10-Q 1 form10q_58202.txt PILLOWTEX CORPORATION FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 1-11756 PILLOWTEX CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-2147728 (State of incorporation) (IRS Employer Identification No.) 4111 Mint Way 75237 Dallas, Texas (Zip Code) (Address of principal executive offices) (214) 333-3225 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 4, 2001 ----- -------------------------- Common Stock, $.01 par value 14,250,892 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) INDEX Part I - Financial Information Page No. Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 2001, April 1, 2000 and December 30, 2000 3 Consolidated Statements of Operations for the three months ended March 31, 2001 and April 1, 2000 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and April 1, 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 32 Signature 33 Index to Exhibits 34 2 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for par value) ASSETS March 31, April 1, December 30, 2001 2000 2000 ---------------- --------------- ---------------- (unaudited) (unaudited) (audited) Current assets: Cash and cash equivalents $ 34,907 19,332 32,157 Receivables: Trade, less allowances of $26,819 as of March 31, 2001, $32,471 as of April 1, 2000 and $43,249 as of December 30, 2000 193,003 249,047 212,727 Other 6,030 11,176 6,261 Inventories 268,704 442,205 278,807 Assets held for sale 6,064 1,599 5,281 Prepaid expenses 5,096 9,806 5,323 ---------------- --------------- ---------------- Total current assets 513,804 733,165 540,556 Property, plant and equipment, net 524,242 644,785 535,391 Intangible assets, at cost less accumulated amortization of 230,332 285,779 233,480 $29,533 as of March 31, 2001, $27,989 as of April 1, 2000 and $27,802 as of December 30, 2000 Other assets 29,394 28,930 29,444 ---------------- --------------- ---------------- Total assets $1,297,772 1,692,659 1,338,871 ================ =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities not subject to compromise: Current liabilities: Accounts payable $ 40,694 113,370 34,909 Accrued expenses 68,331 88,050 58,458 Deferred income taxes - 37,219 - Current portion of long-term debt - 91,508 - Current portion of long-term debt in default 679,591 - 33,229 Long-term debt in default 13,405 - 660,790 ---------------- --------------- ------------- Total current liabilities 802,021 330,147 787,386 Long-term debt, less current portion - 977,045 - Deferred income taxes - 62,388 - Noncurrent liabilities 39,775 52,305 40,016 ---------------- --------------- ------------- Total liabilities not subject to compromise 841,796 1,421,885 827,402 Liabilities subject to compromise 484,989 - 492,093 ---------------- ---------------- ------------- Total liabilities 1,326,785 1,421,885 1,319,495 Series A redeemable convertible preferred stock, $.01 par value; 81,411, 77,517 and 81,411 shares issued and outstanding for March 31, 2001, April 1, 2000, and December 30, 2000, respectively 86,526 75,844 82,827 Shareholders' equity (deficit): Preferred stock, $.01 par value; authorized 20,000,000 shares; only Series A issued - - - Common stock, $.01 par value; authorized 55,000,000 shares; 14,250,892 as of March 31, 2001, 14,232,269 as of April 1, 2000 and 14,252,069 as of December 30, 2000 shares issued and outstanding 143 142 143 Additional paid-in capital 160,120 159,654 160,120 Retained earnings (accumulated deficit) (273,993) 37,599 (222,067) Currency translation adjustment (1,809) (1,754) (1647) Deferred compensation - (711) - ---------------- --------------- ------------- Total shareholders' equity (deficit) (115,539) 194,930 (63,451) Commitments and contingencies ---------------- --------------- ------------- Total liabilities and shareholders' equity (deficit) $1,297,772 1,692,659 1,338,871 ================ =============== =============
See accompanying notes to consolidated financial statements. 3 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2001 and April 1, 2000 (Dollars in thousands, except for per share data) (unaudited)
2001 2000 ------------------ -------------------- Net sales $ 289,766 345,160 Cost of goods sold 285,349 306,065 ------------------ -------------------- Gross profit 4,417 39,095 Selling, general and administrative expenses 24,120 26,939 Restructuring charge 1,977 - ------------------ -------------------- Earnings (loss) from operations (21,680) 12,156 Interest expense (contractual interest of $27,488 in 2001) 18,922 27,844 ------------------ -------------------- Loss before reorganization items and income taxes (40,602) (15,688) Reorganization items 7,625 - ------------------ -------------------- Loss before income taxes (48,227) (15,688) Income tax benefits - (5,961) ------------------ -------------------- Net loss (48,227) (9,727) Preferred dividends and accretion 3,699 1,943 ------------------ -------------------- Loss applicable to common shareholders $ (51,926) (11,670) ================== ==================== Loss per common share - Basic and diluted $ (3.64) (.82) ================== ==================== Weighted average common shares outstanding - Basic and diluted 14,251 14,228 ================== ====================
See accompanying notes to consolidated financial statements. 4 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2001 and April 1, 2000 (Dollars in thousands) (unaudited)
2001 2000 ---------------- ----------------- Cash flows from operating activities: Net loss $ (48,227) (9,727) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 14,007 15,886 Deferred income taxes - (5,961) Changes in assets and liabilities: Trade receivables 19,724 19,452 Inventories 10,103 (19,153) Accounts payable and accrued expenses 11,234 1,061 Other assets and liabilities (415) 2,867 ---------------- ----------------- Net cash provided by operating activities 6,426 4,425 Cash flows from investing activities: Proceeds from sale of property, plant and equipment - 1,326 Purchases of property, plant and equipment (1,950) (14,790) ---------------- ----------------- Net cash used in investing activities (1,950) (13,464) Cash flows from financing activities: Increase (decrease) in checks not yet presented for payment (703) 7,273 Borrowings on revolving credit loans - 107,300 Repayments of revolving credit loans - (81,100) Retirement of long-term debt (1,023) (9,956) ---------------- ----------------- Net cash provided by (used in) financing activities (1,726) 23,517 Net change in cash and cash equivalents 2,750 14,478 Cash and cash equivalents at beginning of period 32,157 4,854 ---------------- ----------------- Cash and cash equivalents at end of period $ 34,907 19,332 ================ ================= Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest $ 21,734 18,149 ================ ================= Income taxes $ 91 (3,302) ================ ================= See accompanying notes to consolidated financial statements.
5 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (1) General The accompanying unaudited consolidated financial statements of Pillowtex Corporation, which is referred to in this report as "Parent," and its subsidiaries, which are collectively with Parent, referred to in this report as the "Company," include all adjustments, consisting only of normal, recurring adjustments and accruals, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statement should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 30, 2000. On November 14, 2000 (the "Petition Date"), Pillowtex Corporation and substantially all of its domestic subsidiaries (collectively, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The chapter 11 cases pending for the Debtors (the "Chapter 11 Cases") are being jointly administered for procedural purposes. In conjunction with the commencement of the Chapter 11 Cases, the Debtors sought and obtained several orders from the Bankruptcy Court which were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 Cases. The most significant of these orders (i) permit the Debtors to operate their consolidated cash management system during the Chapter 11 Cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 Cases, (ii) authorize payment of prepetition employee salaries, wages, and benefits and reimbursement of prepetition employee business expenses, (iii) authorize payment of prepetition sales, payroll, and use taxes owed by the Debtors, (iv) authorize payment of certain prepetition obligations to customers, and (v) authorize payment of certain prepetition obligations to critical vendors to aid the Debtors in maintaining operation of their business. On December 6, 2000, the Bankruptcy Court also entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150.0 million debtor-in-possession financing facility (the "DIP Financing Facility") with Bank of America, N.A. as agent for a syndicate of financial institutions comprised of certain of the Company's prepetition senior secured lenders, and to grant first priority priming liens and mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. The Company obtained the reduction in the amount of the facility based upon its determination that, as a result of its improved liquidity position, it did not need as much availability as originally provided by the facility and its desire to reduce the amount of its monthly unused commitment fee. The Debtors are currently operating their businesses as debtors-in-possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. 6 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) The United States trustee for the District of Delaware has appointed an Official Committee of Unsecured Creditors in accordance with the provisions of the Bankruptcy Code. The Bankruptcy Code provides that the Debtors have exclusive periods during which only they may file and solicit acceptances of a plan of reorganization. The exclusive period of the Debtors to file a plan for reorganization expired on March 14, 2001; however, the Debtors requested and received from the Bankruptcy Court an extension to the exclusive period through July 16, 2001. The Bankruptcy Court also granted an extension on the solicitation period, through September 14, 2001. If the Debtors fail to file a plan of reorganization by July 16, 2001 or, after such plan has been filed, the Debtors fail to obtain acceptance of such plan from the requisite impaired classes of creditors by September 14, 2001, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file their own plan of reorganization for the Debtors. After a plan of reorganization has been filed with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors and equity holders. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (i) with respect to each impaired class of creditors and equity holders, each holder in such class has accepted the plan or will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation, (ii) each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence), and (iii) confirmation of the plan is not likely to be followed by a liquidation or a need for further financial reorganization of the Debtors or any successors to the Debtors unless the plan proposes such liquidation or reorganization. If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the "cram down" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made. As a result of the amount of prepetition indebtedness and the availability of the "cram down" provisions, the holders of the Company's capital stock may receive no value for their interests under the plan of reorganization. Because of such possibility, the value of the Company's outstanding capital stock is highly speculative. Since the Petition Date, the Debtors have conducted business in the ordinary course. Management is in the process of stabilizing the business of the Debtors and evaluating their operations as part of the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by impaired creditors and equity holders and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in the financial statements. The Debtors are in the process of reviewing their operations and identifying assets for disposition. The administrative and reorganization expenses resulting from the Chapter 11 Cases will unfavorably affect the Debtors' results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 Cases. The Company's unaudited consolidated financial statements have been prepared on a "going concern" basis in accordance with United States generally accepted accounting principles. The "going concern" basis of presentation assumes that Pillowtex will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. Because of the Chapter 11 Cases and the circumstances leading to the filing thereof, there is substantial doubt about the appropriateness of the use of the "going concern" assumption. Pillowtex's ability to realize the carrying value of its assets and discharge its liabilities is subject to substantial uncertainty. 7 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) The Company's unaudited consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" basis was not appropriate. If the "going concern" basis was not appropriate for the Company's consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used. The appropriateness of the "going concern" basis is dependent upon, among other things, confirmation of a plan of reorganization, the Company's ability to comply with the terms of the DIP Financing Facility, and the Company's ability to generate sufficient cash flow from operations and financing arrangements to meet its obligations. The accompanying consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7) assuming that the Company will continue as a going concern. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to comply with the DIP Financing Facility, its ability to return to profitability, generate sufficient cash flows from operations and obtain financing sources to meet future obligations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Additionally, the amounts reported on the consolidated balance sheet could materially change because of changes in business strategies and the effects of any proposed plan of reorganization. In the Chapter 11 Cases, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 Cases, have been segregated and classified as liabilities subject to compromise in the accompanying consolidated balance sheet. Generally, all actions to enforce or otherwise effect repayment of pre-Chapter 11 liabilities as well as all pending litigation against the Debtors are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for such liabilities are subject to an approved plan of reorganization and accordingly are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Cases are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Cases or that it is probable that it will be an allowed claim. (2) Comprehensive Loss Comprehensive loss consists of net loss and foreign currency translation adjustments and aggregates $48.4 million and $9.7 million for the three month periods ended March 31, 2001 and April 1, 2000, respectively. 8 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (3) Inventories Inventories consisted of the following at March 31, 2001, April 1, 2000, and December 30, 2000:
March 31, April 1, December 30, 2001 2000 2000 -------------------- ------------------- -------------------- Finished goods $ 139,477 234,198 130,841 Work-in-process 71,824 137,436 93,967 Raw materials 43,791 46,254 41,706 Supplies 13,612 24,317 12,293 -------------------- ------------------- -------------------- $ 268,704 442,205 278,807 ==================== =================== ====================
(4) Loss Per Share There were no reconciling items between basic loss per share and diluted loss per share because the effects of the conversion of preferred convertible stock and convertible debentures or assumed exercise of stock options would have been anti-dilutive for both the three months ended March 31, 2001 and April 1, 2000. (5) Long-Term Debt and Liquidity Long-term debt consists of the following:
March 31, April 1, December 30, 2001 2000 2000 ----------------- ---------------- -------------- Revolver $ 390,825 285,661 373,135 Overline Credit Facility 34,738 35,000 34,738 Term loans 250,400 334,403 268,090 DIP Financing Facility - - - Industrial revenue bonds with interest rates from 3.60% to 7.85% and maturities through July 1, 2021; generally collateralized by land and buildings 14,633 16,437 14,925 9% Senior Subordinated Notes due 2007 185,000 185,000 185,000 10% Senior Subordinated Notes due 2006 125,000 125,000 125,000 6% Convertible Subordinated Sinking Fund Debentures due in 2012 (effective rate of 8.72%, net of $14.0 million in unamortized discount at April 1, 2000) 90,417 83,770 90,417 Other debt 2,400 3,282 3,131 ----------------- ---------------- --------------- Total debt 1,093,413 1,068,553 1,094,436 Less: Current portion of long-term debt - (91,508) - Current portion of long-term debt in default (679,591) - (33,229) Long-term debt in default (13,405) - (660,790) Liabilities subject to compromise (400,417) - (400,417) ----------------- ---------------- --------------- Total long-term debt $ - 977,045 - ================= ================ ===============
9 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) DIP Financing Facility On December 6, 2000, the Bankruptcy Court entered the DIP Financing Order authorizing the Debtors to enter into the $150.0 million DIP Financing Facility and to grant first priority primary liens, mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. The Company obtained the reduction in the amount of the facility based upon its determination that, as a result of its improved liquidity position, it did not need as much availability as originally provided by the facility and its desire to reduce the amount of its monthly unused commitment fee. Under the terms of the DIP Financing Facility, as amended, a $125.0 million revolving credit facility, including up to $60.0 million for postpetition letters of credit, is available to the Company until the earliest of (a) November 14, 2001, (b) the date on which the plan of reorganization becomes effective, (c) any material non-compliance with any of the terms of the DIP Financing Order, (d) any event of default that shall have occurred under the DIP Financing Facility, or (e) consummation of a sale of substantially all of the assets of the Company pursuant to an order of the Bankruptcy Court shall have occurred. Upon the satisfaction of certain conditions, the November 14, 2001 maturity date could be extended for an additional period of six months upon payment of an extension fee equal to 0.50% of the portion of the DIP Financing Facility being extended. Amounts borrowed under the DIP Financing Facility bear interest at the option of the Company at the rate of London Interbank Offered Rate ("LIBOR") plus 3.50% or Bank of America's Base Rate (which is the higher of Federal Funds Rate or Prime Rate plus, in either case, 0.05%) plus 1.00%. In addition to a facility fee and an underwriting fee of 0.50% each, there is an unused commitment fee of 0.50%, a letter of credit fee of 3.50%, and a letter of credit fronting fee of 0.20%. The DIP Financing Facility is secured by a first priority priming lien on the real and personal assets of the Company that also secure the prepetition senior secured credit facilities described below and a junior lien on certain plant and equipment that secure six industrial revenue bond facilities described below (the "IRB Facilities") aggregating approximately $14.6 million as of March 31, 2001, and certain obligations to the Pension Benefit Guaranty Corporation. The documentation evidencing the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum operating cash flow, as well as other covenants that limit, among other things, indebtedness, liens, sales of assets, capital expenditures, investments, and prohibit dividend payments. The net proceeds of certain asset sales outside the ordinary course of business reduce prepetition indebtedness under the senior secured credit facilities; otherwise, the net proceeds of asset sales outside the ordinary course of business are applied as a permanent reduction of the DIP Financing Facility. As of March 31, 2001, the Company had $17.1 million in letters of credit outstanding under the DIP Financing Facility. No cash borrowings were outstanding on the DIP Financing Facility at March 31, 2001. Availability under the DIP Financing Facility as of March 31, 2001, was approximately $72.1 million. As prepetition letters of credit expire under the Company's senior secured revolving credit facility described below, to the extent they are renewed, they will be reissued under the DIP Financing Facility. Senior Debt Facilities In December 1997, in connection with the Fieldcrest Cannon acquisition, the Company entered into senior secured revolving credit and term loan facilities with a group of financial and institutional investors for which Bank of America, N.A. acts as the administrative and collateral agent. These facilities consisted of a $350.0 million revolving credit facility and a $250.0 million term loan facility. The term loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, the Company amended these facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of Leshner, allowing the Company to fund the transaction and reduce borrowings under the revolving credit facility. Effective March 12, 1999, the revolving credit facility was amended to permit the Company to use for working capital one-half of a $61.0 million portion of the facility held as contingency reserve for cash payments required upon conversion of the 6% Convertible Debentures, thereby increasing availability under that facility. 10 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) Effective October 1, 1999, the revolving credit facility was further amended to permit the Company to use the other half of the contingency reserve for working capital, thereby increasing availability under that facility. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under its senior debt facilities. The Company obtained a series of temporary waivers of this non-compliance. Effective as of December 7, 1999, the Company agreed to certain amendments to the senior debt facilities, principally related to cash management, additional collateral, adjustments to restrictive covenants, and borrowings under, and uses of proceeds from, the revolving credit facility. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance with financial covenants and the senior debt facilities were further amended to shorten their terms to maturity and accelerate the related amortization schedule for repayment of principal, to eliminate reinstatement of the contingency reserve requirement referred to above, to increase the applicable interest rate margins (subject to reduction if the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") exceeded a specified level for the 2000 fiscal year), to add a covenant requiring that EBITDA must exceed specified levels for future fiscal periods and eliminate all other financial covenants, to modify certain restrictive covenants, to limit borrowings under the revolving credit facility based on a formula tied to 45% of eligible inventory plus 80% of eligible accounts receivable, and to provide for a series of reductions in the commitment under the revolving credit facility. On September 30, 2000, and prior to the Petition Date, the Company was not in compliance with its EBITDA financial covenant under the senior debt facilities. The Company obtained from its senior lenders a temporary waiver of such non-compliance through November 7, 2000, during which time the Company engaged in active discussions with its senior lenders to obtain an extended or permanent waiver of such non-compliance. The Company was unable to reach such an agreement with its senior lenders and the waiver expired on November 7, 2000. On November 8, 2000, the agent for the senior lenders delivered a notice of default to the Company that declared an event of default under the senior debt facilities based upon such non-compliance with its EBITDA financial covenant. The senior lenders did, however, forbear from exercising rights and remedies under the senior debt facilities and agreed to continue to make available to the Company the unused credit capacity under the revolving credit facility until December 7, 2000. In addition, on November 8, 2000, the senior lenders issued a Payment Blockage Notice to the Company and the indenture trustee for the Company's 10% Senior Subordinated Notes due 2006 (the "10% Notes") prohibiting payment by the Company of the semi-annual interest payment in the aggregate amount of approximately $6.25 million due to the holders of the 10% Notes on November 15, 2000. In addition, the Company was obligated to make a semi-annual interest payment on its 9% Senior Subordinated Notes due 2007 (the "9% Notes") on December 15, 2000 aggregating $8.3 million, which payment the senior lenders likewise indicated they would also block. As a result of the circumstances confronting the Company and its inability to refinance the senior debt facilities or obtain additional capital, the Debtors filed the Chapter 11 Cases on November 14, 2000. As of March 31, 2001, the Company had $14.1 million in letters of credit outstanding under the prepetition revolving credit facility. As these prepetition letters of credit expire, to the extent they are renewed, they will be reissued under the DIP Financing Facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities for the first quarter of 2001 was 10.0%. The senior debt facilities expire on January 31, 2002. The senior debt facilities are guaranteed by each of the domestic subsidiaries of the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. 11 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) Overline Facility In May 1999, the Company entered into a $20.0 million senior unsecured revolving credit facility (the "Overline Facility") in order to obtain additional working capital availability. On July 27, 1999, the Overline Facility was amended to increase the amount of funds available to $35.0 million. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under the Overline Facility, the covenants of which are incorporated by reference to the senior debt facilities described above. The Company obtained a series of temporary waivers of this non-compliance and extensions of the maturity date. Effective December 7, 1999, the Company agreed to certain amendments to the Overline Facility, resulting in the Overline Facility being secured by the same assets securing the senior debt facilities described above. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance and the Overline Facility was amended to lengthen its term to maturity, to impose an amortization schedule for the repayment of principal, and to increase the applicable interest rate margins (subject to reduction if EBITDA exceeded a specified level for the 2000 fiscal year). The Overline Facility is guaranteed on a senior basis by the Company's domestic subsidiaries. Amounts borrowed under the Overline Facility bear interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the Company's option. The Overline Facility matures upon termination by the Company at any time or otherwise at the earliest of: (i) any increase in the commitment under the senior debt facilities described above, the issuance of any capital stock by the Company or its domestic subsidiaries, or other specified events; or (ii) January 31, 2002. For the reasons discussed above with respect to the default under the senior debt facilities, the Company is also in default under the Overline Facility. Senior Subordinated Debt In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million of 9% Senior Subordinated Notes due 2005 (the "9% Notes"), with interest payable semiannually commencing June 15, 1998. The 9% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 10% Notes described below. On November 12, 1996, the Company issued $125.0 million of 10% Senior Subordinated Notes due 2006 (the "10% Notes"), with interest payable semiannually commencing May 15, 1997. The 10% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 9% Notes. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the senior debt facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. As a result of the filing of the Chapter 11 Cases, the Company is in default under the indentures governing both the 9% Notes and the 10% Notes. Fieldcrest Cannon 6% Convertible Debentures As a result of the Company's acquisition of Fieldcrest Cannon, the outstanding Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6% Convertible Debentures") are convertible, at the option of the holders, into a combination of cash and Common Stock. As of March 31, 2001, approximately $90.4 million aggregate principal amount of the 6% Convertible Debentures remained outstanding. If all such outstanding 6% Convertible Debentures were converted at such date, including those surrendered without subsequent rescission, the resulting cash component to be paid to the holders of the 6% Convertible Debentures would have been approximately $57.2 million. 12 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) Prior to the Petition Date, the Company was prohibited under the terms of the indentures governing the 9% Notes and the 10% Notes from making payments in respect of the 6% Convertible 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 certain holders of 6% Convertible Debentures who had surrendered their debentures for conversion but had not been paid the cash portion of the conversion consideration (the "Cash Claimants") and (ii) the cash payment prohibition in respect of any future conversions, the Company initiated discussions with certain holders of the 6% Convertible Debentures regarding a potential restructuring of the 6% Convertible Debentures. Notwithstanding months of effort, the parties to those discussions were unable to agree upon a mutually satisfactory comprehensive restructuring of the 6% Convertible Debentures and amounts owing to the Cash Claimants. In September 2000, the Company notified the holders of the 6% Convertible Debentures of its plan for making payments to the Cash Claimants. Pursuant to the plan, the Company agreed to pay out as a "scheduled payment" cash in the amount of approximately $3.8 million annually to the Cash Claimants, which is the amount of cash sufficient to complete the conversion of $6.25 million principal amount of the 6% Convertible Debentures annually and utilize such converted 6% Convertible Debentures as a credit to satisfy its annual sinking fund obligation under the indenture governing the 6% Convertible Debentures. As part of the plan and in accordance with the terms of the indenture governing the 6% Convertible Debentures, the Company agreed to pay out cash to the Cash Claimants in order to complete and finalize Debenture conversions and utilize such converted Debentures as credits to satisfy its annual sinking fund obligations as follows: (i) approximately $3.8 million on September 28, 2000, (ii) approximately $3.8 million on March 16, 2001, and (iii) the balance owing to Cash Claimants on March 18, 2002. Under the plan, these cash payments would be made by the Company to the Cash Claimants in the order the 6% Convertible Debentures were presented for conversion, i.e., on a first to convert, first to be paid basis. The unpaid cash portion for each Cash Claimant would be evidenced by a non-interest bearing subordinated promissory notes executed by Fieldcrest Cannon (the "Cash Claimant Notes"). Pursuant to the plan, the Company made the first scheduled payment on September 28, 2000. As of March 31, 2001, the aggregate principal amount of the outstanding Cash Claimant Notes was $5.2 million. The 6% Convertible Debentures and Cash Claimant Notes are general unsecured obligations of Fieldcrest Cannon. As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in default under the indenture governing the 6% Debentures and the Cash Claimant Notes. Industrial Revenue Bonds The Company has obligations in respect of six industrial revenue bond facilities. The IRB Facilities are secured by liens on specified plants and equipment. As of March 31, 2001, $14.6 million of bonds in the aggregate were outstanding under the IRB Facilities. As a result of the default on the senior debt facilities and the filing of the Chapter 11 Cases, the Company is in default of its obligations under each of the IRB Facilities. Adequacy of Capital Resources As discussed above, the Debtors are operating their businesses as debtors-in-possession under chapter 11 of the Bankruptcy Code. In addition to the cash requirements necessary to fund ongoing operations, the Company anticipates that it will incur significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. As a result of the uncertainty surrounding Pillowtex's current circumstances, it is difficult to predict the Company's actual liquidity needs at this time. However, based on current and anticipated levels of operations, and efforts to reduce inventories and accounts receivable, the Company anticipates that its cash flow from operations, together with amounts available under the DIP Financing Facility, will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Cases. In the event that cash flows and available borrowings under the DIP Financing Facility are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenditures or seek additional financing. The Company can provide no assurances that reductions in planned capital expenditures would be sufficient to cover 13 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to additional financing is, and for the foreseeable future will likely continue to be, very limited. The Company's long-term liquidity requirements and the adequacy of the Company's capital resources are difficult to predict at this time, and ultimately cannot be determined until a plan of reorganization has been developed and confirmed by the Bankruptcy Court in connection with the Chapter 11 Cases. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of approximately $485.0 million as of March 31, 2001, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. Such rejections could result in additional liabilities subject to compromise. (6) Liabilities Subject to Compromise The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Cases are identified below. The amounts set forth below may vary significantly from the stated amounts of proofs of claim that may be filed with the Bankruptcy Court and may be subject to future adjustments depending on Bankruptcy Court action, further developments with respect to potential disputed claims, determination as to the value of any collateral securing claims, or other events. In addition, other claims may arise from the rejection of additional leases and executory contracts by the Debtors. The components of liabilities subject to compromise at March 31, 2001 and December 30, 2000 are as follows:
March 31, December 30, 2001 2000 ------------------ ----------------- 9% Senior Subordinated Notes due 2007 $ 185,000 185,000 10% Senior Subordinated Notes due 2006 125,000 125,000 6% Convertible Subordinated Sinking Fund Debentures due 2012 90,417 90,417 ------------------ ----------------- Total long-term debt 400,417 400,417 ------------------ ----------------- Interest accrued on above notes and debentures 14,074 14,448 Accounts payable 52,477 55,322 Nonqualified pension plan liability 11,673 11,673 Other accrued expenses 6,348 10,233 ------------------ ----------------- $ 484,989 492,093 ================== =================
As a result of the filing of the Chapter 11 Cases, no principal or interest payments will be made on unsecured prepetition debt without Bankruptcy Court approval or until a plan of reorganization providing for the repayment terms has been confirmed by the Bankruptcy Court and becomes effective. Therefore, interest of $8.6 million on 14 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) prepetition unsecured obligations has not been accrued in the three months ended March 31, 2001. Since the Petition Date, the Company has not accrued interest of $12.6 million on prepetition unsecured obligations. (7) Redeemable Convertible Preferred Stock On December 19, 1997, the Company issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65.0 million less $2.1 million of issue costs. Accretion is being recognized to increase the recorded amount to the redemption amount over the period to the redemption date. Dividends accrued from the issue date through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000, the rate increased to 10% as a result of the Company's earnings per share for 1999 falling below predetermined targets. During the third and fourth quarters of 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. Under the terms of the Series A Preferred Stock, dividends can be paid in cash or additional shares of Series A Preferred Stock until December 2002, at which time they must be paid in cash. Under the DIP Financing Facility, the Company is prohibited from paying any dividends on the Series A Preferred Stock. A total of 81,411 shares of Series A Preferred Stock were outstanding as of March 31, 2001. The commencement of the Chapter 11 Cases constitutes an "Event of Noncompliance" under the terms of the Series A Preferred Stock. The terms of the Series A Preferred Stock provide that upon the occurrence of an Event of Noncompliance, the dividend rate on such stock will increase immediately to the lesser of 18% per annum or the maximum rate permitted by law. Accordingly, as of the Petition Date, dividends on the Series A Preferred Stock began accruing at 18% per year, compounding quarterly. 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. As a result of the amount of prepetition indebtedness and the availability of the "cram down" provision of the Bankruptcy Code described above, the holders of the Series A Preferred Stock may receive no value for their interest under a plan of reorganization. (8) Segment Information The Company manufactures textile products for the bedroom, bathroom and kitchen and markets them to department stores, discount stores, specialty shops and certain institutional customers and over the Internet. The Company is organized into three major divisions that it considers operating segments: Bed and Bath, Blanket, and Pillow and Pad. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, as well as towels, bath rugs and kitchen textile products. The Blanket Division manufactures and sells blanket products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters and mattress pads. Other includes the Company's retail stores and corporate activities. The accounting policies of the divisions are the same as those described in the Summary of Significant Accounting Policies as described in the Company's annual report on Form 10-K for the year ended December 30, 2000. The Company evaluates division performance based on gross profit. Interdivisional sales are not material. 15 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) Information about the Company's divisions is presented below:
Three Months Ended March 31, 2001 ----------------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other Total ----------------------------------------------------------------------------- Net sales $ 210,892 63,326 10,840 4,708 (1) 289,766 Gross profit (loss) 10,361 7,879 (3,074) (10,749) (1) 4,417 Depreciation and amortization 10,188 824 229 2,766 14,007 Capital expenditures 820 - - 1,130 1,950 Total assets 890,324 135,391 51,334 220,723 (2) 1,297,772 Three Months Ended April 1, 2000 ----------------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other Total ----------------------------------------------------------------------------- Net sales $ 252,414 65,745 20,742 6,259 (1) 345,160 Gross profit (loss) 38,315 13,649 (2,135) (10,734) (1) 39,095 Depreciation and amortization 10,324 992 1,859 2,711 15,886 Capital expenditures 9,331 279 115 5,065 14,790 Total assets 1,154,151 144,223 181,198 213,087 (2) 1,692,659
(1) Includes retail stores and miscellaneous Corporate activities, including the Company's central information technology, human resources and purchasing departments. (2) Corporate amounts include primarily data processing equipment and software and other enterprise-wide assets not allocated to the segments. (9) Restructuring Charge During the first quarter of 2001, the Company incurred a charge of $2.0 million associated with the closure of the Company's towel manufacturing facility located in Hawkinsville, Georgia. The Hawkinsville facility closed in March 2001, and its operations have been relocated to the Company's facilities in Kannapolis, North Carolina, Fieldale, Virginia and Columbus, Georgia. Approximately 380 employees were terminated as a result of the closure. The restructuring charge consists principally of severance and benefits, which the Company anticipates to pay during the second and third quarters of 2001. At March 31, 2001, the Company had approximately $1.8 million reflected in accrued expenses related to the restructuring charge. The Company had previously recorded a $3.4 million impairment charge for the fixed assets at the Hawkinsville facility in the year ended December 30, 2000. 16 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (10) Reorganization Items During the first quarter of 2001, the Company recognized the following items as reorganization items in the statement of operations (in thousands): Professional fees and other costs associated with the filing of the Chapter 11 Cases $6,311 Retention Incentive Plan 1,902 Interest income on investments (588) -------- $7,625 ======== During the three months ended March 31, 2001, the Company paid approximately $1.5 million in professional fees associated with the filing of the Chapter 11 Cases. On March 6, 2001, the Bankruptcy Court entered an order authorizing the Company to implement a key employee retention program consisting of (i) a retention incentive plan (the "Retention Incentive Plan"), (ii) an emergence performance bonus plan (the "Emergence Bonus Plan") and (iii) an employee severance plan (the "Severance Plan") (collectively, the "Retention Program"). The purpose of the Retention Program is to provide the incentives necessary for the Company to retain its management team and other key employees and to otherwise address concerns regarding potential key employee attrition during the Company's financial restructuring process. Under the Retention Incentive Plan, eligible employees are to earn a specified retention incentive payment (a "Retention Incentive Payment"), based upon a percentage of their salary determined by the Company's management, payable on the following four dates if the employee remains actively employed by the Company on such dates: (i) 25% of the total Retention Incentive Payment will be paid in the month following the Bankruptcy Court's approval of the Retention Program, (ii) 25% of the total Retention Incentive Payment will be paid on the anniversary date of the filing of the Chapter 11 Cases (i.e., November 14, 2001), (iii) 25% of the total Retention Incentive Payment will be paid on the earlier of (a) six months after the second payment is made or (b) confirmation of a plan of reorganization, and (iv) 25% of the total Retention Incentive Payment will be paid 30 days following confirmation of a plan of reorganization. The Company currently estimates the total cost of the Retention Incentive Plan to be approximately $6.1 million. In addition, a discretionary retention pool of $500,000 is available for non-union employees not already included in the Retention Incentive Plan. On April 9, 2001, the Company paid the first installment of the Retention Incentive Plan for approximately $1.5 million. The Emergence Performance Bonus Plan provides an additional incentive payment to certain management employees who are particularly essential to the implementation of the Company's restructuring to remain with the Company through the plan negotiation and confirmation process. Payments under the Emergence Performance Bonus Plan are tied directly to two factors: the amount of the distribution made under a confirmed plan of reorganization to unsecured creditors and the length of the Chapter 11 Cases. Since the two factors are currently not known, the Company has not reflected any expense associated with the Emergence Performance Bonus Plan in its results of operations for the three months ended March 31, 2001. The Emergence Performance Bonus Plan currently includes eight members of the Company's senior management. The purpose of the Severance Plan is to integrate all severance agreements existing prior to the Petition Date into one plan, which supersedes all prior severance plans and the severance provisions of executives' employment arrangements. The Severance Plan covers all full-time employees of the Company, the majority of which are not eligible to participate in any other components of the Retention Program. With certain exceptions, employees who are terminated after the Petition Date for reasons other than death, disability, retirement or cause, will be eligible to receive severance benefits equal to one week's salary for each completed year of service, with a minimum of two 17 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) weeks salary and a maximum of 26 weeks salary. In addition, eligible employees will be entitled to receive medical insurance, life insurance and certain other benefits. (11) Income Taxes The Company's management, in assessing the realizability of deferred tax assets must consider whether it is more likely than not that part or all of the deferred tax asset may not be realized. This assessment includes consideration for the scheduled reversal of temporary taxable differences, projected future taxable income and tax planning strategies. As a result of this assessment, the Company did not recognize an income tax benefit for the loss incurred for the three months ended March 31, 2001. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. As of March 31, 2001, the Company's management also concluded that deferred tax assets, net of the valuation allowance, can be realized as a result of the reversal of existing temporary taxable differences. At March 31, 2001, the Company has $316 million of federal and state operating loss carryforward expiring 2006 through 2021, $1.9 million of general business tax credit carryforward expiring 2005 through 2020 and a $6.7 million unused alternative minimum tax credit carryforward that does not expire. (12) Recently Adopted Accounting Standard During June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of SFAS No. 133, as amended by SFAS Nos. 137 and 138, are effective for fiscal years beginning after June 15, 2000. The Company adopted the provisions of the Standards on December 31, 2000. The adoption of SFAS No. 133, as amended, did not have any impact on its financial position or results of operations. (13) Subsequent Event On April 24, 2001, the Company announced the closure of its blanket yarn manufacturing facility in Newton, North Carolina and its cut-and-sew bedding facility in Rocky Mount, North Carolina. Most of the impact from these closures, which will affect approximately 290 employees, are expected to occur prior to June 30, 2001. However, certain employees will remain at the Rocky Mount facility for several months past the June closing date to satisfy existing commitments to customers. The Company currently estimates the restructuring charge resulting from the closures will be approximately $1 million to $2 million. The Company had previously reflected a $1.3 million impairment charge for the fixed assets at the Rocky Mount facility in the year ended December 30, 2000. The Rocky Mount facility manufactures decorative bedding exclusively under a license agreement, which expires on June 30, 2001. The Company decided to close the Newton facility as a result of its evaluation of its strategic options relating to the Blanket Division. The Company had incurred an impairment charge of $88.3 million relating to the fixed assets and goodwill associated with the Blanket Division in the year ended December 30, 2000. 18 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (14) 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.
March 31, 2001 ------------------------------------------------------------------------------------- Non- Guarantor Guarantor Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------ ------ ------------ ------------ ------------ ------------ Assets: ------- Trade receivables $ - 187,223 5,780 - 193,003 Receivable from affiliates 763,785 - - (763,785) - Inventories - 262,186 6,518 - 268,704 Other current assets 738 51,233 126 - 52,097 -------------- --------------- -------------- ---------------- --------------- Total current assets 764,523 500,642 12,424 (763,785) 513,804 Property, plant and equipment, net 10 523,140 1,092 - 524,242 Intangibles, net 5,059 223,084 2,189 - 230,332 Other assets 213,948 10,326 - (194,880) 29,394 -------------- --------------- -------------- ---------------- --------------- Total assets $ 983,540 1,257,192 15,705 (958,665) 1,297,772 ============== =============== ============== ================ =============== Liabilities and shareholders' equity (deficit): ----------------------------------------------- Liabilities not subject to compromise: Accounts payable and accrued liabilities $ 13,103 94,466 1,456 - 109,025 Payables to affiliates - 755,968 7,817 (763,785) - Long-term debt in default 675,963 17,033 - - 692,996 -------------- --------------- -------------- ---------------- --------------- Total current liabilities 689,066 867,467 9,273 (763,785) 802,021 Noncurrent liabilities - 39,775 - - 39,775 -------------- --------------- -------------- ---------------- --------------- Total liabilities not subject to compromise 689,066 907,242 9,273 (763,785) 841,796 Liabilities subject to compromise 323,487 161,502 - - 484,989 Redeemable convertible preferred stock 86,526 - - - 86,526 Shareholders' equity (deficit) (115,539) 188,448 6,432 (194,880) (115,539) -------------- --------------- -------------- ---------------- --------------- Total liabilities and shareholders' equity (deficit) $ 983,540 1,257,192 15,705 (958,665) 1,297,772 ============== =============== ============== ================ ===============
19 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information
December 30, 2000 ------------------------------------------------------------------------------------- Non- Guarantor Guarantor Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------ ------ ------------ ------------ ------------ ------------ Assets: ------- Trade receivables $ - 204,836 7,891 - 212,727 Receivable from affiliates 787,590 - - (787,590) - Inventories - 271,919 6,888 - 278,807 Other current assets - 48,213 809 - 49,022 ------------- --------------- -------------- ---------------- ---------------- Total current assets 787,590 524,968 15,588 (787,590) 540,556 Property, plant and equipment, net 320 534,087 984 - 535,391 Intangibles, net 6,622 224,652 2,206 - 233,480 Other assets 214,090 53,967 - (238,613) 29,444 ------------- --------------- -------------- ---------------- ---------------- Total assets $ 1,008,622 1,337,674 18,778 (1,026,203) 1,338,871 ============= =============== ============== ================ ================ Liabilities and shareholders' equity (deficit): ----------------------------------------------- Liabilities not subject to compromise: Accounts payable and accrued liabilities $ 4,151 86,335 2,881 - 93,367 Payables to affiliates - 779,207 8,383 (787,590) - Other current liabilities 984 32,369 (124) - 33,229 Long-term debt in default 660,790 - - - 660,790 ------------- --------------- -------------- ---------------- ---------------- Total current liabilities 665,925 897,911 11,140 (787,590) 787,386 Noncurrent liabilities - 39,910 106 - 40,016 ------------- --------------- -------------- ---------------- ---------------- Total liabilities not subject to compromise 665,925 937,821 11,246 (787,590) 827,402 Liabilities subject to compromise 323,321 168,772 - - 492,093 Redeemable convertible preferred stock 82,827 - - - 82,827 Shareholders' equity (deficit) (63,451) 231,081 7,532 (238,613) (63,451) ------------- --------------- -------------- ---------------- ---------------- Total liabilities and shareholders equity (deficit) $ 1,008,622 1,337,674 18,778 (1,026,203) 1,338,871 ============= =============== ============== ================ ================
20 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information
Three Months Ended March 31, 2001 -------------------------------------------------------------------------------------- Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated --------------------- ------ ------------ ------------ ------------ ------------ Net sales $ - 294,984 3,660 (8,878) 289,766 Cost of goods sold - 291,082 3,145 (8,878) 285,349 -------------- -------------- --------------- --------------- --------------- Gross profit - 3,902 515 - 4,417 Selling, general and administrative 226 22,298 1,596 - 24,120 Restructuring charges - 1,977 - - 1,977 -------------- -------------- --------------- --------------- --------------- Earnings (loss) from operations (226) (20,373) (1,081) - (21,680) Equity in loss of subsidiaries (43,733) - - 43,733 - Interest expense (3,945) 22,848 19 - 18,922 -------------- -------------- --------------- --------------- --------------- Loss before reorganization items and income taxes (40,014) (43,221) (1,100) 43,733 (40,602) Reorganization items 8,213 (588) - - 7,625 -------------- -------------- --------------- --------------- --------------- Earnings (loss) before income taxes (48,227) (42,633) (1,100) 43,733 (48,227) Income taxes - - - - - -------------- -------------- --------------- --------------- --------------- Net earnings (loss) (48,227) (42,633) (1,100) 43,733 (48,227) Preferred dividends 3,699 - - - 3,699 -------------- -------------- --------------- --------------- --------------- Loss applicable to common shareholders $ (51,926) (42,633) (1,100) 43,733 (51,926) ============== ============== =============== =============== ===============
21 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information
Three Months Ended April 1, 2000 ------------------------------------------------------------------------------------- Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated --------------------- ------ ------------ ------------ ------------ ------------ Net sales $ - 337,707 7,453 - 345,160 Cost of goods sold - 299,593 6,472 - 306,065 -------------- --------------- -------------- ---------------- --------------- Gross profit - 38,114 981 - 39,095 Selling, general and administrative (1,099) 27,862 176 - 26,939 -------------- --------------- -------------- ---------------- --------------- Earnings from operations 1,099 10,252 805 - 12,156 Equity in loss of subsidiaries (9,205) - - 9,205 - Interest expense 1,902 25,733 209 - 27,844 -------------- --------------- -------------- ---------------- --------------- Earnings (loss) before income taxes (10,008) (15,481) 596 9,205 (15,688) Income taxes (281) (5,680) - - (5,961) -------------- --------------- -------------- ---------------- --------------- Net earnings (loss) (9,727) (9,801) 596 9,205 (9,727) Preferred dividends 1,943 - - - 1,943 -------------- --------------- -------------- ---------------- --------------- Earnings (loss) applicable to common shareholders $ (11,670) (9,801) 596 9,205 (11,670) ============== =============== ============== ================ ===============
22 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information
Three Months Ended March 31, 2001 ------------------------------------------------------------------------------------- Non- Guarantor Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------ ------------ ------------ ------------ ------------ Cash provided by (used in) Operating activities $ (4,041) 9,743 724 - 6,426 Cash used in Investing activities - (1,792) (158) - (1,950) Cash provided by (used in) Financing activities 4,041 (5,201) (566) - (1,726) ------------- -------------- --------------- --------------- --------------- Net change in cash and cash equivalents - 2,750 - - 2,750 Cash and cash equivalents at Beginning of year - 32,157 - - 32,157 ------------- -------------- --------------- --------------- --------------- Cash and cash equivalents at End of period $ - 34,907 - - 34,907 ============= ============== =============== =============== =============== Three Months Ended April 1, 2000 ------------------------------------------------------------------------------------- Non- Guarantor Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------ ------------ ------------ ------------ ------------ Cash provided by (used in) Operating activities $ 9,684 $ (5,113) $ (146) $ - $ 4,425 Cash used in Investing activities - (13,434) (30) - (13,464) Cash provided by (used in) Financing activities (9,684) 33,025 176 - 23,517 ------------- -------------- --------------- --------------- --------------- Net change in cash and cash equivalents - 14,478 - - 14,478 Cash and cash equivalents at Beginning of year - 4,854 - - 4,854 ------------- -------------- --------------- --------------- --------------- Cash and cash equivalents at End of period $ - $ 19,332 $ - $ - $ 19,332 ============= ============== =============== =============== ===============
23 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 December 30, 2000. Proceedings Under Chapter 11 of the Bankruptcy Code On November 14, 2000 (the "Petition Date"), Pillowtex Corporation and substantially all of its domestic subsidiaries (collectively, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The chapter 11 cases pending for the Debtors (the "Chapter 11 Cases") are being jointly administered for procedural purposes. In conjunction with the commencement of the Chapter 11 Cases, the Debtors sought and obtained several orders from the Bankruptcy Court which were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 Cases. The most significant of these orders (i) permit the Debtors to operate their consolidated cash management system during the Chapter 11 Cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 Cases, (ii) authorize payment of prepetition employee salaries, wages, and benefits and reimbursement of prepetition employee business expenses, (iii) authorize payment of prepetition sales, payroll, and use taxes owed by the Debtors, (iv) authorize payment of certain prepetition obligations to customers, and (v) authorize payment of certain prepetition obligations to critical vendors to aid the Debtors in maintaining operation of their business. On December 6, 2000, the Bankruptcy Court entered the DIP Financing Order authorizing the Debtors to enter into the $150.0 million DIP Financing Facility and to grant first priority primary liens, mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. The Company obtained the reduction in the amount of the facility based upon its determination that, as a result of its improved liquidity position, it did not need as much availability as originally provided by the facility and its desire to reduce the amount of its monthly unused commitment fee. The Debtors are currently operating their businesses as debtors-in-possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. Such rejections could result in additional liabilities subject to compromise. The United States trustee for the District of Delaware has appointed an Official Committee of Unsecured Creditors in accordance with the provisions of the Bankruptcy Code. The Bankruptcy Code provides that the Debtors have exclusive periods during which only they may file and solicit acceptances of a plan of reorganization. The exclusive period of the Debtors to file a plan for reorganization expired on March 14, 2001; however, the Debtors requested and received from the Bankruptcy Court an extension to the exclusive period through July 16, 2001. The Bankruptcy Court also granted an extension on the solicitation period, 24 through September 14, 2001. If the Debtors fail to file a plan of reorganization by July 16, 2001 or, after such plan has been filed, the Debtors fail to obtain acceptance of such plan from the requisite impaired classes of creditors by September 14, 2001, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file their own plan of reorganization for the Debtors. After a plan of reorganization has been filed with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors and equity holders. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (i) with respect to each impaired class of creditors and equity holders, each holder in such class has accepted the plan or will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation, (ii) each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence), and (iii) confirmation of the plan is not likely to be followed by a liquidation or a need for further financial reorganization of the Debtors or any successors to the Debtors unless the plan proposes such liquidation or reorganization. If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the "cram down" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made. As a result of the amount of prepetition indebtedness and the availability of the "cram down" provisions, the holders of the Company's capital stock may receive no value for their interests under the plan of reorganization. Because of such possibility, the value of the Company's outstanding capital stock is highly speculative. Since the Petition Date, the Debtors have conducted business in the ordinary course. Management is in the process of stabilizing the business of the Debtors and evaluating their operations as part of the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by impaired creditors and equity holders and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in the financial statements. The Debtors are in the process of reviewing their operations and identifying assets for disposition. The administrative and reorganization expenses resulting from the Chapter 11 Cases will unfavorably affect the Debtors' results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 Cases. The accompanying consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7) assuming that the Company will continue as a going concern. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to comply with the DIP Financing Facility, its ability to return to profitability, generate sufficient cash flows from operations and obtain financing sources to meet future obligations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Additionally, the amounts reported on the consolidated balance sheet could materially change because of changes in business strategies and the effects of any proposed plan of reorganization. 25 In the Chapter 11 Cases, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 Cases, have been segregated and classified as liabilities subject to compromise in the accompanying consolidated balance sheet. Generally, all actions to enforce or otherwise effect repayment of pre-Chapter 11 liabilities as well as all pending litigation against the Debtors are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for such liabilities are subject to an approved plan of reorganization and accordingly are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Cases are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Cases or that it is probable that it will be an allowed claim. Results of Operations --------------------- Net Sales. Net sales were down from $345.2 million in the first quarter of 2000 to $289.8 million in the first quarter of 2001, a decrease of $55.4 million or 16.1%. Net sales for the Company's operating segments for each quarter are shown below (in thousands): Net Sales Three Months Ended ------------------------------------------- March 31, April 1, 2001 2000 ----------------- ------------------ Bed and Bath $ 210,892 $ 252,414 Pillow and Pad 63,326 65,745 Blanket 10,840 20,742 Other (a) 4,708 6,259 ----------------- ------------------ Total $ 289,766 $ 345,160 ================= ================== (a) Includes retail stores Approximately $38.9 million of the decrease in sales for the first quarter of 2001 is attributable to the loss of a specific customer, affecting the Company's three major Divisions. This, combined with the continued slow down in the U.S. economy and increased competition from imports, was responsible for the Company's decline in sales volume in the first quarter of 2001. Gross Profit. Gross profit decreased $34.7 million from $39.1 million in the first quarter of 2000 to $4.4 million in the first quarter of 2001. Gross profit (loss) by operating segment is as follows (in thousands): Gross Profit (Loss) Three Months Ended ------------------------------------------------------- March 31, April 1, 2001 2000 -------------------------- -------------------------- Bed and Bath $ 10,361 $ 38,315 Pillow and Pad 7,879 13,649 Blanket (3,074) (2,135) Other (a) (10,749) (10,734) -------------------------- -------------------------- Total $ 4,417 $ 39,095 ========================== ========================== (a) Includes retail stores and corporate charges 26 In the first quarter of 2001, the Company continued to focus on reducing working capital by improving receivable collections and lowering inventory levels and matching production to sales more closely. Although this has had a positive impact on the Company's working capital, it has put additional pressure on gross profits primarily due to higher unabsorbed overhead costs of approximately $20.0 million, and increased costs for utilities and chemicals. Currently, management is assessing ways to cut costs and examining strategic alternatives for increasing the Company's long-term profitability. Selling, General and Administrative ("SG&A"). SG&A expenses in the first quarter of 2001 decreased $2.8 million to $24.1 million from the first quarter of 2000 of $26.9 million. These savings are primarily the result of management's continued focus on cost controls. Restructuring Charge. During the first quarter of 2001, the Company incurred a charge of approximately $2.0 million related to the closure of the Company's manufacturing facility in Hawkinsville, Georgia. The charge principally consists of severance and related benefits. The Company had previously recorded a $3.4 million impairment charge for the fixed assets at the Hawkinsville facility in the year ended December 30, 2000. The Company currently anticipates that the closure will result in annual cost savings of approximately $3 million to $4 million. Interest Expense. Interest expense decreased $8.9 million to $18.9 million for the three months ended March 31, 2001, compared to $27.8 million for the three months ended April 1, 2000. The average interest rate in the first quarter of 2001 was approximately 10.0%, compared to approximately 9.3% in the first quarter of 2000. The primary reason for the decrease in interest expense results from the Company's filing of the Chapter 11 Cases, which enabled the Company to cease the payment and accrual of interest on all unsecured prepetition debt. The interest on that unsecured prepetition debt was approximately $8.6 million in the first quarter of 2001. Reorganization Items. During the first quarter of 2001, the Company recognized $7.6 million of reorganization items associated with the Chapter 11 Cases. The charge consists of approximately $6.3 million of fees payable to professionals retained to assist with the filing of the Chapter 11 Cases and approximately $1.9 million for a retention incentive bonus plan for the Company's management team and other key employees, offset by interest income of $0.6 million. Liquidity and Capital Resources ------------------------------- DIP Financing Facility. On December 6, 2000, the Bankruptcy Court entered the DIP Financing Order authorizing the Debtors to enter into the $150.0 million DIP Financing Facility and to grant first priority primary liens, mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. The Company obtained the reduction in the amount of the facility based upon its determination that, as a result of its improved liquidity position, it did not need as much availability as originally provided by the facility and its desire to reduce the amount of its monthly unused commitment fee. Under the terms of the DIP Financing Facility, as amended, a $125.0 million revolving credit facility, including up to $60.0 million for postpetition letters of credit, is available to the Company until the earliest of (a) November 14, 2001, (b) the date on which the plan of reorganization becomes effective, (c) any material non-compliance with any of the terms of the DIP Financing Order, (d) any event of default that shall have occurred under the DIP Financing Facility, or (e) consummation of a sale of substantially all of the assets of the Company pursuant to an order of the Bankruptcy Court shall have occurred. Upon the satisfaction of certain conditions, the November 14, 2001 maturity date could be extended for an additional period of six months upon payment of an extension fee equal to 0.50% of the portion of the DIP Financing Facility being extended. Amounts borrowed under the DIP Financing Facility bear interest at the option of the Company at the rate of London Interbank Offered Rate ("LIBOR") plus 3.50% or Bank of America's Base Rate (which is the higher of Federal Funds Rate or Prime Rate plus, in either case, 0.05%) plus 1.00%. In addition to a facility fee and an underwriting fee of 0.50% each, there is an unused commitment fee of 0.50%, a letter of credit fee of 3.50%, and a letter of credit fronting fee of 0.20%. The DIP Financing Facility is secured by a first priority priming lien on the real and personal assets of the Company that also secure the prepetition senior secured credit facilities described below and a junior lien on certain plant and equipment that secure six industrial revenue bond facilities described below (the "IRB Facilities") aggregating approximately $14.6 27 million as of March 31, 2001, and certain obligations to the Pension Benefit Guaranty Corporation. The documentation evidencing the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum operating cash flow, as well as other covenants that limit, among other things, indebtedness, liens, sales of assets, capital expenditures, investments, and prohibit dividend payments. The net proceeds of certain asset sales outside the ordinary course of business reduce prepetition indebtedness under the senior secured credit facilities; otherwise, the net proceeds of asset sales outside the ordinary course of business are applied as a permanent reduction of the DIP Financing Facility. As of March 31, 2001, the Company had $17.1 million in letters of credit outstanding under the DIP Financing Facility. No cash borrowings were outstanding on the DIP Financing Facility at March 31, 2001. Availability under the DIP Financing Facility as of March 31, 2001, was $72.1 million. As prepetition letters of credit expire under the Company's senior secured revolving credit facility described below, to the extent they are renewed, they will be reissued under the DIP Financing Facility. Senior Debt Facilities. In December 1997, in connection with the Fieldcrest Cannon acquisition, the Company entered into senior secured revolving credit and term loan facilities with a group of financial and institutional investors for which Bank of America, N.A. acts as the administrative and collateral agent. These facilities consisted of a $350.0 million revolving credit facility and a $250.0 million term loan facility. The term loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, the Company amended these facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of Leshner, allowing the Company to fund the transaction and reduce borrowings under the revolving credit facility. Effective March 12, 1999, the revolving credit facility was amended to permit the Company to use for working capital one-half of a $61.0 million portion of the facility held as contingency reserve for cash payments required upon conversion of the 6% Convertible Debentures, thereby increasing availability under that facility. Effective October 1, 1999, the revolving credit facility was further amended to permit the Company to use the other half of the contingency reserve for working capital, thereby increasing availability under that facility. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under its senior debt facilities. The Company obtained a series of temporary waivers of this non-compliance. Effective as of December 7, 1999, the Company agreed to certain amendments to the senior debt facilities, principally related to cash management, additional collateral, adjustments to restrictive covenants, and borrowings under, and uses of proceeds from, the revolving credit facility. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance with financial covenants and the senior debt facilities were further amended to shorten their terms to maturity and accelerate the related amortization schedule for repayment of principal, to eliminate reinstatement of the contingency reserve requirement referred to above, to increase the applicable interest rate margins (subject to reduction if the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") exceeded a specified level for the 2000 fiscal year), to add a covenant requiring that EBITDA must exceed specified levels for future fiscal periods and eliminate all other financial covenants, to modify certain restrictive covenants, to limit borrowings under the revolving credit facility based on a formula tied to 45% of eligible inventory plus 80% of eligible accounts receivable, and to provide for a series of reductions in the commitment under the revolving credit facility. On September 30, 2000, and prior to the Petition Date, the Company was not in compliance with its EBITDA financial covenant under the senior debt facilities. The Company obtained from its senior lenders a temporary waiver of such non-compliance through November 7, 2000, during which time the Company engaged in active discussions with its senior lenders to obtain an extended or permanent waiver of such non-compliance. The Company was unable to reach such an agreement with its senior lenders and the waiver expired on November 7, 2000. On November 8, 2000, the agent for the senior lenders delivered a notice of default to the Company that declared an event of default under the senior debt facilities based upon such non-compliance with its EBITDA financial covenant. The senior lenders did, however, forbear from exercising rights and remedies under the senior debt facilities and agreed to continue to make available to the Company the unused credit capacity under the revolving credit facility until December 7, 2000. In addition, on November 8, 2000, the senior lenders issued a Payment Blockage Notice to the Company and the indenture trustee for the Company's 10% Senior Subordinated Notes due 2006 (the "10% Notes") prohibiting payment by the Company of the semi-annual interest payment in the aggregate amount of approximately $6.25 million due to the holders of the 10% Notes on November 15, 2000. In addition, the Company was obligated to make a semi-annual interest payment on its 9% Senior Subordinated Notes due 2007 (the "9% Notes") on December 15, 2000 aggregating $8.3 million, which payment the senior lenders likewise indicated they would also block. As a result of the circumstances confronting the Company and its inability to refinance the senior debt facilities or obtain additional capital, the Debtors filed the Chapter 11 Cases on November 14, 2000. 28 As of March 31, 2001, the Company had $14.1 million in letters of credit outstanding under the prepetition revolving credit facility. As these prepetition letters of credit expire, to the extent they are renewed, they will be reissued under the DIP Financing Facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities for the first quarter of 2001 was approximately 10.0%. The senior debt facilities expire on January 31, 2002. The senior debt facilities are guaranteed by each of the domestic subsidiaries of the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. Overline Facility. In May 1999, the Company entered into the $20.0 million Overline Facility in order to obtain additional working capital availability. On July 27, 1999, the Overline Facility was amended to increase the amount of funds available to $35.0 million. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under the Overline Facility, the covenants of which are incorporated by reference to the senior debt facilities described above. The Company obtained a series of temporary waivers of this non-compliance and extensions of the maturity date. Effective December 7, 1999, the Company agreed to certain amendments to the Overline Facility, resulting in the Overline Facility being secured by the same assets securing the senior debt facilities described above. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance and the Overline Facility was amended to lengthen its term to maturity, to impose an amortization schedule for the repayment of principal, and to increase the applicable interest rate margins (subject to reduction if EBITDA exceeded a specified level for the 2000 fiscal year). The Overline Facility is guaranteed on a senior basis by the Company's domestic subsidiaries. Amounts borrowed under the Overline Facility bear interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the Company's option. The Overline Facility matures upon termination by the Company at any time or otherwise at the earliest of: (i) any increase in the commitment under the senior debt facilities described above, the issuance of any capital stock by the Company or its domestic subsidiaries, or other specified events; or (ii) January 31, 2002. For the reasons discussed above with respect to the default under the senior debt facilities, the Company is also in default under the Overline Facility. Senior Subordinated Debt. In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million of the 9% Notes, with interest payable semiannually commencing June 15, 1998. The 9% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 10% Notes described below. On November 12, 1996, the Company issued $125.0 million of the 10% Notes, with interest payable semiannually commencing May 15, 1997. The 10% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 9% Notes. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the senior debt facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. As a result of the filing of the Chapter 11 Cases, the Company is in default under the indentures governing both the 9% Notes and the 10% Notes. No principal or interest payment will be made on the 9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases. Fieldcrest Cannon 6% Convertible Debentures. As a result of the Company's acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Debentures are convertible, at the option of the holders, into a combination of cash and 29 Common Stock. During the fourth quarter of 1999, the Company notified the holders of the 6% Convertible Debentures that it was not practicable or prudent for payments to be made in respect of the conversion of the 6% Convertible Debentures and advised holders that had given notice of conversion and surrendered their 6% Convertible Debentures that they could rescind their notice of conversion, return to the Company any Common Stock that had been issued to them, and have their 6% Convertible Debentures reinstated. Although many holders did rescind and return their Common Stock, other holders could not rescind because they had already sold their Common Stock. As of September 30, 2000, the cash component remaining to be paid in respect of the 6% Convertible Debentures that had been surrendered without subsequent rescission was approximately $5.2 million. Including the cash component just mentioned, as of March 31, 2001, approximately $90.4 million aggregate principal amount of the 6% Convertible Debentures remained outstanding, including 6% Convertible Debentures that had been surrendered without subsequent rescission. If all such outstanding 6% Convertible Debentures were converted at such date, including those surrendered without subsequent rescission, the resulting cash component to be paid to the holders of the 6% Convertible Debentures would have been approximately $57.2 million. Prior to the Petition Date, the Company was prohibited under the terms of the indentures governing the 9% Notes and the 10% Notes from making payments in respect of the 6% Convertible 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 certain holders of 6% Convertible Debentures who had surrendered their debentures for conversion but had not been paid the cash portion of the conversion consideration (the "Cash Claimants") and (ii) the cash payment prohibition in respect of any future conversions, the Company initiated discussions with certain holders of the 6% Convertible Debentures regarding a potential restructuring of the 6% Convertible Debentures. Notwithstanding months of effort, the parties to those discussions were unable to agree upon a mutually satisfactory comprehensive restructuring of the 6% Convertible Debentures and amounts owing to the Cash Claimants. In September 2000, the Company notified the holders of the 6% Convertible Debentures of its plan for making payments to the Cash Claimants. Pursuant to the plan, the Company agreed to pay out as a "scheduled payment" cash in the amount of approximately $3.8 million annually to the Cash Claimants, which is the amount of cash sufficient to complete the conversion of $6.25 million principal amount of the 6% Convertible Debentures annually and utilize such converted 6% Convertible Debentures as a credit to satisfy its annual sinking fund obligation under the indenture governing the 6% Convertible Debentures. As part of the plan and in accordance with the terms of the indenture governing the 6% Convertible Debentures, the Company agreed to pay out cash to the Cash Claimants in order to complete and finalize Debenture conversions and utilize such converted Debentures as credits to satisfy its annual sinking fund obligations as follows: (i) approximately $3.8 million on September 28, 2000, (ii) approximately $3.8 million on March 16, 2001, and (iii) the balance owing to Cash Claimants on March 18, 2002. Under the plan, these cash payments would be made by the Company to the Cash Claimants in the order the 6% Convertible Debentures were presented for conversion, i.e., on a first to convert, first to be paid basis. The unpaid cash portion for each Cash Claimant would be evidenced by a non-interest bearing subordinated promissory notes executed by Fieldcrest Cannon (the "Cash Claimant Notes"). Pursuant to the plan, the Company made the first scheduled payment on September 28, 2000. As of March 31, 2001, the aggregate principal amount of the outstanding Cash Claimant Notes was $5.2 million. As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in default under the indenture governing the 6% Debentures and the Cash Claimant Notes. No principal or interest payment will be made on the 6% Convertible Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases. Industrial Revenue Bonds. The Company has obligations in respect of six industrial revenue bond facilities. The IRB Facilities are secured by liens on specified plants and equipment. As of March 31, 2001, $14.6 million of bonds in the aggregate were outstanding under the IRB Facilities. As a result of the default on the senior debt facilities and the filing of the Chapter 11 Cases, the Company is in default of its obligations under each of the IRB Facilities. Adequacy of Capital Resources. As discussed above, the Debtors are operating their businesses as debtors-in-possession under chapter 11 of the Bankruptcy Code. In addition to the cash requirements necessary to fund ongoing operations, the Company anticipates that it will incur significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. As a result of the uncertainty surrounding Pillowtex's current circumstances, it is difficult to predict the Company's actual liquidity needs at this time. However, based on current and anticipated levels of operations, and efforts to reduce inventories 30 and accounts receivable, the Company anticipates that its cash flow from operations, together with amounts available under the DIP Financing Facility, will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Cases. In the event that cash flows and available borrowings under the DIP Financing Facility are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenditures or seek additional financing. The Company can provide no assurances that reductions in planned capital expenditures would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to additional financing is, and for the foreseeable future will likely continue to be, very limited. The Company's long-term liquidity requirements and the adequacy of the Company's capital resources are difficult to predict at this time, and ultimately cannot be determined until a plan of reorganization has been developed and confirmed by the Bankruptcy Court in connection with the Chapter 11 Cases. In addition, the amounts reported in the consolidated financial statements do not reflect adjustments to the carrying value of assets or the amount and classification of liabilities that ultimately may be necessary as the result of a plan of reorganization. Adjustments necessitated by the confirmation of a plan of reorganization could materially change the amounts reported in the consolidated financial statements. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of approximately $485.0 million as of March 31, 2001, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. 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 include, among others: (a) the significant challenges faced in connection with the Chapter 11 Cases; (b) the substantial doubt as to whether the Company will continue as a going concern; (c) the restrictions on the conduct of the Company's business as a result of the Chapter 11 Cases and provisions contained in the DIP Financing Facility; (d) the Company's dependence on specific raw materials; (e) the effects of adverse retail industry conditions; (f) the Company's dependence on specific brand names; (g) the risks related to the loss of key licenses; (h) the risks related to loss of material customers; (I) the risks related to organized labor; (j) the seasonality of the Company's businesses; (k) the difficulties in attracting and retaining personnel; and (l) the substantial effort of management required in connection with the Chapter 11 Cases. For further discussion of such risks, see "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in the Company's Annual Report on Form 10-K for its fiscal year ended December 30, 2000. 31 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Resignation, Appointment and Acceptance, dated March 23, 2001, by and among Pillowtex Corporation, as Issuer, U.S. Bank National Association, as Resigning Trustee, and HSBC Bank USA, as Successor Trustee 10.1 Second Amendment to Post-Petition Credit Agreement dated as of January 30, 2001, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, N.A., as Administrative Agent 10.2* Employment Agreement entered into between Pillowtex Corporation and an executive officer, dated as of March 19, 2001 (b) Reports on Form 8-K None * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. 32 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 14, 2001 PILLOWTEX CORPORATION (Registrant) /s/ Michael R. Harmon ----------------------------------------- Michael R. Harmon Executive Vice President and Chief Financial Officer 33
Index to Exhibits Exhibit Method of Filing 4.1 Resignation, Appointment and Acceptance, dated March 23, 2001, by and Filed herewith electronically among Pillowtex Corporation, as Issuer, U.S. Bank National Association, as Resigning Trustee, and HSBC Bank USA, as Successor Trustee 10.1 Second Amendment to Post-Petition Credit Agreement dated as of Filed herewith electronically January 30, 2001, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, N.A., as Administrative Agent 10.2* Employment Agreement entered into between Pillowtex Corporation and Filed herewith electronically an executive officer, dated as of March 19, 2001
* Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. 35