<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 July 1, 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 August 9, 2000
----- -----------------------------
Common Stock, $.01 par value 14,257,655
1
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PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
Part I - Financial Information Page No.
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of January 1, 2000 and
July 1, 2000 3
Consolidated Statements of Operations for the three months
ended July 3, 1999 and July 1, 2000 4
Consolidated Statements of Operations for the six months
ended July 3, 1999 and July 1, 2000 5
Consolidated Statements of Cash Flows for the six months 6
ended July 3, 1999 and July 1, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index to Exhibits 24
</TABLE>
2
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PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and July 1, 2000
(Dollars in thousands, except for par value)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 1999 2000
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 4,854 3,350
Receivables:
Trade, less allowances of $33,351 and $28,176 in 1999...................... 234,472
and 2000, respectively.................................................. 268,499
Other...................................................................... 17,923 17,748
Inventories.................................................................. 423,052 461,828
Assets held for sale......................................................... 1,595 1,193
Prepaid expenses............................................................. 5,502 5,741
----------- -----------
Total current assets................................................. 721,425 724,332
Property, plant and equipment, less accumulated depreciation of
$150,384 and $176,478 in 1999 and 2000, respectively......................... 644,821 630,597
Intangible assets, at cost, less accumulated amortization of $26,355 and
$31,840 in 1999 and 2000, respectively................................... 288,856 282,845
Other assets.................................................................. 28,287 31,229
----------- -----------
$ 1,683,389 1,669,003
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 119,848 122,770
Accrued expenses............................................................. 73,238 57,137
Deferred income taxes........................................................ 37,848 36,590
Current portion of long-term debt (Note 5)................................... 85,759 87,557
----------- -----------
Total current liabilities............................................ 316,693 304,054
Long-term debt, less current portion (Note 5)................................. 965,323 987,654
Deferred income taxes......................................................... 67,720 59,606
Noncurrent liabilities........................................................ 52,366 52,278
----------- -----------
Total liabilities.................................... 1,402,102 1,403,592
Series A redeemable convertible preferred stock, $0.01 par value; 65,000 and
79,455 shares issued and outstanding in 1999 and 2000 respectively,.......... 73,898 77,835
including accrued dividends (Note 6)
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 14,241,070 shares issued and outstanding
in 1999 and 2000, respectively............................................. 142 142
Additional paid-in capital................................................... 160,515 160,515
Retained earnings............................................................ 49,269 29,487
Currency translation adjustment.............................................. (1,730) (1,947)
Deferred compensation........................................................ (807) (621)
----------- -----------
Total shareholders' equity........................................... 207,389 187,576
----------- -----------
$ 1,683,389 1,669,003
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 3, 1999 and July 1, 2000
(Dollars in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 2000
------- -------
Net sales............................................................................... $ 362,468 $ 341,940
Cost of goods sold...................................................................... 306,211 302,428
------- -------
Gross profit......................................................................... 56,257 39,512
Selling, general and administrative expenses............................................ 25,800 22,613
------ ------
Earnings from operations............................................................. 30,457 16,899
Interest expense........................................................................ 19,735 25,968
------ ------
Earnings (loss) before income taxes.................................................. 10,722 (9,069)
Income taxes............................................................................ 3,949 (2,951)
------ ------
Net earnings (loss).................................................................. 6,773 (6,118)
Preferred dividends and accretion....................................................... 540 1,994
------ ------
Earnings (loss) available for common shareholders.................................... $ 6,233 $ (8,112)
====== ======
Basic earnings (loss) per common share.................................................. $ .44 $ (.57)
====== ======
Weighted average common shares outstanding - basic...................................... 14,186 14,227
====== ======
Diluted earnings (loss) per common share................................................ $ .40 $ (.57)
====== ======
Weighted average common shares outstanding - diluted.................................... 16,914 14,227
====== ======
Dividends declared per common share..................................................... $ .06 $ -
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended July 3, 1999 and July 1, 2000
(Dollars in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Net sales........................................................................... $ 730,975 $ 687,100
Cost of goods sold.................................................................. 622,254 608,493
------- -------
Gross profit..................................................................... 108,721 78,607
Selling, general and administrative expenses........................................ 50,186 49,552
------- -------
Earnings from operations......................................................... 58,535 29,055
Interest expense.................................................................... 39,200 53,812
------- -------
Earnings (loss) before income taxes.............................................. 19,335 (24,757)
Income taxes........................................................................ 7,309 (8,912)
------- -------
Net earnings (loss).............................................................. 12,026 (15,845)
Preferred dividends and accretion................................................... 1,075 3,937
------- -------
Earnings (loss) available for common shareholders................................ $ 10,951 $ (19,782)
======= =======
Basic earnings (loss) per common share.............................................. $ .77 $ (1.39)
======= =======
Weighted average common shares outstanding - basic.................................. 14,167 14,227
======= =======
Diluted earnings (loss) per common share............................................ $ .71 $ (1.39)
Weighted average common shares outstanding - diluted................................ 16,925 14,227
======= =======
Dividends declared per common share................................................. $ .12 $ -
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 3, 1999 and July 1, 2000
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................................. $ 12,026 $ (15,845)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization.................................................... 27,902 32,210
Deferred income taxes............................................................ 1,991 (8,912)
Accretion on debt instruments.................................................... 530 732
Provision for doubtful accounts.................................................. 529 (283)
Amortization of deferred compensation............................................ 237 186
Changes in operating assets and liabilities:
Trade receivables............................................................. (18,285) 34,310
Inventories................................................................... (74,436) (38,776)
Accounts payable.............................................................. 61,771 3,419
Accrued expenses.............................................................. (18,312) (16,101)
Other assets and liabilities.................................................. 641 (1,955)
---------- -----------
Net cash used in operating activities........................................ (5,406) (11,015)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment.................................. 458 3,543
Purchases of property, plant and equipment........................................... (51,081) (16,932)
---------- -----------
Net cash used in investing activities........................................ (50,623) (13,389)
Cash flows from financing activities:
Decrease in checks not yet presented for payment..................................... (15,833) (497)
Borrowings on revolving credit loans................................................. 242,253 474,900
Repayments of revolving credit loans................................................. (153,293) (435,475)
Retirement of long-term debt......................................................... (10,945) (16,028)
Payments of debt issuance costs...................................................... (56) -
Dividends paid....................................................................... (2,669) -
Proceeds from exercise of stock options.............................................. 43 -
---------- -----------
Net cash provided by financing activities.................................... 59,500 22,900
Net change in cash and cash equivalents............................................... 3,471 (1,504)
Cash and cash equivalents at beginning of period...................................... 5,561 4,854
---------- -----------
Cash and cash equivalents at end of period............................................ $ 9,032 3,350
========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest........................................................................... $ 39,943 53,531
========== ===========
Income taxes....................................................................... $ (815) (3,105)
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Pillowtex
Corporation, which is referred to in this report as "Parent," and its
subsidiaries, which are collectively with Parent, referred to in this
report as the "Company," include all adjustments, consisting only of
normal, recurring adjustments and accruals, which are, in the opinion of
management, necessary for fair presentation of the results of operations
and financial position. Results of operations for interim periods may not
be indicative of future results. The unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's annual report on Form 10-K,
as filed with the Securities and Exchange Commission for the fiscal year
ended 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 ($5.3 million and $9.1 million for three and six month periods
ended July 3, 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) Comprehensive Income
Comprehensive income consists of net earnings (loss) and foreign currency
translation adjustments and aggregated $6.3 million and $12.1 million for
the three and six month periods ended July 3, 1999. For the three and six
months periods ended July 1, 2000, comprehensive loss aggregated were $6.4
million and $16.1 million respectively.
(3) Inventories
Inventories consisted of the following at January 1, 2000 and July 1, 2000:
January 1 July 1
2000 2000
---------- ----------
Finished goods $ 218,381 $ 253,254
Work-in-process 136,924 139,019
Raw materials 44,424 45,787
Supplies 23,323 23,768
---------- ----------
$ 423,052 $ 461,828
========== ==========
7
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PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(4) Earnings Per Share
The following table reconciles the numerators and denominators of basic and
diluted earnings (loss) per share for the three and six month periods ended
July 3, 1999. Options to purchase 747,000 shares of common stock were
outstanding during the three and six month periods ended July 3, 1999, but
were not included in the computation of diluted earnings per share because
inclusion would have been antidilutive. Additionally, debentures
convertible into 633,000 common shares were excluded from the computation
of diluted earnings per share for the three and six month periods ended
July 3, 1999 because inclusion would have been antidilutive. Preferred
stock convertible into 3,310,625 common shares, debentures convertible into
517,910 common shares and options to purchase 1,286,799 common shares at an
exercise price ranging from $4.31 to $46.50 were excluded from the
computation of diluted loss per share for the three month and six month
periods ended July 1, 2000 because inclusion would have been antidilutive.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3, 1999 July 3, 1999
------------------------- -------------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Basic - earnings available for common shareholders $ 6,233 14,186 $ 10,951 14,167
Effect of dilutive securities:
Stock options - 20 - 50
Convertible preferred stock 540 2,708 1,075 2,708
---------- ------ ---------- ------
Diluted - earnings available for common shareholders $ 6,773 16,914 $ 12,026 16,925
========== ====== ========== ======
</TABLE>
8
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PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(5) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 1, July 1,
2000 2000
------------ -----------
<S> <C> <C>
Revolver $ 259,800 $ 299,225
Overline Credit Facility 35,000 35,000
Term Loans 341,500 329,830
9% Senior subordinated notes 185,000 185,000
10% Senior subordinated notes 125,000 125,000
6% convertible subordinated sinking fund
debentures due in 2012 (effective rate of
8.72%, net of $14.3 million and $13.6
million in unamortized discount at 82,205 82,936
January 1, 2000 and July 1, 2000,
respectively)
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 15,669
Other debt 5,763 2,551
------------ -----------
1,051,082 1,075,211
Less:
Current portion 85,759 87,557
------------ -----------
Total long-term debt $ 965,323 $ 987,654
============== ===========
</TABLE>
In December 1997, in connection with the Fieldcrest Cannon acquisition,
Pillowtex entered into new senior secured revolving credit and term loan
facilities with a group of financial and institutional investors for which Bank
of America acts as the 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, Pillowtex 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
Pillowtex to fund the transaction and reduce borrowings under the revolving
credit facility. Effective March 12, 1999, the revolving credit facility was
amended to permit Pillowtex 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, thereby increasing availability under that facility.
Effective October 1, 1999, the revolving credit facility was further amended to
permit Pillowtex 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, Pillowtex 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
9
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreed to certain amendments to the senior debt facilities, principally related
to cash management, 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 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 to 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 Company is in compliance with the
amended financial covenants as of July 1, 2000 and believes that it will be able
to comply with the amended financial covenants in the future; however, the
company is subject to changing business and economic conditions (many of which
are beyond the Company's control) which may affect its ability to comply with
the covenants in the near term and there can be no assurance of such compliance.
The revolving credit facility includes $55.0 million of availability for
letters of credit. At July 1, 2000, $32.8 million of letters of credit were
outstanding and $18.0 million was available under the revolving credit facility.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon the London
Interbank Offered Rate 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 for the second quarter of 2000 was 10.03%. The
senior debt facilities expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of Pillowtex, and are secured by first priority liens on all of the
capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital
stock of Pillowtex's foreign subsidiaries. Pillowtex 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 Pillowtex (except as specifically provided), 50% of
the net cash proceeds of equity issuances by Pillowtex or any of its
subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory
prepayments will be applied pro rata between the Tranche A Term Loan and the
Tranche B Term Loan to reduce the remaining installments of principal.
The senior debt facilities contain a number of negative covenants, which
restrict, among other things, Pillowtex's ability to incur additional debt, pay
dividends or make other restricted payments, sell stock of subsidiaries, grant
liens, make capital expenditures, engage in transactions with affiliates, make
loans, advances and investments, dispose of assets, effect mergers,
consolidations and dissolutions, and make certain changes in its business.
A breach of any of the covenants contained in the senior debt facilities
could result in a default under the terms of the facilities. Upon the occurrence
of an event of default: the senior lenders would not be obligated to make
additional advances under the revolving credit facility; the senior lenders
would be entitled to declare all amounts outstanding under the senior debt
facilities, including accrued interest or other obligations, to be immediately
due and payable; the senior lenders would have the rights to block payment on
substantially all of Pillowtex's other long-term debt; and the senior lenders
would be entitled to proceed against the collateral granted to them to secure
the senior debt. In these circumstances, cross defaults could occur making
substantially all of Pillowtex's other long-term debt due. If any senior debt
were to be accelerated, the Company cannot be certain that its assets would be
sufficient to repay in full that debt and its other debt.
As a result of the covenants described above, Pillowtex's ability to
respond to changing business and economic conditions and to secure additional
financing, if needed, is significantly restricted.
In May 1999, Pillowtex 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, this 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, Pillowtex was not in compliance
with
10
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PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain financial covenants under this facility, the covenants of which are
established 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 this facility, resulting in the 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 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 the
Company's EBITDA exceeds a specified level for the 2000 fiscal year). This
facility is guaranteed on a senior basis by Pillowtex's domestic subsidiaries.
Pillowtex is currently required to pay interest on any amounts borrowed under
the facility at a rate which is based upon the London Interbank Offered Rate
plus 4.5% or the base rate plus 3.0%, at Pillowtex's option. This facility
matures upon termination by Pillowtex at any time or otherwise at the earliest
of: a) any increase in the commitment under the senior debt facilities described
above, the issuance of any capital stock by Pillowtex or its domestic
subsidiaries, or other specified events; or b) January 31, 2002.
In connection with the Fieldcrest Cannon merger, Pillowtex issued $185.0
million of 9% Senior Subordinated Notes due December 15, 2007, with interest
payable semiannually commencing June 15, 1998. Pillowtex 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 Pillowtex, and
are subordinated in right of payment to all existing and future senior
indebtedness, and rank pari passu to the 10% Notes described below.
On November 12, 1996, Pillowtex issued the 10% Senior Subordinated Notes
due November 15, 2006, with interest payable semiannually commencing May 15,
1997. Pillowtex 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 Pillowtex, and are subordinated in right of payment to
all existing and future senior indebtedness.
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
Pillowtex and each other subsidiary of Pillowtex that guarantees Pillowtex'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, Pillowtex 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 Pillowtex's acquisition of Fieldcrest Cannon, the
outstanding 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon
are convertible, at the option of the holders, into a combination of cash and
Pillowtex's Common Stock. During the fourth quarter of 1999, Pillowtex 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
Pillowtex any Pillowtex Common Stock that had been issued to them and have their
6% Debentures reinstated. Although many holders did rescind and return their
stock, other holders could not rescind because they had already sold their
Pillowtex stock. As of July 1, 2000, the cash component due in respect of the 6%
Debentures that had been surrendered without subsequent rescission was
approximately $9.1 million. In addition, as of July 1, 2000, approximately $94.2
million aggregate principal amount of the 6% Debentures remained outstanding. 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 $61.0
million (classified as a current liability at July 1, 2000).
Pillowtex is currently prohibited under the terms of its senior
subordinated debt 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 (Cash Claimants) and (ii) the cash
payment prohibition in respect of any future conversions, Pillowtex 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 have been unable to agree upon a mutually
satisfactory comprehensive restructuring proposal. The Company is still in the
process of examining the options currently available to it with respect to the
6% Debentures, but is not yet prepared to make a specific
11
<PAGE>
proposal; however, there can be no assurance that the Company will be able to
adopt a proposal that is satisfactory to the holders of the 6% Debentures.
As of January 1, 2000, Pillowtex had approximately $345.0 million of
notional amounts covered under interest rate swap agreements whereby Pillowtex
exchanged floating rates for fixed rates. The weighted average fixed and
floating rates were 4.70% and 6.05%, respectively. As of July 1, 2000, Pillowtex
had approximately $230.0 million of notional amounts covered under interest rate
swap agreements whereby Pillowtex exchanged floating rates for fixed rates. The
weighted average fixed and floating rates were 4.68% and 6.25%, respectively.
The fair values of the swaps at January 1, 2000 and July 1, 2000 were $4.0
million and $2.2 million, respectively, in favor of Pillowtex.
Under the terms of its senior secured credit agreements and senior
subordinated debt and its Series A Redeemable Convertible Preferred Stock,
Pillowtex currently is prohibited from paying cash dividends to or making other
distributions to holders of its Common Stock.
Based upon current and anticipated levels of operations, and efforts to
reduce inventories and accounts receivable, Pillowtex anticipates that its cash
flow from operations, together with amounts available under its revolving credit
facility, will be adequate to meet its anticipated cash requirements in the
foreseeable future (assuming no significant cash payments are required to be
made in respect of the 6% Convertible Debentures other than scheduled interest
payments and payments related to satisfaction of the sinking fund obligations).
In the event that cash flows and available borrowings under the revolving credit
facility are not sufficient to meet future cash requirements, Pillowtex may be
required to reduce planned capital expenditures or seek additional financing.
Pillowtex 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 terms
acceptable to the Company.
(6) 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 Fiscal 1999, the Company
accrued and paid in kind a one-time cumulative dividend on the Series A
Preferred Stock, from the issue date through December 31, 1999, equal to the
difference between the dividends calculated at the 3% rate and dividends
calculated at the 10% rate, or 10,135 shares of Series A Preferred Stock.
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 dividends on the preferred stock is restricted under the terms of its senior
credit facilities and senior subordinated debt. Total preferred shares
outstanding as of July 1, 2000 were 79,455.
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.
12
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(7) Supplemental Condensed Consolidating Financial Information
The following table presents condensed consolidating financial information
for the Company, segregating the Parent and guarantor subsidiaries from
non-guarantor subsidiaries. The guarantor subsidiaries are wholly owned
subsidiaries of the Parent and the guarantees are full, unconditional and
joint and several. Separate financial statements of the guarantor
subsidiaries are not presented because management believes that these
financial statements would not provide relevant material additional
information.
<TABLE>
<CAPTION>
January 1, 2000
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
-------
Trade receivables $ - $ 260,870 $ 7,629 $ - $ 268,499
Receivable 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, 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 85,579 37,951 77 - 123,607
----------- ------------ ------------ ------------ ------------
Total current liabilities 92,061 956,889 15,067 (747,324) 316,693
Noncurrent liabilities 884,853 200,446 110 - 1,085,409
----------- ------------ ------------ ------------ ------------
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>
13
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
July 1, 2000
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
-------
Trade receivables $ - $ 228,592 $ 5,880 $ - $ 234,472
Receivable from affiliates 752,678 - - (752,678) -
Inventories 447,687 14,141 - 461,828
Other current assets 27,771 261 - 28,032
----------- ------------ ------------ ------------ ------------
Total current assets 752,678 704,050 20,282 (752,678) 724,332
Property, plant and equipment, net 461 629,176 960 - 630,597
Intangible, net 14,036 266,584 2,225 - 282,845
Other assets 475,647 25,514 - (469,932) 31,229
----------- ------------ ------------ ------------ ------------
Total assets $ 1,242,822 $ 1,625,324 $ 23,467 $ (1,222,610) $ 1,669,003
=========== ============ ============ ============ ============
Liabilities and Shareholders' Equity:
-------------------------------------
Accounts payable and accrued
Liabilities $ 3,161 $ 172,597 $ 4,149 $ - $ 179,907
Payables to affiliates - 747,908 4,770 (752,678) -
Other current liabilities 23,696 98,925 1,526 - 124,147
----------- ------------ ------------ ------------ ------------
Total current liabilities 26,857 1,019,430 10,445 (752,678) 304,054
Noncurrent liabilities 950,554 148,876 108 - 1,099,538
----------- ------------ ------------ ------------ ------------
Total liabilities 977,411 1,168,306 10,553 (752,678) 1,403,592
Redeemable convertible preferred 77,835 - - - 77,835
Stock
Shareholders' equity 187,576 457,018 12,914 (469,932) 187,576
----------- ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 1,242,822 $ 1,625,324 $ 23,467 $ (1,222,610) $ 1,669,003
=========== ============ ============ ============ ============
</TABLE>
14
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended July 3, 1999
-------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 356,723 $ 6,886 $ (1,141) $ 362,468
Cost of goods sold - 300,643 6,709 (1,141) 306,211
-------- ------------ ------------ ------------ ------------
Gross profit - 56,080 177 - 56,257
Selling, general and administrative (1,045) 26,643 202 - 25,800
-------- ------------ ------------ ------------ ------------
Earnings (loss) from operations 1,045 29,437 (25) - 30,457
Equity in earnings of subsidiaries 6,163 - - (6,163) -
Interest expense 107 19,634 (6) - 19,735
-------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes 7,101 9,803 (19) (6,163) 10,722
Income taxes 328 3,638 (17) - 3,949
-------- ------------ ------------ ------------ ------------
Net earnings (loss) 6,773 6,165 (2) (6,163) 6,773
Preferred dividends 540 - - - 540
-------- ------------ ------------ ------------ ------------
Earnings (loss) available for
Common shareholders $ 6,233 $ 6,165 $ (2) $ (6,163) $ 6,233
======== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended July 1, 2000
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 350,973 $ 6,319 $ (15,352) $ 341,940
Cost of goods sold - 311,478 6,302 (15,352) 302,428
-------- ------------ ------------ ------------ ------------
Gross profit - 39,495 17 - 39,512
Selling, general and administrative (1,881) 24,346 148 - 22,613
-------- ------------ ------------ ------------ ------------
Earnings (loss) from operations 1,881 15,149 (131) 16,899
Equity in (loss) of subsidiaries (7,172) - 7,172 -
Interest expense 1,505 24,268 195 - 25,968
-------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes (6,796) (9,119) (326) 7,172 (9,069)
Income taxes (678) (2,273) - - (2,951)
-------- ------------ ------------ ------------ ------------
Net earnings (loss) (6,118) (6,846) (326) 7,172 (6,118)
Preferred dividends 1,994 - - - 1,994
-------- ------------ ------------ ------------ ------------
Earnings (loss) available for
common shareholders $ (8,112) $ (6,846) $ (326) $ 7,172 $ (8,112)
======== ============ ============ ============ ============
</TABLE>
15
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Six Months Ended July 3, 1999
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 719,386 $ 13,711 $ (2,122) $ 730,975
Cost of goods sold - 611,620 12,756 (2,122) 622,254
-------- ------------ ------------ ------------- ------------
Gross profit - 107,766 955 - 108,721
Selling, general and administrative (2,087) 51,873 400 - 50,186
-------- ------------ ------------ ------------- ------------
Earnings from operations 2,087 55,893 555 - 58,535
Equity in earnings of subsidiaries 10,202 - - (10,202) -
Interest expense (719) 39,936 (17) - 39,200
-------- ------------ ------------ ------------- ------------
Earnings before income taxes 13,008 15,957 572 (10,202) 19,335
Income taxes 982 6,276 51 - 7,309
-------- ------------ ------------ ------------- ------------
Net earnings 12,026 9,681 521 (10,202) 12,026
Preferred dividends 1,075 - - - 1,075
-------- ------------ ------------ ------------- ------------
Earnings available for
common shareholders $ 10,951 $ 9,681 $ 521 $ (10,202) $ 10,951
======== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended July 1, 2000
-------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- -------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 688,680 $ 13,772 $ (15,352) $ 687,100
Cost of goods sold - 611,071 12,774 (15,352) 608,493
--------- ------------ ------------ ------------ ------------
Gross profit - 77,609 998 - 78,607
Selling, general and administrative (2,980) 52,208 324 - 49,552
--------- ------------ ------------ ------------ ------------
Earnings from operations 2,980 25,401 674 - 29,055
Equity in (loss) of subsidiaries (16,377) - - 16,377 -
Interest expense 3,407 50,001 404 - 53,812
--------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes (16,804) (24,600) 270 16,377 (24,757)
Income taxes (959) (7,953) - - (8,912)
--------- ------------ ------------ ------------ ------------
Net earnings (loss) (15,845) (16,647) 270 16,377 (15,845)
Preferred dividends 3,937 - - - 3,937
--------- ------------ ------------ ------------ ------------
Earnings (loss) available for
common shareholders $ (19,782) $ (16,647) $ 270 $ 16,377 $ (19,782)
========= ============ ============ ============ ============
</TABLE>
16
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Six Months Ended July 3, 1999
--------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- -------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
Operating activities $ 17,874 $ (19,399) $ (3,881) $ - $ (5,406)
Cash provided by (used in)
Investing activities 44 (50,595) (72) - (50,623)
Cash provided by (used in) 3,813
Financing activities (17,918) 73,605 59,500
-------- ------------ ------------ ------------ ------------
Net change in cash and cash (140)
Equivalents - 3,611 - 3,471
Cash and cash equivalents at
Beginning of year - 5,554 7 - 5,561
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
End of period $ - $ 9,165 $ (133) $ - $ 9,032
======== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended July 1, 2000
-------------------------------------------------------------------------------
Non
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
Operating activities $ 16,703 $ (33,426) $ 5,708 $ - $ (11,015)
Cash provided by (used in)
Investing activities 432 (13,677) (144) - (13,389)
Cash provided by (used in)
Financing activities (17,135) 45,599 (5,564) - 22,900
-------- ------------ ------------ ------------ ------------
Net change in cash and cash
Equivalents - (1,504) - - (1,504)
Cash and cash equivalents at
Beginning of year - 4,854 - - 4,854
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
End of period $ - $ 3,350 $ - $ - $ 3,350
======== ============ ============ ============ ============
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended January 1, 2000.
Results of Operations
---------------------
Net Sales. Net sales were $341.9 million for the three months ended July 1,
----------
2000, representing a decrease of $20.6 million, or 5.7%, as compared to $362.5
million for the three months ended July 3, 1999. Sales through the first six
months of this fiscal year were $687.1 million, down $43.9 million or 6.0% from
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 six months ended July 3,
-------------
1999 were 15.5% and 14.9%, respectively. For the three and six months ended
July 1, 2000, gross profit margins decreased to 11.6% and 11.4%, respectively.
The decline in gross profit margin for both the three and six months ended July
1, 2000 is due to lower volumes, higher unabsorbed overhead expenses and higher
cost of raw materials, primarily chemicals and packaging
Selling, General and Administrative ("SG&A"). SG&A expenses decreased $3.2
---------------------------------------------
million to $22.6 million for the three months ended July 1, 2000, compared to
$25.8 million for the three months ended July 3, 1999. SG&A decreased $0.6
million for the first six months of fiscal year 2000 compared to 1999. Higher
professional fees in the first quarter, associated with amendments to the
Company's debt arrangements, partially offset the savings in SG&A expenses
resulting from staff reductions from the beginning of this year.
Interest Expense. Interest expense increased $6.3 million to $26.0 million for
----------------
the three months ended July 1, 2000, compared to $19.7 million for the three
months ended July 3, 1999. Interest expense for the six months ended July 1,
2000 was $53.8 million, $14.6 million higher than the comparable period in 1999.
Contributing to this increase were bank fees related to the restructuring of the
Company's debt, an increased level of debt and a higher weighted average
interest rate of 9.8% for the six months ended July 1, 2000, compared to 7.9%
for the six months ended July 3, 1999. The weighted average interest rate for
the three months ended July 1, 2000 was 9.8%, compared to 7.8% for the three
months ended July 3, 1999.
Liquidity and Capital Resources
-------------------------------
Senior Debt Facilities. In December 1997, in connection with the Fieldcrest
Cannon acquisition, Pillowtex entered into new senior secured revolving credit
and term loan facilities with a group of financial and institutional investors
for which Bank of America acts as the 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,
Pillowtex amended these facilities by increasing the Tranche B Term Loan to
$225.0 million. The increase occurred in conjunction with the acquisition of
Leshner, allowing Pillowtex to fund the transaction and reduce borrowings under
the revolving credit facility. Effective March 12, 1999, the revolving credit
facility was amended to permit Pillowtex 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, thereby increasing availability under that
facility. Effective October 1, 1999, the revolving credit facility was further
amended to permit Pillowtex 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, Pillowtex 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, 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 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 to 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
18
<PAGE>
reductions in the commitment under the revolving credit facility. As of July 1,
2000 the Company had $299.2 million outstanding under its revolving credit
facility. The Company is in compliance with the amended financial covenants as
of July 1, 2000 and believes that it will be able to comply with the amended
financial covenants in the future; however, the company is subject to changing
business and economic conditions (many of which are beyond the Company's
control) which may affect its ability to comply with the covenants in the near
term and there can be no assurance of such compliance.
The revolving credit facility includes $55.0 million of availability for
letters of credit. At July 1, 2000, $32.8 million of letters of credit were
outstanding and $18.0 million was available under the revolving credit facility.
As amended, amounts outstanding under the revolving credit facility and the
Tranche A Term Loan currently bear interest at a rate based upon the London
Interbank Offered Rate 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 for the second quarter of 2000 was 10.03%. The
senior debt facilities expire on January 31, 2002.
The senior debt facilities are guaranteed by each of the domestic
subsidiaries of Pillowtex, and are secured by first priority liens on all of the
capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital
stock of Pillowtex's foreign subsidiaries. Pillowtex 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 Pillowtex (except as specifically provided), 50% of
the net cash proceeds of equity issuances by Pillowtex or any of its
subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory
prepayments will be applied pro rata between the Tranche A Term Loan and the
Tranche B Term Loan to reduce the remaining installments of principal.
The senior debt facilities contain a number of negative covenants, which
restrict, among other things, Pillowtex's ability to incur additional debt, pay
dividends or make other restricted payments, sell stock of subsidiaries, grant
liens, make capital expenditures, engage in transactions with affiliates, make
loans, advances and investments, dispose of assets, effect mergers,
consolidations and dissolutions, and make certain changes in its business.
A breach of any of the covenants contained in the senior debt facilities
could result in a default under the terms of the facilities. Upon the
occurrence of an event of default: the senior lenders would not be obligated to
make additional advances under the revolving credit facility; the senior lenders
would be entitled to declare all amounts outstanding under the senior debt
facilities, including accrued interest or other obligations, to be immediately
due and payable; the senior lenders would have the rights to block payment on
substantially all of Pillowtex's other long-term debt; and the senior lenders
would be entitled to proceed against the collateral granted to them to secure
the senior debt. In these circumstances, cross defaults could occur making
substantially all of Pillowtex's other long-term debt due. If any senior debt
were to be accelerated, the Company cannot be certain that its assets would be
sufficient to repay in full that debt and its other debt.
As a result of the covenants described above, Pillowtex's ability to
respond to changing business and economic conditions and to secure additional
financing, if needed, is significantly restricted.
Overline Facility. In May 1999, Pillowtex 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, this 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, Pillowtex was not
in compliance with certain financial covenants under this facility, the
covenants of which are established 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 this facility, resulting in
the 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 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 the Company's EBITDA exceeds a specified level for the
2000 fiscal year).
This facility is guaranteed on a senior basis by Pillowtex's domestic
subsidiaries. Pillowtex is currently required to pay interest on any amounts
borrowed under the facility at a rate which is based upon the London Interbank
Offered Rate plus 4.5% or the base rate plus 3.0%, at Pillowtex's option. This
facility matures upon termination by Pillowtex at any time or otherwise at the
earliest
19
<PAGE>
of: a) any increase in the commitment under the senior debt facilities described
above, the issuance of any capital stock by Pillowtex or its domestic
subsidiaries, or other specified events; or b) January 31, 2002.
Senior Subordinated Debt. In connection with the Fieldcrest Cannon merger,
Pillowtex issued $185.0 million of 9% Senior Subordinated Notes due December 15,
2007, with interest payable semiannually commencing June 15, 1998. Pillowtex 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
Pillowtex, and are subordinated in right of payment to all existing and future
senior indebtedness, and rank pari passu to the 10% Notes described below.
On November 12, 1996, Pillowtex issued the 10% Senior Subordinated Notes
due November 15, 2006, with interest payable semiannually commencing May 15,
1997. Pillowtex 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 Pillowtex, and are subordinated in right of payment to
all existing and future senior indebtedness.
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
Pillowtex and each other subsidiary of Pillowtex that guarantees Pillowtex'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, Pillowtex 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.
Fieldcrest Cannon Convertible Debentures. As a result of Pillowtex's
acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Subordinated
Debentures due 2012 of Fieldcrest Cannon are convertible, at the option of the
holders, into a combination of cash and Pillowtex's Common Stock. During the
fourth quarter of 1999, Pillowtex 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 Pillowtex any Pillowtex Common Stock that had
been issued to them and have their 6% Debentures reinstated. Although many
holders did rescind and return their stock, other holders could not rescind
because they had already sold their Pillowtex stock. As of July 1, 2000, the
cash component due in respect of the 6% Debentures that had been surrendered
without subsequent rescission was approximately $9.1 million. In addition, as
of July 1, 2000, approximately $94.2 million aggregate principal amount of the
6% Debentures remained outstanding. 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 $61.0 million (classified as a current
liability at July 1, 2000).
Pillowtex is currently prohibited under the terms of its senior
subordinated debt 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 (Cash Claimants) and (ii) the cash
payment prohibition in respect of any future conversions, Pillowtex 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 have been unable to agree upon a mutually
satisfactory comprehensive restructuring proposal. The Company is still in the
process of examining the options currently available to it with respect to the
6% Debentures, but is not yet prepared to make a specific proposal; however,
there can be no assurance that the Company will be able to adopt a proposal that
is satisfactory to the holders of the 6% Debentures.
Swap Agreements. Pillowtex 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 recognized in the consolidated
financial statements. As of January 1, 2000, Pillowtex had approximately $345.0
million of notional amounts covered under interest rate swap agreements whereby
Pillowtex exchanged floating rates for fixed rates. The weighted average fixed
and floating rates were 4.70% and 6.05%, respectively. As of July 1, 2000,
Pillowtex had approximately $230.0 million of notional amounts covered under
interest rate swap agreements whereby Pillowtex exchanged floating rates for
fixed rates. The weighted average fixed and floating rates were 4.68% and
6.25%, respectively. The fair values of the swaps at January 1, 2000 and July
1, 2000 were $4.0 million and $2.2 million, respectively, in favor of Pillowtex.
20
<PAGE>
Adequacy of Capital Resources. As of July 1, 2000, Pillowtex was in
compliance with all its debt covenants. Based on current and anticipated levels
of operations, and efforts to reduce inventories and accounts receivable,
Pillowtex anticipates that its cash flow from operations, together with amounts
available under its revolving credit facility, will be adequate to meet its
anticipated cash requirements in the foreseeable future (assuming no significant
cash payments are required to be made in respect of the 6% Debentures other than
scheduled interest payments and payments related to satisfaction of the sinking
fund obligations as outlined above). In the event that cash flows and available
borrowings under the revolving credit facility are not sufficient to meet future
cash requirements, Pillowtex may be required to reduce planned capital
expenditures or seek additional financing. Pillowtex 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 terms acceptable to the Company.
Recent Accounting Matters
-------------------------
The Company is assessing the reporting and disclosures 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 expects to 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.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25". Among other issues, Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25 (APB No. 25) regarding
(a) the definition of employee for purposes of applying APB No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. The provisions of
Interpretation No. 44 affecting the Company are to be applied on a prospective
basis for periods beginning after July 1, 2000.
Cautionary Statement Regarding Forward-Looking Statements
---------------------------------------------------------
This filing contains certain forward-looking statements. Such statements
are based upon the beliefs and assumptions of, and on information available to,
the Company's management. Because such forward-looking statements are subject
to various risks and uncertainties, results may differ materially from those
expressed in or implied by such statements. Many of the factors that will
determine these results are beyond the Company's ability to control or predict.
Factors which could affect the Company's future results and could cause results
to differ materially from those expressed in or implied by such forward-looking
statements are discussed under the captions "Cautionary Statement Regarding
Forward-Looking Statements" and "Risk Factors" in the Company's Annual Report on
Form 10-K for its fiscal year ended January 1, 2000.
21
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on May 11, 2000.
The following proposal was voted upon and approved at the annual meeting:
Election of Directors
For Three-Year Terms Expiring in 2003:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Votes Votes Broker
Cast Withheld Non-Votes
------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
Charles M. Hansen, Jr. 13,124,473 303,129 0
------------------------------------------------------------------------------------------------------------------
William B. Madden 13,149,833 277,769 0
------------------------------------------------------------------------------------------------------------------
M. Joseph McHugh 12,863,282 564,620 0
------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no abstentions with respect to the election of directors.
Paul G. Gillease, Ralph W. La Rovere, Mark A. Petricoff, Scott E. Shimizu
and Mary R. Silverthorne continued as directors of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 14, 2000 PILLOWTEX CORPORATION
(Registrant)
/s/ Tony Williams
--------------------------
Tony Williams
Chief Financial Officer
23
<PAGE>
INDEX TO EXHIBITS
Exhibit Method of Filing
------- ----------------
27.1 Financial Data Schedule................. Filed herewith electronically
24
