-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AItPrmv7iC+D4bATXOhUZ6vxgAq3QBhM63KnFBUFN639DKn705iky6RBzy0Vktqg cj+6lHnkV3gBUt466asoxQ== 0001021408-01-505326.txt : 20010815 0001021408-01-505326.hdr.sgml : 20010815 ACCESSION NUMBER: 0001021408-01-505326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11756 FILM NUMBER: 1712062 BUSINESS ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 BUSINESS PHONE: 2143333225 MAIL ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 10-Q 1 d10q.txt PILLOWTEX 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 June 30, 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 Dallas, Texas 75237 (Address of principal executive offices) (Zip Code) (214) 333-3225 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 8, 2001 -------- ----------------------------- Common Stock, $.01 par value 14,250,892 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) INDEX PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 2001, July 1, 2000 and December 30, 2000 3 Consolidated Statements of Operations for the three months ended June 30, 2001 and July 1, 2000 4 Consolidated Statements of Operations for the six months ended June 30, 2001 and July 1, 2000 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and July 1, 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 36 SIGNATURE 37 2 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
ASSETS June 30, July 1, December 30, 2001 2000 2000 ------------------------------------------------- Current assets: (unaudited) (unaudited) (audited) Cash and cash equivalents $ 24,621 3,350 32,157 Receivables: Trade, less allowances of $22,702 as of June 30, 2001, $28,176 as of July 1, 2000 and $43,249 as of December 30, 2000 166,577 234,472 212,727 Other 7,439 17,748 6,261 Inventories 244,874 461,828 278,807 Assets held for sale 7,074 1,193 5,281 Prepaid expenses 3,616 5,741 5,323 ---------- --------- --------- Total current assets 454,201 724,332 540,556 Property, plant and equipment, net 492,843 630,597 535,391 Intangible assets, at cost less accumulated amortization of $34,181 as of June 30, 2001, $31,840 as of July 1, 2000 and $27,802 as of December 30, 2000 227,219 282,845 233,480 Other assets 29,511 31,229 29,444 ---------- --------- --------- Total assets $1,203,774 1,669,003 1,338,871 ========== ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities not subject to compromise: Current liabilities: Accounts payable $ 38,267 122,770 34,909 Accrued expenses 52,894 57,137 58,458 Deferred income taxes - 36,590 - Current portion of long-term debt - 87,557 - Current portion of long-term debt in default 678,923 - 33,229 Long-term debt in default 12,673 - 660,790 ---------- --------- --------- Total current liabilities 782,757 304,054 787,386 Long-term debt, less current portion - 987,654 - Deferred income taxes - 59,606 - Noncurrent liabilities 38,833 52,278 40,016 ---------- --------- --------- Total liabilities not subject to compromise 821,590 1,403,592 827,402 Liabilities subject to compromise 491,898 - 492,093 ---------- --------- --------- Total liabilities 1,313,488 1,403,592 1,319,495 Series A redeemable convertible preferred stock, $.01 par value; 81,411, 79,455 and 81,411 shares issued and outstanding for June 30, 2001, July 1, 2000, and December 30, 2000, respectively 90,225 77,835 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 June 30, 2001, 14,241,070 as of July 1, 2000 and 14,252,069 as of December 30, 2000 shares issued and outstanding 143 142 143 Additional paid-in capital 160,120 160,515 160,120 Retained earnings (accumulated deficit) (358,366) 29,487 (222,067) Currency translation adjustment (1,836) (1,947) (1,647) Deferred compensation - (621) - ---------- --------- --------- Total shareholders' equity (deficit) (199,939) 187,576 (63,451) ---------- --------- --------- Commitments and contingencies Total liabilities and shareholders' equity (deficit) $1,203,774 1,669,003 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 June 30, 2001 and July 1, 2000 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (unaudited)
June 30, July 1, 2001 2000 --------- --------- Net sales $247,487 341,940 Cost of goods sold 252,536 302,428 -------- -------- Gross profit (loss) (5,049) 39,512 Selling, general and administrative expenses 20,661 22,613 Impairment of long-lived assets 20,085 - Restructuring charge 4,887 - -------- -------- Earnings (loss) from operations (50,682) 16,899 Interest expense (contractual interest of $25,020 in 2001) 16,454 25,968 -------- -------- Loss before reorganization items and income taxes (67,136) (9,069) Reorganization items 13,540 - -------- -------- Loss before income taxes (80,676) (9,069) Income tax benefits - (2,951) -------- -------- Net loss (80,676) (6,118) Preferred dividends and accretion 3,697 1,994 -------- -------- Loss applicable to common shareholders $(84,373) (8,112) ======== ======== Loss per common share - Basic and diluted $ (5.92) (.57) ======== ======== Weighted average common shares outstanding - Basic and diluted 14,251 14,227 ======== ========
See accompanying notes to consolidated financial statements. 4 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, 2001 and July 1, 2000 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (unaudited)
June 30, July 1, 2001 2000 --------- --------- Net sales $ 537,253 687,100 Cost of goods sold 537,885 608,493 --------- ------- Gross profit (loss) (632) 78,607 Selling, general and administrative expenses 44,781 49,552 Impairment of long-lived assets 20,085 - Restructuring charge 6,864 - --------- ------- Earnings (loss) from operations (72,362) 29,055 Interest expense (contractual interest of $52,508 in 2001) 35,376 53,812 --------- ------- Loss before reorganization items and income taxes (107,738) (24,757) Reorganization items 21,165 - --------- ------- Loss before income taxes (128,903) (24,757) Income tax benefits - (8,912) --------- ------- Net loss (128,903) (15,845) Preferred dividends and accretion 7,396 3,937 --------- ------- Loss applicable to common shareholders $(136,299) (19,782) ========= ======= Loss per common share - Basic and diluted $ (9.56) (1.39) ========= ======= Weighted average common shares outstanding - Basic and diluted 14,251 14,227 ========= =======
See accompanying notes to consolidated financial statements. 5 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and July 1, 2000 (Dollars in thousands) (unaudited)
June 30, July 1, 2001 2000 --------- ------- Cash flows from operating activities: Net loss $(128,903) (15,845) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 28,044 32,210 Impairment of long-lived assets 20,085 - Deferred income taxes - (8,912) Changes in assets and liabilities: Trade receivables 46,150 34,310 Inventories 33,933 (38,776) Accounts payable and accrued expenses (95) (12,682) Other assets and liabilities 3,109 (1,320) --------- --------- Net cash provided by (used in) operating activities 2,323 (11,015) Cash flows from investing activities: Proceeds from sale of property, plant and equipment 1,251 3,543 Purchases of property, plant and equipment (6,380) (16,932) --------- --------- Net cash used in investing activities (5,129) (13,389) Cash flows from financing activities: Decrease in checks not yet presented for payment (2,344) (497) Borrowings on revolving credit loans - 474,900 Repayments of revolving credit loans - (435,475) Retirement of long-term debt (2,386) (16,028) --------- --------- Net cash provided by (used in) financing activities (4,730) 22,900 Net change in cash and cash equivalents (7,536) (1,504) Cash and cash equivalents at beginning of period 32,157 4,854 --------- --------- Cash and cash equivalents at end of period $ 24,621 3,350 ========= ========= Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest $ 37,229 53,531 ========= ======== Income taxes $ 121 (3,105) ========= ========
See accompanying notes to consolidated financial statements. 6 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. Certain reclassifications have been made to the July 1, 2000 and December 30, 2000, inventory categories in note 3 in order to conform with presentation used in 2001. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE On November 14, 2000 (the "Petition Date"), Parent 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. 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 and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. The estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection is approximately $8.9 million, which was accrued in the second quarter of 2001 as a reorganization item. The Company may be required to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. 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 for the Debtors to file a plan of reorganization originally would have expired on March 14, 2001, but was extended by the Bankruptcy Court until July 16, 2001. The Debtors have requested and received from the Bankruptcy Court another extension of the exclusive periods to file a plan of reorganization and solicit acceptances thereof through November 16, 2001 and January 15, 2002, respectively. Unless such periods are again extended by the Bankruptcy Court, if the Debtors fail to file a plan of reorganization by November 16, 2001 or, after such plan has been filed, if the Debtors fail to obtain acceptance of such plan from the requisite impaired classes of creditors by January 15, 2002, 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. 7 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) 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 developing a plan of reorganization and will seek the 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 continuing to review their operations and identify assets for disposition. On July 27, 2001, the Company entered into a definitive agreement to sell most of the inventory and fixed assets associated with its Blanket Division (see note 13). 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. 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. BASIS OF PRESENTATION 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 debtor-in-possession 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. In the Chapter 11 Cases, substantially all unsecured and under-secured 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 8 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) 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 last date by which claims against the Company had to be filed in the Bankruptcy Court if the claimants wished to receive any distribution in the Chapter 11 Cases, i.e., the bar date, was July 23, 2001. Differences between amounts shown by the Debtors and claims filed by creditors will be investigated and amicably resolved, adjudicated before the Bankruptcy Court or resolved through another dispute resolution process. The ultimate amount of and settlement terms for liabilities subject to compromise 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 aggregated $80.7 million and $129.1 million for the three and six month periods ended June 30, 2001, respectively. For the three and six months periods ended July 1, 2000, comprehensive loss aggregated were $6.4 million and $16.1 million, respectively. (3) Inventories Inventories consisted of the following at June 30, 2001, July 1, 2000, and December 30, 2000: June 30, July 1, December 30, 2001 2000 2000 -------- -------- ----------- Finished goods $122,153 240,426 122,257 Work-in-process 49,714 148,721 79,120 Raw materials and supplies 66,325 63,652 62,212 In-transit and off-site 6,682 9,029 15,218 -------- -------- ----------- $244,874 461,828 278,807 -------- -------- ----------- (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 would have been anti-dilutive for the three and six month periods ended June 30, 2001 and July 1, 2000, respectively. Because the exercise price for outstanding options for the three and six month periods ended June 30, 2001 and July 1, 2000, respectively was greater than the average market price, no options were assumed to be exercised. For the three and six month periods ended June 30, 2001 and July 1, 2000, respectively, preferred convertible stock was convertible into approximately 3.8 million and 3.3 shares of common stock and convertible debentures were convertible into approximately 0.5 million shares of common stock and options to purchase approximately 1.1 million and 1.3 million shares of common stock were outstanding. 9 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (5) Long-Term Debt and Liquidity Long-term debt consists of the following:
June 30, July 1, December 30, 2001 2000 2000 ---------- -------- ------------- Revolver less portion to be treated as postpetition debt $ 241,021 299,225 255,956 Term loans less portion to be treated as postpetition debt 250,204 329,830 268,090 Portion of revolver and term loans to be treated as postpetition debt 150,000 - 117,179 Overline Credit Facility 34,738 35,000 34,738 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 13,860 15,669 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 Debentures due 2012 (effective rate of 8.72%, net of $14.0 million in unamortized discount at July 1, 2000) 90,417 82,936 90,417 Other debt 1,811 2,551 3,131 ---------- --------- --------- Total debt 1,092,051 1,075,211 1,094,436 Less: Current portion of long-term debt - (87,557) - Current portion of long-term debt in default (678,923) - (33,229) Long-term debt in default (12,673) - (660,790) Liabilities subject to compromise (400,455) - (400,417) ---------- --------- --------- Total long-term debt $ - 987,654 - ========== ========= =========
DIP FINANCING FACILITY On December 6, 2000, the Bankruptcy Court entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150.0 million debtor-in- possession financing facility including a $60.0 million letter of credit sub- facility (the "DIP Financing Facility") with Bank of America, N.A. as agent for a syndicate of financing 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 size of the facility to $125.0 million, including the $60.0 million letter of credit sub-facility. The Company obtained the reduction in the size of the DIP Financing 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 DIP Financing Facility expires on 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. Under the documentation evidencing the DIP Financing Facility as currently in effect, 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. 10 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) 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 the 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 four industrial revenue bond facilities described below (the "IRB Facilities") aggregating approximately $13.9 million as of June 30, 2001, and certain obligations to the Pension Benefit Guaranty Corporation. The documentation evidencing the DIP Financing Facility as currently in effect 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 assets 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 June 30, 2001, the Company had $22.4 million in letters of credit outstanding under the DIP Financing Facility. No cash borrowings were outstanding on the DIP Financing Facility at June 30, 2001. Availability under the DIP Financing Facility as of June 30, 2001, was approximately $46.7 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. On August 13, 2001, the debtors and the lenders under the DIP Financing Facility entered into an amendment to the facility providing for, among other things, (a) the modification and addition of certain reporting requirements, (b) the modification of the financial covenant requiring maintenance of an asset coverage ratio, (c) the elimination of the financial covenant requiring maintenance of a minimum operating cash flow, (d) the addition of a financial covenant requiring maintenance of a minimum level of earnings before interest, taxes, depreciation and amortization, and (e) the elimination of the six month extension provision described above. The effectiveness of the amendment is subject to, among other things, Bankruptcy Court approval. As of the date of this Quarterly Report, no Bankruptcy Court hearing has been set for this purpose; however, the Company intends promptly to file a motion with the Bankruptcy Court seeking to have the amendment approved at the Bankruptcy Court hearing previously scheduled for August 23, 2001, in connection with the sale of assets associated with the Company's Blanket Division. Simultaneously with entering into the amendment, the lenders under the DIP Financing Facility agreed to waive defaults under the existing asset coverage covenant and reporting requirements of the DIP Financing Facility pending action by the Bankruptcy Court in respect of the amendment. Management believes they will be able to obtain an extension of the DIP Financing Facility beyond November 14, 2001; however, no assurance can be given that any such extension will be obtained or as to the specific terms of any such extension. 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 The Leshner Corporation ("Leshner"), allowing the Company to fund the transaction and reduce borrowings under the revolving credit facility. As of June 30, 2001, the Company had $12.4 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. 11 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) 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 prepetition senior credit facilities for the three months period ended June 30, 2001 was 8.3% and 9.0% for the six months period ended June 30, 2001. The prepetition 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. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the prepetition senior debt facilities. Even though these payments are being made, the Company remains in default under the prepetition senior debt facilities. As of June 30, 2001, $150.0 million of the $641.2 million of the revolver and term loan facilities had become subject to treatment as postpetition debt rather than prepetition debt, as authorized by the DIP Financing Order. 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 and to secure it with the same assets securing the senior debt facilities described above. 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. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the Overline Facility. Even though these payments are being made, the Company remains in default under the Overline Facility. SENIOR SUBORDINATED DEBT In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million aggregate principal amount 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 aggregate principal amount 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. 12 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) The Company is in default under the indentures governing both the 9% Notes and the 10% Notes. No principal or interest payment has been or 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 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 June 30, 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, the resulting cash component of the conversion consideration would have been approximately $57.2 million. Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest bearing subordinated promissory notes (the "Cash Claimant notes") in respect of 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. As of June 30, 2001, the aggregate amount of the outstanding Cash Claimant Notes was $5.2 million. The 6% Convertible Debentures and Cash Claimants Notes are general unsecured obligations of Fieldcrest Cannon. Fieldcrest Cannon is in default under the indenture governing the 6% Convertible Debentures and the Cash Claimant Notes. No principal or interest payment has been or 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 four industrial revenue bond facilities. The IRB Facilities are secured by liens on specified plants and equipment. As of June 30, 2001, $13.9 million of bonds in the aggregate were outstanding under the IRB Facilities. On February 6, 2001, the Bankruptcy Court authorized the Company to make scheduled principal and interest payments on the IRB Facilities. Even though these payments are being made, the Company remains 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 the Company'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 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, the Company'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. 13 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (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 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. The Debtors are in the process of reviewing their executory contracts and unexpired leases and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. The estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection is approximately $8.9 million, which was accrued in the second quarter of 2001 as a reorganization item. The Company may be required to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. The components of liabilities subject to compromise at June 30, 2001 and December 30, 2000 are as follows:
June 30, 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 85,217 85,217 Cash Claimant Notes 5,200 5,200 Other 38 - -------- ------- Total long-term debt 400,455 400,417 -------- ------- Interest accrued on above notes and debentures 14,018 14,448 Accounts payable 50,662 55,322 Nonqualified pension plan liability 11,673 11,673 Rejected contracts and leases 8,936 - Other accrued expenses 6,154 10,233 -------- ------- $491,898 492,093 ======== =======
As a result of the filing of the Chapter 11 Cases, no principal or interest payments have been or 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 aggregating $17.1 million on prepetition unsecured obligations has not been accrued in the six months ended June 30, 2001. Since the Petition Date, the Company has not accrued interest aggregating $21.6 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 14 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) 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 June 30, 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 accrued dividends 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--(Continued) (Tables in thousands) (unaudited) Information about the Company's divisions is presented below:
Three Months Ended June 30, 2001 ------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other Total --------- ------- --------- ------------ ---------- Net sales $176,323 55,761 10,353 5,050 (1) 247,487 Gross profit (loss) 4,755 6,485 (3,547) (12,742)(1) (5,049) Depreciation and amortization 9,907 932 231 2,967 14,037 Capital expenditures 1,041 402 - 2,987 4,430 Total assets 802,298 133,590 40,986 226,900 (2) 1,203,774
Three Months Ended July 1, 2000 --------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other Total ----------- ------- --------- ------------ ---------- Net sales $ 248,905 67,498 18,072 7,465 (1) 341,940 Gross profit (loss) 41,299 11,663 (1,090) (12,360)(1) 39,512 Depreciation and amortization 10,521 953 1,866 2,984 16,324 Capital expenditures - 343 133 1,666 2,142 Total assets 1,144,594 154,275 180,113 190,021 (2) 1,669,003
Six Months Ended June 30, 2001 ------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other Total --------- ------- --------- ------------ ---------- Net sales $387,215 119,087 21,193 9,758 (1) 537,253 Gross profit (loss) 15,116 14,364 (6,621) (23,491)(1) (632) Depreciation and amortization 20,095 1,756 460 5,733 28,044 Capital expenditures 1,861 402 - 4,117 6,380 Total assets 802,298 133,590 40,986 226,900 (2) 1,203,774
16 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited)
Six Months Ended July 1, 2000 --------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other Total ----------- ------- --------- ------------ ---------- Net sales $ 501,319 133,243 38,814 13,724 (1) 687,100 Gross profit (loss) 79,614 25,312 (3,225) (23,094)(1) 78,607 Depreciation and amortization 20,845 1,944 3,725 5,696 32,210 Capital expenditures 9,169 622 248 6,893 16,932 Total assets 1,144,594 154,275 180,113 190,021 (2) 1,669,003
(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 and Impairment of Long-lived Assets 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. During the second quarter of 2001, the Company revised its estimate of benefits to be provided after termination and reduced the restructuring reserve for Hawkinsville by $0.5 million. During the second quarter of 2001, the Company announced the closure of several facilities. A blanket yarn manufacturing plant in Newton, North Carolina was closed on June 30, 2001 as a result of the Company's evaluation of its strategic options relating to the Blanket Division. Production ceased at a cut-and-sew bedding facility in Rocky Mount, North Carolina on June 30, 2001, but the Company currently estimates that certain warehousing and shipping employees will remain through the end of the year to satisfy existing commitments to customers. The Rocky Mount facility manufactured decorative bedding exclusively under a license agreement, which expired on June 30, 2001. A sheet manufacturing facility in Kannapolis, North Carolina was closed on July 15, 2001 and its production was relocated to an existing facility in China Grove, North Carolina. A towel yarn manufacturing operation and cotton warehouse in Columbus, Georgia were closed on July 15, 2001 and production was relocated to the Company's existing yarn manufacturing operations in Kannapolis, North Carolina and Tarboro, North Carolina. A towel warehouse and distribution center in Phenix City, Alabama will be closed in August 2001 and its operations will be transferred to an existing distribution center in Macon, Georgia. In addition, the Company announced plans to scale back towel production at another facility in Kannapolis, which the Company currently expects to complete by the end of 2001. As a result of these closures, the Company incurred a restructuring charge of $5.4 million in the second quarter of 2001, primarily consisting of severance and benefits. The Company currently expects that the majority of the severance and benefits will be paid during the third quarter of 2001. As of June 30, 2001, approximately 850 employees had been terminated. When completed, the closures will affect approximately 1,130 employees. 17 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) Activity in the reserve established for the restructuring charges is presented below: First quarter restructuring charge $ 1,977 Second quarter restructuring charge 5,437 Adjustments to Hawkinsville reserve (550) Payments (2,476) ------- Balance, June 30, 2001 $ 4,388 ======= The Company also recognized a charge for impairment of long-lived assets of $20.1 million during the second quarter of 2001. Approximately $19.9 million of the charge relates to assets located at the facilities discussed above, consisting of a $3.6 million write-down for real property and a $16.3 million write-down for machinery and equipment. In addition, the Company evaluated the carrying values of certain machinery and equipment classified in assets held for sale and recorded a write-down of $0.2 million. The impairment charge reflects management's estimate of the fair market value based upon appraisals and the expected future cash flows to be generated by the assets, including their ultimate disposition. Management expects to sell these assets during the next twelve months. (10) Reorganization Items Through the second quarter of 2001, the Company recognized the following items as reorganization items in the statement of operations (in thousands):
Three months ended Six months ended June 30, 2001 June 30, 2001 ------------------ ----------------- Professional fees and other costs associated with the filing of the Chapter 11 Cases $ 3,799 $10,110 Retention incentive plan 1,206 3,108 Rejected contracts and lease agreements 8,936 8,936 Interest income on investments (401) (989) ------- ------- $13,540 $21,165 ======= =======
PROFESSIONAL FEES. During the three and six month period ended June 30, 2001, the Company paid approximately $6.4 million and $7.9 million respectively in professional fees associated with the filing of the Chapter 11 Cases. KEY EMPLOYEE RETENTION PROGRAM. 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 18 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) first 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 six months ended June 30, 2001. 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 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. REJECTED CONTRACTS AND LEASES. The Debtors are in the process of reviewing their executory contracts and unexpired leases and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. The estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection is approximately $8.9 million, which was accrued in the second quarter of 2001 as a reorganization item. The Company may be required to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. (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 and six months ended June 30, 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 June 30, 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 June 30, 2001, the Company has $383 million of federal and state operating loss carryforward expiring 2006 through 2021, $2.0 million of general business tax credit carryforward expiring 2005 through 2021 and a $6.7 million unused alternative minimum tax credit carryforward that does not expire. (12) Recently Issued or Adopted Accounting Standards 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 19 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) 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. The Company enters into fixed-price contracts for purchases of raw material cotton from its suppliers. SFAS No. 133, as amended, requires the Company to evaluate its commodity contracts to determine whether the contracts are "normal purchases or normal sales." The Company has concluded and documented that these contracts meet the definition of "normal purchases or normal sales," and therefore are not considered derivative instruments In May 2000, the Financial Accounting Standards Board's Emerging Issue Task Force (EITF) issued EITF No. 00-14," Accounting for Certain Sales Incentives" (EITF 00-14). EITF 00-14 addresses the recognition, measurement and income statement classification for certain types of sales incentives offered by vendors to their customers. The Company is required to adopt the provisions of EITF 00-14 at the beginning of fiscal 2002, which commences December 30, 2001. The Company is currently analyzing the impact of adopting EITF 00-14 on its financial position and results of operations. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, and specifies criteria for the recognition and reporting of intangible assets apart from goodwill. Under SFAS No. 142, beginning in fiscal 2002, which commences December 30, 2001, the Company will no longer amortize goodwill and intangible assets with indefinite lives, but instead will test those assets for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. The Company is required to adopt SFAS No. 142 on December 30, 2001. The Company is currently evaluating the provisions of SFAS Nos. 141 and 142 and has not yet determined the effects of these changes on the Company's financial position or results of operations. (13) Subsequent Event On July 27, 2001, the Company executed a definitive agreement to sell most of the inventory and fixed assets associated with its Blanket Division to Beacon Acquisition Corporation, an investment entity owned by a group of current Blanket Division managers and a private investor. The sale is subject to approval by the Company's senior lenders and by the Bankruptcy Court. A hearing on a motion seeking an order authorizing the sale is scheduled for August 23, 2001. The purchaser has agreed to pay a purchase price of $16.8 million, subject to certain adjustments based on inventory levels, prepaid items and accrued but unpaid items as of closing, and to assume all liabilities arising under the terms of contracts to be assumed and assigned to the purchaser and, with limited exceptions, all environmental liabilities associated with the purchased assets, assuming the Company is able to realize on its rights under indemnification agreements with prior owners. The purchase price will be paid in a combination of cash and a three-year promissory note in a principal amount of approximately $1.3 million, secured by a pledge of 100% of the stock of the purchaser, a second lien on the majority of the assets being sold (excluding the Blanket Division's real property located in Westminister, South Carolina) and a third lien on the Blanket Division's real property located in Swannanoa, North Carolina. Third parties may submit competing bids for these assets in accordance with the Bankruptcy's Court Order (a) approving global bidding procedures and (b) authorizing Debtors to grant pre-approved bid protections to prospective purchasers, dated April 6, 2001. The net proceeds from the sale of these assets will be applied to pay down the Debtor's obligations to the lenders under the prepetition senior debt facilities and the Overline Facility described above, in accordance with the Final Order authorizing the Debtors-In-Possession to enter into a postpetition financing agreement and obtain postpetition financing pursuant to section 363 and 364 of the Bankruptcy Code and providing adequate protection and granting liens, security interest and superpriority claims. 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. 20 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (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.
June 30, 2001 ------------------------------------------------------------------ Non Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Assets: - ------- Trade receivables $ - 162,638 3,939 - 166,577 Receivable from affiliates 767,141 - - (767,141) - Inventories - 238,451 6,423 - 244,874 Other current assets 288 40,826 1,636 - 42,750 --------- --------- ------ -------- --------- Total current assets 767,429 441,915 11,998 (767,141) 454,201 Property, plant and equipment, net 12 491,795 1,036 - 492,843 Intangibles, net 3,505 221,542 2,172 - 227,219 Other assets 146,790 4,294 - (121,573) 29,511 --------- --------- ------ -------- --------- Total assets $ 917,736 1,159,546 15,206 (888,714) 1,203,774 ========= ========= ====== ======== ========= Liabilities and shareholders' equity (deficit): - -------------------------------------------------- Liabilities not subject to compromise: Accounts payable and accrued liabilities $ 19,063 69,321 2,777 - 91,161 Payables to affiliates - 759,787 7,354 (767,141) - Current portion of long-term debt in default 675,963 2,960 - - 678,923 Long-term debt in default - 12,673 - - 12,673 --------- --------- ------ -------- --------- Total current liabilities 695,026 844,741 10,131 (767,141) 782,757 Noncurrent liabilities - 38,725 108 - 38,833 --------- --------- ------ -------- --------- Total liabilities not subject to compromise 695,026 883,466 10,239 (767,141) 821,590 Liabilities subject to compromise 332,424 159,474 - - 491,898 Redeemable convertible preferred stock 90,225 - - - 90,225 Shareholders' equity (deficit) (199,939) 116,606 4,967 (121,573) (199,939) --------- --------- ------ -------- --------- Total liabilities and shareholders' equity (deficit) $ 917,736 1,159,546 15,206 (888,714) 1,203,774 ========= ========= ====== ======== =========
21 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information--(Continued)
December 30, 2000 ------------------------------------------------------------------ Non Guarantor Guarantor 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 ========== ========= ====== ========== =========
22 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information--(Continued)
Three Months Ended June 30, 2001 ------------------------------------------------------------------ Non Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Net sales $ - 222,936 3,209 (21,342) 247,487 Cost of goods sold - 225,982 5,212 (21,342) 252,536 -------- ------- ------- ------- ------- Gross loss - (3,046) (2,003) - (5,049) Selling, general and administrative expenses (696) 22,098 (741) - 20,661 Impairment of long-lived assets - 20,085 - - 20,085 Restructuring charge - 4,887 - - 4,887 -------- ------- ------- ------- ------- Earnings (loss) from operations 696 (50,116) (1,262) - (50,682) Equity in loss of subsidiaries (73,307) - - 73,307 - Interest expense (income) (4,887) 21,138 203 - 16,454 -------- ------- ------- ------- ------- Loss before reorganization items and income taxes (67,724) (71,254) (1,465) 73,307 (67,136) Reorganization items 12,952 588 - - 13,540 -------- ------- ------- ------- ------- Loss before income taxes (80,676) (71,842) (1,465) 73,307 (80,676) Income taxes - - - - - -------- ------- ------- ------- ------- Net loss (80,676) (71,842) (1,465) 73,307 (80,676) Preferred dividends 3,697 - - - 3,697 -------- ------- ------- ------- ------- Loss applicable to common shareholders $(84,373) (71,842) (1,465) 73,307 (84,373) ======== ======= ======= ======= =======
23 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information--(Continued)
Three Months Ended July 1, 2000 ------------------------------------------------------------------ Non Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ Net sales $ - 350,973 6,319 (15,352) 341,940 Cost of goods sold - 311,478 6,302 (15,352) 302,428 ------- ------- ----- ------- ------- Gross profit - 39,495 17 - 39,512 Selling, general and administrative expenses (1,881) 24,346 148 - 22,613 ------- ------- ----- ------- ------- Earnings (loss) from operations 1,881 15,149 (131) - 16,899 Equity in loss of subsidiaries (7,172) - - 7,172 - Interest expense 1,505 24,268 195 - 25,968 ------- ------- ----- ------- ------- Loss before income taxes (6,796) (9,119) (326) 7,172 (9,069) Income taxes (678) (2,273) - - (2,951) ------- ------- ----- ------- ------- Net loss (6,118) (6,846) (326) 7,172 (6,118) Preferred dividends 1,994 - - - 1,994 ------- ------- ----- ------- ------- Loss applicable to common shareholders $(8,112) (6,846) (326) 7,172 (8,112) ======= ======= ===== ======= =======
24 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information--(Continued)
Six Months Ended June 30, 2001 ------------------------------------------------------------------ Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated - --------------------- ------ ------------ ------------ ------------ ------------ Net sales $ - 517,920 6,869 (12,464) 537,253 Cost of goods sold - 517,064 8,357 (12,464) 537,885 --------- -------- ------ ------- -------- Gross profit - 856 (1,488) - (632) Selling, general and administrative expenses (470) 44,396 855 - 44,781 - 20,085 - - 20,085 Restructuring charge - 6,864 - - 6,864 --------- -------- ------ ------- -------- Earnings (loss) from operations 470 (70,489) (2,343) - (72,362) Equity in loss of subsidiaries (117,040) - - 117,040 - Interest expense (income) (8,832) 43,986 222 - 35,376 --------- -------- ------ ------- -------- Loss before reorganization items and income taxes (107,738) (114,475) (2,565) 117,040 (107,738) Reorganization items 21,165 - - - 21,165 --------- -------- ------ ------- -------- Loss before income taxes (128,903) (114,475) (2,565) 117,040 (128,903) Income taxes - - - - - --------- -------- ------ ------- -------- Net loss (128,903) (114,475) (2,565) 117,040 (128,903) Preferred dividends 7,396 - - - 7,396 --------- -------- ------ ------- -------- Loss applicable to common shareholders $(128,903) (114,475) (2,565) 117,040 (136,299) ========= ======== ====== ======= ========
25 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information--(Continued)
Six Months Ended July 1, 2000 ------------------------------------------------------------------ Non Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated - --------------------- ------ ------------ ------------ ------------ ------------ Net sales $ - 688,680 13,772 (15,352) 687,100 Cost of goods sold - 611,071 12,774 (15,352) 608,493 -------- ------- ------ ------- ------- Gross profit - 77,609 998 - 78,607 Selling, general and administrative expense (2,980) 52,208 324 - 49,552 -------- ------- ------ ------- ------- Earnings from operations 2,980 25,401 674 - 29,055 Equity in loss of subsidiaries (16,377) - - 16,377 - Interest expense 3,407 50,001 404 - 53,812 -------- ------- ------ ------- ------- Earnings (loss) before income taxes (16,804) (24,600) 270 16,377 (24,757) Income taxes (959) (7,953) - - (8,912) -------- ------- ------ ------- ------- Net earnings (loss) (15,845) (16,647) 270 16,377 (15,845) Preferred dividends 3,937 - - - 3,937 -------- ------- ------ ------- ------- Earnings (loss) applicable to common shareholders $(19,782) (16,647) 270 16,377 (19,782) ======== ======= ====== ======= =======
26 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tables in thousands) (unaudited) (14) Supplemental Condensed Consolidating Financial Information--(Continued)
Six Months Ended June 30, 2001 ------------------------------------------------------------------ Non Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Cash provided by (used in) operating activities $ 4,117 (2,518) 724 - 2,323 Cash used in investing activities (4,117) (854) (158) - (5,129) Cash used in financing activities (4,164) (566) - (4,730) -------- -------- ------- ---- -------- Net change in cash and cash equivalents - (7,536) - - (7,536) Cash and cash equivalents at beginning of year - 32,157 - - 32,157 -------- -------- ------- ---- -------- Cash and cash equivalents at end of period $ - 24,621 - - 24,621 ======== ======== ======= ==== ========
Six Months Ended July 1, 2000 ------------------------------------------------------------------ Non Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Cash provided by (used in) operating activities $ 16,703 (33,426) 5,708 - (11,015) Cash provided by (used in) investing activities 432 (13,677) (144) - (13,389) Cash provided by (used in) financing activities (17,135) 45,599 (5,564) - 22,900 -------- -------- ------- ---- -------- Net change in cash and cash equivalents - (1,504) - - (1,504) Cash and cash equivalents at beginning of year - 4,854 - - 4,854 -------- -------- ------- ---- -------- Cash and cash equivalents at end of period $ - 3,350 - - 3,350 ======== ======== ======= ==== ========
27 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, Pillowtex Corporation and substantially all of its domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code. For further discussion of the Chapter 11 Cases, see the Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Since the Petition Date, the Debtors have conducted business in the ordinary course. Management is in the process of developing a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the 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 continuing to review their operations and identify assets for disposition. As discussed below, the Company entered into a definitive agreement to sell most of the inventory and fixed assets associated with its Blanket Division. The Debtors are in the process of reviewing their executory contracts and unexpired leases and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. The estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection is approximately $8.9 million, which was accrued in the second quarter of 2001 as a reorganization item. The Company may be required to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. 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. BASIS OF PRESENTATION The consolidated financial statements included elsewhere in the Quarterly Report 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. 28 In the Chapter 11 Cases, substantially all unsecured and under-secured 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 consolidated balance sheet included elsewhere in this Quarterly Report. 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 last date by which claims against the Company had to be filed in the Bankruptcy Court if the claimant wished to receive any distribution in the Chapter 11 Cases, i.e., the bar date, was July 23, 2001. Differences between amounts shown by the Debtors and claims filed by creditors will be investigated and amicably resolved, adjudicated before the Bankruptcy Court or resolved through another dispute resolution process. The ultimate amount of and settlement terms for liabilities subject to compromise 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. RECENT DEVELOPMENTS On July 27, 2001, the Company executed a definitive agreement to sell most of the inventory and fixed assets associated with its Blanket Division to Beacon Acquisition Corporation, an investment entity owned by a group of current Blanket Division managers and a private investor. The sale is subject to approval by the Company's senior lenders and by the Bankruptcy Court. A hearing on a motion seeking an order authorizing the sale is scheduled for August 23, 2001. The purchaser has agreed to pay a purchase price of $16.8 million, subject to certain adjustments based on inventory levels, prepaid items and accrued but unpaid items as of closing, and to assume all liabilities arising under the terms of contracts to be assumed and assigned to the purchaser and, with limited exceptions, all environmental liabilities associated with the purchased assets, assuming the Company is able to realize on its rights under indemnification agreements with prior owners. The purchase price will be paid in a combination of cash and a three-year promissory note in a principal amount of approximately $1.3 million, secured by a pledge of 100% of the stock of the purchaser, a second lien on the majority of the assets being sold (excluding the Blanket Division's real property located in Westminister, South Carolina) and a third lien on the Blanket Division's real property located in Swannanoa, North Carolina. Third parties may submit competing bids for these assets in accordance with the Bankruptcy's Court Order (a) approving global bidding procedures and (b) authorizing Debtors to grant pre-approved bid protections to prospective purchasers, dated April 6, 2001. The net proceeds from the sale of these assets will be applied to pay down the Debtor's obligations to the lenders under the prepetition senior debt facilities and the Overline Facility described above, in accordance with the Final Order authorizing the Debtors-In-Possession to enter into a postpetition financing agreement and obtain postpetition financing pursuant to section 363 and 364 of the Bankruptcy Code and providing adequate protection and granting liens, security interest and superpriority claims. 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. RESULTS OF OPERATIONS Net Sales. Net sales were $247.5 million for the three month period ended June 30, 2001, a decrease of $94.4 million or 27.6% from the comparable three month period ended July 1, 2000. Net sales for the six month period ended June 30, 2001 were $537.3 million, down $149.8 million or 21.8% from the comparable six month period ended July 1, 2000. Net sales for the Company's operating segments for each period are shown below (in thousands): Three Months Ended Six Months Ended --------------------- --------------------- June 30, July 1, June 30, July 1, 2001 2000 2001 2000 --------- --------- --------- --------- Bed and Bath $176,323 $248,905 $387,215 $501,319 Pillow and Pad 55,761 67,498 119,087 133,243 Blanket 10,353 18,072 21,193 38,814 Other (a) 5,050 7,465 9,758 13,724 -------- -------- -------- -------- Total $247,487 $341,940 $537,253 $687,100 ======== ======== ======== ======== 29 (a) Includes retail stores Approximately $33.9 million and $72.8 million of the decrease in sales for the three months and six months ended June 30, 2001, respectively, is attributable to the loss of a specific customer, which has affected the Company's three major divisions. Excluding the impact of the lost customer, net sales decreased 19.6% and 12.0%, respectively, for the three month and six month periods ended June 30, 2001, as compared to the corresponding 2000 periods. These decreases are due to a continued slow down in the US economy and increased competition from imports. GROSS PROFIT. In the three months ended June 30, 2001, gross profit was a loss of $5.0 million; a decrease of $44.6 million from $39.5 million for the comparable three months ended July 1, 2000. Gross profit for the six month period ended June 30, 2001 was a loss of $0.6 million, down $79.2 million from $78.6 million for the comparable six months ended July 1, 2000. Gross profit (loss) by operating segment is as follows (in thousands): Three Months Ended Six Months Ended --------------------- --------------------- June 30, July 1, June 30, July 1, 2001 2000 2001 2000 --------- --------- --------- --------- Bed and Bath $ 4,755 $ 41,299 $ 15,116 $ 79,614 Pillow and Pad 6,485 11,663 14,364 25,312 Blanket (3,547) (1,090) (6,621) (3,225) Other (a) (12,742) (12,360) (23,491) (23,093) -------- -------- -------- -------- Total $ (5,049) $ 39,512 $ (632) $ 78,608 ======== ======== ======== ======== (a) Includes retail stores and corporate charges The Company has continued to focus on inventory reduction initiatives and aligning production schedules with sales requirements. Although these actions have had a positive impact on the Company's working capital, it has placed pressure on gross profits by contributing to an increase in unabsorbed overhead cost of approximately $21.4 million and $41.4 million in the three month and six month periods ended June 30, 2001, respectively. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses for the three month period ended June 30, 2001, decreased $1.9 million to $20.7 million from $22.6 million for the comparable three month period ended July 1, 2000. For the six month period ended June 30, 2001, SG&A expenses decreased $4.8 million to $44.8 million from $49.6 million for the comparable six month period ended July 1, 2000. These savings are primarily the result of management's continued focus on cost controls. The combined savings from these efforts in salaries and wages and general fees and services for SG&A for the six month period ended June 30, 2001, were approximately $4.0 million when compared to the six month period ended July 1, 2000. RESTRUCTURING CHARGE. During the second quarter of 2001, the Company incurred a net restructuring charge of $4.9 million associated with the closure of operations in Newton, North Carolina; Rocky Mount, North Carolina; Columbus, Georgia; Kannapolis, North Carolina; and Phenix City, Alabama. The Company had incurred a restructuring charge of $2.0 million during the first quarter of 2001 related to the closure of the Company's facility in Hawkinsville, Georgia. The Company currently estimates that the closures will result in net annual cost savings of approximately $15.0 million to $20.0 million. IMPAIRMENT OF LONG-LIVED ASSETS. During the second quarter of 2001, the Company recognized a charge for impairment of long-lived assets of $20.1 million. The charge consists of $19.9 million for real property and equipment at the facilities closed during 2001 and $0.2 million related to revisions in the Company's estimates of the fair value of certain items included in assets held for sale. INTEREST EXPENSE. Interest expense decreased $9.5 million to $16.5 million for the three month period ended June 30, 2001; compared to $26.0 million for the three month period ended July 1, 2000. The average interest rate for the 30 second quarter of 2001 was approximately 8.3%, compared to approximately 9.8% in the second quarter of 2000. For the six month period ended June 30, 2001, interest expense decreased $18.4 million to $35.4 million from $53.8 million for the comparable six month period ended July 1, 200. 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 and $17.2 million, respectively, for the three and six months ended June 30, 2001. REORGANIZATION ITEMS. Through the second quarter of 2001, the Company recognized $21.2 million of reorganization items associated with the Chapter 11 Cases. The charge consists of approximately $10.1 million of fees payable to professionals retained to assist with the filing of the Chapter 11 Cases, approximately $8.9 million for rejected contracts and leases and approximately $3.1 million for a key employee retention program for the Company's management team and other key employees, offset by interest income of approximately $1.0 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, including a $60.0 million letter of credit such 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 size of the facility to $125.0 million, including the $60.0 million letter of credit sub-facility. 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 DIP Financing Facility expires on 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 Bankruptcy Court shall have occurred. Under the documentation evidencing the DIP Financing Facility as currently in effect, 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 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%, 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 the IRB Facilities described below aggregating approximately $13.9 million as of June 30, 2001, and certain obligations to the Pension Benefit Guaranty Corporation. The documentation evidencing the DIP Financing Facility as currently in effect 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 assets 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 June 30, 2001, the Company had $22.4 million in letters of credit outstanding under the DIP Financing Facility. No cash borrowings were outstanding on the DIP Financing Facility at June 30, 2001. Availability under the DIP Financing Facility as of June 30, 2001, was approximately $46.7 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. 31 On August 13, 2001, the debtors and the lenders under the DIP Financing Facility entered into an amendment to the facility providing for, among other things, (a) the modification and addition of certain reporting requirements, (b) the modification of the financial covenant requiring maintenance of an asset coverage ratio, (c) the elimination of the financial covenant requiring maintenance of a minimum operating cash flow, (d) the addition of a financial covenant requiring maintenance of a minimum level of earnings before interest, taxes, depreciation and amortization, and (e) the elimination of the six month extension provision described above. The effectiveness of the amendment is subject to, among other things, Bankruptcy Court approval. As of the date of this Quarterly Report, no Bankruptcy Court hearing has been set for this purpose; however, the Company intends promptly to file a motion with the Bankruptcy Court seeking to have the amendment approved at the Bankruptcy Court hearing previously scheduled for August 23, 2001, in connection with the sale of assets associated with the Company's Blanket Division. Simultaneously with entering into the amendment, the lenders under the DIP Financing Facility agreed to waive defaults under the existing asset coverage covenant and reporting requirements of the DIP Financing Facility pending action by the Bankruptcy Court in respect of the amendment. Management believes they will be able to obtain an extension of the DIP Financing Facility beyond November 14, 2001; however, no assurance can be given that any such extension will be obtained or as to the specific terms of any such extension. 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. As of June 30, 2001, the Company had $12.4 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 prepetition senior credit facilities for the three months ended June 30, 2001 was 8.3% and 9.0% for the six months ended June 30, 2001. The prepetition 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. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the prepetition senior debt facilities. Even though these payments are being made, the Company remains in default under the prepetition senior debt facilities. As of June 30, 2001, $150.0 million of the $641.2 million of the revolver and term loan facilities had become subject to treatment as postpetition debt rather than prepetition debt, as authorized by the DIP Financing Order. 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 and to secure it with the same assets securing the senior debt facilities described above. 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. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the Overline Facility. Even though these payments are being made, the Company remains in default under the Overline Facility. SENIOR SUBORDINATED DEBT. In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million aggregate principal amount of the 9% Notes, with interest payable semiannually commencing June 15, 1998. 32 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 aggregate principal amount 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. The Company is in default under the indentures governing both the 9% Notes and the 10% Notes. No principal or interest payment has been or 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 Common Stock. As of June 30, 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, the resulting cash component of the conversion consideration would have been approximately $57.2 million. Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest bearing subordinated promissory notes i.e., the Cash Claimant Notes, for the unpaid cash portion of the conversion consideration owed 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. As of June 30, 2001, the aggregate principal amount of the outstanding Cash Claimant Notes was $5.2 million. The 6% Convertible Debentures and Cash Claimants Notes are general unsecured obligations of Fieldcrest Cannon. Fieldcrest Cannon is in default under the indenture governing the 6% Convertible Debentures and the Cash Claimant Notes. No principal or interest payment has been or 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 four industrial revenue bond facilities. The IRB Facilities are secured by liens on specified plants and equipment. As of June 30, 2001, $13.9 million of bonds in the aggregate were outstanding under the IRB Facilities. On February 6, 2001, the Bankruptcy Court authorized the Company to make scheduled principal and interest payments on the IRB Facilities. Even though these payments are being made, the Company remains 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 continue to 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 the Company'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 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 33 and the circumstances leading to the filing thereof, the Company'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 included elsewhere in this Quarterly Report 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 $491.9 million as of June 30, 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 and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine what the ultimate liability will be for all contracts and leases approved by the Bankruptcy Court for rejection, but the estimated prepetition liability for those the Bankruptcy Court has already approved is approximately $ 8.9 million, which was accrued in the second quarter of 2001. The Company may be required to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. NEW ACCOUNTING STANDARDS In May 2000, the Financial Accounting Standards Board's Emerging Issue Task Force (EITF) issued EITF No. 00-14," Accounting for Certain Sales Incentives" (EITF 00-14). EITF 00-14 addresses the recognition, measurement and income statement classification for certain types of sales incentives offered by vendors to their customers. The Company is required to adopt the provisions of EITF 00-14 at the beginning of fiscal 2002, which commences December 30, 2001. The Company is currently analyzing the impact of adopting EITF 00-14 on its financial position and results of operations. In July 2001, the Financial Accounting Standards Board issued SFAS No, 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, and specifies criteria for the recognition and reporting of intangible assets apart from goodwill. Under SFAS No. 142, beginning December 30, 2001, the Company will no longer amortize goodwill and intangible assets with indefinite lives, but instead will test those assets for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. The Company is required to adopt SFAS No. 142 on December 30, 2001. The Company is currently evaluating the provisions of SFAS Nos. 141 and 142 and has not yet determined the effects of these changes on the Company's financial position or results of operations. 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 34 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. 35 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 36 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: August 13, 2001 PILLOWTEX CORPORATION (Registrant) /s/ Michael R. Harmon -------------------------------- Michael R. Harmon Executive Vice President and Chief Financial Officer 37 -----END PRIVACY-ENHANCED MESSAGE-----