<PAGE>
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 October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-11756
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2147728
(State of incorporation) (IRS Employer Identification No.)
4111 Mint Way
Dallas, Texas 75237
(Address of principal executive offices) (Zip Code)
(214) 333-3225
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at November 6, 1998
Common Stock, $0.01 par value 14,122,736
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of
January 3, 1998 and October 3, 1998 3
Consolidated Statements of Earnings for the three months
ended September 27, 1997 and October 3, 1998 4
Consolidated Statements of Earnings for the nine months
ended September 27, 1997 and October 3, 1998 5
Consolidated Statements of Cash Flows for the nine months
ended September 27, 1997 and October 3, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Index to Exhibits 21
-2-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and October 3, 1998
(Dollars in thousands, except for par value)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
ASSETS ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . .$ 4,604 $ 5,095
Receivables:
Trade, less allowance for doubtful accounts of
$14,770 and $16,782 in 1997 and 1998, respectively . 221,185 274,304
Other. . . . . . . . . . . . . . . . . . . . . . . . . 16,468 28,315
Inventories. . . . . . . . . . . . . . . . . . . . . . 359,751 417,696
Assets held for sale . . . . . . . . . . . . . . . . . 32,614 4,599
Prepaid expenses . . . . . . . . . . . . . . . . . . . 6,335 5,580
----------- -----------
Total current assets. . . . . . . . . . . . . . . . 640,957 735,589
Property, plant and equipment, less accum. depreciation
of $55,871 and $87,153 in 1997 and 1998, respectively. 488,841 597,061
Intangible assets, at cost less accumulated
amortization of $5,111 and $9,972 in 1997
and 1998, respectively . . . . . . . . . . . . . . . . 258,867 284,541
Other assets . . . . . . . . . . . . . . . . . . . . . . 21,521 25,716
----------- -----------
$1,410,186 $1,642,907
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . .$ 111,202 $ 113,171
Accrued expenses . . . . . . . . . . . . . . . . . . . 113,575 101,416
Deferred income taxes. . . . . . . . . . . . . . . . . 16,068 36,835
Current portion of long-term debt. . . . . . . . . . . 5,616 10,982
----------- -----------
Total current liabilities . . . . . . . . . . . . . 246,461 262,404
Long-term debt, net of current portion . . . . . . . . . 785,383 956,558
Deferred income taxes. . . . . . . . . . . . . . . . . . 66,340 83,041
Noncurrent liabilities . . . . . . . . . . . . . . . . . 52,413 54,074
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . 1,150,597 1,356,077
Series A redeemable convertible preferred stock, $.01
par value; 65,000 shares issued and outstanding. . . . 62,882 63,003
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
20,000,000 shares; only Series A issued. . . . . . . - -
Common stock, $0.01 par value; authorized 30,000,000
shares; 13,967,715 and 14,122,736 shares issued
and outstanding in 1997 and 1998, respectively . . . 140 141
Additional paid-in capital . . . . . . . . . . . . . . 151,095 155,613
Retained earnings. . . . . . . . . . . . . . . . . . . 46,328 69,920
Currency translation adjustment. . . . . . . . . . . . (856) (1,847)
----------- -----------
Total shareholders' equity . . . . . . . . . . . . 196,707 223,827
----------- -----------
$1,410,186 $1,642,907
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended September 27, 1997 and October 3, 1998
(Amounts in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 151,977 $ 419,799
Cost of goods sold . . . . . . . . . . . . . . . . . . . 125,425 339,933
---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . 26,552 79,866
Selling, general and administrative expenses . . . . . . 10,112 36,300
---------- ----------
Earnings from operations. . . . . . . . . . . . . . 16,440 43,566
Interest expense . . . . . . . . . . . . . . . . . . . . 4,921 19,122
---------- ----------
Earnings before income taxes. . . . . . . . . . . . 11,519 24,444
Income taxes . . . . . . . . . . . . . . . . . . . . . . 4,469 9,422
---------- ----------
Net earnings. . . . . . . . . . . . . . . . . . . . 7,050 15,022
Preferred dividends and accretion. . . . . . . . . . . . - 540
---------- ----------
Earnings available for common shareholders. . . . . $ 7,050 $ 14,482
========== ==========
Basic earnings per common share. . . . . . . . . . . . . $ .66 $ 1.03
========== ==========
Weighted average common shares outstanding - basic . . . 10,744 14,122
========== ==========
Diluted earnings per common share. . . . . . . . . . . . $ .65 $ .87
========== ==========
Weighted average common shares outstanding - diluted . . 10,895 17,619
========== ==========
Dividends declared per common share. . . . . . . . . . . $ .06 $ .06
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended September 27, 1997 and October 3, 1998
(Amounts in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 370,633 $1,118,220
Cost of goods sold . . . . . . . . . . . . . . . . . . . 305,674 915,852
---------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . 64,959 202,368
Selling, general and administrative expenses . . . . . . 33,728 102,430
Restructuring charge . . . . . . . . . . . . . . . . . . - 1,539
---------- -----------
Earnings from operations. . . . . . . . . . . . . . 31,231 98,399
Interest expense . . . . . . . . . . . . . . . . . . . . 13,957 52,920
---------- -----------
Earnings before income taxes. . . . . . . . . . . . 17,274 45,479
Income taxes . . . . . . . . . . . . . . . . . . . . . . 6,702 17,731
---------- -----------
Net earnings. . . . . . . . . . . . . . . . . . . . 10,572 27,748
Preferred dividends and accretion. . . . . . . . . . . . - 1,567
---------- -----------
Earnings available for common shareholders. . . . . $ 10,572 $ 26,181
========== ===========
Basic earnings per common share. . . . . . . . . . . . . $ .99 $ 1.86
========== ===========
Weighted average common shares outstanding - basic . . . 10,669 14,068
========== ===========
Diluted earnings per common share. . . . . . . . . . . . $ .98 $ 1.63
========== ===========
Weighted average common shares outstanding - diluted . . 10,786 17,672
========== ===========
Dividends declared per common share. . . . . . . . . . . $ .18 $ .18
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 27, 1997 and October 3, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . .$ 10,572 $ 27,748
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . 10,642 40,187
Deferred income taxes . . . . . . . . . . . . . . . . (341) 23,581
Accretion on debt instruments . . . . . . . . . . . . - 854
Provision for doubtful accounts . . . . . . . . . . . 585 1,264
Loss (gain)on disposal of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . (1,153) 52
Changes in operating assets and liabilities, net
of businesses acquired:
Trade receivables. . . . . . . . . . . . . . . . . (22,535) (42,627)
Inventories. . . . . . . . . . . . . . . . . . . . (17,659) (37,562)
Accounts payable . . . . . . . . . . . . . . . . . (258) 4,692
Accrued expenses . . . . . . . . . . . . . . . . . 3,244 (13,500)
Other assets and liabilities . . . . . . . . . . . (1,297) (16,662)
---------- ----------
Net cash used in operating activities . . . . . (18,200) (11,973)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment. . . 1,723 2,779
Proceeds from disposal of assets held for sale . . . . . - 35,335
Purchases of property, plant and equipment . . . . . . . (13,891) (89,660)
Payments for businesses purchased, net of cash acquired. - (90,029)
---------- ----------
Net cash used in investing activities . . . . . (12,168) (141,575)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for
payment . . . . . . . . . . . . . . . . . . . . . . . . 5,617 (6,905)
Borrowings on revolving credit loans . . . . . . . . . . 104,450 369,100
Repayments of revolving credit loans . . . . . . . . . . (79,100) (291,500)
Proceeds from the issuance of other long-term debt . . . - 100,000
Retirement of long-term debt . . . . . . . . . . . . . . (1,709) (13,205)
Payments of debt and equity issuance costs . . . . . . . - (1,617)
Dividends paid . . . . . . . . . . . . . . . . . . . . . (1,276) (4,063)
Proceeds from exercise of stock options. . . . . . . . . 2,400 2,229
---------- ----------
Net cash provided by financing activities . . . 30,382 154,039
---------- ----------
Net change in cash and cash equivalents. . . . . . . . . . 14 491
Cash and cash equivalents at beginning of period . . . . . 20 4,604
---------- ----------
Cash and cash equivalents at end of period . . . . . . . .$ 34 $ 5,095
========== ==========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . .$ 10,721 $ 47,835
========== ==========
Income taxes . . . . . . . . . . . . . . . . . . . . .$ 6,871 $ (4,597)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Pillowtex
Corporation (the "Parent") and its subsidiaries (collectively, with Parent,
(the "Company")), include all adjustments, consisting only of normal,
recurring adjustments and accruals, which are, in the opinion of
management, necessary for fair presentation of the results of operations
and financial position. Results of operations for interim periods may not
be indicative of future results. The unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's annual report on
Form 10-K, as filed with the Securities and Exchange Commission on
April 3, 1998 for the fiscal year ended January 3, 1998. The three and
nine month periods ended October 3, 1998 include the results of Fieldcrest
Cannon, Inc. ("Fieldcrest Cannon") which was acquired on December 19, 1997
and the results of The Leshner Corporation ("Leshner") from its
acquisition date of July 28, 1998.
(2) Acquisitions
On July 28, 1998, the Company acquired Leshner, a 91-year-old manufacturer
of towels and terry related products. The acquisition was accounted for
using the purchase method of accounting for business combinations. The
pro forma effects of such transaction, as if it occurred at the beginning
of fiscal 1997, are not significant.
(3) Inventories
Inventories consisted of the following at January 3, 1998 and
October 3, 1998:
<TABLE>
<CAPTION> 1997 1998
-------- --------
<S> <C> <C>
Finished goods $163,905 $196,834
Work-in-process 120,063 125,422
Raw materials 54,790 60,064
Supplies 20,993 35,376
-------- --------
$359,751 $417,696
======== ========
</TABLE>
-7-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(Unaudited)
(4) Earnings Per Share
The following table reconciles the numerators and denominators of basic
and diluted earnings per share for the three and nine month periods ended
October 3, 1998. Options to purchase 466,000 shares of common stock at
prices ranging from $33.50 to $46.50 per share were outstanding during the
three and nine month periods ended October 3, 1998, respectively, but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common shares. There were no material reconciling items for the three
and nine month periods ended September 27, 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, 1998 October 3, 1998
------------------ -----------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Basic - earnings available for common shareholders $ 14,482 14,122 $ 26,181 14,068
Effect of dilutive securities:
Stock options - 155 - 232
Convertible notes 256 633 1,106 663
Convertible preferred stock 540 2,709 1,567 2,709
-------- ------ -------- ------
Diluted - earnings available for common shareholders $ 15,278 17,619 $ 28,854 17,672
======== ====== ======== ======
</TABLE>
(5) New Accounting Standards
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME.
Total comprehensive income for the three months ended October 3, 1998
and September 27, 1997 was $14,355,000 and $7,004,000 respectively.
Total comprehensive income for the nine months ended October 3, 1998 and
September 27, 1997 was $26,757,000 and $10,294,000 respectively.
During 1998, the Company adopted Statement of Position 98-1, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE.
Adoption of this statement did not have a material impact on the
Company's reported financial position, results of operations or cash
flows.
-8-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Supplemental Condensed Consolidating Financial Information
The following is summarized condensed consolidating financial information
for the Company, segregating the Parent and subsidiaries which are
guarantors of the Company's obligations under its senior subordinated
notes, from non-guarantor subsidiaries. The guarantor subsidiaries
are wholly owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several.
<TABLE>
<CAPTION>
January 3, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - ------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
- - -------
Trade receivables $ - $ 216,869 $ 4,316 $ - $ 221,185
Receivable from affiliates 668,588 - - (668,588) -
Inventories - 351,720 8,031 - 359,751
Other current assets - 58,650 1,371 - 60,021
------------ ------------ ------------ ------------ ------------
Total current assets 668,588 627,239 13,718 (668,588) 640,957
Property, plant and equipment, net 657 485,975 2,209 - 488,841
Intangibles, net 24,256 232,112 2,499 - 258,867
Other assets 229,039 19,564 - (227,082) 21,521
------------ ------------ ------------ ------------ ------------
Total assets $ 922,540 $ 1,364,890 $ 18,426 $ (895,670) $ 1,410,186
============ ============ ============ ============ ============
Liabilities and Shareholders' Equity:
- - -------------------------------------
Accounts payable and accrued liabilities $ 85 $ 218,874 $ 5,818 $ - $ 224,777
Payables to affiliates - 668,000 588 (668,588) -
Other current liabilities - 21,591 93 - 21,684
------------ ------------ ------------ ------------ ------------
Total current liabilities 85 908,465 6,499 (668,588) 246,461
Noncurrent liabilities 675,000 228,550 586 - 904,136
------------ ------------ ------------ ------------ ------------
Total liabilities 675,085 1,137,015 7,085 (668,588) 1,150,597
Redeemable convertible preferred stock 62,882 - - - 62,882
Shareholders' equity 184,573 227,875 11,341 (227,082) 196,707
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 922,540 $ 1,364,890 $ 18,426 $ (895,670) $ 1,410,186
============ ============ ============ ============ ============
</TABLE>
-9-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
October 3, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - ------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
- - -------
Trade receivables $ - $ 270,279 $ 4,025 $ - $ 274,304
Receivable from affiliates 744,929 - - (744,929) -
Inventories - 410,666 7,030 - 417,696
Other current assets - 42,867 722 - 43,589
------------ ------------ ------------ ------------ ------------
Total current assets 744,929 723,812 11,777 (744,929) 735,589
Property, plant and equipment, net 602 594,852 1,607 - 597,061
Intangibles, net 19,728 262,569 2,244 - 284,541
Other assets 350,259 15,306 - (339,849) 25,716
------------ ------------ ------------ ------------ ------------
Total assets $ 1,115,518 $ 1,596,539 $ 15,628 $(1,084,778) $ 1,642,907
============ ============ ============ ============ ============
Liabilities and Shareholders' Equity:
- - -------------------------------------
Accounts payable and accrued liabilities $ 13,856 $ 196,465 $ 4,266 $ - $ 214,587
Payables to affiliates - 744,000 929 (744,929) -
Other current liabilities 6,864 40,875 78 - 47,817
------------ ------------ ------------ ------------ ------------
Total current liabilities 20,720 981,340 5,273 (744,929) 262,404
Noncurrent liabilities 844,869 248,241 563 - 1,093,673
------------ ------------ ------------ ------------ ------------
Total liabilities 865,589 1,229,581 5,836 (744,929) 1,356,077
Redeemable convertible preferred stock 63,003 - - - 63,003
Shareholders' equity 186,926 366,958 9,792 (339,849) 223,827
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 1,115,518 $ 1,596,539 $ 15,628 $(1,084,778) $ 1,642,907
============ ============ ============ ============ ============
</TABLE>
-10-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION> Three Months Ended September 27, 1997
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 145,839 $ 8,141 $ (2,003) $ 151,977
Cost of goods sold - 120,339 7,089 (2,003) 125,425
------------ ------------ ------------ ------------ ------------
Gross profit - 25,500 1,052 - 26,552
Selling, general and administrative (1,378) 11,122 368 - 10,112
------------ ------------ ------------ ------------ ------------
Earnings from operations 1,378 14,378 684 - 16,440
Interest expense (income) (34) 4,957 (2) - 4,921
------------ ------------ ------------ ------------ ------------
Earnings before income taxes 1,412 9,421 686 - 11,519
Income taxes 494 3,883 92 - 4,469
------------ ------------ ------------ ------------ ------------
Net earnings $ 918 $ 5,538 $ 594 $ - $ 7,050
============ ============ ============ ============ ============
<CAPTION> Three Months Ended October 3, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 414,387 $ 6,802 $ (1,390) $ 419,799
Cost of goods sold - 335,060 6,263 (1,390) 339,933
------------ ------------ ------------ ------------ ------------
Gross profit - 79,327 539 - 79,866
Selling, general and administrative (1,422) 37,361 361 - 36,300
------------ ------------ ------------ ------------ ------------
Earnings from operations 1,422 41,966 178 - 43,566
Interest expense (income) 182 18,945 (5) - 19,122
------------ ------------ ------------ ------------ ------------
Earnings before income taxes 1,240 23,021 183 - 24,444
Income taxes 434 9,000 (12) - 9,422
------------ ------------ ------------ ------------ ------------
Net earnings 806 14,021 195 - 15,022
Preferred dividends and accretion 540 - - - 540
------------ ------------ ------------ ------------ ------------
Earnings available for
common shareholders $ 266 $ 14,021 $ 195 $ - $ 14,482
============ ============ ============ ============ ============
</TABLE>
-11-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION> Nine Months Ended September 27, 1997
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 354,728 $ 19,087 $ (3,182) $ 370,633
Cost of goods sold - 291,743 17,113 (3,182) 305,674
------------ ------------ ------------ ------------ ------------
Gross profit - 62,985 1,974 - 64,959
Selling, general and administrative (2,306) 34,953 1,081 - 33,728
------------ ------------ ------------ ------------ ------------
Earnings from operations 2,306 28,032 893 - 31,231
Interest expense (income) (679) 14,641 (5) - 13,957
------------ ------------ ------------ ------------ ------------
Earnings before income taxes 2,985 13,391 898 - 17,274
Income taxes 1,045 5,565 92 - 6,702
------------ ------------ ------------ ------------ ------------
Net earnings $ 1,940 $ 7,826 $ 806 $ - $ 10,572
============ ============ ============ ============ ============
<CAPTION> Nine Months Ended October 3, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 1,102,979 $ 18,087 $ (2,846) $ 1,118,220
Cost of goods sold - 901,167 17,531 (2,846) 915,852
------------ ------------ ------------ ------------ ------------
Gross profit - 201,812 556 - 202,368
Selling, general and administrative (3,294) 104,605 1,119 - 102,430
Restructuring charge - 1,539 - - 1,539
------------ ------------ ------------ ------------ ------------
Earnings (loss) from operations 3,294 95,668 (563) - 98,399
Interest expense (income) 234 52,694 (8) - 52,920
------------ ------------ ------------ ------------ ------------
Earnings (loss) before income taxes 3,060 42,974 (555) - 45,479
Income taxes 1,071 16,778 (118) - 17,731
------------ ------------ ------------ ------------ ------------
Net earnings (loss) 1,989 26,196 (437) - 27,748
Preferred dividends and accretion 1,567 - - - 1,567
------------ ------------ ------------ ------------ ------------
Earnings (loss) available for
common shareholders $ 422 $ 26,196 $ (437) $ - $ 26,181
============ ============ ============ ============ ============
</TABLE>
-12-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 27, 1997
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities $ (2,720) $ (18,841) $ 3,361 $ - $ (18,200)
Cash provided by (used in) investing activities (31,811) 19,714 (71) - (12,168)
Cash provided by (used in) financing activities 34,531 (859) (3,290) - 30,382
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents - 14 - - 14
Cash and cash equivalents at beginning of period - 12 8 - 20
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ - $ 26 $ 8 $ - $ 34
============ ============ ============ ============ ============
<CAPTION>
Nine Months Ended October 3, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- - ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities $ 20,371 $ (33,730) $ 1,386 $ - $ (11,973)
Cash used in investing activities (112,767) (28,766) (42) - (141,575)
Cash provided by (used in) financing activities 92,396 62,993 (1,350) - 154,039
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents - 497 (6) - 491
Cash and cash equivalents at beginning of period - 4,590 14 - 4,604
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ - $ 5,087 $ 8 $ - $ 5,095
============ ============ ============ ============ ============
</TABLE>
-13-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Supplemental Condensed Consolidating Financial Information (Continued)
Fieldcrest Cannon is also a guarantor subsidiary and is not included in
the consolidated financial statements for the three and nine months ended
September 27, 1997. Accordingly, the Fieldcrest Cannon consolidated
financial information for the three and nine months ended
September 30, 1997 is included below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Results of Operations September 30, 1997 September 30, 1997
--------------------- ------------------ ------------------
<S> <C> <C>
Net sales $ 286,966 $ 820,635
Cost of goods sold 243,060 695,615
---------- ----------
Gross profit 43,906 125,020
Selling, general and administrative 29,395 85,563
---------- ----------
Earnings from operations 14,511 39,457
Interest expense 6,150 18,708
Other, net (347) (2,021)
---------- ----------
Earnings before income taxes 8,708 22,770
Income taxes 2,884 8,087
---------- ----------
Net earnings 5,824 14,683
Preferred dividends 1,125 3,375
---------- ----------
Earnings available for common shareholders $ 4,699 $ 11,308
========== ==========
<CAPTION>
Nine Months Ended
Cash Flows September 30, 1997
---------- ------------------
<S> <C>
Cash provided by operating activities $ 49,511
Cash used in investing activities (42,937)
Cash used in financing activities (5,746)
----------
Net change in cash and cash equivalents 828
Cash and cash equivalents at beginning of period 4,647
----------
Cash and cash equivalents at end of period $ 5,475
==========
</TABLE>
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended January 3, 1998.
RESULTS OF OPERATIONS
NET SALES. Net sales were $419.8 million for the three months ended October 3,
1998, representing an increase of $267.8 million, as compared to $152.0 million
for the three months ended September 27, 1997. Net sales for the nine months
ended October 3, 1998 increased to $1.1 billion from $370.6 million in the
comparable prior year period, an increase of $747.6 million. These increases
were primarily due to the addition of sales from the Fieldcrest Cannon merger
(the "Merger") in December 1997 and the acquisition of Leshner in July 1998.
GROSS PROFIT. Gross profit margins increased to 19.0% for the three months
ended October 3, 1998 from 17.5% for the three months ended September 27, 1997.
Gross profit margins for the nine months ended October 3, 1998 increased to
18.1% from 17.5% for the nine months ended September 27, 1997. The increase is
primarily due to lower raw material costs and significant operating improvements
including returns from capital investment programs.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses increased $26.2
million to $36.3 million for the three months ended October 3, 1998, compared to
$10.1 million for the three months ended September 27, 1997. For the nine
months ended October 3, 1998, SG&A expenses increased $68.7 million to $102.4
million from $33.7 million for the period ended September 27, 1997. Increases
in total SG&A expenses over the prior three and nine month periods are primarily
due to the Merger and the additional SG&A costs assumed with the Leshner
acquisition. As a percentage of sales, SG&A expenses increased to 8.6% from
6.7% for the three months ended October 3, 1998 and September 27, 1997,
respectively. SG&A as a percent of sales for this period increased from the
year-ago period due to the incurrence of costs related to the consolidation of
Leshner's administration into Pillowtex's operations, as well as increased
travel and personnel related costs. SG&A as a percent of sales for the nine
months ended October 3, 1998 was relatively flat at 9.2% compared to 9.1% for
the nine months ended September 27, 1997.
RESTRUCTURING CHARGE. The $1.5 million restructuring charge for the nine month
period ended October 3, 1998 was related to severance and other employee-related
costs associated with the consolidation of blanket production into facilities in
Swannanoa, North Carolina and Westminster, South Carolina.
INTEREST EXPENSE. Interest expense increased $14.2 million to $19.1 million for
the three months ended October 3, 1998, compared to $4.9 million for the three
months ended September 27, 1997. Interest expense for the nine month period
ended October 3, 1998 increased $38.9 million to $52.9 million from $14.0
million for the nine month period ended September 27, 1997. These increases were
due to the additional debt incurred as a result of the Merger and the purchase
of Leshner. Average interest rates for the three and nine month periods
remained relatively flat from the prior year periods.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its principal sources of liquidity will be funds
from its operations and funds available under its revolving credit facility. As
of October 3, 1998, the outstanding principal balance under the Company's $350.0
million revolving credit facility was $192.6 million, with $38.5 million
committed to outstanding letters of credit and $118.9 million available for
other needs. The debt outstanding under the revolving credit facility reflects
an increase of $77.6 million since January 3, 1998, due primarily to normal
working capital increases during the first three quarters of the year, capital
expenditures, and expenditures relating to the Merger. Based upon current and
anticipated levels of operations, the Company believes that its cash flow from
operations, together with amounts available under the revolving credit facility,
will be adequate to meet its anticipated cash requirements in the foreseeable
future.
Effective July 28, 1998, the Company amended its senior revolving credit and
term loan facilities with NationsBank, N.A. to increase the Tranche B portion
of the term loan by $100.0 million. The proceeds received under this amendment
were used to fund the July 28, 1998 acquisition of Leshner and to pay down the
Company's revolving credit facility. The amendment did not change the December
31, 2004 maturity date of the Tranche B term loan.
The Company periodically enters into interest rate swap agreements to minimize
the risk of fluctuations in interest rates. As of January 3, 1998 and October
3, 1998, the Company had approximately $125.0 million and $250.0 million,
respectively, of notional amounts covered under fixed for floating rate swap
agreements at average interest rates of 9.54% and 5.56%, respectively.
On September 29, 1998, the Company paid a dividend of $.06 per share to its
common shareholders of record as of September 18, 1998. Additionally, the
Company paid preferred dividends in the amount of $492,000 during the third
quarter of 1998.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, effective for periods beginning after
December 15, 1997. The purpose of this standard is to disclose disaggregated
information which provides information about the operating segments an
enterprise engages in, consistent with the way management reviews financial
information to make decisions about the enterprise's operating matters. The
Company will comply with the requirements of this standard for fiscal year 1998.
In February 1998, SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS, was issued, which revises employers' disclosures about
pension and other postretirement benefit plans. This statement standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures previously required under SFAS Nos. 87, 88 and 106. The provisions
of SFAS No. 132 are effective for fiscal years beginning after December 15,
1997. The Company's adoption of these disclosure requirements is not expected
to materially impact the consolidated financial statements.
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, was issued. This statement establishes accounting and reporting
standards for derivatives instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The provisions of SFAS
No. 133 are effective for financial statements beginning after June 15, 1999,
-16-
<PAGE>
although early adoption is allowed. The Company has not determined the
financial impact of adopting this SFAS and has not determined if it will adopt
its provisions prior to its effective date.
YEAR 2000 CONSIDERATIONS
GENERAL
Many existing computer programs use only two digits to identify a year in the
date field. These programs, if not corrected, could fail or create erroneous
results by or at the Year 2000, thereby causing disruptions in the operations of
the Company and its suppliers and customers. This "Year 2000" issue is believed
to affect virtually all companies and organizations, including the Company.
STATE OF READINESS
SYSTEMS REPLACEMENT PROJECT
In 1995, the Company began a project aimed at improving its access to business
information through common, integrated computing and reporting systems. In
1996, prior to the acquisition of Fieldcrest Cannon, Inc. ("Fieldcrest Cannon")
by the Company in December 1997, Fieldcrest Cannon began a similar systems
replacement project. Each of the Company and Fieldcrest Cannon, in connection
with its systems replacement project, elected to implement systems using
software applications developed by Oracle Corporation ("Oracle") to fulfill its
business systems replacement needs. Such software applications replace many of
the accounting, reporting and manufacturing systems that are or previously had
been in place at the Company and Fieldcrest Cannon. Additionally, each of the
Company and Fieldcrest Cannon, in connection with its systems replacement
project, identified certain other payroll, manufacturing and warehousing systems
to be replaced with software applications from other vendors. The Company
believes that the software applications purchased in connection with these
business replacement projects is Year 2000 compliant.
Following the acquisition of Fieldcrest Cannon, the independent systems
replacement projects of the Company and Fieldcrest Cannon were combined, and the
combined project (the "Systems Replacement Project") is proceeding on schedule
with an estimated completion date of June 1999. It is estimated that
approximately 95% of the development of the Oracle software applications are
complete, with the implementation of the financial application having been
substantially completed as of October 1998. Certain other applications
(including payroll, manufacturing and warehousing) are expected to be phased in
over the next eight months. The development and implementation of these other
applications are approximately 50% and 20% complete, respectively.
YEAR 2000 PLAN
In addition to the Systems Replacement Project, the Company, as part of its
Year 2000 compliance program, has developed a specific plan (the "Year
2000 Plan") to help ensure that the Company is not adversely affected by the
Year 2000 issue. The Year 2000 Plan is divided into the following four major
components (each, a "Component"): (1) Information Technology Systems ("IT
Systems"); (2) Information Technology Infrastructure ("IT Infrastructure"); (3)
Process Control and Instrumentation ("PC&I"); and (4) third party suppliers and
customers ("External Agents"). The Year 2000 Plan will be implemented with
respect to each Component in the following six general phases: (1) inventory
Year 2000 items; (2) assign priorities to identified items; (3) assess the
compliance of items determined not to be Year 2000 compliant; (4) convert
or replace material items that are determined not to be Year 2000 compliant; (5)
test material items; and (6) design and implement contingency and business
continuation plans for each location. Additionally, the Company is assessing
-17-
<PAGE>
the feasibility and utility of retaining an independent third party to review
the Company's Year 2000 readiness and make recommendations as needed during the
first or second quarter of 1999. For purposes of the Year 2000 Plan, "material
items" are those believed by the Company to have a risk involving the safety of
individuals or that may cause damage to property or the environment or affect
revenues.
The inventory and priority assessment phases were completed with respect to each
Component of the Year 2000 Plan in May 1998. The Year 2000 Plan is scheduled to
be fully implemented by June 1999.
IT SYSTEMS. IT Systems are comprised primarily of applications software. The
Company's applications software is being remediated primarily through the
Systems Replacement Project. Applications software that is not remediated
through the Systems Replacement Project and is not Year 2000 compliant is being
converted internally through the use of custom programming or replaced by the
supplier of such software. The Company estimates that the conversion phase with
respect to IT Systems was approximately 90% complete as of October 1998 and the
remaining conversions will be completed by June 1999. The testing phase with
respect to converted software is ongoing. Vendor software replacements and
upgrades are on schedule for completion by June 1999. The testing phase with
respect to replacement software is conducted as the software is replaced and is
also scheduled to be completed by June 1999. Contingency planning with respect
to IT Systems is underway and is scheduled to be completed in the first quarter
of 1999.
IT INFRASTRUCTURE. IT Infrastructure consists of hardware and systems software
other than applications software. The implementation of the Year 2000 Plan with
respect to IT Infrastructure is on schedule, and the Company estimates that
approximately 90% of the scheduled activities with respect to IT Infrastructure
had been completed as of October 1998. The testing phase is ongoing as the IT
Infrastructure is remediated, upgraded or replaced. Contingency planning with
respect to IT Infrastructure is scheduled to commence in the fourth quarter of
1998. The implementation of all phases of the Year 2000 Plan with respect to IT
Infrastructure is expected to be completed by June 1999.
PC&I. PC&I involves the hardware, software and associated embedded computer
chips that are used in the operation of the Company's facilities. Plans
detailing the tasks and resources required to implement the Year 2000 Plan with
respect to PC&I are in place. The Company estimates that 80% of the PC&I
vendors have responded to questionnaires indicating their equipment is Year
2000 compliant, and 20% have reported non-compliance. The non-compliant systems
have been remediated, are undergoing remediation or are expected to have
recommendations for remediation in place by November 1998. The implementation
of the Year 2000 Plan with respect to PC&I is on schedule, and the Company
believes that the conversion and testing of PC&I will be completed by June 1999.
Contingency plans with respect to PC&I will be based upon tests expected to be
run during the first quarter of 1999.
EXTERNAL AGENTS. The External Agents Component of the Year 2000 Plan involves
identifying and prioritizing critical business partners at the direct interface
level and communicating with them about their plans and progress in addressing
the Year 2000 issue. Detailed evaluations of the most critical third parties
have been initiated. These evaluations will be followed by the development of
contingency plans, which are scheduled to be completed in the first quarter of
1999. The Company believes the implementation of this Component of the Year
2000 Plan is on schedule as of October 1998.
-18-
<PAGE>
COSTS TO ADDRESS THE BUSINESS SYSTEM REPLACEMENTS AND YEAR 2000
To date, the Company estimates it has spent $48.0 million of capital on the
Systems Replacement Project of which a portion relates to expenditures made
prior to the Merger. It is estimated that an additional $16.0 million of
capital spending will be incurred in 1999 to complete the Systems Replacement
Project. Expenses incurred to complete remediation of the Year 2000 Plan are
not expected to have a material impact on the Company's results of operations or
financial position. The Company believes operating cash flows will be adequate
to fund any remaining expenditures related to the Systems Replacement Project
and the Year 2000 Plan and does not anticipate these needs having a material
effect on its liquidity or financial condition.
RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES
The Company's failure to resolve Year 2000 issues on or before December 31, 1999
could result in system failures or miscalculations causing disruption in
operations, including, among other things, a temporary inability to process
transactions, send invoices, send and/or receive e-mail and voice mail, or
engage in similar normal business activities. Additionally, failure of third
parties, upon whom the Company's business relies, to timely remediate their Year
2000 issues could result in disruption of the Company's supply of materials and
parts, late, missed or unapplied payments, temporary disruptions in order
processing and other general problems related to the Company's daily operations.
While the Company believes the Year 2000 Plan will adequately address the
Company's internal Year 2000 issues, until the Company receives responses from
all significant business partners, the overall risks associated with the Year
2000 issue remain difficult to accurately assess and quantify, and there can be
no assurances that the Year 2000 issue will not have a material adverse effect
on the Company and its operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information available to, the
Company's management. Because such forward-looking statements are subject to
various risks and uncertainties, results may differ materially from those
expressed in or implied by such statements. Many of the factors that will
determine these results are beyond the Company's ability to control or predict.
Factors which could affect the Company's future results and could cause results
to differ materially from those expressed in or implied by such forward-looking
statements are discussed under the caption "Cautionary Statement Regarding
Forward-Looking Statements" in the Company's Annual Report on Form 10-K for its
fiscal year ended January 3, 1998, and under the caption "Risk Factors" in each
of the Joint Proxy Statement/Prospectus forming a part of the Company's
Registration Statement on Form S-4 (No. 333-36663) and the Prospectus forming a
part of the Company's Registration Statement on Form S-4 (No. 333-46209).
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-19-
<PAGE>
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.
(REGISTRANT) PILLOWTEX CORPORATION
BY (SIGNATURE) /s/ Ronald M. Wehtje
(NAME AND TITLE) Ronald M. Wehtje
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
(DATE) November 13, 1998
-20-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Method of Filing
- - ------- -----------------------------
<S> <C> <C>
27.1 Financial Data Schedule. . . . . . . . . . Filed herewith electronically
</TABLE>
-21-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, consolidated statements of operations and
consolidated statements of cash flows found on pages 3, 4, 5 and 6 of the
Company's Form 10-Q for the nine months ended October 3, 1998, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 5,095
<SECURITIES> 0
<RECEIVABLES> 291,086
<ALLOWANCES> 16,782
<INVENTORY> 417,696
<CURRENT-ASSETS> 735,589
<PP&E> 684,214
<DEPRECIATION> 87,153
<TOTAL-ASSETS> 1,642,907
<CURRENT-LIABILITIES> 262,404
<BONDS> 956,558
0
0
<COMMON> 141
<OTHER-SE> 223,686
<TOTAL-LIABILITY-AND-EQUITY> 1,642,907
<SALES> 1,118,220
<TOTAL-REVENUES> 1,118,220
<CGS> 915,852
<TOTAL-COSTS> 915,852
<OTHER-EXPENSES> 103,969
<LOSS-PROVISION> 1,264
<INTEREST-EXPENSE> 52,920
<INCOME-PRETAX> 45,479
<INCOME-TAX> 17,731
<INCOME-CONTINUING> 27,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,748
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.63
</TABLE>
