10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 2002 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: 000-49835 PILLOWTEX CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 75-2147728 (State of Incorporation) (IRS Employer Identification No.) One Lake Circle Drive Kannapolis, North Carolina 28081 (Address of Principal Executive Offices) (Zip Code) (704) 939-2000 (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 by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. 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 1, 2002 Common Stock, $0.01 par value 18,994,000 PILLOWTEX CORPORATION AND SUBSIDIARIES INDEX
Part I - Financial Information Page No. Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets as of June 29, 2002, June 30, 2001 and December 29, 2001 2 Consolidated Statements of Operations for the one month ended June 29, 2002, the two months ended June 1, 2002 and 3 three months ended June 30, 2001 Consolidated Statements of Operations for the five months ended June 1, 2002 and six months ended June 30, 2001 4 Consolidated Statements of Stockholders' Equity (Deficit) for the five months ended June 1, 2002 and the one month 5 ended June 29, 2002 Consolidated Statements of Cash Flows for the one month ended June 29, 2002, the five months ended June 1, 2002 6 and six months ended June 30, 2001 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Part II - Other Information Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 35 Signature 36
1 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for par value)
Successor Predecessor ---------------- ------------------------------- ASSETS June 29, June 30, December 29, 2002 2001 2001 ---------------- -------------- --------------- Current assets: Cash and cash equivalents (including restricted cash of $8,056 as of June 29, 2002 and $3,861 as of December 29, 2001) $ 15,004 24,355 40,388 Receivables: Trade, less allowances of $9,303 as of June 29, 2002, $21,986 as of June 30, 2001 and $9,276 as of December 29, 2001 134,181 153,040 144,727 Other 2,594 7,383 4,478 Inventories 193,673 225,715 200,578 Assets held for sale 18,696 7,074 6,075 Prepaid expenses 5,574 3,491 3,604 Net assets of discontinued operations - 37,657 1,358 ---------------- -------------- --------------- Total current assets 369,722 458,715 401,208 Property, plant and equipment, less accumulated depreciation of $857 as of June 29, 2002, $160,612 as of June 30, 2001 and $172,938 as of December 29, 2001 169,359 485,046 453,440 Intangible assets, at cost less accumulated amortization of $88 as of June 29, 2002, $34,181 as of June 30, 2001 and $40,899 as of December 29, 2001 50,136 227,219 221,729 Other assets 2,766 29,465 11,250 ---------------- -------------- --------------- Total assets $ 591,983 1,200,445 1,087,627 ================ ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities not subject to compromise: Current liabilities: Checks not yet presented for payment $ 14,971 9,726 285 Accounts payable 39,648 26,710 34,834 Accrued expenses 64,536 51,396 59,837 Current portion of long-term debt 6,653 - 356 Current portion of long-term debt in default - 678,923 660,893 Long-term debt in default - 12,673 10,920 ---------------- -------------- --------------- Total current liabilities 125,808 779,428 767,125 Long-term debt, less current portion 201,656 - 645 Noncurrent liabilities 73,858 38,833 48,950 ---------------- -------------- --------------- Total liabilities not subject to compromise 401,322 818,261 816,720 Liabilities subject to compromise - 491,898 500,840 ---------------- -------------- --------------- Total liabilities 401,322 1,310,159 1,317,560 Predecessor Series A redeemable convertible preferred stock, $0.01 par value; 81,411 shares issued and outstanding for June 30, 2001 and December 29, 2001 - 90,225 99,185 Stockholders' equity (deficit): Successor preferred stock, $0.01 par value; authorized 10,000,000 shares - - - Predecessor preferred stock, $0.01 par value; authorized 20,000,000 shares; only Series A issued - - - Successor common stock, $0.01 par value; authorized 50,000,000 shares; 18,600,000 shares issued and outstanding 186 - - Predecessor common stock, $0.01 par value; authorized 55,000,000 shares; 14,250,892 shares issued and outstanding as of June 30, 2001 and December 29, 2001 - 143 143 Additional paid-in capital 191,438 160,120 160,120 Accumulated deficit (1,009) (358,366) (461,186) Accumulated other comprehensive income (loss) 46 (1,836) (28,195) ---------------- -------------- --------------- Total stockholders' equity (deficit) 190,661 (199,939) (329,118) Commitments and contingencies ---------------- -------------- --------------- Total liabilities and stockholders' equity (deficit) $ 591,983 1,200,445 1,087,627 ================ ============== ===============
See accompanying notes to consolidated financial statements. 2 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS One Month Ended June 29, 2002, Two Months Ended June 1, 2002 and Three Months Ended June 30, 2001 (Dollars in thousands, except for per share data)
Successor Predecessor ------------- ----------------------------- One Month Two Months Three Months Ended Ended Ended June 29, June 1, June 30, 2002 2002 2001 ----------- ---------- ---------- Net sales $ 71,291 139,125 232,383 Cost of goods sold 65,291 140,377 238,637 ----------- ---------- ---------- Gross profit (loss) 6,000 (1,252) (6,254) Selling, general, and administrative expenses 5,572 9,010 15,632 Impairment of long-lived assets - 192 20,085 Restructuring charges - 1,200 4,488 ----------- ---------- ---------- Income (loss) from operations 428 (11,654) (46,459) Interest expense (contractual interest of $11,614 in two months ended June 1, 2002 and $25,020 in 2001) 1,437 6,531 16,455 ----------- ---------- ---------- Loss from continuing operations before reorganization items and income taxes (1,009) (18,185) (62,914) Reorganization items: Gain on cancellation of pre-petition liabilities - (856,375) - Fresh start adjustments - 391,091 - Other - 61,330 13,540 ----------- ---------- ---------- Total reorganization items - (403,954) 13,540 ----------- ---------- ---------- Income (loss) from continuing operations before income taxes (1,009) 385,769 (76,454) Income tax expense - - - ----------- ---------- ---------- Net income (loss) from continuing operations (1,009) 385,769 (76,454) Loss from discontinued operations - - 4,222 ----------- ---------- ---------- Net income (loss) (1,009) 385,769 (80,676) Preferred dividends and accretion - 2,892 3,697 =========== ========== ========== Income (loss) applicable to common stockholders $ (1,009) 382,877 (84,373) =========== ========== ========== Basic and diluted loss per common share - Loss applicable to common stockholders $ (0.05) =========== Weighted average common shares outstanding - Basic and diluted 18,600 ===========
See accompanying notes to consolidated financial statements. 3 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Five Months Ended June 1, 2002 and Six Months Ended June 30, 2001 (Dollars in thousands)
Predecessor ----------------------------------- Five Months Six Months Ended Ended June 1, June 30, 2002 2001 ---------------- ------------- Net sales $ 380,050 506,225 Cost of goods sold 371,941 510,071 ---------------- ------------- Gross profit (loss) 8,109 (3,846) Selling, general, and administrative expenses 25,127 34,707 Impairment of long-lived assets 31,111 20,085 Restructuring charges 4,233 6,465 ---------------- ------------- Loss from operations (52,362) (65,103) Interest expense (contractual interest of $30,481 in 2002 and $52,508 in 2001) 16,832 35,376 ---------------- ------------- Loss from continuing operations before reorganization items and income taxes (69,194) (100,479) Reorganization items: Gain on cancellation of pre-petition liabilities (856,375) - Fresh start adjustments 391,091 - Other 66,633 21,165 ---------------- ------------- Total reorganization items (398,651) 21,165 ---------------- ------------- Income (loss) from continuing operations before income taxes 329,457 (121,644) Income tax benefit (7,157) - ---------------- ------------- Net income (loss) from continuing operations 336,614 (121,644) Loss from discontinued operations - 7,259 ---------------- ------------- Net income (loss) 336,614 (128,903) Preferred dividends and accretion 7,467 7,396 ---------------- ------------- Income (loss) applicable to common stockholders $ 329,147 (136,299) ================ =============
See accompanying notes to consolidated financial statements. 4 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Five Months Ended June 1, 2002 and One Month Ended June 29, 2002 (Dollars in thousands)
Common Stock Retained Accumulated Total --------------------------- Additional earnings other stockholders' Number Par paid-in (accumulated comprehensive equity of shares value capital deficit) income (loss) (deficit) ------------ ------------ ------------ ------------ ------------- ------------ Predecessor: Balance at December 29, 2001 14,250,892 $ 143 $ 160,120 $ (461,186) $ (28,195) $ (329,118) Comprehensive loss: Net loss excluding plan of reorganization and fresh start adjustments - - - (128,670) - (128,670) Currency translation adjustments - - - - (30) (30) ---------- Total comprehensive loss (128,700) ---------- Accretion of Series A Preferred Stock - - - (90) - (90) Preferred dividends declared - - - (7,377) - (7,377) Effect of plan of reorganization and fresh start adjustments: Cancellation of old common stock (14,250,892) (143) (160,120) - - (160,263) Issuance of new common stock and warrants 18,600,000 186 191,438 - - 191,624 Other fresh start adjustments - - - 597,323 28,225 625,548 ----------- ------------ ----------- ----------- ----------- ---------- Successor: Balance at June 1, 2002 18,600,000 186 191,438 - - 191,624 Comprehensive loss: Net loss - - - (1,009) - (1,009) Currency translation adjustment - - - - 46 46 ---------- Total comprehensive loss (963) ---------- ----------- ------------ ----------- ----------- ----------- ---------- Balance at June 29, 2002 18,600,000 $ 186 $ 191,438 $ (1,009) $ 46 $ 190,661 =========== ============ =========== =========== =========== ==========
See accompanying notes to consolidated financial statements. 5 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS One Month Ended June 29, 2002, Five Months Ended June 1, 2002 and Six Months Ended June 30, 2001 (Dollars in thousands)
Successor Predecessor ------------------- ----------------------------- Five Months Six Months One Month Ended Ended Ended June 29, June 1, June 30, 2002 2002 2001 ------------------- ------------- ------------- Cash flows from operating activities: Net income (loss) $ (1,009) 336,614 (128,903) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on cancellation of pre-petition liabilities - (856,375) - Fresh start adjustments - 391,091 - Loss from discontinued operations - - 7,259 Depreciation and amortization 857 18,880 27,659 Impairment of long-lived assets - 31,111 20,085 Changes in assets and liabilities, net of effects of fresh start adjustments and the divestiture of the Blanket Division: Trade receivables (9,881) 20,807 36,024 Inventories (6,950) (3,085) 36,430 Accounts payable and accrued expenses (4,535) (994) (322) Other assets and liabilities 7,196 42,845 3,074 --------- --------- --------- Net cash provided by (used in) operating activities (14,322) (19,106) 1,306 Net cash provided by discontinued operations - 894 726 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 1,864 1,058 1,251 Purchases of property, plant and equipment (1,949) (28,491) (6,380) --------- --------- --------- Net cash used in investing activities (85) (27,433) (5,129) Cash flows from financing activities: Increase (decrease) in checks not yet presented for payment 9,735 4,951 (2,344) Borrowings on revolving credit loans 77,806 70,956 - Repayments on revolving credit loans (74,933) (11,933) - Retirement of long-term debt (696) (41,218) (2,386) --------- --------- --------- Net cash provided by (used in) financing activities 11,912 22,756 (4,730) Net change in cash and cash equivalents (2,495) (22,889) (7,827) Cash and cash equivalents at beginning of period 17,499 40,388 32,182 --------- --------- --------- Cash and cash equivalents at end of period $ 15,004 17,499 24,355 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest $ 323 17,758 37,229 ========= ========= ========= Income taxes $ (6,606) 10 121 ========= ========= =========
Supplemental disclosure of noncash financing information: During the five months ended June 1, 2002, the Company converted several operating leases into capital lease obligations of $24,386. See accompanying notes to consolidated financial statements. 6 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (1) General Pillowtex Corporation, a Delaware corporation ("Pillowtex" or "Parent", and together with its subsidiaries, the "Company"), is one of the largest North American designers, manufacturers, and marketers of home textile products. The Company's extensive product offerings include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products. As a leading supplier across all distribution channels, the Company sells it products to mass merchants, department stores, and specialty retailers. The Company also markets its products to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet. Chapter 11 Proceedings and Reorganization On November 14, 2000 (the "Petition Date"), Pillowtex Corporation, a Texas corporation ("Old Pillowtex"), and substantially all of its domestic subsidiaries (collectively with Old Pillowtex, 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 for the Debtors (the "Chapter 11 Cases") were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 2, 2002, Old Pillowtex announced that the Bankruptcy Court had confirmed the Debtors' Second Amended Joint Plan of Reorganization, with certain modifications (as so modified, the "Plan"). On May 24, 2002 (the "Effective Date"), the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. Pursuant to the Plan, the following transactions were completed on or about the Effective Date: . all of Old Pillowtex's issued and outstanding common stock and preferred stock were cancelled without consideration; . Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation (the "Merger"); . certain indebtedness of the Debtors was cancelled in exchange for cash, common stock, par value $0.01 per share, of Pillowtex ("Common Stock"), and/or warrants to purchase shares of Common Stock ("Warrants"); . designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the issuance by Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the "Exit Term Loan") (the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million (see note 4)); . executory contracts or unexpired leases to which any Debtor was a party were assumed, assumed and assigned, or rejected; . industrial revenue bonds in the aggregate principal amount of $11.4 million were reinstated; . members of the boards of directors and officers of Pillowtex and the reorganized Debtor subsidiaries were elected and began serving their respective terms; and . the overall corporate structure was simplified through the restructuring and dissolution of certain of Old Pillowtex's subsidiaries. On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, 7 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Pillowtex Corporation 2002 Equity Incentive Plan (the "Equity Incentive Plan"), which was implemented in accordance with the Plan. In addition, on the Effective Date, Pillowtex entered into a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility (the "Exit Revolver Facility") with Congress Financial Corporation as agent for a syndicate of lenders. See note 4 for a more detailed description of the Exit Revolver Facility. Fresh Start Adjustments The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24, 2002. However, for financial reporting purposes, the Company deemed the effective date of the Plan to have occurred on June 1, 2002. References to "Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002, and references to "Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. In accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting because holders of existing voting shares of Old Pillowtex immediately before filing and confirmation of the Plan received less than 50% of the Common Stock distributed under the Plan and the Company's reorganization value was less than the Debtors' post-petition liabilities and allowed claims in the aggregate on a consolidated basis. Fresh start reporting requires that the reorganization value of the Company be allocated to its assets in conformity with Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value of the specific tangible or identifiable intangible net assets over reorganization value, or negative goodwill, is to be allocated to noncurrent non-monetary assets on a pro rata basis. Based on the consideration of many factors and various valuation methods, including a discounted cash flow, a comparable public company analysis, a comparable acquisitions analysis, and other applicable analyses believed by the Company's management to be appropriate for the Company's business and industry, the Company and its financial advisors determined the reorganization value of the Company to be approximately $400 million, which served as the basis for the Plan approved by the Bankruptcy Court. Approximately $208.4 million of the reorganization value related to debt and other obligations outstanding as of the Effective Date, and the remaining reorganization value of approximately $191.6 million was assigned as the initial equity of the Company. The $208.4 million of the reorganization value related to debt and other obligations is comprised of $206.3 million of long-term debt and $19.6 million of deferred creditor claim payments and bankruptcy-related professional fees included in accrued expenses, offset by $17.5 million of cash included in current assets in the Successor column in the table below. The fair value of the net assets exceeded the reorganization value by $131.2 million, resulting in negative goodwill. The negative goodwill has been allocated on a proportional basis to property, plant and equipment and certain intangible assets. 8 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) The following table reflects the reorganization adjustments to Old Pillowtex's consolidated balance sheet as of June 1, 2002:
Fresh Plan of Start Predecessor Reorganization Adjustments Successor ------------- ----------------- ------------- ----------- Assets: ------- Current assets $ 364,936 - (953) (e) 363,983 Property, plant and equipment, net 456,739 - (288,321) (f) 168,418 Intangibles, net 229,440 - (179,309) (g) 50,131 Other assets 5,946 - (3,087) (e) 2,859 ----------- ----------- --------- --------- Total assets $ 1,057,061 - (471,670) 585,391 =========== =========== ========= ========= Liabilities and stockholders' equity (deficit): ----------------------------------------------- Liabilities not subject to compromise: Checks not yet presented for payment, accounts payable and accrued expenses $ 101,873 7,393 (a) 4,689 (e) 113,955 Long-term debt 194,901 11,380 (b) - 206,281 Long-term debt in default 520,104 (520,104) (c) - - Noncurrent liabilities 52,147 - 21,384 (e) 73,531 ----------- ----------- --------- --------- Total liabilities not subject to compromise 869,025 (501,331) 26,073 393,767 Liabilities subject to compromise 546,668 (546,668) (c) - - ----------- ----------- --------- --------- Total liabilities 1,415,693 (1,047,999) 26,073 393,767 Redeemable convertible preferred stock 106,652 - (106,652) (h) - Stockholders' equity (deficit) (465,284) 1,047,999 (d) (391,091) (h) 191,624 ----------- ----------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 1,057,061 - (471,670) 585,391 =========== =========== ========= =========
(a) To record certain pre-petition accounts payable and property taxes to be settled in cash. (b) To reinstate industrial revenue bonds. (c) To record elimination of pre-petition liabilities that were cancelled. (d) To record issuance of securities of Pillowtex ($191.6 million) and gain on cancellation of pre-petition liabilities ($856.4 million). (e) To reflect assets and liabilities at fair value. Such revaluations include: -- The reduction of inventory to eliminate the existing LIFO reserves and adjust the carrying value to the estimated market value; -- The addition of warehousing costs to the carrying value of inventory; -- The increase in accrued expenses for certain unfavorable contract commitments; -- The increase in accrued pension and postretirement benefit obligations primarily due to the reduction in the value of the pension plan assets; and -- The reduction in carrying values of certain other assets to reflect fair values. (f) To record at fair value, less allocated portion of negative goodwill. (g) To write off goodwill and adjust trademarks and certain licenses to fair value, less allocated portion of negative goodwill. (h) To write off Old Pillowtex's securities, accumulated deficit and accumulated other comprehensive loss. 9 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) The fresh start adjustments were based upon the work of outside appraisers, actuaries, and financial consultants, as well as internal valuation estimates using discounted cash flow analyses, to determine the relative fair values of the assets and liabilities of the Company and its subsidiaries. Basis of Presentation References in these consolidated financial statements to "Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002. References to "Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. The accompanying consolidated financial statements for the five months ended June 1, 2002 (Predecessor), the six months ended June 30, 2001 (Predecessor) and as of December 29, 2001 (Predecessor) have been presented in accordance with SOP 90-7 and assumed that the Debtors would continue as a going concern. In the Chapter 11 Cases, substantially all unsecured liabilities and under-secured liabilities as of the Petition Date were subject to compromise or other treatment under the Plan. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction were dependent on the outcome of the Chapter 11 Cases have been segregated and classified as liabilities subject to compromise in the accompanying consolidated balance sheets as of June 30, 2001 and December 29, 2001. Pursuant to SOP 90-7, professional fees and other costs associated with the Chapter 11 Cases were expensed as incurred and reported as reorganization items. Interest expense was reported only to the extent that it was to be paid during the Chapter 11 Cases. The accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal, recurring adjustments and accruals, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Old Pillowtex's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 29, 2001 (Commission File No. 1-11756). The June 30, 2001 consolidated financial statements have been restated to present the Blanket Division as a discontinued operation (see note 12). The provisions of EITF No. 00-25 (as defined in note 11) were adopted on December 30, 2001. As a result, $4.8 million and $9.8 million of selling, general, and administrative expenses have been reclassified as a reduction to net sales in the three months and six months ended June 30, 2001, respectively. (2) Inventories Inventories consist of the following:
Successor Predecessor -------------------- ------------------------------------------- June 29, June 30, December 29, 2002 2001 2001 -------------------- ------------------- -------------------- Finished goods $ 99,343 113,756 104,532 Work-in-process 44,522 46,614 40,832 Raw materials and supplies 36,799 58,477 46,828 In-transit and off-site 13,009 6,868 8,386 -------------------- ------------------- -------------------- $ 193,673 225,715 200,578 ==================== =================== ====================
10 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (3) 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 the Warrants would have been anti-dilutive for the one month ended June 29, 2002. Warrants exercisable to purchase up to 3,529,412 shares of Common Stock were outstanding as of June 29, 2002. (4) Long-Term Debt and Liquidity Long-term debt consists of the following:
Sucessor Predecessor ----------------- ----------------------------------- June 29, June 30, December 29, 2002 2001 2001 ----------------- ---------------- ---------------- Exit Revolver Facility $ 61,895 - - Exit Term Loan 111,359 - - Revolver less portion to be treated as post-petition debt - 241,021 233,051 Term loans less portion to be treated as post-petition debt - 250,204 242,004 Portion of revolver and term loans to be treated as post-petition debt - 150,000 150,000 Overline Credit Facility - 34,738 34,738 DIP Financing Facility - - - Industrial revenue bonds with interest rates from 1.35% to 2.19% and maturities through July 1, 2021; generally collateralized by land, buildings and letters of credit 11,380 13,860 13,185 9% Senior Subordinated Notes due 2007 - 185,000 185,000 10% Senior Subordinated Notes due 2006 - 125,000 125,000 6% Convertible Subordinated Debentures due 2012 inclusive of Cash Claimant Notes in the principal amount of $5.2 million - 90,417 90,417 Capital lease obligations 23,675 - - Other debt - 1,811 2,106 ----------------- ---------------- ---------------- Total debt 208,309 1,092,051 1,075,501 Less: Current portion of long-term debt (6,653) - (356) Current portion of long-term debt in default - (678,923) (660,893) Long-term debt in default - (12,673) (10,920) Liabilities subject to compromise - (400,455) (402,687) ----------------- ---------------- ---------------- Total long-term debt $ 201,656 - 645 ================= ================ ================
Exit Revolver Facility As discussed in note 1, the Company entered into the Exit Revolver Facility on the Effective Date. The Exit Revolver Facility is a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility. Parent and certain of its domestic subsidiaries are borrowers under the Exit Revolver Facility, and Parent's other domestic and Canadian subsidiaries are guarantors thereunder. The availability of borrowings under the Exit Revolver Facility generally is based on a percentage of eligible accounts receivable and eligible inventory, subject to certain reserves that can be established by the lender. In addition, the borrowers may, at their option, borrow up to a maximum principal amount of $10 million as part of the $200 million facility based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. Any such loan would be partially amortized over the remaining term of the Exit 11 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Revolver Facility. The Exit Revolver Facility is secured by a pledge of the stock of the subsidiaries, a first priority lien on the accounts receivable, inventory, and trademarks, as well as certain real property and equipment, of the borrowers and guarantors, and a second priority lien on the primary collateral that secures the Exit Term Loan. All borrowings under the Exit Revolver Facility bear interest at an annual rate equal to, at Parent's option, the lender's prime rate or the prevailing adjusted Eurodollar rate, in either case plus a specified margin determined based on the amount of excess availability and the Company's leverage ratio. The average interest rate on the Exit Revolver Facility was 5.0% for the month ended June 29, 2002. The Exit Revolver Facility includes an unused commitment fee of either 3/8% or 1/2% per annum (depending on excess availability and the leverage ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2% per annum on the daily outstanding balance of letters of credit issued under the Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of the amount of the maximum credit if the Exit Revolver Facility is terminated in whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of the reduction of the maximum credit if the Company reduces the maximum credit in part at the time of any such reduction. The Exit Revolver Facility contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of Pillowtex or any of its subsidiaries, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, effect mergers, consolidations, and dissolutions, prepay and refinance debt, and make certain changes in its business. The Exit Revolver Facility also establishes a minimum earnings threshold as defined herein that applies at any time excess availability is less than $35 million. As of June 29, 2002, $61.9 million was outstanding under the Exit Revolver Facility and outstanding letters of credit under the Exit Revolver Facility aggregated $23.7 million. Availability as of June 29, 2002 was $111.2 million. Exit Term Loan On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures the Exit Revolver Facility. The Exit Term Loan was entered into by Pillowtex in exchange for cancellation of designated post-petition loans having an aggregate principal amount of $150 million which were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds from the Exit Term Loan. Pillowtex is the borrower under the Exit Term Loan and substantially all of its subsidiaries are guarantors thereunder. The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on the last day of March, June, September, and December, commencing on September 30, 2002. In addition to scheduled payments of principal on the last day of June and December, commencing December 31, 2002, Pillowtex is required to prepay the Exit Term Loan (i) with the net cash proceeds from the sale of certain assets, and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to the minimum excess availability requirements contained in the Exit Revolver Facility), with 50% of the excess cash flow, if any, for the preceding fiscal year. The Exit Term Loan also contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions, prepay debt, and make certain changes in its business, to adopt newly-issued generally accepted accounting standards as appropriate and new tax requirements as they are enacted. The Exit Term Loan requires compliance with a maximum leverage ratio and a minimum interest coverage ratio. Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million utilizing borrowings under the Exit Revolver Facility. Under the Exit Term Loan, Pillowtex has paid or will pay an annual administrative fee of $150,000 on the Effective Date and each anniversary thereof. As of June 29, 2002, $111.4 million was outstanding under the Exit Term Loan. 12 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) DIP Financing Facility On December 12, 2000, the Bankruptcy Court entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150 million debtor-in-possession financing facility, including a $60 million letter of credit sub-facility (the "DIP Financing Facility") with Bank of America, N.A. as administrative agent for a syndicate of financing institutions comprised of certain of Old Pillowtex's pre-petition senior secured lenders. The size of the DIP Financing Facility was subsequently reduced to $100 million, including the $60 million letter of credit sub-facility. The DIP Financing Facility expired by its terms on the Effective Date. No loan amounts were outstanding under the DIP Financing Facility on the Effective Date. Letters of credit outstanding under the DIP Financing Facility as of the Effective Date are being replaced with letters of credit issued under the Exit Revolver Facility. As of June 29, 2002, outstanding letters of credit of $2.5 million remained outstanding under the DIP Financing Facility. The lenders under the DIP Financing Facility were holding approximately $8.1 million as collateral for outstanding letters of credit issued under the facility. As these letters of credit are replaced with letters of credit issued under the Exit Revolver Facility, the funds will be returned to the Company. Senior Debt Facilities In December 1997, in connection with its acquisition of Fieldcrest Cannon, Old Pillowtex 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 million revolving credit facility and a $250 million term loan facility. The term loan facility consisted of a $125 million Tranche A Term Loan and a $125 million Tranche B Term Loan. Effective July 28, 1998, Old Pillowtex amended these facilities by increasing the Tranche B Term Loan to $225 million. The increase occurred in conjunction with the acquisition of The Leshner Corporation, allowing Old Pillowtex to fund the transaction and reduce borrowings under the revolving credit facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan bore interest at a rate based upon LIBOR plus 3.5%. The Tranche B Term Loan bore interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.5%. The weighted average annual interest rate on outstanding borrowings under the various pre-petition senior credit facilities for the five months ended June 1, 2002 was 5.7%. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Debtors to make scheduled interest payments on the pre-petition senior debt facilities during the pendency of the Chapter 11 Cases. As of the Effective Date, the outstanding indebtedness under the revolving credit facility and the term loan facility was $232.6 million and $241.4 million, respectively, after designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the Exit Term Loan. On the Effective Date, pursuant to the Plan the amounts outstanding were cancelled, and in exchange therefor, holders of claims in respect of the senior debt facilities became entitled to receive Common Stock. Overline Facility In May 1999, Old Pillowtex entered into a $20 million senior unsecured revolving credit facility (the "Overline Facility") to obtain additional working capital availability. On July 27, 1999, the Overline Facility was amended to increase the funds available to $35 million and to secure it with the same assets securing the senior debt facilities described above. Amounts borrowed under the Overline Facility bore interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3%, at Old Pillowtex's option. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized Old Pillowtex to make scheduled interest payments on the Overline Facility during the pendency of the Chapter 11 Cases. 13 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) On the Effective Date and pursuant to the Plan, the outstanding indebtedness on the Overline Facility of $34.8 million was cancelled, and in exchange therefor, holders of claims in respect of the Overline Facility became entitled to receive Common Stock and Warrants. Senior Subordinated Debt In connection with its acquisition of Fieldcrest Cannon, Old Pillowtex issued $185 million of 9% Senior Subordinated Notes due 2005 (the "9% Notes"), with interest payable semiannually commencing June 15, 1998. The 9% Notes were general unsecured obligations of Old Pillowtex, were subordinated in right of payment to all existing and future senior indebtedness, and ranked pari passu with the 10% Notes described below. On November 12, 1996, Old Pillowtex issued $125 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 were general unsecured obligations of the Company, were subordinated in right of payment to all existing and future senior indebtedness, and ranked pari passu with the 9% Notes. No principal or interest payments were made on the 9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases. On the Effective Date, pursuant to the Plan indebtedness under the 9% Notes and 10% Notes of $185 million and $125 million, respectively, was cancelled, and in exchange therefore, holders of claims in respect of 9% Notes or 10% Notes became entitled to receive Common Stock and Warrants. Fieldcrest Cannon 6% Convertible Debentures As a result of Old Pillowtex's acquisition of Fieldcrest Cannon, the outstanding Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6% Convertible Debentures") were convertible, at the option of the holders, into a combination of cash and common stock of Old Pillowtex. As of the Effective Date, approximately $85.2 million aggregate principal amount of the 6% Convertible Debentures remained outstanding. 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 the 6% Convertible Debentures who had surrendered their debentures for conversion, but had not been paid the cash portion of the conversion consideration. As of the Effective Date, the aggregate amount of the outstanding Cash Claimant Notes was $5.2 million. No principal or interest payments were made on the 6% Convertible Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases. On the Effective Date, pursuant to the Plan the indebtedness under the 6% Convertible Debentures was cancelled, and in exchange therefor, holders of claims in respect of the 6% Convertible Debentures became entitled to receive Warrants, and the indebtedness under the Cash Claimant Notes was cancelled, and in exchange therefor, holders of claims in respect of the Cash Claimant Notes became entitled to receive Common Stock and Warrants. Industrial Revenue Bonds The Company presently has obligations in respect of two industrial revenue bond facilities that were reinstated on the Effective Date (the "IRB Facilities"). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of June 29, 2002, approximately $11.4 million of bonds in the aggregate were outstanding under the IRB Facilities. On February 6, 2001, the Bankruptcy Court authorized the Debtors to make scheduled principal and interest payments on the IRB Facilities. Even though these payments were being made, the Debtors remained in default of 14 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) its obligations under each of the IRB Facilities. On the Effective Date, pursuant to the Plan the IRB Facilities were reinstated and the letters of credit issued in respect thereof under the senior debt facilities described above were replaced with equivalent letters of credit issued under the Exit Revolver Facility. During the pendency of the Chapter 11 Cases, two industrial revenue bond facilities matured pursuant to their terms and were paid off by the Debtors pursuant to an order of the Bankruptcy Court. The plant facility associated with another industrial revenue bond financing was closed, and the Debtors agreed to have the Bankruptcy Court lift the automatic stay to enable the lender to foreclose on the equipment collateral to satisfy partially the obligations of the Debtor thereunder. Capital Lease Obligations Certain existing operating leases were renegotiated as part of the reorganization process. The renegotiated leases have been classified as capital lease obligations. These leases have interest rates between 7.5% and 9%, and have terms between 48 and 60 months. The total amount of operating leases converted to capital lease obligations during the five months ended June 1, 2002 was approximately $24.4 million. As of June 29, 2002, $23.7 million was outstanding under capital lease obligations. Adequacy of Capital Resources The Company's principal sources of liquidity will be cash flows from operations and borrowings under the Exit Revolver Facility. Based on current and anticipated levels of operations, the Company's management believes that cash flows from operations, together with amounts available under the Exit Revolver Facility, will be adequate to meet the Company's anticipated cash requirements, including debt service requirements and planned capital expenditures. In the event that the Company's borrowing base, comprised of a percentage of eligible accounts receivable and eligible inventory after reserves, becomes insufficient to support additional borrowing under the Exit Revolver Facility, the borrowers thereunder have the option of borrowing up to a maximum principal amount of $10 million (as part of the overall $200 million commitment) based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. However, since the amount of any such loan is dependent on the appraised value of such real property and equipment at the time the option is exercised by the borrowers, no assurance can be given as to the amount of additional borrowing that would actually be available to the borrowers in such circumstances. In the event that cash flows, together with available borrowings under the Exit Revolver Facility, were not sufficient to meet the Company's cash requirements, the Company would be required to obtain alternative financing or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that, except for miscellaneous real property and equipment, substantially all of the Company's existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, industrial revenue bonds and capital lease obligations, or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. 15 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Scheduled Maturities As of June 29, 2002, the scheduled maturities of long-term debt are as follows: Year Amount ---- ------ Remainder of 2002 $ 3,527 2003 8,587 2004 15,214 2005 78,745 2006 14,491 2007 77,745 Thereafter 10,000 The scheduled maturities reflect the expiration of the Exit Revolver Facility in 2005, and the final payment on the Exit Term Loan in 2007. (5) Stockholders' Equity Pillowtex's authorized capital stock consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"). On June 29, 2002, there were 18,600,000 shares of Common Stock issued and outstanding and no shares of Preferred Stock issued and outstanding. On the Effective Date, pursuant to the Plan, 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants and 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Equity Incentive Plan. Common Stock The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by Pillowtex's Board of Directors (the "Board") from funds legally available for payment of dividends. However, Pillowtex does not presently anticipate that dividends will be paid on Common Stock in the foreseeable future. Furthermore, payment of dividends is restricted by the terms of the Exit Term Loan and the Exit Revolver Facility. In the event of a liquidation, dissolution, or winding up of Pillowtex, holders of Common Stock will be entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of outstanding Preferred Stock, if any. Holders of Common Stock have no preemptive, subscription, redemption, or conversion rights. All of the outstanding shares of Common Stock are validly issued, fully paid, and nonassessable. Warrants On the Effective Date, pursuant to the Plan, Warrants initially exercisable to purchase up to 3,529,412 shares of Common Stock were issued. The Warrants were issued under the Warrant Agreement entered into between Pillowtex and Mellon Investor Services L.L.C. Approximately $9.9 million was assigned to the value of the Warrants on the Effective Date and has been included in additional paid-in capital. Each Warrant initially entitles the owner thereof to acquire one share of Common Stock at a cash exercise price of $28.99. Warrants may also be exercised on a cashless basis, subject to the terms and conditions set forth in the Warrant Agreement. The Warrants expire on November 24, 2009, i.e., the date that is seven and one-half years after the Effective Date. The exercise price and the number and kind of shares purchasable upon exercise of a Warrant will be subject to adjustment upon events specified in the Warrant Agreement. Preferred Stock Pillowtex is authorized to issue 10,000,000 shares of Preferred Stock. The Board has the authority to issue Preferred Stock from time to time in one or more classes or series and to fix the price, rights, preferences, privileges, and 16 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) restrictions thereof, including dividend rights, dividend rates, conversion rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting a series or the designation of such series, without any further vote or action by Pillowtex's stockholders. The Preferred Stock may be issued in distinctly designated series, may be convertible into Common Stock, and may rank prior to the Common Stock as to dividend rights, liquidation preferences, or both. The express terms of shares of a different series of any particular class of Preferred Stock will be identical except for such variations as may be permitted by law. Pillowtex's Certificate of Incorporation provides that the Board may not, without the approval of the holders of a majority of the capital stock of Pillowtex or any class or series entitled to vote generally in the election of directors, authorize any series of Preferred Stock or issue any shares of Preferred Stock, or rights to acquire shares of Preferred Stock, in connection with a stockholders' rights plan or any similar plan or arrangement. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss), pension equity adjustments, and foreign currency translation adjustments. For the one month ended June 30, 2002, comprehensive loss was $1.0 million. For the two months and five months ended June 1, 2002, comprehensive loss before the gain on cancellation of pre-petition liabilities and fresh start adjustments was $79.5 million and $128.7 million, respectively. For the three month and six months ended June 30, 2001, comprehensive loss was $80.7 million and $129.1 million, respectively. (6) Redeemable Convertible Preferred Stock On December 19, 1997, Old Pillowtex issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65 million less $2.1 million of issue costs. Accretion was being recognized to increase the recorded amount to the redemption amount over the period to the redemption date. Dividends accrued from the issue date through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000, the rate increased to 10% as a result of Old Pillowtex's earnings per share for 1999 falling below predetermined targets. During the third and fourth quarters of 1999, Old Pillowtex 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 were payable in cash or additional shares of Series A Preferred Stock until December 2002, at which time they would have become payable solely in cash. Under the DIP Financing Facility, Old Pillowtex was 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 the Effective Date. The commencement of the Chapter 11 Cases constituted an "Event of Noncompliance" under the terms of the Series A Preferred Stock. The terms of the Series A Preferred Stock provided that upon the occurrence of an Event of Noncompliance, the dividend rate on such stock would increase immediately to the lesser of 18% per annum and 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. On the Effective Date, pursuant to the Plan the Series A Preferred Stock was cancelled without consideration. (7) 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 two major divisions that it considers operating segments: (1) Bed and Bath and (2) 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 Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. Other includes the Company's retail stores, corporate activities, and the remaining assets associated with the Blanket Division (see note 12). 17 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) The accounting policies of the divisions are the same as those described in the "Summary of Significant Accounting Policies" in Old Pillowtex's Annual Report on Form 10-K for the year ended December 29, 2001. The Company evaluates division performance based on gross profit. Interdivisional sales are not material. Information about the divisions is presented below:
Successor ------------------------------------------------------------------ One Month Ended June 29, 2002 ------------------------------------------------------------------ Bed Pillow and and Bath Pad Other (1) Total ------------------------------------------------------------------ Net sales $ 52,414 17,451 1,426 71,291 Gross profit (loss) 5,992 2,597 (2,589) 6,000 Depreciation and amortization 561 64 232 857 Capital expenditures 1,303 90 556 1,949 Total assets 451,918 84,834 55,231 (2) 591,983 Predecessor ------------------------------------------------------------------ Two Months Ended June 1, 2002 ------------------------------------------------------------------ Bed Pillow and and Bath Pad Other (1) Total ------------------------------------------------------------------ Net sales $ 104,435 32,987 1,703 139,125 Gross profit (loss) 3,417 1,873 (6,542) (1,252) Depreciation and amortization 4,876 164 2,540 7,580 Capital expenditures 22,919 584 838 24,341 Total assets (3) 791,189 105,338 160,534 (2) 1,057,061 Predecessor ------------------------------------------------------------------ Three Months Ended June 30, 2001 ------------------------------------------------------------------ Bed Pillow and and Bath Pad Other (1) Total ------------------------------------------------------------------ Net sales $ 172,397 55,004 4,982 232,383 Gross profit (loss) 760 5,728 (12,742) (6,254) Depreciation and amortization 9,907 932 3,043 13,882 Capital expenditures 1,041 402 2,987 4,430 Total assets 802,298 133,590 264,557 (2) 1,200,445
18 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Predecessor ---------------------------------------------- Five Months Ended June 1, 2002 ---------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ---------------------------------------------- Net sales $ 285,084 88,695 6,271 380,050 Gross profit (loss) 14,190 7,810 (13,891) 8,109 Depreciation and amortization 12,323 954 5,603 18,880 Capital expenditures 25,030 938 2,523 28,491 Total assets (3) 791,189 105,338 160,534 (2) 1,057,061 Predecessor ------------------------------------------------- Six Months Ended June 30, 2001 ------------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ------------------------------------------------- Net sales $ 379,288 117,094 9,843 506,225 Gross profit (loss) 7,274 12,371 (23,491) (3,846) Depreciation and amortization 20,095 1,756 5,808 27,659 Capital expenditures 1,861 402 4,117 6,380 Total assets 802,298 133,590 264,557 (2) 1,200,445 (1) Includes retail stores and miscellaneous corporate activities, including the Company's central information technology, manufacturing, human resources, and purchasing departments. (2) Corporate amounts include primarily data processing equipment and software, other enterprise-wide assets not allocated to the segments, and the net assets associated with the Blanket Division. (3) Does not reflect adjustments for fresh start reporting (note 1). (8) Restructuring Charges and Impairment of Long-lived Assets During the first quarter of 2002, a restructuring charge of $3.0 million associated with the closure of three facilities was incurred. The towel finishing operations in Columbus, Georgia and Phenix City, Alabama closed in July 2002 and impacted approximately 980 employees. The majority of the goods finished at the plants are now being finished at an existing facility in Kannapolis, North Carolina, and the remaining items are being purchased from other suppliers. The automated sewing facility in Dallas, Texas closed in June 2002 and resulted in the termination of approximately 99 employees. The facility's operations were consolidated into other existing pillow and pad facilities. The restructuring charge consisted principally of severance and benefits, which the Company anticipates it will complete paying in the third quarter of 2002. During the two months ended June 1, 2002, a restructuring charge of $1.2 million was incurred. Approximately $0.8 million of the charge relates to a loss resulting from curtailment of defined benefit pension plans for hourly and salaried employees at the closed facilities in Columbus, Georgia and Phenix City, Alabama. A curtailment is an event that significantly reduces the expected years of future service of present employees or eliminates for a 19 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) significant number of employees the accrual of defined benefits for some or all of their future services. The remaining $0.4 million restructuring charge is primarily due to a revision in the estimated cost of benefits provided to the employees at Columbus, Georgia and Phenix City, Alabama after termination. A charge for impairment of long-lived assets of $30.9 million was incurred during the first quarter of 2002 for assets located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge consists of $9.0 million for real property and $21.9 million for machinery and equipment. 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. During the two months ended June 1, 2002, an additional charge of $0.2 million relating to machinery and equipment located at the Phenix City, Alabama location was incurred. These assets have been classified as assets held for sale as of June 29, 2002. Activity in the reserve established for the restructuring charges is presented below: Balance, December 30, 2001 $ 1,063 Restructuring charge 4,233 Reclassification of curtailment loss to pension liability (751) Payments (3,983) ---------- Balance, June 29, 2002 $ 562 ========== During the six months ended June 30, 2001, the closure of several facilities was announced. The facilities included a towel manufacturing facility in Hawkinsville, Georgia; a cut-and-sew bedding facility in Rocky Mount, North Carolina; a sheet manufacturing facility in Kannapolis, North Carolina; a towel yarn manufacturing operation in Columbus, Georgia, and a towel warehouse and distribution center in Phenix City, Alabama. The Rocky Mount, North Carolina facility manufactured decorative bedding exclusively under a licensing agreement, which expired on June 30, 2001. The majority of the production at the other facilities was relocated to existing facilities. The closures resulted in the termination of approximately 1,130 employees. Restructuring charges of $4.5 million and $6.5 million related to these closures were incurred in the three months and six months ended June 30, 2001, respectively. An impairment charge of $20.1 million in the second quarter of 2001 primarily related to the assets in the closed facilities discussed above was also recognized. (9) Reorganization Items The following items have been recognized as reorganization items in the statements of operations:
Predecessor --------------------------------------------------------------------- Two Months Three Months Five Months Six Months Ended Ended Ended Ended June 1, June 30, June 1, June 30, 2002 2001 2002 2001 -------------- ----------------- ----------------- --------------- Gain on cancellation of pre-petition liabilities $ (856,375) - (856,375) - Fresh start adjustments 391,091 - 391,091 - Other: Professional fees and other costs associated with the Chapter 11 Cases 12,682 3,799 17,110 10,110 Retention incentive plan 365 1,206 1,156 3,108 Rejected contracts and lease agreements 48,352 8,936 48,570 8,936 Interest income on investments (69) (401) (203) (989) -------------- ----------------- ----------------- --------------- Total other 61,330 13,540 66,633 21,165 -------------- ----------------- ----------------- --------------- $ (403,954) 13,540 (398,651) 21,165 ============== ================= ================= ===============
20 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Key Employee Retention Program. To stabilize employee relations, the Debtors developed a key employee retention plan (the "Retention Plan"), which the Bankruptcy Court approved on March 6, 2001. The Retention Plan was designed to, among other things, ensure that the employees most critical to the Debtors' reorganization efforts were provided with sufficient economic incentives and protections to remain with the Debtors and fulfill their responsibilities through the successful conclusion of the Chapter 11 Cases. The Retention Plan consists of three separate components: (a) a retention incentive plan (the "Retention Incentive Plan"), (b) an emergence performance bonus plan, and (c) an employee severance plan. Under the Retention Incentive Plan, each eligible employee earned a specified retention incentive payment (the "Retention Incentive Payment"), based upon a percentage of his or her salary as determined by the Company's management, if the employee remained actively employed by the Company on the specified dates. Under the Retention Incentive Plan, three installments were paid on April 9, 2001, November 14, 2001, and May 14, 2002. The final installment of the Retention Incentive Payment of $1.6 million was paid on May 31, 2002. The total amount paid under the Retention Incentive Plan was approximately $6.5 million. No amounts were paid under the emergence performance bonus plan. Rejected Contracts and Leases. During the pendency of the Chapter 11 Cases, the Debtors reviewed their executory contracts and unexpired leases and received approval from the Bankruptcy Court to reject certain contracts and leases. In this context, "rejection" means that the Debtors were relieved from their obligations to perform further under the contract or lease and were subject only to a claim for damages for the breach thereof. Any claim for damages resulting from the rejection of a contract or lease was treated as a general unsecured claim in the Chapter 11 Cases, and the allowed amount of such claim was recognized as a reorganization item. On the Effective Date, pursuant to the Plan, holders of claims in respect of damages became entitled to receive Common Stock and Warrants. (10) 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. Predecessor Periods No income tax benefit was recognized for the loss from continuing operations before reorganization items for the two months ending June 1, 2002. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. In addition, no income tax expense or benefit was recognized on reorganization items for the two months ending June 1, 2002. The items of income and expense included in the reorganization income are non-taxable and non-deductible, respectively. For the five months ending June 1, 2002, the increase in the valuation allowance was partially offset by a $7.2 million tax refund related to a 2001 net operating loss. The reduction of the valuation allowance for the 2001 net operating loss resulted from a provision in Congress' economic stimulus package enacted during the first quarter of 2002 that changed the period for carryback of net operating losses. This change allowed Old Pillowtex to carry back a portion of the 2001 net operating loss five years rather than two years. If all or a portion of Old Pillowtex's deferred tax asset is realized in the future, or considered "more likely than not" realizable by management, intangibles will be reduced first and any excess treated as an increase to additional paid-in capital. 21 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Successor Periods The Company did not recognize an income tax benefit for the loss incurred in the one month ended June 29, 2002. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. Bankruptcy Impact In connection with the reorganization, a gain on cancellation of indebtedness was realized. This gain will not be taxable since the gain resulted from reorganization under the Bankruptcy Code. However, the Company will be required, as of the beginning of its 2003 taxable year, to reduce certain attributes including net operating loss carryforwards ("NOLs"), certain tax credits and tax bases in assets in an amount equal to such gain on extinguishment. The reorganization of the Company on the Effective Date constituted an ownership change under Section 382 of the Internal Revenue Code. Consequently, the use of any of the NOLs and tax credits generated prior to the ownership change, that are not reduced pursuant to the provisions discussed above, will be subject to an annual limitation. (11) Recently Issued or Adopted Accounting Standards The Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future", and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" (collectively, the "EITFs"), which address various aspects of accounting for consideration given by a vendor to a customer or a reseller of products. The provisions of the EITFs were adopted as of the beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require all consideration paid to customers to be classified as a reduction to net sales. Prior to December 30, 2001, amounts paid to customers for co-operative advertising and marketing were classified in selling, general, and administrative expenses. As a result, $4.8 million and $9.8 million of selling, general, and administrative expenses have been reclassified as a reduction to net sales for the three months and six months ended June 30, 2001, respectively. In July 2001, the FASB 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. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. SFAS No. 142 was adopted as of December 30, 2001. The Company has restated its intangible assets to their estimated fair values on June 1, 2002, in conjunction with fresh start reporting (see note 1). 22 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Pro forma loss from continuing operations applicable to common stockholders and loss applicable to common stockholders for the three months and six months ended June 30, 2001, adjusted to eliminate historical amortization of goodwill and intangibles with indefinite lives, are as follows:
Predecessor -------------------------- Three Six Months Months Ended Ended June 30, June 30, 2001 2001 ----------- ------------ Loss from continuing operations applicable to common stockholders - as reported $ (84,373) (136,299) =========== ============ Loss from continuing operations applicable to common stockholders - pro forma $ (82,810) (133,155) =========== ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment of a business (as previously defined in Opinion 30). SFAS No. 144 also retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The provisions of SFAS No. 144 were adopted as of December 30, 2001. The adoption of SFAS No. 144 for long-lived assets held for use did not have a material impact on the consolidated financial statements because the impairment assessment requirements under SFAS No. 144 are largely unchanged from SFAS No. 121. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145, among other things, prohibits the classification of gains and losses from extinguishment of debt as extraordinary unless they meet the criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted upon the Statement's issuance, and as such, the gain recognized by Old Pillowtex on the extinguishment of debt resulting from the emergence from the chapter 11 bankruptcy proceedings has been classified as a reorganization item. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with an exit activity (including a restructuring) or with a disposal of long-lived assets. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets. Under current accounting guidance, a liability can be recorded when management has committed to an exit plan. The requirements under SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Restatement of previously issued financial statements is not permitted. (12) Discontinued Operations On September 6, 2001, Old Pillowtex sold the majority of the inventory and fixed assets associated with its Blanket Division to Beacon Blankets, Inc. (fka Beacon Acquisition Corporation) (the "Purchaser") for approximately $13.4 23 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) million. The results of operations and net assets of the Blanket Division have been accounted for as a discontinued operation. As a result, the June 30, 2001 consolidated financial statements have been restated to reflect the Blanket Division as a discontinued operation. The loss from discontinued operations was $4.2 million and $7.3 million for the three months and six months ended June 30, 2001, respectively. (13) Subsequent Events On July 5, 2002, the Company granted restricted stock awards totaling 394,000 shares of Common Stock and options to acquire 594,200 shares of Common Stock to certain of its key employees. The restricted stock awards and options, as provided in the Plan, were made pursuant to the terms of the Equity Incentive Plan. Restrictions on the restricted stock awards lapsed immediately upon grant with respect to one-third of the shares, while the restrictions on the remaining two-thirds of the shares lapse in equal installments on the first and second anniversary date of the grant. The cost of issuing the restricted stock will be charged to earnings over the vesting period. During the one month ended June 29, 2002 and the two months ended June 1, 2002, approximately $0.4 million and $0.8 million, respectively, was charged to earnings. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report, and with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of Pillowtex Corporation, a Texas corporation ("Old Pillowtex"), as filed with the Securities and Exchange Commission (Commission File No. 1-11756) for the fiscal year ended December 29, 2001. Pillowtex Corporation, a Delaware corporation, is referred to herein as "Pillowtex" or "Parent" and, together with its subsidiaries, as the "Company." Chapter 11 Proceedings and Reorganization On November 14, 2000 (the "Petition Date"), Old Pillowtex and substantially all of its domestic subsidiaries (collectively with Old Pillowtex, 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 for the Debtors (the "Chapter 11 Cases") were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 2, 2002, Old Pillowtex announced that the Bankruptcy Court had confirmed the Debtors' Second Amended Joint Plan of Reorganization, with certain modifications (as so modified, the "Plan"). On May 24, 2002 (the "Effective Date"), the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. Pursuant to the Plan, the following transactions were completed on or about the Effective Date: . all of Old Pillowtex's issued and outstanding common stock and preferred stock were cancelled without consideration; . Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation (the "Merger"); . certain indebtedness of the Debtors was cancelled in exchange for cash, common stock, par value $0.01 per share, of Pillowtex ("Common Stock"), and/or warrants to purchase shares of Common Stock ("Warrants"); . designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the issuance by Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the "Exit Term Loan") (the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million (see note 4 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report)); . executory contracts or unexpired leases to which any Debtor was a party were assumed, assumed and assigned, or rejected; . industrial revenue bonds in the aggregate principal amount of $11.4 million were reinstated; . members of the boards of directors and officers of Pillowtex and the reorganized Debtor subsidiaries were elected and began serving their respective terms; and . the overall corporate structure was simplified through the restructuring and dissolution of certain of Old Pillowtex's subsidiaries. On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Pillowtex Corporation 2002 25 Equity Incentive Plan (the "Equity Incentive Plan"), which was implemented in accordance with the terms of the Plan. In addition, on the Effective Date, Pillowtex entered into a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility (the "Exit Revolver Facility") with Congress Financial Corporation as agent for a syndicate of lenders. See "- Liquidity and Capital Resources" below and note 4 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report for a more detailed description of the Exit Revolver Facility. Critical Accounting Policies Management considers certain accounting policies related to sales returns and allowances, inventory, and impairment of long-lived assets to be "critical" because they have a significant impact in portraying the Company's financial condition and results of operations and require management's most difficult, subjective, and complex judgments due to the need to make estimates about the effects of matters that are inherently uncertain. Sales returns and allowances require management to estimate the eventual expense of all returns and other sales allowances for products shipped and recorded in net sales each period. Management bases its estimate of the expense to be recorded each period on historical returns and allowance levels. At June 29, 2002, a reserve of $7.7 million was recorded and included as an allowance against trade accounts receivable. This allowance includes $2.0 million for returns and allowances not yet claimed by customers, but which management believes is necessary based on historical deduction levels. Management does not believe the likelihood is significant that materially higher deduction levels will result given its experience with the sales and returns deduction activities of its customers in the past few years. Inventory requires management to estimate the net realizable value of the Company's obsolete and slow moving inventory at the end of each period. Management bases its net realizable value estimate on the actual proceeds received for similar inventory items in the most recent three-month period in the Company's Bed and Bath Division and a review of the age of inventory on hand in its Pillow and Pad Division. The Company's determination of the net realizable value of inventory assumes that approximately 35% of the cost of obsolete and slow moving inventory is recovered. Based on experiences in the past few years with selling obsolete and slow moving inventory to various promotional and alternative markets, management does not believe the likelihood is significant that materially higher inventory write-downs due to obsolescence are required. If the assumptions made by management in estimating sales returns and allowances and inventory obsolescence do not reflect the actual expenses to be incurred, net sales and gross profit could be reduced significantly. When management determines that a long-lived asset has been impaired, an estimate of the fair value is required. The methodology used to determine fair value depends on whether the asset will continue to be used in the business or will be sold. Assets held for sale are recorded at their estimated fair values. Management bases its estimate of the fair value on available information from the sale of similar assets in similar locations and appraisals as well as economic conditions. Given the significant number of recent plant closures in the textile industry in the geographic areas where the Company operates, the likelihood is remote that historical sales levels will be achieved, and management attempts to take this into consideration when determining fair values. Management continually reviews its fair value estimates and records further impairment charges for assets held for sale when management determines, based on new and reliable information, that such charges are appropriate. At June 29, 2002, the Company had $18.7 million in assets held for sale, of which $12.6 million relates to real property and $6.1 million relates to machinery and equipment. While management has exercised its good faith business judgment in determining such amounts, based on the fluctuations in fair values for transactions completed in 2001 and 2002 and the adjustments recorded during fiscal 2001, management believes it is reasonably possible that the Company will not fully recover these balances and that additional impairment charges may be required in subsequent periods. Fresh Start Reporting and Factors Affecting Comparability of Financial Information The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24, 2002. However, for financial reporting purposes, the Company deemed the Effective Date of the Plan to have occurred on June 1, 2002. Fresh start reporting has been implemented as of June 1, 2002, and accordingly, at such date all assets and liabilities were restated to reflect their respective fair values. See note 1 to the unaudited consolidated financial statements included 26 elsewhere in this Quarterly Report for a discussion of the fresh start adjustments. For financial reporting purposes, references to "Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002, and references to "Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements. However, for purposes of discussion of results of operations, the one month ended June 29, 2002 (Successor) has been combined with the two months ended June 1, 2002 (Predecessor) and then compared to the three months ended June 30, 2001 (Predecessor). Similarly, for year-to-date discussion of results of operations, the one month ended June 29, 2002 (Successor) has been combined with the five months ended June 1, 2002 (Predecessor) and compared with the six months ended June 30, 2001 (Predecessor). Results of Operations As a result of the sale of the Blanket Division on September 6, 2001, operations of the Blanket Division have been accounted for as a discontinued operation. The results of operations for the three months and six months ended June 30, 2001 have been restated to reflect the Blanket Division as a discontinued operation. Amounts paid to customers for co-operative advertising and marketing were classified as a reduction to net sales beginning on December 30, 2001. Prior to fiscal 2002, these amounts were classified in selling, general, and administrative expenses. Approximately $4.8 million and $9.8 million have been reclassified from selling, general, and administrative expenses as a reduction to net sales in the three months and six months ended June 30, 2001, respectively, to conform to the 2002 presentation. See "- New Accounting Standards" below. The operating results of the Company's segments are disclosed in note 7 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report. The following table shows the combined 2002 periods in comparison to the corresponding 2001 periods (dollars in thousands):
Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ---------- ---------- --------- ---------- Net sales $ 210,416 232,383 451,341 506,225 Cost of goods sold 205,668 238,637 437,232 510,071 ---------- ---------- --------- ---------- Gross profit (loss) 4,748 (6,254) 14,109 (3,846) Selling, general, and administrative 14,582 15,632 30,699 34,707 expenses Impairment of long-lived assets 192 20,085 31,111 20,085 Restructuring charges 1,200 4,488 4,233 6,465 Interest expense 7,968 16,455 18,269 35,376 Reorganization items (403,954) 13,540 (398,651) 21,165 Income tax benefit - - (7,157) - ---------- ---------- --------- ---------- Income (loss) from continuing 384,760 (76,454) 335,605 (121,644) operations Loss from discontinued operations - 4,222 - 7,259 ---------- ---------- --------- ---------- Net income (loss) $ 384,760 (80,676) 335,605 (128,903) ========== ========== ========= ==========
Net Sales. Net sales were $210.4 million for the three-month period ended June 29, 2002, a decrease of $22.0 million or 9.5% from the comparable three-month period ended June 30, 2001. Net sales for the six-month period ended June 29, 2002 were $451.3 million, a decrease of $54.9 million or 10.8% from the comparable six-month period ended June 30, 2001. The non-renewal of a Ralph Lauren licensing agreement on June 30, 2001 contributed $20 million and $28 million to the sales decreases in the three-month and six-month periods ended June 29, 2002, respectively. The remaining decrease for the six-month period ended June 29, 2002 is primarily attributable to the one-time inventory liquidation in 2001. A charge had been taken in December 2000 to reduce certain inventories to net realizable value. Sales of these products were $12 million and $29 million in the three-month and six-month periods ended June 30, 2001, respectively. 27 Gross Profit. Gross profit increased $11.0 million from a loss of $6.3 million in the three-month period ended June 30, 2001 to $4.7 million in the three-month period ended June 29, 2002. For the six-month period ended June 29, 2002, gross profit was $14.1 million, an increase of $17.9 million, compared to a loss of $3.8 million in the six-month period ended June 30, 2001. These increases are attributable to lower overhead costs resulting from a manufacturing rationalization plan and reduced material costs and natural gas prices. These savings have been partially offset by operating inefficiencies experienced due to the relocation of certain manufacturing operations required by the recently announced facility closures. During 2002, the towel finishing operations in Columbus, Georgia and Phenix City, Alabama and the Pillow and Pad automated sewing line facility in Dallas, Texas were closed. The operations at these facilities were transferred to existing facilities. Selling, General, and Administrative ("SG&A") Expenses. SG&A expenses decreased $1.0 million from $15.6 million in the three-month period ended June 30, 2001 to $14.6 million in the three-month period ended June 29, 2002. SG&A expenses decreased $4.0 million from $34.7 million in the six-month period ended June 30, 2001 to $30.7 million in the six-month period ended June 29, 2002. Statement of Financial Accounting Standard ("SFAS") No. 142 was adopted on December 30, 2001 which requires that goodwill and intangible assets with indefinite lives no longer be amortized (see "- New Accounting Standards" below). As a result, no amortization on its goodwill and trademarks has been recorded during 2002, which contributed approximately $1.6 million and $3.1 million to the decreases in SG&A expenses for the three-month and six-month periods ended June 29, 2002, respectively. In addition to lower amortization expense in 2002, a $2.2 million gain was recognized on the termination of an excess benefit plan provided for certain employees and former employees. These decreases have been partially offset by higher advertising expense due to the implementation of a national advertising campaign in 2002. Restructuring Charges. During the six-month period ended June 29, 2002, a restructuring charge of $4.2 million was recorded for severance and related benefits for the approximately 1,079 employees terminated by the closures of the facilities discussed above. The facilities closed during June and July 2002. During the six months ended June 30, 2001, a restructuring charge of $6.5 million was recorded, related to the facility closures at four locations. Impairment of Long-lived Assets. A charge for impairment of long-lived assets of $31.1 million was incurred during the six months ended June 29, 2002 for assets located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge consists of $9.0 million for real property and $22.1 million for machinery and equipment. During the six-month period ended June 30, 2001, a charge for impairment of long-lived assets of $20.1 million was incurred primarily relating to facilities closed in 2001. Interest Expense. Interest expense decreased $8.5 million from $16.5 million in the three-month period ended June 30, 2001 to $8.0 million in the three-month period ended June 29, 2002. Interest expense decreased $17.1 million from $35.4 million in the six-month period ended June 30, 2001 to $18.3 million in the six-month period ended June 29, 2002. The decreases are primarily due to a decrease in the average interest rate from 9.0% for the six-month period ended June 30, 2001 to 5.6% for the six-month period ended June 29, 2002. Reorganization Items. Gains of $404.0 million and $398.7 million were recognized in the three month and six months ended June 29, 2002, respectively. The gains were due to the gain recognized on the cancellation of pre-petition liabilities upon emergence, offset by fresh start accounting adjustments. Discontinued Operations. During the three-month and six-month periods ended June 30, 2001, the Blanket Division incurred a loss from discontinued operations of $4.2 million and $7.3 million, respectively. The Blanket Division was sold on September 6, 2001. 28 Liquidity and Capital Resources Exit Revolver Facility As discussed above and in note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report, the Company entered into the Exit Revolver Facility on the Effective Date. The Exit Revolver Facility is a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility. Parent and certain of its domestic subsidiaries are borrowers under the Exit Revolver Facility, and Parent's other domestic and Canadian subsidiaries are guarantors thereunder. The availability of borrowings under the Exit Revolver Facility generally is based on a percentage of eligible accounts receivable and eligible inventory, subject to certain reserves that can be established by the lender. In addition, the borrowers may, at their option, borrow up to a maximum principal amount of $10 million as part of the $200 million facility based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. Any such loan would be partially amortized over the remaining term of the Exit Revolver Facility. The Exit Revolver Facility is secured by a pledge of the stock of the subsidiaries, a first priority lien on the accounts receivable, inventory, and trademarks, as well as certain real property and equipment, of the borrowers and guarantors and a second priority lien on the primary collateral that secures the Exit Term Loan. All borrowings under the Exit Revolver Facility bear interest at an annual rate equal to, at Parent's option, the lender's prime rate or the prevailing adjusted Eurodollar rate, in either case plus a specified margin determined based on the amount of excess availability and the Company's leverage ratio. The average interest rate on the Exit Revolver Facility was 5.0% for the month ended June 29, 2002. The Exit Revolver Facility includes an unused commitment fee of either 3/8% or 1/2% per annum (depending on excess availability and the leverage ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2% per annum on the daily outstanding balance of letters of credit issued under the Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of the amount of the maximum credit if the Exit Revolver Facility is terminated in whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of the reduction of the maximum credit if the Company reduces the maximum credit in part at the time of any such reduction. The Exit Revolver Facility contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of Pillowtex or any of its subsidiaries, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, effect mergers, consolidations, and dissolutions, prepay and refinance debt, and make certain changes in its business. The Exit Revolver Facility also establishes a minimum earnings threshold as defined herein that applies at any time excess availability is less than $35 million. As of June 29, 2002, $61.9 million was outstanding under the Exit Revolver Facility and outstanding letters of credit under the Exit Revolver Facility aggregated $23.7 million. Availability as of June 29, 2002 was $111.2 million. Exit Term Loan On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures the Exit Revolver Facility. The Exit Term Loan was entered into by Pillowtex in exchange for cancellation of designated post-petition loans having an aggregate principal amount of $150 million which were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds from the Exit Term Loan. Pillowtex is the borrower under the Exit Term Loan and substantially all of its subsidiaries are guarantors thereunder. The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on the last day of March, June, September, and December, commencing on September 30, 2002. In addition to scheduled payments of principal on the last day of June and December, commencing December 31, 2002, Pillowtex is required to prepay the Exit Term Loan (i) with the net cash proceeds from the sale of certain assets, and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to the minimum excess availability requirements contained in the Exit Revolver Facility), with 50% of the excess cash flow, if any, for the preceding fiscal year. 29 The Exit Term Loan also contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions, prepay debt, and make certain changes in its business, to adopt newly-issued generally accepted accounting standards as appropriate and new tax requirements as they are enacted. The Exit Term Loan requires compliance with a maximum leverage ratio and a minimum interest coverage ratio. Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million utilizing borrowings under the Exit Revolver Facility. Under the Exit Term Loan, Parent has paid or will pay an annual administrative fee of $150,000 on the Effective Date and each anniversary thereof. As of June 29, 2002, $111.4 million was outstanding under the Exit Term Loan. Industrial Revenue Bonds The Company presently has obligations in respect of two industrial revenue bond facilities that were reinstated on the Effective Date (the "IRB Facilities"). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of June 29, 2002, approximately $11.4 million of bonds in the aggregate were outstanding under the IRB Facilities. Adequacy of Capital Resources The Company's principal sources of liquidity will be cash flows from operations and borrowings under the Exit Revolver Facility. Based on current and anticipated levels of operations, the Company's management believes that cash flows from operations, together with amounts available under the Exit Revolver Facility, will be adequate to meet the Company's anticipated cash requirements, including debt service requirements and planned capital expenditures. In the event that the Company's borrowing base, comprised of a percentage of eligible accounts receivable and inventory after reserves, becomes insufficient to support additional borrowing under the Exit Revolver Facility, the borrowers thereunder have the option of borrowing up to a maximum principal amount of $10 million (as part of the overall $200 million commitment) based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. However, since the amount of any such loan is dependent on the appraised value of such real property and equipment at the time the option is exercised by the borrowers, no assurance can be given as to the amount of additional borrowing that would actually be available to the borrowers in such circumstances. In the event that cash flows, together with available borrowings under the Exit Revolver Facility were not sufficient to meet the Company's cash requirements, the Company would be required to obtain alternative financing or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that, except for miscellaneous real property and equipment, substantially all of the Company's existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, industrial revenue bonds and capital lease obligations or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. 30 Contractual Obligations and Commercial Commitments The following table contains the contractual cash obligations outstanding under long-term debt, which for this table comprises the Exit Term Loan and industrial revenue bonds, capital lease obligations, and operating leases as of June 29, 2002 (dollars in thousands):
Payments Due by Period ----------------------------------------------------------------------------- During remainder 2003 - 2005 - Contractual Obligations Total of 2002 2004 2006 After 2006 ---------------------------- ----------- ------------ ------------ ----------- ------------- Long-term debt $ 122,739 557 13,073 22,272 86,838 Capital lease obligations 23,675 2,970 10,728 9,069 907 Operating lease obligations 15,502 1,995 7,024 3,880 2,603 Cotton purchase commitments 48,794 22,871 25,923 - - ----------- ------------ ------------ ----------- ------------- Total contractual cash obligations $ 210,710 28,393 56,748 35,221 90,348 =========== ============ ============ =========== =============
Other commercial commitments outstanding as of June 29, 2002 are as follows (dollars in thousands):
Amount of Commitment Expiration Per Period ---------------------------------------------------------------------------- Total During Other Commercial Amounts Remainder 2003- 2005- Commitments Committed of 2002 2004 2006 After 2006 ---------------------------- ------------- ------------ ---------- ----------- ------------- Line of credit $ 61,895 - - 61,895 - Standby letters of credit 25,489 350 1,397 23,742 - Commercial letters of credit 799 799 - - - ------------- ------------ ---------- ----------- ------------- Total commercial commitments $ 88,183 1,149 1,397 85,637 - ============= ============ ========== =========== =============
New Accounting Standards The Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future", and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" (collectively, the "EITFs"), which address various aspects of accounting for consideration given by a vendor to a customer or a reseller of products. The provisions of the EITFs were adopted as of the beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require all consideration paid to customers to be classified as a reduction to net sales. Prior to December 30, 2001, amounts paid to customers for co-operative advertising and marketing were classified in selling, general, and administrative expenses. As a result, $4.8 million and $9.8 million of selling, general, and administrative expenses have been reclassified as a reduction to net sales for the three months and six months ended June 30, 2001, respectively. In July 2001, the FASB 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. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. SFAS No. 142 was adopted as of December 30, 2001. The Company has restated its intangible assets to their estimated fair values on June 1, 2002, in conjunction with fresh start reporting. See note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report. 31 Pro forma loss from continuing operations applicable to common stockholders and loss applicable to common stockholders for the three months and six months ended June 30, 2001, adjusted to eliminate historical amortization of goodwill and intangibles with indefinite lives, are as follows (dollars in thousands):
Predecessor --------------------------- Three Six Months Months Ended Ended June 30, June 30, 2001 2001 ----------- ------------ Loss from continuing operations applicable to common stockholders - as reported $ (84,373) (136,299) =========== ============ Loss from continuing operations applicable to common stockholders - pro forma $ (82,810) (133,155) =========== ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment of a business (as previously defined in Opinion 30). SFAS No. 144 also retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The provisions of SFAS No. 144 were adopted as of December 30, 2001. The adoption of SFAS No. 144 for long-lived assets held for use did not have a material impact on the consolidated financial statements because the impairment assessment requirements under SFAS No. 144 are largely unchanged from SFAS No. 121. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145, among other things, prohibits the classification of gains and losses from extinguishment of debt as extraordinary unless they meet the criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted upon the Statement's issuance, and as such, the gain recognized by Old Pillowtex on the extinguishment of debt resulting from the emergence from the chapter 11 bankruptcy proceedings has been classified as a reorganization item. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with an exit activity (including a restructuring) or with a disposal of long-lived assets. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets. Under current accounting guidance, a liability can be recorded when management has committed to an exit plan. The requirements under SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Restatement of previously issued financial statements is not permitted. Subsequent Events On July 5, 2002, the Company granted restricted stock awards totaling 394,000 shares of Common Stock and options to acquire 594,200 shares of Common Stock to certain of its key employees. The restricted stock awards and options, as provided in the Plan, were made pursuant to the terms of the Equity Incentive Plan. Restrictions on the restricted stock awards lapsed immediately upon grant with respect to one-third of the shares, while the restrictions on the remaining two-thirds of the shares lapse in equal installments on the first and second anniversary date of the grant. 32 The cost of issuing the restricted stock will be charged to earnings over the vesting period. During the one month ended June 29, 2002 and the two months ended June 1, 2002, approximately $0.4 million and $0.8 million, respectively, was charged to earnings. 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 restrictions on the conduct of the Company's business as a result of the provisions contained in the Exit Revolving Facility and Exit Term Loan; (b) the Company's dependence on specific raw materials; (c) the effects of adverse retail industry conditions; (d) the Company's dependence on specific brand names; (e) the risks related to loss of material customers; (f) the risks related to organized labor; (g) the seasonality of the Company's businesses, and (h) the difficulties in attracting and retaining personnel. For further discussion of such risks, see "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in Old Pillowtex's Annual Report on Form 10-K for its fiscal year ended December 29, 2001. 33 PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Old Pillowtex's Current Reports on Form 8-K filed on February 26, 2002, March 4, 2002, March 12, 2002, May 24, 2002, and May 16, 2002, and Part I, Item 3. Legal Proceedings, of the Annual Report on Form 10-K for the fiscal year ended December 29, 2001 filed on March 28, 2002, which reported during the fiscal year some of the legal proceedings referenced below. See note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Chapter 11 Cases. Such discussion is incorporated herein by this reference. Item 2. Changes in Securities and Use of Proceeds The Plan became effective on May 24, 2002. On the Effective Date, pursuant to the Plan all of Old Pillowtex's issued and outstanding common stock and preferred stock were cancelled without consideration; Old Pillowtex, a Texas corporation, was merged with and into its wholly-owned subsidiary Pillowtex, a Delaware corporation, with Pillowtex as the surviving corporation; and the Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of Pillowtex continued as the certificate of incorporation and bylaws of the surviving corporation. Additionally, on the Effective Date, pursuant to the Plan (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Equity Incentive Plan. Descriptions of the Common Stock and Warrants are included in the Company's Current Report on Form 8-K dated and filed May 24, 2002. Copies of the Certificate and Bylaws are filed as Exhibits 4.2 and 4.3, respectively, to such Form 8-K. Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of securities under a plan of reorganization from registration under the Securities Act and state securities laws if three principal requirements are satisfied: (a) the securities must be offered and sold under a plan of reorganization and must be securities of the debtor, an affiliate participating in a joint plan with the debtor or a successor to the debtor under the plan; (b) the recipients of the securities must hold a pre-petition or administrative expense claim against the debtor or an interest in the debtor; and (c) the securities must be issued entirely in exchange for the recipient's claim against or interest in the debtor, or principally in such exchange and partly for cash or property. Section 1145(a)(2) of the Bankruptcy Code exempts the offer of a security through any warrant, option, right to purchase or conversion privilege that is sold in the manner specified in section 1145(a)(1) and the sale of a security upon the exercise of such a warrant, option, right or privilege. Pillowtex believes that the offer and sale of the Common Stock and the Warrants under the Plan satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code and, therefore, are exempt from registration under the Securities Act and state securities laws. Similarly, Pillowtex believes that the offer of Common Stock through the Warrants and the sale of Common Stock upon the exercise of the Warrants satisfy the requirements of section 1145(a)(2) of the Bankruptcy Code and, therefore, are exempt from registration under the Securities Act and state securities laws. Item 5. Other Information On June 12, 2002, the Company announced the hiring of David A. Perdue as the Company's new Chairman of the Board and Chief Executive Officer, effective July 1, 2002. 34 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description ----------- ----------- 10.1* Restated Employment Agreement dated August 1, 2002 and effective as of July 1, 2002, between Pillowtex Corporation and David A. Perdue 10.2* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Anthony T. Williams 10.3* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Michael R. Harmon 10.4* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Scott E. Shimizu 10.5* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and A. Allen Oakley 10.6* Form of Indemnification Agreement entered into between Pillowtex Corporation and Directors and Executive Officers 10.7 Schedule of Indemnification Agreements pursuant to Instruction 2 of Item 601 10.8 First Amendment to Term Loan Agreement dated as of June 28, 2002, among Pillowtex Corporation, Bank of America, N.A., as Administrative Agent, and the Lenders party thereto
_____________ * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. (b) Reports on Form 8-K During the quarter ended June 29, 2002, Old Pillowtex and Pillowtex filed the following Current Reports on Form 8-K: Current Report on Form 8-K, dated May 2, 2002 and filed May 16, 2002, reporting information under "Item 3. Bankruptcy or Receivership" regarding the confirmation by the Bankruptcy Court of the Plan. Current Report on Form 8-K, dated and filed May 24, 2002, reporting information under "Item 5. Other Events" regarding the effective date of the Plan (the "May 24 Form 8-K"). Current Report on Form 8-K/A, dated May 24, 2002 and filed June 10, 2002, amending the May 24 Form 8-K by adding certain exhibits thereto. 35 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, 2002 PILLOWTEX CORPORATION (Registrant) By: /s/ Michael R. Harmon ---------------------------------- Michael R. Harmon Executive Vice President and Chief Financial Officer 36