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 June 29, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 000-49835
PILLOWTEX CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 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 by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
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 August 1, 2002
Common Stock, $0.01 par value 18,994,000
PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of June 29, 2002, June 30, 2001
and December 29, 2001 2
Consolidated Statements of Operations for the one month
ended June 29, 2002, the two months ended June 1, 2002 and 3
three months ended June 30, 2001
Consolidated Statements of Operations for the five months
ended June 1, 2002 and six months ended June 30, 2001 4
Consolidated Statements of Stockholders' Equity (Deficit)
for the five months ended June 1, 2002 and the one month 5
ended June 29, 2002
Consolidated Statements of Cash Flows for the one month
ended June 29, 2002, the five months ended June 1, 2002 6
and six months ended June 30, 2001
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Part II - Other Information
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 35
Signature 36
1
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for par value)
Successor Predecessor
---------------- -------------------------------
ASSETS June 29, June 30, December 29,
2002 2001 2001
---------------- -------------- ---------------
Current assets:
Cash and cash equivalents (including restricted cash of
$8,056 as of June 29, 2002 and $3,861 as of December 29,
2001) $ 15,004 24,355 40,388
Receivables:
Trade, less allowances of $9,303 as of June 29, 2002,
$21,986 as of June 30, 2001 and $9,276 as of December 29,
2001 134,181 153,040 144,727
Other 2,594 7,383 4,478
Inventories 193,673 225,715 200,578
Assets held for sale 18,696 7,074 6,075
Prepaid expenses 5,574 3,491 3,604
Net assets of discontinued operations - 37,657 1,358
---------------- -------------- ---------------
Total current assets 369,722 458,715 401,208
Property, plant and equipment, less accumulated
depreciation of $857 as of June 29, 2002, $160,612 as of
June 30, 2001 and $172,938 as of December 29, 2001 169,359 485,046 453,440
Intangible assets, at cost less accumulated amortization of
$88 as of June 29, 2002, $34,181 as of June 30, 2001
and $40,899 as of December 29, 2001 50,136 227,219 221,729
Other assets 2,766 29,465 11,250
---------------- -------------- ---------------
Total assets $ 591,983 1,200,445 1,087,627
================ ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Checks not yet presented for payment $ 14,971 9,726 285
Accounts payable 39,648 26,710 34,834
Accrued expenses 64,536 51,396 59,837
Current portion of long-term debt 6,653 - 356
Current portion of long-term debt in default - 678,923 660,893
Long-term debt in default - 12,673 10,920
---------------- -------------- ---------------
Total current liabilities 125,808 779,428 767,125
Long-term debt, less current portion 201,656 - 645
Noncurrent liabilities 73,858 38,833 48,950
---------------- -------------- ---------------
Total liabilities not subject to compromise 401,322 818,261 816,720
Liabilities subject to compromise - 491,898 500,840
---------------- -------------- ---------------
Total liabilities 401,322 1,310,159 1,317,560
Predecessor Series A redeemable convertible preferred
stock, $0.01 par value; 81,411 shares issued and
outstanding for June 30, 2001 and December 29, 2001 - 90,225 99,185
Stockholders' equity (deficit):
Successor preferred stock, $0.01 par value; authorized
10,000,000 shares - - -
Predecessor preferred stock, $0.01 par value;
authorized 20,000,000 shares; only Series A issued - - -
Successor common stock, $0.01 par value;
authorized 50,000,000 shares;
18,600,000 shares issued and outstanding 186 - -
Predecessor common stock, $0.01 par value; authorized 55,000,000
shares; 14,250,892 shares issued and outstanding as of
June 30, 2001 and December 29, 2001 - 143 143
Additional paid-in capital 191,438 160,120 160,120
Accumulated deficit (1,009) (358,366) (461,186)
Accumulated other comprehensive income (loss) 46 (1,836) (28,195)
---------------- -------------- ---------------
Total stockholders' equity (deficit) 190,661 (199,939) (329,118)
Commitments and contingencies
---------------- -------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 591,983 1,200,445 1,087,627
================ ============== ===============
See accompanying notes to consolidated financial statements.
2
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
One Month Ended June 29, 2002, Two Months Ended June 1, 2002 and
Three Months Ended June 30, 2001
(Dollars in thousands, except for per share data)
Successor Predecessor
------------- -----------------------------
One Month Two Months Three Months
Ended Ended Ended
June 29, June 1, June 30,
2002 2002 2001
----------- ---------- ----------
Net sales $ 71,291 139,125 232,383
Cost of goods sold 65,291 140,377 238,637
----------- ---------- ----------
Gross profit (loss) 6,000 (1,252) (6,254)
Selling, general, and administrative expenses 5,572 9,010 15,632
Impairment of long-lived assets - 192 20,085
Restructuring charges - 1,200 4,488
----------- ---------- ----------
Income (loss) from operations 428 (11,654) (46,459)
Interest expense (contractual interest of $11,614 in two
months ended June 1, 2002 and $25,020 in 2001) 1,437 6,531 16,455
----------- ---------- ----------
Loss from continuing operations before
reorganization items and income taxes (1,009) (18,185) (62,914)
Reorganization items:
Gain on cancellation of pre-petition liabilities - (856,375) -
Fresh start adjustments - 391,091 -
Other - 61,330 13,540
----------- ---------- ----------
Total reorganization items - (403,954) 13,540
----------- ---------- ----------
Income (loss) from continuing operations
before income taxes (1,009) 385,769 (76,454)
Income tax expense - - -
----------- ---------- ----------
Net income (loss) from continuing operations (1,009) 385,769 (76,454)
Loss from discontinued operations - - 4,222
----------- ---------- ----------
Net income (loss) (1,009) 385,769 (80,676)
Preferred dividends and accretion - 2,892 3,697
=========== ========== ==========
Income (loss) applicable to common stockholders $ (1,009) 382,877 (84,373)
=========== ========== ==========
Basic and diluted loss per common share -
Loss applicable to common stockholders $ (0.05)
===========
Weighted average common shares outstanding -
Basic and diluted 18,600
===========
See accompanying notes to consolidated financial statements.
3
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Five Months Ended June 1, 2002 and
Six Months Ended June 30, 2001
(Dollars in thousands)
Predecessor
-----------------------------------
Five Months Six Months
Ended Ended
June 1, June 30,
2002 2001
---------------- -------------
Net sales $ 380,050 506,225
Cost of goods sold 371,941 510,071
---------------- -------------
Gross profit (loss) 8,109 (3,846)
Selling, general, and administrative expenses 25,127 34,707
Impairment of long-lived assets 31,111 20,085
Restructuring charges 4,233 6,465
---------------- -------------
Loss from operations (52,362) (65,103)
Interest expense (contractual interest of $30,481 in 2002
and $52,508 in 2001) 16,832 35,376
---------------- -------------
Loss from continuing operations before
reorganization items and income taxes (69,194) (100,479)
Reorganization items:
Gain on cancellation of pre-petition liabilities (856,375) -
Fresh start adjustments 391,091 -
Other 66,633 21,165
---------------- -------------
Total reorganization items (398,651) 21,165
---------------- -------------
Income (loss) from continuing operations
before income taxes 329,457 (121,644)
Income tax benefit (7,157) -
---------------- -------------
Net income (loss) from continuing operations 336,614 (121,644)
Loss from discontinued operations - 7,259
---------------- -------------
Net income (loss) 336,614 (128,903)
Preferred dividends and accretion 7,467 7,396
---------------- -------------
Income (loss) applicable to common stockholders $ 329,147 (136,299)
================ =============
See accompanying notes to consolidated financial statements.
4
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Five Months Ended June 1, 2002 and One Month Ended June 29, 2002
(Dollars in thousands)
Common Stock Retained Accumulated Total
--------------------------- Additional earnings other stockholders'
Number Par paid-in (accumulated comprehensive equity
of shares value capital deficit) income (loss) (deficit)
------------ ------------ ------------ ------------ ------------- ------------
Predecessor:
Balance at December 29, 2001 14,250,892 $ 143 $ 160,120 $ (461,186) $ (28,195) $ (329,118)
Comprehensive loss:
Net loss excluding plan of
reorganization and fresh start
adjustments - - - (128,670) - (128,670)
Currency translation adjustments - - - - (30) (30)
----------
Total comprehensive loss (128,700)
----------
Accretion of Series A Preferred
Stock - - - (90) - (90)
Preferred dividends declared - - - (7,377) - (7,377)
Effect of plan of reorganization and fresh
start adjustments:
Cancellation of old common stock (14,250,892) (143) (160,120) - - (160,263)
Issuance of new common stock
and warrants 18,600,000 186 191,438 - - 191,624
Other fresh start adjustments - - - 597,323 28,225 625,548
----------- ------------ ----------- ----------- ----------- ----------
Successor:
Balance at June 1, 2002 18,600,000 186 191,438 - - 191,624
Comprehensive loss:
Net loss - - - (1,009) - (1,009)
Currency translation adjustment - - - - 46 46
----------
Total comprehensive loss (963)
----------
----------- ------------ ----------- ----------- ----------- ----------
Balance at June 29, 2002 18,600,000 $ 186 $ 191,438 $ (1,009) $ 46 $ 190,661
=========== ============ =========== =========== =========== ==========
See accompanying notes to consolidated financial statements.
5
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
One Month Ended June 29, 2002, Five Months Ended June 1, 2002 and
Six Months Ended June 30, 2001
(Dollars in thousands)
Successor Predecessor
------------------- -----------------------------
Five Months Six Months
One Month Ended Ended Ended
June 29, June 1, June 30,
2002 2002 2001
------------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (1,009) 336,614 (128,903)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on cancellation of pre-petition liabilities - (856,375) -
Fresh start adjustments - 391,091 -
Loss from discontinued operations - - 7,259
Depreciation and amortization 857 18,880 27,659
Impairment of long-lived assets - 31,111 20,085
Changes in assets and liabilities, net of effects of fresh start
adjustments and the divestiture of the Blanket Division:
Trade receivables (9,881) 20,807 36,024
Inventories (6,950) (3,085) 36,430
Accounts payable and accrued expenses (4,535) (994) (322)
Other assets and liabilities 7,196 42,845 3,074
--------- --------- ---------
Net cash provided by (used in) operating activities (14,322) (19,106) 1,306
Net cash provided by discontinued operations - 894 726
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 1,864 1,058 1,251
Purchases of property, plant and equipment (1,949) (28,491) (6,380)
--------- --------- ---------
Net cash used in investing activities (85) (27,433) (5,129)
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment 9,735 4,951 (2,344)
Borrowings on revolving credit loans 77,806 70,956 -
Repayments on revolving credit loans (74,933) (11,933) -
Retirement of long-term debt (696) (41,218) (2,386)
--------- --------- ---------
Net cash provided by (used in) financing activities 11,912 22,756 (4,730)
Net change in cash and cash equivalents (2,495) (22,889) (7,827)
Cash and cash equivalents at beginning of period 17,499 40,388 32,182
--------- --------- ---------
Cash and cash equivalents at end of period $ 15,004 17,499 24,355
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 323 17,758 37,229
========= ========= =========
Income taxes $ (6,606) 10 121
========= ========= =========
Supplemental disclosure of noncash financing information:
During the five months ended June 1, 2002, the Company converted several
operating leases into capital lease obligations of $24,386.
See accompanying notes to consolidated financial statements.
6
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(1) General
Pillowtex Corporation, a Delaware corporation ("Pillowtex" or "Parent", and
together with its subsidiaries, the "Company"), is one of the largest North
American designers, manufacturers, and marketers of home textile products. The
Company's extensive product offerings include a full line of utility and fashion
bedding and complementary bedroom textile products, as well as a full line of
bathroom and kitchen textile products. As a leading supplier across all
distribution channels, the Company sells it products to mass merchants,
department stores, and specialty retailers. The Company also markets its
products to wholesale clubs, catalog merchants, institutional distributors, and
international customers and on the Internet.
Chapter 11 Proceedings and Reorganization
On November 14, 2000 (the "Petition Date"), Pillowtex Corporation, a Texas
corporation ("Old Pillowtex"), and substantially all of its domestic
subsidiaries (collectively with Old Pillowtex, 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 for the Debtors (the
"Chapter 11 Cases") were jointly administered for procedural purposes. From the
Petition Date until May 24, 2002, the Debtors operated their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. On May 2, 2002, Old
Pillowtex announced that the Bankruptcy Court had confirmed the Debtors' Second
Amended Joint Plan of Reorganization, with certain modifications (as so
modified, the "Plan"). On May 24, 2002 (the "Effective Date"), the Plan became
effective and the Debtors successfully emerged from their chapter 11 bankruptcy
proceedings.
Pursuant to the Plan, the following transactions were completed on or about the
Effective Date:
.. all of Old Pillowtex's issued and outstanding common stock and preferred
stock were cancelled without consideration;
.. Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware
subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation
(the "Merger");
.. certain indebtedness of the Debtors was cancelled in exchange for cash,
common stock, par value $0.01 per share, of Pillowtex ("Common Stock"),
and/or warrants to purchase shares of Common Stock ("Warrants");
.. designated post-petition loans having an aggregate principal amount of $150
million were cancelled in exchange for the issuance by Pillowtex of $150
million aggregate principal amount of notes under a new secured term loan
(the "Exit Term Loan") (the principal amount of the Exit Term Loan was
immediately reduced on the Effective Date by $38.6 million (see note 4));
.. executory contracts or unexpired leases to which any Debtor was a party
were assumed, assumed and assigned, or rejected;
.. industrial revenue bonds in the aggregate principal amount of $11.4 million
were reinstated;
.. members of the boards of directors and officers of Pillowtex and the
reorganized Debtor subsidiaries were elected and began serving their
respective terms; and
.. the overall corporate structure was simplified through the restructuring
and dissolution of certain of Old Pillowtex's subsidiaries.
On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants
initially exercisable to purchase 3,529,412 shares of Common Stock were issued
for distribution in respect of claims against the Debtors,
7
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(b) 3,529,412 shares of Common Stock were reserved for issuance upon the
exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for
issuance in satisfaction of awards under the Pillowtex Corporation 2002 Equity
Incentive Plan (the "Equity Incentive Plan"), which was implemented in
accordance with the Plan. In addition, on the Effective Date, Pillowtex entered
into a three-year $200 million senior secured asset-based nonamortizing
revolving credit facility, including a $60 million letter of credit sub-facility
(the "Exit Revolver Facility") with Congress Financial Corporation as agent for
a syndicate of lenders. See note 4 for a more detailed description of the Exit
Revolver Facility.
Fresh Start Adjustments
The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24,
2002. However, for financial reporting purposes, the Company deemed the
effective date of the Plan to have occurred on June 1, 2002. References to
"Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May
24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1,
2002, and references to "Successor" refer to Pillowtex and its subsidiaries on
and after June 1, 2002, after giving effect to the implementation of fresh start
reporting. In accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted
fresh start reporting because holders of existing voting shares of Old Pillowtex
immediately before filing and confirmation of the Plan received less than 50% of
the Common Stock distributed under the Plan and the Company's reorganization
value was less than the Debtors' post-petition liabilities and allowed claims in
the aggregate on a consolidated basis.
Fresh start reporting requires that the reorganization value of the Company be
allocated to its assets in conformity with Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value
of the specific tangible or identifiable intangible net assets over
reorganization value, or negative goodwill, is to be allocated to noncurrent
non-monetary assets on a pro rata basis. Based on the consideration of many
factors and various valuation methods, including a discounted cash flow, a
comparable public company analysis, a comparable acquisitions analysis, and
other applicable analyses believed by the Company's management to be appropriate
for the Company's business and industry, the Company and its financial advisors
determined the reorganization value of the Company to be approximately $400
million, which served as the basis for the Plan approved by the Bankruptcy
Court. Approximately $208.4 million of the reorganization value related to debt
and other obligations outstanding as of the Effective Date, and the remaining
reorganization value of approximately $191.6 million was assigned as the initial
equity of the Company. The $208.4 million of the reorganization value related to
debt and other obligations is comprised of $206.3 million of long-term debt and
$19.6 million of deferred creditor claim payments and bankruptcy-related
professional fees included in accrued expenses, offset by $17.5 million of cash
included in current assets in the Successor column in the table below.
The fair value of the net assets exceeded the reorganization value by $131.2
million, resulting in negative goodwill. The negative goodwill has been
allocated on a proportional basis to property, plant and equipment and certain
intangible assets.
8
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
The following table reflects the reorganization adjustments to Old Pillowtex's
consolidated balance sheet as of June 1, 2002:
Fresh
Plan of Start
Predecessor Reorganization Adjustments Successor
------------- ----------------- ------------- -----------
Assets:
- -------
Current assets $ 364,936 - (953) (e) 363,983
Property, plant and equipment, net 456,739 - (288,321) (f) 168,418
Intangibles, net 229,440 - (179,309) (g) 50,131
Other assets 5,946 - (3,087) (e) 2,859
----------- ----------- --------- ---------
Total assets $ 1,057,061 - (471,670) 585,391
=========== =========== ========= =========
Liabilities and stockholders' equity (deficit):
- -----------------------------------------------
Liabilities not subject to compromise:
Checks not yet presented for payment,
accounts payable and accrued expenses $ 101,873 7,393 (a) 4,689 (e) 113,955
Long-term debt 194,901 11,380 (b) - 206,281
Long-term debt in default 520,104 (520,104) (c) - -
Noncurrent liabilities 52,147 - 21,384 (e) 73,531
----------- ----------- --------- ---------
Total liabilities not subject to compromise 869,025 (501,331) 26,073 393,767
Liabilities subject to compromise 546,668 (546,668) (c) - -
----------- ----------- --------- ---------
Total liabilities 1,415,693 (1,047,999) 26,073 393,767
Redeemable convertible preferred stock 106,652 - (106,652) (h) -
Stockholders' equity (deficit) (465,284) 1,047,999 (d) (391,091) (h) 191,624
----------- ----------- --------- ---------
Total liabilities and stockholders' equity
(deficit) $ 1,057,061 - (471,670) 585,391
=========== =========== ========= =========
(a) To record certain pre-petition accounts payable and property taxes to
be settled in cash.
(b) To reinstate industrial revenue bonds.
(c) To record elimination of pre-petition liabilities that were cancelled.
(d) To record issuance of securities of Pillowtex ($191.6 million) and
gain on cancellation of pre-petition liabilities ($856.4 million).
(e) To reflect assets and liabilities at fair value. Such revaluations
include:
-- The reduction of inventory to eliminate the existing LIFO
reserves and adjust the carrying value to the estimated market
value;
-- The addition of warehousing costs to the carrying value of
inventory;
-- The increase in accrued expenses for certain unfavorable contract
commitments;
-- The increase in accrued pension and postretirement benefit
obligations primarily due to the reduction in the value of the
pension plan assets; and
-- The reduction in carrying values of certain other assets to
reflect fair values.
(f) To record at fair value, less allocated portion of negative goodwill.
(g) To write off goodwill and adjust trademarks and certain licenses to
fair value, less allocated portion of negative goodwill.
(h) To write off Old Pillowtex's securities, accumulated deficit and
accumulated other comprehensive loss.
9
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
The fresh start adjustments were based upon the work of outside appraisers,
actuaries, and financial consultants, as well as internal valuation estimates
using discounted cash flow analyses, to determine the relative fair values of
the assets and liabilities of the Company and its subsidiaries.
Basis of Presentation
References in these consolidated financial statements to "Predecessor" refer to
Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex
and its subsidiaries from May 24, 2002 through June 1, 2002. References to
"Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002,
after giving effect to the implementation of fresh start reporting.
The accompanying consolidated financial statements for the five months ended
June 1, 2002 (Predecessor), the six months ended June 30, 2001 (Predecessor) and
as of December 29, 2001 (Predecessor) have been presented in accordance with SOP
90-7 and assumed that the Debtors would continue as a going concern. In the
Chapter 11 Cases, substantially all unsecured liabilities and under-secured
liabilities as of the Petition Date were subject to compromise or other
treatment under the Plan. For financial reporting purposes, those liabilities
and obligations whose treatment and satisfaction were dependent on the outcome
of the Chapter 11 Cases have been segregated and classified as liabilities
subject to compromise in the accompanying consolidated balance sheets as of June
30, 2001 and December 29, 2001.
Pursuant to SOP 90-7, professional fees and other costs associated with the
Chapter 11 Cases were expensed as incurred and reported as reorganization items.
Interest expense was reported only to the extent that it was to be paid during
the Chapter 11 Cases.
The accompanying unaudited consolidated financial statements 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 Old Pillowtex's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission for the fiscal year ended
December 29, 2001 (Commission File No. 1-11756).
The June 30, 2001 consolidated financial statements have been restated to
present the Blanket Division as a discontinued operation (see note 12).
The provisions of EITF No. 00-25 (as defined in note 11) were adopted on
December 30, 2001. As a result, $4.8 million and $9.8 million of selling,
general, and administrative expenses have been reclassified as a reduction to
net sales in the three months and six months ended June 30, 2001, respectively.
(2) Inventories
Inventories consist of the following:
Successor Predecessor
-------------------- -------------------------------------------
June 29, June 30, December 29,
2002 2001 2001
-------------------- ------------------- --------------------
Finished goods $ 99,343 113,756 104,532
Work-in-process 44,522 46,614 40,832
Raw materials and supplies 36,799 58,477 46,828
In-transit and off-site 13,009 6,868 8,386
-------------------- ------------------- --------------------
$ 193,673 225,715 200,578
==================== =================== ====================
10
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(3) 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 the Warrants would have been
anti-dilutive for the one month ended June 29, 2002. Warrants exercisable to
purchase up to 3,529,412 shares of Common Stock were outstanding as of June 29,
2002.
(4) Long-Term Debt and Liquidity
Long-term debt consists of the following:
Sucessor Predecessor
----------------- -----------------------------------
June 29, June 30, December 29,
2002 2001 2001
----------------- ---------------- ----------------
Exit Revolver Facility $ 61,895 - -
Exit Term Loan 111,359 - -
Revolver less portion to be treated as post-petition debt - 241,021 233,051
Term loans less portion to be treated as post-petition debt - 250,204 242,004
Portion of revolver and term loans to be treated as
post-petition debt - 150,000 150,000
Overline Credit Facility - 34,738 34,738
DIP Financing Facility - - -
Industrial revenue bonds with interest rates from 1.35% to
2.19% and maturities through July 1, 2021; generally
collateralized by land, buildings and letters of credit 11,380 13,860 13,185
9% Senior Subordinated Notes due 2007 - 185,000 185,000
10% Senior Subordinated Notes due 2006 - 125,000 125,000
6% Convertible Subordinated Debentures due
2012 inclusive of Cash Claimant Notes in the principal
amount of $5.2 million - 90,417 90,417
Capital lease obligations 23,675 - -
Other debt - 1,811 2,106
----------------- ---------------- ----------------
Total debt 208,309 1,092,051 1,075,501
Less:
Current portion of long-term debt (6,653) - (356)
Current portion of long-term debt in default - (678,923) (660,893)
Long-term debt in default - (12,673) (10,920)
Liabilities subject to compromise - (400,455) (402,687)
----------------- ---------------- ----------------
Total long-term debt $ 201,656 - 645
================= ================ ================
Exit Revolver Facility
As discussed in note 1, the Company entered into the Exit Revolver Facility on
the Effective Date. The Exit Revolver Facility is a three-year $200 million
senior secured asset-based nonamortizing revolving credit facility, including a
$60 million letter of credit sub-facility. Parent and certain of its domestic
subsidiaries are borrowers under the Exit Revolver Facility, and Parent's other
domestic and Canadian subsidiaries are guarantors thereunder. The availability
of borrowings under the Exit Revolver Facility generally is based on a
percentage of eligible accounts receivable and eligible inventory, subject to
certain reserves that can be established by the lender. In addition, the
borrowers may, at their option, borrow up to a maximum principal amount of $10
million as part of the $200 million facility based on the value of certain real
property and equipment held as collateral that would be added to the borrowing
base. Any such loan would be partially amortized over the remaining term of the
Exit
11
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
Revolver Facility. The Exit Revolver Facility is secured by a pledge of the
stock of the subsidiaries, a first priority lien on the accounts receivable,
inventory, and trademarks, as well as certain real property and equipment, of
the borrowers and guarantors, and a second priority lien on the primary
collateral that secures the Exit Term Loan.
All borrowings under the Exit Revolver Facility bear interest at an annual rate
equal to, at Parent's option, the lender's prime rate or the prevailing adjusted
Eurodollar rate, in either case plus a specified margin determined based on the
amount of excess availability and the Company's leverage ratio. The average
interest rate on the Exit Revolver Facility was 5.0% for the month ended June
29, 2002. The Exit Revolver Facility includes an unused commitment fee of either
3/8% or 1/2% per annum (depending on excess availability and the leverage
ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2%
per annum on the daily outstanding balance of letters of credit issued under the
Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of
the amount of the maximum credit if the Exit Revolver Facility is terminated in
whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of
the reduction of the maximum credit if the Company reduces the maximum credit in
part at the time of any such reduction.
The Exit Revolver Facility contains a number of negative covenants, which
restrict, among other things, Pillowtex's ability to incur additional debt, pay
dividends or make other restricted payments, sell stock of Pillowtex or any of
its subsidiaries, grant liens, make loans, advances, and investments, engage in
transactions with affiliates, dispose of assets, effect mergers, consolidations,
and dissolutions, prepay and refinance debt, and make certain changes in its
business. The Exit Revolver Facility also establishes a minimum earnings
threshold as defined herein that applies at any time excess availability is less
than $35 million.
As of June 29, 2002, $61.9 million was outstanding under the Exit Revolver
Facility and outstanding letters of credit under the Exit Revolver Facility
aggregated $23.7 million. Availability as of June 29, 2002 was $111.2 million.
Exit Term Loan
On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150
million senior five-year term loan secured by a first priority lien on certain
real estate, plant, and equipment and a second priority lien on the primary
collateral that secures the Exit Revolver Facility. The Exit Term Loan was
entered into by Pillowtex in exchange for cancellation of designated
post-petition loans having an aggregate principal amount of $150 million which
were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds
from the Exit Term Loan. Pillowtex is the borrower under the Exit Term Loan and
substantially all of its subsidiaries are guarantors thereunder.
The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on
the last day of March, June, September, and December, commencing on September
30, 2002. In addition to scheduled payments of principal on the last day of June
and December, commencing December 31, 2002, Pillowtex is required to prepay the
Exit Term Loan (i) with the net cash proceeds from the sale of certain assets,
and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to
the minimum excess availability requirements contained in the Exit Revolver
Facility), with 50% of the excess cash flow, if any, for the preceding fiscal
year.
The Exit Term Loan also contains a number of negative covenants, which restrict,
among other things, Pillowtex's ability to incur additional debt, pay dividends
or make other restricted payments, sell stock of subsidiaries, grant liens, make
loans, advances and investments, engage in transactions with affiliates, dispose
of assets, enter into sale-leaseback arrangements, effect mergers,
consolidations, and dissolutions, prepay debt, and make certain changes in its
business, to adopt newly-issued generally accepted accounting standards as
appropriate and new tax requirements as they are enacted. The Exit Term Loan
requires compliance with a maximum leverage ratio and a minimum interest
coverage ratio.
Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was
immediately reduced on the Effective Date by $38.6 million utilizing borrowings
under the Exit Revolver Facility. Under the Exit Term Loan, Pillowtex has paid
or will pay an annual administrative fee of $150,000 on the Effective Date and
each anniversary thereof. As of June 29, 2002, $111.4 million was outstanding
under the Exit Term Loan.
12
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
DIP Financing Facility
On December 12, 2000, the Bankruptcy Court entered an order (the "DIP Financing
Order") authorizing the Debtors to enter into a $150 million
debtor-in-possession financing facility, including a $60 million letter of
credit sub-facility (the "DIP Financing Facility") with Bank of America, N.A. as
administrative agent for a syndicate of financing institutions comprised of
certain of Old Pillowtex's pre-petition senior secured lenders. The size of the
DIP Financing Facility was subsequently reduced to $100 million, including the
$60 million letter of credit sub-facility. The DIP Financing Facility expired by
its terms on the Effective Date. No loan amounts were outstanding under the DIP
Financing Facility on the Effective Date. Letters of credit outstanding under
the DIP Financing Facility as of the Effective Date are being replaced with
letters of credit issued under the Exit Revolver Facility. As of June 29, 2002,
outstanding letters of credit of $2.5 million remained outstanding under the DIP
Financing Facility. The lenders under the DIP Financing Facility were holding
approximately $8.1 million as collateral for outstanding letters of credit
issued under the facility. As these letters of credit are replaced with letters
of credit issued under the Exit Revolver Facility, the funds will be returned to
the Company.
Senior Debt Facilities
In December 1997, in connection with its acquisition of Fieldcrest Cannon, Old
Pillowtex 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 million revolving credit facility and a $250 million term loan
facility. The term loan facility consisted of a $125 million Tranche A Term Loan
and a $125 million Tranche B Term Loan. Effective July 28, 1998, Old Pillowtex
amended these facilities by increasing the Tranche B Term Loan to $225 million.
The increase occurred in conjunction with the acquisition of The Leshner
Corporation, allowing Old Pillowtex to fund the transaction and reduce
borrowings under the revolving credit facility.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan bore interest at a rate based upon LIBOR plus 3.5%. The
Tranche B Term Loan bore interest on a similar basis to the Tranche A Term Loan,
plus an additional margin of 0.5%. The weighted average annual interest rate on
outstanding borrowings under the various pre-petition senior credit facilities
for the five months ended June 1, 2002 was 5.7%. Pursuant to the DIP Financing
Order, the Bankruptcy Court authorized the Debtors to make scheduled interest
payments on the pre-petition senior debt facilities during the pendency of the
Chapter 11 Cases.
As of the Effective Date, the outstanding indebtedness under the revolving
credit facility and the term loan facility was $232.6 million and $241.4
million, respectively, after designated post-petition loans having an aggregate
principal amount of $150 million were cancelled in exchange for the Exit Term
Loan. On the Effective Date, pursuant to the Plan the amounts outstanding were
cancelled, and in exchange therefor, holders of claims in respect of the senior
debt facilities became entitled to receive Common Stock.
Overline Facility
In May 1999, Old Pillowtex entered into a $20 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 funds available to $35 million and to secure it with the same assets
securing the senior debt facilities described above.
Amounts borrowed under the Overline Facility bore interest at a rate based upon
LIBOR plus 4.5% or the base rate plus 3%, at Old Pillowtex's option. Pursuant to
the DIP Financing Order, the Bankruptcy Court authorized Old Pillowtex to make
scheduled interest payments on the Overline Facility during the pendency of the
Chapter 11 Cases.
13
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
On the Effective Date and pursuant to the Plan, the outstanding indebtedness on
the Overline Facility of $34.8 million was cancelled, and in exchange therefor,
holders of claims in respect of the Overline Facility became entitled to receive
Common Stock and Warrants.
Senior Subordinated Debt
In connection with its acquisition of Fieldcrest Cannon, Old Pillowtex issued
$185 million of 9% Senior Subordinated Notes due 2005 (the "9% Notes"), with
interest payable semiannually commencing June 15, 1998. The 9% Notes were
general unsecured obligations of Old Pillowtex, were subordinated in right of
payment to all existing and future senior indebtedness, and ranked pari passu
with the 10% Notes described below.
On November 12, 1996, Old Pillowtex issued $125 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 were
general unsecured obligations of the Company, were subordinated in right of
payment to all existing and future senior indebtedness, and ranked pari passu
with the 9% Notes.
No principal or interest payments were made on the 9% Notes or the 10% Notes
during the pendency of the Chapter 11 Cases.
On the Effective Date, pursuant to the Plan indebtedness under the 9% Notes and
10% Notes of $185 million and $125 million, respectively, was cancelled, and in
exchange therefore, holders of claims in respect of 9% Notes or 10% Notes became
entitled to receive Common Stock and Warrants.
Fieldcrest Cannon 6% Convertible Debentures
As a result of Old Pillowtex's acquisition of Fieldcrest Cannon, the outstanding
Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6%
Convertible Debentures") were convertible, at the option of the holders, into a
combination of cash and common stock of Old Pillowtex. As of the Effective Date,
approximately $85.2 million aggregate principal amount of the 6% Convertible
Debentures remained outstanding.
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 the Effective Date, the aggregate amount of the outstanding
Cash Claimant Notes was $5.2 million.
No principal or interest payments were made on the 6% Convertible Debentures or
Cash Claimant Notes during the pendency of the Chapter 11 Cases.
On the Effective Date, pursuant to the Plan the indebtedness under the 6%
Convertible Debentures was cancelled, and in exchange therefor, holders of
claims in respect of the 6% Convertible Debentures became entitled to receive
Warrants, and the indebtedness under the Cash Claimant Notes was cancelled, and
in exchange therefor, holders of claims in respect of the Cash Claimant Notes
became entitled to receive Common Stock and Warrants.
Industrial Revenue Bonds
The Company presently has obligations in respect of two industrial revenue bond
facilities that were reinstated on the Effective Date (the "IRB Facilities").
One of the IRB Facilities is secured by liens on specified plants and equipment
and by a letter of credit. The other IRB Facility is secured by a letter of
credit. As of June 29, 2002, approximately $11.4 million of bonds in the
aggregate were outstanding under the IRB Facilities.
On February 6, 2001, the Bankruptcy Court authorized the Debtors to make
scheduled principal and interest payments on the IRB Facilities. Even though
these payments were being made, the Debtors remained in default of
14
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
its obligations under each of the IRB Facilities. On the Effective Date,
pursuant to the Plan the IRB Facilities were reinstated and the letters of
credit issued in respect thereof under the senior debt facilities described
above were replaced with equivalent letters of credit issued under the Exit
Revolver Facility.
During the pendency of the Chapter 11 Cases, two industrial revenue bond
facilities matured pursuant to their terms and were paid off by the Debtors
pursuant to an order of the Bankruptcy Court. The plant facility associated with
another industrial revenue bond financing was closed, and the Debtors agreed to
have the Bankruptcy Court lift the automatic stay to enable the lender to
foreclose on the equipment collateral to satisfy partially the obligations of
the Debtor thereunder.
Capital Lease Obligations
Certain existing operating leases were renegotiated as part of the
reorganization process. The renegotiated leases have been classified as capital
lease obligations. These leases have interest rates between 7.5% and 9%, and
have terms between 48 and 60 months. The total amount of operating leases
converted to capital lease obligations during the five months ended June 1, 2002
was approximately $24.4 million. As of June 29, 2002, $23.7 million was
outstanding under capital lease obligations.
Adequacy of Capital Resources
The Company's principal sources of liquidity will be cash flows from operations
and borrowings under the Exit Revolver Facility. Based on current and
anticipated levels of operations, the Company's management believes that cash
flows from operations, together with amounts available under the Exit Revolver
Facility, will be adequate to meet the Company's anticipated cash requirements,
including debt service requirements and planned capital expenditures. In the
event that the Company's borrowing base, comprised of a percentage of eligible
accounts receivable and eligible inventory after reserves, becomes insufficient
to support additional borrowing under the Exit Revolver Facility, the borrowers
thereunder have the option of borrowing up to a maximum principal amount of $10
million (as part of the overall $200 million commitment) based on the value of
certain real property and equipment held as collateral that would be added to
the borrowing base. However, since the amount of any such loan is dependent on
the appraised value of such real property and equipment at the time the option
is exercised by the borrowers, no assurance can be given as to the amount of
additional borrowing that would actually be available to the borrowers in such
circumstances. In the event that cash flows, together with available borrowings
under the Exit Revolver Facility, were not sufficient to meet the Company's cash
requirements, the Company would be required to obtain alternative financing or
reduce planned capital expenditures. The Company can provide no assurance that
alternative financing would be available on acceptable terms, especially in
light of the fact that, except for miscellaneous real property and equipment,
substantially all of the Company's existing assets are pledged as collateral for
the Exit Term Loan, Exit Revolver Facility, industrial revenue bonds and capital
lease obligations, or that reductions in planned capital expenditures would be
sufficient to cover any cash shortfalls.
15
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
Scheduled Maturities
As of June 29, 2002, the scheduled maturities of long-term debt are as follows:
Year Amount
---- ------
Remainder of 2002 $ 3,527
2003 8,587
2004 15,214
2005 78,745
2006 14,491
2007 77,745
Thereafter 10,000
The scheduled maturities reflect the expiration of the Exit Revolver Facility in
2005, and the final payment on the Exit Term Loan in 2007.
(5) Stockholders' Equity
Pillowtex's authorized capital stock consists of 50,000,000 shares of Common
Stock and 10,000,000 shares of preferred stock, par value $0.01 per share
("Preferred Stock"). On June 29, 2002, there were 18,600,000 shares of Common
Stock issued and outstanding and no shares of Preferred Stock issued and
outstanding. On the Effective Date, pursuant to the Plan, 3,529,412 shares of
Common Stock were reserved for issuance upon the exercise of Warrants and
1,400,000 shares of Common Stock were reserved for issuance in satisfaction of
awards under the Equity Incentive Plan.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by
Pillowtex's Board of Directors (the "Board") from funds legally available for
payment of dividends. However, Pillowtex does not presently anticipate that
dividends will be paid on Common Stock in the foreseeable future. Furthermore,
payment of dividends is restricted by the terms of the Exit Term Loan and the
Exit Revolver Facility. In the event of a liquidation, dissolution, or winding
up of Pillowtex, holders of Common Stock will be entitled to share ratably in
all assets remaining after payment of liabilities and the liquidation preference
of outstanding Preferred Stock, if any. Holders of Common Stock have no
preemptive, subscription, redemption, or conversion rights. All of the
outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable.
Warrants
On the Effective Date, pursuant to the Plan, Warrants initially exercisable to
purchase up to 3,529,412 shares of Common Stock were issued. The Warrants were
issued under the Warrant Agreement entered into between Pillowtex and Mellon
Investor Services L.L.C. Approximately $9.9 million was assigned to the value of
the Warrants on the Effective Date and has been included in additional paid-in
capital. Each Warrant initially entitles the owner thereof to acquire one share
of Common Stock at a cash exercise price of $28.99. Warrants may also be
exercised on a cashless basis, subject to the terms and conditions set forth in
the Warrant Agreement. The Warrants expire on November 24, 2009, i.e., the date
that is seven and one-half years after the Effective Date. The exercise price
and the number and kind of shares purchasable upon exercise of a Warrant will be
subject to adjustment upon events specified in the Warrant Agreement.
Preferred Stock
Pillowtex is authorized to issue 10,000,000 shares of Preferred Stock. The Board
has the authority to issue Preferred Stock from time to time in one or more
classes or series and to fix the price, rights, preferences, privileges, and
16
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
restrictions thereof, including dividend rights, dividend rates, conversion
rights, terms of redemption, redemption prices, liquidation preferences, and the
number of shares constituting a series or the designation of such series,
without any further vote or action by Pillowtex's stockholders. The Preferred
Stock may be issued in distinctly designated series, may be convertible into
Common Stock, and may rank prior to the Common Stock as to dividend rights,
liquidation preferences, or both. The express terms of shares of a different
series of any particular class of Preferred Stock will be identical except for
such variations as may be permitted by law. Pillowtex's Certificate of
Incorporation provides that the Board may not, without the approval of the
holders of a majority of the capital stock of Pillowtex or any class or series
entitled to vote generally in the election of directors, authorize any series of
Preferred Stock or issue any shares of Preferred Stock, or rights to acquire
shares of Preferred Stock, in connection with a stockholders' rights plan or any
similar plan or arrangement.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss), pension equity
adjustments, and foreign currency translation adjustments. For the one month
ended June 30, 2002, comprehensive loss was $1.0 million. For the two months and
five months ended June 1, 2002, comprehensive loss before the gain on
cancellation of pre-petition liabilities and fresh start adjustments was $79.5
million and $128.7 million, respectively. For the three month and six months
ended June 30, 2001, comprehensive loss was $80.7 million and $129.1 million,
respectively.
(6) Redeemable Convertible Preferred Stock
On December 19, 1997, Old Pillowtex issued 65,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Preferred Stock") for $65 million less
$2.1 million of issue costs. Accretion was 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 Old
Pillowtex's earnings per share for 1999 falling below predetermined targets.
During the third and fourth quarters of 1999, Old Pillowtex 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 were payable in cash or additional shares of Series A
Preferred Stock until December 2002, at which time they would have become
payable solely in cash. Under the DIP Financing Facility, Old Pillowtex was
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 the Effective
Date. The commencement of the Chapter 11 Cases constituted an "Event of
Noncompliance" under the terms of the Series A Preferred Stock. The terms of the
Series A Preferred Stock provided that upon the occurrence of an Event of
Noncompliance, the dividend rate on such stock would increase immediately to the
lesser of 18% per annum and the maximum rate permitted by law. Accordingly, as
of the Petition Date, dividends on the Series A Preferred Stock began accruing
at 18% per year, compounding quarterly.
On the Effective Date, pursuant to the Plan the Series A Preferred Stock was
cancelled without consideration.
(7) Segment Information
The Company manufactures textile products for the bedroom, bathroom, and kitchen
and markets them to department stores, discount stores, specialty shops and
certain institutional customers and over the Internet. The Company is organized
into two major divisions that it considers operating segments: (1) Bed and Bath
and (2) Pillow and Pad. The Bed and Bath Division manufactures and sells sheets
and other fashion bedding textiles, as well as towels, bath rugs, and kitchen
textile products. The Pillow and Pad Division manufactures and sells bed
pillows, down comforters, and mattress pads. Other includes the Company's retail
stores, corporate activities, and the remaining assets associated with the
Blanket Division (see note 12).
17
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
The accounting policies of the divisions are the same as those described in the
"Summary of Significant Accounting Policies" in Old Pillowtex's Annual Report on
Form 10-K for the year ended December 29, 2001. The Company evaluates division
performance based on gross profit. Interdivisional sales are not material.
Information about the divisions is presented below:
Successor
------------------------------------------------------------------
One Month Ended
June 29, 2002
------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other (1) Total
------------------------------------------------------------------
Net sales $ 52,414 17,451 1,426 71,291
Gross profit (loss) 5,992 2,597 (2,589) 6,000
Depreciation and amortization 561 64 232 857
Capital expenditures 1,303 90 556 1,949
Total assets 451,918 84,834 55,231 (2) 591,983
Predecessor
------------------------------------------------------------------
Two Months Ended
June 1, 2002
------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other (1) Total
------------------------------------------------------------------
Net sales $ 104,435 32,987 1,703 139,125
Gross profit (loss) 3,417 1,873 (6,542) (1,252)
Depreciation and amortization 4,876 164 2,540 7,580
Capital expenditures 22,919 584 838 24,341
Total assets (3) 791,189 105,338 160,534 (2) 1,057,061
Predecessor
------------------------------------------------------------------
Three Months Ended
June 30, 2001
------------------------------------------------------------------
Bed Pillow
and and
Bath Pad Other (1) Total
------------------------------------------------------------------
Net sales $ 172,397 55,004 4,982 232,383
Gross profit (loss) 760 5,728 (12,742) (6,254)
Depreciation and amortization 9,907 932 3,043 13,882
Capital expenditures 1,041 402 2,987 4,430
Total assets 802,298 133,590 264,557 (2) 1,200,445
18
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
Predecessor
----------------------------------------------
Five Months Ended
June 1, 2002
----------------------------------------------
Bed Pillow
and and
Bath Pad Other(1) Total
----------------------------------------------
Net sales $ 285,084 88,695 6,271 380,050
Gross profit (loss) 14,190 7,810 (13,891) 8,109
Depreciation and amortization 12,323 954 5,603 18,880
Capital expenditures 25,030 938 2,523 28,491
Total assets (3) 791,189 105,338 160,534 (2) 1,057,061
Predecessor
-------------------------------------------------
Six Months Ended
June 30, 2001
-------------------------------------------------
Bed Pillow
and and
Bath Pad Other(1) Total
-------------------------------------------------
Net sales $ 379,288 117,094 9,843 506,225
Gross profit (loss) 7,274 12,371 (23,491) (3,846)
Depreciation and amortization 20,095 1,756 5,808 27,659
Capital expenditures 1,861 402 4,117 6,380
Total assets 802,298 133,590 264,557 (2) 1,200,445
(1) Includes retail stores and miscellaneous corporate activities, including
the Company's central information technology, manufacturing, human
resources, and purchasing departments.
(2) Corporate amounts include primarily data processing equipment and software,
other enterprise-wide assets not allocated to the segments, and the net
assets associated with the Blanket Division.
(3) Does not reflect adjustments for fresh start reporting (note 1).
(8) Restructuring Charges and Impairment of Long-lived Assets
During the first quarter of 2002, a restructuring charge of $3.0 million
associated with the closure of three facilities was incurred. The towel
finishing operations in Columbus, Georgia and Phenix City, Alabama closed in
July 2002 and impacted approximately 980 employees. The majority of the goods
finished at the plants are now being finished at an existing facility in
Kannapolis, North Carolina, and the remaining items are being purchased from
other suppliers. The automated sewing facility in Dallas, Texas closed in June
2002 and resulted in the termination of approximately 99 employees. The
facility's operations were consolidated into other existing pillow and pad
facilities. The restructuring charge consisted principally of severance and
benefits, which the Company anticipates it will complete paying in the third
quarter of 2002.
During the two months ended June 1, 2002, a restructuring charge of $1.2 million
was incurred. Approximately $0.8 million of the charge relates to a loss
resulting from curtailment of defined benefit pension plans for hourly and
salaried employees at the closed facilities in Columbus, Georgia and Phenix
City, Alabama. A curtailment is an event that significantly reduces the expected
years of future service of present employees or eliminates for a
19
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
significant number of employees the accrual of defined benefits for some or all
of their future services. The remaining $0.4 million restructuring charge is
primarily due to a revision in the estimated cost of benefits provided to the
employees at Columbus, Georgia and Phenix City, Alabama after termination.
A charge for impairment of long-lived assets of $30.9 million was incurred
during the first quarter of 2002 for assets located at the Columbus, Georgia and
Phenix City, Alabama facilities. The charge consists of $9.0 million for real
property and $21.9 million for machinery and equipment. The impairment charge
reflects management's estimate of the fair market value based upon appraisals
and the expected future cash flows to be generated by the assets, including
their ultimate disposition. During the two months ended June 1, 2002, an
additional charge of $0.2 million relating to machinery and equipment located at
the Phenix City, Alabama location was incurred. These assets have been
classified as assets held for sale as of June 29, 2002.
Activity in the reserve established for the restructuring charges is presented
below:
Balance, December 30, 2001 $ 1,063
Restructuring charge 4,233
Reclassification of curtailment loss to pension liability (751)
Payments (3,983)
----------
Balance, June 29, 2002 $ 562
==========
During the six months ended June 30, 2001, the closure of several facilities was
announced. The facilities included a towel manufacturing facility in
Hawkinsville, Georgia; a cut-and-sew bedding facility in Rocky Mount, North
Carolina; a sheet manufacturing facility in Kannapolis, North Carolina; a towel
yarn manufacturing operation in Columbus, Georgia, and a towel warehouse and
distribution center in Phenix City, Alabama. The Rocky Mount, North Carolina
facility manufactured decorative bedding exclusively under a licensing
agreement, which expired on June 30, 2001. The majority of the production at the
other facilities was relocated to existing facilities. The closures resulted in
the termination of approximately 1,130 employees. Restructuring charges of $4.5
million and $6.5 million related to these closures were incurred in the three
months and six months ended June 30, 2001, respectively. An impairment charge of
$20.1 million in the second quarter of 2001 primarily related to the assets in
the closed facilities discussed above was also recognized.
(9) Reorganization Items
The following items have been recognized as reorganization items in the
statements of operations:
Predecessor
---------------------------------------------------------------------
Two Months Three Months Five Months Six Months
Ended Ended Ended Ended
June 1, June 30, June 1, June 30,
2002 2001 2002 2001
-------------- ----------------- ----------------- ---------------
Gain on cancellation of pre-petition
liabilities $ (856,375) - (856,375) -
Fresh start adjustments 391,091 - 391,091 -
Other:
Professional fees and other costs
associated with the Chapter 11 Cases 12,682 3,799 17,110 10,110
Retention incentive plan 365 1,206 1,156 3,108
Rejected contracts and lease
agreements 48,352 8,936 48,570 8,936
Interest income on investments (69) (401) (203) (989)
-------------- ----------------- ----------------- ---------------
Total other 61,330 13,540 66,633 21,165
-------------- ----------------- ----------------- ---------------
$ (403,954) 13,540 (398,651) 21,165
============== ================= ================= ===============
20
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
Key Employee Retention Program. To stabilize employee relations, the Debtors
developed a key employee retention plan (the "Retention Plan"), which the
Bankruptcy Court approved on March 6, 2001. The Retention Plan was designed to,
among other things, ensure that the employees most critical to the Debtors'
reorganization efforts were provided with sufficient economic incentives and
protections to remain with the Debtors and fulfill their responsibilities
through the successful conclusion of the Chapter 11 Cases. The Retention Plan
consists of three separate components: (a) a retention incentive plan (the
"Retention Incentive Plan"), (b) an emergence performance bonus plan, and (c) an
employee severance plan.
Under the Retention Incentive Plan, each eligible employee earned a specified
retention incentive payment (the "Retention Incentive Payment"), based upon a
percentage of his or her salary as determined by the Company's management, if
the employee remained actively employed by the Company on the specified dates.
Under the Retention Incentive Plan, three installments were paid on April 9,
2001, November 14, 2001, and May 14, 2002. The final installment of the
Retention Incentive Payment of $1.6 million was paid on May 31, 2002. The total
amount paid under the Retention Incentive Plan was approximately $6.5 million.
No amounts were paid under the emergence performance bonus plan.
Rejected Contracts and Leases. During the pendency of the Chapter 11 Cases, the
Debtors reviewed their executory contracts and unexpired leases and received
approval from the Bankruptcy Court to reject certain contracts and leases. In
this context, "rejection" means that the Debtors were relieved from their
obligations to perform further under the contract or lease and were subject only
to a claim for damages for the breach thereof. Any claim for damages resulting
from the rejection of a contract or lease was treated as a general unsecured
claim in the Chapter 11 Cases, and the allowed amount of such claim was
recognized as a reorganization item. On the Effective Date, pursuant to the
Plan, holders of claims in respect of damages became entitled to receive Common
Stock and Warrants.
(10) 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.
Predecessor Periods
No income tax benefit was recognized for the loss from continuing operations
before reorganization items for the two months ending June 1, 2002. Instead, the
increase in net deferred tax assets as a result of the loss was offset by an
equal increase in the valuation allowance. In addition, no income tax expense or
benefit was recognized on reorganization items for the two months ending June 1,
2002. The items of income and expense included in the reorganization income are
non-taxable and non-deductible, respectively.
For the five months ending June 1, 2002, the increase in the valuation allowance
was partially offset by a $7.2 million tax refund related to a 2001 net
operating loss. The reduction of the valuation allowance for the 2001 net
operating loss resulted from a provision in Congress' economic stimulus package
enacted during the first quarter of 2002 that changed the period for carryback
of net operating losses. This change allowed Old Pillowtex to carry back a
portion of the 2001 net operating loss five years rather than two years.
If all or a portion of Old Pillowtex's deferred tax asset is realized in the
future, or considered "more likely than not" realizable by management,
intangibles will be reduced first and any excess treated as an increase to
additional paid-in capital.
21
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
Successor Periods
The Company did not recognize an income tax benefit for the loss incurred in the
one month ended June 29, 2002. Instead, the increase in net deferred tax assets
as a result of the loss was offset by an equal increase in the valuation
allowance.
Bankruptcy Impact
In connection with the reorganization, a gain on cancellation of indebtedness
was realized. This gain will not be taxable since the gain resulted from
reorganization under the Bankruptcy Code. However, the Company will be required,
as of the beginning of its 2003 taxable year, to reduce certain attributes
including net operating loss carryforwards ("NOLs"), certain tax credits and tax
bases in assets in an amount equal to such gain on extinguishment.
The reorganization of the Company on the Effective Date constituted an ownership
change under Section 382 of the Internal Revenue Code. Consequently, the use of
any of the NOLs and tax credits generated prior to the ownership change, that
are not reduced pursuant to the provisions discussed above, will be subject to
an annual limitation.
(11) Recently Issued or Adopted Accounting Standards
The Emerging Issues Task Force (the "EITF") of the Financial Accounting
Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to be Delivered in the Future", and EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" (collectively, the "EITFs"), which address various
aspects of accounting for consideration given by a vendor to a customer or a
reseller of products. The provisions of the EITFs were adopted as of the
beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require
all consideration paid to customers to be classified as a reduction to net
sales. Prior to December 30, 2001, amounts paid to customers for co-operative
advertising and marketing were classified in selling, general, and
administrative expenses. As a result, $4.8 million and $9.8 million of selling,
general, and administrative expenses have been reclassified as a reduction to
net sales for the three months and six months ended June 30, 2001, respectively.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Intangible assets with definite
useful lives will be amortized over such lives to their estimated residual
values. SFAS No. 142 was adopted as of December 30, 2001. The Company has
restated its intangible assets to their estimated fair values on June 1, 2002,
in conjunction with fresh start reporting (see note 1).
22
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
Pro forma loss from continuing operations applicable to common stockholders and
loss applicable to common stockholders for the three months and six months ended
June 30, 2001, adjusted to eliminate historical amortization of goodwill and
intangibles with indefinite lives, are as follows:
Predecessor
--------------------------
Three Six
Months Months
Ended Ended
June 30, June 30,
2001 2001
----------- ------------
Loss from continuing operations applicable to common
stockholders - as reported $ (84,373) (136,299)
=========== ============
Loss from continuing operations applicable to common
stockholders - pro forma $ (82,810) (133,155)
=========== ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes both SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in Opinion 30). SFAS No. 144 also retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the statement of operations but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142.
The provisions of SFAS No. 144 were adopted as of December 30, 2001. The
adoption of SFAS No. 144 for long-lived assets held for use did not have a
material impact on the consolidated financial statements because the impairment
assessment requirements under SFAS No. 144 are largely unchanged from SFAS No.
121.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145, among other things, prohibits the classification of gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted upon
the Statement's issuance, and as such, the gain recognized by Old Pillowtex on
the extinguishment of debt resulting from the emergence from the chapter 11
bankruptcy proceedings has been classified as a reorganization item.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with
an exit activity (including a restructuring) or with a disposal of long-lived
assets. Under SFAS No. 146, a company will record a liability for a cost
associated with an exit or disposal activity when that liability is incurred and
can be measured at fair value. A liability is incurred when an event obligates
the entity to transfer or use assets. Under current accounting guidance, a
liability can be recorded when management has committed to an exit plan. The
requirements under SFAS No. 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Restatement of previously issued
financial statements is not permitted.
(12) Discontinued Operations
On September 6, 2001, Old Pillowtex sold the majority of the inventory and fixed
assets associated with its Blanket Division to Beacon Blankets, Inc. (fka Beacon
Acquisition Corporation) (the "Purchaser") for approximately $13.4
23
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
million. The results of operations and net assets of the Blanket Division have
been accounted for as a discontinued operation. As a result, the June 30, 2001
consolidated financial statements have been restated to reflect the Blanket
Division as a discontinued operation. The loss from discontinued operations was
$4.2 million and $7.3 million for the three months and six months ended June 30,
2001, respectively.
(13) Subsequent Events
On July 5, 2002, the Company granted restricted stock awards totaling 394,000
shares of Common Stock and options to acquire 594,200 shares of Common Stock to
certain of its key employees. The restricted stock awards and options, as
provided in the Plan, were made pursuant to the terms of the Equity Incentive
Plan. Restrictions on the restricted stock awards lapsed immediately upon grant
with respect to one-third of the shares, while the restrictions on the remaining
two-thirds of the shares lapse in equal installments on the first and second
anniversary date of the grant.
The cost of issuing the restricted stock will be charged to earnings over the
vesting period. During the one month ended June 29, 2002 and the two months
ended June 1, 2002, approximately $0.4 million and $0.8 million, respectively,
was charged to earnings.
24
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 audited consolidated financial statements and
notes thereto included in the Annual Report on Form 10-K of Pillowtex
Corporation, a Texas corporation ("Old Pillowtex"), as filed with the Securities
and Exchange Commission (Commission File No. 1-11756) for the fiscal year ended
December 29, 2001. Pillowtex Corporation, a Delaware corporation, is referred to
herein as "Pillowtex" or "Parent" and, together with its subsidiaries, as the
"Company."
Chapter 11 Proceedings and Reorganization
On November 14, 2000 (the "Petition Date"), Old Pillowtex and substantially all
of its domestic subsidiaries (collectively with Old Pillowtex, 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 for the
Debtors (the "Chapter 11 Cases") were jointly administered for procedural
purposes. From the Petition Date until May 24, 2002, the Debtors operated their
businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 2,
2002, Old Pillowtex announced that the Bankruptcy Court had confirmed the
Debtors' Second Amended Joint Plan of Reorganization, with certain modifications
(as so modified, the "Plan"). On May 24, 2002 (the "Effective Date"), the Plan
became effective and the Debtors successfully emerged from their chapter 11
bankruptcy proceedings.
Pursuant to the Plan, the following transactions were completed on or about the
Effective Date:
.. all of Old Pillowtex's issued and outstanding common stock and preferred
stock were cancelled without consideration;
.. Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware
subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation
(the "Merger");
.. certain indebtedness of the Debtors was cancelled in exchange for cash,
common stock, par value $0.01 per share, of Pillowtex ("Common Stock"),
and/or warrants to purchase shares of Common Stock ("Warrants");
.. designated post-petition loans having an aggregate principal amount of
$150 million were cancelled in exchange for the issuance by Pillowtex of
$150 million aggregate principal amount of notes under a new secured term
loan (the "Exit Term Loan") (the principal amount of the Exit Term Loan
was immediately reduced on the Effective Date by $38.6 million (see note
4 to the unaudited consolidated financial statements included elsewhere
in this Quarterly Report));
.. executory contracts or unexpired leases to which any Debtor was a party
were assumed, assumed and assigned, or rejected;
.. industrial revenue bonds in the aggregate principal amount of $11.4
million were reinstated;
.. members of the boards of directors and officers of Pillowtex and the
reorganized Debtor subsidiaries were elected and began serving their
respective terms; and
.. the overall corporate structure was simplified through the restructuring
and dissolution of certain of Old Pillowtex's subsidiaries.
On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants
initially exercisable to purchase 3,529,412 shares of Common Stock were issued
for distribution in respect of claims against the Debtors, (b) 3,529,412 shares
of Common Stock were reserved for issuance upon the exercise of Warrants, and
(c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction
of awards under the Pillowtex Corporation 2002
25
Equity Incentive Plan (the "Equity Incentive Plan"), which was implemented in
accordance with the terms of the Plan. In addition, on the Effective Date,
Pillowtex entered into a three-year $200 million senior secured asset-based
nonamortizing revolving credit facility, including a $60 million letter of
credit sub-facility (the "Exit Revolver Facility") with Congress Financial
Corporation as agent for a syndicate of lenders. See "- Liquidity and Capital
Resources" below and note 4 to the unaudited consolidated financial statements
included elsewhere in this Quarterly Report for a more detailed description of
the Exit Revolver Facility.
Critical Accounting Policies
Management considers certain accounting policies related to sales returns and
allowances, inventory, and impairment of long-lived assets to be "critical"
because they have a significant impact in portraying the Company's financial
condition and results of operations and require management's most difficult,
subjective, and complex judgments due to the need to make estimates about the
effects of matters that are inherently uncertain.
Sales returns and allowances require management to estimate the eventual expense
of all returns and other sales allowances for products shipped and recorded in
net sales each period. Management bases its estimate of the expense to be
recorded each period on historical returns and allowance levels. At June 29,
2002, a reserve of $7.7 million was recorded and included as an allowance
against trade accounts receivable. This allowance includes $2.0 million for
returns and allowances not yet claimed by customers, but which management
believes is necessary based on historical deduction levels. Management does not
believe the likelihood is significant that materially higher deduction levels
will result given its experience with the sales and returns deduction activities
of its customers in the past few years.
Inventory requires management to estimate the net realizable value of the
Company's obsolete and slow moving inventory at the end of each period.
Management bases its net realizable value estimate on the actual proceeds
received for similar inventory items in the most recent three-month period in
the Company's Bed and Bath Division and a review of the age of inventory on hand
in its Pillow and Pad Division. The Company's determination of the net
realizable value of inventory assumes that approximately 35% of the cost of
obsolete and slow moving inventory is recovered. Based on experiences in the
past few years with selling obsolete and slow moving inventory to various
promotional and alternative markets, management does not believe the likelihood
is significant that materially higher inventory write-downs due to obsolescence
are required.
If the assumptions made by management in estimating sales returns and allowances
and inventory obsolescence do not reflect the actual expenses to be incurred,
net sales and gross profit could be reduced significantly.
When management determines that a long-lived asset has been impaired, an
estimate of the fair value is required. The methodology used to determine fair
value depends on whether the asset will continue to be used in the business or
will be sold. Assets held for sale are recorded at their estimated fair values.
Management bases its estimate of the fair value on available information from
the sale of similar assets in similar locations and appraisals as well as
economic conditions. Given the significant number of recent plant closures in
the textile industry in the geographic areas where the Company operates, the
likelihood is remote that historical sales levels will be achieved, and
management attempts to take this into consideration when determining fair
values. Management continually reviews its fair value estimates and records
further impairment charges for assets held for sale when management determines,
based on new and reliable information, that such charges are appropriate. At
June 29, 2002, the Company had $18.7 million in assets held for sale, of which
$12.6 million relates to real property and $6.1 million relates to machinery and
equipment. While management has exercised its good faith business judgment in
determining such amounts, based on the fluctuations in fair values for
transactions completed in 2001 and 2002 and the adjustments recorded during
fiscal 2001, management believes it is reasonably possible that the Company will
not fully recover these balances and that additional impairment charges may be
required in subsequent periods.
Fresh Start Reporting and Factors Affecting Comparability of Financial
Information
The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24,
2002. However, for financial reporting purposes, the Company deemed the
Effective Date of the Plan to have occurred on June 1, 2002. Fresh start
reporting has been implemented as of June 1, 2002, and accordingly, at such date
all assets and liabilities were restated to reflect their respective fair
values. See note 1 to the unaudited consolidated financial statements included
26
elsewhere in this Quarterly Report for a discussion of the fresh start
adjustments. For financial reporting purposes, references to "Predecessor" refer
to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex
and its subsidiaries from May 24, 2002 through June 1, 2002, and references to
"Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002,
after giving effect to the implementation of fresh start reporting. Successor
consolidated financial statements are not comparable to Predecessor consolidated
financial statements. However, for purposes of discussion of results of
operations, the one month ended June 29, 2002 (Successor) has been combined with
the two months ended June 1, 2002 (Predecessor) and then compared to the three
months ended June 30, 2001 (Predecessor). Similarly, for year-to-date discussion
of results of operations, the one month ended June 29, 2002 (Successor) has been
combined with the five months ended June 1, 2002 (Predecessor) and compared with
the six months ended June 30, 2001 (Predecessor).
Results of Operations
As a result of the sale of the Blanket Division on September 6, 2001, operations
of the Blanket Division have been accounted for as a discontinued operation. The
results of operations for the three months and six months ended June 30, 2001
have been restated to reflect the Blanket Division as a discontinued operation.
Amounts paid to customers for co-operative advertising and marketing were
classified as a reduction to net sales beginning on December 30, 2001. Prior to
fiscal 2002, these amounts were classified in selling, general, and
administrative expenses. Approximately $4.8 million and $9.8 million have been
reclassified from selling, general, and administrative expenses as a reduction
to net sales in the three months and six months ended June 30, 2001,
respectively, to conform to the 2002 presentation. See "- New Accounting
Standards" below.
The operating results of the Company's segments are disclosed in note 7 to the
unaudited consolidated financial statements included elsewhere in this Quarterly
Report.
The following table shows the combined 2002 periods in comparison to the
corresponding 2001 periods (dollars in thousands):
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- --------- ----------
Net sales $ 210,416 232,383 451,341 506,225
Cost of goods sold 205,668 238,637 437,232 510,071
---------- ---------- --------- ----------
Gross profit (loss) 4,748 (6,254) 14,109 (3,846)
Selling, general, and administrative 14,582 15,632 30,699 34,707
expenses
Impairment of long-lived assets 192 20,085 31,111 20,085
Restructuring charges 1,200 4,488 4,233 6,465
Interest expense 7,968 16,455 18,269 35,376
Reorganization items (403,954) 13,540 (398,651) 21,165
Income tax benefit - - (7,157) -
---------- ---------- --------- ----------
Income (loss) from continuing 384,760 (76,454) 335,605 (121,644)
operations
Loss from discontinued operations - 4,222 - 7,259
---------- ---------- --------- ----------
Net income (loss) $ 384,760 (80,676) 335,605 (128,903)
========== ========== ========= ==========
Net Sales. Net sales were $210.4 million for the three-month period ended June
29, 2002, a decrease of $22.0 million or 9.5% from the comparable three-month
period ended June 30, 2001. Net sales for the six-month period ended June 29,
2002 were $451.3 million, a decrease of $54.9 million or 10.8% from the
comparable six-month period ended June 30, 2001. The non-renewal of a Ralph
Lauren licensing agreement on June 30, 2001 contributed $20 million and $28
million to the sales decreases in the three-month and six-month periods ended
June 29, 2002, respectively. The remaining decrease for the six-month period
ended June 29, 2002 is primarily attributable to the one-time inventory
liquidation in 2001. A charge had been taken in December 2000 to reduce certain
inventories to net realizable value. Sales of these products were $12 million
and $29 million in the three-month and six-month periods ended June 30, 2001,
respectively.
27
Gross Profit. Gross profit increased $11.0 million from a loss of $6.3 million
in the three-month period ended June 30, 2001 to $4.7 million in the three-month
period ended June 29, 2002. For the six-month period ended June 29, 2002, gross
profit was $14.1 million, an increase of $17.9 million, compared to a loss of
$3.8 million in the six-month period ended June 30, 2001. These increases are
attributable to lower overhead costs resulting from a manufacturing
rationalization plan and reduced material costs and natural gas prices. These
savings have been partially offset by operating inefficiencies experienced due
to the relocation of certain manufacturing operations required by the recently
announced facility closures. During 2002, the towel finishing operations in
Columbus, Georgia and Phenix City, Alabama and the Pillow and Pad automated
sewing line facility in Dallas, Texas were closed. The operations at these
facilities were transferred to existing facilities.
Selling, General, and Administrative ("SG&A") Expenses. SG&A expenses decreased
$1.0 million from $15.6 million in the three-month period ended June 30, 2001 to
$14.6 million in the three-month period ended June 29, 2002. SG&A expenses
decreased $4.0 million from $34.7 million in the six-month period ended June 30,
2001 to $30.7 million in the six-month period ended June 29, 2002. Statement of
Financial Accounting Standard ("SFAS") No. 142 was adopted on December 30, 2001
which requires that goodwill and intangible assets with indefinite lives no
longer be amortized (see "- New Accounting Standards" below). As a result, no
amortization on its goodwill and trademarks has been recorded during 2002, which
contributed approximately $1.6 million and $3.1 million to the decreases in SG&A
expenses for the three-month and six-month periods ended June 29, 2002,
respectively. In addition to lower amortization expense in 2002, a $2.2 million
gain was recognized on the termination of an excess benefit plan provided for
certain employees and former employees. These decreases have been partially
offset by higher advertising expense due to the implementation of a national
advertising campaign in 2002.
Restructuring Charges. During the six-month period ended June 29, 2002, a
restructuring charge of $4.2 million was recorded for severance and related
benefits for the approximately 1,079 employees terminated by the closures of the
facilities discussed above. The facilities closed during June and July 2002.
During the six months ended June 30, 2001, a restructuring charge of $6.5
million was recorded, related to the facility closures at four locations.
Impairment of Long-lived Assets. A charge for impairment of long-lived assets of
$31.1 million was incurred during the six months ended June 29, 2002 for assets
located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge
consists of $9.0 million for real property and $22.1 million for machinery and
equipment. During the six-month period ended June 30, 2001, a charge for
impairment of long-lived assets of $20.1 million was incurred primarily relating
to facilities closed in 2001.
Interest Expense. Interest expense decreased $8.5 million from $16.5 million in
the three-month period ended June 30, 2001 to $8.0 million in the three-month
period ended June 29, 2002. Interest expense decreased $17.1 million from $35.4
million in the six-month period ended June 30, 2001 to $18.3 million in the
six-month period ended June 29, 2002. The decreases are primarily due to a
decrease in the average interest rate from 9.0% for the six-month period ended
June 30, 2001 to 5.6% for the six-month period ended June 29, 2002.
Reorganization Items. Gains of $404.0 million and $398.7 million were recognized
in the three month and six months ended June 29, 2002, respectively. The gains
were due to the gain recognized on the cancellation of pre-petition liabilities
upon emergence, offset by fresh start accounting adjustments.
Discontinued Operations. During the three-month and six-month periods ended June
30, 2001, the Blanket Division incurred a loss from discontinued operations of
$4.2 million and $7.3 million, respectively. The Blanket Division was sold on
September 6, 2001.
28
Liquidity and Capital Resources
Exit Revolver Facility
As discussed above and in note 1 to the unaudited consolidated financial
statements included elsewhere in this Quarterly Report, the Company entered into
the Exit Revolver Facility on the Effective Date. The Exit Revolver Facility is
a three-year $200 million senior secured asset-based nonamortizing revolving
credit facility, including a $60 million letter of credit sub-facility. Parent
and certain of its domestic subsidiaries are borrowers under the Exit Revolver
Facility, and Parent's other domestic and Canadian subsidiaries are guarantors
thereunder. The availability of borrowings under the Exit Revolver Facility
generally is based on a percentage of eligible accounts receivable and eligible
inventory, subject to certain reserves that can be established by the lender. In
addition, the borrowers may, at their option, borrow up to a maximum principal
amount of $10 million as part of the $200 million facility based on the value of
certain real property and equipment held as collateral that would be added to
the borrowing base. Any such loan would be partially amortized over the
remaining term of the Exit Revolver Facility. The Exit Revolver Facility is
secured by a pledge of the stock of the subsidiaries, a first priority lien on
the accounts receivable, inventory, and trademarks, as well as certain real
property and equipment, of the borrowers and guarantors and a second priority
lien on the primary collateral that secures the Exit Term Loan.
All borrowings under the Exit Revolver Facility bear interest at an annual rate
equal to, at Parent's option, the lender's prime rate or the prevailing adjusted
Eurodollar rate, in either case plus a specified margin determined based on the
amount of excess availability and the Company's leverage ratio. The average
interest rate on the Exit Revolver Facility was 5.0% for the month ended June
29, 2002. The Exit Revolver Facility includes an unused commitment fee of either
3/8% or 1/2% per annum (depending on excess availability and the leverage
ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2%
per annum on the daily outstanding balance of letters of credit issued under the
Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of
the amount of the maximum credit if the Exit Revolver Facility is terminated in
whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of
the reduction of the maximum credit if the Company reduces the maximum credit in
part at the time of any such reduction.
The Exit Revolver Facility contains a number of negative covenants, which
restrict, among other things, Pillowtex's ability to incur additional debt, pay
dividends or make other restricted payments, sell stock of Pillowtex or any of
its subsidiaries, grant liens, make loans, advances, and investments, engage in
transactions with affiliates, dispose of assets, effect mergers, consolidations,
and dissolutions, prepay and refinance debt, and make certain changes in its
business. The Exit Revolver Facility also establishes a minimum earnings
threshold as defined herein that applies at any time excess availability is less
than $35 million.
As of June 29, 2002, $61.9 million was outstanding under the Exit Revolver
Facility and outstanding letters of credit under the Exit Revolver Facility
aggregated $23.7 million. Availability as of June 29, 2002 was $111.2 million.
Exit Term Loan
On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150
million senior five-year term loan secured by a first priority lien on certain
real estate, plant, and equipment and a second priority lien on the primary
collateral that secures the Exit Revolver Facility. The Exit Term Loan was
entered into by Pillowtex in exchange for cancellation of designated
post-petition loans having an aggregate principal amount of $150 million which
were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds
from the Exit Term Loan. Pillowtex is the borrower under the Exit Term Loan and
substantially all of its subsidiaries are guarantors thereunder.
The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on
the last day of March, June, September, and December, commencing on September
30, 2002. In addition to scheduled payments of principal on the last day of June
and December, commencing December 31, 2002, Pillowtex is required to prepay the
Exit Term Loan (i) with the net cash proceeds from the sale of certain assets,
and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to
the minimum excess availability requirements contained in the Exit Revolver
Facility), with 50% of the excess cash flow, if any, for the preceding fiscal
year.
29
The Exit Term Loan also contains a number of negative covenants, which restrict,
among other things, Pillowtex's ability to incur additional debt, pay dividends
or make other restricted payments, sell stock of subsidiaries, grant liens, make
loans, advances and investments, engage in transactions with affiliates, dispose
of assets, enter into sale-leaseback arrangements, effect mergers,
consolidations, and dissolutions, prepay debt, and make certain changes in its
business, to adopt newly-issued generally accepted accounting standards as
appropriate and new tax requirements as they are enacted. The Exit Term Loan
requires compliance with a maximum leverage ratio and a minimum interest
coverage ratio.
Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was
immediately reduced on the Effective Date by $38.6 million utilizing borrowings
under the Exit Revolver Facility. Under the Exit Term Loan, Parent has paid or
will pay an annual administrative fee of $150,000 on the Effective Date and each
anniversary thereof. As of June 29, 2002, $111.4 million was outstanding under
the Exit Term Loan.
Industrial Revenue Bonds
The Company presently has obligations in respect of two industrial revenue bond
facilities that were reinstated on the Effective Date (the "IRB Facilities").
One of the IRB Facilities is secured by liens on specified plants and equipment
and by a letter of credit. The other IRB Facility is secured by a letter of
credit. As of June 29, 2002, approximately $11.4 million of bonds in the
aggregate were outstanding under the IRB Facilities.
Adequacy of Capital Resources
The Company's principal sources of liquidity will be cash flows from operations
and borrowings under the Exit Revolver Facility. Based on current and
anticipated levels of operations, the Company's management believes that cash
flows from operations, together with amounts available under the Exit Revolver
Facility, will be adequate to meet the Company's anticipated cash requirements,
including debt service requirements and planned capital expenditures. In the
event that the Company's borrowing base, comprised of a percentage of eligible
accounts receivable and inventory after reserves, becomes insufficient to
support additional borrowing under the Exit Revolver Facility, the borrowers
thereunder have the option of borrowing up to a maximum principal amount of $10
million (as part of the overall $200 million commitment) based on the value of
certain real property and equipment held as collateral that would be added to
the borrowing base. However, since the amount of any such loan is dependent on
the appraised value of such real property and equipment at the time the option
is exercised by the borrowers, no assurance can be given as to the amount of
additional borrowing that would actually be available to the borrowers in such
circumstances. In the event that cash flows, together with available borrowings
under the Exit Revolver Facility were not sufficient to meet the Company's cash
requirements, the Company would be required to obtain alternative financing or
reduce planned capital expenditures. The Company can provide no assurance that
alternative financing would be available on acceptable terms, especially in
light of the fact that, except for miscellaneous real property and equipment,
substantially all of the Company's existing assets are pledged as collateral for
the Exit Term Loan, Exit Revolver Facility, industrial revenue bonds and capital
lease obligations or that reductions in planned capital expenditures would be
sufficient to cover any cash shortfalls.
30
Contractual Obligations and Commercial Commitments
The following table contains the contractual cash obligations outstanding under
long-term debt, which for this table comprises the Exit Term Loan and industrial
revenue bonds, capital lease obligations, and operating leases as of June 29,
2002 (dollars in thousands):
Payments Due by Period
-----------------------------------------------------------------------------
During
remainder 2003 - 2005 -
Contractual Obligations Total of 2002 2004 2006 After 2006
---------------------------- ----------- ------------ ------------ ----------- -------------
Long-term debt $ 122,739 557 13,073 22,272 86,838
Capital lease obligations 23,675 2,970 10,728 9,069 907
Operating lease
obligations 15,502 1,995 7,024 3,880 2,603
Cotton purchase
commitments 48,794 22,871 25,923 - -
----------- ------------ ------------ ----------- -------------
Total contractual cash
obligations $ 210,710 28,393 56,748 35,221 90,348
=========== ============ ============ =========== =============
Other commercial commitments outstanding as of June 29, 2002 are as follows
(dollars in thousands):
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------
Total During
Other Commercial Amounts Remainder 2003- 2005-
Commitments Committed of 2002 2004 2006 After 2006
---------------------------- ------------- ------------ ---------- ----------- -------------
Line of credit $ 61,895 - - 61,895 -
Standby letters of credit 25,489 350 1,397 23,742 -
Commercial letters of
credit 799 799 - - -
------------- ------------ ---------- ----------- -------------
Total commercial
commitments $ 88,183 1,149 1,397 85,637 -
============= ============ ========== =========== =============
New Accounting Standards
The Emerging Issues Task Force (the "EITF") of the Financial Accounting
Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to be Delivered in the Future", and EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" (collectively, the "EITFs"), which address various
aspects of accounting for consideration given by a vendor to a customer or a
reseller of products. The provisions of the EITFs were adopted as of the
beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require
all consideration paid to customers to be classified as a reduction to net
sales. Prior to December 30, 2001, amounts paid to customers for co-operative
advertising and marketing were classified in selling, general, and
administrative expenses. As a result, $4.8 million and $9.8 million of selling,
general, and administrative expenses have been reclassified as a reduction to
net sales for the three months and six months ended June 30, 2001, respectively.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Intangible assets with definite
useful lives will be amortized over such lives to their estimated residual
values. SFAS No. 142 was adopted as of December 30, 2001. The Company has
restated its intangible assets to their estimated fair values on June 1, 2002,
in conjunction with fresh start reporting. See note 1 to the unaudited
consolidated financial statements included elsewhere in this Quarterly Report.
31
Pro forma loss from continuing operations applicable to common stockholders and
loss applicable to common stockholders for the three months and six months ended
June 30, 2001, adjusted to eliminate historical amortization of goodwill and
intangibles with indefinite lives, are as follows (dollars in thousands):
Predecessor
---------------------------
Three Six
Months Months
Ended Ended
June 30, June 30,
2001 2001
----------- ------------
Loss from continuing operations applicable to common
stockholders - as reported $ (84,373) (136,299)
=========== ============
Loss from continuing operations applicable to common
stockholders - pro forma $ (82,810) (133,155)
=========== ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes both SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in Opinion 30). SFAS No. 144 also retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the statement of operations but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142.
The provisions of SFAS No. 144 were adopted as of December 30, 2001. The
adoption of SFAS No. 144 for long-lived assets held for use did not have a
material impact on the consolidated financial statements because the impairment
assessment requirements under SFAS No. 144 are largely unchanged from SFAS No.
121.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145, among other things, prohibits the classification of gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted upon
the Statement's issuance, and as such, the gain recognized by Old Pillowtex on
the extinguishment of debt resulting from the emergence from the chapter 11
bankruptcy proceedings has been classified as a reorganization item.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with
an exit activity (including a restructuring) or with a disposal of long-lived
assets. Under SFAS No. 146, a company will record a liability for a cost
associated with an exit or disposal activity when that liability is incurred and
can be measured at fair value. A liability is incurred when an event obligates
the entity to transfer or use assets. Under current accounting guidance, a
liability can be recorded when management has committed to an exit plan. The
requirements under SFAS No. 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Restatement of previously issued
financial statements is not permitted.
Subsequent Events
On July 5, 2002, the Company granted restricted stock awards totaling 394,000
shares of Common Stock and options to acquire 594,200 shares of Common Stock to
certain of its key employees. The restricted stock awards and options, as
provided in the Plan, were made pursuant to the terms of the Equity Incentive
Plan. Restrictions on the restricted stock awards lapsed immediately upon grant
with respect to one-third of the shares, while the restrictions on the remaining
two-thirds of the shares lapse in equal installments on the first and second
anniversary date of the grant.
32
The cost of issuing the restricted stock will be charged to earnings over the
vesting period. During the one month ended June 29, 2002 and the two months
ended June 1, 2002, approximately $0.4 million and $0.8 million, respectively,
was charged to earnings.
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 restrictions on the conduct of the
Company's business as a result of the provisions contained in the Exit Revolving
Facility and Exit Term Loan; (b) the Company's dependence on specific raw
materials; (c) the effects of adverse retail industry conditions; (d) the
Company's dependence on specific brand names; (e) the risks related to loss of
material customers; (f) the risks related to organized labor; (g) the
seasonality of the Company's businesses, and (h) the difficulties in attracting
and retaining personnel. For further discussion of such risks, see "Cautionary
Statement Regarding Forward-Looking Statements" and "Risk Factors" in Old
Pillowtex's Annual Report on Form 10-K for its fiscal year ended December 29,
2001.
33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Old Pillowtex's Current Reports on Form 8-K filed on
February 26, 2002, March 4, 2002, March 12, 2002, May 24, 2002, and May 16,
2002, and Part I, Item 3. Legal Proceedings, of the Annual Report on Form 10-K
for the fiscal year ended December 29, 2001 filed on March 28, 2002, which
reported during the fiscal year some of the legal proceedings referenced below.
See note 1 to the unaudited consolidated financial statements included elsewhere
in this Quarterly Report and Part I, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
the Chapter 11 Cases. Such discussion is incorporated herein by this reference.
Item 2. Changes in Securities and Use of Proceeds
The Plan became effective on May 24, 2002. On the Effective Date, pursuant to
the Plan all of Old Pillowtex's issued and outstanding common stock and
preferred stock were cancelled without consideration; Old Pillowtex, a Texas
corporation, was merged with and into its wholly-owned subsidiary Pillowtex, a
Delaware corporation, with Pillowtex as the surviving corporation; and the
Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of
Pillowtex continued as the certificate of incorporation and bylaws of the
surviving corporation. Additionally, on the Effective Date, pursuant to the Plan
(a) 18,600,000 shares of Common Stock and Warrants initially exercisable to
purchase 3,529,412 shares of Common Stock were issued for distribution in
respect of claims against the Debtors, (b) 3,529,412 shares of Common Stock were
reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of
Common Stock were reserved for issuance in satisfaction of awards under the
Equity Incentive Plan. Descriptions of the Common Stock and Warrants are
included in the Company's Current Report on Form 8-K dated and filed May 24,
2002. Copies of the Certificate and Bylaws are filed as Exhibits 4.2 and 4.3,
respectively, to such Form 8-K.
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under the Securities
Act and state securities laws if three principal requirements are satisfied: (a)
the securities must be offered and sold under a plan of reorganization and must
be securities of the debtor, an affiliate participating in a joint plan with the
debtor or a successor to the debtor under the plan; (b) the recipients of the
securities must hold a pre-petition or administrative expense claim against the
debtor or an interest in the debtor; and (c) the securities must be issued
entirely in exchange for the recipient's claim against or interest in the
debtor, or principally in such exchange and partly for cash or property. Section
1145(a)(2) of the Bankruptcy Code exempts the offer of a security through any
warrant, option, right to purchase or conversion privilege that is sold in the
manner specified in section 1145(a)(1) and the sale of a security upon the
exercise of such a warrant, option, right or privilege. Pillowtex believes that
the offer and sale of the Common Stock and the Warrants under the Plan satisfy
the requirements of section 1145(a)(1) of the Bankruptcy Code and, therefore,
are exempt from registration under the Securities Act and state securities laws.
Similarly, Pillowtex believes that the offer of Common Stock through the
Warrants and the sale of Common Stock upon the exercise of the Warrants satisfy
the requirements of section 1145(a)(2) of the Bankruptcy Code and, therefore,
are exempt from registration under the Securities Act and state securities laws.
Item 5. Other Information
On June 12, 2002, the Company announced the hiring of David A. Perdue as the
Company's new Chairman of the Board and Chief Executive Officer, effective July
1, 2002.
34
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1* Restated Employment Agreement dated August 1, 2002 and effective as of July 1,
2002, between Pillowtex Corporation and David A. Perdue
10.2* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and
Anthony T. Williams
10.3* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and
Michael R. Harmon
10.4* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Scott
E. Shimizu
10.5* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and A.
Allen Oakley
10.6* Form of Indemnification Agreement entered into between Pillowtex Corporation and
Directors and Executive Officers
10.7 Schedule of Indemnification Agreements pursuant to Instruction 2 of Item 601
10.8 First Amendment to Term Loan Agreement dated as of June 28, 2002, among Pillowtex
Corporation, Bank of America, N.A., as Administrative Agent, and the Lenders
party thereto
_____________
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
(b) Reports on Form 8-K
During the quarter ended June 29, 2002, Old Pillowtex and
Pillowtex filed the following Current Reports on Form 8-K:
Current Report on Form 8-K, dated May 2, 2002 and filed May 16,
2002, reporting information under "Item 3. Bankruptcy or
Receivership" regarding the confirmation by the Bankruptcy Court
of the Plan.
Current Report on Form 8-K, dated and filed May 24, 2002,
reporting information under "Item 5. Other Events" regarding the
effective date of the Plan (the "May 24 Form 8-K").
Current Report on Form 8-K/A, dated May 24, 2002 and filed June
10, 2002, amending the May 24 Form 8-K by adding certain exhibits
thereto.
35
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: August 13, 2002 PILLOWTEX CORPORATION
(Registrant)
By: /s/ Michael R. Harmon
----------------------------------
Michael R. Harmon
Executive Vice President and Chief
Financial Officer
36