-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IwSlUvpdLyuHqimhQQk4Y9xNX9CydZlgurnD0BJaoDM7oanLGC1ABasW+9lBXdkP n0Q/hNpRFR8La9ARF4iJ8w== 0000896265-97-000005.txt : 19970318 0000896265-97-000005.hdr.sgml : 19970318 ACCESSION NUMBER: 0000896265-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11756 FILM NUMBER: 97557468 BUSINESS ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 BUSINESS PHONE: 2143333225 MAIL ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 FORMER COMPANY: FORMER CONFORMED NAME: PILLOWTEX CORP DATE OF NAME CHANGE: 19930125 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 28, 1996 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) (I.R.S. Employer Identification No.) 4111 Mint Way, Dallas, Texas 75237 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 333-3225 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $0.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28, 1997 was $74,567,049. As of February 28, 1997, Registrant had 10,617,722 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's Annual Meeting of Shareholders for the year ended December 28, 1996 are incorporated by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Pillowtex Corporation (the 'Company' or 'Pillowtex'), founded in 1954, is a leading North American designer, manufacturer and marketer of bed pillows, blankets, mattress pads and down comforters. Other complementary bedroom textile furnishings offered by the Company include comforter covers, featherbeds, pillow protectors, decorative pillows, bedspreads, synthetic comforters, pillow shams, dust ruffles and window treatments. Pillowtex has positioned itself as a single-source supplier to retailers for top-of-the-bed home textile furnishings (other than sheets), offering a broad assortment of products across multiple price points. The Company markets its products primarily to department stores, mass merchants, wholesale clubs, specialty retail stores, catalogs and institutional distributors. The Company believes that it is one of the principal suppliers of bedroom textile furnishings to virtually all of the largest department stores in the United States. BUSINESS STRATEGY Pillowtex's business strategy is to capitalize on the strengths that have distinguished the Company as a preferred supplier of high quality bedroom textile products in North America. OFFER EXTENSIVE PRODUCT LINES EMPHASIZING HIGHER MARGIN GOODS. The Company offers more top-of-the-bed product lines than any of its major North American competitors. With the exception of sheets, the Company's strategy is to provide a 'one-stop shop' for top-of-the-bed products, customized to each retailer's specific consumer profile. Therefore, the Company offers broad product assortments of high quality products at multiple price points. The Company emphasizes higher end, premium lines to encourage the consumer to trade up to better products with generally higher margins for the retailer and the Company. MAINTAIN STRONG CUSTOMER RELATIONSHIPS THROUGH COMPREHENSIVE MERCHANDISING PROGRAMS. The Company offers extensive merchandising programs to retailers in order to maximize product line sales and profitability. Merchandising programs, developed in meetings between the Company and the retailer, address product line assortments, branding strategies and point-of-sale displays, as well as promotional and advertising plans and layouts. In many cases, the Company oversees the creation of promotional and advertising supplements for its customers. Merchandising programs focus on motivating the retail consumer to 'trade up' to better goods that offer higher margins. Pillowtex manufactures and markets goods utilizing established and well recognized licensed trademarks, Company-owned trademarks and trade names, customer-owned private labels and manufacturers' brand names including the Ralph Lauren Home Collection, Mickey & Co. -Registered Trademark-, Royal Velvet - -Registered Trademark-, Touch of Class -Registered Trademark-, Cannon - -Registered Trademark-, Nettle Creek -Registered Trademark-, Martex -Registered Trademark-, Regency by Globe -Registered Trademark-, Blue Heaven -TM-, Comforel - -Registered Trademark-, and Dacron -Registered Trademark-. These trademarks and names provide the Company with the ability to differentiate its product offerings from its competitors for different channels of retail distribution and between different price points. The Company also provides extensive private label production for major retailers such as JCPenney Company, Inc., May Merchandising Corporation and Sears Roebuck and Co. CAPITALIZE ON NATIONWIDE PRODUCTION AND DISTRIBUTION CAPABILITIES. Capitalizing on its initial reputation as a key supplier to department stores, the Company has become a nationwide supplier for virtually all channels of retail and institutional distribution. The Company is a supplier to 47 of the top 50 retailers in the United States and the top five retailers in Canada. In order to most cost effectively ship bed pillows, mattress pads and down comforters and minimize delivery times, the Company developed regional production facilities and can now produce and ship from coast to coast. The Company was one of the industry pioneers in the development of extensive 'quick response' capability, including an Electronic Data Interchange ('EDI') system for nationwide, 24-hour acceptance of electronically transmitted customer orders. Through a single transmission, customers may place orders for multiple product lines for distribution from the Company's production facilities. These systems, in combination with the Company's manufacturing capabilities, enable the Company to produce and ship products to retailers with lead times as short as three to five days from receipt of order. ENHANCE THE COMPANY'S POSITION AS A LOW COST PRODUCER. The Company focuses on increasing automation, process improvements and system controls within its plants and throughout the business that are intended to result in improved operational efficiencies. These efforts have enabled the Company to achieve what it believes are the highest sales per employee of any major textile manufacturer in the United States. The Company also believes that significant opportunities still exist to improve production efficiency, especially within the Company's blanket facilities. In late 1995, the Company added a new cotton yarn spinning plant which enabled it to consolidate two smaller facilities and resulted in the elimination of significant outside yarn purchases. The Company pursues worldwide procurement of both finished products and raw materials to reduce costs and locate new sources of production. The Company further emphasizes continual cost monitoring and the ongoing containment of selling, general and administrative ('SG&A') expenses through consolidation of these functions at acquired companies, implementation of better systems, and the retention and training of a well qualified staff. As a result, during 1996 the Company was able to achieve what it believes is one of the lowest levels of SG&A expenses, measured as a percent of sales, in the industry. MAKE SELECTIVE STRATEGIC ACQUISITIONS. Pillowtex continues to selectively make acquisitions of companies that offer products it believes will complement its existing lines and will provide product, marketing, channel of distribution or operational synergies. Since the early 1980's, Pillowtex has made a number of acquisitions in order to enter new product lines and markets. The Company follows a strategy of consolidating plant and SG&A functions and leveraging its strong retail relationships to expand sales and profitability. Through this strategy, Pillowtex has achieved a compounded annual growth rate for net sales of 13.6% and for earnings before interest, taxes, depreciation and amortization ('EBITDA') of 18.7% over the past five years. PRODUCTS The Company has built its core business around four utility bedding product lines that have a low risk of obsolescence. These include bed pillows (including natural fill, synthetic fiber fill and latex), blankets (including cotton, wool blends, acrylic and polyester blankets and throws), down comforters and mattress pads (including thread quilt, sonic quilt and convoluted foam). The Company also sells other bedroom textile furnishings, including comforter covers, featherbeds, pillow protectors, decorative pillows, bedspreads, synthetic comforters, pillow shams, dust ruffles and window treatments. BED PILLOWS. Management believes that the Company is currently a leading manufacturer and marketer of bed pillows in the United States and Canada. The Company produces and markets a broad line of traditional bed pillows, as well as specially designed bed pillows such as the BodyMate -Registered Trademark- body pillow and Great Shapes -Registered Trademark- pillows, including Euro Square, U-Neck and Neck Roll. The Company offers products at various levels of quality and price, from synthetic pillows sold at retail prices as low as $4 to fine white goose down pillows sold at a retail price of up to approximately $185. The Company believes that it is a leading feather and down pillow manufacturer in North America, offering products filled with quality goose and duck down, or blends of feather and down, in a range of grades. These materials, known as 'natural fill,' are noted for their loft and resiliency. The Company also manufactures and markets a full line of bed pillows featuring staple (cut and crimped), tow (continuous filament) and cluster (individual ball) synthetic fiber fills. The Company believes that it is a leading supplier of premium synthetic and latex bed pillows in the United States and Canada. BLANKETS. Management believes that the Company is a leading producer of blankets in the United States, as well as a leading marketer of blankets in Canada. The Company manufactures woven and nonwoven conventional and thermal weave blankets and throws in a wide assortment of fibers, including cotton, wool blend, acrylic and polyester. The Company is the exclusive supplier in North America of blankets for the Ralph Lauren Home Collection. The Company has a strong presence in the infant blanket market with products ranging from nonwoven receiving blankets, to jacquard throws, to the finest Supima -Registered Trademark- cotton crib blanket. The Company also designs and manufactures a full line of decorative cotton and acrylic jacquard throws. DOWN COMFORTERS. The Company was a pioneer in marketing down comforters in the United States, and management believes that the Company is a leading manufacturer and marketer of down comforters in the United States and Canada. Down comforters became increasingly popular for both their insulation and fashion qualities, selling well in both warm and cool climates, and they sell at department stores at prices ranging from $70 to approximately $400. Increasingly popular higher-end comforters typically offer more down fill, sport higher thread count shells and/or feature more appealing 'surface interest,' such as damask dots, stripes and checks. MATTRESS PADS. Management believes that the Company is a leading manufacturer and marketer of mattress pads in the United States and Canada. The Company produces and markets a complete line of mattress pads, including sizes for adults and children, natural and synthetic filled, flat and fitted, as well as its skirted Adjust-A-Fit -Registered Trademark- mattress pad, an adjustable fit mattress pad made with Lycra -Registered Trademark- a multi-directional stretch material produced by E.I. DuPont de Nemours & Company ('DuPont'). The Adjust-A-Fit -Registered Trademark- mattress pad correctly fits a broad range of mattress thicknesses, including pillow top mattresses. OTHER BEDROOM TEXTILES. The Company offers a variety of other complementary bedroom textile products including comforter covers, featherbeds, pillow protectors, synthetic fill comforters, decorative pillows, pillow shams, dust ruffles and window treatments. These products represent a source of additional profitability as 'add-on' sales for retailers. MARKETING, SALES AND DISTRIBUTION The Company markets its products to virtually all major retailers through channels of distribution that include department and specialty stores, mass merchants, discounters and catalogs, as well as institutional suppliers. The Company believes that it is one of the principal suppliers of bedroom textile products to several of the largest retailers in the United States. The Company's top ten customers accounted for approximately 65% of total net sales in 1996. Wal-Mart and Dayton Hudson accounted for 14.0% and 13.0% of the Company's total net sales in 1996, respectively. No other customer accounted for more than 10% of total net sales in 1996. Consistent with industry practice, the Company does not generally operate under long-term written supply contracts with its customers. The Company's current international business is concentrated in Canada, although it also sells in Mexico, Latin America and overseas. The Company's acquisition of Torfeaco Industries, Ltd. ('Torfeaco') in 1993, and of Imperial Feather Company ('Imperial') and Beacon Manufacturing Company ('Beacon') in 1994, greatly enhanced the Company's market position in Canada and its relationships with important Canadian retailers. The Company markets its products under numerous Company-owned trademarks and trade names and customer-owned private labels, as well as certain licensed trademarks and trade names. The Company uses trademarks, trade names and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors. The Company's relationship with Ralph Lauren began in 1987, and the Ralph Lauren Home Collection is among its most important licensed trademarks. The Company holds an exclusive license for pillows, down comforters, mattress pads and blankets, and a non-exclusive license for fashion bedding to manufacture, and in certain cases to sell, a variety of home textile products sold in North America. The Ralph Lauren Home Collection products are sold worldwide to fine department and specialty stores. In an effort to maximize the Company's product exposure and increase sales, Pillowtex works closely with its major customers to assist them in merchandising and promoting the Company's products to the consumer. In addition to frequent personal consultation with the employees of these customers, the Company meets with its customers' senior management periodically to jointly develop merchandise assortments and plan promotional events specifically tailored for its customers. The Company provides merchandising assistance with store layouts, fixture designs, advertising and point-of-sale displays. The Company also provides customers with preprinted, customized advertising materials designed to increase sales. The Company's EDI system allows customers to place, and allows the Company to fill, track and bill, orders by computer. This system enables the Company to ship products on a 'quick response' basis. The Company generally employs salespeople who have many years of industry experience. Most salespeople are compensated with a combination of salary and discretionary bonus. Certain Ralph Lauren Home Collection products are sold by the Ralph Lauren sales force. PATENTS, TRADEMARKS AND LICENSE AGREEMENTS The Company owns various trademarks and trade names, including Blue Heaven - -TM-, Softie -Registered Trademark-, Regency by Globe -Registered Trademark- and BodyMate -Registered Trademark-. The Company regards its trademarks and trade names as valuable assets and vigorously protects them against infringement. Pillowtex holds the exclusive license for the highly regarded Ralph Lauren Home Collection for pillows, down comforters, mattress pads and blankets, and a non-exclusive license for fashion bedding to manufacture, and in certain cases sell, a variety of home textile products in North America. The Company also has entered into an exclusive 25-year license agreement with Fieldcrest Cannon, Inc. ('Fieldcrest') for the manufacture and sale of various goods, including bed pillows, mattress pads, down comforters and blankets under certain of its various trademarks, including Cannon -Registered Trademark-, Royal Velvet - -Registered Trademark-, Charisma -Registered Trademark- and Touch of Class - -Registered Trademark-. In addition, the Company manufactures and sells various goods, including pillows, blankets and throws under non-exclusive license agreements with Disney for the standard characters including Mickey Mouse, Minnie Mouse and Donald Duck, as well as other characters and film properties such as Winnie the Pooh and Lion King. The Company also markets products under trademark license agreements with various other organizations including DuPont, WestPoint Stevens, Inc. and the U.S. Postal Service. These license agreements generally require royalty payments based upon product sales, including payments of minimum annual royalties, and expire at various future dates from 1997 to 1998. Fieldcrest license agreements expire in 2021. PRODUCT DEVELOPMENT The Company's product development staff seeks to create and develop products with new or superior performance characteristics in cooperation with various outside sources, including the Company's suppliers and customers. The Company believes that this ability is an important competitive advantage. As a result, the Company commits time and resources to identifying new materials, designs and products from a variety of domestic and international vendors. In addition to internal product development, the Company's acquisitions have expanded its product lines and enhanced its manufacturing and other resources available for developing existing and new product lines. MANUFACTURING, RAW MATERIALS AND IMPORTS Pillowtex operates an extensive network of manufacturing and distribution facilities in Texas, California, Illinois, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee and Toronto, Canada. The Company's North American manufacturing and distribution network enables Pillowtex to ship pillows, mattress pads and comforters cost effectively to all major cities in the United States and Canada. The hub of the network for pillows and comforters is located in Dallas, Texas, where the Company operates what it believes to be the largest feather and down processing facility in North America, which yields significant economies of scale. Feather and down are processed by state-of- the-art computerized washing and sorting equipment and are sorted into a variety of mixtures and grades used in manufacturing natural fill pillows and comforters. The raw materials are shipped along with imported products to the Company's regional facilities for final assembly and distribution to customers. The Company also operates an automated sewing facility in Dallas, Texas, where high speed, computerized machines cut and sew fabric into pillow shells. Many of the Company's regional manufacturing facilities produce natural fill and synthetic fill pillows. Natural fill pillows are assembled by blowing processed feather and down into the pillow shell and sewing the open seam closed. Synthetic fill pillows are produced on machines known as garnets that open, comb and expand compressed polyester fibers. Once expanded, the fibers are inserted into a pillow shell and the open seam is sewn shut. Mattress pads are manufactured at the California, Mississippi, Pennsylvania and Toronto, Canada facilities by two automated methods. The traditional quilt sewing method uses high-speed equipment that sews the top, bottom and fill material together. The sonic method fuses the top, bottom and fill material together. The Company's line of natural fill comforters are manufactured by the Company at its California, Illinois, Mississippi, Pennsylvania and Toronto, Canada locations using processed down from the Dallas facility. The Company imports the majority of its comforter shells from China, Hong Kong and India. The Company produces blankets and spins yarn at manufacturing facilities in North Carolina, South Carolina and Tennessee. These plants provide full vertical production capability, including spinning, weaving, dyeing and finishing. During 1996, the Company acquired a 746,600 square foot warehouse in Mauldin, South Carolina ('Mauldin') to consolidate the operations of four smaller warehouses in a more central distribution facility. In November 1996, Pillowtex acquired certain assets from Fieldcrest's blanket operations, including newer and faster equipment which is being installed at our existing blanket facilities during the first half of 1997. As with its other lines of business, the Company plans the continuation of equipment and plant upgrades over the next several years in order to increase production efficiency and add capacity. The Company's quality control program is designed to ensure that its products meet predetermined quality standards established both internally and by its customers. The Company has devoted significant resources to support its quality improvement efforts. Each manufacturing facility is staffed with a quality control team that identifies and resolves quality issues. The Company attempts to maintain close contact with customer quality control or other appropriate personnel to ascertain that the customer's requirements are consistently satisfied. The Company analyzes feather and down and other raw materials, as well as finished products of both the Company and its competitors, at its facilities in Dallas, Texas. The Company maintains a computerized tracking system to monitor feather and down processing from the receipt of raw materials through the delivery of finished products. At the blanket production plants, numerous distinct quality check points are monitored throughout the manufacturing process. The Company also has a program with its major suppliers to assure the consistency of purchased raw materials by imposing strict standards and materials inspection, and requiring rapid response to the Company's complaints. The principal raw materials that the Company uses in manufacturing its products are: feather and down; synthetic (polyester and acrylic), cotton and wool fibers; and cotton and poly/cotton blend fabrics. The Company imports feather and down from several sources outside the United States. A majority of such purchases are from China, where feather and down are by-products of ducks and geese raised for food. The Company believes that it is currently the largest United States importer of feather and down from China, the world's largest producing country. The Company is generally able to purchase feather and down from its suppliers in China on open credit terms without letters of credit. In 1994, certain goods imported from China, including down-filled comforters, comforter shells and comforter covers, were assigned to a new import group. The 1994 quota for that group closed in July and, in 1995, the quota closed in March. As a consequence, the Company made the strategic decision to markedly accelerate its import schedule in both years in order to purchase the required goods prior to the closing of the quota. In 1995, the Company diminished its reliance on imported finished goods from China by manufacturing more of these products in the United States and Canada and by continuing to develop relationships with suppliers in other countries, including India. The Company also opened an office in Hong Kong to facilitate more direct purchases in China and to develop alternative sources of supply. In 1996, virtually all down comforters sold by the Company were manufactured in the United States and Canada. A majority of the comforter shells and comforter covers was purchased directly by the Company, as was a significant percentage of raw feather and down, some of which was also obtained through an independent supplier in the United States. In addition, in 1995 the Company was successful in achieving a change in the import regulations regarding down comforter shells, which are not generally manufactured in the United States. Since July 1, 1996, no import quota restrictions for shells remain, which has allowed the Company to import shells as needed and thereby reduce inventory carrying costs. The Company purchases its Adjust-A-Fit -Registered Trademark- mattress pad Lycra -Registered Trademark- skirting from DuPont. Because of DuPont's patent on Lycra -Registered Trademark-, it is the exclusive supplier for this material. The Company believes that the risk that DuPont will cease to manufacture Lycra - Registered Trademark- and sell skirting to the Company is minimal. The Company purchases synthetic fiber from, among others, DuPont, Wellman, Inc., Monsanto Company, Cytec Industries, Inc., Hoechst Celanese Corporation and Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations, the Company makes commitments from time to time for future purchases of synthetic and natural fibers. In 1996, the Company experienced some decreases in cotton and synthetic raw materials prices. The Company uses fabric purchased from third parties in the production of pillow shells, comforter covers and various other products. Although the Company believes that fabric is a commodity-type product that is available from numerous sources, the Company currently purchases large quantities of pillow ticking fabric from a single supplier to control costs and quality. Management of the Company believes relationships with its suppliers are good. COMPETITION The Company participates in a highly competitive industry. The Company competes with a number of established manufacturers, importers and distributors of home textile furnishings, some of which have greater financial, distribution and marketing resources. The Company's current competitors consist primarily of domestic suppliers of bed pillows, blankets, mattress pads, down comforters and other bedroom textile furnishings. The home fashion products industry also includes companies that produce bed sheets, towels and other commodity-type items. A number of these companies do not currently offer the Company's principal products. There can be no assurance, however, that these companies will not compete with Pillowtex in the future. The Company competes on the basis of price, quality, brand names and service. The Company believes that the principal competitive factors affecting its business include its sales and marketing expertise, its ability to create and develop products offering superior performance characteristics, its relationships with customers and its manufacturing and distribution capabilities. GOVERNMENT REGULATION The Company is subject to various federal, state and local environmental laws and regulations governing the discharge, storage, handling and disposal of various substances, including provisions of the California Health and Safety Code pertaining to air quality management. The Company is also subject to federal and state laws and regulations that require products such as bed pillows and comforters to bear product content labels containing specified information, including their place of origin and fiber content. In addition, the Company's operations are governed by a variety of federal, state, local and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other matters applicable to businesses in general. In 1995, the Company achieved a change in the import regulations regarding down comforter shells which are not generally manufactured in the United States. As a result of this regulatory change, the Company has been able to import comforter shells on an unlimited and as-needed basis since July 1, 1996. All laws and regulations are subject to change, and the Company cannot predict what effect, if any, changes in laws and regulations might have on its business. BACKLOG The amount of the Company's backlog orders at any particular time is affected by a number of factors, including seasonality and scheduling of the manufacturing and shipment of products. In general, the Company's EDI and 'quick response' capabilities have resulted in shortened lead times between submission of purchase orders and delivery and lowered the level of backlog orders. Consequently, the Company believes that the amount of its backlog is not an appropriate indicator of levels of future production. EMPLOYEES As of February 28, 1997, the Company had approximately 3,900 employees. The Company is subject to the following collective bargaining agreements.
Number of Union Location Covered Expiration Employees - --------------------------------- -------------------- ----------- ---------- United Auto Workers Tunica, Mississippi 08/01/99 240 Warehouse, Mail Order, Office, Technical and Professional Employees (Teamsters) Chicago, Illinois 02/01/00 140 Union of Needletrades, Industrial and Textile Employees Lebanon, Tennessee 03/28/97 200 Union of Needletrades, Industrial and Textile Workers Toronto, Canada 02/28/97 225 Union of Needletrades, Industrial and Textile Workers Eden, North Carolina 03/01/00 20
To date, none of these unions have engaged in strikes or work stoppages against the Company. The Company believes that its relationships with both its union and nonunion employees are good. ITEM 2. FACILITIES The following table summarizes selected information concerning certain of the Company's facilities:
Square Owned/ Location Principal Use Feet Leased (1) - ------------------ ------------------------------------- -------- ----------- Dallas, TX Headquarters and feather and down processing 104,000 Owned Dallas, TX General administration, manufacturing and distribution 150,000 Owned Dallas, TX Warehouse 163,000 Leased Los Angeles, CA Manufacturing and distribution 320,000 Leased Tunica, MS Manufacturing and distribution 288,000 Owned Hanover, PA Manufacturing and distribution 291,000 Owned Rocky Mount, NC Manufacturing and distribution 139,000 Owned Rocky Mount, NC Manufacturing and distribution 78,000 Leased Chicago, IL Manufacturing and distribution 121,000 Owned New York, NY Principal sales office & showroom 12,500 Leased Monroe, NC Manufacturing and distribution 288,000 Leased Goodlettsville, TN Warehouse and distribution 158,000 Leased Lebanon, TN Warehouse and distribution 53,000 Leased Lebanon, TN Manufacturing 175,000 Owned Toronto, Ontario Manufacturing and distribution 99,000 Leased Toronto, Ontario Manufacturing and distribution 60,000 Leased Swannanoa, NC Manufacturing and distribution 822,000 Owned Swannanoa, NC Office 30,000 Owned Swannanoa, NC Outlet Store 5,000 Owned Swannanoa, NC Warehouse and distribution 573,000 Owned Asheville, NC Warehouse 177,000 Leased Asheville, NC Warehouse 254,000 Leased Asheville, NC Warehouse 185,000 Leased Westminster, SC Manufacturing and distribution 308,000 Owned Westminster, SC Office 6,000 Owned Westminster, SC Warehouse and distribution 284,000 Owned Westminster, SC Warehouse 29,000 Leased Westminster, SC Warehouse 54,000 Owned Newton, NC Manufacturing and distribution 297,000 Leased Mauldin, SC Warehouse and distribution 747,000 Owned (1) For additional information concerning the Company's leases, see note 12 of Notes to Consolidated Financial Statements.
Pillowtex also maintains small sales offices for its sales staff in Arkansas, California, Massachusetts, Minnesota and North Carolina as well as a purchasing office in Hong Kong. On November 19, 1996, the Company purchased a 746,600 square foot warehouse facility in Mauldin, South Carolina for approximately $8.4 million, to replace certain leased warehouse facilities and consolidate Beacon's distribution operations. The Company believes that its facilities are generally well maintained, in good operating condition and adequate for its current needs. In 1996, the Company acquired newer and faster equipment from Fieldcrest for use at its blanket facilities in North Carolina, South Carolina and Tennessee. The Company will continue to emphasize improvements at these plants, upgrading the physical plant and purchasing additional and newer machinery and equipment. ITEM 3. LEGAL PROCEEDINGS Louisville Bedding Company ('Louisville') filed a complaint for patent infringement against the Company in the United States District Court in the Western District of Kentucky, Louisville Division, on December 21, 1994. Louisville alleges in its complaint that Pillowtex is manufacturing and selling mattress pads that infringe patents owned by Louisville. Louisville is seeking a preliminary and permanent injunction enjoining Pillowtex from continued infringement on the Louisville patents, an accounting of profits and an unspecified amount of general damages against Pillowtex for alleged infringement. In addition, Louisville requests that such unspecified damages be trebled and seeks costs, interest and reasonable attorneys' fees. The Company has denied the allegations and is vigorously defending the suit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $0.01 par value ('Common Stock'), is listed for trading on the New York Stock Exchange under the symbol PTX. As of February 28, 1997, the Company had approximately 340 common shareholders of record. On December 27, 1996, the closing market price of the Common Stock was $18. The following table reflects the range of high and low selling prices of the Common Stock for the periods indicated. This information is based on closing prices as reported by the New York Stock Exchange.
1996 1996 1995 1995 HIGH LOW HIGH LOW ------- ------- ------- ------- First Quarter $12 1/2 $10 1/2 $10 1/8 $8 Second Quarter $13 3/4 $12 $11 1/2 $8 3/4 Third Quarter $14 3/8 $10 5/8 $13 $9 5/8 Fourth Quarter $18 1/4 $12 7/8 $13 $11
Pillowtex paid four quarterly dividends to shareholders of its Common Stock of $0.05 per share during 1996. The amount of dividends which the Company may pay is limited under a covenant in the Company's Revolver. See Note 8 of Notes to Consolidated Financial Statements and 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.' ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (In thousands, except per share data) The selected financial data presented below are derived from the Company's consolidated financial statements for the five years ended December 28, 1996. The data should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the consolidated financial statements and related notes included elsewhere in this document.
Year Ended 12/31/92 12/31/93(1) 12/31/94(2) 12/30/95 12/28/96 -------- ----------- ----------- -------- -------- STATEMENTS OF EARNINGS DATA: Net sales . . . . . . . . . .$273,462 291,624 349,520 474,899 490,655 Cost of goods sold. . . . . . 222,611 238,155 294,714 395,922 411,048 -------- ----------- ----------- -------- -------- Gross profit. . . . . . . . . 50,851 53,469 54,806 78,977 79,607 S,G & A expenses. . . . . . . 33,376 29,227 36,399 42,508 41,445 -------- ----------- ----------- -------- -------- Earnings from operations. . . 17,475 24,242 18,407 36,469 38,162 Interest expense. . . . . . . 4,997 3,042 6,361 17,491 13,971 Other expense (income), net . 1,049 - (379) - - Earnings before income taxes.-------- ----------- ----------- -------- -------- and extraordinary loss . . . 11,429 21,200 12,425 18,978 24,191 Income taxes. . . . . . . . . 529 8,420 4,736 7,509 9,459 -------- ----------- ----------- -------- -------- Earnings before extra-. . . . ordinary loss. . . . . . . . 10,900 12,780 7,689 11,469 14,732 Extraordinary loss, net . . . - - - - (609) -------- ----------- ----------- -------- -------- Net earnings. . . . . . . . . 10,900 12,780 7,689 11,469 14,123 Accretion to repurchase price of common stock subject. . . to repurchase . . . . . . . 2,500 - - - - -------- ----------- ----------- -------- -------- Net earnings available to common stock shareholders. .$ 8,400 12,780 7,689 11,469 14,123 ======== =========== =========== ======== ======== Earnings per share before extraordinary loss . . . . .$ .73 1.08 1.39 Extraordinary loss. . . . . . - - (.06) ----------- -------- -------- Net earnings per share. . . .$ .73 1.08 1.33 =========== ======== ======== PRO FORMA EARNINGS DATA: Net earnings as reported. . .$ 10,900 12,780 Pro forma adjustment to provision for income taxes . 3,208 (97) -------- ----------- Pro forma net earnings. . . .$ 7,692 12,877 ======== =========== Pro forma net earnings available to common stock shareholders . . . . . . . .$ 5,192 12,877 ======== =========== Pro forma net earnings per share. . . . . . . . . . . .$ .80 1.32 ======== =========== Weighted average common shares outstanding. . . . . 6,505 9,751 10,604 10,618 10,618 OPERATING DATA: Depreciation and amortization$ 3,104 3,868 6,365 11,994 12,775 Capital expenditures . . . . 5,869 7,135 10,538 12,448 21,040 Cash dividends. . . . . . . . 4,025 2,506 244 531 2,124 BALANCE SHEET DATA: Working capital . . . . . . .$ 65,567 78,141 122,738 110,128 150,506 P, P & E, net . . . . . . . . 28,301 39,110 81,187 84,567 94,267 Total assets. . . . . . . . . 131,542 180,967 319,544 324,710 375,714 Long-term debt, net of current portion. . . . . . . 63,599 63,735 177,149 153,472 194,851 Common stock subject to repurchase . . . . . . . . . 27,500 - - - - Shareholders' equity . . . . 7,072 69,329 76,478 87,990 100,004 (1) Amounts set forth in 1993 reflect the inclusion of Manetta Home Fashions, Inc. from August 30, 1993, Tennessee Woolen Mills, Inc. from September 7, 1993 and Torfeaco Industries Limited from December 1, 1993. (2) Amounts set forth in 1994 reflect the inclusion of Imperial Feather Company from August 19, 1994 and Beacon Manufacturing Company from December 1, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company, originally founded in 1954 as a pillow manufacturer, expanded its product lines through acquisitions into other categories of top-of- the-bed home textiles including mattress pads, comforters and blankets. The Company has been successful in integrating these acquisitions into its existing operations, resulting in increased sales, more efficient distribution and a broader product line. The Company originally expanded its product line to include blankets through the acquisition of Manetta Mills, Inc. ('Manetta') in August 1993 and Tennessee Woolen Mills, Inc. ('TWM') in September 1993. In addition, in December 1994, the Company acquired substantially all of the assets of Beacon Manufacturing Company ('Beacon'), a manufacturer of cotton and synthetic blankets and throws. The Company expanded its manufacturing operations into Canada through the acquisition of Torfeaco Industries, Ltd. ('Torfeaco'), a manufacturer of fashion and synthetic bedding products, in December 1993, and Imperial Feather Company ('Imperial'), a manufacturer of bedding products, including natural fill and synthetic bed pillows, down comforters and comforter covers, in August 1994. Each of these acquisitions was accounted for under the purchase method of accounting, and, accordingly, the results of operations of each acquired company have been included in the Consolidated Statements of Earnings since its respective acquisition date. Due to the number, magnitude and timing of the Company's acquisitions, the Company's operating results, as reflected in the Consolidated Financial Statements, are not directly comparable on a year-to-year or quarter-to-quarter basis. In November 1996, the Company purchased certain assets of Fieldcrest Cannon, Inc.'s ('Fieldcrest') blanket operations, including selected equipment, inventory and an exclusive long-term license for the use of certain trademarks and trade names. On March 17, 1993, the Company completed an initial public offering of its Common Stock with the issuance of 4,085,000 shares at $14.00 per share. The Company received net proceeds of $52.1 million after deducting offering costs. On November 12, 1996, the Company completed a private offering for an aggregate principal amount of $125 million of 10% Senior Subordinated Notes (the 'Notes') due November 15, 2006. After deducting offering costs, the Company received net proceeds of approximately $121.7 million. INCOME TAXES From March 1, 1987 until March 23, 1993, the Company elected to be taxed as an S Corporation under Subchapter S of the Internal Revenue Code and comparable provisions of certain state tax laws, and, therefore, paid no federal income taxes and no state taxes in certain states during this period. The Company paid cash dividends in 1993 and 1994 to fund the payment of the federal and state income tax liabilities of the Company's shareholders attributable to its Subchapter S earnings. RESULTS OF OPERATIONS The following table presents certain statements of earnings data as a percentage of sales for the periods indicated and should be read in conjunction with the Selected Financial Data in Item 6 of this report.
Year Ended 12/31/94 12/30/95 12/28/96 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 84.3 83.4 83.8 Gross profit 15.7 16.6 16.2 Selling, general and administrative expenses 10.4 9.0 8.4 Earnings from operations 5.3 7.7 7.8 Interest expense 1.8 3.7 2.8 Other income 0.1 - - Earnings before income taxes and extraordinary loss 3.6 3.9 4.9 Extraordinary loss - - 0.1 Net earnings 2.2 2.4 2.9
1996 vs. 1995 NET SALES. Net sales were $490.7 million in 1996, representing an increase of $15.8 million or 3.3% as compared to $474.9 million in 1995. This increase reflected strong bed pillow, mattress pad and fashion bedding sales, partially offset by lower sales in the Beacon Division due to a weak retail climate for blankets. GROSS PROFIT. Gross profit margins decreased to 16.2% in 1996 from 16.6% in 1995 due primarily to a highly competitive pricing environment in blankets, lower blanket sales and start-up operational issues at our Newton cotton yarn spinning facility, which negatively impacted margins throughout the first half of 1996. However, margins began to show improvement on a year-over-year basis during the second half of 1996. SG&A. Selling, general and administrative ('SG&A') expenses fell by $1.1 million to $41.4 million in 1996, from $42.5 million in 1995, and, as a percentage of sales, SG&A expenses decreased to 8.4% from 9.0% in the respective periods. These decreases reflected the Company's continuing success at reducing these costs. INTEREST. Interest expense decreased to $14.0 million in 1996, from $17.5 million in 1995. Interest expense fell due to lower borrowings and decreased average interest rates. TAXES. The effective tax rate for 1996 decreased to 39.1% compared to 39.6% for 1995, primarily due to lower state taxes. EXTRAORDINARY LOSS. An extraordinary loss of $0.6 million was recorded in 1996 related to the write-off of deferred finance costs for the Company's term loan, which was retired with a portion of the proceeds from the private offering of the Notes. NET EARNINGS. Net earnings increased to $14.1 million in 1996, from $11.5 million in 1995. As a percentage of sales, net earnings increased to 2.9% in 1996, from 2.4% in 1995. 1995 vs. 1994 NET SALES. Net sales were $474.9 million in 1995, representing an increase of $125.4 million or 35.9% as compared to sales of $349.5 million in 1994. This increase resulted primarily from the inclusion of 12 months of sales from Beacon during 1995. Due to generally weak retail buying conditions, sales of the Company's core product lines were largely flat. GROSS PROFIT. Gross profit margins increased to 16.6% in 1995, from 15.7% in 1994. Margins were supported by product price increases implemented in 1995 and increased operating productivity at the Company's manufacturing facilities, the latter of which resulted from efficiencies achieved through the further successful integration of the blanket plants acquired in 1993 and 1994. Margin increases were offset in part by a sales mix change that included a greater percentage of blanket sales in 1995, which generally carry lower margins than the Company's other products, increases in raw material prices and by a higher percentage of closeout goods in the sales mix. SG&A. SG&A expenses grew by $6.1 million to $42.5 million in 1995, from $36.4 million in 1994, due primarily to the acquisition in December 1994 of Beacon. As a percentage of sales, however, SG&A expenses fell significantly, to 9.0% in 1995, from 10.4% in 1994. This decrease was the result of comprehensive cost cutting throughout the Company, including expenses related to the integration of the blanket plants acquired in 1993 and 1994, as well as reductions in salaries, travel, advertising, professional fees and other general administrative expenses. INTEREST. Interest expense increased to $17.5 million in 1995, from $6.4 million in 1994, due to increased debt levels and interest rates. Higher borrowings related to the acquisition of Beacon in 1994 and the inventory carrying costs resulting from earlier purchases of certain imported products in expectation of closure of quota categories applicable to certain goods imported from China. TAXES. The effective tax rate in 1995 grew to 39.6%, compared to 38.1% in 1994, due to the expiration of certain tax credits and to a reduction in tax-exempt earnings. NET EARNINGS. Net earnings increased to $11.5 million in 1995, from $7.7 million in 1994, as a result of improved gross margins and marked decreases in SG&A expenses, partially offset by increased interest expense. LIQUIDITY AND CAPITAL RESOURCES The primary uses of cash by the Company have historically been to provide funds for operations, make expenditures for capital improvements, equipment and facilities, repay indebtedness, pay cash dividends to shareholders, repurchase shares of common stock and make acquisitions. In 1997, the Company's most significant capital commitments include the payment of interest, royalty payments under license agreements, capital improvement expenditures and operating lease payments. The Company's principle capital resources included cash flow generated by operations and borrowings under the Company's $175 million revolving bank credit facilities (the 'Credit Agreement'). The Company consummated the private offering of the Notes in November 1996, resulting in proceeds to the Company, net of $3.3 million in financing costs, of approximately $121.7 million. The Company used these net proceeds (i) to retire the indebtedness outstanding under the Company's previously existing term loan of $70.4 million, (ii) to finance the acquisition of certain assets of Fieldcrest's blanket operations for approximately $28.3 million, (iii) to temporarily reduce indebtedness under the revolving credit facility (the 'Revolver') by approximately $14.6 million and (iv) to acquire a warehouse facility in Mauldin, S.C. for approximately $8.4 million. Concurrently with the private offering of the Notes, the Company amended and restated the Revolver under its Credit Agreement. The Credit Agreement provides for borrowings in an aggregate principal amount of up to $175.0 million. Indebtedness under the Credit Agreement is guaranteed by each domestic subsidiary of the Company and is secured by the Company's accounts receivable and inventory and by (i) 100% of the capital stock of the Company's domestic subsidiaries and (ii) 65% of the capital stock of the Company's foreign subsidiaries. Loans made pursuant to the Credit Agreement may be borrowed, repaid and reborrowed from time to time until the fifth anniversary of the establishment of the Credit Agreement, subject to satisfaction of certain conditions on the date of any such borrowing. As of December 28, 1996, the outstanding principal balance of the Revolver was $61.0 million. Letters of credit were outstanding under the Revolver with an aggregate undrawn face amount of $11.6 million, and unused availability under the Revolver was $102.4 million. Amounts outstanding under the Credit Agreement bear interest at a rate based, at the Company's option, upon (i) either NationsBank of Texas, N.A.'s ('NationsBank') base rate or LIBOR (the London Interbank Offered Rate) plus 0.875% or (ii) NationsBank's reserve-adjusted CD rate plus 1.000%. These rates are subject to decrease based upon the Company's achievement of (i) certain senior unsecured debt ratings or (ii) certain ratios of funded debt to earnings before interest, taxes, depreciation and amortization ('EBITDA'). The weighted average annual interest rate on outstanding borrowings under the Credit Agreement during 1996 was 7.02%, and the effective rate at December 28, 1996 was 6.39%. The Company from time to time enters into interest rate swap agreements in order to minimize the risk of fluctuations in interest rates. Pillowtex currently has interest rate swap agreements in place covering approximately $215.0 million of indebtedness which expire at various dates, with some extending through November 2000, with an average interest rate of 6.24%. The Credit Agreement contains a number of financial, affirmative and negative covenants that regulate the Company's operations. Financial covenants require maintenance of certain ratios of current assets to current liabilities, funded debt to EBITDA, and minimum cash flow coverages, and require the Company to maintain a minimum tangible net worth. Negative covenants restrict, among other things, the incurrence of debt, the existence of liens, transactions with affiliates, loans, advances and investments by the Company, payment of dividends and other distributions to shareholders, dispositions of assets, mergers, consolidations and dissolutions, contingent liabilities, changes in business and acquisitions. As of December 28, 1996, the Company was in compliance with all covenants under the Credit Agreement. In 1995, the Company's capital expenditures were $12.4 million, including a total of $8.7 million for improvements and equipment purchases related to the blanket production facilities and approximately $0.3 million related to Torfeaco. For 1996, the Company's capital expenditures were $21.0 million, most of which were used to upgrade the physical plants and purchase machinery and equipment for the blanket facilities, including $6.3 million for equipment purchased from Fieldcrest. In addition, the Company purchased a warehouse in Mauldin, South Carolina, for approximately $8.4 million, to replace certain warehouse facilities leased by Beacon. The Company expects to spend approximately $12.9 million in 1997, including approximately $10.9 million at the blanket facilities in North Carolina, South Carolina and Tennessee. The balance of the capital expenditures for 1997 will be used for regular maintenance and improvements at the Company's other manufacturing facilities and to continue the upgrade of the Company's computer system. On each of March 27, 1996, June 26, 1996, September 26, 1996 and December 16, 1996, the Company paid a cash dividend to shareholders of record on March 13, 1996, June 12, 1996, September 11, 1996 and December 2, 1996, respectively, of $.05 per share. Historically, a significant portion of the Company's net sales has been generated during the second half of the year. During each of the past three years, sales and earnings from operations during the second half of the year averaged 60.9% and 72.2%, respectively, of the Company's total sales and earnings from operations. Consequently, working capital requirements and, therefore, total debt levels, reach their highest levels as net sales peak in the third and fourth quarters of the year. The Company believes that cash flow generated from operations and funds provided by the Notes and available under the Revolver will be adequate to meet its working capital and related financing needs for the foreseeable future. In June 1996, the Financial Accounting Standards Board issued Statement No. 125, 'Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities,' which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. Statement No. 125 has been amended by Statement No. 127, which amends the effective date of certain provisions for these transactions occurring after December 31, 1997. The management of the Company does not believe that the impact from adopting the provisions of Statement No. 125 in fiscal year 1998 will be material. FORWARD-LOOKING INFORMATION This report and other reports and statements filed by the Company from time to time with the Securities and Exchange Commission (collectively, 'SEC Filings') contain or may contain certain forward-looking statements and infor- mation that are based upon beliefs of, and information currently available to, the Company's management. When used in SEC Filings, the words 'anticipate,' 'believe,' 'estimate,' 'future,' 'intend,' 'plan,' and similar expressions with prospective connotations as they relate to the Company and its business identify forward-looking statements. All forward-looking statements reflect the current views of the Company with respect to future events and are subject to various risks, uncertainties and assumptions relating to the Company and its operating environment which may cause the actual results to vary significantly from those anticipated. Specific factors that may cause the Company's actual results to differ from those anticipated in forward-looking statements include the following: - generally adverse industry conditions, including further consolidation, customer bankruptcies and inconsistent consumer demand for some or all bedroom textile products, - changes in the competitive environment, including the entry of new competitors in the manufacture of our primary product lines and greater foreign import competition, - the seasonality of the Company's business, which makes it more sensitive to economic and industry influences during the second half of the year, - disruption of key supply sources such as China, including changes in import regulations, - the loss of key management personnel, - the loss of key licenses under which the Company markets a significant percentage of its products, and - the loss of material customers, such as Wal-Mart and Dayton Hudson, that each account for over 10% of the Company's revenues, and other important retailers. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are set forth herein commencing on page F-1. Schedule II to the financial statements is set forth herein on page S-1. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the Company's 1997 Proxy Statement under the captions 'Election of Directors' and 'Executive Officers.' ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's 1997 Proxy Statement under the caption 'Executive Compensation,' except that the information under the subcaptions 'Compensation Committee Report on Executive Compensation' and 'Stock Price Performance Graph' is not incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's 1997 Proxy Statement under the caption 'Security Ownership of Certain Beneficial Owners and Management.' ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's 1997 Proxy Statement under the captions 'Employment Agreements' and 'Compensation Committee Interlocks and Insider Participation.' PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. CONSOLIDATED FINANCIAL STATEMENTS: PAGE Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996 F-3 Consolidated Statements of Earnings for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 F-6 Notes to Consolidated Financial Statements F-7 2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule of the Company for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of the Company. Schedule II Valuation and Qualifying Accounts Page S-1 3. INDEX TO EXHIBITS Exhibit Number Exhibit - ------- --------- 3.1 Restated Articles of Incorporation of Pillowtex, as amended 3.2 Amendment to Bylaws and Amended and Restated Bylaws as currently in effect for Pillowtex 4.1 Specimen of Certificate evidencing Common Stock 4.2 Indenture, dated November 12, 1996 10.1 Registration Rights Agreement, dated as of November 12, 1996, by and among Pillowtex, each domestic subsidiary of Pillowtex and NationsBanc Capital Markets, Inc., and Merrill Lynch, Pierce, Fenner & Smith, Incorporated 10.2 Restated Credit Agreement, dated as of November 12, 1996, by and among Pillowtex and NationsBank of Texas, N.A., as Agent for the Lenders specified therein (excludes Schedules) 10.3 Form of Swing-Line Note, dated as of November 12, 1996, by and among Pillowtex and NationsBank of Texas, N.A. (see Exhibit A-1 to Exhibit 10.61) 10.4 Form of Revolving Note, by and among Pillowtex and NationsBank of Texas, N.A. (see Exhibit A-2 to Exhibit 10.61) Exhibit Number Exhibit - ------- --------- 10.5 Form of Restated Guaranty, by and among Beacon Manufacturing Company, Manetta Home Fashions, Inc., Tennessee Woolen Mills, Inc., Pillowtex, Inc., PTEX Holding Company, and Pillowtex Management Services Company as guarantors, NationsBank of Texas, N.A. as Agent and Pillowtex as Borrower (see Exhibit B to Exhibit 10.61) 10.6 Form of Restated Security Agreement, by and among Pillowtex as Debtor/Borrower, NationsBank of Texas, N.A. as Secured Party and Beacon Manufacturing Company, Manetta Home Fashions, Inc.,Tennessee Woolen Mills, Inc., Pillowtex, Inc., PTEX Holding Company, and Pillowtex Management Services Company as Subsidiary Debtors (see Exhibit C-1 to Exhibit 10.61) 10.7 Asset Purchase Agreement, dated as of October 3, 1996, by and among Pillowtex and Fieldcrest Cannon, Inc. 10.8 Mississippi Business Finance Corporation Industrial Development Variable Rate Demand Notes (Pillowtex Corporation Project) Series 1992 Loan Agreement, Indenture of Trust, Promissory Note, Remarketing and Interest Services Agreement, Placement Agreement, Deed of Trust and Security Agreement, Bond Fund Trustee Agreement, Reimbursement Agreement, and Lease Agreement (including First Amendment) 10.9 Second through Fourth Amendment to Mississippi Business Finance Corporation Industrial Development Variable Rate Demand Notes (Pillowtex Corporation Project) Loan Agreement 10.10 Deed of Trust (with Security Agreement and Assignment of Rents and Leases), dated as of July 15, 1988, between Pillowtex and Principal Mutual Life Insurance Company, as amended, Deed of Trust Note, and Loan Modification and Amendment Agreement 10.11 Second Loan Agreement Modification and Amendment Agreement dated as of January 19, 1993, between Pillowtex and Principal Mutual Life Insurance Company 10.12 Deed of Trust Note dated as of July 15, 1988, from Pillowtex to Principal Mutual Life Insurance Company 10.13 Loan and Security Agreement dated April 6, 1992, between MetLife Capital Corporation and Pillowtex, as amended, and including Term Note dated June 5, 1992 10.14 Pennsylvania Economic Development Financing Authority ('PEDFA') Economic Development Revenue Bonds 1990 Series C (Silversen-Hanover Corporation Project), dated April 1, 1990, Indenture of Trust between PEDFA and First Pennsylvania Bank; Financing Agreement between PEDFA and Silversen-Hanover Corporation; Bond Placement Agreement among PEDFA, NCNB National Bank of North Carolina and Silversen-Hanover Corporation; Reimbursement Agreement between Silversen-Hanover Corporation and NCNB National Bank of North Carolina; and Form of Bond 10.15 Distribution Agreement, dated February 1, 1995 by and among Beacon Manufacturing Company, Manetta Home Fashions, Inc.,Tennessee Woolen Mills, Inc., NEMCOR, Inc., Norm McIntyre, Tim McIntyre and Don McIntyre 10.16 The Priorities Agreement, dated February 27, 1995, between Toronto Dominion Bank, Manetta Home Fashions, Inc., Tennessee Woolen Mills, Inc. and Beacon Manufacturing Company and NEMCOR, Inc. Exhibit Number Exhibit - ------- --------- 10.17 A Guarantee, dated February 27, 1995, between Beacon Manufacturing Company, Manetta Home Fashions, Inc., Tennessee Woolen Mills, Inc. and NEMCOR, Inc. 10.18 Security Agreement, dated February 16, 1995, between NEMCOR, Inc. and Manetta Home Fashions, Inc. 10.19 Security Agreement, dated February 16, 1995, between NEMCOR, Inc. and Tennessee Woolen Mills, Inc. 10.20 Security Agreement, dated February 16, 1995, between NEMCOR, Inc. and Beacon Manufacturing Company. 10.21 Amended and Restated Acquisition Agreement dated as of November 30, 1994, by and among David H. Murdock, Beacon Manufacturing Company, Wiscassett Mills Company, Pillowtex, Be-Ac,Inc., Realmac, Inc., and Wiscat, Inc. 10.22 Purchase agreement between Coopers & Lybrand and Torfeaco Industries Limited for certain assets, dated August 19, 1994 10.23 Indenture dated as of February 1, 1994, by and among Torfeaco Industries Limited and Lodestone Investments Limited, Lese Holdings Limited, Golden Elms Limited, M. Swadron Limited, and Helsinor Investments Limited 10.24 Sublicense Agreement, dated as of July 1, 1995, between Pillowtex and the Ralph Lauren Home Collection 10.25 Lease Agreement dated as of September 18, 1995, between Pillowtex and Sanwa Business Credit Corp. 10.26 Agreement of Lease dated May 23, 1995, between Ten Seventy One Joint Venture and Pillowtex 10.27 Lease dated as of March 1, 1977, by and among Torfeaco Industries Limited and Standa Investment Limited, and Sharon Construction Limited 10.28 Industrial Lease dated as of November 23, 1992, between Angel and Jean Echevarria and Pillowtex 10.29 Form of Lease dated as of October 12, 1988, between Jimmie D. Smith, Jr. and Pillowtex 10.30 Form of Equipment Leasing Agreement between BTM Financial & Leasing Corporation B-4 and Beacon Manufacturing Company, Manetta Home Fashions, Inc. and Tennessee Woolen Mills, Inc., dated as of June 14, 1996 (without exhibits) 10.31 Employment Agreement dated as of January 1, 1993, between Pillowtex and Charles M. Hansen, Jr. ('Hansen') 10.32 Amendment to Employment Agreement dated as of July 26, 1993, between Pillowtex and Hansen 10.33 Form of Employment Agreement dated as of September 1, 1995, between Pillowtex and each of Christopher N. Baker, Jeffrey D. Cordes and Scott E. Shimizu Exhibit Number Exhibit - ------- --------- 10.34 Form of Change of Control Agreement dated as of September 1, 1995, between Pillowtex and each of Christopher N. Baker, Jeffrey D. Cordes and Scott E. Shimizu 10.35 Form of Confidentiality and Noncompetition Agreement 10.36 Form of Director Indemnification Agreement 10.37 Split Dollar Life Insurance Agreement between Pillowtex and Charles M. Hansen, Jr. dated July 26, 1993 10.38 Pillowtex Corporation 1993 Stock Option Plan 21.2 List of Principal Operating Subsidiaries 23.1 Consent of Independent Auditors Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (33-57314) filed January 22, 1993 and amended on February 19, 1993, March 4, 1993, March 15, 1993, and March 17, 1993, which Registration Statement became effective March 17, 1993. Incorporated by reference to the exhibits filed with Registrant's Form 10-K filed on March 31, 1994. Incorporated by reference to the exhibits filed with Registrant's Form 8-K filed December 14, 1994. Incorporated by reference to the exhibits filed with Registrant's Form 10-K filed on March 31, 1995. Incorporated by reference to the exhibits filed with Registrant's Form 10-Q filed on August 14, 1995. Incorporated by reference to the exhibits filed with Registrant's Form 10-Q/A filed on November 14, 1995. Incorporated by reference to the exhibits filed with Registrant's Form 10-K filed on March 30, 1996. Incorporated by reference to the exhibits filed with Registrant's Form 10-Q filed on May 10, 1996. Incorporated by reference to the exhibits filed with Registrant's Form 10-Q filed on August 9, 1996. Incorporated by reference to the exhibits filed with Registrant's Form S-4 filed on December 12, 1996. Filed herewith. (b) Report on Form 8-K. During the quarter ended December 28, 1996, the Company filed reports on Form 8-K dated October 23, 1996, announcing the Company's offering of Senior Subordinated Notes and dated November 18, 1996, reporting the Company's acquisition of certain assets of Fieldcrest's blanket operations. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. (REGISTRANT) PILLOWTEX CORPORATION By (SIGNATURE) /s/Charles M. Hansen, Jr. (NAME AND TITLE) Chairman of the Board and Chief Executive Officer (DATE) March 10, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By (SIGNATURE) /s/Charles M. Hansen, Jr. (NAME AND TITLE) Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) (DATE) March 10, 1997 By (SIGNATURE) /s/Jeffrey D. Cordes (NAME AND TITLE) President, Chief Operating Officer and Director (Principal Financial and Accounting Officer) (DATE) March 10, 1997 By (SIGNATURE) /s/Christopher N. Baker (NAME AND TITLE) Director (DATE) March 10, 1997 By (SIGNATURE) /s/Scott E. Shimizu (NAME AND TITLE) Director (DATE) March 10, 1997 By (SIGNATURE) /s/Mary R. Silverthorne (NAME AND TITLE) Director (DATE) March 10, 1997 By (SIGNATURE) /s/William B. Madden (NAME AND TITLE) Director (DATE) March 10, 1997 By (SIGNATURE) /s/M. Joseph McHugh (NAME AND TITLE) Director (DATE) March 10, 1997 By (SIGNATURE) /s/Paul G. Gillease (NAME AND TITLE) Director (DATE) March 10, 1997 PILLOWTEX CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements and Financial Statement Schedule Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . .F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-3 Consolidated Statements of Earnings for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 . . . . . . .F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 . . . . . . .F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 . . . . . . .F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .F-7 Financial Statement Schedule as of and for the years ended December 31, 1994, December 30, 1995 and December 28, 1996: Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . .S-1 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Pillowtex Corporation: We have audited the consolidated financial statements of Pillowtex Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pillowtex Corporation and subsidiaries as of December 30, 1995 and December 28, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Dallas, Texas February 6, 1997 F-2 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 30, 1995 and December 28, 1996 (Dollars in thousands, except for par value)
ASSETS 1995 1996 --------- --------- Current assets: Cash and cash equivalents. . . . . . . . . . . . . . $ 411 20 Receivables (note 8): Trade, less allowance for doubtful accounts of $2,195 in 1995 and $2,346 in 1996. . . . . . . . . 71,684 78,482 Other . . . . . . . . . . . . . . . . . . . . . . 2,284 4,480 Inventories (notes 4 and 8). . . . . . . . . . . . . 107,404 133,495 Deferred income taxes (note 9) . . . . . . . . . . . 2,419 2,567 Prepaid expenses . . . . . . . . . . . . . . . . . . 1,644 2,613 --------- --------- Total current assets . . . . . . . . . . . . 185,846 221,657 Property, plant and equipment, net (notes 5 and 8) . . 84,567 94,267 Intangible assets, at cost less accumulated amortization of $2,500 in 1995 and $3,843 in 1996 . . 51,779 57,113 Other assets . . . . . . . . . . . . . . . . . . . . . 2,518 2,677 --------- --------- $ 324,710 375,714 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable (note 6). . . . . . . . . . . . . . $ 42,090 45,481 Accrued expenses (note 6). . . . . . . . . . . . . . 21,137 22,156 Current portion of long-term debt (note 8) . . . . . 11,916 1,868 Income taxes payable . . . . . . . . . . . . . . . . 575 1,646 --------- --------- Total current liabilities. . . . . . . . . . 75,718 71,151 Long-term debt, net of current portion (note 8). . . . 153,472 194,851 Deferred income taxes (note 9) . . . . . . . . . . . . 7,530 9,708 Shareholders' equity (notes 8 and 10): Preferred stock, $0.01 par value; authorized 20,000,000 shares; none issued and outstanding. . . - - Common stock, $0.01 par value; authorized 30,000,000 shares; 10,617,722 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . 106 106 Additional paid-in capital . . . . . . . . . . . . . 58,427 58,427 Retained earnings. . . . . . . . . . . . . . . . . . 29,666 41,665 Currency translation adjustment. . . . . . . . . . . (209) (194) --------- --------- Total shareholders' equity . . . . . . . . . 87,990 100,004 Commitments and contingencies (notes 7 and 12) --------- --------- $ 324,710 375,714 ========= =========
See accompanying notes to consolidated financial statements. F-3 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 1994, December 30, 1995 and December 28, 1996 (Dollars in thousands, except for per share data)
1994 1995 1996 --------- --------- --------- Net sales . . . . . . . . . . . . . . . . . . $ 349,520 474,899 490,655 Cost of goods sold . . . . . . . . . . . . . . 294,714 395,922 411,048 --------- --------- --------- Gross profit . . . . . . . . . . . . . . . . 54,806 78,977 79,607 Selling, general and administrative expenses . 36,399 42,508 41,445 --------- --------- --------- Earnings from operations . . . . . . . . 18,407 36,469 38,162 Interest expense . . . . . . . . . . . . . . . 6,361 17,491 13,971 Other income, net. . . . . . . . . . . . . . . (379) - - --------- --------- --------- 5,982 17,491 13,971 --------- --------- --------- Earnings before income taxes and extraordinary loss . . . . . . . . . . 12,425 18,978 24,191 Income taxes (note 9). . . . . . . . . . . . . 4,736 7,509 9,459 --------- --------- --------- Earnings before extraordinary loss . . . 7,689 11,469 14,732 Extraordinary loss, net of income tax benefit of $391 (note 8) . . . . . . . . . . . . . . - - (609) --------- --------- --------- Net earnings . . . . . . . . . . . . . . $ 7,689 11,469 14,123 ========= ========= ========= Earnings per common share before extraordinary loss . . . . . . . . . . . . . . . . . . $ .73 1.08 1.39 Extraordinary loss . . . . . . . . . . . . . . - - (.06) --------- --------- --------- Earnings per common share. . . . . . . . . . . $ .73 1.08 1.33 ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1994, December 30, 1995 and December 28, 1996 (Dollars in thousands, except for per share data)
Common stock Common stock Additional Currency Total Number of Par paid-in Retained translation shareholders' shares value capital earnings adjustment equity ------------- ------------- ------------- ------------- ------------- ------------- Balances at December 31, 1993 10,590,224 $ 106 58,044 11,179 - 69,329 Exercise of stock options 27,498 - 352 - - 352 Dividends declared (note 11) - - - (140) - (140) Currency translation changes - - - - (752) (752) Net earnings - - - 7,689 - 7,689 ------------- ------------- ------------- ------------- ------------- ------------- Balances at December 31, 1994 10,617,722 106 58,396 18,728 (752) 76,478 Other - - 31 - - 31 Dividends declared ($.05 per share) - - - (531) - (531) Currency translation changes - - - - 543 543 Net earnings - - - 11,469 - 11,469 ------------- ------------- ------------- ------------- ------------- ------------- Balances at December 30, 1995 10,617,722 106 58,427 29,666 (209) 87,990 Dividends declared ($.20 per share) - - - (2,124) - (2,124) Currency translation changes - - - - 15 15 Net earnings - - - 14,123 - 14,123 ------------- ------------- ------------- ------------- ------------- ------------- Balances at December 28, 1996 10,617,722 $ 106 58,427 41,665 (194) 100,004 ============= ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements. F-5 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1994, December 30, 1995 and December 28, 1996 (Dollars in thousands)
1994 1995 1996 ---------- --------- --------- Cash flows from operating activities: Net earnings. . . . . . . . . . . . . . . . . . .$ 7,689 11,469 14,123 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . 6,365 11,994 12,775 Deferred income taxes . . . . . . . . . . . . . (174) 3,635 2,030 Loss (gain) on disposal of property, plant and equipment . . . . . . . . . . . . . (39) 74 40 Changes in operating assets and liabilities, net of businesses acquired: Trade receivables. . . . . . . . . . . . . . 11,362 714 (7,040) Inventories. . . . . . . . . . . . . . . . . (13,526) (172) (26,107) Accounts payable . . . . . . . . . . . . . . 4,585 (3,698) 6,267 Other assets and liabilities . . . . . . . . (198) 1,869 (1,374) ---------- --------- --------- Net cash provided by operating activities . 16,064 25,885 714 ---------- --------- --------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment. . . . . . . . . . . . . . . . . . . . 156 119 19 Purchases of property, plant and equipment. . . . (10,538) (12,448) (21,040) Purchase of other assets. . . . . . . . . . . . . (951) - - Payments for businesses purchased, net of cash acquired . . . . . . . . . . . . . . . . . . . . (116,253) - - Other . . . . . . . . . . . . . . . . . . . . . (42) (2,235) (4,112) ---------- --------- --------- Net cash used in investing activities . . . (127,628) (14,564) (25,133) ---------- --------- --------- Cash flows from financing activities: Increase (decrease) in checks not yet presented for payment. . . . . . . . . . . . . . 853 8,155 (2,526) Proceeds from issuance of bonds . . . . . . . . . - - 125,000 Retirement of long-term debt. . . . . . . . . . . (6,884) (5,056) (89,357) Borrowings on revolving credit loans. . . . . . . 103,350 47,150 62,000 Repayments of revolving credit loans. . . . . . . (49,510) (61,500) (66,600) Proceeds from long-term debt. . . . . . . . . . . 64,750 645 635 Debt issuance costs . . . . . . . . . . . . . . . (3,107) (350) (3,000) Proceeds from exercise of stock options . . . . . 352 - - Dividends paid. . . . . . . . . . . . . . . . . . (244) (531) (2,124) ---------- --------- --------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . 109,560 (11,487) 24,028 ---------- --------- --------- Effect of exchange rate changes on cash and cash equivalents. . . . . . . . . . . . . . . . . (11) 6 - ---------- --------- --------- Net change in cash and cash equivalents. . . . . . (2,015) (160) (391) Cash and cash equivalents at beginning of year . . 2,586 571 411 ---------- --------- --------- Cash and cash equivalents at end of year . . . . .$ 571 411 20 ========== ========= =========
See accompanying notes to consolidated financial statements. F-6 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (1) GENERAL Pillowtex Corporation and subsidiaries ('the Company') operate primarily in one industry segment which includes the design, manufacture and marketing of bed pillows, mattress pads, down comforters, blankets, throws and other bedroom textile furnishings. Virtually all of the Company's assets are located in North America. The Company supplies its products primarily to customers in the retail sector, including department stores, mass merchants, wholesale clubs, specialty retail stores, catalogs and institutions. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Pillowtex Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) FISCAL YEAR Beginning in 1995, the Company's fiscal year ends on the Saturday closest to December 31. The fiscal year-ends for the consolidated financial statements presented are December 31, 1994, December 30, 1995 and December 28, 1996. (c) STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, the Company considers all short- term investments with original maturities of three months or less to be cash equivalents. Supplemental disclosures of cash flow information for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 follow:
1994 1995 1996 ------- ------- ------- Interest paid $ 5,134 15,632 15,234 ======= ======= ======= Income taxes paid $ 5,451 3,793 6,483 ======= ======= =======
(d) INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. F-7 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (e) PROPERTY, PLANT AND EQUIPMENT Depreciation is provided generally using the straight-line method in amounts sufficient to amortize the cost of the assets over their estimated useful lives as follows:
Estimated useful life --------------------- Buildings and improvements 10-30 years Machinery and equipment 5-12 years Data processing equipment 5 years Furniture and fixtures 5 years
Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the remaining term of the lease using the straight-line method. Interest costs of $273,000 incurred during the year ended December 28, 1996, for the purchase and construction of long-term assets were capitalized and are being amortized over the related assets' estimated useful lives. Renewals and betterments are capitalized and depreciated over the remaining life of the specific property unit. (f) INTANGIBLES Intangible assets consist primarily of goodwill ($48,079,000 and $46,667,000 as of December 30, 1995 and December 28, 1996, respectively) recorded in connection with the Company's acquisitions (see note 3). Goodwill represents the excess of purchase price over net identifiable tangible and intangible assets acquired. Additions to goodwill during 1995 were primarily related to the finalization of purchase price allocations for previous acquisitions. Amortization is provided using the straight-line method, the majority of which is over the estimated useful life of 40 years. Other intangible assets consist principally of deferred loan costs, trademarks and noncompete agreements amortized over periods ranging from 2 to 20 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. F-8 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (g) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED Of The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,' on December 31, 1995, the first day of fiscal year 1996. This statement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's consolidated financial statements. (h) INCOME TAXES Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (i) STOCK OPTION PLAN Prior to fiscal year 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ('APB') Opinion No. 25, 'Accounting for Stock Issued to Employees,' and related interpretations. Accordingly, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. At the beginning of fiscal year 1996, the Company adopted SFAS No. 123, 'Accounting for Stock-Based Compensation,' which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (j) REVENUE RECOGNITION Revenue is recognized upon shipment of products. Reserves for sales returns and allowances are recorded in the same accounting period as the related revenues. F-9 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (k) ADVERTISING EXPENSES The Company expenses advertising costs as incurred. Advertising expense was approximately $3,899,000, $3,004,000 and $3,223,000 during the years ended December 31, 1994, December 30, 1995 and December 28, 1996, respectively. (l) EARNINGS PER SHARE Earnings per share for 1994, 1995 and 1996 are based on 10,603,660 weighted average shares of common stock outstanding in 1994 and 10,617,722 weighted average shares of common stock outstanding in 1995 and 1996. Common share equivalents in the form of stock options are excluded from the earnings per share calculations since they have no material dilutive effect. (m) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Company's foreign subsidiaries use the local currency as the functional currency. The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded in a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in the consolidated statements of earnings and were not material in any of the years presented. (n) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) ACQUISITIONS BUSINESSES ACQUIRED On August 19, 1994, the Company, through its subsidiary, Torfeaco Industries, Ltd. ('Torfeaco'), purchased certain business assets including receivables, inventory and fixed assets of Imperial Feather Company of Canada ('Imperial') for approximately $3,600,000. Imperial was a family- owned and long-established producer of high quality bedding products, including natural fill and synthetic bed pillows, down comforters and comforter covers. The funds for the acquisition were provided by the Company's revolving credit facility. F-10 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) On December 1, 1994, the Company purchased substantially all of the net assets of Beacon Manufacturing Company ('Beacon'), for a purchase price of $100,823,000 in cash, plus the assumption of approximately $11,028,000 in liabilities, which were repaid at the time of acquisition. Beacon is a manufacturer of cotton and synthetic blankets and throws headquartered in Swannanoa, North Carolina. The funds for this acquisition were provided primarily from borrowings under a $240,000,000 Credit Facility with NationsBank of Texas, N.A., which was modified in conjunction with the acquisition. These acquisitions have been accounted for as purchases and, accordingly, results of operations of the acquired companies have been included in the consolidated statements of earnings since the acquisition dates. A summary of the assets acquired and liabilities assumed for the year ended December 31, 1994 follows: Current assets $ 60,746 Property, plant and equipment 36,566 Intangible assets 32,372 Other assets 28 Current liabilities (13,459) ---------- Cash paid, net of cash acquired $ 116,253 ==========
ASSETS ACQUIRED On November 18, 1996, the Company purchased certain assets of Fieldcrest Cannon's blanket operations for a purchase price of $28,304,000 in cash. The acquisition included selected equipment ($6,300,000), inventory ($18,004,000) and an exclusive long-term license for the use of certain trademarks and tradenames ($4,000,000). The funds for the acquisition were provided by the Company's private offering of Senior Subordinated Notes (see note 8). (4) INVENTORIES Inventories consist of the following at December 30, 1995 and December 28, 1996:
1995 1996 --------- --------- Finished goods $ 37,670 56,085 Work-in-process 35,980 33,436 Raw materials 31,851 41,955 Supplies 1,903 2,019 --------- --------- $ 107,404 133,495 ========= =========
Inventory balances are net of inventory reserves of approximately $2,525,000 and $3,285,000 at December 30, 1995 and December 28, 1996, respectively. F-11 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and consist of the following at December 30, 1995 and December 28, 1996:
1995 1996 --------- --------- Land $ 1,504 2,847 Buildings and improvements 35,676 44,713 Machinery and equipment 69,364 74,580 Data processing equipment 4,342 6,714 Furniture and fixtures 3,006 2,070 Leasehold improvements 1,205 1,403 Projects in progress 2,881 5,660 --------- --------- 117,978 137,987 Less accumulated depreciation and amortization (33,411) (43,720) --------- --------- $ 84,567 94,267 ========= =========
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable includes $11,757,000 at December 30, 1995 and $9,231,000 at December 28, 1996 of checks not yet presented for payment on zero balance disbursement accounts. Accrued expenses consist of the following at December 30, 1995 and December 28, 1996:
1995 1996 --------- --------- Accrued customer rebates $ 3,477 5,220 Employee-related compensation and benefits 5,166 4,159 Accrued advertising 2,875 927 Accrued royalties and commissions 3,560 4,831 Accrued insurance and worker's compensation reserves 1,095 2,117 Accrued interest and commitment fees 3,085 1,831 Other accrued expenses 1,879 3,071 --------- --------- $ 21,137 22,156 ========= =========
F-12 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (7) PENSION PLAN The Company has a defined benefit pension plan covering substantially all of its non-union employees. The Company's funding policy provides for annual contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. Pension plan assets consist primarily of investments in publicly traded corporate common stocks and bonds, as well as U.S. government obligations. Net pension expense includes the following components for the years ended December 31, 1994, December 30, 1995 and December 28, 1996:
1994 1995 1996 -------- -------- -------- Service cost $ 339 585 766 Interest cost on projected benefit obligation 381 402 523 Actual (return) loss on plan assets 163 (1,041) (564) Net amortization and deferral (518) 684 133 -------- -------- -------- Net pension expense $ 365 630 858 ======== ======== ========
A reconciliation of the funded status of the pension plan at December 30, 1995 and December 28, 1996 follows:
1995 1996 --------- --------- Actuarial present value of accumulated benefit obligations: Vested benefit obligation $ 5,032 5,492 Nonvested benefit obligation 226 421 --------- --------- Accumulated benefit obligation $ 5,258 5,913 ========= ========= Projected benefit obligation for services rendered to date (6,441) (7,286) Pension plan assets at fair value 5,338 6,275 --------- --------- Pension plan assets less than projected benefit obligation (1,103) (1,011) Unrecognized net asset at March 1, 1987 being recognized over 17 years (68) (60) Unrecognized prior service costs 278 243 Amortization and deferral of net (gains) and losses 293 (88) --------- --------- Net pension liability included in accrued expenses $ (600) (916) ========= =========
F-13 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The following assumptions were used in determining the actuarial present value of the projected benefit obligation and net pension expense:
1994 1995 1996 ------ ------ ------ Discount rate 8.75% 7.25 7.75 Rate of increase in future compensation 5.0 4.0 4.0 Expected long-term rate of return on assets 8.5 8.5 8.5
(8) LONG-TERM DEBT Long-term debt consists of the following at December 30, 1995 and December 28, 1996:
1995 1996 --------- --------- 10% Senior Subordinated Notes due 2006 $ - 125,000 Revolver 65,600 61,000 Term loan 87,500 - Deed of trust note, collateralized by land and buildings, with interest at 10.5% per annum, payable in monthly installments of approximately $49, maturing on July 1, 1998 3,039 2,762 Industrial revenue bonds - Pennsylvania Economic Development Financing Authority (PEDFA), collateralized by land and building, with variable rate interest (7.35% to 7.85% per annum) maturing serially in annual amounts ranging from $355 to $640 through April 1, 2002 3,645 3,235 Industrial revenue bonds - Mississippi Business Finance Corporation, collateralized by land, building and equipment, with variable rate interest (2.75% to 4.5% per annum) payable monthly and annual principal payments of $460 beginning July 1, 1995 and maturing on July 1, 2004 4,140 3,680 Other 1,464 1,042 --------- --------- 165,388 196,719 Less current portion (11,916) (1,868) --------- --------- $ 153,472 194,851 ========= =========
F-14 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) On November 12, 1996, the Company completed a private offering of $125,000,000 of 10% Senior Subordinated Notes (the 'Notes') due November 15, 2006 with interest payable semiannually, commencing May 15, 1997. The Company used the proceeds to retire the outstanding indebtedness under the Company's previously existing term loan, to finance the acquisition of certain assets of Fieldcrest Cannon's blanket operations (see note 3), to temporarily reduce indebtedness under the Revolver and to acquire a warehouse facility. In connection with the retirement of the term loan, the Company charged the related unamortized deferred loan costs to expense resulting in an extraordinary loss on debt extinguishment of $609,000, net of related income taxes of $391,000. The Notes do not have a mandatory redemption; however, the Company may redeem the Notes on or after November 15, 2001 in whole or in part. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the credit facility described below. Upon a change in control, the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. The Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the credit facility described below (see note 15). The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. The Notes are subject to certain covenants which restrict, among other things, the Company's ability to incur additional indebtedness and issue preferred stock, incur liens to secure subordinated indebtedness, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the Notes, merge or consolidate with any other person, sell stock of subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. As of December 28, 1996, the Company was in compliance with all covenants under the Notes. Concurrently with the private offering of the Notes, the Company entered into an Amended and Restated Credit Facility (the 'Facility') with a group of banks for which NationsBank of Texas, N.A. ('NationsBank') acts as Agent. The Facility replaced a prior credit agreement with NationsBank and a syndicate of banks, and provides for a $175,000,000 revolving credit line (the 'Revolver') with a term of five years expiring November 11, 2001. As of December 28, 1996, letters of credit were outstanding under the Revolver with an aggregate undrawn face amount of $11,645,000 and unused availability under the Revolver was $102,355,000. Amounts outstanding under the Facility bear interest at a rate based, at the Company's option, upon (i) either NationsBank's base rate or LIBOR (the London Interbank Offered Rate) plus 0.875% or (ii) NationsBank's reserve-adjusted CD rate plus 1.000%. These rates are subject to decrease based upon the Company's achievement of (i) certain senior unsecured debt ratings or (ii) certain ratios of funded debt to earnings before interest, taxes, depreciation and amortization ('EBITDA'). The weighted average annual interest rate on outstanding borrowings under the Credit Agreements during 1996 was 7.02% and the effective rate at December 28, 1996 was 6.39%. F-15 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The Company enters into interest rate swap agreements to minimize the risk of fluctuations in interest rates. The Company currently has interest rate swap agreements in place covering approximately $215,000,000 of indebtedness which expire at various dates with some extending through November 2000, with an average interest rate of 6.24%. The Facility is secured by a pledge of the receivables and inventory of the Company and its domestic subsidiaries, 100% of the present and future capital stock of all of the Company's present and future direct and indirect domestic subsidiaries, and approximately 65% of the present and future capital stock of all of the Company's present and future foreign subsidiaries. The Facility contains a number of financial, affirmative and negative covenants which, among other things, require maintenance of certain ratios of current assets to current liabilities, funded debt to EBITDA, and cash flow coverages, and require the Company to maintain a minimum tangible net worth. Negative covenants restrict, among other things, the incurrence of debt, the existence of liens, transactions with affiliates, loans, advances and investments by the Company, payment of dividends and other distributions to shareholders, dispositions of assets, mergers, consolidations and dissolutions, contingent liabilities, changes in business and acquisitions. As of December 28, 1996, the Company was in compliance with all covenants under the Facility. The interest rates on the deed of trust note and industrial revenue bonds differ from current market rates. The fair value of these financial instruments, estimated by discounting the future cash flows using rates currently available, is approximately $9,654,000 and $9,492,000 at December 30, 1995 and December 28, 1996, respectively. Other debt is at current market rates; therefore, the fair value approximates carrying value. Aggregate maturities of long-term debt for each of the five years following December 28, 1996 and thereafter, assuming the unpaid principal balance at December 28, 1996 under the Revolver remains unchanged, are as follows:
Year ending Amount -------------- ---------- 1997 $ 1,868 1998 3,672 1999 1,084 2000 1,015 2001 62,060 Thereafter 127,020
F-16 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (9) INCOME TAXES The components of income tax expense are as follows:
1994 1995 1996 ------- ------- ------- U.S. federal - current $ 4,159 2,632 6,604 U.S. federal - deferred (40) 3,412 1,793 State and foreign taxes - current 751 1,242 825 State and foreign taxes - deferred (134) 223 237 ------- ------- ------- $ 4,736 7,509 9,459 ======= ======= =======
A reconciliation of income tax expense computed using the U.S. federal statutory income tax rate of 35% of earnings before income taxes and extraordinary loss to the actual provision for income taxes follows:
1994 1995 1996 ------- ------- ------- Expected tax at U.S. statutory rate $ 4,349 6,642 8,467 State and foreign taxes, net of federal benefit 414 652 555 Nondeductible meals and entertainment expenses 170 162 166 Other (197) 53 271 ------- ------- ------- $ 4,736 7,509 9,459 ======= ======= =======
F-17 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 30, 1995 and December 28, 1996 are presented below:
1995 1996 -------- -------- Net deferred tax assets: Inventory costs and reserves $ 760 1,113 Accrued employee benefits 287 422 Allowance for doubtful accounts 266 544 State deferred taxes 1,106 488 -------- -------- Current deferred tax asset 2,419 2,567 -------- -------- Net deferred tax liabilities: Package design costs 141 336 Depreciable assets (5,830) (9,057) State deferred income taxes (1,008) (562) Goodwill (633) (565) Other (200) 140 -------- -------- Noncurrent deferred tax liability (7,530) (9,708) -------- -------- Net deferred tax liability $(5,111) (7,141) ======== ========
(10) STOCK OPTIONS Effective February 17, 1993, the Company established a stock option plan, under which options may be granted to eligible employees and nonemployee directors of the Company. Under the stock option plan, the Board of Directors may grant either nonqualified stock options or incentive stock options. Additionally, the plan provides for the reservation and issuance of up to 1,200,000 shares of the Company's common stock. At December 28, 1996, there were 689,135 additional shares available for grant under the stock option plan. The per share weighted-average fair value of stock options granted during 1995 and 1996 was $2.75 and $4.65, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1995 1996 ------- ------- Expected dividend yield 1.14% 1.14 Stock price volatility 38.82% 38.82 Risk-free interest rate 6.66% 6.16 Expected option term 5 years 5 years
F-18 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 -------- -------- Net earnings: As reported $ 11,469 14,123 Pro forma 11,443 13,986 Earnings per share: As reported 1.08 1.33 Pro forma 1.08 1.32
Pro forma net earnings reflects only options granted in 1995 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. All options are granted at an exercise price not less than the fair market value of the common stock at the date of grant. The option period may not be more than ten years from the date the option is granted and generally the options may be exercised ratably over a four-year period or as otherwise specified by the Board of Directors. A summary of option activity during 1994, 1995 and 1996 follows:
Shares Exercise price ($) --------- ------------------ Outstanding at December 31, 1993 (no shares exercisable) 447,871 14.00 - 14.88 Granted 86,431 15.13 - 19.00 Canceled (142,863) 14.00 - 14.88 Exercised (27,498) 14.00 --------- Outstanding at December 31, 1994 (69,378 shares exercisable) 363,941 14.00 - 19.00 Granted 187,000 8.88 - 14.00 Canceled (114,002) 8.88 - 19.00 --------- Outstanding at December 30, 1995 (130,719 shares exercisable) 436,939 8.88 - 19.00 Granted 225,500 12.00 - 15.75 Canceled (151,574) 8.88 - 19.00 --------- Outstanding at December 28, 1996 (176,345 shares exercisable) 510,865 8.88 - 19.00 =========
F-19 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (11) RELATED PARTY TRANSACTIONS Dividends payable to the former Subchapter S shareholders were declared and paid in 1994 to satisfy certain federal and state tax liabilities attributable to their share of earnings during the period that the Company was a Subchapter S corporation for tax purposes. (12) COMMITMENTS AND CONTINGENT LIABILITIES Manufacturing facilities at certain locations, a showroom and warehouse space are leased under noncancelable operating lease agreements. These leases generally require the Company to pay all executory costs such as maintenance and taxes. Rental expense for operating leases was approximately $1,928,000, $3,061,000 and $5,285,000 during 1994, 1995 and 1996, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) which expire at various dates through 2005 are as follows: Year ending Amount ----------- -------- 1997 $ 5,381 1998 4,510 1999 3,660 2000 2,904 2001 2,391 Thereafter 5,606 From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of all matters currently pending will not have a materially adverse effect on the Company's financial position or results of operations. (13) SEGMENT DATA AND CONCENTRATION OF CREDIT RISK The Company's customers are located primarily throughout the United States and Canada and concentration of credit risks with respect to the Company's unsecured trade receivables is considered to be limited. Although the Company closely monitors the creditworthiness of its customers, adjusting credit policies and limits as needed, a customers' ability to pay is largely dependent upon the retail industry's economic environment. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. The Company has trade receivables which are due from certain customers who are experiencing financial difficulties. However, in the opinion of management of the Company, the allowance for doubtful accounts is adequate and trade receivables are presented at net realizable value. Sales to the Company's two individual major customers, including their affiliated entities, accounted for approximately 13% each of net sales in 1994, 14% and 13% in 1995 and 14% and 13% in 1996. Sales to foreign customers were approximately 9% of net sales in 1994, 8% in 1995 and 7% in 1996. F-20 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables present unaudited financial data of the Company for each quarter of 1995 and 1996:
1995 quarter ended --------------------------------------------------- April 1 July 1 September 30 December 30 ------------ ------------ ------------ ------------ Net sales $ 94,740 90,788 146,824 142,547 Gross profit 16,454 16,126 24,365 22,032 Net earnings 1,162 1,088 4,738 4,481 Earnings per common share .11 .10 .45 .42 1996 quarter ended --------------------------------------------------- March 30 June 29 September 28 December 28 ------------ ------------ ------------ ------------ Net sales $ 100,794 91,185 143,791 154,885 Gross profit 15,568 15,615 24,315 24,109 Earnings before extraordinary loss 941 1,491 6,122 6,178 Net earnings 941 1,491 6,122 5,569 Earnings per common share .09 .14 .58 .52
F-21 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (15) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following is summarized condensed consolidating financial information for the Company, segregating the Parent and guarantor subsidiaries from nonguarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the Company and 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 be material to investors.
December 30, 1995 December 28, 1996 -------------------------------------- -------------------------------------- Parent and Non- Parent and Non- Guarantor Guarantor Guarantor Guarantor Financial Position Subsidiaries Subsidiaries Consolidated Subsidiaries Subsidiaries Consolidated ------------------ ------------ ------------ ------------ ------------ ------------ ------------ Assets Receivables: Trade $ 66,854 4,830 71,684 73,439 5,043 78,482 Affiliates 8,795 - - 4,283 - - Inventories 95,710 11,694 107,404 125,803 7,692 133,495 Other current assets 5,699 1,059 6,758 8,944 736 9,680 ------------ ------------ ------------ ------------ ------------ ------------ Total current assets 177,058 17,583 185,846 212,469 13,471 221,657 Property, plant and equipment, net 81,574 2,993 84,567 91,381 2,886 94,267 Intangible assets 49,042 2,737 51,779 54,454 2,659 57,113 Other assets 2,518 - 2,518 2,677 - 2,677 ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 310,192 23,313 324,710 360,981 19,016 375,714 ============ ============ ============ ============ ============ ============
December 30, 1995 December 28, 1996 -------------------------------------- -------------------------------------- Parent and Non- Parent and Non- Guarantor Guarantor Guarantor Guarantor Financial Position Subsidiaries Subsidiaries Consolidated Subsidiaries Subsidiaries Consolidated ------------------ ------------ ------------ ------------ ------------ ------------ ------------ Liabilities and Shareholders' Equity Accounts payable and accrued liabilities $ 59,305 3,922 63,227 64,534 3,103 67,637 Accounts payable - affiliates - 8,795 - - 4,283 - Other current liabilities 12,452 39 12,491 3,347 167 3,514 ------------ ------------ ------------ ------------ ------------ ------------ Total current liabilities 71,757 12,756 75,718 67,881 7,553 71,151 Noncurrent liabilities 160,370 632 161,002 203,928 631 204,559 Shareholders' equity 78,065 9,925 87,990 89,172 10,832 100,004 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 310,192 23,313 324,710 360,981 19,016 375,714 ============ ============ ============ ============ ============ ============
F-22 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data)
Year Ended December 31, 1994 Year Ended December 30, 1995 -------------------------------------- -------------------------------------- Parent and Non- Parent and Non- Guarantor Guarantor Guarantor Guarantor Results of Operations Subsidiaries Subsidiaries Consolidated Subsidiaries Subsidiaries Consolidated --------------------- ------------ ------------ ------------ ------------ ------------ ------------ Net sales $ 322,124 27,396 349,520 437,658 37,241 474,899 Cost of goods sold 269,008 25,706 294,714 361,749 34,173 395,922 ------------ ------------ ------------ ------------ ------------ ------------ Gross profit 53,116 1,690 54,806 75,909 3,068 78,977 Selling, general and administrative 35,128 1,271 36,399 40,771 1,737 42,508 ------------ ------------ ------------ ------------ ------------ ------------ Earnings from operations 17,988 419 18,407 35,138 1,331 36,469 Interest expense and other, net 6,369 (387) 5,982 17,482 9 17,491 ------------ ------------ ------------ ------------ ------------ ------------ Earnings before income taxes and extraordinary loss 11,619 806 12,425 17,656 1,322 18,978 Income taxes 4,694 42 4,736 7,101 408 7,509 ------------ ------------ ------------ ------------ ------------ ------------ Earnings before extraordinary loss 6,925 764 7,689 10,555 914 11,469 Extraordinary loss - - - - - - ------------ ------------ ------------ ------------ ------------ ------------ Net earnings $ 6,925 764 7,689 10,555 914 11,469 ============ ============ ============ ============ ============ ============
Year Ended December 28, 1996 -------------------------------------- Parent and Non- Guarantor Guarantor Results of Operations Subsidiaries Subsidiaries Consolidated --------------------- ------------ ------------ ------------ Net sales $ 459,175 31,480 490,655 Cost of goods sold 382,314 28,734 411,048 ------------ ------------ ------------ Gross profit 76,861 2,746 79,607 Selling, general and administrative 39,827 1,618 41,445 ------------ ------------ ------------ Earnings from operations 37,034 1,128 38,162 Interest expense and other, net 13,991 (20) 13,971 ------------ ------------ ------------ Earnings before income taxes and extraordinary loss 23,043 1,148 24,191 Income taxes 9,250 209 9,459 ------------ ------------ ------------ Earnings before extraordinary loss 13,793 939 14,732 Extraordinary loss (609) - (609) ------------ ------------ ------------ Net earnings $ 13,184 939 14,123 ============ ============ ============
F-23 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data)
Year Ended December 31, 1994 Year Ended December 30, 1995 -------------------------------------- -------------------------------------- Parent and Non- Parent and Non- Guarantor Guarantor Guarantor Guarantor Cash Flows Subsidiaries Subsidiaries Consolidated Subsidiaries Subsidiaries Consolidated ---------- ------------ ------------ ------------ ------------ ------------ ------------ Cash provided by (used in) operating activities $ 24,400 (8,336) 16,064 23,852 2,033 25,885 Cash used in investing activities (125,414) (2,214) (127,628) (13,883) (681) (14,564) Cash provided by (used in) financing activities 99,590 9,970 109,560 (10,132) (1,355) (11,487) Effect of exchange rate changes on cash and cash equivalents - (11) (11) - 6 6 ------------ ------------ ------------ ------------ ------------ ------------ Net change in cash and cash equivalents (1,424) (591) (2,015) (163) 3 (160) Cash and cash equivalents at beginning of year 1,993 593 2,586 569 2 571 ------------ ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of year $ 569 2 571 406 5 411 ============ ============ ============ ============ ============ ============
Year Ended December 28, 1996 -------------------------------------- Parent and Non- Guarantor Guarantor Cash Flows Subsidiaries Subsidiaries Consolidated ---------- ------------ ------------ ------------ Cash provided by (used in) operating activities $ (9,525) 6,239 (3,286) Cash used in investing activities (20,561) (572) (21,133) Cash provided by (used in) financing activities 29,692 (5,664) 24,028 Effect of exchange rate changes on cash and cash equivalents - - - ------------ ------------ ------------ Net change in cash and cash equivalents (394) 3 (391) Cash and cash equivalents at beginning of year 406 5 411 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 12 8 20 ============ ============ ============
F-24 SCHEDULE II PILLOWTEX CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1994, December 30, 1995 and December 28, 1996 (Dollars in thousands)
Additions Deductions ----------------------------- ------------ Balance at Charged to Charged Balance beginning costs and to other Write-offs/ at end of Description of period expenses Accounts (recoveries) period - ----------- ------------ ------------ ------------ ------------ ------------ Allowance for doubtful accounts: Year ended December 31, 1994 $ 1,773 390 962(2) 192(1) 2,933 ============ ============ ============ ============ ============ Year ended December 30, 1995 $ 2,933 685 176(3) 1,599(1) 2,195 ============ ============ ============ ============ ============ Year ended December 28, 1996 $ 2,195 210 (89) (30)(1) 2,346 ============ ============ ============ ============ ============ Inventory reserves: Year ended December 31, 1994 $ 2,711 1,335 1,916(2) 40 5,922 ============ ============ ============ ============ ============ Year ended December 30, 1995 $ 5,922 1,416 (3,186) 1,627 2,525 ============ ============ ============ ============ ============ Year ended December 28, 1996 $ 2,525 2,130 - 1,370 3,285 ============ ============ ============ ============ ============ (1) Accounts written off, less recoveries. (2) Reserves for acquired companies as of the date of acquisition. (3) Adjustments to the reserves for acquired companies after the date of acquisition.
S-1 EX-21 2 EXHIBIT 21.2 PILLOWTEX CORPORATION LIST OF PRINCIPAL OPERATING SUBSIDIARIES BEACON MANUFACTURING COMPANY Swannanoa, North Carolina Westminster, South Carolina Newton, North Carolina Eden, North Carolina Mauldin, South Carolina TENNESSEE WOOLEN MILLS, INC. Lebanon, Tennessee MANETTA HOME FASHIONS, INC. Monroe, North Carolina TORFEACO INDUSTRIES LIMITED Toronto, Ontario, Canada EX-23 3 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Pillowtex Corporation: We consent to incorporation by reference in the registration statement Nos. 33-65408, 33-84624 and 33-81478 on Forms S-8 of Pillowtex Corporation and subsidiaries of our report dated February 6, 1997, relating to the consolidated balance sheets of Pillowtex Corporation and subsidiaries as of December 30, 1995 and December 28, 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 28, 1996, which report appears in the December 28, 1996 annual report on Form 10-K of Pillowtex Corporation and subsidiaries. KPMG Peat Marwick LLP Dallas, Texas March 14, 1997 EX-27 4
5 1000 12-MOS DEC-28-1996 DEC-31-1995 DEC-28-1996 20 0 80,828 2,346 133,495 221,657 137,987 43,720 375,714 71,151 196,719 0 0 106 99,898 375,714 490,655 490,655 411,048 411,048 41,445 210 13,971 24,191 9,459 14,732 0 (609) 0 14,123 1.33 1.33
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