<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark FORM 10-Q
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-11756
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2147728
(State of incorporation) (IRS Employer Identification No.)
4111 Mint Way 75237
Dallas, Texas (Zip Code)
(Address of principal executive offices)
(214) 333-3225
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 9, 2000
----- -------------------------------
Common Stock, $.01 par value 14,252,069
1
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PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of January 1, 2000 and
September 30, 2000 3
Consolidated Statements of Operations for the three months
ended October 2, 1999 and September 30, 2000 4
Consolidated Statements of Operations for the nine months 5
ended October 2, 1999 and September 30, 2000
Consolidated Statements of Cash Flows for the nine months 6
ended October 2, 1999 and September 30, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 22
Financial Condition and Results of Operations
Part II - Other Information
Item 3. Defaults upon Senior Securities 30
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
Index to Exhibits 32
</TABLE>
2
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par value)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS January 1, September 30,
---------- -------------
2000 2000
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 4,854 $ 3,645
Receivables:
Trade, less allowances of $33,351 and $24,836 at January 1, 2000
and September 30, 2000, respectively.................................... 268,499 235,468
Other...................................................................... 17,923 10,024
Inventories.................................................................. 423,052 427,999
Prepaid expenses and other................................................... 7,097 13,033
----------------- ---------------
Total current assets................................................. 721,425 690,169
Property, plant and equipment, less accumulated depreciation of
$150,384 and $188,978 at January 1, 2000 and September 30, 2000,
respectively.............................................................. 644,821 627,651
Intangible assets, at cost, less accumulated amortization of $26,355 and
$32,523 at January 1, 2000 and September 30, 2000, respectively.......... 288,856 279,652
Other assets.................................................................. 28,287 29,938
----------------- ---------------
$ 1,683,389 $ 1,627,410
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 119,848 $ 105,487
Accrued expenses............................................................. 73,238 60,090
Deferred income taxes........................................................ 37,848 37,350
Current portion of long-term debt (Note 6)................................... 85,759 87,534
Long-term debt in default (Note 6)........................................... - 637,539
----------------- ---------------
Total current liabilities............................................ 316,693 928,000
Long-term debt (in default subsequent to September 30, 2000)
less current portion (Note 6)................................................ 965,323 345,877
Deferred income taxes......................................................... 67,720 51,567
Noncurrent liabilities........................................................ 52,366 52,720
----------------- ---------------
Total liabilities.................................................... 1,402,102 1,378,164
Series A redeemable convertible preferred stock, $0.01 par value; 65,000 and
81,411 shares issued and outstanding at January 1, 2000 and September 30,
2000, respectively, including accrued dividends (Note 7)..................... 73,898 79,875
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 20,000,000 shares;
only Series A issued....................................................... - -
Common stock, $0.01 par value; authorized 55,000,000 shares;
14,261,856 and 14,240,889 shares issued and outstanding
at January 1, 2000 and September 30, 2000, respectively.................... 142 142
Additional paid-in capital................................................... 160,515 160,707
Retained earnings............................................................ 49,269 11,179
Currency translation adjustment.............................................. (1,730) (2,099)
Deferred compensation........................................................ (807) (558)
----------------- ---------------
Total shareholders' equity........................................... 207,389 169,371
----------------- ---------------
$ 1,683,389 $ 1,627,410
================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended October 2, 1999 and September 30, 2000
(In thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Net sales.......................................................................... $ 415,806 $ 357,436
Cost of goods sold................................................................. 375,327 327,964
Provision for inventory write-down (Note 4)........................................ 4,900 -
----------------- ---------------
Gross profit.................................................................... 35,579 29,472
Selling, general and administrative expenses....................................... 29,448 25,010
Provision for asset impairment (Note 8)............................................ 2,000 -
----------------- ---------------
Earnings from operations........................................................ 4,131 4,462
Interest expense................................................................... 21,263 27,657
----------------- ---------------
Loss before income taxes........................................................ (17,132) (23,195)
Income taxes....................................................................... (6,053) (6,927)
----------------- ---------------
Net loss........................................................................ (11,079) (16,268)
Preferred dividends and accretion.................................................. 9,526 2,040
----------------- ---------------
Loss applicable to common shareholders.......................................... $ (20,605) $ (18,308)
================= ===============
Basic and diluted loss per common share............................................ $ (1.45) $ (1.29)
================= ===============
Weighted average common shares outstanding - basic and diluted..................... 14,184 14,241
================= ===============
Dividends declared per common share................................................ $ .06 $ -
================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended October 2, 1999 and September 30, 2000
(In thousands, except for per share data)
(Unaudited)
<TABLE>
1999 2000
---- ----
<S> <C> <C>
Net sales.......................................................................... $ 1,146,781 $ 1,044,536
Cost of goods sold................................................................. 997,582 936,457
Provision for inventory write-down (Note 4)........................................ 4,900 -
-------------- --------------
Gross profit.................................................................... 144,299 108,079
Selling, general and administrative expenses....................................... 79,632 74,562
Provision for asset impairment (Note 8)............................................ 2,000 -
-------------- --------------
Earnings from operations........................................................ 62,667 33,517
Interest expense................................................................... 60,464 81,469
-------------- --------------
Earnings (loss) before income taxes............................................. 2,203 (47,952)
Income taxes....................................................................... 1,255 (15,839)
-------------- --------------
Net earnings (loss)............................................................. 948 (32,113)
Preferred dividends and accretion.................................................. 10,602 5,977
-------------- --------------
Loss applicable to common shareholders.......................................... $ (9,654) $ (38,090)
============== ==============
Basic and diluted loss per common share............................................ $ (.68) $ (2.68)
============== ==============
Weighted average common shares outstanding - basic and diluted..................... 14,172 14,232
============== ==============
Dividends declared per common share................................................ $ .18 $ -
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 2, 1999 and September 30, 2000
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).............................................................. $ 948 $ (32,113)
Adjustments to reconcile net earnings (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization................................................. 43,184 49,580
Deferred income taxes......................................................... 1,825 (15,839)
Accretion on debt instruments................................................. 1,552 1,098
Provision for doubtful accounts............................................... 873 140
Loss on disposal of property, plant and equipment............................. 65 -
Amortization of deferred compensation......................................... 312 249
Changes in operating assets and liabilities:
Trade receivables........................................................... (79,605) 32,891
Inventories................................................................. (26,140) (4,947)
Accounts payable............................................................ 55,504 (12,210)
Accrued expenses............................................................ (20,153) (13,148)
Other assets and liabilities................................................ 1,806 2,310
---------- ----------
Net cash (used in) provided by operating activities...................... (19,829) 8,011
---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment.............................. 472 4,569
Purchases of property, plant and equipment....................................... (73,622) (30,407)
----------- ----------
Net cash used in investing activities.................................... (73,150) (25,838)
----------- ----------
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment...................... 598 (2,152)
Borrowings on revolving credit loans............................................. 346,098 680,034
Repayments of revolving credit loans............................................. (233,928) (637,298)
Retirement of long-term debt..................................................... (13,657) (23,966)
Payments of debt issuance costs.................................................. (56) -
Dividends paid................................................................... (4,011) -
Proceeds from exercise of stock options.......................................... 43 -
----------- ----------
Net cash provided by financing activities................................ 95,087 16,618
----------- ----------
Net change in cash and cash equivalents........................................... 2,108 (1,209)
Cash and cash equivalents at beginning of period.................................. 5,561 4,854
----------- ----------
Cash and cash equivalents at end of period........................................ $ 7,669 3,645
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest....................................................................... $ 47,718 72,991
=========== ==========
Income taxes................................................................... $ (812) (3,011)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Pillowtex
Corporation and its subsidiaries, which are collectively referred to in
this report as the "Company," include all adjustments, consisting only of
normal recurring adjustments and accruals, which are, in the opinion of
management, necessary for fair presentation of the results of operations
and financial position. Results of operations for interim periods may not
be indicative of future results. The unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's annual report on Form 10-K,
as filed with the Securities and Exchange Commission for the fiscal year
ended January 1, 2000.
The Company is organized by functional responsibilities and operates as a
single segment.
Information technology costs associated with the Company's manufacturing
systems ($3.8 million and $12.8 million for three and nine month periods
ended October 2, 1999, respectively) have been reclassified from selling,
general and administrative expense to cost of goods sold in the 1999
consolidated statements of operation to conform to the current year
presentation.
(2) Subsequent Events
Subsequent to the end of the Company's third fiscal quarter, Pillowtex
Corporation and substantially all of its domestic subsidiaries
(collectively, the "Debtors"), including Fieldcrest Cannon, Inc.
("Fieldcrest Cannon"), filed voluntary petitions for reorganization under
chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") on November 14, 2000 (the "Petition Date"). The chapter
11 cases pending for the Debtors (the "Chapter 11 Cases") are being jointly
administered for procedural purposes.
In conjunction with the commencement of the Chapter 11 Cases, the Debtors
sought and obtained several orders from the Bankruptcy Court which were
intended to enable the Debtors to operate in the normal course of business
during the Chapter 11 Cases. The most significant of these orders (i)
permit the Debtors to operate their consolidated cash management system
during the Chapter 11 Cases in substantially the same manner as it was
operated prior to the commencement of the Chapter 11 Cases, (ii) authorize
payment of prepetition employee salaries, wages and benefits and
reimbursement of prepetition employee business expenses, (iii) authorize
payment of prepetition sales, payroll and use taxes owed by the Debtors,
(iv) authorize payment of certain prepetition obligations to customers, and
(v) authorize payment of certain prepetition obligations to critical
vendors to aid the Debtors in maintaining operation of their business.
On November 14, 2000, the Bankruptcy Court also entered an order (the
"Interim DIP Financing Order") authorizing the Debtors to enter into a
$150.0 million debtor-in-possession financing facility (the "DIP Financing
Facility") with Bank of America, N.A. as agent for a syndicate of financial
institutions comprised of certain of the Company's prepetition senior
secured lenders, and to grant first priority priming liens and mortgages,
security interests, and liens (including priming liens), and on
substantially all of the assets of the Debtors to secure the DIP Financing
Facility. Pursuant to the Interim DIP Financing Order, the Debtors are
authorized to utilize up to $60.0 million, consisting of up to $35.0
million in postpetition loans and $25.0 million in postpetition letters of
credit, under the DIP Financing Facility, on an interim basis pending a
final hearing to approve the DIP Financing Facility. Such hearing is
scheduled for December 6, 2000. As of the date of this report, the
documentation evidencing the DIP Financing Facility has not been executed,
but the parties have agreed to the principal terms of the arrangement and
the form documentation was attached to the Interim DIP Financing Order. The
Company anticipates that the documentation for the DIP Financing Facility
will be finalized and executed prior to the Bankruptcy Court hearing
scheduled for December 6, 2000. Following the entry of the final order
approving the DIP Financing Facility by the Bankruptcy Court (the "Final
DIP Financing Order"), the remaining $90.0 million, over and above the
$60.0 million approved
7
<PAGE>
by the Interim DIP Financing Order of the Bankruptcy Court, would be
available to the Debtors. See Note 6 for a discussion of the DIP Financing
Facility.
The Debtors are currently operating their businesses as debtors-in-
possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy
Code, prepetition obligations of the Debtors, including obligations under
debt instruments, generally may not be enforced against the Debtors, and
any actions to collect prepetition indebtedness are automatically stayed,
unless the stay is lifted by the Bankruptcy Court. In addition, as
debtors-in-possession, the Debtors have the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject executory
contracts and unexpired leases. In this context, "assumption" means that
the Debtors agree to perform their obligations and cure all existing
defaults under the contract or lease, and "rejection" means that the
Debtors are relieved from their obligations to perform further under the
contract or lease, but are subject to a claim for damages for the breach
thereof. Any damages resulting from rejection of executory contracts and
unexpired leases will be treated as general unsecured claims in the Chapter
11 Cases unless such claims had been secured on a prepetition basis prior
to the Petition Date. The Debtors are in the process of reviewing their
executory contracts and unexpired leases to determine which, if any, they
will reject. The Debtors cannot presently determine or reasonably estimate
the ultimate liability that may result from rejecting contracts or leases
or from the filing of claims for any rejected contracts or leases, and no
provisions have yet been made for these items.
The Bankruptcy Code provides that the Debtors have exclusive periods during
which only they may file and solicit acceptances of a plan of
reorganization. The exclusive period of the Debtors to file a plan for
reorganization currently expires on March 14, 2001; however, the Debtors
can request the Bankruptcy Court to extend such exclusive period. If the
Debtors fail to file a plan of reorganization during the exclusive period
or, after such plan has been filed, if the Debtors fail to obtain
acceptance of such plan from the requisite impaired classes of creditors
and equity holders during the exclusive solicitation period, any party in
interest, including a creditor, an equity holder, a committee of creditors
or equity holders or an indenture trustee, may file their own plan of
reorganization for the Debtors.
After a plan of reorganization has been filed with the Bankruptcy Court,
the plan, along with a disclosure statement approved by the Bankruptcy
Court, will be sent to all creditors and equity holders. Following the
solicitation period, the Bankruptcy Court will consider whether to confirm
the plan. In order to confirm a plan of reorganization, the Bankruptcy
Court, among other things, is required to find that (i) with respect to
each impaired class of creditors and equity holders, each holder in such
class has accepted the plan or will, pursuant to the plan, receive at least
as much as such holder would receive in a liquidation, (ii) each impaired
class of creditors and equity holders has accepted the plan by the
requisite vote (except as described in the following sentence), and (iii)
confirmation of the plan is not likely to be followed by a liquidation or a
need for further financial reorganization of the Debtors or any successors
to the Debtors unless the plan proposes such liquidation or reorganization.
If any impaired class of creditors or equity holders does not accept the
plan and, assuming that all of the other requirements of the Bankruptcy
Code are met, the proponent of the plan may invoke the "cram down"
provisions of the Bankruptcy Code; under these provisions, the Bankruptcy
Court may confirm a plan notwithstanding the non-acceptance of the plan by
an impaired class of creditors or equity holders if certain requirements of
the Bankruptcy Code are met. These requirements may, among other things,
necessitate payment in full for senior classes of creditors before payment
to a junior class can be made. As a result of the amount of prepetition
indebtedness and the availability of the "cram down" provisions, the
holders of the Company's capital stock may receive no value for their
interests under the plan of reorganization. Because of such possibility,
the value of the Company's outstanding capital stock is highly speculative.
Since the Petition Date, the Debtors have continued to conduct business in
the ordinary course. Management is in the process of stabilizing the
business of the Debtors and evaluating their operations before beginning
the development of a plan of reorganization.
During the pendency of the Chapter 11 Cases, the Debtors may, with
Bankruptcy Court approval, sell assets and settle liabilities, including
for amounts other than those reflected in the financial statements. The
8
<PAGE>
administrative and reorganization expenses resulting from the Chapter 11
Cases will unfavorably affect the Debtors' results of operations. Future
results of operations may also be adversely affected by other factors
related to the Chapter 11 Cases.
(3) Comprehensive Income
Comprehensive income consists of net earnings (loss) and foreign currency
translation adjustments and aggregated ($10.7) million and $1.5 million,
respectively, for the three and nine month periods ended October 2, 1999.
For the three and nine month periods ended September 30, 2000,
comprehensive (losses) aggregated ($16.4) million and ($32.5) million,
respectively.
(4) Inventories
Inventories consisted of the following at January 1, 2000 and September 30,
2000 (in thousands):
January 1, September 30,
2000 2000
------------ -------------
Finished goods $ 218,381 $ 222,839
Work-in-process 136,924 158,200
Raw materials 44,424 35,763
Supplies 23,323 11,197
------------ -------------
$ 423,052 $ 427,999
============ =============
During the third quarter of 1999, the Company recorded a $4.9 million pre-
tax non-cash charge to reduce certain blanket inventory to net realizable
value.
(5) Earnings Per Share
The potentially dilutive effects of stock options, convertible debentures
and convertible preferred stock were excluded from the computation of
diluted loss per share for the periods ended October 2, 1999 and September
30, 2000 because their inclusion would be antidilutive.
9
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
January 1, September 30,
2000 2000
---- ----
<S> <C> <C>
Revolving Credit Facility........................... $ 259,800 $ 302,538
Overline Facility................................... 35,000 35,000
Term Loans.......................................... 341,500 324,752
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 in
2012, with sinking fund (effective rate of
8.72%, net of $12.2 million and $11.1 million in
unamortized discount at January 1, 2000 and
September 30, 2000, respectively)................ 82,205 79,296
Industrial revenue bonds with interest rates
from 3.60% to 7.85% and maturities through July
1, 2021; generally collateralized by land and
buildings........................................ 16,814 15,456
Other debt.......................................... 5,763 3,908
------------ ----------
1,051,082 1,070,950
Less:
Current portion..................................... 85,759 87,534
Long-term debt in default........................... 637,539
------------ ----------
Total long-term debt................................ $ 965,323 $ 345,877
============ ============
</TABLE>
DIP Financing Facility. As discussed in Note 2 above, on November 14,
----------------------
2000, the Bankruptcy Court entered the Interim DIP Financing Order
authorizing the Debtors to enter into the $150.0 million DIP Financing
Facility and to grant superpriority claims and mortgages, security
interests, and liens (including priming liens), and on substantially all of
the assets of the Debtors to secure the DIP Financing Facility. Pursuant to
the Interim DIP Financing Order, the Debtors are authorized to utilize up
to $60.0 million, consisting of up to $35.0 million in postpetition loans
and $25.0 million in postpetition letters of credit, under the DIP
Financing Facility, on an interim basis pending a final hearing to approve
the DIP Financing Facility. Such hearing is scheduled for December 6, 2000.
As of the date of this report, the documentation evidencing the DIP
Financing Facility has not been executed, but the parties have agreed to
the principal terms of the arrangement and the form documentation was
attached to the Interim DIP Financing Order. The Company anticipates that
the documentation for the DIP Financing Facility will be finalized and
executed prior to the Bankruptcy Court hearing scheduled for December 6,
2000. Following the entry of the Final DIP Financing Order, the remaining
$90.0 million, over and above the $60.0 million approved by the Interim DIP
Financing Order of the Bankruptcy Court, would be available to the Debtors.
Under the terms of the DIP Financing Facility, a $150.0 million revolving
credit facility, including up to $60 million for postpetition letters of
credit, would be available to the Company until the earliest of (i)
November 14, 2001, (ii) the date on which the plan of reorganization
becomes effective, (iii) any material non-compliance with any of the terms
of the Interim DIP Financing Order or the Final DIP Financing Order, (iv)
any event of default that shall have occurred under the DIP Financing
Facility, or (v) consummation of a sale of substantially all of the assets
of the Company pursuant to an order of the
10
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bankruptcy Court shall have occurred. Upon the satisfaction of certain
conditions, the November 14, 2001 maturity date could be extended for an
additional period of six months upon payment of an extension fee equal to
0.50% of the portion of DIP Financing Facility being extended. Amounts
borrowed under the DIP Financing Facility would bear interest at the option
of the Company at the rate of the London Interbank Offering Rate ("LIBOR")
plus 3.50% or Bank of America's Base Rate (which is the higher of Federal
Funds Rate or Prime Rate plus, in either case, 0.05%) plus 1.00%. In
addition to a facility fee and an underwriting fee of 0.50% each, there is
an unused commitment fee of 0.50%, a letter of credit fee of 3.50%, and a
letter of credit fronting fee of 0.20%. The DIP Financing Facility would be
secured by a first priority priming lien on the real and personal assets of
the Company that also secure the prepetition senior secured credit
facilities and a junior lien on certain plant and equipment that secure six
industrial revenue bond facilities (the "IRB Facilities") aggregating
approximately $15.5 million and certain obligations to the Pension Benefit
Guaranty Corporation. The documentation evidencing the DIP Financing
Facility would contain financial covenants requiring maintenance of an
asset coverage ratio and a minimum operating cash flow, as well as other
covenants that limit, among other things, indebtedness, liens, sales of
assets, capital expenditures and investments, and prohibit dividend
payments. The net proceeds of certain asset sales outside the ordinary
course of business would reduce prepetition indebtedness under the senior
secured credit facilities; otherwise, the net proceeds of asset sales
outside the ordinary course of business would be applied as a permanent
reduction of the DIP Financing Facility.
There can be no assurance that the documentation evidencing the DIP
Financing Facility will be finalized and executed on the terms described
above or that, if finalized and executed on such terms, the DIP Financing
Facility will be approved by final order of the Bankruptcy Court.
Senior Debt Facilities. In December 1997, in connection with the
----------------------
Fieldcrest Cannon acquisition, the Company entered into new senior secured
revolving credit and term loan facilities with a group of financial and
institutional investors for which Bank of America, N.A. acts as the
administrative and collateral agent. These facilities consisted of a
$350.0 million revolving credit facility and a $250.0 million term loan
facility. The term loan facility consisted of a $125.0 million Tranche A
Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28,
1998, the Company amended these facilities by increasing the Tranche B Term
Loan to $225.0 million. The increase occurred in conjunction with the
acquisition of The Leshner Corporation, allowing the Company to fund the
transaction and reduce borrowings under the revolving credit facility.
Effective March 12, 1999, the revolving credit facility was amended to
permit the Company to use for working capital one-half of a $61.0 million
portion of the facility held as contingency reserve for cash payments
required upon conversion of the Fieldcrest Cannon 6% Convertible
Subordinated Debentures due 2012 (the "6% Debentures"), thereby increasing
availability under that facility. Effective October 1, 1999, the revolving
credit facility was further amended to permit the Company to use the other
half of the contingency reserve for working capital, thereby increasing
availability under that facility. At the end of the third and fourth
quarters of its 1999 fiscal year, the Company was not in compliance with
certain financial covenants under its senior debt facilities. The Company
obtained a series of temporary waivers of this non-compliance. Effective
as of December 7, 1999, the Company agreed to certain amendments to the
senior debt facilities, principally related to cash management, additional
collateral, adjustments to restrictive covenants, and borrowings under, and
uses of proceeds from, the revolving credit facility. Effective as of
March 31, 2000, the Company obtained a permanent waiver of its prior non-
compliance with financial covenants and the senior debt facilities were
further amended to shorten their terms to maturity and accelerate the
related amortization schedule for repayment of principal, to eliminate
reinstatement of the contingency reserve requirement referred to above, to
increase the applicable interest rate margins (subject to reduction if the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") exceeds a specified level for the 2000 fiscal year), to add a
covenant requiring that EBITDA must exceed specified levels for future
fiscal periods and eliminate all other financial covenants, to modify
certain restrictive covenants, to limit borrowings under the revolving
credit facility based on a formula tied to 45% of eligible inventory plus
80% of eligible accounts receivable, and to provide for a series of
reductions in the commitment under the revolving credit facility.
11
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revolving credit facility includes $55.0 million of availability for
letters of credit. Under the revolving credit facility, at September 30,
2000, $302.5 million of loans were outstanding, $32.9 million of letters of
credit were outstanding, and $14.6 million was available for borrowings.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon the LIBOR
plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to
the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted
average annual interest rate on outstanding borrowings under the various
senior credit facilities through the third quarter of 2000 was 10.21%. The
senior debt facilities expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of the Company, and are secured by first priority liens on all
of the capital stock of each domestic subsidiary of the Company and by 65%
of the capital stock of the Company's foreign subsidiaries. The Company
has also granted a first priority security interest in all of its presently
unencumbered and future domestic assets and properties, and all presently
unencumbered and future domestic assets and properties of each of its
subsidiaries. The term loan facility is subject to mandatory prepayment
from all net cash proceeds of asset sales and debt issuances of the Company
(except as specifically provided), 50% of the net cash proceeds of equity
issuances by the Company or any of its subsidiaries, and 75% of Excess Cash
Flow (as defined). All mandatory prepayments are to be applied pro rata
between the Tranche A Term Loan and the Tranche B Term Loan to reduce the
remaining installments of principal.
On September 30, 2000, and prior to the Petition Date, the Company was not
in compliance with its EBITDA financial covenant under the senior debt
facilities. The Company obtained from its senior lenders a temporary
waiver of such non-compliance through November 7, 2000, during which time
the Company engaged in active discussions with its senior lenders to obtain
an extended or permanent waiver of such non-compliance. The Company was
unable to reach such an agreement with its senior lenders and the waiver
expired on November 7, 2000. On November 8, 2000, the agent for the senior
lenders delivered a notice of default to the Company that declared an event
of default under the senior debt facilities based upon such non-compliance
with its EBITDA financial covenant. The senior lenders did, however,
forbear from exercising rights and remedies under the senior debt
facilities and agreed to continue to make available to the Company the
unused credit capacity under the revolving credit facility until December
7, 2000. In addition, on November 8, 2000, the senior lenders issued a
Payment Blockage Notice to the Company and the indenture trustee for the
Company's 10% Senior Subordinated Notes due 2006 (the "10% Notes")
prohibiting payment by the Company of the semi-annual interest payment in
the aggregate amount of approximately $6.25 million due to the holders of
the 10% Notes on November 15, 2000. After a 30-day grace period, the 10%
Notes would be in default for nonpayment of interest. In addition, the
Company was obligated to make a semi-annual interest payment on its 9%
Senior Subordinated Notes due 2007 (the "9% Notes") on December 15, 2000
aggregating $8.3 million, which payment the senior lenders likewise
indicated they would also block. As a result of the circumstances
confronting the Company and its inability to refinance the senior debt
facilities or obtain additional capital, the Debtors filed the Chapter 11
Cases on November 14, 2000.
As a result of the EBITDA financial covenant default, the Company has
classified all of the senior secured debt directly affected by the default
(including debt under the overline facility described below) as current.
As of September 30, 2000, the long-term debt payable within one year was
$725.1 million, of which $637.5 million is the result of the default.
Overline Facility. In May 1999, the Company entered into a $20.0 million
-----------------
senior unsecured revolving credit facility (overline facility) in order to
obtain additional working capital availability. On July 27, 1999, the
overline facility was amended to increase the amount of funds available to
$35.0 million. At the end of the third and fourth quarters of its 1999
fiscal year, the Company was not in compliance with certain financial
covenants under the overline facility, the covenants of which are
incorporated by reference to the senior debt facilities described above.
The Company obtained a series of temporary waivers of this non-compliance
and extensions of the maturity date. Effective as of December 7, 1999, the
Company agreed to
12
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain amendments to the overline facility, resulting in the overline
facility being secured by the assets securing the senior debt facilities
described above. Effective as of March 31, 2000, the Company obtained a
permanent waiver of its prior non-compliance and the overline facility was
amended to lengthen its term to maturity, to impose an amortization
schedule for the repayment of principal, and to increase the applicable
interest rate margins (subject to reduction if EBITDA exceeds a specified
level for the 2000 fiscal year).
The overline facility is guaranteed on a senior basis by the Company's
domestic subsidiaries. The Company is currently required to pay interest
on any amounts borrowed under the overline facility at a rate which is
based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the Company's
option. The overline facility matures upon termination by the Company at
any time or otherwise at the earliest of: (i) any increase in the
commitment under the senior debt facilities described above, the issuance
of any capital stock by the Company or its domestic subsidiaries, or other
specified events; or (ii) January 31, 2002.
For the reasons discussed above with respect to the default under the
senior debt facilities, the Company is also in default under the overline
facility.
Senior Subordinated Debt. In connection with the Fieldcrest Cannon merger,
------------------------
the Company issued $185.0 million of the 9% Notes, with interest payable
semiannually commencing June 15, 1998. The Company may, at its option,
redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at
a redemption price of 104.5%, which declines 1.5% annually through December
15, 2005 to 100%. The 9% Notes are general unsecured obligations of the
Company, are subordinated in right of payment to all existing and future
senior indebtedness, and rank pari passu with the 10% Notes described
below.
On November 12, 1996, the Company issued $125.0 million of the 10% Notes,
with interest payable semiannually commencing May 15, 1997. The Company
may, at its option, redeem the 10% Notes, in whole or in part, on or after
November 15, 2001 at a redemption price of 105.0%, which declines 1.667%
annually through November 15, 2004 to 100%. The 10% Notes are general
unsecured obligations of the Company, are subordinated in right of payment
to all existing and future senior indebtedness, and rank pari passu with
the 9% Notes.
The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior
subordinated basis by each of the existing and future domestic subsidiaries
of the Company and each other subsidiary of the Company that guarantees the
Company's obligations under the senior debt facilities described above.
The guarantees are subordinated in right of payment to all existing and
future senior indebtedness of the relevant guarantor. Upon a change in
control, the Company will be required to make an offer to repurchase all
outstanding 9% Notes and 10% Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the date of
repurchase.
As a result of the filing of the Chapter 11 Cases, the Company is in
default under the indentures governing both the 9% Notes and the 10% Notes.
Fieldcrest Cannon Convertible Debentures. As a result of the Company's
----------------------------------------
acquisition of Fieldcrest Cannon, the outstanding 6% Debentures are
convertible, at the option of the holders, into a combination of cash and
the Company's common stock ("Common Stock"). During the fourth quarter of
1999, the Company notified the holders of the 6% Debentures that it was not
practicable or prudent for payments to be made in respect of the conversion
of the 6% Debentures and advised holders that had given notice of
conversion and surrendered their 6% Debentures that they could rescind
their notice of conversion, return to the Company any Common Stock that had
been issued to them and have their 6% Debentures reinstated. Although many
holders did rescind and return their Common Stock, other holders could not
rescind because they had already sold their Common Stock. As of September
30, 2000, the cash component remaining to be paid in respect of the 6%
Debentures that had been surrendered without subsequent rescission was
approximately $5.2 million. In addition, as of September 30, 2000,
approximately $90.4 million aggregate principal amount of the 6% Debentures
remained outstanding, including 6% Debentures
13
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that had been surrendered without subsequent rescission. If all such
outstanding 6% Debentures were converted at such date, including those
surrendered without subsequent rescission, the resulting cash component to
be paid to the holders of the 6% Debentures would have been approximately
$57.2 million.
Prior to the Petition Date, the Company was prohibited under the terms of
the indentures governing the 9% Notes and the 10% Notes from making
payments in respect of the 6% Debentures except for interest payments and
payments at maturity or pursuant to sinking fund obligations. In an effort
to address both (i) the unpaid cash portion of the conversion consideration
owing to those holders of 6% Debentures who have surrendered their
debentures for conversion but have not been paid the cash portion of the
conversion consideration (the "Cash Claimants") and (ii) the cash payment
prohibition in respect of any future conversions, the Company initiated
discussions with certain holders of the 6% Debentures regarding a potential
restructuring of the 6% Debentures. Notwithstanding months of efforts, the
parties to those discussions were unable to agree upon a mutually
satisfactory comprehensive restructuring of the 6% Debentures and amounts
owing to the Cash Claimants. In September 2000, the Company notified the
holders of the 6% Debentures of its plan for making payments to the Cash
Claimants. Pursuant to the plan, the Company agreed to pay out as a
"scheduled payment" cash in the amount of approximately $3.8 million
annually to the Cash Claimants, which is the amount of cash sufficient to
complete the conversion of $6.25 million principal amount of the 6%
Debentures annually and utilize such converted 6% Debentures as a credit to
satisfy its annual sinking fund obligation under the indenture governing
the 6% Debentures. As part of the plan and in accordance with the terms of
the indenture governing the 6% Debentures, the Company agreed to pay out
cash to the Cash Claimants in order to complete and finalize Debenture
conversions and utilize such converted Debentures as credits to satisfy its
annual sinking fund obligations as follows: (i) approximately $3.8 million
on September 28, 2000, (ii) approximately $3.8 million on March 16, 2001,
and (iii) the balance owing to Cash Claimants on March 18, 2002. These
cash payments would be made by the Company to the Cash Claimants in the
order the 6% Debentures were presented for conversion, i.e., on a first to
convert, first to be paid basis. Furthermore, the unpaid cash portion for
each Cash Claimant is evidenced by a non-interest bearing subordinated
promissory note executed by Fieldcrest Cannon (the "Cash Claimant Notes").
Pursuant to the plan, the Company made the first scheduled payment on
September 28, 2000. As of September 30, 2000, the aggregate principal
amount of the outstanding Cash Claimant Notes was $5.2 million.
As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in
default under the indenture governing the 6% Debentures and the Cash
Claimant Notes.
Industrial Revenue Bonds. The Company has obligations in respect of six
------------------------
industrial revenue bond facilities. The IRB Facilities are secured by
liens on specified plants and equipment. As of September 30, 2000, $15.5
million of bonds in the aggregate were outstanding under the IRB
Facilities.
As a result of the default on the senior debt facilities and the filing of
the Chapter 11 Cases, the Company is in default of its obligations under
each of the IRB Facilities
Swap Agreements. The Company enters into interest rate swap agreements to
---------------
modify the interest characteristics of portions of its outstanding debt.
These agreements entitle the Company to receive or pay to the counterparty
(a major bank), on a quarterly basis, the amounts, if any, by which the
Company's interest payments covered by swap agreements differ from those of
the counterparty. These amounts are recorded as adjustments to interest
expense. The fair value of the swap agreements and changes in fair value
as a result of changes in market interest rates are not currently
recognized in the consolidated financial statements. As of January 1, 2000,
the Company had approximately $345.0 million of notional amounts covered
under interest rate swap agreements whereby the Company exchanged floating
rates for fixed rates. The weighted average fixed and floating rates were
4.70% and 5.96%, respectively. As of September 30, 2000, the Company had
approximately $230.0 million of notional amounts covered under interest
rate swap agreements whereby the Company exchanged floating rates for fixed
rates. The weighted average fixed and floating rates were 4.68% and 6.61%,
respectively. The fair values of the
14
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
swaps at January 1, 2000 and September 30, 2000 were $4.0 million and $1.2
million, respectively, in favor of the Company. These swaps expired on
October 27, 2000.
Adequacy of Capital Resources. As discussed above, the Debtors are
-----------------------------
operating their businesses as debtors-in-possession under chapter 11 of the
Bankruptcy Code. The Company anticipates that it will incur significant
professional fees and other restructuring costs in connection with the
Chapter 11 Cases and the ongoing restructuring of its business operations
throughout the remainder of fiscal year 2000 and during fiscal year 2001.
Based on current and anticipated levels of operations, and efforts to
reduce inventories and accounts receivable, the Company anticipates that
its cash flow from operations, together with amounts available under the
DIP Financing Facility, will be adequate to meet its anticipated cash
requirements during the time that the Chapter 11 Cases are pending. In the
event that cash flows and available borrowings under the DIP Financing
Facility are not sufficient to meet future cash requirements, the Company
may be required to reduce planned capital expenditures or seek additional
financing. The Company can provide no assurances that reductions in
planned capital expenditures would be sufficient to cover shortfalls in
available cash or that additional financing would be available or, if
available, offered on acceptable terms. The Company's long-term liquidity
and the adequacy of the Company's capital resources cannot ultimately be
determined until a plan of reorganization has been developed and confirmed
by the Bankruptcy Court in connection with the Chapter 11 Cases.
(7) Redeemable Convertible Preferred Stock
On December 19, 1997, the Company issued 65,000 shares of Series A
Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for
$65.0 million less $2.1 million of issue costs. Accretion is being
recognized to increase the recorded amount to the redemption amount over
the period to the redemption date. Dividends accrued from the issue date
through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000,
the rate increased to 10% as a result of the Company's earnings per share
for 1999 falling below predetermined targets. During the third and fourth
quarters of the 1999 fiscal year, the Company accrued and paid in kind a
one-time cumulative dividend on the Series A Preferred Stock, from the
issue date through December 31, 1999, equal to the difference between the
dividends calculated at the 3% rate and dividends calculated at the 10%
rate, or 10,135 shares of Series A Preferred Stock. Under the terms of the
Series A Preferred Stock, dividends can be paid in cash or additional
shares of preferred stock until December 2002, at which time they must be
paid in cash. The Company's ability to pay cash dividends on the Series A
Preferred Stock is restricted under the terms of its senior credit
facilities and senior subordinated debt. Under the DIP Financing Facility,
the Company would be prohibited from paying any dividends on the Series A
Preferred Stock. A total of 81,411 shares of Series A Preferred Stock were
outstanding as of September 30, 2000.
The Series A Preferred Stock is convertible, at any time at the option of
the holder, into Common Stock at a rate calculated by dividing $1,000 plus
unpaid dividends per share by $24.00 per share. Each share of Series A
Preferred Stock is subject to mandatory redemption in ten and one-half
years after the issue date at a redemption price of $1,000 plus accrued and
unpaid dividends. The Company has the right after the fourth anniversary
of the issue date to call all or a portion of the Series A Preferred Stock
at $1,000 per share plus accrued and unpaid dividends times a premium equal
to the dividend rate after the fourth anniversary date and declining
ratably to the mandatory redemption date. Holders of the Series A
Preferred Stock are entitled to limited voting rights only under certain
conditions.
The commencement of the Chapter 11 Cases constitutes an "Event of
Noncompliance" under the terms of the Series A Preferred Stock. The terms
of the Series A Preferred Stock provide that upon the occurrence of an
Event of Noncompliance, the dividend rate on such stock will increase
immediately to the lesser of 18% per annum and the maximum rate permitted
by law.
15
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Lived Assets
During the third quarter of 1999, the Company recorded a $2.0 million
charge to adjust the carrying value of the Opelika facility, which was
closed in the first quarter of 1999, to estimated fair market value.
The Company's ability to fully recover the carrying amount of goodwill and
other long-lived assets through undiscounted cash flows assumes that
results of operations and cash flows in future periods will improve from
their current levels. In the event that the market or general economic
conditions affecting the Company worsen or if management is unable to
achieve its business objectives, impairment of goodwill and other long-
lived assets may be necessary; these impairment charges could be material
in the near term. Additionally, management is currently evaluating various
alternatives for restructuring the Company's business. These alternatives
may include, among other things, disposal of certain assets. In the event
of a disposal of assets, a loss could result if the cash flows generated
from disposal are not sufficient to recover the carrying amount of such
assets. As of September 30, 2000, the Company had no assets that were held
for sale.
16
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Supplemental Condensed Consolidating Financial Information
The following table presents condensed consolidating financial information
for the Company, segregating Pillowtex Corporation ("Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries
are wholly owned domestic subsidiaries of Parent and the guarantees are
full, unconditional and joint and several. Separate financial statements
of the guarantor subsidiaries are not presented because management believes
that these financial statements would not provide relevant material
additional information.
<TABLE>
<CAPTION>
January 1, 2000
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
Assets: (in thousands)
-------
<S> <C> <C> <C> <C> <C>
Trade receivables $ - $ 260,870 $ 7,629 $ - $ 268,499
Receivables from affiliates 747,324 - - (747,324) -
Inventories - 406,801 16,251 - 423,052
Other current assets - 29,769 105 - 29,874
----------- ------------- ----------- ------------- -------------
Total current assets 747,324 697,440 23,985 (747,324) 721,425
Property, plant and equipment, net 467 642,833 1,521 - 644,821
Intangible assets, net 16,831 269,710 2,315 - 288,856
Other assets 493,579 18,930 - (484,222) 28,287
----------- ------------- ----------- ------------- -------------
Total assets $ 1,258,201 $ 1,628,913 $ 27,821 $ (1,231,546) $ 1,683,389
=========== ============= =========== ============= =============
Liabilities and Shareholders' Equity:
-------------------------------------
Accounts payable and accrued liabilities $ 6,482 $ 182,218 $ 4,386 $ - $ 193,086
Payables to affiliates - 736,720 10,604 (747,324) -
Other current liabilities - 37,951 77 - 38,028
Current portion of long-term debt 85,579 - - - 85,579
----------- ------------- ----------- ------------- -------------
Total current liabilities 92,061 956,889 15,067 (747,324) 316,693
Noncurrent liabilities - 119,976 110 - 120,086
Long-term debt 884,853 80,470 - - 965,323
----------- ------------- ----------- ------------- -------------
Total liabilities 976,914 1,157,335 15,177 (747,324) 1,402,102
Redeemable convertible preferred stock 73,898 - - - 73,898
Shareholders' equity 207,389 471,578 12,644 (484,222) 207,389
----------- ------------- ----------- ------------- -------------
Total liabilities and
shareholders' equity $ 1,258,201 $ 1,628,913 $ 27,821 $ (1,231,546) $ 1,683,389
=========== ============= =========== ============= =============
</TABLE>
17
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
September 30, 2000
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets: (in thousands)
-------
Trade receivables $ - $ 228,715 $ 6,753 $ - $ 235,468
Receivables from affiliates 742,845 - - (742,845) -
Inventories 417,125 10,874 - 427,999
Other current assets 25,495 1,207 - 26,702
----------- ------------ ------------ ------------- ------------
Total current assets 742,845 671,335 18,834 (742,845) 690,169
Property, plant and equipment, net 430 626,212 1,009 - 627,651
Intangible assets, net 12,725 264,751 2,176 - 279,652
Other assets 475,837 11,037 - (456,936) 29,938
----------- ------------ ------------ ------------- ------------
Total assets $ 1,231,837 $ 1,573,335 $ 22,019 $ (1,199,781) $ 1,627,410
=========== ============ ============ ============= ============
Liabilities and Shareholders' Equity:
-------------------------------------
Accounts payable and accrued liabilities $ 10,105 $ 151,722 $ 3,750 $ - $ 165,577
Payables to affiliates - 736,760 6,085 (742,845) -
Other current liabilities - 37,087 263 - 37,350
Current portion of long-term debt 28,384 59,150 - - 87,534
Current portion of long-term debt (default
subsequent to September 30, 2000) 637,539 - - - 637,539
----------- ------------ ------------ ------------- ------------
Total current liabilities 676,028 984,719 10,098 (742,845) 928,000
Noncurrent liabilities 196 103,985 106 - 104,287
Long-term debt in (default subsequent to
September 30, 2000) 306,367 39,510 - - 345,877
----------- ------------ ------------ ------------- ------------
Total liabilities 982,591 1,128,214 10,204 (742,845) 1,378,164
Redeemable convertible preferred stock 79,875 - - - 79,875
Shareholders' equity 169,371 445,121 11,815 (456,936) 169,371
----------- ------------ ------------ ------------- ------------
Total liabilities and
shareholders' equity $ 1,231,837 $ 1,573,335 $ 22,019 $ (1,199,781) $ 1,627,410
=========== ============ ============ ============= ============
</TABLE>
18
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended October 2, 1999
----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 410,720 $ 7,262 $ (2,176) $ 415,806
Cost of goods sold - 370,269 7,234 (2,176) 375,327
Provision for inventory write-down - 4,900 - - 4,900
--------- ------------ ---------- ----------- ------------
Gross profit - 35,551 28 - 35,579
Selling, general and administrative (1,817) 31,029 236 - 29,448
Provision for asset impairment - 2,000 - - 2,000
--------- ------------ ---------- ----------- ------------
Earnings (loss) from operations 1,817 2,522 (208) - 4,131
Equity in loss of subsidiaries (12,054) - - 12,054 -
Interest expense (income) 316 20,950 (3) - 21,263
--------- ------------ ---------- ----------- ------------
Loss before income taxes
(10,553) (18,428) (205) 12,054 (17,132)
Income taxes 526 (6,537) (42) - (6,053)
--------- ------------ ---------- ----------- ------------
Net loss (11,079) (11,891) (163) 12,054 (11,079)
Preferred dividends 9,526 - - - 9,526
--------- ------------ ---------- ----------- ------------
Loss applicable to common shareholders $ (20,605) $ (11,891) $ (163) $ 12,054 $ (20,605)
========= ============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 354,934 $ 7,348 $ (4,846) $ 357,436
Cost of goods sold - 324,903 7,907 (4,846) 327,964
--------- ------------ ------------ ----------- -----------
Gross profit (loss) - 30,031 (559) - 29,472
Selling, general and administrative (2,315) 27,170 155 - 25,010
--------- ------------ ------------ ----------- -----------
Earnings (loss) from operations 2,315 2,861 (714) 4,462
Equity in loss of subsidiaries (10,909) - 10,909 -
Interest expense 8,129 19,143 385 - 27,657
--------- ------------ ------------ ----------- -----------
Loss before income taxes (16,723) (16,282) (1,099) 10,909 (23,195)
Income taxes (455) (6,472) - - (6,927)
--------- ------------ ------------ ----------- -----------
Net loss (16,268) (9,810) (1,099) 10,909 (16,268)
Preferred dividends 2,040 - - - 2,040
--------- ------------ ------------ ----------- -----------
Loss applicable to common shareholders $ (18,308) $ (9,810) $ (1,099) $ 10,909 $ (18,308)
========= ============ ============ =========== ===========
</TABLE>
19
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Nine Months Ended October 2, 1999
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 1,130,107 $ 20,973 $ (4,299) $ 1,146,781
Cost of goods sold - 981,891 19,990 (4,299) 997,582
Provision for inventory write-down - 4,900 - - 4,900
--------- -------------- -------------- -------------- --------------
Gross profit - 143,316 983 - 144,299
Selling, general and administrative (3,905) 82,901 636 - 79,632
Provision for asset impairment - 2,000 - - 2,000
-------- -------------- -------------- -------------- --------------
Earnings from operations 3,905 58,415 347 - 62,667
Equity in earnings (loss) of
subsidiaries (1,852) - - 1,852 -
Interest expense (income) (403) 60,887 (20) - 60,464
-------- -------------- -------------- -------------- --------------
Earnings (loss) before income taxes 2,456 (2,472) 367 1,852 2,203
Income taxes 1,508 (262) 9 - 1,255
-------- -------------- -------------- -------------- --------------
Net earnings (loss) 948 (2,210) 358 1,852 948
Preferred dividends 10,602 - - - 10,602
-------- -------------- -------------- -------------- --------------
Earnings (loss) applicable to
common shareholders $ (9,654) $ (2,210) $ 358 $ 1,852 $ (9,654)
======== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
---------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 1,043,614 $ 21,120 $ (20,198) $ 1,044,536
Cost of goods sold - 935,974 20,681 (20,198) 936,457
-------- -------------- -------------- -------------- --------------
Gross profit - 107,640 439 - 108,079
Selling, general and administrative (5,295) 79,378 479 - 74,562
-------- -------------- -------------- -------------- --------------
Earnings (loss) from operations 5,295 28,262 (40) - 33,517
Equity in (loss) of subsidiaries (27,286) - - 27,286 -
Interest expense 11,536 69,144 789 - 81,469
-------- -------------- -------------- -------------- --------------
Loss before income taxes (33,527) (40,882) (829) 27,286 (47,952)
Income taxes (1,414) (14,425) - - (15,839)
-------- -------------- -------------- -------------- --------------
Net loss (32,113) (26,457) (829) 27,286 (32,113)
Preferred dividends 5,977 - - - 5,977
-------- -------------- -------------- -------------- --------------
Loss applicable to common
shareholders $(38,090) $ (26,457) $ (829) $ 27,286 $ (38,090)
======== ============== ============== ============== ==============
</TABLE>
20
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession Subsequent to September 30, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Nine Months Ended October 2, 1999
-------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
operating activities $ 10,090 $ (26,038) $ (3,881) $ - $ (19,829)
Cash provided by (used in)
investing activities 71 (73,149) (72) - (73,150)
Cash provided by (used in)
financing activities (10,161) 101,435 3,813 - 95,087
---------- ------------ ------------ ------------- ------------
Net change in cash and cash
equivalents - 2,248 (140) - 2,108
Cash and cash equivalents at
beginning of year - 5,554 7 - 5,561
---------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ - $ 7,802 $ (133) $ - $ 7,669
========== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended October 2, 1999
-------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
operating activities $ (13,014) $ 15,450 $ 5,575 $ - $ 8,011
Cash provided by (used in)
investing activities 432 (26,043) (227) - (25,838)
Cash provided by (used in)
financing activities 12,582 9,384 (5,348) - 16,618
---------- ------------ ------------ ------------ ------------
Net change in cash and cash -
equivalents - (1,209) - (1,209)
Cash and cash equivalents at
beginning of year - 4,854 - - 4,854
---------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ - $ 3,645 - $ - $ 3,645
========== ============ ============ ============ ============
</TABLE>
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pillowtex Corporation and its subsidiaries are collectively referred to in this
report as the "Company". 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 1, 2000.
Subsequent Events
-----------------
Subsequent to the end of the Company's third fiscal quarter, on (the "Petition
Date"), Pillowtex Corporation and substantially all of its domestic subsidiaries
(collectively, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest
Cannon"), filed voluntary petitions for reorganization under chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") November
14, 2000. The chapter 11 cases pending for the Debtors (the "Chapter 11 Cases")
are being jointly administered for procedural purposes.
In conjunction with the commencement of the Chapter 11 Cases, the Debtors sought
and obtained several orders from the Bankruptcy Court which were intended to
enable the Debtors to operate in the normal course of business during the
Chapter 11 Cases. The most significant of these orders (i) permit the Debtors
to operate their consolidated cash management system during the Chapter 11 Cases
in substantially the same manner as it was operated prior to the commencement of
the Chapter 11 Cases, (ii) authorize payment of prepetition employee salaries,
wages and benefits and reimbursement of prepetition employee business expenses,
(iii) authorize payment of prepetition sales, payroll and use taxes owed by the
Debtors, (iv) authorize payment of criteria prepetition obligations to
customers, and (v) authorize payment of certain prepetition obligations to
critical vendors to aid the Debtors in maintaining operation of their business.
On November 14, 2000, the Bankruptcy Court also entered an order (the "Interim
DIP Financing Order") authorizing the Debtors to enter into a $150.0 million
debtor-in-possession financing facility (the "DIP Financing Facility") with Bank
of America, N.A. as agent for a syndicate of financial institutions comprised of
certain of the Company's prepetition senior secured lenders and to grant
superpriority claims and mortgages, security interests, and liens (including
primary liens), and on substantially all of the assets of the Debtors to secure
the DIP Financing Facility. Pursuant to the Interim DIP Financing Order, the
Debtors are authorized to utilize up to $60.0 million, consisting of up to $35.0
million in postpetition loans and $25 million in postpetition letters of credit,
under the DIP Financing Facility, on an interim basis pending a final hearing to
approve the DIP Financing Facility. Such hearing is scheduled for December 6,
2000. As of the date of this report, the documentation evidencing the DIP
Financing Facility has not been executed, but the parties have agreed to the
principal terms of the arrangement and the form documentation was attached to
the Interim DIP Financing Order. The Company anticipates that the documentation
for the DIP Financing Facility will be finalized and executed prior to the
Bankruptcy Court hearing scheduled for December 6, 2000. Following the entry of
the final order approving the DIP Financing Facility by the Bankruptcy Court
(the "Final DIP Financing Order"), the remaining $90.0 million, over and above
the $60.0 million approved by the Interim DIP Financing Order of the Bankruptcy
Court, would be available to the Debtors. The DIP Financing facility is
discussed further below.
The Debtors are currently operating their businesses as debtors-in-possession
pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition
obligations of the Debtors, including obligations under debt instruments,
generally may not be enforced against the Debtors, and any actions to collect
prepetition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have
the right, subject to Bankruptcy Court approval and certain other limitations,
to assume or reject executory contracts and unexpired leases. In this context,
"assumption" means that the Debtors agree to perform their obligations and cure
all existing defaults under the contract or lease, and "rejection" means that
the Debtors are relieved from their obligations to perform further under the
contract or lease, but are subject to a claim for damages for the breach
thereof. Any damages resulting from rejection of executory contracts and
unexpired leases will be treated as general unsecured claims in the Chapter 11
Cases unless such claims had been secured on a prepetition basis prior to the
Petition Date. The Debtors are in the process of reviewing their executory
contracts and unexpired leases to determine which, if any, they will reject.
The Debtors cannot presently determine or reasonably estimate the ultimate
liability that may result from rejecting contracts or leases or from the filing
of claims for any rejected contracts or leases, and no provisions have yet been
made for these items.
22
<PAGE>
The Bankruptcy Code provides that the Debtors have exclusive periods during
which only they may file and solicit acceptances of a plan of reorganization.
The exclusive period of the Debtors to file a plan for reorganization currently
expires on March 14, 2001; however, the Debtors can request the Bankruptcy Court
to extend the exclusive period. If the Debtors fail to file a plan of
reorganization during the exclusive period or, after such plan has been filed,
if the Debtors fail to obtain acceptance of such plan from the requisite
impaired classes of creditors and equity holders during the exclusive
solicitation period, any party in interest, including a creditor, an equity
holder, a committee of creditors or equity holders or an indenture trustee, may
file their own plan of reorganization for the Debtors.
After a plan of reorganization has been filed with the Bankruptcy Court, the
plan, along with a disclosure statement approved by the Bankruptcy Court, will
be sent to all creditors and equity holders. Following the solicitation period,
the Bankruptcy Court will consider whether to confirm the plan. In order to
confirm a plan of reorganization, the Bankruptcy Court, among other things, is
required to find that (i) with respect to each impaired class of creditors and
equity holders, each holder in such class has accepted the plan or will,
pursuant to the plan, receive at least as much as such holder would receive in a
liquidation, (ii) each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as described in the following
sentence), and (iii) confirmation of the plan is not likely to be followed by a
liquidation or a need for further financial reorganization of the Debtors or any
successors to the Debtors unless the plan proposes such liquidation or
reorganization. If any impaired class of creditors or equity holders does not
accept the plan and, assuming that all of the other requirements of the
Bankruptcy Code are met, the proponent of the plan may invoke the "cram down"
provisions of the Bankruptcy Code; under these provisions, the Bankruptcy Court
may confirm a plan notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity holders if certain requirements of the Bankruptcy
Code are met. These requirements may, among other things, necessitate payment
in full for senior classes of creditors before payment to a junior class can be
made. As a result of the amount of prepetition indebtedness and the
availability of the "cram down" provisions, the holders of the Company's capital
stock may receive no value for their interests under the plan of reorganization.
Because of such possibility, the value of the Company's outstanding capital
stock is highly speculative.
Since the Petition Date, the Debtors have continued to conduct business in the
ordinary course. Management is in the process of stabilizing the business of the
Debtors and evaluating their operations before beginning the development of a
plan of reorganization.
During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy
Court approval, sell assets and settle liabilities, including for amounts other
than those reflected in the financial statements. The administrative and
reorganization expenses resulting from the Chapter 11 Cases will unfavorably
affect the Debtors' results of operations. Future results of operations may also
be adversely affected by other factors related to the Chapter 11 Cases.
Results of Operations
---------------------
Net Sales. Net sales were $357.4 million for the three months ended September
---------
30, 2000, representing a decrease of $58.4 million, or 14.0%, as compared to
$415.8 million for the three months ended October 2, 1999. Sales through the
first nine months of this fiscal year were $1,044.5 million, down $102.3 million
or 8.9% from the comparable period last year. The drop in sales comes mainly
from towels and sheets, where increased competition from imports and higher
inventory levels held by certain customers softened demand for these products in
the Company's institutional and regional discount markets.
Gross Profit. Gross profit margins for the three and nine months ended October
------------
2, 1999 were 8.6% and 12.6%, respectively. For the three and nine months ended
September 30, 2000, gross profit margins decreased to 8.2% and 10.3%,
respectively, which included a $4.9 million water-down. The decline in gross
profit margin for both the three and nine months ended September 30, 2000 were
primarily due to lower volumes, higher unabsorbed overhead expenses and higher
cost of raw materials. Gross profit for each 1999 period was negatively affected
by a $4.9 million inventory write-down. The Company's gross profit margins
continue to experience downward pressure due to the factors described above.
Selling, General and Administrative ("SG&A"). SG&A expenses (including asset
--------------------------------------------
impairments) decreased $6.4 million to $25.0 million for the three months ended
September 30, 2000, compared to $31.4 million for the three months ended October
2, 1999. SG&A decreased $7.1 million for the first nine months of fiscal year
2000 compared to the same period of 1999. Excluding the write-offs associated
with the Company's Opelika facility last year and a note receivable this year,
and higher professional fees associated with activities related to the Company's
23
<PAGE>
financial difficulties, SG&A expenses were lower primarily because of staff
reductions since the beginning of this year.
Interest Expense. Interest expense increased $6.4 million to $27.7 million for
----------------
the three months ended September 30, 2000, compared to $21.3 million for the
three months ended October 2, 1999. Interest expense for the nine months ended
September 30, 2000 was $81.5 million, $21.0 million higher than the comparable
period in 1999. Contributing to this increase were bank fees related to the
restructuring of the Company's senior debt facilities, higher levels of debt and
a higher weighted average interest rate of 9.9% for the nine months ended
September 30, 2000, compared to 8.0% for the nine months ended October 2, 1999.
The weighted average interest rate for the three months ended September 30, 2000
was 10.1%, compared to 8.1% for the three months ended October 2, 1999.
Long-Lived Assets. During the third quarter of 1999, the Company recorded a
-----------------
$2.0 million charge to adjust the carrying value of the Opelika facility, which
was closed in the first quarter of 1999, to estimated fair market value.
The Company's ability to fully recover the carrying amount of goodwill and other
long-lived assets through undiscounted cash flows assumes that results of
operations and cash flows in future periods will improve from their current
levels. In the event that the market or general economic conditions affecting
the Company worsen or if management is unable to achieve its business
objectives, impairment of goodwill and other long-lived assets may be necessary;
these impairment charges could be material in the near term. Additionally,
management is currently evaluating various many alternatives for restructuring
the Company's business. These alternatives include, among other things, disposal
of certain assets. In the event of a disposal of assets, a loss could result if
the cash flows generated from disposal are not sufficient to recover the
carrying amount of such assets. As of September 30, 2000, the Company had no
assets that were held for sale.
Liquidity and Capital Resources
-------------------------------
DIP Financing Facility. As indicated above, on November 14, 2000, the
----------------------
Bankruptcy Court entered the Interim DIP Financing Order authorizing the Debtors
to enter into the $150.0 million DIP Financing Facility and to grant mortgages,
security interests, and liens (including priming liens), and on substantially
all of the assets of the Debtors to secure the DIP Financing Facility. Pursuant
to the Interim DIP Financing Order, the Debtors are authorized to utilize up to
$60.0 million, consisting of up to $35.0 million in postpetition loans and $25.0
million in postpetition letters of credit, under the DIP Financing Facility, on
an interim basis pending a final hearing to approve the DIP Financing Facility.
Such hearing is scheduled for December 6, 2000. As of the date of this report,
the documentation evidencing the DIP Financing Facility has not been executed,
but the parties have agreed to the principal terms of the arrangement and the
form documentation was attached to the Interim DIP Financing Order. The Company
anticipates that the documentation for the DIP Financing Facility will be
finalized and executed prior to the Bankruptcy Court hearing scheduled for
December 6, 2000. Following the entry of the Final DIP Financing Order, the
remaining $90.0 million, over and above the $60.0 million approved by the
Interim Order of the Bankruptcy Court, would be available to the Debtors.
Under the terms of the DIP Financing Facility, a $150.0 million revolving credit
facility, including up to $60.0 million for post petition letters of credit,
would be available to the Company until the earliest of (a) November 14, 2001,
(b) the date on which the plan of reorganization becomes effective, (c) any
material non-compliance with any of the terms of the Interim DIP Financing Order
or the Final DIP Financing Order, (d) any event of default that shall have
occurred under the DIP Financing Facility, or (e) consummation of a sale of
substantially all of the assets of the Company pursuant to an order of the
Bankruptcy Court shall have occurred. Upon the satisfaction of certain
conditions, the November 14, 2001 maturity date could be extended for an
additional period of six months upon payment of an extension fee equal to 0.50%
of the portion of the DIP Financing Facility being extended. Amounts borrowed
under the DIP Financing Facility would bear interest at the option of the
Company at the rate of London Interbank Offered Rate ("LIBOR") plus 3.50% or
Bank of America's Base Rate (which is the higher of Federal Funds Rate or Prime
Rate plus, in either case, 0.05%) plus 1.00%. In addition to a facility fee and
an underwriting fee of 0.50% each, there is an unused commitment fee of 0.50%, a
letter of credit fee of 3.50%, and a letter of credit fronting fee of 0.20%. The
DIP Financing Facility would be secured by a first priority priming lien on the
real and personal assets of the Company that also secure the prepetition senior
secured credit facilities and a junior lien on certain plant and equipment that
secure six industrial revenue bond facilities (the "IRB Facilities") aggregating
approximately $15.5 million and certain obligations to the Pension Benefit
Guaranty Corporation. The documentation evidencing the DIP Financing Facility
would contain financial covenants requiring maintenance of an asset coverage
ratio and a minimum operating cash flow, as well as other covenants that limit,
among other things, indebtedness, liens, sales of
24
<PAGE>
assets, capital expenditures and investments, and prohibit dividend payments.
The net proceeds of certain asset sales outside the ordinary course of business
would reduce prepetition indebtedness under the senior secured credit
facilities; otherwise, the net proceeds of asset sales outside the ordinary
course of business would be applied as a permanent reduction of the DIP
Financing Facility.
There can be no assurance that the documentation evidencing the DIP Financing
Facility will be finalized and executed on the terms described above or that, if
finalized and executed on such terms, the DIP Financing Facility will be
approved by final order of the Bankruptcy Court.
Senior Debt Facilities. In December 1997, in connection with the Fieldcrest
----------------------
Cannon acquisition, the Company entered into senior secured revolving credit and
term loan facilities with a group of financial and institutional investors for
which Bank of America, N.A. acts as the administrative and collateral agent.
These facilities consisted of a $350.0 million revolving credit facility and a
$250.0 million term loan facility. The term loan facility consisted of a $125.0
million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective
July 28, 1998, the Company amended these facilities by increasing the Tranche B
Term Loan to $225.0 million. The increase occurred in conjunction with the
acquisition of The Leshner Corporation, allowing the Company to fund the
transaction and reduce borrowings under the revolving credit facility. Effective
March 12, 1999, the revolving credit facility was amended to permit the Company
to use for working capital one-half of a $61.0 million portion of the facility
held as contingency reserve for cash payments required upon conversion of the
Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6%
Debentures"), thereby increasing availability under that facility. Effective
October 1, 1999, the revolving credit facility was further amended to permit the
Company to use the other half of the contingency reserve for working capital,
thereby increasing availability under that facility. At the end of the third and
fourth quarters of its 1999 fiscal year, the Company was not in compliance with
certain financial covenants under its senior debt facilities. The Company
obtained a series of temporary waivers of this non-compliance. Effective as of
December 7, 1999, the Company agreed to certain amendments to the senior debt
facilities, principally related to cash management, additional collateral,
adjustments to restrictive covenants, and borrowings under, and uses of proceeds
from, the revolving credit facility. Effective as of March 31, 2000, the Company
obtained a permanent waiver of its prior non-compliance with financial covenants
and the senior debt facilities were further amended to shorten their terms to
maturity and accelerate the related amortization schedule for repayment of
principal, to eliminate reinstatement of the contingency reserve requirement
referred to above, to increase the applicable interest rate margins (subject to
reduction if the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") exceeds a specified level for the 2000 fiscal year), to
add a covenant requiring that EBITDA must exceed specified levels for future
fiscal periods and eliminate all other financial covenants, to modify certain
restrictive covenants, to limit borrowings under the revolving credit facility
based on a formula tied to 45% of eligible inventory plus 80% of eligible
accounts receivable, and to provide for a series of reductions in the commitment
under the revolving credit facility.
The revolving credit facility includes $55.0 million of availability for letters
of credit. Under the revolving credit facility, at September 30, 2000, $302.5
million of loans were outstanding, $32.9 million of letters of credit were
outstanding, and $14.6 million was available for borrowings.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus
3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche
A Term Loan, plus an additional margin of 0.50%. The weighted average annual
interest rate on outstanding borrowings under the various senior credit
facilities through the third quarter of 2000 was 10.21%. The senior debt
facilities expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic subsidiaries
of the Company, and are secured by first priority liens on all of the capital
stock of each domestic subsidiary of the Company and by 65% of the capital stock
of the Company's foreign subsidiaries. The Company has also granted a first
priority security interest in all of its presently unencumbered and future
domestic assets and properties, and all presently unencumbered and future
domestic assets and properties of each of its subsidiaries. The term loan
facility is subject to mandatory prepayment from all net cash proceeds of asset
sales and debt issuances of the Company (except as specifically provided), 50%
of the net cash proceeds of equity issuances by the Company or any of its
subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory
prepayments are to be applied pro rata between the Tranche A Term Loan and the
Tranche B Term Loan to reduce the remaining installments of principal.
On September 30, 2000, and prior to the Petition Date, the Company was not in
compliance with its EBITDA financial covenant under the senior debt facilities.
The Company obtained from its senior lenders a temporary
25
<PAGE>
waiver of such non-compliance through November 7, 2000, during which time the
Company engaged in active discussions with its senior lenders to obtain an
extended or permanent waiver of such non-compliance. The Company was unable to
reach such an agreement with its senior lenders and the waiver expired on
November 7, 2000. On November 8, 2000, the agent for the senior lenders
delivered a notice of default to the Company that declared an event of default
under the senior debt facilities based upon such non-compliance with its EBITDA
financial covenant. The senior lenders did, however, forbear from exercising
rights and remedies under the senior debt facilities and agreed to continue to
make available to the Company the unused credit capacity under the revolving
credit facility until December 7, 2000. In addition, on November 8, 2000, the
senior lenders issued a Payment Blockage Notice to the Company and the indenture
trustee for the Company's 10% Senior Subordinated Notes due 2006 (the "10%
Notes") prohibiting payment by the Company of the semi-annual interest payment
in the aggregate amount of approximately $6.25 million due to the holders of the
10% Notes on November 15, 2000. After a 30-day grace period, the 10% Notes would
be in default for nonpayment of interest. In addition, the Company was obligated
to make a semi-annual interest payment on its 9% Senior Subordinated Notes due
2007 (the "9% Notes") on December 15, 2000 aggregating $8.3 million, which
payment the senior lenders likewise indicated they would also block. As a result
of the circumstances confronting the Company and its inability to refinance the
senior debt facilities or obtain additional capital, the Debtors filed the
Chapter 11 Cases on November 14, 2000.
As a result of the EBITDA financial covenant default, the Company has classified
all of the senior secured debt directly affected by the default (including debt
under the overline facility described below) as current. As of September 30,
2000, the long-term debt payable within one year was $725.1 million, of which
$637.5 million is the result of the default.
Overline Facility. In May 1999, the Company entered into a $20.0 million senior
-----------------
unsecured revolving credit facility (overline facility) in order to obtain
additional working capital availability. On July 27, 1999, the overline
facility was amended to increase the amount of funds available to $35.0 million.
At the end of the third and fourth quarters of its 1999 fiscal year, the Company
was not in compliance with certain financial covenants under the overline
facility, the covenants of which are incorporated by reference to the senior
debt facilities described above. The Company obtained a series of temporary
waivers of this non-compliance and extensions of the maturity date. Effective
as of December 7, 1999, the Company agreed to certain amendments to the overline
facility, resulting in the overline facility being secured by the assets
securing the senior debt facilities described above. Effective as of March 31,
2000, the Company obtained a permanent waiver of its prior non-compliance and
the overline facility was amended to lengthen its term to maturity, to impose an
amortization schedule for the repayment of principal, and to increase the
applicable interest rate margins (subject to reduction if EBITDA exceeds a
specified level for the 2000 fiscal year).
The overline facility is guaranteed on a senior basis by the Company's domestic
subsidiaries. The Company is currently required to pay interest on any amounts
borrowed under the overline facility at a rate which is based upon LIBOR plus
4.5% or the base rate plus 3.0%, at the Company's option. The overline facility
matures upon termination by the Company at any time or otherwise at the earliest
of: (i) any increase in the commitment under the senior debt facilities
described above, the issuance of any capital stock by the Company or its
domestic subsidiaries, or other specified events; or (ii) January 31, 2002.
For the reasons discussed above with respect to the default under the senior
debt facilities, the Company is also in default under the overline facility.
Senior Subordinated Debt. In connection with the Fieldcrest Cannon merger, the
------------------------
Company issued $185.0 million of the 9% Notes, with interest payable
semiannually commencing June 15, 1998. The Company may, at its option, redeem
the 9% Notes, in whole or in part, on or after December 15, 2002 at a redemption
price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%.
The 9% Notes are general unsecured obligations of the Company, are subordinated
in right of payment to all existing and future senior indebtedness, and rank
pari passu with the 10% Notes described below.
On November 12, 1996, the Company issued $125.0 million of the 10% Notes, with
interest payable semiannually commencing May 15, 1997. The Company may, at its
option, redeem the 10% Notes, in whole or in part, on or after November 15, 2001
at a redemption price of 105.0%, which declines 1.667% annually through November
15, 2004 to 100%. The 10% Notes are general unsecured obligations of the
Company, are subordinated in right of payment to all existing and future senior
indebtedness, and rank pari passu with the 9% Notes.
26
<PAGE>
The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior
subordinated basis by each of the existing and future domestic subsidiaries of
the Company and each other subsidiary of the Company that guarantees the
Company's obligations under the senior debt facilities described above. The
guarantees are subordinated in right of payment to all existing and future
senior indebtedness of the relevant guarantor. Upon a change in control, the
Company will be required to make an offer to repurchase all outstanding 9% Notes
and 10% Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of repurchase.
As a result of the filing of the Chapter 11 Cases, the Company is in default
under the indentures governing both the 9% Notes and the 10% Notes.
Fieldcrest Cannon Convertible Debentures. As a result of the Company's
----------------------------------------
acquisition of Fieldcrest Cannon, the outstanding 6% Debentures are convertible,
at the option of the holders, into a combination of cash and the Company's
common stock ("Common Stock"). During the fourth quarter of 1999, the Company
notified the holders of the 6% Debentures that it was not practicable or prudent
for payments to be made in respect of the conversion of the 6% Debentures and
advised holders that had given notice of conversion and surrendered their 6%
Debentures that they could rescind their notice of conversion, return to the
Company any Common Stock that had been issued to them and have their 6%
Debentures reinstated. Although many holders did rescind and return their
Common Stock, other holders could not rescind because they had already sold
their Common Stock. As of September 30, 2000, the cash component remaining to
be paid in respect of the 6% Debentures that had been surrendered without
subsequent rescission was approximately $5.2 million. In addition, as of
September 30, 2000, approximately $90.4 million aggregate principal amount of
the 6% Debentures remained outstanding, including 6% Debentures that had been
surrendered without subsequent rescission. If all such outstanding 6%
Debentures were converted at such date, including those surrendered without
subsequent rescission, the resulting cash component to be paid to the holders of
the 6% Debentures would have been approximately $57.2 million.
Prior to the Petition Date, the Company was prohibited under the terms of the
indentures governing the 9% Notes and the 10% Notes from making payments in
respect of the 6% Debentures except for interest payments and payments at
maturity or pursuant to sinking fund obligations. In an effort to address both
(i) the unpaid cash portion of the conversion consideration owing to those
holders of 6% Debentures who have surrendered their debentures for conversion
but have not been paid the cash portion of the conversion consideration (the
"Cash Claimants") and (ii) the cash payment prohibition in respect of any future
conversions, the Company initiated discussions with certain holders of the 6%
Debentures regarding a potential restructuring of the 6% Debentures.
Notwithstanding months of efforts, the parties to those discussions were unable
to agree upon a mutually satisfactory comprehensive restructuring of the 6%
Debentures and amounts owing to the Cash Claimants. In September 2000, the
Company notified the holders of the 6% Debentures of its plan for making
payments to the Cash Claimants. Pursuant to the plan, the Company agreed to pay
out as a "scheduled payment" cash in the amount of approximately $3.8 million
annually to the Cash Claimants, which is the amount of cash sufficient to
complete the conversion of $6.25 million principal amount of the 6% Debentures
annually and utilize such converted 6% Debentures as a credit to satisfy its
annual sinking fund obligation under the indenture governing the 6% Debentures.
As part of the plan and in accordance with the terms of the indenture governing
the 6% Debentures, the Company agreed to pay out cash to the Cash Claimants in
order to complete and finalize Debenture conversions and utilize such converted
Debentures as credits to satisfy its annual sinking fund obligations as follows:
(i) approximately $3.8 million on September 28, 2000, (ii) approximately $3.8
million on March 16, 2001, and (iii) the balance owing to Cash Claimants on
March 18, 2002. These cash payments would be made by the Company to the Cash
Claimants in the order the 6% Debentures were presented for conversion, i.e., on
a first to convert, first to be paid basis. Furthermore, the unpaid cash
portion for each Cash Claimant is evidenced by a non-interest bearing
subordinated promissory note executed by Fieldcrest Cannon (the "Cash Claimant
Notes"). Pursuant to the plan, the Company made the first scheduled payment on
September 28, 2000. As of September 30, 2000, the aggregate principal amount of
the outstanding Cash Claimant Notes was $5.2 million.
As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in
default under the indenture governing the 6% Debentures and the Cash Claimant
Notes.
Industrial Revenue Bonds. The Company has obligations in respect of six
------------------------
industrial revenue bond facilities. The IRB Facilities are secured by liens on
specified plants and equipment. As of September 30, 2000, $15.5 million of
bonds in the aggregate were outstanding under the IRB Facilities.
As a result of the default on the senior debt facilities and the filing of the
Chapter 11 Cases, the Company is in default of its obligations under each of the
IRB Facilities.
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Swap Agreements. The Company enters into interest rate swap agreements to modify
---------------
the interest characteristics of portions of its outstanding debt. These
agreements entitle the Company to receive or pay to the counterparty (a major
bank), on a quarterly basis, the amounts, if any, by which the Company's
interest payments covered by swap agreements differ from those of the
counterparty. These amounts are recorded as adjustments to interest expense. The
fair value of the swap agreements and changes in fair value as a result of
changes in market interest rates are not currently recognized in the
consolidated financial statements. As of January 1, 2000, the Company had
approximately $345.0 million of notional amounts covered under interest rate
swap agreements whereby the Company exchanged floating rates for fixed rates.
The weighted average fixed and floating rates were 4.70% and 5.96%,
respectively. As of September 30, 2000, the Company had approximately $230.0
million of notional amounts covered under interest rate swap agreements whereby
the Company exchanged floating rates for fixed rates. The weighted average fixed
and floating rates were 4.68% and 6.61%, respectively. The fair values of the
swaps at January 1, 2000 and September 30, 2000 were $4.0 million and $1.2
million, respectively, in favor of the Company. These swaps expired on October
27, 2000.
Adequacy of Capital Resources. As discussed above, the Debtors are operating
-----------------------------
their businesses as debtors-in-possession under chapter 11 of the Bankruptcy
Code. The Company anticipates that it will incur significant professional fees
and other restructuring costs in connection with the Chapter 11 Cases and the
ongoing restructuring of its business operations throughout the remainder of
fiscal year 2000 and during fiscal year 2001. Based on current and anticipated
levels of operations, and efforts to reduce inventories and accounts receivable,
the Company anticipates that its cash flow from operations, together with
amounts available under the DIP Financing Facility, will be adequate to meet its
anticipated cash requirements during the time that the Chapter 11 Cases are
pending. In the event that cash flows and available borrowings under the DIP
Financing Facility are not sufficient to meet future cash requirements, the
Company may be required to reduce planned capital expenditures or seek
additional financing. The Company can provide no assurances that reductions in
planned capital expenditures would be sufficient to cover shortfalls in
available cash or that additional financing would be available or, if available,
offered on acceptable terms. The Company's long-term liquidity and the adequacy
of the Company's capital resources cannot ultimately be determined until a plan
of reorganization has been developed and confirmed by the Bankruptcy Court in
connection with the Chapter 11 Cases.
Recent Accounting Matters
-------------------------
The Company is assessing the reporting and disclosure requirements of SFAS No.
133, "Accounting For Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and will require the Company to recognize all
derivatives on its balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivatives will either be offset against the change in fair value of the hedged
item through earnings, or recognized in other comprehensive income until the
hedged item is recognized in earnings. The Company will adopt SFAS No. 133, as
amended in the first quarter of fiscal 2001 and is evaluating the impact
adoption will have on the Company's results of operations and financial
position.
Cautionary Statement regarding Forward-Looking Statements
---------------------------------------------------------
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements include
statements identified by the use of the words "will," "would," "could,"
"should," anticipates," "believes," "expects," "estimates," "intends" or similar
expressions and other statements that are not historical facts. Such forward-
looking statements are subject to various risks and uncertainties that could
cause actual results to differ materially from those expressed in or implied by
such statements. Factors which could cause the Company's actual results in
future periods to differ materially from those expressed in or implied by such
statements include, but are not limited to, the following:
- The documentation evidencing the DIP Financing Facility may not be finalized
and executed on the terms described herein; if finalized and executed on such
terms, the DIP Financing Facility may not be approved by final order of the
Bankruptcy Court.
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- The cash and cash equivalents on hand at November 14, 2000, cash generated by
the Company from operations and cash available from borrowing under the DIP
Financing Facility may not be sufficient to fund the operations of the
Company until such time as the Company is able to propose a plan of
reorganization that will be acceptable to creditors and other parties in
interest and confirmed by the Bankruptcy Court.
- Actions may be taken by creditors or other parties in interest that may have
the effect of preventing or unduly delaying confirmation of a plan of
reorganization in connection with the Chapter 11 Cases.
- The Bankruptcy Court may not confirm the Company's plan of reorganization,
when proposed.
- The plan of reorganization proposed by the Company and approved by the
Bankruptcy Court may not be viable.
- The Company's senior management may be required to expend a substantial
amount of time and effort structuring a plan of reorganization, which could
have a disruptive impact on management's ability to focus on the operation of
the Company's business.
- The Company may not be able to obtain sufficient financing to meet future
obligations.
- The Company's access to capital markets will likely be limited for the
foreseeable future.
- The Company may have difficulty in attracting and retaining customers, top
management and other key personnel and labor as a result of the Chapter 11
Cases.
- The Company may have difficulty in maintaining existing or creating new
relationships with suppliers or vendors as a result of the Chapter 11 Cases;
suppliers to the Company may stop providing supplies or services to the
Company or provide such supplies or services only on "cash on delivery,"
"cash on order" or other terms that could have an adverse impact on the
Company's cash flow.
- The Company faces significant competitive pressures.
- The price and availability of raw materials used by the Company are subject
to rapid and significant change.
- The Company may be affected by changes in general retail industry conditions.
- The Company's success may depend in part on the goodwill associated with and
protection of the brand names owned by the Company.
Certain of these factors, as well as other such factors, are discussed under the
captions "Cautionary Statement Regarding Forward-Looking Statements" and "Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
January 1, 2000. By making these forward-looking statements, the Company does
not undertake to update them in any manner except as may be required by law.
29
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PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Securities
On November 8, 2000, the agent for the senior lenders delivered a notice of
default to the Company that declared an event of default under the Company's
senior debt facilities based upon the Company's non-compliance with its EBITDA
financial covenant. For the same reason, the Company is in default under the
overline facility.
As a result of the filing of the Chapter 11 Cases, the Company is also in
default under the indentures governing both the 9% Notes and the 10% Notes, and
Fieldcrest Cannon is in default under the indenture governing the 6% Debentures
and the Cash Claimant Notes.
As a result of the default the senior debt facilities and the filing of the
Chapter 11 Cases, the Company is in default of its obligations under each of the
IRB Facilities.
See Notes 2 and 6 to the attached consolidated financial statements and "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding these defaults. Such
information is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
30
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 20, 2000 PILLOWTEX CORPORATION
(Registrant)
/s/ Anthony T. Williams
---------------------------------------
Anthony T. Williams
President, Chief Operating Officer
and Chief Financial Officer
31
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INDEX TO EXHIBITS
Exhibit Method of Filing
------- ----------------
27.1 Financial Data Schedule................... Filed herewith electronically
32
