructuring costs in connection with the Chapter 11 Cases and
the restructuring of its business operations. As a result of the uncertainty
surrounding the Company's current circumstances, it is difficult to predict the
Company's actual liquidity needs at this time. However, based on current and
anticipated levels of operations and efforts to reduce inventories and accounts
receivable and assuming that the amendment to the DIP Financing Facility
described above is approved by the Bankruptcy Court, the Company anticipates
that its cash flow from operations, together with amounts available under the
DIP Financing Facility, will be adequate to meet its anticipated cash
requirements during the pendency of the Chapter 11 Cases. In the event that cash
flows and available borrowings under the DIP Financing Facility are not
sufficient to meet future cash requirements, the Company may be required to
reduce planned capital expenditures or seek additional financing. The Company
can provide no assurances that reductions in planned capital expenditures would
be sufficient to cover shortfalls in available cash or that additional financing
would be available or, if available, offered on acceptable terms. As a result of
the Chapter 11 Cases and the circumstances leading to the filing thereof, the
Company's access to additional financing is, and for the foreseeable future will
likely continue to be, very limited. The Company's long-term liquidity
requirements and the adequacy of its capital resources are difficult to predict
at this time and ultimately cannot be determined until a plan of reorganization
has been developed and confirmed by the Bankruptcy Court in connection with the
Chapter 11 Cases.
In addition, the amounts reported in the consolidated financial statements
included elsewhere in this Quarterly Report do not reflect adjustments to the
carrying value of assets or the amount and classification of liabilities that
35
ultimately may be necessary as the result of a plan of reorganization.
Adjustments necessitated by the confirmation of a plan of reorganization could
materially change the amounts reported in the consolidated financial statements.
Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of
approximately $482.0 million as of September 29, 2001, including obligations
under debt instruments, generally may not be enforced against the Debtors, and
any actions to collect prepetition indebtedness are automatically stayed, unless
the stay is lifted by the Bankruptcy Court. In addition, as
debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. In this context, "assumption" means that the Debtors agree
to perform their obligations and cure all existing defaults under the contract
or lease, and "rejection" means that the Debtors are relieved from their
obligations to perform further under the contract or lease, but are subject to a
claim for damages for the breach thereof. Any damages resulting from rejection
of executory contracts and unexpired leases will be treated as general unsecured
claims in the Chapter 11 Cases unless such claims had been secured on a
prepetition basis prior to the Petition Date. The Debtors are in the process of
reviewing their executory contracts and unexpired leases 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 $14.4 million. The Company may be required to accrue
additional liabilities as more contracts and leases are approved for rejection
by the Bankruptcy Court.
New Accounting Standards
In May 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) issued EITF No. 00-14, "Accounting for Certain Sales Incentives"
(EITF No. 00-14). EITF No. 00-14 addresses the recognition, measurement and
income statement classification for certain types of sales incentives offered by
vendors to their customers. The Company is required to adopt the provisions of
EITF No. 00-14 at the beginning of fiscal 2002, which commences December 30,
2001. The Company is currently analyzing the impact of adopting EITF No. 00-14
on its financial position and results of operations.
In July 2001, the Financial Accounting Standards Board 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. Under SFAS No. 142, beginning in fiscal 2002, which commences December
30, 2001, the Company will no longer amortize goodwill and intangible assets
with indefinite lives, but instead will test those assets for impairment at
least annually. Intangible assets with definite useful lives will be amortized
over such lives to their estimated residual values. The Company is required to
adopt SFAS No. 142 on December 30, 2001. The Company is currently evaluating the
provisions of SFAS Nos. 141 and 142 and has not yet determined the effects of
these changes on the Company's financial position or results of operations.
Cautionary Statement Regarding Forward-Looking Statements
This filing contains certain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information available to, the
Company's management. Because such forward-looking statements are subject to
various risks and uncertainties, results may differ materially from those
expressed in or implied by such statements. Many of the factors that will
determine these results are beyond the Company's ability to control or predict.
Factors which could affect the Company's future results and could cause results
to differ materially from those expressed in or implied by such forward-looking
statements include, among others: (a) the significant challenges faced in
connection with the Chapter 11 Cases; (b) the substantial doubt as to whether
the Company will continue as a going concern; (c) the restrictions on the
conduct of the Company's business as a result of the Chapter 11 Cases and
provisions contained in the DIP Financing Facility; (d) the Company's dependence
on specific raw materials; (e) the effects of adverse retail industry
conditions; (f) the Company's dependence on specific brand names; (g) the risks
related to the loss of key licenses; (h) the risks related to loss of material
customers; (i) the risks related to organized labor; (j) the seasonality of the
Company's businesses; (k) the difficulties in attracting and retaining
personnel; and (l) the substantial effort of management required in connection
with the Chapter 11 Cases. For further discussion of such risks, see "Cautionary
Statement Regarding Forward-Looking Statements" and "Risk Factors" in the
Company's annual report on Form 10-K for its fiscal year ended December 30,
2000.
36
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Third Amendment to Post-Petition Credit Agreement dated as of
August 13, 2001, among Pillowtex Corporation and certain of
its subsidiaries, certain Lenders named therein, and Bank of
America, N.A., as Administrative Agent
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during
the quarter ended September 29, 2001:
Current Report on Form 8-K dated as of August 23, 2001 and
filed August 27, 2001, reporting information under "Item 5.
Other Events" regarding the sale of the Blanket Division.
Current Report on Form 8-K dated as of September 6, 2001 and
filed September 13, 2001, reporting information under "Item
2. Acquisition or Disposition of Assets" regarding the sale
of the Blanket Division.
____________
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: November 12, 2001 PILLOWTEX CORPORATION
(Registrant)
/s/ Michael R. Harmon
-------------------------------------
Michael R. Harmon
Executive Vice President and
Chief Financial Officer
38