10-K 1 d10k.htm FORM 10-K FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


x            Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 28, 2002

OR

o            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
(State of Incorporation)

 
75-2147728
(I.R.S. Employer
Identification No.)
 

  One Lake Circle Drive,
Kannapolis, North Carolina
(Address of Principal Executive Offices)
   
28081
(Zip Code)
 

Registrant’s telephone number, including area code: (704) 939-2000


Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value


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 o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x No o

The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 28, 2002 was $115,133,421.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:

Indicate by check whether the registrant has filed all documents and reports required to be filed by Section 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 o

As of March 20, 2003, Registrant had 19,095,215 shares of Common Stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

None.




 


Unless the context otherwise requires, references to “Pillowtex” or the “Company” include Pillowtex Corporation, a Delaware corporation, and its subsidiaries. Pillowtex’s filings with the Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and any amendments to the foregoing, are available free of charge on the Company’s website at www.pillowtex.com, as soon as reasonably practicable after the Company files such material with the SEC.

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements identified by the use of the words “will,” “would,” “could,” “should,” “anticipates,” “believes,” “expects,” “estimates,” “intends,” or similar expressions and other statements that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. Factors that could cause the Company’s actual results in future periods to differ materially from those expressed in or implied by such statements include, but are not limited to, the following:

         Pillowtex’s consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a “going concern,” even though there is substantial doubt about Pillowtex’s ability to continue as a “going concern” due to the uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants and therefore as to the adequacy of the Company’s financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods.

         The Company’s ongoing review of its strategic alternatives, which may include a sale of the business, sales of assets or restructuring options, which could include a bankruptcy proceeding.

         The restrictions on the conduct of the Company’s business as a result of the provisions contained in the Exit Revolver Facility and Exit Term Loan and uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants.

         The Company’s access to capital markets will be limited for the foreseeable future.

         The Company could have difficulty in attracting and retaining customers, top management, and other key personnel and labor as a result of its financial condition.

         As a result of its financial condition, the Company could have difficulty in maintaining existing or creating new relationships with suppliers or vendors, which may stop providing supplies or services to the Company or provide them only on “cash on delivery,” “cash on order,” or other terms that could have an adverse impact on the Company’s cash flow.

         The Company faces significant competitive pressures.

         The price and availability of certain raw materials used by the Company are subject to rapid and significant change.

         The Company may be affected by changes in general retail industry conditions.

         The Company’s success may depend in part on the goodwill associated with and protection of the brand names owned by the Company.

Certain of these factors, as well as other such factors, are discussed herein in greater detail under “Item 1. Business - Risk Factors” below. In making these forward-looking statements, the Company does not undertake to update them in any manner except as may be required by law.

 


1


PART I

ITEM 1.         BUSINESS

General

Founded in 1954, Pillowtex is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex’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, Pillowtex sells its 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.

Pillowtex, through its operating subsidiaries, manufactures and markets its products utilizing established and well-recognized Pillowtex-owned brand names. In addition, through licensing agreements, Pillowtex currently has rights to manufacture and market bedding products under other well-known brand names. The Company also manufactures products for customers under their own brand names.

Pillowtex’s diverse portfolio of top brand names allows it to differentiate Pillowtex’s products from those of its competitors. Pillowtex also provides distinct brand names for different channels of retail distribution and for different price points.

Pillowtex is organized into two major operating divisions: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, towels, bath rugs, and kitchen textile products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. See note 19 of the notes to the Company’s consolidated financial statements included elsewhere in this Annual Report for financial information regarding segments.

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 relief 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 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report for a more detailed description of the Exit Term Loan));

         executory contracts or unexpired leases to which any Debtor was a party were assumed, assumed and assigned, or rejected;

 


2


         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 other reorganized Debtors 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 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 non-amortizing 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 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report for a more detailed description of the Exit Revolver Facility.

See “- Risk Factors – Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access to Additional Financing,” and “- Risk Factors – Pillowtex Is Subject To Restrictions On The Conduct Of Its Business” below.

Products

General

Pillowtex has expanded beyond its traditional pillow operations largely through strategic acquisitions, including the 1997 acquisition of Fieldcrest Cannon and the 1998 acquisition of The Leshner Corporation (“Leshner”). As a result of these acquisitions, Pillowtex’s extensive product offerings now 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.

Bed and Bath and Other Textile Products

Sheets and Other Fashion Bedding. Pillowtex produces a wide variety of sheets, ranging from muslin to the finest 420-thread count 100% Supima® cotton sheets. Its principal brand names for this product line include Cannon®, Fieldcrest®, Royal Velvet®, and Charisma®. Pillowtex’s sheeting strengths include solid color sheets with coordinating decorative bedding accessories. In addition to sheets, Pillowtex’s fashion bedding products consist of matching synthetic fill comforters, comforter covers, and pillow shams along with coordinated ruffled or pleated bed skirts. Retail prices of Pillowtex’s sheets vary widely based on size, thread count, and fabric type.

Towels. Pillowtex’s bathroom textile products include bath, hand, and fingertip towels, washcloths, and bath mats. Royal Velvet®, Fieldcrest®, Cannon®, Charisma®, Royal Velvet Big & Soft®, and St. Mary’s® are well-known, high quality towel brand names. These brand names provide Pillowtex with a strong market position in substantially all key sectors of the North American market. Pillowtex is also recognized as the color leader in the towel industry as it markets 40 colors in its Royal Velvet® franchise. In the marketplace, Pillowtex differentiates its towels by using fine ring spun cotton yarns to produce Royal Velvet® towels and pima and Supima® cotton yarns for Charisma® towels. The towel line includes solid colors, woven stripes, and fancy jacquards, as well as printed towels. Retail prices of Pillowtex’s towels range widely based on, among other things, size, weight, and yarn type.

Bath Rugs. Pillowtex also markets a variety of bath and accent rugs in conjunction with its towel offerings. These products come in a variety of sizes and are marketed under the Royal Velvet®, Cannon®, Fieldcrest®, Royal Family®, and Charisma® brands, as well as under private labels.

Kitchen Products. Pillowtex is a leading manufacturer and marketer of kitchen textile products in North America. Pillowtex’s kitchen products include terry towels, terry dish cloths, waffle weave and flat woven dish cloths, bar mops, utility cloths, pot holders, and oven mitts. A variety of constructions include yarn-dye checks, stripes, and plaids coordinating with piece-dye solids, as well as printed fashion motifs. Fabricated pot holders, oven mitts, and other coordinating accessories accompany most of Pillowtex’s kitchen ensembles.

 


3


Other Bedroom Textiles. Pillowtex also offers a variety of other complementary bedroom textile products, including featherbeds, pillow protectors, decorative pillows, and window treatments.

Pillows and Pads

Bed Pillows. Pillowtex is a leading manufacturer and marketer of bed pillows in North America. Pillowtex produces and markets a broad line of traditional bed pillows, as well as specially designed products such as body pillows. Pillowtex offers products at various levels of quality and price. Pillowtex’s products range from synthetic pillows sold at relatively low retail prices to fine white goose down pillows sold at much higher price points.

Pillowtex is a leading feather and down pillow manufacturer in North America. These products contain quality goose and duck down, or blends of feather and down, in a range of grades. These materials, known as “natural fill,” have gained popularity for their loft and resiliency.

Pillowtex also manufactures and markets a full line of bed pillows featuring staple (cut and crimped), tow (continuous filament), and cluster (individual ball) synthetic fiber fills. Pillowtex is a leading supplier of premium synthetic bed pillows in North America.

Down Comforters. Pillowtex was a pioneer in marketing down comforters in the United States, and is now a leading manufacturer and marketer of down comforters in North America. Down comforters have become increasingly popular for both their insulation and fashion qualities, selling well in both warm and cool climates. They are sold at department stores, specialty stores, and mass merchants at a variety of prices. Increasingly popular higher-end comforters typically offer more down fill, have higher thread count shells, and feature more appealing “surface interest,” such as damask, dots, stripes, and checks.

Mattress Pads. Pillowtex is a leading manufacturer and marketer of mattress pads in North America. It produces and markets a complete line of mattress pads, including sizes for adults and children, natural and synthetic filled, flat, fitted, and stretch-to-fit mattress pads (adjustable fit mattress pads made with Lycra®, a multidirectional stretch material manufactured by E.I. DuPont de Nemours & Co.).

Marketing and Sales

Pillowtex markets its products to mass merchants, department stores, and specialty retail stores, as well as to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet.

Pillowtex’s top ten customers accounted for approximately 71% of its total net sales in 2002. Wal-Mart Stores, Inc. (“Wal-Mart”) and its affiliated entity, Sam’s Club stores, accounted for approximately 23% and 5%, respectively, of Pillowtex’s total net sales in 2002. No other customer accounted for 10% or more of Pillowtex’s total net sales in 2002. Consistent with industry practice, Pillowtex does not operate under long-term written supply contracts with its customers. See “- Risk Factors – Risk of Loss of Material Customers” below.

Pillowtex segments its portfolio of brand names by distribution channel to solidify the perceived value of such brands and maintain their integrity. Royal Velvet®, Charisma®, Fieldcrest®, and Royal Family® brand name bed and bath products are distributed primarily through leading department stores, specialty home furnishing stores, and catalog merchants. Cannon® brand name bed and bath products are distributed across a wide variety of distribution channels, while St. Mary’s® brand name bed and bath products are distributed primarily through mass merchants. Pillowtex’s Royal Velvet®, Charisma®, and Cannon® brand names receive national consumer advertising. Pillowtex sells private brands primarily through large chain stores. It also sells a smaller amount of branded products to institutional customers.

Pillowtex’s current international business is concentrated in Canada. However, Pillowtex also sells its products in other foreign markets, including Asia, Australia, Europe, Mexico, and South America. Sales outside the United States accounted for approximately 3% of total sales in 2002, 2% in 2001, and 5% in 2000. During each of the last three years, less than 5% of the Pillowtex’s assets have been located outside the United States. In addition, from time to time, Pillowtex enters into license agreements with third parties to produce and sell products using certain of the Company’s trademarks in foreign markets, including Asia, Australia, Europe, Mexico, South America, and the Middle East. These license agreements require third parties to pay royalties to Pillowtex based upon product sales and generally require payments of minimum annual royalties.

To maximize product exposure and increase sales, Pillowtex works closely with its major customers to assist them in merchandising and promoting Pillowtex’s products to the consumer. In addition to frequent personal consultation with the employees of such customers, Pillowtex meets periodically with the senior management of these customers. Pillowtex assists them in developing joint merchandising programs, new products, product mix strategies, point-of-sale

 


4


concepts, and advertising campaigns specifically tailored to that customer’s needs. Pillowtex also provides its customers merchandising assistance with store layouts, fixture designs, point-of-sale displays, and advertising materials.

Pillowtex’s electronic data interchange system (“EDI”) allows customers to place, and Pillowtex to fill, track, and bill, orders by computer. This system enables Pillowtex to ship products on a “quick response” basis.

Pillowtex sells products under its Charisma® brand name over the Internet at www.charismahome.com and under its Royal Velvet® brand name over the Internet at www.royalvelvet.com. In addition, Pillowtex operates an online outlet store at www.cannonoutlet.com.

Trademarks And License Agreements

Pillowtex manufactures and markets products:

          under its proprietary Pillowtex-owned trademarks and trade names;

          under some licensed trademarks and trade names; and

          under customer-owned private labels.

Pillowtex regards its trademarks and trade names as valuable assets and vigorously protects them against infringement. See “- Risk Factors – Dependence on Specific Brand Names” below. Pillowtex uses trademarks, trade names, and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors.

From time to time, Pillowtex enters into license agreements with third parties for the use of third party trademarks and trade names on products manufactured by Pillowtex. These licenses generally require the payment of royalties based on net sales. Pillowtex currently holds a sublicense from Revman Industries Inc. to manufacture and sell certain Pillowtex products under the Tommy Hilfiger trademark in the United States, Canada, and Mexico. Pillowtex’s sublicense with Revman Industries Inc. expires on December 31, 2003, subject to extension of up to four additional years as provided in the sublicense.

Pillowtex manufactures products for some customers under the customer’s private labels. Products manufactured under customer-owned private labels are marketed by the customer.

Pillowtex occasionally identifies product lines for which it is more advantageous for Pillowtex to license third parties to use its brand names for use in the manufacture and sale of these products. These license agreements require third parties to pay royalties to Pillowtex based upon product sales and generally require payments of minimum annual royalties. In January 1998, Pillowtex entered into a license agreement with Ex-Cell Home Fashions, Inc. whereby Pillowtex granted Ex-Cell an exclusive license to manufacture, sell, and distribute shower curtains and bath accessories under some of Pillowtex’s trademarks and trade names. In January 1999, Pillowtex entered into a license agreement with Bardwil Industries, Inc. under which Pillowtex granted Bardwil an exclusive license to manufacture, sell, and distribute tablecloths and other table-top accessories under some of Pillowtex’s trademarks and trade names.

Product Development

Pillowtex’s product development staff creates and develops products with new or superior performance characteristics in cooperation with various outside sources, including its suppliers and customers. Pillowtex’s ability to develop products responsive to individual customers’ needs is an important competitive advantage. As a result, Pillowtex commits time and resources to identifying new materials, designs, and products from a variety of domestic and international vendors.

Manufacturing And Distribution

General

Pillowtex operates an extensive network of facilities in Texas, Alabama, California, Illinois, Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Virginia, and Toronto, Canada in connection with the manufacture and distribution of Pillowtex’s product lines. This nationwide manufacturing and distribution network enables Pillowtex to ship its products cost effectively to all major cities in North America.

 


5


In addition, Pillowtex operates 18 retail outlet stores that sell certain of Pillowtex’s products directly to customers. These stores sell both first quality merchandise and seconds or “off-goods” at competitive retail prices.

Bed, Bath, and Other Textile Products

Sheets and Other Fashion Bedding. Pillowtex produces bed sheet products at its facilities in Kannapolis, China Grove, Concord and Rockwell, North Carolina, and Union, South Carolina. These facilities provide a full range of Pillowtex’s sheet products for substantially all channels of distribution. Pillowtex spins cotton and synthetic fibers into yarn and weaves the yarn into greige cloth for finishing, dyeing, cutting, and sewing. Pillowtex produces synthetic fill comforters and other decorative bedding products, such as pillow shams and decorative pillows, at its Eden, North Carolina facility. The product is later packaged for shipment to retail customers.

Towels. Pillowtex produces bath towels at its facilities in Alabama, North Carolina, and Virginia. Cotton and synthetic fibers are spun into yarns, and then woven into fabric or greige cloth. The fabric is then finished, dyed, cut, and sewn into finished towel products. Pillowtex’s Fieldale, Virginia facility generally produces the higher quality products for department and specialty stores. The Phenix City, Alabama facility weaves fabric that is then finished in the Kannapolis, North Carolina facility. The Kannapolis, North Carolina facility produces a variety of products for multiple distribution channels.

Bath Rugs. Pillowtex produces bath rugs at its Scottsboro, Alabama facility. Pillowtex punches tufted yarn into fabric and cuts it to a uniform height. Pillowtex then applies a latex coating to the underside of the fabric to hold the fibers. Finally, the product is dyed, cut, and finished.

Kitchen Products. Pillowtex imports kitchen textile products for distribution to various customers.

Other Bedroom Textiles. Pillowtex manufactures other complementary bedroom textile products, such as featherbeds, pillow protectors, decorative pillows, and window treatments, at one or more of the facilities described above.

Pillows and Pads

Bed Pillows. Pillowtex’s facility in Dallas, Texas is one of the largest feather and down processing facilities in North America. Computerized washing and sorting equipment process feather and down. Pillowtex later sorts these products into a variety of mixtures and grades used in manufacturing natural fill pillows and comforters. Pillowtex ships raw materials, along with imported products, to its regional facilities for final assembly and distribution to customers.

Many of Pillowtex’s regional manufacturing facilities produce natural fill and synthetic fill pillows. Pillowtex assembles natural fill pillows by blowing processed feather and down into the pillow shell and sewing the open seam closed. Pillowtex produces synthetic fill pillows on machines known as garnets. Garnets pull, comb, and expand compressed polyester fibers. Once expanded, Pillowtex inserts the fibers into a pillow shell and sews the open seam shut.

Down Comforters. Pillowtex manufactures its line of natural fill comforters at its California, Illinois, Mississippi, Pennsylvania, and Toronto, Canada locations using processed down from the Dallas facility.

Mattress Pads. Pillowtex manufactures mattress pads at the California, Mississippi, and Pennsylvania facilities by two automated methods. The traditional quilt sewing method uses high-speed equipment that sews the top, bottom, and fill material together. The sonic method fuses the top, bottom, and fill material together.

Quality Control Programs

Pillowtex has quality control programs in place to ensure that its products meet quality standards established both internally and by its customers. Pillowtex devotes significant resources to support its quality improvement efforts. Each manufacturing facility has a quality control team that identifies and resolves quality issues. Pillowtex attempts to maintain close contact with customer quality control or other appropriate personnel to ensure that Pillowtex understands the customers’ requirements. Pillowtex also has programs with its major suppliers to ensure the consistency of purchased raw materials by imposing strict standards and materials inspection, and by requiring rapid response to Pillowtex’s complaints.


6


Raw Materials And Imports

General

The principal raw materials that Pillowtex uses in manufacturing its various product lines are:

          cotton;

          feather and down;

          synthetic (polyester and acrylic) fibers;

          yarn; and

          cotton and polyester-cotton blend fabrics.

A wide variety of sources offer these materials, and Pillowtex currently expects no significant shortage of these materials. Management believes that the Company’s relationships with its suppliers are generally good. See “- Risk Factors – Dependence on Specific Raw Materials” below.

Cotton

Domestic cotton merchants are Pillowtex’s primary source of cotton. Pillowtex uses significant quantities of cotton. To reduce the effect of potential price fluctuations in cotton prices, Pillowtex makes commitments for a portion of its anticipated future purchases of cotton. At December 28, 2002, the Company had $27.0 million in outstanding commitments for future purchases of cotton, pursuant to, in part, contracts that have been assumed in connection with the Chapter 11 Cases. The contracts governing these commitments meet the normal purchases or normal sales exclusion provided for in derivative accounting and, as such, are not accounted for as derivative instruments.

Feathers and Down

Pillowtex imports feather and down from several sources outside the United States. Pillowtex purchases a majority of these products from China, where feather and down are by-products of ducks and geese raised for food. Pillowtex generally purchases feather and down from its suppliers in China on open credit terms without letters of credit. Pillowtex also purchases some feather and down from suppliers in Europe.

Synthetic Fibers

Domestic fiber producers are Pillowtex’s primary source of synthetic fibers. To reduce the effect of potential price fluctuations, Pillowtex makes commitments for a portion of its anticipated future purchases of synthetic fibers.

Yarn

Pillowtex uses significant quantities of yarn in its operations, some of which is produced internally and some of which is purchased from third party suppliers. To reduce the effect of potential fluctuations in price and to ensure a timely supply of quality product, Pillowtex makes commitments for a portion of its anticipated future purchases of yarn. In this regard, Pillowtex has entered into a long-term supply contract with Parkdale America, LLC, one of the nation’s largest yarn suppliers.

Fabric

Pillowtex uses fabric purchased from third parties in the production of pillow shells, comforter covers, and various other products. In addition, Pillowtex imports the majority of its down comforter shells from China and India.

Other

Some of Pillowtex’s stretch-to-fit mattress pads use Lycra® skirting. Because of DuPont’s patent on Lycra®, it is the exclusive supplier of this material. Management believes that the risk that DuPont will cease to manufacture and sell Lycra® is minimal.


7


Competition

Pillowtex participates in a highly competitive industry. It competes with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial resources than does the Company. Pillowtex competes on the basis of quality, brand names, service, and price.

Government Regulation

Pillowtex must comply with various federal, state, and local environmental laws and regulations governing the discharge, storage, handling, and disposal of various substances. The Company must also comply with federal and state laws and regulations that require certain of its products to bear product content labels containing specified information, including their place of origin and fiber content. In addition, a variety of federal, state, local, and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other general business matters, govern Pillowtex’s operations. Laws and regulations may change, and Pillowtex cannot predict what effect, if any, changes in various laws and regulations might have on its business.

Backlog

A number of factors affect the amount of Pillowtex’s backlog orders at any particular time. These factors include seasonality and scheduling of the manufacturing and shipment of products. In general, Pillowtex’s EDI and “quick response” capabilities have resulted in shortened lead times between submission of purchase orders and delivery and have lowered the level of backlog orders. Consequently, Pillowtex believes that the amount of its backlog is not an appropriate indicator of levels of future sales.

Employees

As of March 14, 2003, Pillowtex had approximately 7,850 employees.

As of March 14, 2003, Pillowtex Corporation and/or certain of its subsidiaries had entered into the following collective bargaining agreements:

 

Union

 

Location Covered

 

Expiration

 

Approximate
Number of
Bargaining Unit
Employees

 

Union of Needletrades, Industrial and Textile Workers

 

Phenix City, Alabama;
Concord, North Carolina;
Eden, North Carolina;
Kannapolis, North Carolina;
China Grove, North Carolina;
Rockwell, North Carolina;
Mauldin, South Carolina;
Union, South Carolina;
and Fieldale, Virginia

 

 

01/31/06

 

 

 

4,859

 

 

Union of Needletrades, Industrial and Textile Workers

 

Hanover, Pennsylvania

 

 

11/23/04

 

 

 

246

 

 

Union of Needletrades, Industrial and Textile Workers

 

Los Angeles, California

 

 

12/12/04

 

 

 

230

 

 

Union of Needletrades, Industrial and Textile Workers

 

Toronto, Ontario, Canada

 

 

08/31/03

 

 

 

60

 

 

Union of Needletrades, Industrial and Textile Workers

 

Scottsboro, Alabama

 

 

01/22/04

 

 

 

236

 

 

United Auto Workers

 

Tunica, Mississippi

 

 

07/31/03

 

 

 

252

 

 

Warehouse, Mail Order, Office, Technical and Professional Employees (Teamsters)

 

Chicago, Illinois

 

 

01/31/04

 

 

 

116

 

 

As of March 1, 2003, approximately 53% of Pillowtex’s employees covered by collective bargaining agreements had chosen to have union dues deducted from their paychecks.

Pillowtex believes that it generally has good relationships with both its union and non-union employees.

8


Risk Factors

Pillowtex and its businesses are subject to a number of risks including those enumerated below. Any or all of such risks could have a material adverse effect on the business, financial condition, results of operations, or prospects of Pillowtex. See also “Cautionary Statement Regarding Forward-Looking Statements” above.

Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access To Additional Financing

After taking into consideration the range of projections of cash flows from operations, anticipated capital expenditures, debt principal repayment requirements, and anticipated pension plan cash funding payments, the Company believes that the excess availability under the Exit Revolver Facility may drop below $35 million at certain times during the second half of 2003. The Company does not believe that it would be able to comply with the minimum earnings threshold contained in its Exit Revolver Facility, which would become effective in this event. As a result of these factors, coupled with the uncertainties as to the results of future negotiations with the Company’s term loan lenders as to revised financial covenants, the Company can provide no assurances that it will have adequate financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods. If the Company is unable to comply with the minimum earnings threshold contained in the Exit Revolver Facility, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that the Company would obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

In the event that the Company’s borrowing base, comprised of a percentage of eligible accounts receivable and eligible inventory after reserves, falls below $200 million and 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 substantially all of the Company’s existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, IRB Facilities, and capital lease obligations, or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. Accordingly, the Company’s ability to respond to changing business and economic conditions and to secure additional financing, if needed, would be significantly restricted.

The Company is reviewing its strategic alternatives, which may include a sale of the business, sales of assets or restructuring options, which could include a bankruptcy proceeding. The Company has retained Credit Suisse First Boston as its financial advisor to assist it in this review.

Pillowtex Cannot Be Certain That It Will Be Able To Amend The Exit Term Loan


9


As further described in note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report, the Company entered into amendments to the Exit Term Loan, which included a waiver of compliance by the Company with the maximum leverage ratio and minimum interest coverage ratio covenants for the first quarter of fiscal year 2003. The Company anticipates that it will be unable to comply with the covenants, as currently written, at the end of the second quarter of 2003. The Company intends to continue to negotiate with the term loan lenders to amend the financial covenants contained in the Exit Term Loan effective as of the end of the second quarter of 2003 and for future periods; however, the Company can provide no assurances that it will be able to amend the covenants in the Exit Term Loan upon terms that are acceptable to the Company.

A failure to comply with any of the covenants contained in the Exit Term Loan would result in an event of default under the Exit Term Loan. Upon the occurrence of an event of default, the term loan lenders would be entitled to declare all amounts outstanding under the Exit Term Loan, including accrued interest and other obligations, to be immediately due and payable, and the term loan lenders would be entitled to proceed against the collateral granted to them to secure the Exit Term Loan. In these circumstances, cross-defaults could occur under the documents governing the Company’s other outstanding debt. Pursuant to the terms of the Exit Revolver Facility, a default by the Company of the financial covenants set forth in the Exit Term Loan will be deemed an event of default under the Exit Revolver Facility if such default continues for more than sixty (60) days and is not waived in writing by or on behalf of the term loan lenders. If the Company fails to comply with any of the covenants in the Exit Term Loan, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that Company would be able to obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

Pillowtex’s Financial Statements Assume That It Will Continue As A “Going Concern” Even Though There Is Substantial Doubt In This Regard

Pillowtex’s consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a “going concern.” Continuing adverse conditions in the general economic environment, the effect of those conditions on the retail industry through which the Company sells a substantial portion of its products, and intense domestic and foreign competition have had a negative impact on the Company’s cash flows and results from operations and therefore on its ability to comply with certain financial covenants previously established by its revolver and term loan lenders. Because of the uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants and therefore as to the adequacy of the Company’s financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods (such uncertainties being more fully discussed under “ – Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access To Additional Financing” above), there is substantial doubt about Pillowtex’s ability to continue as a “going concern.” The continuation of the Company as a “going concern” is dependent upon, among other things, Pillowtex’s ability to comply with the terms of the Exit Revolver Facility and the Exit Term Loan and Pillowtex’s ability to generate sufficient cash from operations and financing arrangements to meet its obligations. If the “going concern” basis was not appropriate for Pillowtex’s consolidated financial statements, then significant adjustments might be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used.

Pillowtex Is Subject To Restrictions On The Conduct Of Its Business

Both the Exit Term Loan and the Exit Revolver Facility contain a number of negative covenants, which restrict, among other things, Pillowtex’s ability to incur additional debt, pay dividends or make other restricted payments, sell stock of 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. In addition, the Exit Revolver Facility also establishes a minimum earnings threshold that applies at any time excess availability is less than $35 million and the Exit Term Loan contains certain financial covenants (see note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report).

As a result of the restrictions described above, the ability of the Company to respond to changing business and economic conditions may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be considered beneficial.

Pillowtex Is Prohibited From Paying Dividends On Its Common Stock For The Foreseeable Future


10


The Exit Revolver Facility and the Exit Term Loan currently prohibit Pillowtex from paying dividends to or making other distributions to holders of its Common Stock. Accordingly, Pillowtex does not anticipate paying dividends on its Common Stock for the foreseeable future.

Dependence On Specific Raw Materials

Cotton is the primary raw material used in the Company’s businesses. The availability of cotton is subject to weather conditions and other factors affecting agricultural markets. Historically, there have been periods of rapid and significant movement in the price of cotton both upward and downward. Other raw materials on which the Company is dependent include the raw feathers and down that it uses to produce natural fill pillows and down comforters. China is currently the Company’s primary source of raw feathers and down. See “— Dependence on Supply Sources in China.”

The raw materials used by the Company are generally available from a number of sources. No significant shortage of these materials is currently anticipated. However, the Company uses significant quantities of these raw materials, which are subject to price fluctuations. The Company cannot be certain that shortages of these materials will not occur in the future, which could increase the cost or delay the shipment of its products. Moreover, the Company cannot be certain that it will be able to pass on any increase in the price of raw materials to its customers.

Relationships with Suppliers and Vendors

Pillowtex may have difficulty in maintaining existing or creating new relationships with suppliers or vendors as a result of its financial condition. In the event that the Company was to default under the Exit Revolver Facility or the Exit Term Loan and, at the time of such default, alternative financing was not available, Pillowtex’s suppliers and vendors might stop providing supplies or services to Pillowtex or provide such supplies or services only on “cash on delivery,” “cash on order,” or other terms that could have an adverse impact on Pillowtex’s short-term cash flow.

Dependence on Supply Sources in China

In fiscal year 2002, based on cost, approximately 85% of the raw feathers and down that Pillowtex used to produce natural fill pillows and down comforters was imported from China. Pillowtex’s relationships with its suppliers in China could be disrupted or adversely affected due to a number of factors, including governmental regulation, fluctuation in exchange rates, and changes in economic and political conditions in China. If Pillowtex’s supply sources in China were disrupted for any reason, Pillowtex believes, based on existing market conditions, that it could establish alternative supply relationships. However, because establishing these relationships involves numerous uncertainties relating to delivery requirements, price, payment terms, quality control, and other matters, Pillowtex is unable to predict whether such relationships would be on satisfactory terms.

Industry Competition

The Company participates in a highly competitive industry. It competes with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial, distribution and marketing resources than the Company. It is important that the Company remains competitive in the areas of quality, price, selection and convenience, as failure to do so could result in the reduction of the price at which the Company sells its products. If the Company is unable to compete effectively, it may lose market share.

Imports of foreign-made textile products are a significant source of competition for most sectors of the domestic textile industry. The United States has attempted to regulate the growth of certain textile imports through tariffs and bilateral agreements, which establish quotas on imports from lesser-developed countries that historically account for significant shares of United States imports. The General Agreement on Tariffs and Trade (“GATT”) may have a negative effect on the domestic textile industry and the Company. The World Trade Organization is coordinating the phase-out of textile quotas over a 10-year period through 2004. The 10-year phase-out of quotas will replace the existing system of bilateral import restrictions and revert to GATT rules that prohibit quotas to gradually allow more imports to enter the United States. In addition, under GATT, the United States is obligated to lower its tariffs on imports of textiles. These reductions are being phased in gradually over the 10-year period through 2004. If there is a significant influx of imports, there may be intense price competition, which could adversely affect the Company’s business. The United States has agreed to a new round of multilateral trade negotiations. Those negotiations, which are scheduled to conclude within three years, could result in additional tariff reductions on imports of textile products. Any such further reductions in tariffs could have an adverse affect on the Company’s results of operations.

Adverse Retail Industry Conditions


11


The Company sells its products to a number of department stores and other major retailers that have experienced financial difficulties during past years. Some of these retailers have previously sought protection under the Bankruptcy Code. In addition, some of the Company’s current retail customers may seek protection under the Bankruptcy Code or state insolvency laws in the future. As a result of these financial difficulties and bankruptcy and insolvency proceedings, the Company may be unable to collect some or all amounts owed to it by these retail customers. In addition, all or part of the operations of a retail customer that seeks bankruptcy or other debtor protection may be discontinued, or sales of the Company’s products to the customer may be curtailed or terminated as a result of bankruptcy or insolvency proceedings. There can be no assurance that the Company will not be adversely affected by retail industry conditions.

Dependence On Specific Brand Names

In fiscal year 2002, sales of products bearing Pillowtex’s principal proprietary brand names of Royal Velvet®, Cannon®, Charisma®, Royal Velvet Big & Soft®, Fieldcrest®, Royal Family®, and St. Mary’s® made up a substantial portion of its net sales. Accordingly, the Company’s future success may depend in part upon the goodwill associated with these brand names.

Pillowtex’s principal brand names are registered in the United States and certain foreign countries. However, Pillowtex cannot be certain that the steps taken by it to protect its proprietary rights in such brand names will be adequate to prevent their misappropriation in the United States or abroad. In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as the laws of the United States.

Risk Of Loss Of Material Customers

In fiscal year 2002, the Company’s top ten customers accounted for approximately 71% of its total net sales. Net sales to Wal-Mart and its affiliated entity, Sam’s Club stores, accounted for approximately 23% and 5%, respectively, of the Company’s total net sales in 2002. Other than Wal-Mart, no customer accounted for 10% or more of the Company’s total net sales during this period. Consistent with industry practice, Pillowtex does not operate under a long-term written supply contract with Wal-Mart or any of its other customers. The loss of Wal-Mart or another large customer could have a materially adverse effect on the Company’s business, financial condition, results of operations, or prospects.

Labor Relations

As of March 14, 2003, Pillowtex had approximately 7,850 employees. As of that date, approximately 76% of Pillowtex’s employees were in areas covered by collective bargaining agreements, and approximately 53% of those employees had chosen to have union dues deducted from their pay checks. Pillowtex believes that it generally has good relationships with both its union and non-union employees; however, a work stoppage could occur as a result of disputes under the Company’s existing collective bargaining agreements with labor unions or in connection with negotiations of new collective bargaining agreements which, if protracted, could substantially adversely affect the Company’s business and results of operations.

Seasonality of Business

Pillowtex’s business is subject to a pattern of seasonal fluctuation. Sales and earnings from operations generated during the second half of a given fiscal year generally are expected to be higher than sales and earnings from operations generated during the first half of the year. Accordingly, the need for working capital generally is expected to increase in the second half of the year. As a result, total debt levels generally tend to peak in the third and fourth quarters, falling off again in the first quarter of the following year. The amount of sales generated during the second half of the year generally will depend upon a number of factors, including the level of retail sales for home textile furnishings during the fall and winter, weather conditions affecting the sales of down comforters, general economic conditions, and other factors beyond Pillowtex’s control. The seasonality of the business may impact the results of operations achieved by Pillowtex.

Pillowtex May Have Difficulty Attracting And Retaining Personnel

Pillowtex believes that its future success will be highly dependent upon its ability to attract and retain skilled managers and other personnel. No assurance can be given that Pillowtex will not have difficulty attracting and retaining such personnel in the future.


12


ITEM 2.         PROPERTIES

The following table summarizes certain information concerning certain of the facilities used by Pillowtex in connection with the manufacture and distribution of its product lines:

 

Location

 

Principal Use

 

Approx.
Square
Feet

 

Owned/
Leased

 

 

 

 

 

 

 

 

 

Dallas, Texas

 

Feather and down processing for Pillow and Pad Division and administrative offices

 

104,000

 

Owned

 

Phenix City, Alabama

 

Manufacturing and warehouse for Bed and Bath Division

 

813,416

 

Owned

 

Scottsboro, Alabama

 

Manufacturing and warehouse for Bed and Bath Division

 

290,461

 

Owned

 

Los Angeles, California

 

Manufacturing and distribution for Pillow and Pad Division

 

360,000

 

Leased

 

Chicago, Illinois

 

Manufacturing and distribution for Pillow and Pad Division

 

121,000

 

Owned

 

Tunica, Mississippi

 

Manufacturing and distribution for Pillow and Pad Division

 

288,000

 

Owned

 

New York, New York

 

Sales office and showroom for all divisions

 

64,490

 

Leased

 

Concord, North Carolina

 

Manufacturing for Bed and Bath Division

 

696,963

 

Owned

 

Eden, North Carolina

 

Manufacturing and warehouse for Bed and Bath Division

 

529,273

 

Owned

 

Eden, North Carolina

 

Warehouse for Bed and Bath Division

 

411,531

 

Owned

 

Kannapolis, North Carolina

 

Manufacturing for Bed and Bath Division

 

682,407

 

Owned

 

Kannapolis, North Carolina

 

Headquarters and manufacturing and warehouse for Bed and Bath Division

 

5,863,041

 

Owned

 

Rockwell, North Carolina

 

Manufacturing for Bed and Bath Division

 

98,240

 

Owned

 

China Grove, North Carolina

 

Manufacturing and warehouse for Bed and Bath Division

 

567,000

 

Owned

 

Hanover, Pennsylvania

 

Manufacturing and distribution for Pillow and Pad Division

 

291,000

 

Owned

 

Mauldin, South Carolina

 

Warehouse and distribution for Bed and Bath Division

 

746,600

 

Owned

 

Union, South Carolina

 

Manufacturing for Bed and Bath Division

 

107,400

 

Owned

 

Fieldale, Virginia

 

Manufacturing and warehouse for Bed and Bath Division

 

973,253

 

Owned

 

Martinsville, Virginia

 

Warehouse for Bed and Bath Division

 

160,000

 

Leased

 

Toronto, Ontario, Canada

 

Manufacturing and distribution for Pillow and Pad Division

 

60,000

 

Leased

 


In addition to the locations listed above, Pillowtex maintains warehousing and distribution centers in the states where its manufacturing facilities are located. It also maintains approximately 23 retail outlets and small sales and marketing offices in other states. Pillowtex also owns various other properties, both developed and undeveloped, which are unrelated to its manufacturing operations. Fieldcrest Cannon acquired these properties throughout the years for investment or as part of specific acquisitions. Pillowtex has listed some of these properties for sale and has leased others to third parties. Substantially all of Pillowtex’s assets are pledged as collateral for borrowings under its credit facilities and capital lease obligations.

Pillowtex believes that its facilities are generally well maintained, in good operating condition, and adequate for its current needs.

ITEM 3.         LEGAL PROCEEDINGS

The discussion of the Chapter 11 Cases set forth in “Item 1. Business – Proceedings Under Chapter 11 of the Bankruptcy Code” is incorporated herein by this reference.

In addition, Pillowtex is involved in various claims and lawsuits incidental to its business; however, the outcome of such suits is not expected to have a material adverse effect on the Company’s financial position or its results of operations.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


13


PART II

ITEM 5.         MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Since the Effective Date, the Company’s common stock, par value $0.01 per share (“Common Stock”), has been trading on the over-the-counter electronic bulletin board (the “OTCBB”) under the symbol “PWTX.OB.” The following table sets forth for the periods indicated the high and low reported bid prices on the OTCBB of the Common Stock:

 

Fiscal Year:

 

High

 

Low

 


 


 


 

2002

 

 

 

 

 

Fourth Quarter

 

$

1.97

 

$

0.165

 

Third Quarter

 

7.65

 

1.60

 

Second Quarter (from 5/24/02)

 

 

9.05

 

 

5.50

 


The quotations reflect inter-dealer prices without retail mark-up, markdown, or commission and may not represent actual transactions.

As of March 20, 2003, Pillowtex had approximately 865 holders of record of Common Stock.

Pillowtex paid no dividends on the Common Stock during fiscal year 2002. Under the terms of the Exit Revolver Facility and the Exit Term Loan, Pillowtex is prohibited from paying dividends on the Common Stock. See “Item 1. Business - Risk Factors - Pillowtex Is Subject To Restrictions On The Conduct Of Its Business.” Accordingly, Pillowtex does not expect to pay any further dividends on the Common Stock.


14


ITEM 6.         SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA
(In thousands of dollars, except per share data)

The selected financial data presented below are derived from Pillowtex’s consolidated financial statements for the seven months ended December 28, 2002, the five months ended June 1, 2002, and the fiscal years ended 2001, 2000, 1999 and 1998. The data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report.

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 Company’s consolidated financial statements included elsewhere in this Annual 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.

  

 

 

Successor

 

 

 

Predecessor

 

 

 


 

 

 


 

 

 

Seven
Months
Ended
December 28,
2002

 

Five Months
Ended June 1,
2002

 

Fiscal Year Ended

 

 

 

 

 


 

 

 

 

 

2001

 

2000

 

1999

 

1998 (1)

 

 

 


 


 


 


 


 


 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales (2)

 

$

554,842

 

$

380,050

 

$

1,011,888

 

$

1,234,817

 

$

1,412,678

 

$

1,349,946

 

Cost of goods sold

 

520,348

 

371,941

 

992,540

 

1,222,572

 

1,241,903

 

1,112,148

 

 

 


 


 


 


 


 


 

Gross profit

 

34,494

 

8,109

 

19,348

 

12,245

 

170,775

 

237,798

 

Selling, general, and administrative expenses

 

48,186

 

25,127

 

73,108

 

102,166

 

94,264

 

92,928

 

Impairment of long-lived assets and restructuring charges

 

2,412

 

35,344

 

51,720

 

24,400

 

2,000

 

 

 

 


 


 


 


 


 


 

Earnings (loss) from operations

 

(16,104

)

(52,362

)

(105,480

)

(114,321

)

74,511

 

144,870

 

Interest and other expense

 

11,530

 

16,832

 

64,666

 

107,062

 

87,279

 

72,283

 

 

 


 


 


 


 


 


 

Earnings (loss) from continuing operations before reorganization items and income taxes

 

(27,634

)

(69,194

)

(170,146

)

(221,383

)

(12,768

)

72,587

 

Reorganization items

 

 

(398,651

)

31,401

 

19,368

 

 

 

 

 


 


 


 


 


 


 

Earnings (loss) from continuing operations before income taxes

 

(27,634

 

329,457

 

(201,547

)

(240,751

)

(12,768

)

72,587

 

Income tax expense (benefit)

 

 

(7,157

)

 

(93,361

)

(2,740

)

28,230

 

 

 


 


 


 


 


 


 

Earnings (loss) from continuing operations

 

(27,634

)

336,614

 

(201,547

)

(147,390

)

(10,028

)

44,357

 

Loss from discontinued operations, net

 

 

 

(21,214

)

(115,018

)

(9,504

)

(1,502

)

 

 


 


 


 


 


 


 

Net earnings (loss)

 

(27,634

)

336,614

 

(222,761

)

(262,408

)

(19,532

)

42,855

 

Preferred dividends and accretion

 

 

7,467

 

16,358

 

8,928

 

12,294

 

2,097

 

 

 


 


 


 


 


 


 

Earnings (loss) available for common shareholders

 

$

(27,634

)

$

329,147

$

(239,119

)

$

(271,336

)

$

(31,826

)

$

40,758

 

 

 



 



 



 



 



 



 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.46

)

$

23.10

 

$

(15.29

)

$

(10.97

)

$

(1.58

)

$

3.00

 

Discontinued operations

 

 

 

$

(1.49

)

(8.07

)

(0.67

)

(0.11

)

 

 


 


 



 


 


 


 

Basic earnings (loss) per common share

 

$

(1.46

)

$

23.10

 

$

(16.78

)

$

(19.04

)

$

(2.25

)

$

2.89

 

 

 



 



 



 



 



 



 

Weighted average common shares outstanding - basic

 

18,984

 

14,251

 

14,251

 

14,252

 

14,154

 

14,082

 

 

 


 


 


 


 


 


 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.46

)

$

23.10

 

$

(15.29

)

$

(10.97

)

$

(1.58

)

$

2.39

 

Discontinued operations

 

 

 

$

(1.49

)

(8.07

)

(0.67

)

(0.09

)

 

 


 


 



 


 


 


 

Diluted earnings (loss) per common share

 

$

(1.46

)

$

23.10

 

$

(16.78

)

$

(19.04

)

$

(2.25

)

$

2.30

 

 

 



 



 



 



 



 



 

Weighted average common shares outstanding - diluted

 

18,984

 

14,251

 

14,251

 

14,252

 

14,154

 

17,653

 

 

 


 


 


 


 


 


 



15


 

 

 

Successor

 

Predecessor

 

 

 


 


 

 

 

Seven
Months
Ended
December 28,
2002

 

Five
Months
Ended
June 1,
2002

 

Fiscal Year Ended

 

 

 

 

 


 

 

 

 

 

2001

 

2000

 

1999

 

1998 (1)

 

 

 


 


 


 


 


 


 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

8,257

 

$

18,880

 

$

53,785

 

$

57,517

 

$

51,941

 

$

45,888

 

Capital expenditures

 

8,085

 

28,491

 

12,832

 

33,197

 

89,737

 

133,620

 

Preferred stock cash dividends

 

 

 

 

 

1,456

 

2,019

 

Common stock cash dividends

 

 

 

 

 

 

 

 

 

 

2,555

 

 

3,383

 


 

 

 

Successor

 

Predecessor

 

 

 


 


 

 

 

 

 

(Unaudited)
As of
June 1,
2002

 

As of Fiscal Year End

 

 

 

 

 

 


 

 

 

As of
December 28,
2002

 

 

2001

 

2000

 

1999

 

1998 (1)

 

 

 


 


 


 


 


 


 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

    20,792

(3)  

$

242,915

 

$

(365,917

(3)

$

(237,376

(3)

$

511,139

 

$

557,968

 

Property, plant and equipment, net

 

166,992

 

168,418

 

453,440

 

525,990

 

577,947

 

559,851

 

Total assets

 

591,586

 

585,391

 

1,087,627

 

1,335,769

 

1,671,776

 

1,644,736

 

Long-term debt, net of current portion

 

14,870

 

199,168

 

645

 

 

965,323

 

944,493

 

Redeemable convertible preferred stock

 

 

 

99,185

 

82,827

 

73,898

 

63,057

 

Shareholders’ equity (deficit)

 

 

105,168

 

 

191,624

 

 

(329,118

)

 

(63,451

)

 

207,389

 

 

237,933

 


   (1)    Amounts set forth in 1998 reflect the inclusion of Leshner from July 28, 1998.

   (2)    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 $19.2 million, $24.2 million, $19.8 million and $18.9 million have been reclassified from selling, general, and administrative expenses as a reduction in net sales in the fiscal years ended 2001, 2000, 1999 and 1998, respectively, to conform to the 2002 presentation.

   (3)    Includes long-term debt of $213.2 million at December 28, 2002 classified as current pursuant to EITF No. 86-30 (see Note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report), and long-term debt in default of $671.8 million in 2001 and $694.0 million in 2000.


16


ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Pillowtex is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex manufactures and markets home textile furnishings for the bedroom, bathroom, and kitchen. Pillowtex operates a network of manufacturing, purchasing, and distribution facilities in the United States and Canada with approximately 7,850 employees. Pillowtex markets its products to mass merchants, department stores, and specialty retailers, as well as wholesale clubs, catalog merchants, institutional distributors, and international customers, and over the Internet.

The Company is organized into two major manufacturing divisions that it considers operating segments: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding, towels, bath rugs, and kitchen products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads.

Pillowtex’s consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a “going concern.” Continuing adverse conditions in the general economic environment, the effect of those conditions on the retail industry through which the Company sells a substantial portion of its products, and intense domestic and foreign competition have had a negative impact on the Company’s cash flows and results from operations and therefore on its ability to comply with certain financial covenants previously established by its revolver and term loan lenders. Because of the uncertainties as to the results of future negotiations with the Company’s revolver and term loan lenders as to revised financial covenants and therefore as to the adequacy of the Company’s financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods (such uncertainties being more fully discussed under “- Adequacy of Capital Resources” below), there is substantial doubt about Pillowtex’s ability to continue as a “going concern.” The continuation of the Company as a “going concern” is dependent upon, among other things, Pillowtex’s ability to comply with the terms of the Exit Revolver Facility and the Exit Term Loan and Pillowtex’s ability to generate sufficient cash from operations and financing arrangements to meet its obligations. If the “going concern” basis was not appropriate for Pillowtex’s consolidated financial statements, then significant adjustments might be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used.

The Company is reviewing its strategic alternatives, which may include a sale of the business, sales of assets or restructuring options, which could include a bankruptcy proceeding. The Company has retained Credit Suisse First Boston as its financial advisor to assist it in this review.

Chapter 11 Proceedings and Reorganization

On November 14, 2000, Pillowtex Corporation and substantially all of its domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code. The Chapter 11 Cases were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their business as debtors-in-possession pursuant to the Bankruptcy Code. On May 24, 2002, the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. For further discussion of the Chapter 11 Cases, see “Item 1. Business – Chapter 11 Proceedings and Reorganization” above and the notes to the Company’s consolidated financial statements included elsewhere in this Annual Report.

Critical Accounting Policies

Management considers certain accounting policies related to sales returns and allowances, allowance for doubtful accounts, inventory, sales incentive programs, self-insured employee medical and workers’ compensation claims costs, pension and postretirement benefit obligations, impairment of long-lived assets, and deferred income taxes 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. 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.


17


The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. The Company has trade receivables which are due from certain customers that are experiencing financial difficulties. At December 28, 2002, a reserve of $1.9 million was recorded and included as an allowance against trade accounts receivable. Management believes that the allowance is adequate to cover potential losses resulting from uncollectible accounts and deductions resulting from sales returns and allowances.

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.

The Company’s sales incentive programs require management to estimate the eventual expense to be incurred for the various discount, rebate and other incentive allowances employed by the Company to promote and maintain its product lines. Management bases its estimate of the expense to be recorded each period on the agreements established from time to time with customers, commitments made by sales personnel and industry practice. As the cost of certain types of sales incentive programs is dependent upon a detailed analysis of a customers’ sales activity, the exact amount required to be expensed in a period has to be estimated by management initially based on historical levels. Management does not believe the likelihood is significant that materially higher sales incentive expense levels will result given its experience with such costs.

The Company self-insures for the majority of its employee medical costs and is insured for its workers’compensation costs with a $250,000 per occurrence deductible. As a result management, with assistance from its actuarial advisors, must estimate the required accrual for these costs at each period end. The Company is responsible for the cost of all employee medical claims up to $300,000 per occurrence. An insurance policy has been acquired to reimburse the Company for the cost of all employee medical claims in excess of $300,000 per occurrence. The year-end accrual for the cost of workers' compensation and employee medical costs is based on historical claims experience. The Company’s actuarial advisors review historical claims levels and development factors, along with industry cost trends to provide management with an estimate of costs yet to be paid for claims incurred prior to the period end. Management determines the most likely year-end accrual required by selecting a value that is consistent with the methods used in prior periods. Management does not believe the likelihood is significant that materially higher insurance expense levels will result given its experience with such costs.

The Company’s calculations of pension and postretirement benefit obligations are dependent on assumptions, including discount rates, expected return on plan assets, interest costs, benefits earned, mortality rates, and other factors. Actual results that differ from assumptions are accumulated and amortized over future periods and therefore generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect the Company’s pension and postretirement benefit obligations and future expense. See “- Liquidity and Capital Resources – Pension Plans” below and notes 9 and 10 to the Company’s consolidated financial statements included elsewhere in this Annual Report for more information.

If the assumptions made by management in estimating sales returns and allowances, inventory obsolescence, sales incentive programs, self-insured employee medical costs and workers’ compensation costs, and pension and postretirement benefit obligations do not reflect the actual expenses to be incurred, net sales and loss from operations could be significantly impacted.

When management determines that a long-lived asset has been impaired, an estimate of the fair value of the asset 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 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 December 28, 2002, the Company had $17.4 million in assets held for sale, of which $12.0 million relates to real property and $5.4 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


18


in 2002 and 2001 and the adjustments recorded during fiscal 2002 and 2001, management believes that it is reasonably possible that the Company will not fully recover these balances and that additional impairment charges may be required in subsequent periods.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance, at December 28, 2002 to be realized as a result of the reversal of existing taxable temporary differences.

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. 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. See note 1 to the Company’s consolidated financial statements included elsewhere in this Annual 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 the results of operations, the seven months ended December 28, 2002 (Successor) have been combined with the five months ended June 1, 2002 (Predecessor) and compared with the fiscal year ended December 29, 2001 (Predecessor).

Results of Operations

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 $19.2 million and $24.2 million have been reclassified from selling, general, and administrative expenses as a reduction to net sales in the years ended December 29, 2001 and December 30, 2000, respectively, to conform to the 2002 presentation.

The following table shows the combined 2002 periods in comparison to the corresponding 2001 and 2000 periods (dollars in thousands):

 

 

 

Twelve Months Ended

 

 

 


 

 

 

December 28,
2002

 

December 29,
2001

 

December 30,
2000

 

 

 


 


 


 

Net sales

 

$

934,892

 

1,011,888

 

1,234,817

 

Cost of goods sold

 

892,289

 

992,540

 

1,222,572

 

 

 


 


 


 

Gross profit

 

42,603

 

19,348

 

12,245

 

Selling, general, and administrative expenses

 

73,313

 

73,108

 

102,166

 

Impairment of long-lived assets

 

32,308

 

40,961

 

24,400

 

Restructuring charges

 

5,448

 

10,759

 

 

Interest and other expense

 

28,362

 

64,666

 

107,062

 

Reorganization items

 

(398,651

)

31,401

 

19,368

 

Income tax benefit

 

(7,157

)

 

(93,361

)

 

 


 


 


 

Income (loss) from continuing operations

 

308,980

 

(201,547

)

(147,390

)

Loss from discontinued operations

 

 

(21,214

)

(115,018

)

 

 


 


 


 

Net income (loss)

 

$

308,980

 

 

(222,761

)

 

(262,408

)

 

 



 



 



 


The operating results of the Company’s segments are disclosed in note 19 to the Company’s consolidated financial statements included elsewhere in this Annual Report.

Twelve Months Ended December 28, 2002 Compared to Fiscal Year 2001


19


Net Sales. Net sales were down from $1,011.9 million in 2001 to $934.9 million in 2002, a decrease of $77.0 million or 7.6%. Approximately $31 million of the decrease is attributable to the expiration of a Ralph Lauren licensing agreement on June 30, 2001. Fiscal year 2001 also included approximately $29 million in sales relating to a one-time inventory liquidation. A charge had been taken in December 2000 to reduce certain inventories to net realizable value. The remaining decrease is due to lower selling prices and lower sales volume caused by increased competitive pressures from both domestic and international competitors and a weaker than expected retail environment. The Company anticipates that the difficult competitive environment and slowdown in retail sales will continue to adversely affect net sales for the foreseeable future.

Gross Profit. Gross profit increased $23.3 million from $19.3 million in 2001 to $42.6 million in 2002. Gross margin increased to 4.6% in 2002, compared to 1.9% in 2001. The increase is due in part to lower depreciation expense resulting from a revaluation of fixed assets performed in conjunction with fresh start reporting and reduced operating lease costs due to the Company’s emergence from its chapter 11 bankruptcy proceedings in May 2002. The gross profit increase experienced in 2002 is also 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 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 either transferred to existing facilities or sourced from other vendors. While the Company has experienced improvements in gross profit in comparison to the prior year periods, the Company anticipates that it will continue to experience selling price pressure, which will adversely impact operating results for the foreseeable future.

Selling, General, and Administrative (“SG&A”) Expenses. SG&A expenses increased $0.2 million from $73.1 million in 2001 to $73.3 million in 2002. The increase in SG&A expenses is primarily due to costs associated with a national advertising campaign and approximately $6 million of non-recurring costs related to executive management changes that took place during 2002. These increases have been partially offset by lower depreciation expense due to the revaluation of fixed assets in conjunction with fresh start reporting and lower amortization expense due to the adoption of SFAS No. 142. SFAS No. 142 was adopted on December 30, 2001 and requires that goodwill and intangible assets with indefinite lives no longer be amortized. As a result, no amortization on its goodwill and trademarks has been recorded during 2002, which reduced SG&A expenses by $6.3 million. SG&A expenses in 2002 were also partially offset by a $2.2 million gain recognized on the termination of an excess benefit plan provided for certain employees and former employees.

Impairment of Long-lived Assets. A charge for impairment of long-lived assets of $32.3 million was incurred during 2002 primarily related to assets located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge consists of $9.8 million for real property and $22.5 million for machinery and equipment. During 2001, charges for impairment of long-lived assets of $41.0 million were incurred primarily for facilities closed in 2001. The 2001 charge includes $36.5 million related to real property and equipment at facilities closed during 2001 and $4.5 million related to assets held for sale. During 2001, the Company announced the closure of facilities in Hawkinsville, Georgia; Rocky Mount, North Carolina; Kannapolis, North Carolina; Columbus, Georgia; Phenix City, Alabama; Tarboro, North Carolina; and Toronto, Canada.

Restructuring Charges. During 2002, facilities at Columbus, Georgia; Phenix City, Alabama; Dallas, Texas; and Macon, Georgia were closed, affecting approximately 1,225 employees. In addition, approximately 60 administrative positions were eliminated during 2002. The total restructuring charges for severance and related benefits associated with these actions were $5.4 million. During 2001, the Company incurred $10.8 million in restructuring charges, of which $6.5 million relates to severance and related benefits associated with employees terminated at the closed facilities discussed above. In addition to the facility closures, the Company implemented an enhanced early retirement plan for certain salaried employees in 2001. The Company also undertook a reduction in force among its salaried employees. The charge associated with the 2001 early retirement plan and reduction in force was $4.3 million.

Interest and Other Expense. Interest and other expense decreased $36.3 million from $64.7 million in 2001 to $28.4 million in 2002. The decrease is primarily due to a decrease in the amount of debt outstanding due to the Company’s emergence from its chapter 11 bankruptcy proceedings in May 2002. The outstanding debt balance decreased $435.6 million from $672.8 million (excluding liabilities subject to compromise for which no interest expense was recorded) as of December 29, 2001 to $237.2 million as of December 28, 2002. In addition, the average interest rate decreased from 7.8% for 2001 to 6.0% for 2002.

Reorganization Items. A gain of $398.7 million was recognized in 2002. The gain was due to the gain


20


recognized on the cancellation of pre-petition liabilities upon emergence, offset by fresh start adjustments and costs associated with the Chapter 11 Cases.

Fiscal Year 2001 Compared to Fiscal Year 2000

Net Sales. Net sales were down from $1,234.8 million in 2000 to $1,011.9 million in 2001, a decrease of $222.9 million or 18.1%. Approximately $86 million of the decrease was attributable to the loss of a specific customer in August 2000, which affected the Company’s two major divisions. In addition, the Company’s license agreement with Ralph Lauren, which expired on June 30, 2001, contributed approximately $23 million to the sales decrease experienced in 2001. Excluding the impact of these decreases, net sales decreased 9.2% in 2001 as compared to 2000. This decrease was due to the continued slowdown in the United States economy and increased competition from imports.

Gross Profit. Gross profit increased $7.1 million from $12.2 million in 2000 to $19.3 million in 2001. During the fourth quarter of 2000, the Company recorded a charge for inventory write-downs of $49.5 million to reduce certain inventories to net realizable value. This charge resulted from a number of factors, including a slowdown in the retail environment and increased pressure due to the filing of the Chapter 11 Cases to liquidate excess, obsolete, and distressed inventory in a shorter time frame than in the past.

Gross margin decreased to 1.9% in 2001, compared to 5.0% in 2000, excluding the inventory write-downs in 2000. The decrease was due to the decline in sales volume, increased unabsorbed overhead costs due to inventory reduction initiatives, increased levels of customer deductions, and lower selling prices.

Selling, General, and Administrative (“SG&A”) Expense. SG&A expense in 2001 decreased $29.1 million from $102.2 million in 2000 to $73.1 million in 2000. The decrease was primarily the result of management’s continued focus on cost controls, particularly in travel, salaries, and general fees and services. In addition, SG&A expense in 2000 included severance payments to the Company’s former chief executive officer and higher bad debt expense resulting from the deteriorating creditworthiness of certain of the Company’s customers.

Impairment of Long-Lived Assets. The Company incurred charges for impairment of long-lived assets of $41.0 million in 2001, compared to $24.4 million in 2000. The 2001 charge includes $36.5 million related to real property and equipment at facilities closed during 2001 and $4.5 million related to assets held for sale. During 2001, the Company announced the closure of facilities in Hawkinsville, Georgia; Rocky Mount, North Carolina; Kannapolis, North Carolina; Columbus, Georgia; Phenix City, Alabama; Tarboro, North Carolina; and Toronto, Canada. The 2000 charge includes $4.6 million related to real property and $19.8 million related to equipment and miscellaneous corporate assets.

The impairment of the manufacturing facilities and equipment resulted from management’s rationalization of production capacity in connection with filing of the Chapter 11 Cases. The impairment reflected management’s estimate of the fair value of the assets as determined by the present value of expected future cash flows to be generated by the assets, including their ultimate disposition.

Restructuring Charges. During 2001, the Company incurred $10.8 million in restructuring charges, of which $6.5 million relates to severance and related benefits associated with employees terminated at the closed facilities discussed above. In addition to the facility closures, the Company implemented an enhanced early retirement plan for certain salaried employees. The Company also undertook a reduction in force among its salaried employees. The charge associated with the early retirement plan and reduction in force was $4.3 million. These actions were undertaken in an effort to reduce manufacturing capacity and lower costs.

Interest and Other Expense. Interest and other expense decreased $42.4 million to $64.7 million in 2001, compared to $107.1 million in 2000. The primary reason for the overall decrease in 2001 resulted from the Company’s filing of the Chapter 11 Cases, which enabled the Company to cease the payment and accrual of interest on all unsecured debt, partially offset by other financing costs. The interest on such unsecured pre-petition debt was approximately $34.3 million in 2001 and $4.0 million in 2000. In addition, the average interest rates on the Company’s debt decreased in comparison to 2000. The average interest rate in 2001 was 7.8%, compared to 10.1% in 2000.

Reorganization Items. During 2001, the Company incurred $31.4 million of reorganization items associated with the Chapter 11 Cases. The charge consists of $17.1 million of fees payable to professionals retained to assist with the Chapter 11 Cases, $10.3 million for rejected contracts and leases, and $5.4 million for a key employee retention program for the Company’s management team and other key employees, offset by net interest income of $1.4 million.


21


During 2000, Pillowtex incurred $19.4 million of reorganization items. The charge consists of $17.6 million related to the non-cash write-off of the unamortized discount on the Fieldcrest Cannon, Inc. 6% Convertible Subordinated Debentures due 2012 (the “6% Convertible Debentures”) and the non-cash write-off of deferred financing costs associated with other unsecured debt classified as subject to compromise. In addition, the Company incurred $1.8 million in fees payable to professionals retained to assist with the Chapter 11 Cases.

Loss from Discontinued Operations. The loss from operations of the Blanket Division (which the Company sold in September 2001) was $18.3 million in 2001, compared to $115.0 million in 2000. The 2000 loss includes a charge of $88.3 million for impairment of long-lived assets, consisting of $50.0 million related to real property and equipment and $38.3 million related to goodwill, and a charge for inventory write-downs of $19.7 million. These charges were incurred to reflect the Blanket Division at its net realizable value. The loss on disposal of the Blanket Division incurred in 2001 was $3.0 million.

Liquidity and Capital Resources

Exit Revolver Facility

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 non-amortizing revolving credit facility, including a $60 million letter of credit sub-facility. Pillowtex Corporation and certain of its domestic subsidiaries are borrowers under the Exit Revolver Facility, and Pillowtex Corporation’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 Pillowtex’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 4.6% for the seven months ended December 28, 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 that applies at any time excess availability is less than $35 million. See “- Adequacy of Capital Resources” below.

As of December 28, 2002, $96.6 million was outstanding under the Exit Revolver Facility and outstanding letters of credit under the Exit Revolver Facility aggregated $27.0 million. Availability as of March 15, 2003 was $62.7 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


22


which were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds from the Exit Term Loan. Pillowtex Corporation 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, which commenced 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. Effective September 27, 2002, the Exit Term Loan was amended to add an asset coverage ratio test and a minimum availability requirement under the Exit Revolver Facility (the “Amended Financial Covenants”), which were measured at the end of each fiscal month for the remainder of fiscal year 2002. The amendment also included a waiver of compliance by the Company with the maximum leverage ratio and minimum interest coverage ratio covenants for the third quarter of the 2002 fiscal year. Effective December 20, 2002, the Exit Term Loan was further amended to include a waiver of compliance with the maximum leverage ratio and minimum interest coverage ratio for the fourth quarter of 2002. The amendment also extends through the end of the first fiscal quarter of 2003 the effectiveness of the Amended Financial Covenants. Effective March 27, 2003, the Exit Term Loan was further amended to include a waiver of compliance with certain provisions, including, among others, the maximum leverage ratio and minimum interest coverage ratio for the first quarter of 2003. The amendment also extends through the end of the second fiscal quarter of 2003 the effectiveness of the Amended Financial Covenants.

A failure to comply with any of the covenants contained in the Exit Term Loan would result in an event of default under the Exit Term Loan. Upon the occurrence of an event of default, the term loan lenders would be entitled to declare all amounts outstanding under the Exit Term Loan, including accrued interest and other obligations, to be immediately due and payable, and the term loan lenders would be entitled to proceed against the collateral granted to them to secure the Exit Term Loan. In these circumstances, cross-defaults could occur under the documents governing the Company’s other outstanding debt. Pursuant to the terms of the Exit Revolver Facility, a default by the Company of the financial covenants set forth in the Exit Term Loan will be deemed an event of default under the Exit Revolver Facility if such default continues for more than sixty (60) days and is not waived in writing by or on behalf of the term loan lenders. If the Company fails to comply with any of the covenants in the Exit Term Loan, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that the Company would be able to obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

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 December 28, 2002, $108.5 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 December 28, 2002, $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


23


default of their obligations under each of the IRB Facilities. On the Effective Date, pursuant to the Plan, the IRB Facilities were reinstated.

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 Debtors thereunder.

Capital Lease Obligations

Certain existing operating leases for machinery and equipment 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 from 48 to 60 months. The total amount of operating leases converted into capital lease obligations during the five months ended June 1, 2002 was $24.4 million. As of December 28, 2002, $20.7 million was outstanding under capital lease obligations.

Pension Plans

The assets of the Company’s defined benefit pension plans, like numerous other companies’ similar plans, are, to a substantial degree, invested in the capital markets and managed by third party investment advisors. Given the weak performance of the capital markets, the asset values of the Company’s pension plans have declined, requiring the Company to make cash contributions to its pension plans.

Beginning in the 2003 plan year, the Company, with the consent of the Pension Benefit Guarantee Corporation, adopted an asset valuation smoothing technique for determining cash funding obligations (the “smoothing technique”), which allows for the required cash funding contributions to be spread over five years, thus resulting in a reduction in the cash obligation for plan year 2003 from that which would have otherwise been required under the Company’s prior valuation method. Increases in post-2003 pension cash funding requirements will occur, however, if the performance of the capital markets in future periods does not more closely approximate the long-term rate of return assumed by the Company, and the amount of any such increases could be material. Based on the January 1, 2003 preliminary actuarial valuation of the Company’s pension plans, the Company will be required to make cash contributions to its pension plans of $18.6 million during fiscal year 2003 (which includes $10.6 million for plan year 2002 and $8.0 million for plan year 2003) and $17.5 million in fiscal year 2004 (which includes $6.6 million, the balance of the funding obligation for plan year 2003, and $10.9 million, the minimum amount of quarterly contributions required for plan year 2004). In addition, unless there is a significant recovery in 2003 in the stock market and more specifically a recovery in the equity asset investments of the plans, the Company anticipates that it would be required to make significant additional cash contributions to its pension plans during fiscal year 2005 relating to contribution requirements for plan year 2004, which are measured as of January 1, 2004. The Company will continue to review other potential changes that could reduce the future cash funding obligations of the Company.

Upon each determination of the amount of the contributions required to be made for any fiscal year by the Company in respect of the pension plans, the Company must notify the agent bank (the “Revolver Agent”) under the Exit Revolver Facility of such determination. If the amount required to be contributed is more than $5 million greater than the amount that was required to be contributed for the immediately preceding fiscal year, the Revolver Agent may establish a reserve against availability under the Exit Revolver Facility in an amount equal to such excess. The Company anticipates that such determination will be finalized with respect to the 2003 fiscal year during May 2003. The amount required to be contributed to the pension plans for the 2002 fiscal year is $10.6 million. Consequently, to the extent that on such determination date the amount required to be contributed to the pension plans for the 2003 fiscal year exceeds $15.6 million, the Revolver Agent will be entitled to establish a reserve in the amount equal to such excess. Based on the estimates of the contributions required for fiscal year 2003 above, the Company does not anticipate such a reserve being established during 2003. The creation of such a reserve results in a corresponding reduction in the availability under the Exit Revolver Facility.

The Company anticipates that based on the overall decline in the value of the pension plans’ assets and the current assumptions described in “ – Critical Accounting Policies” above, pension costs reflected in its 2003 operating results will increase by approximately $9 million.

Adequacy of Capital Resources

The Company’s principal sources of liquidity are cash flows from operations and borrowings under the Exit


24


The Company’s principal sources of liquidity are cash flows from operations and borrowings under the Exit Revolver Facility. After taking into consideration the range of projections of cash flows from operations, anticipated capital expenditures (which the Company estimates will be approximately $9 million during fiscal year 2003, primarily related to updating and maintaining existing facilities and equipment), debt principal repayment requirements, and anticipated pension plan cash funding payments, the Company believes that the excess availability under the Exit Revolver Facility may drop below $35 million at certain times during the second half of 2003. The Company does not believe that it would be able to comply with the minimum earnings threshold contained in its Exit Revolver Facility, which would become effective in such event. As a result of these factors, coupled with the uncertainties as to the results of future negotiations with the Company’s term loan lenders as to revised financial covenants, the Company can provide no assurances that it will have adequate financial resources to meet its anticipated cash requirements for the second half of 2003 and future periods. If the Company is unable to comply with the minimum earnings threshold contained in the Exit Revolver Facility, the Company would anticipate seeking to obtain appropriate waivers or amendments, but there can be no assurance that the Company would obtain any such waiver or amendment. If an event of default occurs and the Company is unable to obtain appropriate waivers or amendments, the Company’s lenders would be entitled to exercise their remedies under the Company’s respective debt instruments, and the Company would no longer have access to borrowings under the Exit Revolver Facility, its principal source of liquidity. In such event, the Company can provide no assurance that alternative financing would be available on terms acceptable to the Company. If these developments were to occur, the Company would have to consider pursuing appropriate restructuring options, which could include a bankruptcy proceeding.

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, IRB Facilities, and capital lease obligations, or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. Accordingly, the Company’s ability to respond to changing business and economic conditions and to secure additional financing, if needed, would be significantly restricted.

Contractual Obligations and Commercial Commitments

The following table contains the contractual cash obligations outstanding under long-term debt (for which this table comprises the Exit Term Loan and IRB Facilities), capital lease obligations, and operating leases as of December 28, 2002 (dollars in thousands):

 

 

 

Payments Due by Period

 

 

 


 

Contractual Obligations

 

Total

 

2003-
2004

 

2005-
2006

 

2007-
2008

 

After 2008

 


 


 


 


 


 


 

Long-term debt (1)

 

$

119,849

 

13,629

 

22,272

 

73,948

 

10,000

 

Capital lease obligations (1)

 

20,705

 

10,729

 

9,069

 

907

 

 

Operating lease obligations

 

13,286

 

8,363

 

3,346

 

1,574

 

3

 

Cotton purchase commitments

 

26,969

 

26,969

 

 

 

 

 

 


 


 


 


 


 

Total contractual cash obligations

 

$

180,809

 

59,690

 

34,687

 

76,429

 

10,003

 

 

 



 


 


 


 


 


Other commercial commitments outstanding as of December 28, 2002 are as follows (dollars in thousands):

 

 

 

Amount of Commitment Expiration Per Period

 

 

 


 

Other Commercial
Commitments

 

Total
Amounts
Committed

 

2003-
2004

 

2005-
2006

 

2007-
2008

 

After 2008

 


 


 


 


 


 


 


25


 

Line of credit (1)

 

$

96,640

 

 

96,640

 

 

 

Standby letters of credit

 

27,490

 

1,397

 

26,093

 

 

 

Commercial letters of credit

 

869

 

869

 

 

 

 

 

 


 


 


 


 


 

Total commercial commitments

 

$

124,999

 

2,266

 

122,733

 

 

 

 

 



 


 


 


 


 


   (1)    These amounts are scheduled based upon contractual payment terms and do not reflect the reclassification to current liabilities pursuant to EITF No. 86-30 (see Note 11 to the Company’s consolidated financial statements included elsewhere in this Annual Report).

New Accounting Standards

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 at the beginning of fiscal year 2003, which commences on December 29, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on the Company’s consolidated financial statements.

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 APB Opinion No. 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. The adoption of SFAS No. 146 is not expected to have a material effect on the Company’s consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, and interpretation of FASB Statements of No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to the Company’s consolidated financial statements included elsewhere in this Annual Report.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation addresses the consolidation of business enterprises (variable interest entities) to which the usual condition of consolidation does not apply. This interpretation focuses on financial interests that indicate control. It concludes that in the absence of clear control through voting interests, a company’s exposure (variable interest) to the economic risks and potential rewards from the variable interest entity’s assets and activities are the best evidence of control. Variable interests are rights and obligations that convey economic gains or losses from changes in the values of the variable interest entity’s assets and liabilities. Variable interests may arise from financial instruments, service contracts, nonvoting membership interests and other arrangements. If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary would be required to include assets, liabilities and the results of operations of the variable interest entity in its financial statements. This interpretation applies to variable interest entities that are created after or for which control is obtained after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions would be applied effective July 1, 2003. This interpretation is not expected to have a material effect on the Company’s consolidated financial statements included elsewhere in this Annual Report.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pillowtex is exposed to market risk from changes in interest rates on debt and foreign currency exchange rates. Pillowtex’s exposure to interest rate risk consists of floating rate debt based on the prime rate or Eurodollar rate, plus an adjustable margin. The annual impact on the Company’s results of operations of a 100 basis point interest


26


rate change on the December 28, 2002 outstanding balance of the variable rate debt would be $1.1 million. This same calculation for 2001 was $6.6 million.

Pillowtex’s exposure to fluctuations in foreign currency exchange rates is due primarily to a foreign subsidiary domiciled in Canada. Pillowtex’s Canadian subsidiary uses the Canadian dollar as its functional currency. Pillowtex generally does not use financial derivative instruments to hedge foreign currency exchange rate risks. The Canadian subsidiary is not material to Pillowtex’s consolidated results of operations.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are set forth herein commencing on page F-1. Schedule II to the financial statements is set forth herein on page S-1.

ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


27


PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

DIRECTORS OF THE REGISTRANT

The following is a list of directors, their ages, positions and business experience as of March 28, 2003.

 

Name and Position

 

Age

 

Experience

 

 

 

 

 

Michael T. Gannaway,
Chairman of the Board and Chief Executive Officer

 

51

 

Mr. Gannaway has served as Chairman of the Board and Chief Executive Officer since March 2003. From October 2002 to March 2003, Mr. Gannaway served as President of the Company. From 1993 until joining the Company, Mr. Gannaway worked in various positions for Sara Lee Corporation, a global manufacturer and marketer of well-known brand name products for consumers throughout the world. From March 2001 until October 2002, Mr. Gannaway served as President and Chief Executive Officer of Customer Business Teams and Mega Brand Marketing for Sara Lee Branded Apparel, a global business segment of Sara Lee Corporation. From 2000 until February 2001, Mr. Gannaway served as President, Mass Brands for Sara Lee Underwear, a business division of the Branded Apparel unit. From 1996 until 2000, Mr. Gannaway served as President of the Polo Ralph Lauren Underwear and Department Store Brands for Sara Lee Underwear. From 1994 until 1995, Mr. Gannaway served as Vice President of Department Store Brands at Sara Lee Intimates, and from 1993 until 1994, he served as Vice President for the Bali brand at Sara Lee. Prior to joining Sara Lee Corporation, Mr. Gannaway worked in various capacities from 1986 until 1993 for Revlon Inc., including President – Department Store Sales. From 1981 until 1986, Mr. Gannaway served as Vice President of Sales – Men’s Fragrances at Estee Lauder Inc., and from 1973 until 1981, he served in various capacities culminating as the Division Merchandise Manager – Cosmetic/Fashion Accessories at Dayton’s a unit of the Target Corporation.

 

 

 

 

 

Bradley I. Dietz

 

48

 

Mr. Dietz became a director of the Company in May 2002. Mr. Dietz has served as Managing Director and Partner of Peter J. Solomon Company, Ltd., an investment banking company, since 2001. From 1991 until 2001, Mr. Dietz served as Managing Director of the Institutional Recovery Management Group of Citibank, N.A. (“Citibank”), and from 1987 until 1990, he served as Vice President of the Mergers and Acquisitions Group of Citibank. Prior to joining Citibank, Mr. Dietz served as Vice President-Corporate Finance Department of Bankers Trust Company from 1984 until 1987.

 

 

 

 

 

Scott L. Graves

 

32

 

Mr. Graves became a director of the Company in September 2002. Mr. Graves currently serves as a Vice President of Oaktree Capital Management, LLC (“Oaktree”), a registered investment adviser specializing in alternative and inefficient investment markets. Prior to joining Oaktree in 2001, Mr. Graves served as a Principal in William E. Simon & Sons’ private equity group where he was responsible for sourcing, structuring, executing and managing corporate leveraged buy-outs and growth capital investments. Before joining William E. Simon & Sons in 1998, Mr. Graves worked at Merrill Lynch & Company in the mergers and acquisitions group, where he focused on leveraged buy-out situations and the valuation of public and private companies. Prior thereto, Mr. Graves worked at Price Waterhouse LLP in the Audit Business Services division. In addition to Pillowtex, Mr. Graves currently serves on the boards of Spalding Holdings Corp, Maidenform, Inc., Excellegence Learning Corp. and Reeves Industries.

 

 

 

 

 

Kenneth Liang

 

42

 

Mr. Liang became a director of the Company in May 2002. Mr. Liang has served as Managing Director-Distressed Debt of Oaktree since June 2001, and from 1995 until June 2001, he served as General Counsel of Oaktree.

 

 

 

 

 



28


 

 

 

 

 

From 1992 until 1995, Mr. Liang served as Senior Vice President-Special Credit Funds of TCW. Prior to joining TCW, Mr. Liang served as Senior Corporate Counsel for Dole Food Company, Inc. (“Dole”), the largest producer and marketer of fresh food products, and prior to serving with Dole, he was an associate with the law firm of O’Melveny & Myers.

 

 

 

 

 


CORPORATE OFFICERS OF THE REGISTRANT

The following are the corporate officers of the Company, their ages, position and business experience as of March 28, 2003.

 

Name and Position (1)

 

Age

 

Experience

 

 

 

 

 

Michael T. Gannaway(2),
Chairman of the Board and Chief Executive Officer

 

51

 

See “Item 10. Directors and Officers of the Registrant – Directors of the Registrant” above.

 

 

 

 

 

Michael R. Harmon(2),
President and Chief Financial Officer

 

55

 

Michael R. Harmon has served as President and Chief Financial Officer of the Company since March 2003. From March 2001 to March 2003 Mr. Harmon served as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Harmon spent 13 years at Galey & Lord, Inc., a $1 billion manufacturer of textiles, where he last served as Executive Vice President and Chief Financial Officer. Galey & Lord, Inc. filed for bankruptcy protection under chapter 11 of the Bankruptcy Code on February 19, 2002.

 

 

 

 

 

A. Allen Oakley(2),
Executive Vice President – Manufacturing

 

49

 

A. Allen Oakley has served as Executive Vice President - Manufacturing and a director of the Company since May 2000. Prior to that time and since 1976, Mr. Oakley served in various managerial capacities for the Company and Fieldcrest Cannon.

 

 

 

 

 

Richard A. Grissinger,
Senior Vice President – Marketing

 

59

 

Richard A. Grissinger has served as Senior Vice President - Marketing of the Company since March 2000. From September 1998 to February 2000, he was Senior Vice President - Marketing - Bath of the Company and from December 1997 to September 1998, Mr. Grissinger was Vice President - Marketing for the Department Store Specialty Business of the Company. Mr. Grissinger was Business Manager of the Bath Division of Fieldcrest Cannon from 1995 to December 1997.

 

 

 

 

 

John F. Sterling(2),
Vice President and General Counsel and Secretary

 

39

 

John F. Sterling has served as Vice President and General Counsel of the Company since November 1999 and as Secretary since July 2001. From May 1997 to November 1999, Mr. Sterling was Associate General Counsel of the Company. Prior to joining the Company, Mr. Sterling was an attorney with the law firm of Thompson & Knight, P.C.

 

 

 

 

 

Thomas D. D’Orazio(2),
Vice President and Corporate Controller

 

44

 

Thomas D. D’Orazio has served as Vice President and Corporate Controller of the Company since October 2001. Prior to joining the Company, from December 1998 to September 2001, Mr. D’Orazio was Corporate Controller of Glatfelter, a $0.7 billion global manufacturer of specialty paper and engineered products. From March 1994 to December 1998, Mr. D’Orazio was Assistant Corporate Controller of Mohawk Industries, Inc., a multi-billion producer of woven and tufted broadloom carpet and rugs for residential and commercial applications.

 

 

 

 

 

Donald Mallo,
Vice President – Human Resources

 

53

 

Donald Mallo has served as Vice President - Human Resources of the Company since September 2000. Prior to joining the Company, Mr. Mallo practiced labor and employment law in New York. From 1998 through 1999, Mr. Mallo was Senior Vice President - Human Resources of Grove Worldwide LLC, a leading manufacturer of construction cranes and aerial work platforms. From 1993 to 1998, Mr. Mallo was Executive Vice

 

 

 

 

 



29


 

 

 

 

 

President - Human Resources and Counsel for Foamex International, Inc., a large manufacturer of polyurethane foam products for the automotive, furniture, bedding, and medical supply industries. From 1985 until its acquisition by Foamex in 1993, Mr. Mallo was Vice President - Employee Relations for General Felt Industries, Inc., a manufacturer of carpet cushions and related products.

 

 

 

 

 

Henry T. Pollock,
Vice President and Treasurer

 

62

 

Henry T. Pollock has served as Vice President and Treasurer of the Company since March 2001. From June 2000 to November 2000, Mr. Pollock was a consultant to the Company in the areas of finance and treasury and joined the Company full-time in November 2000. Prior to joining the Company, Mr. Pollock was assistant treasurer of Varity Corporation, a $2.5 billion worldwide manufacturer of brake systems and diesel engines.

 

 

 

 

 

Deborah G. Poole,
Vice President and Chief
Information Officer

 

48

 

Deborah G. Poole has served as Vice President and Chief Information Officer of the Company since February 1999. Prior to joining the Company, from 1991 to February 1999, Ms. Poole was Corporate Vice President, Information Services of Guilford Mills, Inc., a textile manufacturer. Guilford Mills, Inc. filed for bankruptcy protection under chapter 11 of the Bankruptcy Code on March 13, 2002.

 

 

 

 

 

John Wahoski,
Vice President – Financial and Operational Analysis

 

50

 

John Wahoski has served as Vice President - Financial and Operational Analysis since July 2000. Prior to joining the Company, Mr. Wahoski spent 12 years at TRW Automotive Systems, a $6 billion automotive supplier, and its predecessors where he last served as Director - Financial and Operational Analysis.


   (1)    All executive officers serve at the pleasure of the Board of Directors.

   (2)    Officers subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.

____________________________

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires directors and officers of the Company, and persons who own more than 10 percent of the Common Stock, to file with the Securities and Exchange Commission (the “SEC”) initial reports of ownership and reports of changes in ownership of such stock. Directors, officers and beneficial owners of more than 10 percent of the Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all Section 16(a) filing requirements applicable to its directors, officers and beneficial owners of more than 10 percent of its Common Stock were met during the year ended December 28, 2002.


30


ITEM 11.       EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the compensation paid or accrued by the Company to the Chief Executive Officer and each of the six other most highly compensated executive officers (the “Named Executive Officers”) for their services in 2002, 2001 and 2000.

  

 

 

 

 

Annual Compensation

 

Long Term Compensation

 

 

 

 

 

 

 


 


 

 

 

Name and Principal Position

 

Year

 

Salary
($)

 

Bonus
($)(4)

 

Other Annual
Compensation
($)(5)

 

Restricted
Stock
Awards
($)(6)

 

Securities
Underlying
Options
(#)

 

All Other
Compensation
($)(7)

 


 


 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David A. Perdue (1)

 

2002

 

312,500

 

2,112,500

 

724,537

 

 

600,000

 

1,110

 

Chairman and CEO (through March 27, 2003)

 

2001

 

 

 

 

 

 

 

 

 

2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael T. Gannaway

 

2002

 

103,077

 

175,000

 

 

 

100,000

 

426

 

Chairman and CEO

 

2001

 

 

 

 

 

 

 

 

 

2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael R. Harmon

 

2002

 

350,000

 

50,000

 

168,881

 

447,000

 

90,000

 

112,993

 

President

 

2001

 

277,083

 

 

128,825

 

 

 

56,661

 

and CFO

 

2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A. Allen Oakley

 

2002

 

300,000

 

 

123,193

 

447,000

 

90,000

 

107,108

 

Executive Vice President -

 

2001

 

300,000

 

 

 

 

 

105,721

 

Manufacturing

 

2000

 

300,000

 

 

 

 

 

8,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Richard A. Grissinger

 

2002

 

286,000

 

 

43,182

 

119,200

 

24,000

 

74,275

 

Senior Vice President-

 

2001

 

284,167

 

 

 

 

 

73,902

 

Marketing

 

2000

 

275,000

 

 

 

 

7,500

 

5,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anthony T. Williams (2)

 

2002

 

278,012

 

 

155,951

 

596,000

 

123,200

 

1,622,159

 

President and Chief

 

2001

 

400,000

 

 

135,998

 

 

 

249,237

 

Operating Officer (through

 

2000

 

147,917

 

 

19,312

 

 

40,000

 

6,020

 

September 10, 2002)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott E. Shimizu (3)

 

2002

 

334,135

 

 

119,735

 

447,000

 

90,000

 

1,181,103

 

Executive Vice President -

 

2001

 

375,000

 

 

 

 

 

220,485

 

Sales & Marketing (through

 

2000

 

375,000

 

 

 

 

 

6,271

 

October 31, 2002)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


FOOTNOTES:

   (1)    The Company’s former Chief Executive Officer resigned from the Company effective October 26, 2000. From his departure date until the hiring of Mr. Perdue in July 2002, the Company did not elect or appoint an individual to replace him as the Company’s Chief Executive Officer; however, the Board of Directors appointed a Management Committee consisting of Anthony T. Williams, Scott E. Shimizu, and two former directors to fulfill the duties of the Chief Executive Officer. No additional compensation was paid to the members for their participation on the Management Committee. Mr. Perdue served as Chairman and Chief Executive Officer of the Company from July 2002 until his resignation on March 27, 2003, on which date Mr. Gannaway was promoted to Chairman and Chief Executive Officer of the Company.

   (2)    Mr. Williams served during 2002 as the Company’s President and Chief Operating Officer until his departure from the Company in September 2002.

   (3)    Mr. Shimizu served during 2002 as the Company’s Executive Vice President – Sales and Marketing until his departure from the Company in October 2002.

   (4)    For 2002, the amount for Mr. Perdue includes $1,800,000 paid as a signing bonus to Mr. Perdue ($1,050,000 in cash and the remainder in shares of Common Stock (101,215 shares)), and $312,500 paid in January 2003 as a bonus for his services during 2002, all in accordance with the terms of his employment agreement.


31


   (5)    Certain of the Company’s executive officers receive personal benefits in addition to salary and cash bonuses. For 2002, the amount for Mr. Perdue includes a grossed-up cash payment in the amount of $700,677 paid to Mr. Perdue in January 2003 to be applied towards the tax obligation of Mr. Perdue resulting from the issuance of 101,215 shares of Common Stock as part of his signing bonus. For 2002, the amount for Mr. Harmon includes a grossed-up cash payment in the amount of $45,785 paid to the Internal Revenue Service on behalf of Mr. Harmon to be applied towards the tax obligation resulting from the cash bonus paid to Mr. Harmon in 2002. For 2002, the amounts paid to the following named executive officers include a grossed-up cash payment in the amount indicated paid to the Internal Revenue Service on behalf of each such individual to be applied towards the tax obligation of such individuals resulting from the vesting of a portion of the restricted stock granted to such individuals during 2002: $99,333 for Mr. Harmon; $99,333 for Mr. Oakley; $26,487 for Mr. Grissinger; $132,446 for Mr. Williams; and $99,333 for Mr. Shimizu. The amount of personal benefits has been omitted from the table for each named executive officer for whom the aggregate amount of any benefits did not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus reported for the named executive officer. Personal benefit amounts paid that do not exceed 25% of the total personal benefits received have been omitted from this footnote.

   (6)    On July 5, 2002, the Company granted restricted stock awards to certain of its key employees. The following named executive officers received restricted stock awards in the amounts indicated: Mr. Harmon – 60,000 shares; Mr. Oakley – 60,000 shares; Mr. Grissinger – 16,000 shares; Mr. Williams – 80,000 shares; and Mr. Shimizu – 60,000 shares. 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. Based on the closing bid price of the Common Stock on December 28, 2002, the aggregate number and value of all restricted stock holdings on such date were: 40,000 shares and $14,000 for Mr. Harmon; 40,000 shares and $14,000 for Mr. Oakley; and 10,667 shares and $3,733 for Mr. Grissinger. No dividends were paid on the restricted stock in 2002. In accordance with the terms of the agreements underlying the grants, the restrictions on all of the restricted stock awarded during 2002 to Messrs. Williams and Shimizu were removed effective on the respective dates of their departure from the Company.

   (7)    For 2002, the amount for Mr. Perdue includes $115 for medical insurance and $995 for group term life insurance; the amount for Mr. Gannaway includes $426 for group term life insurance; the amount for Mr. Harmon includes $105,000 paid under the Retention Plan (as such term is hereinafter defined (see “Key Employee Retention Program” below)); $230 for medical insurance and $3,655 for group term life insurance; the amount for Mr. Oakley includes $90,000 paid under the Retention Plan, $11,358 for medical insurance and $1,350 for group term life insurance; the amount for Mr. Grissinger includes $68,750 paid under the Retention Plan and $1,290 for group term life insurance; the amount for Mr. Williams includes $120,000 paid under the Retention Plan, $1,473,077 paid as severance to Mr. Williams pursuant to the terms of his employment agreement, $21,779 for medical insurance and $2,903 for group term life insurance; and the amount for Mr. Shimizu includes $112,500 paid under the Retention Plan, $994,000 paid as severance to Mr. Shimizu pursuant to the terms of his employment agreement, $6,353 for medical insurance, $1,350 for group term life insurance and $62,500 in consulting fees following his departure from the Company. The amounts for 2002 for certain of the named executive officers also include the following company contributions to the Pillowtex Corporation 401(k) Plan, a qualified ERISA plan:$4,108 for Mr. Harmon; $4,400 for Mr. Oakley; $4,235 for Mr. Grissinger; $4,400 for Mr. Williams; and $4,400 for Mr. Shimizu.

Option Grants in Last Fiscal Year

  

Individual Grants

 

Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
for Option Term(1)

 


 


 

Name

 

Number of
Securities
Underlying
Options
Granted(#) (2)

 

% of Total
Options
Granted to
Employees
in Fiscal
Year

 

Exercise
Price
($/Sh)

 

Expiration
Date

 

5%
($)

 

10%
($)

 


 


 


 


 


 


 


 

David A. Perdue (3)

 

600,000

 

46.4

 

1.45

 

4/26/2003

 

354,177

 

825,384

 

Michael T. Gannaway

 

100,000

 

7.7

 

1.45

 

10/11/2009

 

59,030

 

137,564

 

Michael R. Harmon

 

90,000

 

6.9

 

7.45

 

7/05/2009

 

272,961

 

636,115

 

A. Allen Oakley

 

90,000

 

6.9

 

7.45

 

7/05/2009

 

272,961

 

636,115

 

Richard A. Grissinger

 

24,000

 

1.8

 

7.45

 

7/05/2009

 

72,790

 

169,631

 

Anthony T. Williams(3)

 

123,200

 

9.5

 

7.45

 

12/09/2002

 

N/A

 

N/A

 

Scott E. Shimizu(3)

 

90,000

 

6.9

 

7.45

 

1/29/2003

 

N/A

 

N/A

 


FOOTNOTES:

   (1)    The values shown are based on the indicated assumed annual rates of appreciation compounded annually. Actual


31


gains realized, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and overall stock market conditions. There can be no assurance that the values shown in this table will be achieved.

   (2)    With respect to Messrs. Perdue and Gannaway, 25% of the option award vests on each of the first four anniversary dates of the grant, subject to acceleration under certain circumstances. With respect to all other option grants, 33-1/3% of the option award vests on each of the first three anniversary dates of the grant, subject to acceleration under certain circumstances.

   (3)    In accordance with the terms of the agreements underlying the grants, as a result of their departure from the Company, all unexercised option awards granted to Mr. Perdue will expire on April 26, 2003, all unexercised option awards granted to Mr. Williams expired on December 9, 2002 and all unexercised option awards granted to Mr. Shimizu expired on January 29, 2003.

Aggregated Option Exercises in Fiscal 2002 and Option Values at December 28, 2002

  

 

 

 

 

 

 

Number of Securities
Underlying Unexercised
Options at December 28, 2002
(#)

 

Value of Unexercised
In-the-Money Options at
December 28, 2002 ($)

 

 

 

 

 

 

 


 


 

Name

 

Shares
Acquired
on Exercise
(#)

 

Value
Realized
($)

 

Exercisable

 

Unexercisable

 

Exercisable

 

Unexercisable

 


 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David A. Perdue

 

 

 

 

600,000

 

 

 

Michael T. Gannaway

 

 

 

 

100,000

 

 

 

Michael R. Harmon

 

 

 

 

90,000

 

 

 

A. Allen Oakley

 

 

 

 

90,000

 

 

 

Richard A. Grissinger

 

 

 

 

24,000

 

 

 

Anthony T. Williams

 

 

 

 

 

 

 

Scott E. Shimizu

 

 

 

90,000

(1)

 

 

 


   (1)    In accordance with the terms of the agreement underlying the grant, as a result of his departure from the Company, all unexercised option awards granted to Mr. Shimizu expired on January 29, 2003.

Pension Plan

The Company maintains defined benefit pension plans covering substantially all of its employees, other than employees of the Company’s Canadian subsidiary, Pillowtex Canada Inc., and other employees subject to collective bargaining agreements. The Company funds the pension plans through annual contributions in an amount between the minimum required and the maximum amount that can be deducted for federal income taxes. Prior to January 1, 2000, the Company maintained a pension plan for qualified employees in its Pillow and Pad Division, as well as separate pension plans for qualified employees of two of its subsidiaries, Fieldcrest Cannon and Leshner. On January 1, 2000, the Company merged the pension plans into two new plans covering all of the qualified salaried and hourly employees of the Company.

Certain of the Named Executive Officers have always been subject to the surviving plan; however, prior to January 1, 2000, Scott E. Shimizu was subject to one of the plans that was merged out of existence (the “Prior Pillowtex Plan”). Pursuant to the terms of the new consolidated plan, such participant’s benefits for his years of service prior to January 1, 2000 will continue to be determined using the benefit provisions of the Prior Pillowtex Plan. Accordingly, a separate table is presented to determine the annual benefits available to Mr. Shimizu for his years of service prior to January 1, 2000.


33


The following tables present certain information concerning annual benefits provided under the pension plans.

  

 For Years of Service Under Prior Plan Formula (1)

 


 

Years of Service
Average
Compensation*(2)

 

5

 

10

 

15

 

20

 

25

 

30

 

35

 

40

 


 


 


 


 


 


 


 


 


 

$125,000

 

$

5,264

 

$

10,528

 

$

15,792

 

$

21,056

 

$

26,320

 

$

31,583

 

$

36,847

 

$

42,111

 

$150,000

 

$

6,514

 

$

13,028

 

$

19,542

 

$

26,056

 

$

32,570

 

$

39,083

 

$

45,597

 

$

52,111

 

$175,000

 

$

7,514

 

$

15,028

 

$

22,542

 

$

30,056

 

$

37,570

 

$

45,083

 

$

52,597

 

$

60,111

 

$200,000

 

$

7,514

 

$

15,028

 

$

22,542

 

$

30,056

 

$

37,570

 

$

45,083

 

$

52,597

 

$

60,111

 

$250,000

 

$

7,514

 

$

15,028

 

$

22,542

 

$

30,056

 

$

37,570

 

$

45,083

 

$

52,597

 

$

60,111

 

$275,000

 

$

7,514

 

$

15,028

 

$

22,542

 

$

30,056

 

$

37,570

 

$

45,083

 

$

52,597

 

$

60,111

 

$300,000

 

$

7,514

 

$

15,028

 

$

22,542

 

$

30,056

 

$

37,570

 

$

45,083

 

$

52,597

 

$

60,111

 


______________

      *    “Average Compensation” is equal to the average of the highest five years of compensation out of the last ten years of employment.

  

For Years of Service Under Current Plan Formula (1)

 


 

Years of Service
Career Average
Compensation**(2)

 

5

 

10

 

15

 

20

 

25

 

30

 

35

 

40

 


 


 


 


 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$125,000

 

$

9,375

 

$

18,750

 

$

28,125

 

$

37,500

 

$

42,188

 

$

46,875

 

$

51,563

 

$

56,250

 

$150,000

 

$

11,250

 

$

22,500

 

$

33,750

 

$

45,000

 

$

50,625

 

$

56,250

 

$

61,875

 

$

67,500

 

$175,000

 

$

12,750

 

$

25,500

 

$

38,250

 

$

51,000

 

$

57,375

 

$

63,750

 

$

70,125

 

$

76,500

 

$200,000

 

$

12,750

 

$

25,500

 

$

38,250

 

$

51,000

 

$

57,375

 

$

63,750

 

$

70,125

 

$

76,500

 

$250,000

 

$

12,750

 

$

25,500

 

$

38,250

 

$

51,000

 

$

57,375

 

$

63,750

 

$

70,125

 

$

76,500

 

$275,000

 

$

12,750

 

$

25,500

 

$

38,250

 

$

51,000

 

$

57,375

 

$

63,750

 

$

70,125

 

$

76,500

 

$300,000

 

$

12,750

 

$

25,500

 

$

38,250

 

$

51,000

 

$

57,375

 

$

63,750

 

$

70,125

 

$

76,500

 


______________

    **    “Career Average Compensation” is equal to the average of all years of compensation, where years before 1991 are considered to equal 1991 compensation.

FOOTNOTES:

(1)       Estimated years of service as of January 1, 2003 for the named executive officers are as follows:

  

 

 

Years of Service

 

 

 


 

Name

 

Prior Formula

 

Current Formula

 


 


 


 

David A. Perdue

 

  0

 

  1

 

Michael T. Gannaway

 

  0

 

  1

 

Michael R. Harmon

 

  0

 

  2

 

A. Allen Oakley

 

  0

 

27

 

Richard A. Grissinger

 

  0

 

24

 

Anthony T. Williams

 

  0

 

  3

 

Scott E. Shimizu

 

18

 

  3

 


(2)       An employee’s compensation for purposes of determining pension benefits is calculated on substantially the same basis as the employee’s cash compensation set forth in the Summary Compensation Table. The maximum compensation allowed for the purposes of determining benefits under the pension plan is $170,000. Therefore, fiscal 2002 compensation for all employees would be limited to $170,000.

Benefits under the pension plan are integrated with Social Security and are computed as straight life annuities. The benefits shown are not offset by any other Company benefits or by Social Security.


34


Employment Agreements

Pillowtex has entered into employment agreements with each of the Named Executive Officers. The employment agreements provide for initial annual base salaries, subject to increase in accordance with Company policy. The base salary as of March 28, 2003 for each of the Named Executive Officers was as follows:

 

Named Executive Officer

 

Initial Amount
Base Salary

 


 


 

 

 

 

 

David A. Perdue

 

 

N/A

 

Michael T. Gannaway

 

$

500,000

 

Michael R. Harmon

 

425,000

 

A. Allen Oakley

 

300,000

 

Richard A. Grissinger

 

286,000

 

Anthony T. Williams

 

N/A

 

Scott E. Shimizu

 

 

N/A

 


Mr. Perdue’s employment agreement was entered into effective as of July 1, 2002 and had an initial term of four years. Pursuant to the agreement, Mr. Perdue was entitled to a guaranteed bonus equal to one hundred percent (100%) of his base salary for the year ended December 31, 2002, pro-rated based on the salary actually paid to Mr. Perdue during 2002. Accordingly, the Company paid Mr. Perdue a cash bonus of $312,500 in January 2003. In addition, in accordance with the terms of his employment agreement, during 2002, the Company paid Mr. Perdue a signing bonus equal to a total amount of $1,800,000. The signing bonus was paid partly in cash ($1,050,000), with the remainder paid by the issuance of 101,215 shares of Common Stock to Mr. Perdue.

Mr. Perdue’s employment agreement also provided for certain bonus and incentive payments, as well as for certain severance payments and benefits to be provided upon an involuntary termination of employment for reasons other than death, disability or cause or a termination by Mr. Perdue for good reason. The Company believes that Mr. Perdue voluntarily resigned from his employment with the Company without good reason and thus is not entitled to any such payments or severance benefits. In addition, in connection with his voluntary resignation all of Mr. Perdue’s 600,000 unvested options will expire as of April 26, 2003.

Mr. Gannaway’s employment agreement was recently amended to provide that, effective as of March 28, 2003, he would serve as Chairman and Chief Executive Officer of the Company. Pursuant to the terms of his agreement, Mr. Gannaway is eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. Mr. Gannaway is also eligible to receive an annual bonus equal to a percentage of his base salary upon achievement of annual performance goals to be determined by the Board and the Compensation Committee. If during the term of his agreement, Mr. Gannaway’s employment is involuntarily terminated for reasons other than death, disability or cause, or he terminates employment for good reason no later than four months after the occurrence of an event constituting good reason under the agreement, Pillowtex will pay to Mr. Gannaway in a single lump sum no later than 15 business days after such termination of employment a severance benefit in an amount equal to the sum of (i) all earned and accrued but unpaid base salary, bonus payments and vacation pay, and (ii) $400,000. The Company expects this severance benefit to be secured by a letter of credit to be arranged with a third party (see “Certain Relationships and Related Transactions,” below). In addition, under such circumstances, any Company stock options held by Mr. Gannaway that have not previously terminated or been exercised shall be deemed vested and exercisable and all restrictions on any restricted securities granted by the Company to Mr. Gannaway that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements governing such awards shall have been satisfied. In accordance with the terms of his employment agreement, during 2002, the Company paid Mr. Gannaway a cash signing bonus equal to $175,000.

Mr. Harmon’s employment agreement was recently amended to provide that, effective as of March 28, 2003, he would serve as President and Chief Financial Officer of the Company. Mr. Harmon’s employment agreement was entered into on May 24, 2002 and has an initial term of two years. Pursuant to the terms of his agreement, Mr. Harmon is eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. If during the term of his agreement, Mr. Harmon’s employment is involuntarily terminated for reasons other than death, disability or cause, or he terminates employment for good reason no later than four months after the occurrence of an event constituting good reason under the agreement, Pillowtex will pay to Mr. Harmon in a single lump sum no later than 15 business days after such termination of employment a severance benefit in an amount equal to the sum of (i) all earned and accrued but unpaid base salary,


35


bonus payments and vacation pay, and (ii) $400,000. The Company expects this severance benefit to be secured by a letter of credit to be arranged with a third party (see “Certain Relationships and Related Transactions,” below). In addition, under such circumstances, any Company stock options held by Mr. Harmon that have not previously terminated or been exercised shall be deemed vested and exercisable and all restrictions on any restricted securities granted by the Company to Mr. Harmon that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements governing such awards shall have been satisfied. Finally, under such circumstances, Mr. Harmon would be entitled to the continuation of certain employee benefits for a period of two years following the termination date of his employment.

Mr. Oakley’s employment agreement was entered into on May 24, 2002 and has an initial term of two years. Pursuant to the terms of his agreement, Mr. Oakley is eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. If during the term of his agreement, Mr. Oakley’s employment is involuntarily terminated for reasons other than death, disability or cause, or he terminates employment for good reason no later than four months after the occurrence of an event constituting good reason under the agreement, Pillowtex will pay to Mr. Oakley in a single lump sum no later than 15 business days after such termination of employment a severance benefit in an amount equal to the sum of (i) all earned and accrued but unpaid base salary, bonus payments and vacation pay, and (ii) two (2.0) times his base salary and bonuses paid during the preceding twelve months. In addition, under such circumstances, any Company stock options held by Mr. Oakley that have not previously terminated or been exercised shall be deemed vested and exercisable and all restrictions on any restricted securities granted by the Company to Mr. Oakley that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements governing such awards shall have been satisfied. Finally, under such circumstances, Mr. Oakley would be entitled to the continuation of certain employee benefits for a period of two years following the termination date of his employment.

Under the employment agreement with Mr. Grissinger, if his employment is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any company-sponsored pension plan in which he participates or cause, or if following a change in control he terminates employment for good reason no later than six months after the occurrence of an event constituting good reason under the employment agreement, Pillowtex will pay to him a severance benefit equal to his base salary then in effect for a period of 24 months, less any amount received by him under the Retention Plan. The severance benefit shall be paid to Mr. Grissinger as follows: (a) the portion of the severance benefit equal to his annual base salary then in effect, shall be paid in a single lump sum no later than five days after the termination of his employment; and (b) the remainder of the severance benefit shall be paid in equal monthly installments beginning on the first anniversary date of the termination of his employment; provided, however, that he will not be entitled to the remaining amount if he obtains other full-time employment prior to such anniversary and the obligation to pay the remaining amount shall immediately cease if he obtains other full-time employment after such anniversary.

Each employment agreement also includes certain noncompetition, nondisclosure and nonsolicitation provisions.

The Company had also entered into employment agreements with Messrs. Williams and Shimizu. Pursuant to the terms of their respective agreements, both Mr. Williams and Mr. Shimizu received severance payments during 2002 following their departures from the Company (see footnote 5 to Summary Compensation Table). In addition, in order to provide for an orderly transition following his departure from the Company, the Company entered into a consulting agreement with Mr. Shimizu pursuant to which Mr. Shimizu continued to provide sales and marketing services to the Company from November 1, 2002 through January 31, 2003. Pursuant to this agreement, the Company paid Mr. Shimizu a fee of $31,250 per month in exchange for his services.

Pillowtex has entered into similar employment agreements with certain other key employees.

Key Employee Retention Program

To stabilize employee relations, the Company developed a key employee retention plan (the “Retention Plan”), which the Bankruptcy Court approved on March 6, 2001. The Retention Plan is designed to, among other things, ensure that the employees most critical to the Company’s reorganization efforts are provided with sufficient economic incentives and protections to remain with the Company and fulfill their responsibilities through the successful conclusion of the Chapter 11 Cases. The Retention Plan consists of three separate components: (a) a


36


retention incentive plan (the “Retention Incentive Plan”), (b) an emergence performance bonus plan, (the “Emergence Performance Bonus Plan”), and (c) an employee severance plan (the “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. Each of the Named Executive Officers except for Mr. Perdue and Mr. Gannaway participated in the Retention Incentive Plan and were paid the following amount under such plan during fiscal year 2002: Mr. Harmon - $105,000; Mr. Oakley - $90,000; Mr. Grissinger - $68,750; Mr. Williams - $120,000; and Mr. Shimizu - $112,500.

No amounts were paid under the Emergence Performance Bonus Plan.

The Severance Plan covers all full-time employees of the Company, the majority of whom are not eligible to participate in any other components of the Retention Plan. With certain exceptions, under the Severance Plan, employees who are terminated for reasons other than death, disability, retirement or cause, are eligible to receive severance benefits equal to one week’s salary for each completed year of service, with a minimum benefit of two weeks’ salary and a maximum of 26 weeks’ salary. In addition, eligible employees are entitled to receive medical insurance, life insurance and certain other benefits.

Restricted Stock Awards

On July 5, 2002, the Company granted restricted stock awards totaling 394,000 shares of Common Stock to certain of its key employees. The restricted stock awards, 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. Messrs. Harmon, Oakley, Grissinger, Williams, and Shimizu each received restricted stock awards.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of Pillowtex consists entirely of non-employee directors. Mr. Dietz and Mr. Jeffry J. Keenan served on the Compensation Committee of Pillowtex during 2002. Prior to the Effective Date, the Compensation Committee of Old Pillowtex consisted entirely of non-employee directors. William B. Madden, Mark A. Petricoff, Mary R. Silverthorne, and Paul G. Gillease served on the Compensation Committee of Old Pillowtex during 2002.

Compensation of Directors

Directors who are not officers of the Company or any of its subsidiaries receive an annual fee of $35,000. For each committee meeting attended, committee members are paid a fee of $1,000 and committee chairmen are paid a fee of $2,500. The Company also reimburses directors for travel, lodging and related expenses they incur in attending Board and committee meetings. The Company provides no retirement benefits to non-employee directors. Directors who are also employees of the Company receive no additional compensation from the Company for services rendered in their capacity as directors.

The Equity Incentive Plan allows for the grant of nonqualified stock options to directors who are not employees. To date, no such grants have been made under the Equity Incentive Plan to non-employee directors.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table lists certain information concerning the beneficial ownership of the Company’s Common Stock, as of March 20, 2003, by the following persons:

         Each person known by the Company to own beneficially more than 5% of the outstanding Common Stock;

         The executive officers whose names appear in the table set forth under “Item 11. Executive Compensation – Summary Compensation Table” above;

         Each director of the Company; and


37


         All executive officers and directors as a group.

Except as otherwise indicated, the Company believes that the owners named below have sole voting and investment power of the shares of Common Stock listed.

 

Name

 

Number of Shares
Beneficially Owned

 

Percent of Class

 


 


 


 

 

 

 

 

 

 

David A. Perdue

 

101,215

 

 

Bradley I. Dietz

 

0

 

 

Scott L. Graves (1)

 

0

 

 

 

 

 

 

 

 

Kenneth Liang (1)

 

0

 

 

Michael T. Gannaway

 

0

 

 

Michael R. Harmon

 

60,066

 

 

A. Allen Oakley

 

60,058

 

 

Richard A. Grissinger

 

16,000

 

 

Anthony T. Williams (2)

 

80,000

 

 

Scott E. Shimizu (2)

 

60,000

 

 

Oaktree Capital Management, LLC (3)

 

3,839,181

 

20.1%

 

Banc of America Strategic Solutions, Inc. (4)

 

1,494,082

 

  7.8%

 

Gotham Partners, L.P. (5)

 

1,242,710

 

  6.5%

 

Scion Capital, LLC (6)

 

1,029,200

 

  5.4%

 

All executive officers and directors as a group (9 persons)

 

241,339

 

  1.3%

 


______________

*Less than 1%.

FOOTNOTES:

   (1)    Mr. Graves is a Vice President of Oaktree Capital Management, LLC (“Oaktree”) and Mr. Liang is a Managing Director of Oaktree. The amounts shown for Messrs. Graves and Liang do not include the shares of Common Stock that Oaktree has reported for certain funds and accounts it manages, and both Messrs. Graves and Liang disclaim beneficial ownership of such shares, except to the extent of any pecuniary interest therein.

   (2)    Based on information known to the Company as of the last day of employment of Mr. Williams and Mr. Shimizu, as the case may be.

   (3)    The address of Oaktree Capital Management, LLC is 333 South Grand Avenue, 28th Floor, Los Angeles, California 90071. Oaktree is the general partner or investment manager of (i) OCM Opportunities Fund III, L.P. which is the direct beneficial owner of 3,771,684 shares of Common Stock, (ii) a third party trust account, which is the direct beneficial owner of 23,840 shares of Common Stock and (iii) a third party separate account, which is the direct beneficial owner of 43,657 shares of Common stock. Although Oaktree may be deemed to beneficially own the securities referenced above for the purposes of the reporting requirements of the Securities Exchange Act of 1934, Oaktree, a registered investment adviser under the Investment Advisers Act of 1940, disclaims any beneficial ownership of the shares of such securities held by the funds and accounts that it manages, except to the extent of any pecuniary interest therein.

   (4)    The address of Banc of America Strategic Solutions, Inc. is 100 North Tryon Street, Charlotte, North Carolina 28255. Represents ownership as of February 14, 2003 and includes 198,690 shares of Common Stock issuable upon the exercise of Warrants, according to the Schedule 13D filed by Banc of America Strategic Solutions, Inc. and other related parties on February 14, 2003.

   (5)    The address of Gotham Partners, L.P. is 110 East 42nd Street, 18th Floor, New York, New York 10017. Represents ownership as of February 14, 2003, according to the Schedule 13G/A filed by Gotham Partners, L.P. and other related parties on February 14, 2003.

   (6)    The address of Scion Capital, LLC is 2055 Gateway Place, Suite 400, San Jose, California 95110. Represents ownership as of September 20, 2002, according to the Schedule 13G filed by Scion Capital, LLC on September 23, 2002.

Equity Compensation Plan Information as of December 28, 2002

The Company maintains the Pillowtex Corporation 2002 Equity Incentive Plan (the “Equity Incentive Plan”), pursuant to which it may grant options to purchase shares of the Company’s Common Stock, stock appreciation rights, annual incentive awards and performance units payable in cash or Common Stock, and restricted stock awards to eligible persons. The following table provides information about equity awards under the Equity Incentive Plan.

38


 

Equity Compensation Plan Information at December 28, 2002

  

 

 

 

 

Weighted-Average

 

Number of Securities
Remaining Available for
Future Issuance Under

 

Plan Category

 

Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants and Rights (a)

 

Exercise Price of
Outstanding
Options, Warrants
and Rights (b)

 

Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a)) (c)

 


 


 


 


 

Equity compensation plans approved by shareholders

 

 

1,163,500

 

$

3.84

 

 

1,387,613

(1)

Equity compensation plans not approved by shareholders

 

N/A

 

N/A

 

N/A

 

Total

 

 

1,163,500

 

$

3.84

 

 

1,387,613

 


   (1)    All 1,387,613 shares of Common Stock remaining available for future issuance under the Equity Incentive Plan may be issued in respect of restricted stock awards or in settlement of annual incentive awards or performance units.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Oaktree, as agent on behalf of certain managed funds and accounts, is a lender under the Company’s Exit Term Loan. As such, in 2002, the Company assumes that Oaktree received its proportionate share of interest payments and amendment fees paid to the agent of the Exit Term Loan for the benefit of term loan lenders during 2002. Messrs. Graves and Liang, each a director of the Company, respectively is a Vice President and a Managing Director of Oaktree.

The Company expects to arrange for letters of credit with a third-party bank for the purpose of securing the Company’s obligation to pay severance benefits that would become payable to Messrs. Gannaway and Harmon upon certain terminations of employment (see “Employment Agreements,” above). The Named Executive Officers would only be entitled to draw on such letters of credit in the event the Company failed to meet its obligation following any such termination.

ITEM 14.       CONTROLS AND PROCEDURES

(a)       Evaluation of disclosure controls and procedures. Within the 90-day period prior to the filing of this Annual Report, an evaluation was performed under the supervision and with the participation of Pillowtex’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Pillowtex’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that all material information required to be filed in this Annual Report has been made known to them on a timely basis.

(b)       Changes in internal controls. There were no significant changes in Pillowtex’s internal controls, or in other factors that could significantly affect Pillowtex’s internal controls, subsequent to the most recent evaluation of internal controls performed by the Company.


39

 


PART IV

ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)       The following documents are filed as part of this Report:

 

 

Page

 

 

1.         Consolidated Financial Statements:

 

 

 

Independent Auditors’ Report

F-2

 

 

Consolidated Balance Sheets as of December 28, 2002 and December 29, 2001

F-3

 

 

Consolidated Statements of Operations for the seven months ended December 28, 2002, the five months ended June 1, 2002 and the years ended December 29, 2001 and December 30, 2000

F-4

 

 

Consolidated Statements of Shareholders’ Equity (Deficit) for the seven months ended December 28, 2002, the five months ended June 1, 2002 and the years ended December 29, 2001 and December 30, 2000

F-5

 

 

Consolidated Statements of Cash Flows for the seven months ended December 28, 2002, the five months ended June 1, 2002 and the years ended December 29, 2001 and December 30, 2000

F-6

 

 

Notes to Consolidated Financial Statements

F-7

 

 

2.         Financial Statement Schedule. The following financial statement schedule of Pillowtex for the seven months ended December 28, 2002, five months ended June 1, 2002, and fiscal years ended December 29, 2001 and December 30, 2000 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Pillowtex:

 

 

 

 

Schedule II – Valuation and Qualifying Accounts

S-1

 

 

3.         Index to Exhibits

 

 

 


  

EXHIBIT
NUMBER

DESCRIPTION OF EXHIBIT

 

 

2.1

Agreement and Plan of Merger, dated as of September 10, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Old Pillowtex Corporation’s Registration Statement on Form S-4 (No. 333-36663))

 

 

2.2

Amendment to Agreement and Plan of Merger, dated as of September 23, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Old Pillowtex Corporation’s Registration Statement on Form S-4 (No. 333-36663))

 

 

2.3

Asset Purchase Agreement, dated as of July 27, 2001 between Beacon Manufacturing Co. and Beacon Acquisition Co. (incorporated by reference to Exhibit 2.1 to Old Pillowtex Corporation’s Current Report on Form 8-K dated August 23, 2001)

 

 

2.4

First Amendment to Asset Purchase Agreement, dated September 6, 2001 between Beacon Manufacturing Co. and Beacon Acquisition Co. (incorporated by reference to Exhibit 2.2 to Old Pillowtex Corporation’s Current Report on Form 8-K dated September 6, 2001)

 

 

2.5

Second Amended Joint Plan of Reorganization of Pillowtex Corporation and Its Debtor Subsidiaries, dated March 6, 2002 (incorporated by reference to Exhibit 99.1 to Old Pillowtex Corporation’s Current Report on Form 8-K dated March 11, 2002)



40


 

3.1

Certificate of Incorporation of Pillowtex Corporation (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002)

 

 

3.2

Bylaws of Pillowtex Corporation (incorporated by reference to Exhibit 4.3 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002)

 

 

4.1

Registration Rights Agreement (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002)

 

 

4.2

Warrant Agreement (incorporated by reference to Exhibit 4.4 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002)

 

 

4.3

Form of Warrant Certificate (incorporated by reference to Exhibit A to Exhibit 4.4 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002)

 

 

4.3

Form of Common Stock Certificate (incorporated by reference to Exhibit 4.6 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002, as amended by a Form 8-K/A (Amendment No. 1))

 

 

10.1

Loan and Security Agreement dated May 24, 2002, among Pillowtex Corporation, various subsidiaries of Pillowtex Corporation, Congress Financial Corporation, as Agent, and the Financial Institutions named therein (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002, as amended by a Form 8-K/A (Amendment No. 1))

 

 

10.2

First Amendment to Loan and Security Agreement dated May 24, 2002, among Pillowtex Corporation, various subsidiaries of Pillowtex Corporation, Congress Financial Corporation, as Agent, and the Financial Institutions named therein

 

 

10.3

Term Loan Agreement dated as of May 24, 2002, among Pillowtex Corporation, Bank of America, N.A., as Administrative Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation’s Current Report on Form 8-K dated May 24, 2002, as amended by a Form 8-K/A (Amendment No. 1))

 

 

10.4

First Amendment to Term Loan Agreement, dated as of June 28, 2002, among Pillowtex Corporation, Bank of America, N.A., as Administrative Agent and a Lender, and the Lenders named therein (incorporated by reference to Exhibit 10.8 to Pillowtex Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002)

 

 

10.5

Waiver, Consent and Second Amendment to Term Loan Agreement, dated to be effective as of September 27, among Pillowtex Corporation, Bank of America, N.A., as Administrative Agent and a Lender, and the Lenders named therein (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation’s Current Report on Form 8-K dated September 24, 2002)

 

 

10.6

Waiver, Consent and Third Amendment to Term Loan Agreement, dated to be effective as of December 20, 2002, among Pillowtex Corporation, Bank of America, N.A., as Administrative Agent and a Lender, and the Lenders named therein (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation’s Current Report on Form 8-K dated December 20, 2002)

 

 

10.7

Industrial Lease, dated as of November 23, 1992, between Angel and Jean Echevarria and Pillowtex Corporation (incorporated by reference to Exhibit 10.21 to Pillowtex Corporation’s Registration Statement on Form S-1 (No. 33-57314))

 

 

10.8

Second Amendment to Lease entered into in September 1997 between Angel and Jean Echevarria and Pillowtex Corporation (incorporated by reference to Exhibit 10.17 to Pillowtex Corporation’s Annual Report on Form 10-K for the fiscal year ended January 3, 1998)

 

 

10.9*

Form of Confidentiality and Noncompetition Agreement (incorporated by reference to Exhibit 10.27 to Pillowtex Corporation’s Registration Statement on Form-S-1 (No. 33-57314))



41


 

10.10*

Form of Indemnification Agreement entered into between Pillowtex Corporation and its directors and executive officers

 

 

10.11*

Schedule of Indemnification Agreements pursuant to Instruction 2 of Item 601

 

 

10.12*

Pillowtex Corporation 2002 Equity Incentive Plan (incorporated by reference to Exhibit 10.36 to Pillowtex Corporation’s Registration Statement on Form S-8 (No. 333-91482))

 

 

10.13*

Amendment No. 1 to Pillowtex Corporation 2002 Equity Incentive Plan

 

 

10.14*

Restated Employment Agreement dated August 1, 2002 and effective as of July 1, 2002, between Pillowtex Corporation and David A. Perdue (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002)

 

 

10.15*

Employment Agreement dated October 1, 2002, between Pillowtex Corporation and Michael T. Gannaway

 

 

10.16*

Amendment No. 1 to Employment Agreement dated October 1, 2002, between Pillowtex Corporation and Michael T. Gannaway

 

 

10.17*

Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Michael R. Harmon (incorporated by reference to Exhibit 10.3 to Pillowtex Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002)

 

 

10.18*

Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Scott E. Shimizu (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002)

 

 

10.19*

Employment Agreement dated May 24, 2002, between Pillowtex Corporation and A. Allen Oakley (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002)

 

 

10.20*

Employment Agreement entered into between Pillowtex Corporation and Richard A. Grissinger, dated as of April 1, 2001 (incorporated by reference to Exhibit 10.48 to Old Pillowtex Corporation’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001)

 

 

10.21*

Pillowtex Corporation Executive Medical Expense Reimbursement Plan, effective as of January 1, 1998 (incorporated by reference to Exhibit 10.2 to Old Pillowtex Corporation’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998)

 

 

21.1

List of Pillowtex Corporation’s Principal Operating Subsidiaries

 

 

23.1

Consent of KPMG LLP

 

 

99.1

Second Amended Joint Plan of Reorganization of Pillowtex Corporation and Its Debtor Subsidiaries (incorporated by reference to Exhibit 99.2 to Pillowtex Corporation’s Current Report on Form 8-K dated March 11, 2002)

 

 

99.2

Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code for the Second Amended Joint Plan of Reorganization of Pillowtex Corporation and Its Debtor Subsidiaries (incorporated by reference to Exhibit 99.3 to Pillowtex Corporation’s Current Report on Form 8-K dated March 11, 2002)

 

 

99.3

Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

 

 

99.4

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

 

 


b)        Reports On Form 8-K.

During the quarter ended December 28, 2002, Pillowtex filed the following Current Report on Form 8-K:


42


Current Report on Form 8-K, dated November 12, 2002 and filed November 12, 2002, reporting information under “Item 9. Regulation FD Disclosure” regarding the certifications made by the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which accompanied Pillowtex’s Quarterly Report on Form 10-Q for the period ended September 28, 2002.

Current Report on Form 8-K, dated December 20, 2002 and filed December 20, 2002, reporting information under “Item 5. Other Events and Regulation FD Disclosure” regarding an amendment to the Company’s Exit Term Loan.

_______________

      *    Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

 


43


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2003.

  

 

 

PILLOWTEX CORPORATION



 

By: 


/s/ MICHAEL T. GANNAWAY

 

 

 


 

 

 

Michael T. Gannaway
Chief Executive Officer

  

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2003.

  

Signatures

 

Title

 

 

 

/s/ MICHAEL T. GANNAWAY

 

Chairman of the Board and Chief Executive Officer; Director
(Principal Executive Officer)


Michael T. Gannaway

 

 

 

/s/ MICHAEL R. HARMON

 

President and Chief Financial Officer
(Principal Financial Officer)


Michael R. Harmon

 

 

 

/s/ BRADLEY I. DIETZ

 

Director


Bradley I. Dietz

 

 

 

/s/ SCOTT L. GRAVES

 

Director


Scott L. Graves

 

 

 

/s/ KENNETH LIANG

 

Director


Kenneth Liang

 

 

 

/s/ THOMAS D. D’ORAZIO

 

Vice President and Corporate Controller
(Principal Accounting Officer)


Thomas D. D’Orazio

  


44


CERTIFICATIONS

I, Michael T. Gannaway, certify that:

1.        I have reviewed this annual report on Form 10-K of Pillowtex Corporation;

2.        Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.        Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.        The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)        designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)        evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)        presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.        The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)        all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.        The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  

 

 

 

 


Date: March 28, 2003

 

 


/s/ MICHAEL T. GANNAWAY

 

 

 


 

 

 

Michael T. Gannaway
Chief Executive Officer

  


45


I, Michael R. Harmon, certify that:

1.        I have reviewed this annual report on Form 10-K of Pillowtex Corporation;

2.        Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.        Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.        The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)        designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)        evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)        presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.        The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)        all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.        The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  

 

 

 

 


Date: March 28, 2003

 

 


/s/ MICHAEL R. HARMON

 

 

 


 

 

 

Michael R. Harmon
President and Chief Financial Officer


46


PILLOWTEX CORPORATION AND SUBSIDIARIES

  

Independent Auditors’ Report

F-2

 

 

Consolidated Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets as of December 28, 2002 and December 29, 2001

F-3

 

 

Consolidated Statements of Operations for the seven months ended December 28, 2002,
five months ended June 1, 2002, and years ended December 29, 2001
and December 30, 2000

F-4

 

 

Consolidated Statements of Shareholders’ Equity (Deficit) for the
seven months ended December 28, 2002, five months ended June 1, 2002, and
years ended December 29, 2001 and December 30, 2000

F-5

 

 

Consolidated Statements of Cash Flows for the
seven months ended December 28, 2002, five months ended June 1, 2002, and
years ended December 29, 2001 and December 30, 2000

F-6

 

 

Notes to Consolidated Financial Statements

F-7

 

 

Financial Statement Schedule for seven months ended December 28, 2002, five months
ended June 1, 2002, and years ended December 29, 2001 and December 30, 2000

 

 

 

Schedule II – Valuation and Qualifying Accounts

S-1

 

 



F-1


Independent Auditors’ Report

The Board of Directors and Shareholders
Pillowtex Corporation:

We have audited the consolidated financial statements of Pillowtex Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pillowtex Corporation and subsidiaries as of December 28, 2002 and December 29, 2001, and the results of their operations and their cash flows for the seven-month period ended December 28, 2002, the five-month period ended June 1, 2002, and each of the two years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, effective December 30, 2001, Pillowtex Corporation and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which resulted in a change in the Company’s method of accounting for goodwill and intangible assets.

The accompanying consolidated financial statements have been prepared assuming Pillowtex Corporation will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, on November 14, 2000, Pillowtex Corporation, and substantially all of its subsidiaries (collectively, the Debtors) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Chapter 11). The Debtors operated their business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in Delaware (the Bankruptcy Court) from November 14, 2000 until May 24, 2002. On May 24, 2002, the Bankruptcy Court approved the Debtors’ plan of reorganization and the Debtors emerged from their Chapter 11 proceedings. Pillowtex Corporation and subsidiaries, the successor companies, have incurred significant operating losses and negative operating cash flows since their emergence from their Chapter 11 proceedings on May 24, 2002, and when considered with other matters discussed in Note 1 to the consolidated financial statements raise substantial doubt about their ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

 

 



 

 


(signed) KPMG LLP

Charlotte, North Carolina
March 28, 2003

 

 

 

 


F-2


PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 28, 2002 and December 29, 2001
(in thousands of dollars, except for par value)

  

 

 

Successor

 

Predecessor

 

 

 


 


 

 

 

December 28,
2002

 

December 29,
2001

 

 

 


 


 


ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents (including restricted cash of $1,764 as of December 28, 2002 and $3,861 as of December 29, 2001)

 

$

8,658

 

 

40,388

 

Receivables:

 

 

 

 

 

Trade, less allowances of $9,384 as of December 28, 2002 and $9,276 as of December 29, 2001

 

150,097

 

144,727

 

Other

 

2,219

 

4,478

 

Inventories

 

188,101

 

200,578

 

Assets held for sale

 

17,356

 

6,075

 

Prepaid expenses

 

6,554

 

3,604

 

Net assets of discontinued operations

 

 

1,358

 

 

 


 


 

Total current assets

 

372,985

 

401,208

 

Property, plant, and equipment, less accumulated depreciation of $8,124 as of December 28, 2002 and $172,938 as of December 29, 2001

 

166,992

 

453,440

 

Intangible assets, at cost less accumulated amortization of $925 as of December 28, 2002 and $40,899 as of December 29, 2001

 

48,878

 

221,729

 

Other assets

 

2,731

 

11,250

 

 

 


 


 

Total assets

 

$

591,586

 

1,087,627

 

 

 



 


 


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Liabilities not subject to compromise:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Checks not yet presented for payment

 

$

10,168

 

285

 

Accounts payable

 

32,644

 

34,834

 

Accrued expenses

 

87,057

 

59,837

 

Current portion of long-term debt

 

222,324

 

356

 

Current portion of long-term debt in default

 

 

660,893

 

Long-term debt in default

 

 

10,920

 

 

 


 


 

Total current liabilities

 

352,193

 

767,125

 

Long-term debt, less current portion

 

14,870

 

645

 

Noncurrent liabilities

 

119,355

 

48,950

 

 

 


 


 

Total liabilities not subject to compromise

 

486,418

 

816,720

 

Liabilities subject to compromise

 

 

500,840

 

 

 


 


 

Total liabilities

 

486,418

 

1,317,560

 

Predecessor Series A redeemable convertible preferred stock, $0.01 par value; 81,411 shares issued and outstanding as of December 29, 2001

 

 

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; 19,095,215 shares issued and outstanding as of December 28, 2002

 

191

 

 

Predecessor common stock, $0.01 par value; authorized 55,000,000 shares; 14,250,892 shares issued and outstanding as of December 29, 2001

 

 

143

 

Additional paid-in capital

 

195,118

 

160,120

 

Accumulated deficit

 

(27,634

)

(461,186

)

Treasury stock, at cost

 

(163

)

 

Deferred compensation

 

(730

)

 

Accumulated other comprehensive loss

 

(61,614

)

(28,195

)

 

 


 


 

Total stockholders’ equity (deficit)

 

105,168

 

(329,118

)

 

 


 


 

Commitments and contingencies

 

 

 

 

 

Total liabilities and stockholders’ equity (deficit)

 

$

591,586

 

 

1,087,627

 

 

 



 



 


See accompanying notes to consolidated financial statements.


F-3


PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Seven Months ended December 28, 2002, Five Months ended June 1, 2002, Year ended December 29, 2001 and
Year ended December 30, 2000
(in thousands of dollars, except for per share data)

  

 

 

Successor

 

Predecessor

 

 

 


 


 

 

 

Seven Months
Ended
December 28,
2002

 

Five Months
Ended
June 1,
2002

 

Year Ended
December 29,
2001

 

Year Ended
December 30,
2000

 

 

 


 


 


 


 

Net sales

 

$

554,842

 

380,050

 

1,011,888

 

1,234,817

 

Cost of goods sold

 

520,348

 

371,941

 

992,540

 

1,222,572

 

 

 


 


 


 


 

Gross profit

 

34,494

 

8,109

 

19,348

 

12,245

 

Selling, general, and administrative expenses

 

48,186

 

25,127

 

73,108

 

102,166

 

Impairment of long-lived assets

 

1,197

 

31,111

 

40,961

 

24,400

 

Restructuring charges

 

1,215

 

4,233

 

10,759

 

 

 

 


 


 


 


 

Loss from operations

 

(16,104

)

(52,362

)

(105,480

)

(114,321

)

Interest and other expense (contractual interest of $30,481 in five months ended June 1, 2002, $98,929 in 2001 and $111,061 in 2000)

 

11,530

 

16,832

 

64,666

 

107,062

 

 

 


 


 


 


 

Loss from continuing operations before reorganization items and income taxes

 

(27,634

)

(69,194

)

(170,146

)

(221,383

)

Reorganization items:

 

 

 

 

 

 

 

 

 

Gain on cancellation of pre-petition liabilities

 

 

(856,375

)

 

 

Fresh start adjustments

 

 

391,091

 

 

 

Other

 

 

66,633

 

31,401

 

19,368

 

 

 


 


 


 


 

Total reorganization items

 

 

(398,651

)

31,401

 

19,368

 

 

 


 


 


 


 

Income (loss) from continuing operations before income taxes

 

(27,634

)

329,457

 

(201,547

)

(240,751

)

Income tax benefit

 

 

(7,157

)

 

(93,361

)

 

 


 


 


 


 

Net income (loss) from continuing operations

 

(27,634

)

336,614

 

(201,547

)

(147,390

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from operations, net of income tax benefit of $11,399 in 2000

 

 

 

(18,258

)

(115,018

)

Loss on disposal

 

 

 

(2,956

)

 

 

 


 


 


 


 

Loss from discontinued operations

 

 

 

(21,214

)

(115,018

)

 

 


 


 


 


 

Net income (loss)

 

(27,634

)

336,614

 

(222,761

)

(262,408

)

Preferred dividends and accretion

 

 

7,467

 

16,358

 

8,928

 

 

 


 


 


 


 

Income (loss) applicable to common shareholders

 

$

(27,634

)

329,147

 

(239,119

)

(271,336

)

 

 



 


 


 


 

Basic and diluted loss per common share -

 

 

 

 

 

 

 

 

 

Loss applicable to common shareholders

 

$

(1.46

)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Weighted average common shares -

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

18,984

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 


See accompanying notes to consolidated financial statements.


F-4


PILLOWTEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity (Deficit)
Seven Months ended December 28, 2002, Five Months ended June 1, 2002, Year ended December 29, 2001 and Year ended December 30, 2000
(in thousands of dollars, except for per share data)

  

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number
of shares

 

Par
value

 

Additional
paid-in
capital

 

Retained
earnings
(accumulated
deficit)

 

Treasury
Stock

 

Deferred
compensation

 

Accumulated
Other
comprehensive
income (loss)

 

Total
stockholders’
Equity
(deficit)

 

 

 


 


 


 


 


 


 


 


 

Predecessor:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2000

 

14,261,886

 

$

143

 

$

160,515

 

$

49,269

 

$

 

$

 

$

(2,538

)

$

207,389

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(262,408

)

 

 

 

 

(262,408

)

Currency translation adjustments

 

 

 

 

 

 

 

84

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(262,324

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Restricted stock – amortization and forfeitures

 

(15,469

)

 

(586

)

 

 

 

807

 

221

 

Issuance of common stock – convertible debentures

 

5,652

 

 

191

 

 

 

 

 

191

 

Accretion of Series A Preferred Stock

 

 

 

 

(216

)

 

 

 

(216

)

Preferred stock dividends

 

 

 

 

(8,712

)

 

 

 

(8,712

)

 

 


 


 


 


 


 


 


 


 

Balance at December 30, 2000

 

14,252,069

 

143

 

160,120

 

 

(222,067

)

 

 

 

(1,647

)

 

(63,451

)

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(222,761

)

 

 

 

 

(222,761

)

Currency translation adjustments

 

 

 

 

 

 

 

(143

)

(143

)

Excess of additional pension liability over unrecognized prior service cost

 

 

 

 

 

 

 

 

(26,405

)

(26,405

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(249,309

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Cancellation of restricted stock

 

(1,177

)

 

 

 

 

 

 

 

Accretion of Series A Preferred Stock

 

 

 

 

(216

)

 

 

 

(216

)

Preferred stock dividends

 

 

 

 

(16,142

)

 

 

 

(16,142

)

 

 


 


 


 


 


 


 


 


 

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

 

 

 

 

 

(27,634

)

 

 

 

 

(27,634

)

Currency translation adjustment

 

 

 

 

 

 

 

 

(113

)

(113

)

Excess of additional pension liability over unrecognized prior service cost

 

 

 

 

 

 

 

 

(61,501

)

 

(61,501

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Total comprehensive loss