<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 April 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 May 5, 2000
----- --------------------------
Common Stock, $.01 par value 14,231,708
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of January 1, 2000 and
April 1, 2000 3
Consolidated Statements of Operations for the three months
ended April 3, 1999 and April 1, 2000 4
Consolidated Statements of Cash Flows for the three months
ended April 3, 1999 and April 1, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Index to Exhibits 22
2
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and April 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 $ 19,332
Receivables:
Trade, less allowances of $33,351 and $32,471 in 1999
and 2000, respectively................................................ 268,499 249,047
Other.................................................................... 17,923 11,176
Inventories................................................................. 423,052 442,205
Assets held for sale........................................................ 1,595 1,599
Prepaid expenses............................................................ 5,502 9,806
------------ ----------
Total current assets............................................ 721,425 733,165
Property, plant and equipment, less accumulated depreciation of
$150,384 and $162,367 in 1999 and 2000, respectively........................ 644,821 644,785
Intangible assets, at cost, less accumulated amortization of $26,355 and
$27,989 in 1999 and 2000, respectively...................................... 288,856 285,779
Other assets.................................................................... 28,287 28,930
------------ ----------
$ 1,683,389 1,692,659
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 119,848 113,370
Accrued expenses............................................................ 73,238 88,050
Deferred income taxes....................................................... 37,848 37,219
Current portion of long-term debt........................................... 85,759 91,508
------------ ----------
Total current liabilities....................................... 316,693 330,147
Long-term debt, less current portion (Note 5)................................... 965,323 977,045
Deferred income taxes........................................................... 67,720 62,388
Noncurrent liabilities.......................................................... 52,366 52,305
------------ ----------
Total liabilities............................................... 1,402,102 1,421,885
Series A redeemable convertible preferred stock, $0.01 par value; 77,517
shares issued and outstanding, including accrued dividends (Note 6)............. 73,898 75,844
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 14,232,269 shares issued and outstanding
in 1999 and 2000, respectively............................................ 142 142
Additional paid-in capital.................................................. 160,515 159,654
Retained earnings........................................................... 49,269 37,599
Currency translation adjustment............................................. (1,730) (1,754)
Deferred compensation....................................................... (807) (711)
------------ ----------
Total shareholders' equity ..................................... 207,389 194,930
------------ ----------
$ 1,683,389 $1,692,659
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended April 3, 1999 and April 1, 2000
(Amounts in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Net sales....................................................................... $ 368,508 $ 345,160
Cost of goods sold.............................................................. 312,294 306,065
----------- ----------
Gross profit.............................................................. 56,214 39,095
Selling, general and administrative expenses.................................... 28,136 26,939
----------- ----------
Earnings from operations.................................................. 28,078 12,156
Interest expense................................................................ 19,466 27,844
----------- ----------
Earnings (loss) before income taxes....................................... 8,612 (15,688)
Income taxes.................................................................... 3,359 (5,961)
----------- ----------
Net earnings (loss)....................................................... 5,253 (9,727)
Preferred dividends and accretion............................................... 535 1,943
----------- ----------
Earnings (loss) available for common shareholders......................... $ 4,718 $ (11,670)
=========== ==========
Basic earnings (loss) per common share.......................................... $ .33 $ (.82)
=========== ==========
Weighted average common shares outstanding - basic.............................. 14,148 14,228
=========== ==========
Diluted earnings (loss) per common share........................................ $ .31 $ (.82)
=========== ==========
Weighted average common shares outstanding - diluted............................ 16,937 14,228
=========== ==========
Dividends declared per common share............................................. $ .06 $ -
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 3, 1999 and April 1, 2000
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ........................................................ $ 5,253 $ (9,727)
Adjustments to reconcile net earnings (loss) to net cash
Used in operating activities:
Depreciation and amortization........................................... 13,627 15,886
Deferred income taxes................................................... (195) (5,961)
Accretion on debt instruments........................................... 317 366
Provision for doubtful accounts......................................... 140 416
Amortization of deferred compensation................................... 99 96
Changes in operating assets and liabilities:
Trade receivables.................................................... (10,499) 19,036
Inventories.......................................................... (46,901) (19,153)
Accounts payable..................................................... 40,424 (13,751)
Accrued expenses..................................................... (2,229) 14,812
Other assets and liabilities......................................... (330) 2,405
--------- -----------
Net cash provided by (used in) operating activities............ (294) 4,425
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment......................... 77 1,326
Purchases of property, plant and equipment.................................. (27,996) (14,790)
Payments for businesses purchased........................................... (59) -
--------- -----------
Net cash used in investing activities........................... (27,978) (13,464)
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment................. (30,167) 7,273
Borrowings on revolving credit loans........................................ 142,800 107,300
Repayments of revolving credit loans........................................ (70,600) (81,100)
Retirement of long-term debt................................................ (4,189) (9,956)
Payments of debt issuance costs............................................. (38) -
Dividends paid.............................................................. (1,332) -
Proceeds from exercise of stock options..................................... 10 -
--------- -----------
Net cash provided by financing activities....................... 36,484 23,517
Net change in cash and cash equivalents......................................... 8,212 14,478
Cash and cash equivalents at beginning of period................................ 5,561 4,854
--------- -----------
Cash and cash equivalents at end of period...................................... $ 13,773 19,332
========= ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest.................................................................. $ 13,540 18,149
========= ===========
Income taxes.............................................................. $ (2,160) (3,302)
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of
Pillowtex Corporation, 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 statement 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.
(2) Comprehensive Income
Comprehensive income consists of net earnings (loss) and foreign
currency translation adjustments and aggregates $5.8 million and $(9.7)
million for the three month periods ended April 3, 1999 and April 1,
2000, respectively.
(3) Inventories
Inventories consisted of the following at January 1, 2000 and April 1,
2000:
January 1 April 1
2000 2000
------------ ------------
Finished goods $ 218,381 $ 234,198
Work-in-process 136,924 137,436
Raw materials 44,424 46,254
Supplies 23,323 24,317
------------ ------------
$ 423,052 $ 442,205
============ ============
6
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(Unaudited)
(4) Earnings Per Share
The following table reconciles the numerators and denominators of basic
and diluted earnings (loss) per share for the three month periods ended
April 3, 1999 and April 1, 2000. Preferred stock convertible into
3,229,875 common shares, debentures convertible into 607,861 common
shares and options to purchase 958,049 common shares at an exercise
price ranging from $4.31 to $44.38 were excluded from the computation
of diluted earnings per share for the three months ended April 1, 2000
because inclusion would have been anti-dilutive. Debentures convertible
into 633,000 common shares and options to purchase 697,000 common
shares at an exercise price from $22.00 to $44.38 were excluded from
the computation of diluted earnings per share because inclusion would
have been anti-dilutive for the three months ended April 3, 1999.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 3, 1999 April 1, 2000
---------------------------- -------------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Basic - earnings (loss) available for common shareholders $ 4,718 14,148 $ (11,670) 14,228
Effect of dilutive securities:
Stock options - 81 - -
Convertible preferred stock 535 2,708 - -
--------- --------- --------- ---------
Diluted - earnings (loss) available for common shareholders $ 5,253 16,937 $ (11,670) 14,228
========= ========= ========= =========
</TABLE>
7
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(5) Long-Term Debt
Long-term debt consists of the following (in thousands):
January 1, April 1,
2000 2000
--------------- ---------------
<S> <C> <C>
Revolver $ 259,800 $ 285,661
Overline Credit Facility 35,000 35,000
Term Loans 341,500 334,403
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 $14.0 million in unamortized
discount at January 1, 2000 and April 1, 2000,
respectively) 82,205 83,770
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 16,437
Other debt 5,763 3,282
--------------- --------------
1,051,082 1,068,553
Less:
Current portion 85,759 91,508
--------------- --------------
Total long-term debt $ 965,323 $ 977,045
=============== ==============
</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 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
8
<PAGE>
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 April 1, 2000 and believes that it
will be able to comply with the amended financial covenants in the future;
however, there can be no assurance of such compliance.
The revolving credit facility includes $55.0 million of availability
for letters of credit. At May 5, 2000, $36.2 million of letters of credit were
outstanding. At May 5, 2000, $ 28.9 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 first quarter of 2000 was 9.67%.
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 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).
9
<PAGE>
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,
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 6% Convertible Debentures that it was not practicable or prudent
for payments to be made in respect of the conversion of 6% Convertible
Debentures and advised holders that had surrendered 6% Convertible Debentures
that, with limited exceptions, they could rescind their notice of conversion,
return to Pillowtex any Pillowtex Common Stock that had been issued to them and
regain possession of their 6% Convertible Debentures. As of April 1, 2000, the
cash component due in respect of 6% Convertible Debentures that had been
surrendered without subsequent rescission of that surrender was $9.1 million. In
addition, as of April 1, 2000, $96.5 million aggregate principal amount of 6%
Convertible Debentures remained outstanding. If all such outstanding 6%
Convertible Debentures were converted, including those surrendered without
subsequent rescission, at such date, the resulting cash component to be paid to
the holders of 6% Convertible Debentures would have been approximately $61.0
million (classified as current portion of long-term debt at April 1, 2000).
Pillowtex is currently prohibited under the terms of its senior subordinated
debt from making payments in respect of the 6% Convertible Debentures except for
interest and at maturity or pursuant to sinking fund obligations. Pillowtex has
initiated discussions with certain holders of its 6% Convertible Debentures
regarding a potential restructuring of the 6% Convertible Debentures. Currently,
it is anticipated that any comprehensive restructuring of the 6% Convertible
Debentures involving cash payments (other than pursuant to sinking fund
obligations) would likely require the consent of the holders of Pillowtex's
senior subordinated debt.
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 April 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 4.70% and 6.04%,
respectively. The fair values of the swaps at January 1, 2000 and April 1, 2000
were $4.0 million and $3.0 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
aggressive 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
10
<PAGE>
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 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 common stock
and preferred stock is restricted under the terms of its senior credit
facilities and senior subordinated debt. Total preferred shares outstanding as
of April 1, 2000 was 77,517.
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.
11
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 (in thousands). 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>
12
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
April 1, 2000
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------ ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
- ------
Trade receivables $ - $ 241,631 $ 7,416 $ - $ 249,047
Receivable from affiliates 742,184 - - (742,184) -
Inventories - 424,552 17,653 - 442,205
Other current assets - 41,913 - - 41,913
------------ ------------- ------------- ------------ ---------------
Total current assets 742,184 708,096 25,069 (742,184) 733,165
Property, plant and equipment, net 488 643,385 912 - 644,785
Intangible, net 15,570 267,917 2,292 - 285,779
Other assets 493,325 10,622 - (475,017) 28,930
------------ ------------- ------------- ------------ ---------------
Total assets $ 1,251,567 $ 1,630,020 $ 28,273 $ (1,217,201) $ 1,692,659
============ ============= ============= ============ ===============
Liabilities and Shareholders' Equity:
- ------------------------------------
Accounts payable and accrued
liabilities $ 15,194 $ 182,045 $ 4,181 $ - $ 201,420
Payables to affiliates - 732,000 10,184 (742,184) -
Other current liabilities 82,226 45,943 558 - 128,727
------------ ------------- ------------- ------------ ---------------
Total current liabilities 97,420 959,988 14,923 (742,184) 330,147
Noncurrent liabilities 883,373 208,255 110 - 1,091,738
------------ ------------- ------------- ------------ ---------------
Total liabilities 980,793 1,168,243 15,033 (742,184) 1,421,885
Redeemable convertible preferred
Stock 75,844 - - - 75,844
Shareholders' equity 194,930 461,777 13,240 (475,017) 194,930
------------ ------------- ------------- ------------ ---------------
Total liabilities and
shareholders' equity $ 1,251,567 $ 1,630,020 $ 28,273 $ (1,217,201) $ 1,692,659
============ ============= ============= ============ ===============
</TABLE>
13
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended April 3, 1999
------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 362,664 $ 6,825 $ (981) $ 368,508
Cost of goods sold - 307,228 6,047 (981) 312,294
------------ -------------- ------------ ------------ ------------
Gross profit - 55,436 778 - 56,214
Selling, general and administrative (1,042) 28,980 198 - 28,136
------------ -------------- ------------ ------------ ------------
Earnings (loss) from operations 1,042 26,456 580 - 28,078
Equity in earnings of subsidiaries 4,039 - - (4,039) -
Interest expense (826) 20,303 (11) - 19,466
------------ -------------- ------------ ------------ ------------
Earnings before income taxes 5,907 6,153 591 (4,039) 8,612
Income taxes 654 2,637 68 - 3,359
------------ -------------- ------------ ------------ ------------
Net earnings 5,253 3,516 523 (4,039) 5,253
Preferred dividends 535 - - - 535
------------ -------------- ------------ ------------ ------------
Earnings (loss) available for
common shareholders $ 4,718 $ 3,516 $ 523 $ (4,039) $ 4,718
============ ============== ============ ============ ============
<CAPTION>
Three Months Ended April 1, 2000
------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------- ------ ------------- -------------- ------------ ------------
Net sales $ - $ 337,707 $ 7,453 $ - $ 345,160
Cost of goods sold - 299,593 6,472 - 306,065
------------- ------------- -------------- -------------- --------------
Gross profit - 38,114 981 - 39,095
Selling, general and administrative (1,099) 27,862 176 - 26,939
------------- ------------- -------------- -------------- --------------
Earnings from operations 1,099 10,252 805 - 12,156
Equity in loss of subsidiaries (9,205) - - 9,205 -
Interest expense 1,902 25,733 209 - 27,844
------------- ------------- -------------- -------------- --------------
Earnings (loss) before income taxes (10,008) (15,481) 596 9,205 (15,688)
Income taxes (281) (5,680) - - (5,961)
------------- ------------- -------------- -------------- --------------
Net earnings (loss) (9,727) (9,801) 596 9,205 (9,727)
Preferred dividends 1,943 - - - 1,943
------------- ------------- -------------- -------------- --------------
Earnings (loss) available for
common shareholders $ (11,670) $ (9,801) $ 596 $ 9,205 $ (11,670)
============= ============= ============== ============== ==============
</TABLE>
14
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended April 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 $ 16,304 $ (13,573) $ (3,025) $ - $ (294)
Cash provided by (used in)
Investing activities 18 (27,967) (29) - (27,978)
Cash provided by (used in)
Financing activities (16,322) 48,871 3,935 36,484
----------- ------------- -------------- --------------- ---------------
Net change in cash and cash
Equivalents - 7,331 881 - 8,212
Cash and cash equivalents at
Beginning of year - 5,554 7 - 5,561
----------- ------------- -------------- --------------- ---------------
Cash and cash equivalents at
End of period $ - $ 12,885 $ 888 $ - $ 13,773
=========== ============= ============== =============== ===============
<CAPTION>
Three Months Ended Apri1, 2000
-------------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
Operating activities $ 9,684 $ (5,113) $ (146) $ - $ 4,425
Cash provided by (used in)
Investing activities - (13,434) (30) - (13,464)
Cash provided by (used in)
Financing activities (9,684) 33,025 176 - 23,517
-------------- ------------- -------------- --------------- ---------------
Net change in cash and cash
Equivalents - 14,478 - - 14,478
Cash and cash equivalents at
Beginning of year - 4,854 - - 4,854
-------------- ------------- -------------- --------------- ---------------
Cash and cash equivalents at
End of period $ - $ 19,332 $ - $ - $ 19,332
============== ============= ============== =============== ===============
</TABLE>
15
<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 $345.2 million for the three months ended April 1,
- ----------
2000, representing a decrease of $23.3 million, or 6.3%, as compared to $368.5
million for the three months ended April 3, 1999. The decrease in net sales was
due to high inventories held by certain customers and to a lesser extent to the
systems conversion for the Company's Pillow and Pad products combined with no
major product roll-outs during the first quarter. The biggest drop in sales
occurred in bath products, where sales dropped $17.2 million (10.0%) from last
year's first quarter.
Gross Profit. Gross profit margins decreased to 11.3% for the three months ended
- -------------
April 1, 2000 from 15.3% for the three months ended April 3, 1999. The decline
in gross profit margin is primarily due to higher unabsorbed overhead expenses,
lower volume and price realization.
The Company continues to focus on decreasing inventory, accounts receivable and
operating costs and is closely monitoring sales and marketing programs to
improve operating results.
Selling, General and Administrative ("SG&A"). SG&A expenses decreased $1.2
- ---------------------------------------------
million to $26.9 million for the three months ended April 1, 2000, compared to
$28.1 million for the three months ended April 3, 1999. Higher professional fees
associated with the revisions to the Company's debt arrangements with the
lending group during the first quarter of 2000 were more than offset by the
inclusion in manufacturing overhead of certain production related technology
costs previously included in SG&A.
Interest Expense. Interest expense increased $8.3 million to $27.8 million for
- -----------------
the three months ended April 1, 2000, compared to $19.5 million for the three
months ended April 3, 1999. Contributing to the increase in interest expense in
the first quarter of fiscal 2000 were bank fees related to the restructuring of
debt, an increase in the level of borrowings, and higher average interest rates
of 9.3% compared to 8.0% in the first quarter of fiscal 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 reductions in the commitment under the revolving credit facility. As
of April 1, 2000 the Company had $285.7 million outstanding under its revolving
credit facility.
16
<PAGE>
The revolving credit facility includes $55.0 million of availability
for letters of credit. At April 1, 2000, $34.6 million of letters of credit were
outstanding. At May 5, 2000, $ 28.9 million was available under the revolving
credit faciliity.
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 first quarter of 2000 was 9.67%. 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 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, are subordinated in right of payment to all existing
and future senior indebtedness, and rank pari passu to the 10% Notes described
below.
17
<PAGE>
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% Convertible
Debentures that it was not practicable or prudent for payments to be made in
respect of the conversion of the 6% Convertible Debentures and advised holders
that had given notice of conversion and surrendered their 6% Convertible
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% Convertible Debentures reinstated. As of April 1, 2000, the cash component
due in respect of the 6% Convertible Debentures that had been surrendered
without subsequent rescission was $9.1 million. In addition, as of April 1,
2000, $96.5 million aggregate principal amount of the 6% Convertible Debentures
remained outstanding. If all such outstanding 6% Convertible 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%
Convertible Debentures would have been approximately $61.0 million (classified
as a current liability at April 1, 2000). Pillowtex is currently prohibited
under the terms of its senior subordinated debt from making payments in respect
of the 6% Convertible Debentures except for interest and at maturity or pursuant
to sinking fund obligations. Pillowtex has initiated discussions with certain
holders of its 6% Convertible Debentures regarding a potential restructuring of
the 6% Convertible Debentures. Currently any comprehensive restructuring of the
6% Convertible Debentures involving cash payments (other than pursuant to
sinking fund obligations) would likely require the consent of the holders of
Pillowtex's senior subordinated debt. The Company cannot guarantee that it will
be able to restructure the 6% Convertible Debentures nor can it predict the
terms of any potential restructuring of that debt.
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 April 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 4.70% and 6.04%,
respectively. The fair values of the swaps at January 1, 2000 and April 1, 2000
were $4.0 million and $3.0 million, respectively, in favor of Pillowtex.
Adequacy of Capital Resources. As of April 1, 2000, Pillowtex was in
compliance with all its debt covenants. Cash flow from operations increased by
$4.7 million as compared to the period ended April 3, 1999, and based upon
current and anticipated levels of operations, and aggressive 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.
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
18
<PAGE>
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 in the first quarter of
fiscal 2001 and is evaluating the impact adoption will have on the Company's
results of operations or 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 effective
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.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Resignation, Appointment and Acceptance Agreement, dated April
14, 2000, by and among Pillowtex Corporation, as Issuer, Norwest
Bank Minnesota, as Resigning Trustee, and U.S. Bank National
Association, as Successor Trustee.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
20
<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: May 16, 2000 PILLOWTEX CORPORATION
(Registrant)
/s/ John C. Macaulay
---------------------------------------
John C. Macaulay
Senior Vice President - Finance
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Method of Filing
- ------- ----------------------------------
<S> <C>
4.1 Resignation, Appointment and Acceptance Agreement, dated April 14, 2000, by
and among Pillowtex Corporation, as Issuer, Norwest Bank Minnesota, as
Resigning Trustee, and U.S. Bank National Association, as Successor
Trustee..................................................................... Filed herewith electronically
27.1 Financial Data Schedule..................................................... Filed herewith electronically
</TABLE>
22
<PAGE>
EXHIBIT 4.1
THIS INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, ("Instrument"),
dated to be effective as of April 14, 2000 (the "Effective Date"), is by and
among Pillowtex Corporation, a Texas corporation (the "Company"), Norwest Bank
Minnesota, National Association, a national banking association organized and
existing under the laws of the United States having its principal corporate
trust office in Minneapolis, Minnesota (the "Resigning Trustee") and U.S. Bank
National Association, a national banking association organized and existing
under the laws of the United States having its principal corporate trust office
in St. Paul, Minnesota (the "Successor Trustee"). Capitalized terms not
otherwise defined herein shall have the same meaning ascribed to such terms in
the Indenture (as defined below).
RECITALS
--------
WHEREAS, pursuant to an Indenture dated as of December 18, 1997 (as amended
or supplemented, the "Indenture") between the Company and the Resigning Trustee,
the Company issued its 9% Senior Subordinated Notes Due 2007 (Series A and
B)(the "Notes");
WHEREAS, the Company appointed the Resigning Trustee as the paying agent
(the "Paying Agent") and registrar (the "Registrar") under the Indenture;
WHEREAS, there is presently issued and outstanding $185,000,000 in
aggregate principal amount of the Notes;
WHEREAS, the Indenture provides that the Trustee may resign at any time and
be discharged from the trusts created by the Indenture by notifying the Company
in writing;
WHEREAS, the Indenture further provides that if the Trustee resigns, the
Company shall promptly appoint a successor Trustee;
WHEREAS, the Resigning Trustee desires to resign, and the Company desires
to appoint the Successor Trustee as Trustee, Paying Agent and Registrar to
succeed the Resigning Trustee in such capacities under the Indenture and the
documents executed in connection with or related to the Indenture (collectively,
as amended or supplemented, the "Documents"); and
WHEREAS, the Successor Trustee is willing to accept the appointment as
Trustee, Paying Agent and Registrar under the Indenture and the Documents.
NOW, THEREFORE, in consideration of the covenants set forth herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Acceptance of Resignation of Resigning Trustee and Appointment of
-----------------------------------------------------------------
Successor Trustee. The Company hereby accepts the resignation of the Resigning
- -----------------
Trustee as Trustee, Paying Agent and Registrar under the Indenture and the
Documents. Pursuant to Section 7.08 of the Indenture, the Company hereby
appoints the Successor Trustee as Trustee, Paying Agent and Registrar under the
Indenture and the Documents, and vests and confirms to the Successor Trustee all
rights, powers, trusts, privileges, duties and obligations of the Trustee,
<PAGE>
Paying Agent and Registrar under the Indenture and the Documents. The Company
and the Resigning Trustee shall execute and deliver such further instruments and
shall do such other things as the Successor Trustee may reasonably request to as
to more fully and certainly vest and confirm in the Successor Trustee all the
rights, powers, privileges, duties and obligations assigned, transferred,
delivered and confirmed hereunder.
2. Company Representations and Warranties. The Company hereby represents
--------------------------------------
and warrants to the Successor Trustee that:
a. It is duly organized and validly existing;
b. The Indenture and the Documents have been amended or supplemented
pursuant to a Supplemental Indenture dated as of December 19, 1997 and a
Second Supplemental Indenture dated as of July 28, 1998;
c. No Event of Default and no default exists under the Indenture or any
of the Documents;
d. No covenant or condition contained in the Indenture or the Documents
has been waived by the Holders of a percentage in aggregate principal
amount of the Notes required by the Indenture to effect any such waiver;
e. The Notes are validly issued securities of the Company; and
f. The Company's execution and delivery of this Instrument do not and
will not conflict with, or result in a breach of, any of the terms or
provisions of, or constitute a default under, any (i) contract, agreement,
indenture or other instrument (including, without limitation, the Company's
certificate of incorporation and by-laws) to which the Company is a party
or by which the Company or its property is bound, or (ii) any judgment,
decree or order of any court or governmental agency or regulatory body or
law, rule or regulation applicable to the Company or its property.
3. Resigning Trustee Representations and Warranties. The Resigning
------------------------------------------------
Trustee hereby represents and warrants to the Successor Trustee that:
a. It has not entered into any amendment or supplement to the Indenture
or any of the Documents except as noted herein, and the Indenture and the
Documents are in full force and effect;
b. No covenant or condition contained in the Indenture or the Documents
has been waived by the Resigning Trustee or, to the best of the knowledge
of the Resigning Trustee, by the holders of a percentage in aggregate
principal amount of the Notes required by the Indenture to effect any such
waiver;
c. There is no action, suit or proceeding pending or, to the best of the
knowledge of the Resigning Trustee threatened, against the Resigning
Trustee before any court or
2
<PAGE>
governmental authority arising out of any action or omission by the
Resigning Trustee as Trustee, Paying Agent or Registrar under the Indenture
or the Documents;
d. It has made, or promptly will make, available to the Successor Trustee
originals, if available, or copies in its possession, of all Documents
relating to the trusts created by the Indenture (the "Trusts") and all
information in the possession of its corporate trust administration
department relating to the administration and status of the Trusts and
shall do such other things as the Successor Trustee may reasonably request
to more fully vest and confirm in the Successor Trustee all the rights,
powers, trusts, privileges, duties and obligations assigned and transferred
hereby to the Successor Trustee;
e. To the best of its knowledge, it has lawfully discharged its duties as
Trustee, Paying Agent and Registrar under the Indenture and the Documents;
and
f. There is presently issued and outstanding $185,000,000 in aggregate
principal amount of the Notes and interest has been paid through December
15, 1999.
4. Successor Trustee Representation and Warranty. The Successor Trustee
---------------------------------------------
represents and warrants to the Resigning Trustee and the Company that:
a. it is qualified and eligible to serve as Trustee, Paying Agent and
Registrar under the Indenture, the Documents and the Trust Indenture Act of
1939, as amended (the "Act").
5. Acceptance by Successor Trustee. The Successor Trustee hereby accepts
-------------------------------
its appointment, as of the Effective Date, as Successor Trustee, Paying Agent
and Registrar under the Indenture and the Documents, and assumes, as of the
Effective Date, all rights, powers, trusts, privileges, duties and obligations
of the Trustee, Paying Agent and Registrar thereunder, subject to the terms and
conditions therein. Promptly after the execution and delivery of this
Instrument, the Successor Trustee shall cause a notice, substantially in the
form of Exhibit A hereto, to be sent to each holder of the Notes in accordance
with Section 7.08 of the Indenture.
6. Assignment by Resigning Trustee. The Resigning Trustee hereby
-------------------------------
confirms, assigns, transfers, delivers and conveys, as of the Effective Date, to
the Successor Trustee, as successor Trustee, Paying Agent and Registrar under
the Indenture and the Documents, upon the Trusts expressed in the Indenture, all
rights, powers, trusts, privileges, duties and obligations, which the Resigning
Trustee, as Trustee, Paying Agent and Registrar now holds under and by virtue of
the Indenture and the Documents, and shall pay over to the Successor Trustee,
any and all property and moneys held by the Resigning Trustee under and by
virtue of the Indenture and the Documents, subject to the lien provided by
Section 7.07 of the Indenture, which lien the Resigning Trustee expressly
reserves to the fullest extent necessary to secure the Company's obligations
under said Section to the Resigning Trustee, which lien shall also secure the
Company's obligations under said Section to the Successor Trustee.
3
<PAGE>
7. Indemnification by Resigning Trustee. The Resigning Trustee agrees to
------------------------------------
pay or indemnify, as applicable, the Successor Trustee and save the Successor
Trustee harmless from and against any and all costs, claims, liabilities, losses
or damages whatsoever (including the reasonable fees, expenses and disbursements
of the Successor Trustee's legal counsel and other advisors) arising out of the
actual, alleged or adjudicated actions or omissions of the Resigning Trustee
that the Successor Trustee may suffer or incur as a result of the Successor
Trustee accepting this appointment and acting as successor Trustee, Paying Agent
and Registrar under the Indenture and the Documents. The Successor Trustee will
furnish to the Resigning Trustee, promptly upon receipt, all documents with
respect to any action the outcome of which would make the indemnity provided for
in this paragraph operative. The Successor Trustee shall promptly notify the
Resigning Trustee in writing (an, in any event, within no later than 10 days) of
any claim for which it may seek indemnity. The Resigning Trustee shall have the
right to elect to provide its own defense to any such claim and the Successor
Trustee shall cooperate fully in any such defense. In the event the Resigning
Trustee elects to provide its own defense, the Resigning Trustee shall not pay
for separate counsel to the Successor Trustee. The Resigning Trustee shall not
be obligated to pay for any settlement absent its consent.
8. Resigning Trustee's Lien and Payment of Fees, Expenses and
----------------------------------------------------------
Indemnification. The Resigning Trustee hereby appoints the Successor Trustee and
- ---------------
the Successor Trustee hereby acknowledges its appointment, as the Resigning
Trustee's agent with respect to the assertion, perfection and enforcement of the
Resigning Trustee's lien provided for in Section 7.07 of the Indenture to secure
the satisfaction of the Company's indemnification obligations to the Resigning
Trustee and its payment of the Resigning Trustee's past, current and future fees
and expenses as provided for in said Section 7.07 (said indemnification
obligations, fees and expenses, collectively, the "Resigning Trustee's Claims").
The Successor Trustee further acknowledges that the Resigning Trustee's Claims
are and will be due under Section 7.07 of the Indenture and thus, are included
within the "First" priority of payment provided for under Section 6.10 of the
Indenture.
9. Additional Documentation. The Company and the Resigning Trustee, for
------------------------
the purposes of more fully and certainly vesting in and confirming to the
Successor Trustee, as successor Trustee, Paying Agent, and Registrar under the
Indenture and the Documents, said rights, powers, trusts, privileges, duties and
obligations agrees, upon reasonable request of the Successor Trustee, to
execute, acknowledge and deliver such further instruments of conveyance and
further assurance and to do such other things as may reasonably be required for
more fully and certainly vesting and confirming to the Successor Trustee all
rights, powers, trusts, privileges, duties and obligations which the Resigning
Trustee now holds under and by virtue of the Indenture and the Documents.
10. Effective Date. This Instrument and the resignation, appointment and
--------------
acceptance effected hereunder shall be effective as of the close of business on
the Effective Date.
11. Governing Law. This Instrument shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
4
<PAGE>
12. Counterparts. This Instrument may be executed in any number of
------------
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
13. Survival of Certain Obligations of the Company. Notwithstanding the
----------------------------------------------
the resignation of the Resigning Trustee, as Trustee under the Indenture, the
Company shall remain obligated under the Indenture to compensate, reimburse and
indemnify the Resigning Trustee in connection with its trusteeship under the
Indenture, and nothing contained in this Instrument shall in any way abrogate
the obligations of the Company to the Resigning Trustee under the Indenture and
the Documents or any lien created thereunder in favor of the Resigning Trustee.
14. Notices. All notices, whether faxed or mailed will be deemed received
-------
when sent pursuant to the following instructions:
TO THE RESIGNING TRUSTEE:
Julie J. Becker, Vice President
Norwest Bank Minnesota, National Association
Corporate Trust Services
Sixth Street and Marquette Avenue
Mac No. N9303-120
Minneapolis, Minnesota 55479
TELEPHONE: (612) 316-4772
TELECOPIER: (612) 667-9825
TO THE SUCCESSOR TRUSTEE:
Jeffrey C. Tupper, Vice President
U.S. Bank National Association
M.S. SPFT0210
180 East Fifth Street
St. Paul, Minnesota 55101
TELEPHONE: (651) 244-0743
TELECOPIER: (651) 244-0089
TO THE COMPANY:
Jamie Vasquez, Treasurer
Pillowtex Corporation
4111 Mint Way
Dallas, Texas 75237
TELEPHONE: (214) 333-3325
TELECOPIER: (214) 467-0823
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Instrument to be effective as
of the day and year first above written.
Dated: April 13, 2000 PILLOWTEX CORPORATION
By: John F. Sterling
Its: Vice President
Dated: April 14, 2000 NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: Julie J. Becker
Its: Vice President
Dated: April 12, 2000 U.S. BANK NATIONAL ASSOCIATION
By: Lori-Anne Rosenburg
Its: Assistant Vice President
6
<PAGE>
EXHIBIT A
---------
NOTICE TO HOLDERS OF
PILLOWTEX CORPORATION
9% SENIOR SUBORDINATED NOTES DUE 2007
(SERIES A AND B)
We hereby notify you of the resignation of Norwest Bank Minnesota, National
Association, as Trustee under the Indenture dated as of December 18, 1997 (as
amended or supplemented, the "Indenture"), pursuant to which the above-described
notes were issued and are outstanding.
Pillowtex Corporation has appointed US Bank National Association, whose
corporate Trust Office is located at 180 East Fifth Street, M.S. SPFT0210, St.
Paul, Minnesota 55101, as Successor Trustee under the Indenture, which
appointment has been accepted and has become effective.
7
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<PERIOD-START> JAN-03-1999 JAN-02-2000
<PERIOD-END> APR-03-1999 APR-01-2000
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73,898 75,894
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