10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark FORM 10-Q One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 1-11756 PILLOWTEX CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-2147728 (State of incorporation) (IRS Employer Identification No.) 4111 Mint Way 75237 Dallas, Texas (Zip Code) (Address of principal executive offices) (214) 333-3225 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 9, 2000 ----- ----------------------------- Common Stock, $.01 par value 14,257,655 1 PILLOWTEX CORPORATION AND SUBSIDIARIES INDEX Part I - Financial Information Page No. Item 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheets as of January 1, 2000 and July 1, 2000 3 Consolidated Statements of Operations for the three months ended July 3, 1999 and July 1, 2000 4 Consolidated Statements of Operations for the six months ended July 3, 1999 and July 1, 2000 5 Consolidated Statements of Cash Flows for the six months 6 ended July 3, 1999 and July 1, 2000 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 Index to Exhibits 24
2 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 1, 2000 and July 1, 2000 (Dollars in thousands, except for par value) (Unaudited)
ASSETS 1999 2000 ---- ---- Current assets: Cash and cash equivalents.................................................... $ 4,854 3,350 Receivables: Trade, less allowances of $33,351 and $28,176 in 1999...................... 234,472 and 2000, respectively.................................................. 268,499 Other...................................................................... 17,923 17,748 Inventories.................................................................. 423,052 461,828 Assets held for sale......................................................... 1,595 1,193 Prepaid expenses............................................................. 5,502 5,741 ----------- ----------- Total current assets................................................. 721,425 724,332 Property, plant and equipment, less accumulated depreciation of $150,384 and $176,478 in 1999 and 2000, respectively......................... 644,821 630,597 Intangible assets, at cost, less accumulated amortization of $26,355 and $31,840 in 1999 and 2000, respectively................................... 288,856 282,845 Other assets.................................................................. 28,287 31,229 ----------- ----------- $ 1,683,389 1,669,003 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................................. $ 119,848 122,770 Accrued expenses............................................................. 73,238 57,137 Deferred income taxes........................................................ 37,848 36,590 Current portion of long-term debt (Note 5)................................... 85,759 87,557 ----------- ----------- Total current liabilities............................................ 316,693 304,054 Long-term debt, less current portion (Note 5)................................. 965,323 987,654 Deferred income taxes......................................................... 67,720 59,606 Noncurrent liabilities........................................................ 52,366 52,278 ----------- ----------- Total liabilities.................................... 1,402,102 1,403,592 Series A redeemable convertible preferred stock, $0.01 par value; 65,000 and 79,455 shares issued and outstanding in 1999 and 2000 respectively,.......... 73,898 77,835 including accrued dividends (Note 6) Shareholders' equity: Preferred stock, $0.01 par value; authorized 20,000,000 shares; only Series A issued....................................................... - - Common stock, $0.01 par value; authorized 55,000,000 shares; 14,261,856 and 14,241,070 shares issued and outstanding in 1999 and 2000, respectively............................................. 142 142 Additional paid-in capital................................................... 160,515 160,515 Retained earnings............................................................ 49,269 29,487 Currency translation adjustment.............................................. (1,730) (1,947) Deferred compensation........................................................ (807) (621) ----------- ----------- Total shareholders' equity........................................... 207,389 187,576 ----------- ----------- $ 1,683,389 1,669,003 =========== ===========
See accompanying notes to consolidated financial statements. 3 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended July 3, 1999 and July 1, 2000 (Dollars in thousands, except for per share data) (Unaudited)
1999 2000 ------- ------- Net sales............................................................................... $ 362,468 $ 341,940 Cost of goods sold...................................................................... 306,211 302,428 ------- ------- Gross profit......................................................................... 56,257 39,512 Selling, general and administrative expenses............................................ 25,800 22,613 ------ ------ Earnings from operations............................................................. 30,457 16,899 Interest expense........................................................................ 19,735 25,968 ------ ------ Earnings (loss) before income taxes.................................................. 10,722 (9,069) Income taxes............................................................................ 3,949 (2,951) ------ ------ Net earnings (loss).................................................................. 6,773 (6,118) Preferred dividends and accretion....................................................... 540 1,994 ------ ------ Earnings (loss) available for common shareholders.................................... $ 6,233 $ (8,112) ====== ====== Basic earnings (loss) per common share.................................................. $ .44 $ (.57) ====== ====== Weighted average common shares outstanding - basic...................................... 14,186 14,227 ====== ====== Diluted earnings (loss) per common share................................................ $ .40 $ (.57) ====== ====== Weighted average common shares outstanding - diluted.................................... 16,914 14,227 ====== ====== Dividends declared per common share..................................................... $ .06 $ - ====== ======
See accompanying notes to consolidated financial statements. 4 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended July 3, 1999 and July 1, 2000 (Dollars in thousands, except for per share data) (Unaudited)
1999 2000 ------- ------- Net sales........................................................................... $ 730,975 $ 687,100 Cost of goods sold.................................................................. 622,254 608,493 ------- ------- Gross profit..................................................................... 108,721 78,607 Selling, general and administrative expenses........................................ 50,186 49,552 ------- ------- Earnings from operations......................................................... 58,535 29,055 Interest expense.................................................................... 39,200 53,812 ------- ------- Earnings (loss) before income taxes.............................................. 19,335 (24,757) Income taxes........................................................................ 7,309 (8,912) ------- ------- Net earnings (loss).............................................................. 12,026 (15,845) Preferred dividends and accretion................................................... 1,075 3,937 ------- ------- Earnings (loss) available for common shareholders................................ $ 10,951 $ (19,782) ======= ======= Basic earnings (loss) per common share.............................................. $ .77 $ (1.39) ======= ======= Weighted average common shares outstanding - basic.................................. 14,167 14,227 ======= ======= Diluted earnings (loss) per common share............................................ $ .71 $ (1.39) Weighted average common shares outstanding - diluted................................ 16,925 14,227 ======= ======= Dividends declared per common share................................................. $ .12 $ - ======= =======
See accompanying notes to consolidated financial statements. 5 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended July 3, 1999 and July 1, 2000 (Dollars in thousands) (Unaudited)
1999 2000 ---- ---- Cash flows from operating activities: Net earnings (loss).................................................................. $ 12,026 $ (15,845) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization.................................................... 27,902 32,210 Deferred income taxes............................................................ 1,991 (8,912) Accretion on debt instruments.................................................... 530 732 Provision for doubtful accounts.................................................. 529 (283) Amortization of deferred compensation............................................ 237 186 Changes in operating assets and liabilities: Trade receivables............................................................. (18,285) 34,310 Inventories................................................................... (74,436) (38,776) Accounts payable.............................................................. 61,771 3,419 Accrued expenses.............................................................. (18,312) (16,101) Other assets and liabilities.................................................. 641 (1,955) ---------- ----------- Net cash used in operating activities........................................ (5,406) (11,015) Cash flows from investing activities: Proceeds from sale of property, plant and equipment.................................. 458 3,543 Purchases of property, plant and equipment........................................... (51,081) (16,932) ---------- ----------- Net cash used in investing activities........................................ (50,623) (13,389) Cash flows from financing activities: Decrease in checks not yet presented for payment..................................... (15,833) (497) Borrowings on revolving credit loans................................................. 242,253 474,900 Repayments of revolving credit loans................................................. (153,293) (435,475) Retirement of long-term debt......................................................... (10,945) (16,028) Payments of debt issuance costs...................................................... (56) - Dividends paid....................................................................... (2,669) - Proceeds from exercise of stock options.............................................. 43 - ---------- ----------- Net cash provided by financing activities.................................... 59,500 22,900 Net change in cash and cash equivalents............................................... 3,471 (1,504) Cash and cash equivalents at beginning of period...................................... 5,561 4,854 ---------- ----------- Cash and cash equivalents at end of period............................................ $ 9,032 3,350 ========== =========== Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest........................................................................... $ 39,943 53,531 ========== =========== Income taxes....................................................................... $ (815) (3,105) ========== ===========
See accompanying notes to consolidated financial statements. 6 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (1) Basis of Presentation The accompanying unaudited consolidated financial statements of Pillowtex Corporation, which is referred to in this report as "Parent," and its subsidiaries, which are collectively with Parent, referred to in this report as the "Company," include all adjustments, consisting only of normal, recurring adjustments and accruals, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended January 1, 2000. The Company is organized by functional responsibilities and operates as a single segment. Information technology costs associated with the Company's manufacturing systems ($5.3 million and $9.1 million for three and six month periods ended July 3, 1999, respectively) have been reclassified from selling, general and administrative expense to cost of goods sold in the 1999 consolidated statements of operation to conform to the current year presentation. (2) Comprehensive Income Comprehensive income consists of net earnings (loss) and foreign currency translation adjustments and aggregated $6.3 million and $12.1 million for the three and six month periods ended July 3, 1999. For the three and six months periods ended July 1, 2000, comprehensive loss aggregated were $6.4 million and $16.1 million respectively. (3) Inventories Inventories consisted of the following at January 1, 2000 and July 1, 2000: January 1 July 1 2000 2000 ---------- ---------- Finished goods $ 218,381 $ 253,254 Work-in-process 136,924 139,019 Raw materials 44,424 45,787 Supplies 23,323 23,768 ---------- ---------- $ 423,052 $ 461,828 ========== ========== 7 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (4) Earnings Per Share The following table reconciles the numerators and denominators of basic and diluted earnings (loss) per share for the three and six month periods ended July 3, 1999. Options to purchase 747,000 shares of common stock were outstanding during the three and six month periods ended July 3, 1999, but were not included in the computation of diluted earnings per share because inclusion would have been antidilutive. Additionally, debentures convertible into 633,000 common shares were excluded from the computation of diluted earnings per share for the three and six month periods ended July 3, 1999 because inclusion would have been antidilutive. Preferred stock convertible into 3,310,625 common shares, debentures convertible into 517,910 common shares and options to purchase 1,286,799 common shares at an exercise price ranging from $4.31 to $46.50 were excluded from the computation of diluted loss per share for the three month and six month periods ended July 1, 2000 because inclusion would have been antidilutive.
Three Months Ended Six Months Ended July 3, 1999 July 3, 1999 ------------------------- ------------------------- Earnings Shares Earnings Shares -------- ------ -------- ------ Basic - earnings available for common shareholders $ 6,233 14,186 $ 10,951 14,167 Effect of dilutive securities: Stock options - 20 - 50 Convertible preferred stock 540 2,708 1,075 2,708 ---------- ------ ---------- ------ Diluted - earnings available for common shareholders $ 6,773 16,914 $ 12,026 16,925 ========== ====== ========== ======
8 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (5) Long-Term Debt Long-term debt consists of the following:
January 1, July 1, 2000 2000 ------------ ----------- Revolver $ 259,800 $ 299,225 Overline Credit Facility 35,000 35,000 Term Loans 341,500 329,830 9% Senior subordinated notes 185,000 185,000 10% Senior subordinated notes 125,000 125,000 6% convertible subordinated sinking fund debentures due in 2012 (effective rate of 8.72%, net of $14.3 million and $13.6 million in unamortized discount at 82,205 82,936 January 1, 2000 and July 1, 2000, respectively) Industrial revenue bonds with interest rates from 3.60% to 7.85% and maturities through July 1, 2021; generally collateralized by land and buildings 16,814 15,669 Other debt 5,763 2,551 ------------ ----------- 1,051,082 1,075,211 Less: Current portion 85,759 87,557 ------------ ----------- Total long-term debt $ 965,323 $ 987,654 ============== ===========
In December 1997, in connection with the Fieldcrest Cannon acquisition, Pillowtex entered into new senior secured revolving credit and term loan facilities with a group of financial and institutional investors for which Bank of America acts as the agent. These facilities consisted of a $350.0 million revolving credit facility and a $250.0 million term loan facility. The term loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, Pillowtex amended these facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of The Leshner Corporation, allowing Pillowtex to fund the transaction and reduce borrowings under the revolving credit facility. Effective March 12, 1999, the revolving credit facility was amended to permit Pillowtex to use for working capital one-half of a $61.0 million portion of the facility held as contingency reserve for cash payments required upon conversion of the Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012, thereby increasing availability under that facility. Effective October 1, 1999, the revolving credit facility was further amended to permit Pillowtex to use the other half of the contingency reserve for working capital, thereby increasing availability under that facility. At the end of the third and fourth quarters of its 1999 fiscal year, Pillowtex was not in compliance with certain financial covenants under its senior debt facilities. The Company obtained a series of temporary waivers of this non-compliance. Effective as of December 7, 1999, the Company 9 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS agreed to certain amendments to the senior debt facilities, principally related to cash management, adjustments to restrictive covenants, and borrowings under, and uses of proceeds from, the revolving credit facility. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance with financial covenants and the senior debt facilities were further amended to shorten their terms to maturity and accelerate the related amortization schedule for repayment of principal, to eliminate the contingency reserve requirement referred to above, to increase the applicable interest rate margins (subject to reduction if the Company's earnings before interest, taxes, depreciation and amortization (EBITDA) exceeds a specified level for the 2000 fiscal year), to add a covenant requiring that EBITDA must exceed specified levels for future fiscal periods and to eliminate all other financial covenants, to modify certain restrictive covenants, to limit borrowings under the revolving credit facility based on a formula tied to 45% of eligible inventory plus 80% of eligible accounts receivable, and to provide for a series of reductions in the commitment under the revolving credit facility. The Company is in compliance with the amended financial covenants as of July 1, 2000 and believes that it will be able to comply with the amended financial covenants in the future; however, the company is subject to changing business and economic conditions (many of which are beyond the Company's control) which may affect its ability to comply with the covenants in the near term and there can be no assurance of such compliance. The revolving credit facility includes $55.0 million of availability for letters of credit. At July 1, 2000, $32.8 million of letters of credit were outstanding and $18.0 million was available under the revolving credit facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan currently bear interest at a rate based upon the London Interbank Offered Rate plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities for the second quarter of 2000 was 10.03%. The senior debt facilities expire on January 31, 2002. The senior debt facilities are guaranteed by each of the domestic subsidiaries of Pillowtex, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital stock of Pillowtex's foreign subsidiaries. Pillowtex has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The term loan facility is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of Pillowtex (except as specifically provided), 50% of the net cash proceeds of equity issuances by Pillowtex or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the remaining installments of principal. The senior debt facilities contain a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make capital expenditures, engage in transactions with affiliates, make loans, advances and investments, dispose of assets, effect mergers, consolidations and dissolutions, and make certain changes in its business. A breach of any of the covenants contained in the senior debt facilities could result in a default under the terms of the facilities. Upon the occurrence of an event of default: the senior lenders would not be obligated to make additional advances under the revolving credit facility; the senior lenders would be entitled to declare all amounts outstanding under the senior debt facilities, including accrued interest or other obligations, to be immediately due and payable; the senior lenders would have the rights to block payment on substantially all of Pillowtex's other long-term debt; and the senior lenders would be entitled to proceed against the collateral granted to them to secure the senior debt. In these circumstances, cross defaults could occur making substantially all of Pillowtex's other long-term debt due. If any senior debt were to be accelerated, the Company cannot be certain that its assets would be sufficient to repay in full that debt and its other debt. As a result of the covenants described above, Pillowtex's ability to respond to changing business and economic conditions and to secure additional financing, if needed, is significantly restricted. In May 1999, Pillowtex entered into a $20.0 million senior unsecured revolving credit facility (overline facility) in order to obtain additional working capital availability. On July 27, 1999, this facility was amended to increase the amount of funds available to $35.0 million. At the end of the third and fourth quarters of its 1999 fiscal year, Pillowtex was not in compliance with 10 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS certain financial covenants under this facility, the covenants of which are established by reference to the senior debt facilities described above. The Company obtained a series of temporary waivers of this non-compliance and extensions of the maturity date. Effective as of December 7, 1999, the Company agreed to certain amendments to this facility, resulting in the facility being secured by the assets securing the senior debt facilities described above. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance and the facility was amended to lengthen its term to maturity, to impose an amortization schedule for the repayment of principal, and to increase the applicable interest rate margins (subject to reduction if the Company's EBITDA exceeds a specified level for the 2000 fiscal year). This facility is guaranteed on a senior basis by Pillowtex's domestic subsidiaries. Pillowtex is currently required to pay interest on any amounts borrowed under the facility at a rate which is based upon the London Interbank Offered Rate plus 4.5% or the base rate plus 3.0%, at Pillowtex's option. This facility matures upon termination by Pillowtex at any time or otherwise at the earliest of: a) any increase in the commitment under the senior debt facilities described above, the issuance of any capital stock by Pillowtex or its domestic subsidiaries, or other specified events; or b) January 31, 2002. In connection with the Fieldcrest Cannon merger, Pillowtex issued $185.0 million of 9% Senior Subordinated Notes due December 15, 2007, with interest payable semiannually commencing June 15, 1998. Pillowtex may at its option redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at a redemption price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%. The 9% Notes are general unsecured obligations of Pillowtex, and are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu to the 10% Notes described below. On November 12, 1996, Pillowtex issued the 10% Senior Subordinated Notes due November 15, 2006, with interest payable semiannually commencing May 15, 1997. Pillowtex may, at its option, redeem the 10% Notes, in whole or in part, on or after November 15, 2001 at a redemption price of 105.0%, which declines 1.667% annually through November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of Pillowtex, and are subordinated in right of payment to all existing and future senior indebtedness. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of Pillowtex and each other subsidiary of Pillowtex that guarantees Pillowtex's obligations under the senior debt facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. Upon a change in control, Pillowtex will be required to make an offer to repurchase all outstanding 9% Notes and 10% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. As a result of Pillowtex's acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon are convertible, at the option of the holders, into a combination of cash and Pillowtex's Common Stock. During the fourth quarter of 1999, Pillowtex notified the holders of the 6% Debentures that it was not practicable or prudent for payments to be made in respect of the conversion of the 6% Debentures and advised holders that had given notice of conversion and surrendered their 6% Debentures that they could rescind their notice of conversion, return to Pillowtex any Pillowtex Common Stock that had been issued to them and have their 6% Debentures reinstated. Although many holders did rescind and return their stock, other holders could not rescind because they had already sold their Pillowtex stock. As of July 1, 2000, the cash component due in respect of the 6% Debentures that had been surrendered without subsequent rescission was approximately $9.1 million. In addition, as of July 1, 2000, approximately $94.2 million aggregate principal amount of the 6% Debentures remained outstanding. If all such outstanding 6% Debentures were converted at such date, including those surrendered without subsequent rescission, the resulting cash component to be paid to the holders of the 6% Debentures would have been approximately $61.0 million (classified as a current liability at July 1, 2000). Pillowtex is currently prohibited under the terms of its senior subordinated debt from making payments in respect of the 6% Debentures except for interest payments and payments at maturity or pursuant to sinking fund obligations. In an effort to address both (i) the unpaid cash portion of the conversion consideration owing to those holders of 6% Debentures who have surrendered their debentures for conversion but have not been paid the cash portion of the conversion consideration (Cash Claimants) and (ii) the cash payment prohibition in respect of any future conversions, Pillowtex initiated discussions with certain holders of the 6% Debentures regarding a potential restructuring of the 6% Debentures. Notwithstanding months of efforts, the parties to those discussions have been unable to agree upon a mutually satisfactory comprehensive restructuring proposal. The Company is still in the process of examining the options currently available to it with respect to the 6% Debentures, but is not yet prepared to make a specific 11 proposal; however, there can be no assurance that the Company will be able to adopt a proposal that is satisfactory to the holders of the 6% Debentures. As of January 1, 2000, Pillowtex had approximately $345.0 million of notional amounts covered under interest rate swap agreements whereby Pillowtex exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.70% and 6.05%, respectively. As of July 1, 2000, Pillowtex had approximately $230.0 million of notional amounts covered under interest rate swap agreements whereby Pillowtex exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.68% and 6.25%, respectively. The fair values of the swaps at January 1, 2000 and July 1, 2000 were $4.0 million and $2.2 million, respectively, in favor of Pillowtex. Under the terms of its senior secured credit agreements and senior subordinated debt and its Series A Redeemable Convertible Preferred Stock, Pillowtex currently is prohibited from paying cash dividends to or making other distributions to holders of its Common Stock. Based upon current and anticipated levels of operations, and efforts to reduce inventories and accounts receivable, Pillowtex anticipates that its cash flow from operations, together with amounts available under its revolving credit facility, will be adequate to meet its anticipated cash requirements in the foreseeable future (assuming no significant cash payments are required to be made in respect of the 6% Convertible Debentures other than scheduled interest payments and payments related to satisfaction of the sinking fund obligations). In the event that cash flows and available borrowings under the revolving credit facility are not sufficient to meet future cash requirements, Pillowtex may be required to reduce planned capital expenditures or seek additional financing. Pillowtex can provide no assurances that reductions in planned capital expenditures would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on terms acceptable to the Company. (6) Redeemable Convertible Preferred Stock On December 19, 1997, the Company issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65.0 million less $2.1 million of issue costs. Accretion is being recognized to increase the recorded amount to the redemption amount over the period to the redemption date. Dividends accrued from the issue date through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000, the rate increased to 10% as a result of the Company's earnings per share for 1999 falling below predetermined targets. During the third and fourth quarters of Fiscal 1999, the Company accrued and paid in kind a one-time cumulative dividend on the Series A Preferred Stock, from the issue date through December 31, 1999, equal to the difference between the dividends calculated at the 3% rate and dividends calculated at the 10% rate, or 10,135 shares of Series A Preferred Stock. Dividends can be paid in cash or additional shares of preferred stock until December 2002, at which time they must be paid in cash. The Company's ability to pay dividends on the preferred stock is restricted under the terms of its senior credit facilities and senior subordinated debt. Total preferred shares outstanding as of July 1, 2000 were 79,455. The Series A Preferred Stock is convertible, at any time at the option of the holder, into common stock at a rate calculated by dividing $1,000 plus unpaid dividends per share by $24.00 per share. Each share of Series A Preferred Stock is subject to mandatory redemption in ten and one-half years after the issue date at a redemption price of $1,000 plus accrued and unpaid dividends. The Company has the right after the fourth anniversary of the issue date to call all or a portion of the Series A Preferred Stock at $1,000 per share plus accrued and unpaid dividends times a premium equal to the dividend rate after the fourth anniversary date and declining ratably to the mandatory redemption date. Holders of the Series A Preferred Stock are entitled to limited voting rights only under certain conditions. 12 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (7) Supplemental Condensed Consolidating Financial Information The following table presents condensed consolidating financial information for the Company, segregating the Parent and guarantor subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the Parent and the guarantees are full, unconditional and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that these financial statements would not provide relevant material additional information.
January 1, 2000 -------------------------------------------------------------------------------- Non- Guarantor Guarantor Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------ ------ ------------ ------------ ------------- ------------ Assets: ------- Trade receivables $ - $ 260,870 $ 7,629 $ - $ 268,499 Receivable from affiliates 747,324 - - (747,324) - Inventories - 406,801 16,251 - 423,052 Other current assets - 29,769 105 - 29,874 ----------- ------------ ------------ ------------ ------------ Total current assets 747,324 697,440 23,985 (747,324) 721,425 Property, plant and equipment, net 467 642,833 1,521 - 644,821 Intangible, net 16,831 269,710 2,315 - 288,856 Other assets 493,579 18,930 - (484,222) 28,287 ----------- ------------ ------------ ------------ ------------ Total assets $ 1,258,201 $ 1,628,913 $ 27,821 $ (1,231,546) $ 1,683,389 =========== ============ ============ ============ ============ Liabilities and Shareholders' Equity: ------------------------------------- Accounts payable and accrued liabilities $ 6,482 $ 182,218 $ 4,386 $ - $ 193,086 Payables to affiliates - 736,720 10,604 (747,324) - Other current liabilities 85,579 37,951 77 - 123,607 ----------- ------------ ------------ ------------ ------------ Total current liabilities 92,061 956,889 15,067 (747,324) 316,693 Noncurrent liabilities 884,853 200,446 110 - 1,085,409 ----------- ------------ ------------ ------------ ------------ Total liabilities 976,914 1,157,335 15,177 (747,324) 1,402,102 Redeemable convertible preferred Stock 73,898 - - - 73,898 Shareholders' equity 207,389 471,578 12,644 (484,222) 207,389 ----------- ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,258,201 $ 1,628,913 $ 27,821 $ (1,231,546) $ 1,683,389 =========== ============== ============== ============== ==============
13 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (7) Supplemental Condensed Consolidating Financial Information (Continued)
July 1, 2000 -------------------------------------------------------------------------------- Non- Guarantor Guarantor Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------ ------ ------------ ------------ ------------ ------------ Assets: ------- Trade receivables $ - $ 228,592 $ 5,880 $ - $ 234,472 Receivable from affiliates 752,678 - - (752,678) - Inventories 447,687 14,141 - 461,828 Other current assets 27,771 261 - 28,032 ----------- ------------ ------------ ------------ ------------ Total current assets 752,678 704,050 20,282 (752,678) 724,332 Property, plant and equipment, net 461 629,176 960 - 630,597 Intangible, net 14,036 266,584 2,225 - 282,845 Other assets 475,647 25,514 - (469,932) 31,229 ----------- ------------ ------------ ------------ ------------ Total assets $ 1,242,822 $ 1,625,324 $ 23,467 $ (1,222,610) $ 1,669,003 =========== ============ ============ ============ ============ Liabilities and Shareholders' Equity: ------------------------------------- Accounts payable and accrued Liabilities $ 3,161 $ 172,597 $ 4,149 $ - $ 179,907 Payables to affiliates - 747,908 4,770 (752,678) - Other current liabilities 23,696 98,925 1,526 - 124,147 ----------- ------------ ------------ ------------ ------------ Total current liabilities 26,857 1,019,430 10,445 (752,678) 304,054 Noncurrent liabilities 950,554 148,876 108 - 1,099,538 ----------- ------------ ------------ ------------ ------------ Total liabilities 977,411 1,168,306 10,553 (752,678) 1,403,592 Redeemable convertible preferred 77,835 - - - 77,835 Stock Shareholders' equity 187,576 457,018 12,914 (469,932) 187,576 ----------- ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,242,822 $ 1,625,324 $ 23,467 $ (1,222,610) $ 1,669,003 =========== ============ ============ ============ ============
14 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (7) Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended July 3, 1999 ------------------------------------------------------------------------------- Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated --------------------- ------ ------------ ------------ ------------ ------------ Net sales $ - $ 356,723 $ 6,886 $ (1,141) $ 362,468 Cost of goods sold - 300,643 6,709 (1,141) 306,211 -------- ------------ ------------ ------------ ------------ Gross profit - 56,080 177 - 56,257 Selling, general and administrative (1,045) 26,643 202 - 25,800 -------- ------------ ------------ ------------ ------------ Earnings (loss) from operations 1,045 29,437 (25) - 30,457 Equity in earnings of subsidiaries 6,163 - - (6,163) - Interest expense 107 19,634 (6) - 19,735 -------- ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 7,101 9,803 (19) (6,163) 10,722 Income taxes 328 3,638 (17) - 3,949 -------- ------------ ------------ ------------ ------------ Net earnings (loss) 6,773 6,165 (2) (6,163) 6,773 Preferred dividends 540 - - - 540 -------- ------------ ------------ ------------ ------------ Earnings (loss) available for Common shareholders $ 6,233 $ 6,165 $ (2) $ (6,163) $ 6,233 ======== ============ ============ ============ ============
Three Months Ended July 1, 2000 -------------------------------------------------------------------------------- Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated --------------------- ------ ------------ ------------ ------------ ------------ Net sales $ - $ 350,973 $ 6,319 $ (15,352) $ 341,940 Cost of goods sold - 311,478 6,302 (15,352) 302,428 -------- ------------ ------------ ------------ ------------ Gross profit - 39,495 17 - 39,512 Selling, general and administrative (1,881) 24,346 148 - 22,613 -------- ------------ ------------ ------------ ------------ Earnings (loss) from operations 1,881 15,149 (131) 16,899 Equity in (loss) of subsidiaries (7,172) - 7,172 - Interest expense 1,505 24,268 195 - 25,968 -------- ------------ ------------ ------------ ------------ Earnings (loss) before income taxes (6,796) (9,119) (326) 7,172 (9,069) Income taxes (678) (2,273) - - (2,951) -------- ------------ ------------ ------------ ------------ Net earnings (loss) (6,118) (6,846) (326) 7,172 (6,118) Preferred dividends 1,994 - - - 1,994 -------- ------------ ------------ ------------ ------------ Earnings (loss) available for common shareholders $ (8,112) $ (6,846) $ (326) $ 7,172 $ (8,112) ======== ============ ============ ============ ============
15 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (7) Supplemental Condensed Consolidating Financial Information (Continued)
Six Months Ended July 3, 1999 -------------------------------------------------------------------------------- Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated --------------------- ------- ------------ ------------- ------------- ------------ Net sales $ - $ 719,386 $ 13,711 $ (2,122) $ 730,975 Cost of goods sold - 611,620 12,756 (2,122) 622,254 -------- ------------ ------------ ------------- ------------ Gross profit - 107,766 955 - 108,721 Selling, general and administrative (2,087) 51,873 400 - 50,186 -------- ------------ ------------ ------------- ------------ Earnings from operations 2,087 55,893 555 - 58,535 Equity in earnings of subsidiaries 10,202 - - (10,202) - Interest expense (719) 39,936 (17) - 39,200 -------- ------------ ------------ ------------- ------------ Earnings before income taxes 13,008 15,957 572 (10,202) 19,335 Income taxes 982 6,276 51 - 7,309 -------- ------------ ------------ ------------- ------------ Net earnings 12,026 9,681 521 (10,202) 12,026 Preferred dividends 1,075 - - - 1,075 -------- ------------ ------------ ------------- ------------ Earnings available for common shareholders $ 10,951 $ 9,681 $ 521 $ (10,202) $ 10,951 ======== ============ ============ ============ ============
Six Months Ended July 1, 2000 ------------------------------------------------------------------------------- Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated --------------------- -------- ------------- ------------ ------------- ------------- Net sales $ - $ 688,680 $ 13,772 $ (15,352) $ 687,100 Cost of goods sold - 611,071 12,774 (15,352) 608,493 --------- ------------ ------------ ------------ ------------ Gross profit - 77,609 998 - 78,607 Selling, general and administrative (2,980) 52,208 324 - 49,552 --------- ------------ ------------ ------------ ------------ Earnings from operations 2,980 25,401 674 - 29,055 Equity in (loss) of subsidiaries (16,377) - - 16,377 - Interest expense 3,407 50,001 404 - 53,812 --------- ------------ ------------ ------------ ------------ Earnings (loss) before income taxes (16,804) (24,600) 270 16,377 (24,757) Income taxes (959) (7,953) - - (8,912) --------- ------------ ------------ ------------ ------------ Net earnings (loss) (15,845) (16,647) 270 16,377 (15,845) Preferred dividends 3,937 - - - 3,937 --------- ------------ ------------ ------------ ------------ Earnings (loss) available for common shareholders $ (19,782) $ (16,647) $ 270 $ 16,377 $ (19,782) ========= ============ ============ ============ ============
16 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (7) Supplemental Condensed Consolidating Financial Information (Continued)
Six Months Ended July 3, 1999 -------------------------------------------------------------------------------- Non- Guarantor Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- -------- ------------- ------------- ------------ ------------- Cash provided by (used in) Operating activities $ 17,874 $ (19,399) $ (3,881) $ - $ (5,406) Cash provided by (used in) Investing activities 44 (50,595) (72) - (50,623) Cash provided by (used in) 3,813 Financing activities (17,918) 73,605 59,500 -------- ------------ ------------ ------------ ------------ Net change in cash and cash (140) Equivalents - 3,611 - 3,471 Cash and cash equivalents at Beginning of year - 5,554 7 - 5,561 -------- ------------ ------------ ------------ ------------ Cash and cash equivalents at End of period $ - $ 9,165 $ (133) $ - $ 9,032 ======== ============ ============ ============ ============
Six Months Ended July 1, 2000 ------------------------------------------------------------------------------- Non Guarantor Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------- ------------ ------------ ------------ ------------ Cash provided by (used in) Operating activities $ 16,703 $ (33,426) $ 5,708 $ - $ (11,015) Cash provided by (used in) Investing activities 432 (13,677) (144) - (13,389) Cash provided by (used in) Financing activities (17,135) 45,599 (5,564) - 22,900 -------- ------------ ------------ ------------ ------------ Net change in cash and cash Equivalents - (1,504) - - (1,504) Cash and cash equivalents at Beginning of year - 4,854 - - 4,854 -------- ------------ ------------ ------------ ------------ Cash and cash equivalents at End of period $ - $ 3,350 $ - $ - $ 3,350 ======== ============ ============ ============ ============
17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto, and with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended January 1, 2000. Results of Operations --------------------- Net Sales. Net sales were $341.9 million for the three months ended July 1, ---------- 2000, representing a decrease of $20.6 million, or 5.7%, as compared to $362.5 million for the three months ended July 3, 1999. Sales through the first six months of this fiscal year were $687.1 million, down $43.9 million or 6.0% from last year. The drop in sales comes mainly from towels and sheets, where increased competition from imports and higher inventory levels held by certain customers softened demand for these products in the Company's institutional and regional discount markets. Gross Profit. Gross profit margins for the three and six months ended July 3, ------------- 1999 were 15.5% and 14.9%, respectively. For the three and six months ended July 1, 2000, gross profit margins decreased to 11.6% and 11.4%, respectively. The decline in gross profit margin for both the three and six months ended July 1, 2000 is due to lower volumes, higher unabsorbed overhead expenses and higher cost of raw materials, primarily chemicals and packaging Selling, General and Administrative ("SG&A"). SG&A expenses decreased $3.2 --------------------------------------------- million to $22.6 million for the three months ended July 1, 2000, compared to $25.8 million for the three months ended July 3, 1999. SG&A decreased $0.6 million for the first six months of fiscal year 2000 compared to 1999. Higher professional fees in the first quarter, associated with amendments to the Company's debt arrangements, partially offset the savings in SG&A expenses resulting from staff reductions from the beginning of this year. Interest Expense. Interest expense increased $6.3 million to $26.0 million for ---------------- the three months ended July 1, 2000, compared to $19.7 million for the three months ended July 3, 1999. Interest expense for the six months ended July 1, 2000 was $53.8 million, $14.6 million higher than the comparable period in 1999. Contributing to this increase were bank fees related to the restructuring of the Company's debt, an increased level of debt and a higher weighted average interest rate of 9.8% for the six months ended July 1, 2000, compared to 7.9% for the six months ended July 3, 1999. The weighted average interest rate for the three months ended July 1, 2000 was 9.8%, compared to 7.8% for the three months ended July 3, 1999. Liquidity and Capital Resources ------------------------------- Senior Debt Facilities. In December 1997, in connection with the Fieldcrest Cannon acquisition, Pillowtex entered into new senior secured revolving credit and term loan facilities with a group of financial and institutional investors for which Bank of America acts as the agent. These facilities consisted of a $350.0 million revolving credit facility and a $250.0 million term loan facility. The term loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, Pillowtex amended these facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of Leshner, allowing Pillowtex to fund the transaction and reduce borrowings under the revolving credit facility. Effective March 12, 1999, the revolving credit facility was amended to permit Pillowtex to use for working capital one-half of a $61.0 million portion of the facility held as contingency reserve for cash payments required upon conversion of the Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012, thereby increasing availability under that facility. Effective October 1, 1999, the revolving credit facility was further amended to permit Pillowtex to use the other half of the contingency reserve for working capital, thereby increasing availability under that facility. At the end of the third and fourth quarters of its 1999 fiscal year, Pillowtex was not in compliance with certain financial covenants under its senior debt facilities. The Company obtained a series of temporary waivers of this non-compliance. Effective as of December 7, 1999, the Company agreed to certain amendments to the senior debt facilities, principally related to cash management, adjustments to restrictive covenants, and borrowings under, and uses of proceeds from, the revolving credit facility. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance with financial covenants and the senior debt facilities were further amended to shorten their terms to maturity and accelerate the related amortization schedule for repayment of principal, to eliminate the contingency reserve requirement referred to above, to increase the applicable interest rate margins (subject to reduction if the Company's earnings before interest, taxes, depreciation and amortization (EBITDA) exceeds a specified level for the 2000 fiscal year), to add a covenant requiring that EBITDA must exceed specified levels for future fiscal periods and to eliminate all other financial covenants, to modify certain restrictive covenants, to limit borrowings under the revolving credit facility based on a formula tied to 45% of eligible inventory plus 80% of eligible accounts receivable, and to provide for a series of 18 reductions in the commitment under the revolving credit facility. As of July 1, 2000 the Company had $299.2 million outstanding under its revolving credit facility. The Company is in compliance with the amended financial covenants as of July 1, 2000 and believes that it will be able to comply with the amended financial covenants in the future; however, the company is subject to changing business and economic conditions (many of which are beyond the Company's control) which may affect its ability to comply with the covenants in the near term and there can be no assurance of such compliance. The revolving credit facility includes $55.0 million of availability for letters of credit. At July 1, 2000, $32.8 million of letters of credit were outstanding and $18.0 million was available under the revolving credit facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan currently bear interest at a rate based upon the London Interbank Offered Rate plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities for the second quarter of 2000 was 10.03%. The senior debt facilities expire on January 31, 2002. The senior debt facilities are guaranteed by each of the domestic subsidiaries of Pillowtex, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital stock of Pillowtex's foreign subsidiaries. Pillowtex has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The term loan facility is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of Pillowtex (except as specifically provided), 50% of the net cash proceeds of equity issuances by Pillowtex or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the remaining installments of principal. The senior debt facilities contain a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make capital expenditures, engage in transactions with affiliates, make loans, advances and investments, dispose of assets, effect mergers, consolidations and dissolutions, and make certain changes in its business. A breach of any of the covenants contained in the senior debt facilities could result in a default under the terms of the facilities. Upon the occurrence of an event of default: the senior lenders would not be obligated to make additional advances under the revolving credit facility; the senior lenders would be entitled to declare all amounts outstanding under the senior debt facilities, including accrued interest or other obligations, to be immediately due and payable; the senior lenders would have the rights to block payment on substantially all of Pillowtex's other long-term debt; and the senior lenders would be entitled to proceed against the collateral granted to them to secure the senior debt. In these circumstances, cross defaults could occur making substantially all of Pillowtex's other long-term debt due. If any senior debt were to be accelerated, the Company cannot be certain that its assets would be sufficient to repay in full that debt and its other debt. As a result of the covenants described above, Pillowtex's ability to respond to changing business and economic conditions and to secure additional financing, if needed, is significantly restricted. Overline Facility. In May 1999, Pillowtex entered into a $20.0 million senior unsecured revolving credit facility (overline facility) in order to obtain additional working capital availability. On July 27, 1999, this facility was amended to increase the amount of funds available to $35.0 million. At the end of the third and fourth quarters of its 1999 fiscal year, Pillowtex was not in compliance with certain financial covenants under this facility, the covenants of which are established by reference to the senior debt facilities described above. The Company obtained a series of temporary waivers of this non- compliance and extensions of the maturity date. Effective as of December 7, 1999, the Company agreed to certain amendments to this facility, resulting in the facility being secured by the assets securing the senior debt facilities described above. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance and the facility was amended to lengthen its term to maturity, to impose an amortization schedule for the repayment of principal, and to increase the applicable interest rate margins (subject to reduction if the Company's EBITDA exceeds a specified level for the 2000 fiscal year). This facility is guaranteed on a senior basis by Pillowtex's domestic subsidiaries. Pillowtex is currently required to pay interest on any amounts borrowed under the facility at a rate which is based upon the London Interbank Offered Rate plus 4.5% or the base rate plus 3.0%, at Pillowtex's option. This facility matures upon termination by Pillowtex at any time or otherwise at the earliest 19 of: a) any increase in the commitment under the senior debt facilities described above, the issuance of any capital stock by Pillowtex or its domestic subsidiaries, or other specified events; or b) January 31, 2002. Senior Subordinated Debt. In connection with the Fieldcrest Cannon merger, Pillowtex issued $185.0 million of 9% Senior Subordinated Notes due December 15, 2007, with interest payable semiannually commencing June 15, 1998. Pillowtex may at its option redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at a redemption price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%. The 9% Notes are general unsecured obligations of Pillowtex, and are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu to the 10% Notes described below. On November 12, 1996, Pillowtex issued the 10% Senior Subordinated Notes due November 15, 2006, with interest payable semiannually commencing May 15, 1997. Pillowtex may, at its option, redeem the 10% Notes, in whole or in part, on or after November 15, 2001 at a redemption price of 105.0%, which declines 1.667% annually through November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of Pillowtex, and are subordinated in right of payment to all existing and future senior indebtedness. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of Pillowtex and each other subsidiary of Pillowtex that guarantees Pillowtex's obligations under the senior debt facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. Upon a change in control, Pillowtex will be required to make an offer to repurchase all outstanding 9% Notes and 10% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. Fieldcrest Cannon Convertible Debentures. As a result of Pillowtex's acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon are convertible, at the option of the holders, into a combination of cash and Pillowtex's Common Stock. During the fourth quarter of 1999, Pillowtex notified the holders of the 6% Debentures that it was not practicable or prudent for payments to be made in respect of the conversion of the 6% Debentures and advised holders that had given notice of conversion and surrendered their 6% Debentures that they could rescind their notice of conversion, return to Pillowtex any Pillowtex Common Stock that had been issued to them and have their 6% Debentures reinstated. Although many holders did rescind and return their stock, other holders could not rescind because they had already sold their Pillowtex stock. As of July 1, 2000, the cash component due in respect of the 6% Debentures that had been surrendered without subsequent rescission was approximately $9.1 million. In addition, as of July 1, 2000, approximately $94.2 million aggregate principal amount of the 6% Debentures remained outstanding. If all such outstanding 6% Debentures were converted at such date, including those surrendered without subsequent rescission, the resulting cash component to be paid to the holders of the 6% Debentures would have been approximately $61.0 million (classified as a current liability at July 1, 2000). Pillowtex is currently prohibited under the terms of its senior subordinated debt from making payments in respect of the 6% Debentures except for interest payments and payments at maturity or pursuant to sinking fund obligations. In an effort to address both (i) the unpaid cash portion of the conversion consideration owing to those holders of 6% Debentures who have surrendered their debentures for conversion but have not been paid the cash portion of the conversion consideration (Cash Claimants) and (ii) the cash payment prohibition in respect of any future conversions, Pillowtex initiated discussions with certain holders of the 6% Debentures regarding a potential restructuring of the 6% Debentures. Notwithstanding months of efforts, the parties to those discussions have been unable to agree upon a mutually satisfactory comprehensive restructuring proposal. The Company is still in the process of examining the options currently available to it with respect to the 6% Debentures, but is not yet prepared to make a specific proposal; however, there can be no assurance that the Company will be able to adopt a proposal that is satisfactory to the holders of the 6% Debentures. Swap Agreements. Pillowtex enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. These agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the consolidated financial statements. As of January 1, 2000, Pillowtex had approximately $345.0 million of notional amounts covered under interest rate swap agreements whereby Pillowtex exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.70% and 6.05%, respectively. As of July 1, 2000, Pillowtex had approximately $230.0 million of notional amounts covered under interest rate swap agreements whereby Pillowtex exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.68% and 6.25%, respectively. The fair values of the swaps at January 1, 2000 and July 1, 2000 were $4.0 million and $2.2 million, respectively, in favor of Pillowtex. 20 Adequacy of Capital Resources. As of July 1, 2000, Pillowtex was in compliance with all its debt covenants. Based on current and anticipated levels of operations, and efforts to reduce inventories and accounts receivable, Pillowtex anticipates that its cash flow from operations, together with amounts available under its revolving credit facility, will be adequate to meet its anticipated cash requirements in the foreseeable future (assuming no significant cash payments are required to be made in respect of the 6% Debentures other than scheduled interest payments and payments related to satisfaction of the sinking fund obligations as outlined above). In the event that cash flows and available borrowings under the revolving credit facility are not sufficient to meet future cash requirements, Pillowtex may be required to reduce planned capital expenditures or seek additional financing. Pillowtex can provide no assurances that reductions in planned capital expenditures would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on terms acceptable to the Company. Recent Accounting Matters ------------------------- The Company is assessing the reporting and disclosures requirements of SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments and hedging activities and will require the Company to recognize all derivatives on its balance sheet at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged item through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company expects to adopt SFAS No. 133, as amended in the first quarter of fiscal 2001 and is evaluating the impact adoption will have on the Company's results of operations and financial position. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25". Among other issues, Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The provisions of Interpretation No. 44 affecting the Company are to be applied on a prospective basis for periods beginning after July 1, 2000. Cautionary Statement Regarding Forward-Looking Statements --------------------------------------------------------- This filing contains certain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. Because such forward-looking statements are subject to various risks and uncertainties, results may differ materially from those expressed in or implied by such statements. Many of the factors that will determine these results are beyond the Company's ability to control or predict. Factors which could affect the Company's future results and could cause results to differ materially from those expressed in or implied by such forward-looking statements are discussed under the captions "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in the Company's Annual Report on Form 10-K for its fiscal year ended January 1, 2000. 21 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held on May 11, 2000. The following proposal was voted upon and approved at the annual meeting: Election of Directors For Three-Year Terms Expiring in 2003:
------------------------------------------------------------------------ Votes Votes Broker Cast Withheld Non-Votes ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ Charles M. Hansen, Jr. 13,124,473 303,129 0 ------------------------------------------------------------------------------------------------------------------ William B. Madden 13,149,833 277,769 0 ------------------------------------------------------------------------------------------------------------------ M. Joseph McHugh 12,863,282 564,620 0 ------------------------------------------------------------------------------------------------------------------
There were no abstentions with respect to the election of directors. Paul G. Gillease, Ralph W. La Rovere, Mark A. Petricoff, Scott E. Shimizu and Mary R. Silverthorne continued as directors of the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None 22 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: August 14, 2000 PILLOWTEX CORPORATION (Registrant) /s/ Tony Williams -------------------------- Tony Williams Chief Financial Officer 23 INDEX TO EXHIBITS Exhibit Method of Filing ------- ---------------- 27.1 Financial Data Schedule................. Filed herewith electronically 24