-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjFTSAWGnyjOBVIcnBduohJj52VvTz/h/NZOa5ySYWnAGQb72a6X7GOB8TEYWf9W WxPZkQifiDhpvD1A6O6kFA== 0000896265-99-000006.txt : 19990331 0000896265-99-000006.hdr.sgml : 19990331 ACCESSION NUMBER: 0000896265-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11756 FILM NUMBER: 99577415 BUSINESS ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 BUSINESS PHONE: 2143333225 MAIL ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 FORMER COMPANY: FORMER CONFORMED NAME: PILLOWTEX CORP DATE OF NAME CHANGE: 19930125 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JANUARY 2, 1999 _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ______ COMMISSION FILE NUMBER 1-11756 PILLOWTEX CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-2147728 (State of Incorporation) (I.R.S. Employer Identification No.) 4111 MINT WAY, DALLAS, TEXAS 75237 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 333-3225 __________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ----------------------------- ----------------------- Common Stock, $0.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None __________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark 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/ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 22, 1999 was $149,789,491. As of March 22, 1999, Registrant had 14,183,852 shares of Common Stock outstanding. __________________ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders are incorporated by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" INCLUDE PILLOWTEX CORPORATION AND ITS SUBSIDIARIES. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report and other reports and statements, including those incorporated by reference herein, filed by the Company from time to time with the Securities and Exchange Commission (collectively, "Company SEC Filings") contain or may contain certain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. Any statements preceded by, followed by, or that include the words "anticipates," "believes" "expects," "estimates," "intends," or similar expressions contained in Company SEC Filings, as well as any other statements contained in Company SEC Filings regarding matters that are not historical facts, are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because such forward-looking statements are subject to various risks and uncertainties, results and values may differ materially from those expressed in or implied by such statements. Many of the factors that will determine these results and values are beyond the Company's ability to control or predict. The Company's shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date of the document in which they are contained. The Company's shareholders should understand that the following important factors, in addition to those discussed elsewhere in Company SEC Filings, could affect the Company's future results and could cause results and values to differ materially from those expressed in or implied by such forward-looking statements: (i) the Company's significant leverage and debt service obligations; (ii) the restrictive covenants contained in the instruments governing the Company's indebtedness; (iii) the Company's ability to integrate acquired operations successfully with existing operations; (iv) the price and availability of raw materials used by the Company; (v) general retail industry conditions; (vi) the Company's ability to renew key trademark licenses; (vii) the goodwill associated with the brand names owned by the Company and the Company's ability to protect its proprietary rights in such brand names; (viii) the Company's ability to retain key customers; (ix) the Company's relationships with both union and non-union employees; (x) the influence of significant shareholders of the Company; (xi) the Company's dependence on key management personnel; and (xii) the seasonality of the Company's business. The foregoing factors are discussed herein in greater detail under the caption "Risk Factors" beginning on page 9 hereof. PART I ITEM 1. BUSINESS GENERAL Founded in 1954, the Company is one of the largest North American designers, manufacturers, and marketers of home textile products. The Company's extensive product offerings include a full line of utility and fashion bedding and complimentary bedroom textile products, as well as a full line of bathroom and kitchen textile products. As a leading supplier across all distribution channels, the Company sells its products to most major mass merchants, department stores, and specialty retailers, providing its customers with a centralized "one-stop" source for their home textile merchandise. The Company also markets its products to wholesale clubs, catalog merchants, institutional distributors, and international customers. The Company, through its operating subsidiaries, manufactures and markets its products utilizing established and well-recognized Company-owned brand names, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Charisma-Registered Trademark-, St. Mary's-Registered Trademark-, Touch of Class-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-, and Beacon-Registered Trademark-. In addition, through licensing agreements, the Company currently has rights to manufacture and, in some instances, market certain bedding products under such well-known brand names as Ralph Lauren, Comforel-Registered Trademark-, and Waverly-Registered Trademark-. This diverse portfolio of premier brand names allows the Company to differentiate its products from those of its competitors and provides distinct brand names for different channels of retail distribution and for different price points. The Company believes that this portfolio of brand names provides it with a significant competitive advantage. 1 COMPETITIVE STRENGTHS The Company is one of the largest firms in the home textile industry and has significant competitive strengths. The Company has one of the largest market shares in North America in each of the bath towel, bed pillow, blanket, and down comforter product segments and a significant market share in each of the sheet, pillowcase, mattress pad, fashion bedding, bath rug and kitchen textile product segments. The Company's management team has successfully integrated acquisitions over the last several years which have improved the Company's overall efficiency and consistently produced a record of growth and profitability. The Company's management team provides a breadth of expertise rivaling any in the industry. The Company's management team believes the following competitive strengths enhance the Company's position in the marketplace: - INDUSTRY LEADING BRANDS: The Company owns some of the most recognizable brand names in the industry, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Charisma-Registered Trademark-, St. Mary's-Registered Trademark-, Touch of Class-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-, and Beacon-Registered Trademark-. Furthermore, through licensing agreements, the Company currently has rights to manufacture and, in some instances, market certain bedding products under such well-known brand names as Ralph Lauren, Comforel-Registered Trademark-, and Waverly-Registered Trademark-. This diverse portfolio of premier brand names allows the Company to differentiate its products from those of its competitors and provides distinct brand names for different channels of retail distribution and for different price points. These brand names also enable the Company to assist its customers in coordinating their product offerings and differentiating such offerings from those of their competitors. - STRONG CUSTOMER RELATIONSHIPS: The Company has established relationships with the top home textile retailers in North America. The Company's broad product offerings provide its customers with the benefits of a true "one-stop" source for bed and bath products. These strong relationships create a stable base from which the Company can pursue future business and new product introductions. - CREATIVE MERCHANDISING STRATEGIES: Historically, the Company has maintained creative partnerships with its customers, including extensive merchandising programs, that have resulted in the creation of successful new products, product mix strategies, point-of-sale concepts, and advertising campaigns. Retail customers are increasingly demanding exclusive or specially designed product lines to differentiate their product offerings from those of other retailers and to implement price tiering in order to achieve higher margins. The Company will continue this collaboration with its retail customers to design products and marketing programs responsive to individual customer's needs. - LOW COST OPERATING CAPABILITIES: As a result of its continued emphasis on cost-containment and capital expenditures to obtain greater plant efficiencies, the Company is a low cost producer of bed pillows, blankets, down comforters, and mattress pads in the home textile industry. The Company has efficient, low cost towel and bath rug production capabilities, including a new, state-of-the-art towel production facility. In addition, the Company has emphasized a low cost of operations, creating a competitive advantage by operating with one of the lowest percentages of selling, general and administrative expenses relative to sales in the industry. BUSINESS STRATEGY The Company's strategic objectives are to capitalize on its industry-leading position by leveraging the strength of its brand names, customer relationships, and operational capabilities across its comprehensive array of product offerings. The Company's strategic focus is as follows: - CAPITALIZE ON INDUSTRY LEADING POSITION: The Company focuses on leveraging its market leadership by implementing sales and marketing programs designed to facilitate a customer-driven "pull" strategy. By cross-marketing its various products using the Company's strong brand names, the Company seeks to create enhanced product value and facilitate greater differentiation of its products from those of its competitors. 2 - DEVELOP THE PREMIER "One-Stop Shop" for Home Textiles: The Company's practice of offering broad product assortments across diverse product lines provides it with a significant competitive advantage as it can offer its retail customers a centralized "one-stop" purchasing source for their home textile merchandise. The Company's extensive assortment of home textile products includes fashion and utility bedding and complimentary bedroom textile products, as well as a full line of bathroom textile products. - FURTHER STRENGTHEN CUSTOMER RELATIONSHIPS: The Company has a long history of strong customer relationships with the top retailers in the United States and Canada. The Company has developed these relationships by providing value-added services, such as innovative marketing and cross-merchandising capabilities. The Company believes that the value of such services to retailers has been increased significantly by the Company's expansion of its traditional bed pillow, blanket, down comforter, and mattress pad product lines to include towel, bath rug, sheet, fashion bedding, and kitchen textile product lines, creating a centralized purchasing source and the ability to utilize established and well-recognized Company-owned brand names across all such product lines. The Company continues to increase the use of marketing and cross-merchandising services to create opportunities for added sales and to provide retailers with more opportunities to differentiate their product offerings from those of their competitors. - ENHANCE OPERATIONAL EFFICIENCIES: The Company continues to focus on reducing its manufacturing cost structure by reviewing its current operations and investing in automation, equipment modernization, process improvements, and system controls throughout all aspects of its business. The Company's management believes that significant opportunities exist to improve production efficiency through capital investment, improved operational logistics, selective outsourcing, and increased utilization of information systems. The Company is currently in the middle of a three-year program to make capital expenditures in excess of $275.0 million by the end of 2000, principally to modernize certain acquired sheet and towel manufacturing facilities through the addition of new machinery and equipment. The Company anticipates that approximately $85.0 million in capital expenditures will be made in fiscal 1999. PRODUCTS GENERAL The Company has expanded its historic pillow operations largely through strategic acquisitions. Most recently, on December 19, 1997, the Company acquired Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), a designer, manufacturer and marketer of a broad range of household textile products including towels, bath rugs, sheets, and comforters, and on July 28, 1998, the Company acquired The Leshner Corporation, a 91-year-old manufacturer and marketer of quality bath and kitchen terry products. As a result of all such acquisitions, the Company's extensive product offerings now include a full line of utility and fashion bedding and complimentary bedroom textile products, as well as a full line of bathroom and kitchen textile products. BEDDING AND OTHER BEDROOM TEXTILE PRODUCTS BED PILLOWS. The Company is a leading manufacturer and marketer of bed pillows in North America. The Company produces and markets a broad line of traditional bed pillows, as well as specially designed bed pillows such as body pillows. The Company offers products at various levels of quality and price, from synthetic pillows sold at relatively low retail prices to fine white goose down pillows sold at much higher price levels. The Company is a leading feather and down pillow manufacturer in North America, offering products filled with quality goose and duck down, or blends of feather and down, in a range of grades. These materials, known as "natural fill," are noted for their loft and resiliency. The Company 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. The Company is a leading supplier of premium synthetic and latex bed pillows in North America. BLANKETS. The Company is a leading producer of adult blankets in North America, manufacturing woven and non-woven conventional and thermal weave blankets and throws in a wide assortment of fibers, including cotton, wool blend, acrylic, and polyester. The Company is the exclusive supplier in North America of blankets for Ralph Lauren. The Company also has a strong presence in the infant blanket market with products ranging from non-woven receiving blankets to the finest Supima-Registered Trademark- cotton crib blankets. 3 DOWN COMFORTERS. The Company 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. The Company is a leading manufacturer and marketer of mattress pads in North America, producing and marketing 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-Registered Trademark-, a multidirectional stretch material produced by E.I. DuPont de Nemours & Co. ("DuPont")). The Company's stretch-to-fit mattress pads correctly fit a broad range of mattress thicknesses, including pillow top mattresses. SHEETS AND OTHER FASHION BEDDING. The Company produces a wide variety of sheets, ranging from muslin to the finest 310-thread count, 100% pima cotton sheets. Its principal brand names for this product line include Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Velvet-Registered Trademark-, and Charisma-Registered Trademark-. Among the Company's sheeting strengths are solid color sheets with coordinating decorative bedding accessories. In addition to sheets, the Company'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 the Company's sheets vary widely based on size, thread count, and fabric type. OTHER BEDROOM TEXTILES. The Company also offers a variety of other complementary bedroom textile products, including featherbeds, pillow protectors, decorative pillows, and window treatments. These products represent a source of additional profitability as "add-on" sales for retailers. BATHROOM TEXTILE PRODUCTS TOWELS. The Company's bathroom textile products include bath, hand, and fingertip towels, washcloths, and bath mats. Royal Velvet-Registered Trademark-, Fieldcrest-Registered Trademark-, Cannon-Registered Trademark-, Charisma-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-, and St. Mary's-Registered Trademark- are well-known, high quality towel brand names, providing the Company with a strong market position in substantially all key sectors of the North American market. The Company is also recognized as the color leader in the towel industry as it markets 40 colors in its Royal Velvet-Registered Trademark- franchise. In the marketplace, the Company differentiates its towels by using fine ring spun cotton yarns to produce Royal Velvet-Registered Trademark- towels and pima cotton yarns for Charisma-Registered Trademark- towels. The towel line includes solid colors, woven stripes, and fancy jacquards, as well as printed towels. Retail prices of the Company's towels range on a wide variety of price levels based on, among other things, size, weight, and yarn type. BATH RUGS. The Company also markets a variety of bath and accent rugs in conjunction with its towel offering. Sizes range from 17-inches by 24-inches to 48-inches by 72-inches. These products are marketed under the Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, and Charisma-Registered Trademark- brands, as well as private labels. KITCHEN TEXTILE PRODUCTS The Company is a leading manufacturer and marketer of kitchen textile products in North America. The Company'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. Most of the Company's kitchen ensembles are accompanied by fabricated pot holders, oven mitts, and other coordinating accessories. MARKETING AND SALES The Company markets its products to major mass merchants, department stores, and specialty retail stores, as well as to wholesale clubs, catalog merchants, institutional distributors, and international customers. The Company's top ten customers accounted for approximately 61% of its total net sales in fiscal year 1998. Wal-Mart Stores, Inc. (including Wal-Mart and Sam's Club Stores) ("Wal-Mart") accounted for approximately 24% of the 4 Company's total net sales in fiscal year 1998; no other customer accounted for more than 10% of the Company's total net sales in fiscal year 1998. Consistent with industry practice, the Company generally does not operate under long-term written supply contracts with its customers. The use of the Company's Fieldcrest portfolio of brand names is segmented by distribution channel in order to solidify the perceived value of such brands and maintain their integrity. Royal Velvet-Registered Trademark-, Charisma- Registered Trademark-, Fieldcrest-Registered Trademark-, and Royal Family-Registered Trademark- brand name bed and bath products are distributed primarily to leading department stores, specialty home furnishing stores, and catalog merchants. St. Mary's-Registered Trademark- and Cannon-Registered Trademark- brand name bed and bath products are distributed through mass merchants. The Company's Royal Velvet-Registered Trademark-, Charisma-Registered Trademark-, and Cannon-Registered Trademark- brand names are supported with national consumer advertising. The Company also utilizes private brands through large chain stores and also sells a smaller amount of unbranded products to institutional and government customers. The Company's current international business is concentrated in Canada; however, it also sells its products in other foreign markets, including Asia, Australia, Europe, Mexico, and South America. In order to maximize product exposure and increase sales, the Company works closely with its major customers to assist them in merchandising and promoting the Company's products to the consumer. In addition to frequent personal consultation with the employees of such customers, the Company meets periodically with the senior management of such customers to develop joint merchandising programs, new products, product mix strategies, point-of-sale concepts, and advertising campaigns specifically tailored to that customer's needs. The Company also provides its customers merchandising assistance with store layouts, fixture designs, point-of-sale displays, and advertising materials. The Company's electronic data interchange system allows customers to place, and allows the Company to fill, track, and bill, orders by computer. This system enables the Company to ship products on a "quick response" basis. The Company's products are generally sold through its own salespeople, who have many years of industry experience; however, certain Ralph Lauren products are sold by the Ralph Lauren sales force. TRADEMARKS AND LICENSE AGREEMENTS The Company markets its products under its proprietary Company-owned trademarks and trade names and under customer-owned private labels, as well as under certain licensed trademarks and trade names. The Company 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. The Company owns various trademarks and trade names, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Charisma-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-, St. Mary's-Registered Trademark-, Touch of Class-Registered Trademark-, and Beacon-Registered Trademark-. The Company regards its trademarks and trade names as valuable assets and vigorously protects them against infringement. The Company holds the exclusive license for the highly regarded Ralph Lauren trademark for pillows, blankets, down comforters, mattress pads, and bath rugs in the United States and Canada. In addition, the Company holds a non-exclusive license to manufacture, and in certain cases sell, a variety of fashion bedding products under the Ralph Lauren trademark in the United States, Canada, and Mexico. The Company's licenses with Polo/Ralph Lauren Corporation expire on June 30, 2001. The Company has a long-standing relationship with Polo/Ralph Lauren Corporation and has no reason to believe that such licenses will not be renewed. However, there can be no assurance that, upon their expiration, the Company will be able to renew such licenses on acceptable terms. From time to time, the Company identifies product lines for which it is more advantageous to the Company to license its brand names to third parties for use in the manufacture and sale of such products. These license agreements require royalty payments to the Company based upon product sales and generally require payments of minimum annual royalties. In January 1998, the Company entered into such a license agreement with Ex-Cell Home Fashions, Inc. ("Ex-Cell"), pursuant to which the Company granted Ex-Cell an exclusive license to manufacture, sell, and distribute shower curtains and bath accessories under certain of the Company's trademarks and trade names, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, 5 Fieldcrest-Registered Trademark-, Charisma-Registered Trademark-, and Touch of Class-Registered Trademark-. In January 1999, the Company entered into another such license agreement with Bardwil Industries, Inc. ("Bardwil"), pursuant to which the Company granted Bardwil an exclusive license to manufacture, sell, and distribute tablecloths and other table-top accessories under certain of the Company's trademarks and trade names, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Charisma-Registered Trademark-, and St. Mary's-Registered Trademark-. From time to time, the Company also enters into selective international license agreements to promote the sale of its products in specific regions of the world. PRODUCT DEVELOPMENT The Company'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. The Company believes that the ability to develop products responsive to individual customers' needs is an important competitive advantage. As a result, the Company commits time and resources to identifying new materials, designs, and products from a variety of domestic and international vendors. MANUFACTURING AND DISTRIBUTION GENERAL The Company operates an extensive network of facilities in Texas, Alabama, California, Georgia, Illinois, Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Virginia and Toronto, Canada in connection with the manufacture and distribution of the Company's product lines. This nationwide manufacturing and distribution network enables the Company to ship its products cost effectively to all major cities in North America. As a supplement to its primary distribution channels, the Company operates retail outlet stores that sell certain of the Company's products directly to customers. These stores sell both first quality merchandise and seconds or "off-goods" at competitive retail prices. The Company believes that its retail outlet stores provide an effective channel for the distribution of second quality merchandise. BEDDING AND OTHER BEDROOM TEXTILE PRODUCTS BED PILLOWS. The hub of the network for bed pillows is located in Dallas, Texas, where the Company operates what it believes to be the largest feather and down processing facility in North America, producing significant economies of scale. Feather and down are processed by state-of-the-art computerized washing and sorting equipment and are sorted into a variety of mixtures and grades used in manufacturing natural fill pillows and comforters. The raw materials are shipped, along with imported products, to the Company's regional facilities for final assembly and distribution to customers. The Company also operates an automated sewing facility in Dallas, Texas, where high speed, computerized machines cut and sew fabric into pillow shells. Many of the Company's regional manufacturing facilities produce natural fill and synthetic fill pillows. Natural fill pillows are assembled by blowing processed feather and down into the pillow shell and sewing the open seam closed. Synthetic fill pillows are produced on machines known as garnets that pull, comb, and expand compressed polyester fibers. Once expanded, the fibers are inserted into a pillow shell and the open seam is sewn shut. BLANKETS. The Company produces blankets and spins yarn at manufacturing facilities in North Carolina and South Carolina. These plants provide full vertical production capability, including spinning, weaving, dyeing, and finishing. DOWN COMFORTERS. The Company's line of natural fill comforters are manufactured by the Company at its California, Illinois, Mississippi, Pennsylvania, and Toronto, Canada locations using processed down from the Dallas facility. MATTRESS PADS. Mattress pads are manufactured at the California, Mississippi, Pennsylvania, and Toronto, Canada 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. SHEETS AND OTHER FASHION BEDDING. Bed sheet products are produced in the Company's facilities in Kannapolis, North Carolina, Concord, North Carolina, and Union City, South Carolina. As with the Company's towel operations, these facilities provide a full range of the Company's sheet products for substantially all channels of distribution. Cotton and synthetic fibers are spun into yarn and woven into greige cloth for finishing, dyeing, cutting, and sewing. The Company produces synthetic fill comforters and other decorative bedding products such as pillow shams and decorative pillows at its Eden, North Carolina and Rocky Mount, North Carolina facilities. Finished cloth generally 6 is supplied by the Company's bed sheet operations. The cloth is cut, polyester fiber-fill is inserted, and the product is sewn and packaged for shipment to retail customers. OTHER BEDROOM TEXTILES. Other complementary bedroom textile products offered by the Company, such as featherbeds, pillow protectors, decorative pillows, and window treatments, are manufactured at one or more of the facilities described above. BATHROOM TEXTILE PRODUCTS TOWELS. The Company produces bath towels at its facilities in Alabama, Georgia, North Carolina, and Virginia. Cotton and synthetic fibers are spun into yarn utilizing the Company's spinning capacity and, subsequently, woven into fabric or greige cloth. The greige cloth is finished, dyed, cut, and sewn into finished towel products. The Company's Fieldale, Virginia facility generally produces the higher quality, department and specialty stores' products. The Columbus, Georgia, Phenix City, Alabama, and Hawkinsville, Georgia facilities generally support the Company's mass merchant business channel. The Kannapolis, North Carolina facility is capable of producing both types of products and, as a result, is used to support both distribution channels. BATH RUGS. Bath rugs are produced in the Company's Scottsboro, Alabama facility. Tufted yarn is punched into fabric and cut into a uniform height. A latex coating is applied to the underside of the fabric to hold the fibers. The product is dyed, cut, and finished. KITCHEN TEXTILE PRODUCTS The Company's kitchen textile products are manufactured at its facilities in Phenix City, Alabama, Hawkinsville, Georgia and Kannapolis, North Carolina. QUALITY CONTROL PROGRAMS The Company has established quality control programs that are designed to assure that its products meet predetermined quality standards established both internally and by its customers. The Company devotes significant resources to support its quality improvement efforts. Each manufacturing facility is staffed with a quality control team that identifies and resolves quality issues. The Company attempts to maintain close contact with customer quality control or other appropriate personnel to assure that the Company understands the customers' requirements. The Company also has programs with its major suppliers to assure the consistency of purchased raw materials by imposing strict standards and materials inspection, and requiring rapid response to the Company's complaints. RAW MATERIALS AND IMPORTS GENERAL. The principal raw materials that the Company uses in manufacturing its various product lines are: cotton; feather and down; synthetic (polyester and acrylic) fibers; and cotton and polyester-cotton blend fabrics. These materials are generally available from a wide variety of sources, and no significant shortage of such materials is currently anticipated. Management believes that its relationships with its suppliers are generally good. COTTON. Domestic cotton merchants are the Company's primary source of cotton. The Company uses significant quantities of cotton, which is subject to ongoing price fluctuations. To reduce the effect of potential price fluctuations, the Company makes commitments from time to time for future purchases of cotton. FEATHERS AND DOWN. The Company imports feather and down from several sources outside the United States. A majority of such purchases are from the People's Republic of China ("China"), where feather and down are by-products of ducks and geese raised for food. The Company is generally able to purchase feather and down from its suppliers in China on open credit terms without letters of credit. The Company also purchases some feather and down from suppliers in Europe. SYNTHETIC FIBERS. Domestic fiber producers are the Company's primary source of synthetic fibers. The Company purchases synthetic fiber from, among others, DuPont, Wellman, Inc., Monsanto Company, Cytec Industries Inc., Kosa, and Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations, the Company makes commitments from time to time for future purchases of synthetic fibers. 7 FABRIC. The Company uses fabric purchased from third parties in the production of pillow shells, comforter covers, and various other products. Although the Company believes that fabric is a commodity-type product that is available from numerous sources, the Company currently purchases large quantities of pillow ticking fabric from a single supplier, Santee Print Works, to control costs and assure quality. Consistent with industry practice, the Company and Santee Print Works have not entered into a long-term supply contract. However, to reduce the effect of potential price fluctuations, the Company makes commitments from time to time for future purchases from Santee Print Works. In addition, the Company imports the majority of its down comforter shells from China and India. OTHER. Certain of the Company's stretch-to-fit mattress pads utilize Lycra-Registered Trademark- skirting. Because of DuPont's patent on Lycra-Registered Trademark-, it is the exclusive supplier for this material. The Company believes that the risk that DuPont will cease to manufacture and sell Lycra-Registered Trademark- is minimal. BACKLOG The amount of the Company's backlog orders at any particular time is affected by a number of factors, including seasonality and scheduling of the manufacturing and shipment of products. In general, the Company's electronic data interchange and "quick response" capabilities have resulted in shortened lead times between submission of purchase orders and delivery and lowered the level of backlog orders. Consequently, the Company believes that the amount of its backlog is not an appropriate indicator of levels of future production. EMPLOYEES As of March 22, 1999, the Company had approximately 14,000 employees. As of March 22, 1999, the Company was subject to the following collective bargaining agreements:
Number of Number of Eligible Covered Union Location Covered Expiration Employees Employees - ------------------------------------------------ ------------------------ -------------- ------------- ------------- Union of Needletrades, Industrial and Textile Columbus, Georgia 01/06/00 375 247 Workers Union of Needletrades, Industrial and Textile Phenix City, Alabama 01/06/00 837 529 Workers Union of Needletrades, Industrial and Textile Phenix City, Alabama; 09/30/01 490 214 Workers Hawkinsville, Georgia; and Macon, Georgia Union of Needletrades, Industrial and Textile Eden, North Carolina 01/06/00 507 236 Workers Union of Needletrades, Industrial and Textile Fieldale, Virginia 01/06/00 1,024 350 Workers Union of Needletrades, Industrial and Textile Toronto, Ontario, Canada 02/28/00 301 236 Workers United Auto Workers Tunica, Mississippi 08/01/99 265 188 Warehouse, Mail Order, Office, Technical Chicago, Illinois 02/01/00 146 146 and Professional Employees (Teamsters)
Since 1991, the Union of Needletrades, Industrial and Textile Workers ("UNITE") has campaigned to organize approximately 5,500 additional hourly workers at five of the Company's plants, including a significant manufacturing facility in Kannapolis, North Carolina. The Company has opposed UNITE's organizing efforts. Although a majority of employees at these plants has previously voted not to select UNITE as a bargaining representative, the results of the election have not been certified. UNITE may seek a new election; however, there can be no assurances as to whether or when a new election will be scheduled. It is impossible to predict the effect, if any, that another lengthy organizing campaign will have on the productivity of the Company's workforce. The Company believes that its relationships with both its union and non-union employees are generally good. 8 RISK FACTORS The Company 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 and prospects of the Company and on the market price of the Company's Common Stock. See also "Cautionary Statement Regarding Forward-Looking Statements" above. SIGNIFICANT LEVERAGE AND DEBT SERVICE The Company is highly leveraged. At January 2, 1999, the Company had total outstanding long-term indebtedness (including the current portion of long-term indebtedness) of approximately $956.9 million and total shareholders' equity of approximately $237.9 million. In addition, subject to restrictions contained in instruments governing its indebtedness, the Company and its subsidiaries may incur additional indebtedness from time to time to finance acquisitions or capital expenditures or for general corporate purposes. The level of the Company's indebtedness could have important consequences to the business activities of the Company, including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for acquisitions, working capital, capital expenditures, or research and development may be limited; and (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in its industry or economic conditions generally. The Company's ability to service its debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business, and other factors, certain of which are beyond its control, as well as the availability of borrowings under its $350.0 million revolving credit facility (the "Revolving Credit Facility", and, together with the Company's $350.0 million term loan facility, the "Senior Credit Facility") or any other credit arrangement. The Company will require substantial amounts of cash to fund scheduled payments of principal and interest on its outstanding indebtedness, as well as future capital expenditures and any increased working capital requirements. If the Company is unable to meet its cash requirements out of cash flow from operations and its available borrowings, there can be no assurance that it will be able to obtain alternative financing or that it will be permitted to do so under the terms of the Revolving Credit Facility or its other indebtedness. In the absence of such financing, the Company's ability to respond to changing business and economic conditions, to make future acquisitions, to absorb adverse operating results, or to fund capital expenditures or research and development costs may be adversely affected. If the Company does not generate sufficient cash flow from operations to repay its indebtedness at maturity, it could attempt to refinance such indebtedness; however, no assurance can be given that such refinancing would be available on terms acceptable to the Company, if at all. RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS Certain instruments governing the Company's indebtedness restrict, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens to secure pari passu or subordinated indebtedness, sell stock of subsidiaries, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey, or otherwise dispose of substantially all of the assets of the Company, enter into certain transactions with affiliates, or incur indebtedness that is subordinate in right of payment to the Senior Credit Facility and senior in right of payment to the Company's senior subordinated notes. The Senior Credit Facility requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. The Company's ability to meet those financial ratios and tests can be affected by events beyond its control, and there can be no assurance that the Company will meet those tests. The Senior Credit Facility also prohibits the Company from prepaying other indebtedness before indebtedness under the Senior Credit Facility. A breach of any of these covenants or other covenants contained in the Senior Credit Facility could result in a default thereunder. Upon the occurrence of an event of default under the Senior Credit Facility, the lenders thereunder could elect to declare all amounts outstanding under the Senior Credit Facility, including accrued interest or other obligations, to be immediately due and payable or proceed against the collateral granted to them to secure that indebtedness. If any other senior indebtedness were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full that indebtedness and the other indebtedness of the Company. 9 As a result of the covenants described above, the ability of the Company to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be considered beneficial to the Company. RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company currently intends to continue to pay quarterly dividends of $0.06 per share on its Common Stock. The Company's dividend policy will be reviewed by the Company's Board of Directors from time to time in light of, among other things, the Company's results of operations and financial position. In addition, certain instruments governing the indebtedness of the Company and the terms of the Company's Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") restrict the Company's ability to pay dividends or make other distributions to holders of Common Stock. Pursuant to terms of such instruments, the ability of the Company to pay dividends or make other distributions is subject to its ability to maintain certain financial ratios and satisfy certain financial condition tests. For example, under the terms of the indentures governing the Company's senior subordinated notes, the Company is prohibited from paying dividends on its Common Stock or the Series A Preferred Stock at any time when (i) an "event of default" exists, (ii) the Company's "fixed charge coverage ratio" falls below 1.75 to 1, in the case of its 10% Senior Subordinated Notes due 2006 (the "10% Notes"), or 2 to 1, in the case of its 9% Senior Subordinated Notes due 2007, or (iii) the aggregate of such dividends and certain other restricted payments exceeds an accumulated reference amount which takes into account future earnings, equity offerings, conversions of debt securities, and amortization of certain investments. Similarly, under the terms of the Series A Preferred Stock the Company is prohibited from paying dividends on the Common Stock at any time when (i) an "event of noncompliance" exists, (ii) the Company's "fixed charge coverage ratio" falls below 1.75 to 1, or (iii) the aggregate of such dividends and certain other restricted payments exceeds an accumulated reference amount which takes into account future earnings, equity offerings, and conversions of debt securities. The Senior Credit Facility also contains restrictions on the Company's ability to pay dividends, although these restrictions are generally less restrictive than those contained in the documentation governing the 10% Notes. As a result of the foregoing, there can be no assurance that the Company will pay any dividends on the Common Stock in the future or, if dividends are paid, as to the amount thereof. RISKS ASSOCIATED WITH ACQUISITIONS The Company expects to continue a strategy of identifying and acquiring companies with complementary products or services that may be expected to enhance the Company's operations and profitability. There can be no assurances that the Company will be able to integrate the operations of any acquired company successfully with existing operations or that any of such acquisitions will prove profitable. DEPENDENCE ON RAW MATERIALS Cotton is the primary raw material used in the Company's business. Cotton is an agricultural product and, consequently, its availability is subject to weather conditions and other factors affecting agricultural markets. There have been historical 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 feather and down that the Company uses to produce natural fill pillows and down comforters. China is currently the primary source of raw feather and down for the Company. In fiscal year 1998, approximately 81%, based on cost, of the raw feather and down that the Company used to produce natural fill pillows and down comforters was imported from China. The Company'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 the Company's supply sources in China were disrupted for any reason, the Company 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, the Company is unable to predict whether such relationships would be on terms satisfactory to the Company. The Company's relationships with its suppliers in China are also subject to risks associated with changes in United States legislation and regulations relating to imports, including quotas, duties, and taxes, and other charges or restrictions on imports. Products that the Company imports from China currently receive preferential tariff treatment accorded goods from countries granted "most favored nation" status. Under the Trade Act of 1974, the President of the United States is authorized, upon making specified findings, 10 to waive certain restrictions that would otherwise render China ineligible for most favored nation treatment. The President has waived these provisions each year since 1979. Most favored nation status was accordingly renewed in June 1997 despite legislation pursued by Congress demanding that China desist from certain trade and military activities. Congress will continue to monitor these activities and may encourage the President to reconsider the renewal of most favored nation status for China in the future, and no assurance can be given that China will continue to enjoy this status in the future. Raw materials and finished products entering the United States from China without the benefit of most favored nation treatment would be subject to significantly higher duty rates. The raw materials used by the Company are generally available from a number of sources, and no significant shortage of such materials is currently anticipated. However, the Company uses significant quantities of such raw materials, which are subject to price fluctuations, and there can be no assurance that shortages of such materials will not occur in the future, which could increase the cost of or delay the shipment of products. Moreover, there can be no assurance that the Company will be able to pass on any increase in the price of raw materials to its customers. ADVERSE RETAIL INDUSTRY CONDITIONS The Company sells its products to a number of department stores and other major retailers who have experienced financial difficulties during the past several years. Some of these retailers have recently emerged from the protection of federal bankruptcy laws and some current retail customers of the Company may seek protection under the federal bankruptcy laws 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 by these retail customers. Additionally, 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 such a customer may be curtailed or terminated as a result of bankruptcy or insolvency proceedings. DEPENDENCE ON BRAND NAMES In fiscal year 1998, a substantial portion of the Company's net sales were from sales of products bearing the Company's principal proprietary brand names of Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Charisma-Registered Trademark-, Royal Velvet Big & Soft-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Caldwell-Registered Trademark-, and St. Mary's-Registered Trademark-. Accordingly, the Company's future success may depend in part upon the goodwill associated with these brand names. The Company's principal brand names are registered in the United States and certain foreign countries. However, there can be no assurance that the steps taken by the Company to protect its proprietary rights in such brand names will be adequate to prevent the misappropriation thereof 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 do the laws of the United States. DEPENDENCE ON KEY LICENSES The Company holds licenses with organizations such as Polo/Ralph Lauren Corporation, DuPont, F. Schumacher & Co. and others, using such well-known trademarks and trade names as Ralph Lauren, Comforel-Registered Trademark-, and Waverly-Registered Trademark-. These licenses generally require the payment of royalties based on net sales, including the payment of minimum annual royalties, and expire at various dates through June 2001. No assurance can be given that the Company will be able to renew these licenses on acceptable terms upon their expiration or will be able to acquire new licenses to use other popular trademarks. The loss of one or more of the Company's other third-party licenses is unlikely to have a material adverse effect on the business of the Company. RISK OF LOSS OF MATERIAL CUSTOMERS In fiscal year 1998, sales to Wal-Mart accounted for approximately 24% of the Company's total net sales. No other single customer accounted for more than 10% of the Company's total net sales during such period. 11 Consistent with industry practice, the Company does not operate under a long-term written supply contract with any of its customers. The business, financial condition, and results of operations of the Company could be materially adversely affected by the loss of Wal-Mart as a customer. LABOR RELATIONS As of March 22, 1999, the Company had approximately 14,000 employees, approximately 26% of whom were eligible to elect to be covered by collective bargaining agreements and 15% of which had elected to be covered by such agreements. See "Business - Employees." Since 1991, the UNITE has campaigned to organize approximately 5,500 additional hourly workers at five of the Company's plants, including a significant manufacturing facility in Kannapolis, North Carolina. The Company has opposed UNITE's organizing efforts. Although a majority of employees at these plants has previously voted not to select UNITE as a bargaining representative, the results of the election have not been certified. UNITE may seek a new election; however, there can be no assurances as to whether or when a new election will be scheduled. It is impossible to predict the effect, if any, that another lengthy organizing campaign will have on the productivity of the Company's workforce. GOVERNMENT REGULATION The Company is subject to various federal, state, and local environmental laws and regulations governing the discharge, storage, handling, and disposal of various substances. The Company is also subject to 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, the Company's operations are governed by a variety of federal, state, local, and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other matters applicable to businesses in general. All laws and regulations are subject to change, and the Company cannot predict what effect, if any, changes in laws and regulations might have on its business. INDUSTRY COMPETITION AND COMPETITIVE FACTORS The Company participates in a highly competitive industry, competing with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial, distribution, manufacturing, and marketing resources. SEASONALITY OF BUSINESS The Company's business is subject to a pattern of seasonal fluctuation. The Company's 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 Company's needs for working capital generally are expected to increase in the second half of the year and, 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 the Company's 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 level of sales of down comforters and blankets (which are sold in greater quantities in cold weather), general economic conditions, and other factors beyond the Company's control. INFLUENCE BY SIGNIFICANT SHAREHOLDERS As of March 22, 1999, Charles M. Hansen, Jr., Mary R. Silverthorne, the John H. Silverthorne Marital Trust B, and the John H. Silverthorne Family Trust A (for both of which trusts Ms. Silverthorne acts as trustee), owned, in the aggregate, approximately 37% of the outstanding shares of Common Stock. These shareholders exert significant influence over the direction and management of the Company. DEPENDENCE ON KEY PERSONNEL The Company's success is largely dependent on the skills, experience, and performance of certain key members of its management, including Charles M. 12 Hansen, Jr., the Company's Chairman of the Board and Chief Executive Officer, and Jeffrey D. Cordes, the Company's President and Chief Operating Officer. The Company believes that its future success will be highly dependent upon its ability to attract and retain skilled managers and other personnel, including Mr. Hansen and Mr. Cordes. The loss of Mr. Hansen's or Mr. Cordes' services could have a material adverse effect on the Company. MARKET RISK WITH RESPECT TO COMMON STOCK The Company's Common Stock is listed for trading on the New York Stock Exchange. The prices at which shares of the Company's Common Stock trade are subject to fluctuation based on many factors, including general economic and industry conditions and the performance of, and investor expectations for, the Company. No assurance can be given that a holder of the Company's Common Stock will be able to sell such securities at any particular price. CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS, AND OTHER AGREEMENTS The Company's Restated Articles of Incorporation (the "Articles"), the Company's Amended and Restated Bylaws (the "Bylaws"), and certain agreements to which the Company is a party contain provisions that may have the effect of delaying, deterring, or preventing a change in control of the Company. In addition, the Articles authorize the issuance of up to 30,000,000 shares of Common Stock and 20,000,000 shares of preferred stock of the Company. (The Company's Board of Directors has recommended to the Company's shareholders for approval at the Company's 1999 annual meeting of shareholders a proposal to increase the number of authorized shares of Common Stock from 30,000,000 shares to 55,000,000 shares.) The Company's Board of Directors will have the power to determine the price and terms under which any additional capital stock may be issued, and subject to the terms of any issued and outstanding preferred stock (including without limitation the Series A Preferred Stock), to fix the terms of such preferred stock, and existing shareholders will not have preemptive rights with respect thereto. YEAR 2000 CONSIDERATIONS Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the Year 2000, thereby causing disruptions in the operations of the Company and its suppliers and customers. This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. As part of its Year 2000 compliance program, the Company has developed a specific plan to help ensure that the Company is not adversely affected by the Year 2000 issue. The Company's failure to resolve Year 2000 issues on or before December 31, 1999 could result in system failures or miscalculations causing disruption in operations, including, among other things, a temporary inability to process transactions, send invoices, send and/or receive e-mail and voice mail, or engage in similar normal business activities. Additionally, failure of third parties, upon whom the Company's business relies, to timely remediate their Year 2000 issues could result in disruption of the Company's supply of materials and parts, late, missed or unapplied payments, temporary disruptions in order processing and other general problems related to the Company's daily operations. While the Company believes its Year 2000 plan will adequately address the Company's internal Year 2000 issues, until the Company receives responses from all significant business partners, the overall risks associated with the Year 2000 issue remain difficult to accurately assess and quantify, and there can be no assurances that the Year 2000 issue will not have a material adverse effect on the Company and its operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000 Considerations." 13 ITEM 2. PROPERTIES The following table summarizes certain information concerning certain of the facilities used by the Company in connection with the manufacture and distribution of its product lines:
Approx. Owned/ Location Principal Use Square Feet Leased -------------------------- -------------------------------------------------------- ----------- ------ Dallas, Texas Headquarters and feather and down processing 104,000 Owned Dallas, Texas Manufacturing, distribution and offices 150,000 Owned Phenix City, Alabama Manufacturing and warehouse 777,681 Owned Phenix City, Alabama Manufacturing 220,000 Owned Scottsboro, Alabama Manufacturing and warehouse 272,800 Owned Los Angeles, California Manufacturing and distribution 320,000 Leased Columbus, Georgia Manufacturing and warehouse 727,246 Owned Hawkinsville, Georgia Manufacturing and warehouse 260,000 Owned Macon, Georgia Warehouse 220,000 Owned Chicago, Illinois Manufacturing and distribution 121,000 Owned Tunica, Mississippi Manufacturing and distribution 288,000 Owned New York, New York Sales office and showroom 64,490 Leased Asheville, North Carolina Warehouse 117,000 Leased Asheville, North Carolina Warehouse 254,000 Leased Concord, North Carolina Manufacturing 696,963 Owned Eden, North Carolina Manufacturing and warehouse 529,273 Owned Eden, North Carolina Warehouse 411,531 Owned Eden, North Carolina Warehouse 27,241 Owned Kannapolis, North Carolina Manufacturing 682,407 Owned Kannapolis, North Carolina Manufacturing, warehouse and offices 5,863,041 Owned Newton, North Carolina Manufacturing and distribution 297,000 Leased Rockwell, North Carolina Manufacturing 98,240 Owned Rocky Mount, North Carolina Manufacturing and distribution 139,000 Owned Rocky Mount, North Carolina Manufacturing and distribution 78,000 Leased Salisbury, North Carolina Manufacturing 229,361 Owned China Grove, North Carolina Manufacturing and warehouse 567,000 Owned Swannanoa, North Carolina Manufacturing, distribution, warehouse and office 1,425,000 Owned Tarboro, North Carolina Manufacturing and warehouse 370,000 Owned Hanover, Pennsylvania Manufacturing and distribution 291,000 Owned Mauldin, South Carolina Warehouse and distribution 746,600 Owned Union City, South Carolina Manufacturing 95,700 Owned Westminster, South Carolina Manufacturing, distribution, warehouse and office 652,000 Owned Westminster, South Carolina Warehouse 29,000 Leased Fieldale, Virginia Manufacturing and warehouse 973,253 Owned Martinsville, Virginia Warehouse 100,000 Leased Toronto, Ontario, Canada Manufacturing and distribution 99,000 Leased Toronto, Ontario, Canada Manufacturing and distribution 60,000 Leased Toronto, Ontario, Canada Warehouse 106,000 Leased In addition to the foregoing, the Company maintains warehousing and distribution centers in the states where certain of its manufacturing facilities are located and maintains small sales and marketing offices in certain other states. The Company also owns various other properties, both developed and undeveloped, which are unrelated to its manufacturing operations. Certain of these properties were acquired by Fieldcrest Cannon throughout the years for investment or ancillary to specific acquisitions. Some of such properties are currently held for investment, some are listed for sale, and some are leased to third parties. The Company believes that its facilities are generally well maintained, in good operating condition, and adequate for its current needs. The Company will continue to emphasize improvements at these plants, upgrading the physical plant and purchasing additional and newer machinery and equipment. ITEM 3. LEGAL PROCEEDINGS The Company 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 results of operations. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock, par value $0.01 per share ("Common Stock") is traded on the New York Stock Exchange under the symbol "PTX." The following table sets forth for the period indicated the high and low sales prices of the Common Stock:
Fiscal Year: High Low ------------ ---------- ---------- 1998 Fourth Quarter ................ $34 11/16 $23 9/16 Third Quarter ................. 45 7/8 23 7/8 Second Quarter ................ 50 7/8 37 13/16 First Quarter ................. 49 5/16 30 1/2 1997 Fourth Quarter ................ $34 7/8 $26 1/2 Third Quarter ................. 28 7/16 21 Second Quarter ................ 23 16 5/8 First Quarter ................. 18 3/8 15 7/8
At March 22, 1999, the Company had approximately 975 holders of record of Common Stock. The Company paid four quarterly dividends of $0.06 per share in each of the fiscal years 1997 and 1998. The Company currently intends to continue to pay quarterly dividends of $0.06 per share on the Common Stock. Certain instruments governing the indebtedness of the Company and the terms of the Series A Preferred Stock restrict the Company's ability to pay dividends or make other distributions to holders of Common Stock. Accordingly, there can be no assurance that the Company will pay any such dividends in the future or, if such dividends are paid, as to the amount thereof. See "Item 1. Business - Risk factors - Restrictions on Payments of Dividends." 15 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (In thousands, except per share data) The selected financial data presented below are derived from the Company's consolidated financial statements for the five years ended January 2, 1999. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Annual Report. YEAR ENDED 12/31/94(1) 12/30/95 12/28/96 01/03/98(2) 01/02/99(3) ----------------------------------------------------------------------- STATEMENTS OF EARNINGS DATA: Net sales $ 349,520 $ 474,899 $ 490,655 $ 579,999 $1,509,841 Cost of goods sold 294,714 395,922 411,048 485,679 1,228,463 ---------- ---------- ---------- ---------- ---------- Gross profit 54,806 78,977 79,607 94,320 281,378 Selling, general and administrative expenses 36,399 42,508 41,445 52,090 137,307 Restructuring charge - - - 5,986 1,539 ---------- ---------- ---------- ---------- ---------- Earnings from operations 18,407 36,469 38,162 36,244 142,532 Interest expense 6,361 17,491 13,971 22,470 72,288 Other income (379) - - - - ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and extraordinary items 12,425 18,978 24,191 13,774 70,244 Income taxes 4,736 7,509 9,459 5,538 27,389 ---------- ---------- ---------- ---------- ---------- Earnings before extraordinary items 7,689 11,469 14,732 8,236 42,855 Extraordinary items, net - - (609) (919) - ---------- ---------- ---------- ---------- ---------- Net earnings 7,689 11,469 14,123 7,317 42,855 Preferred dividends and accretion - - - 85 2,097 ---------- ---------- ---------- ---------- ---------- Earnings available for common shareholders $ 7,689 $ 11,469 $ 14,123 $ 7,232 40,758 ========== ========== ========== ========== ========== BASIC EARNINGS PER COMMON SHARE: Before extraordinary items $ .73 $ 1.08 $ 1.39 $ .75 $ 2.89 Extraordinary items - - (.06) (.08) - ---------- ---------- ---------- ---------- ---------- Basic earnings per common share $ .73 $ 1.08 $ 1.33 $ .67 $ 2.89 ========== ========== ========== ========== ========== Weighted average common shares outstanding - basic 10,604 10,618 10,618 10,837 14,082 ========== ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE: Before extraordinary items $ .72 $ 1.08 $ 1.39 $ .74 $ 2.52 Extraordinary items - - (.06) (.08) - ---------- ---------- ---------- ---------- ---------- Diluted earnings per common share $ .72 $ 1.08 $ 1.33 $ .66 $ 2.52 ========== ========== ========== ========== ========== Weighted average common shares outstanding - diluted 10,640 10,620 10,634 11,086 17,653 ========== ========== ========== ========== ========== OPERATING DATA: Depreciation and amortization $ 6,365 $ 11,994 $ 12,775 $ 16,064 $ 54,021 Capital expenditures 10,538 12,448 21,040 20,567 133,620 Cash dividends 244 531 2,124 2,569 5,402 BALANCE SHEET DATA: Working capital $ 122,738 $ 110,128 $ 150,506 $ 394,496 $ 447,933 Property, plant and equipment, net 81,187 84,567 94,267 488,841 629,205 Total assets 319,544 324,710 375,714 1,410,186 1,654,154 Long-term debt, net of current portion 177,149 153,472 194,851 785,383 944,493 Redeemable convertible preferred stock - - - 62,882 63,057 Shareholders' equity 76,478 87,990 100,004 196,707 237,933
(1) Amounts set forth in 1994 reflect the inclusion of Imperial Feather Company from August 19, 1994 and Beacon Manufacturing Company from December 1, 1994. (2) Amounts set forth in 1997 reflect the results of operations for a 53-week period, and the inclusion of Fieldcrest Cannon, Inc. from December 19, 1997. (3) Amounts set forth in 1998 reflect the inclusion of The Leshner Corporation from July 28, 1998. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company markets and manufactures home textile furnishings for the bedroom, bathroom and kitchen. The Company operates a network of manufacturing, purchasing and distribution facilities in the U.S. and Canada with approximately 14,000 employees. MERGERS AND ACQUISITIONS On July 28, 1998, the Company acquired the net assets of The Leshner Corporation ("Leshner"), a 91 year-old manufacturer of towels and terry-related products, for a purchase price of $41.8 million in cash (including acquisition costs). In connection with the acquisition, the Company retired $32.5 million of outstanding Leshner debt. The acquisition was accounted for using the purchase method of accounting for business combinations. As such, the operating results of Leshner for the period from the acquisition date through January 2, 1999 have been included in fiscal year 1998 results. On December 19, 1997 (the "Merger Date"), the Company acquired Fieldcrest Cannon, Inc. ("Fieldcrest Cannon") for a combination of cash and stock valued at approximately $409.0 million (the "Merger"). Additionally, the Company retired approximately $199.0 million of existing Fieldcrest Cannon long-term debt. The Merger was accounted for using the purchase method of accounting. Accordingly, the operating results of Fieldcrest Cannon for the period from the Merger Date through January 3, 1998 have been included in fiscal year 1997 results, and 1998 includes a full year of Fieldcrest Cannon operations. RESULTS OF OPERATIONS The following table presents certain historical statements of operations data as a percentage of net sales for the periods indicated. YEAR ENDED ------------------------------------------ DECEMBER 28, JANUARY 3, JANUARY 2, 1996 1998 1999 ---- ---- ---- Net sales................... 100.0% 100.0% 100.0% Cost of goods sold.......... 83.8 83.7 81.4 ----- ----- ----- Gross profit................ 16.2 16.3 18.6 Selling, general and administrative expenses... 8.4 9.0 9.1 Restructuring charge........ - 1.0 0.1 ----- ----- ----- Earnings from operations.... 7.8 6.3 9.4 Interest expense............ 2.8 3.9 4.8 ----- ----- ----- Earnings before income taxes and extraordinary items... 5.0% 2.4% 4.6% ===== ===== =====
The discussion below makes reference to pro forma fiscal year 1997 results. Pro forma amounts include historical results of operations for Fieldcrest Cannon from January 1, 1997 and Leshner from August 1, 1997. Lines of business exited or sold since the acquisitions are not included in the pro forma fiscal year 1997 results of operations. Fiscal year 1997 results include a 53-week period as compared to a 52-week period for fiscal year 1998. FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 NET SALES. Net sales were $1.5 billion in fiscal year 1998, representing an increase of $929.8 million, or 160.3%, as compared to $580.0 million in fiscal year 1997. The $929.8 million increase in net sales is primarily due to the inclusion of a full year of operations for Fieldcrest Cannon and the inclusion of $34.6 million in Leshner net sales since its acquisition date. Net sales decreased $84.1 million, or 5.3%, as compared to 1997 pro forma results. 17 Approximately $32.0 million of this decline is attributable to the 52-week period in fiscal year 1998 versus the 53-week period in fiscal year 1997. Other factors contributing to the decrease were lower sales of utility bedding and bath towels. Utility bedding sales declined primarily due to lower volume in jacquard blankets and decreases in Disney blanket sales due to the termination of the Disney license. Bath towel sales were down due to several customers adjusting inventory levels, thereby delaying orders. Additionally, two large customers delayed promotional events and new product rollouts until 1999 which were originally scheduled to be 1998 events. These declines were offset by increases in fashion bedding sales, which were primarily due to the Royal Velvet-Registered Trademark- sheet reintroduction program and initial rollouts of bed-in-a-bag programs. GROSS PROFIT. Gross profit margins increased to 18.6% in fiscal year 1998, compared to 16.3% in fiscal year 1997. Increases in gross profit margins resulted from lower raw material costs and the realization of significant operating improvements, due in part to capital investment programs within the bath and decorative bedding businesses. Gross profit for fiscal year 1998 was $281.4 million, or 18.6% of net sales, up from pro forma results for the same period in fiscal year 1997 of $246.8 million, or 15.5% of net sales. The increase is attributable to an improving mix of business in bath towels and the lower material costs and operating efficiencies discussed above. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A increased $85.2 million to $137.3 million in fiscal year 1998, compared to $52.1 million in fiscal year 1997, and as a percentage of net sales, increased to 9.1% in fiscal year 1998 from 9.0% in fiscal year 1997. The increase in total SG&A expenses is primarily due to a full year of expenses for Fieldcrest Cannon and the inclusion of Leshner SG&A expenses since the acquisition date. SG&A expenses of $137.3 million in fiscal year 1998 is a decrease of $24.6 million as compared to fiscal year 1997 pro forma amounts. This decline is primarily attributable to the reductions in headcount at Fieldcrest Cannon and other cost control programs begun in December 1997. RESTRUCTURING CHARGE. The $1.5 million restructuring charge was related to severance and other employee-related costs associated with the consolidation of blanket production into facilities in Swannanoa, North Carolina and Westminster, South Carolina. INTEREST EXPENSE. Interest expense increased by $49.8 million to $72.3 million in fiscal year 1998, compared to $22.5 million in fiscal year 1997. The increase was primarily due to the additional debt incurred as a result of the Merger and the purchase of Leshner. Average interest rates for fiscal year 1998 declined slightly from fiscal year 1997. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 NET SALES. Net sales were $580.0 million in fiscal year 1997, representing an increase of $89.3 million, or 18.2%, as compared to $490.7 million in fiscal year 1996. Excluding $40.0 million of Fieldcrest Cannon net sales since the Merger Date, the $49.3 million increase in net sales is due to increases in blanket sales of $30.8 million, as well as higher sales in bed pillows, mattress pads and fashion bedding of $18.5 million. The increases are due in part to the acquisition of the blanket operations of Fieldcrest Cannon in November 1996 and the offering of new branded products introduced in early 1997. GROSS PROFIT. Gross profit margins remained virtually flat at 16.3% in fiscal year 1997, compared to 16.2% in fiscal year 1996. Increases in product margins resulted primarily from lower raw material prices, which were offset by costs associated with reconfiguring the Company's South Carolina distribution facility, increases in obsolescence reserves, higher sales-related deductions, and losses on sales of certain inventories to accommodate the consolidation of the blanket facilities. SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased $10.7 million to $52.1 million in fiscal year 1997, compared to $41.4 million in fiscal year 1996, and as a percentage of net sales, increased to 9.0% in fiscal year 1997 from 8.4% in fiscal year 1996. Excluding $3.5 million of Fieldcrest Cannon expenses since the Merger Date, the $7.2 million increase resulted primarily from higher personnel costs due in part to filling several management positions which were vacant in 1996 and the payment of severance, increased travel expenses primarily related to the Merger, and higher professional fees. 18 RESTRUCTURING CHARGE. The $6.0 million restructuring charge was related to costs associated with the consolidation of blanket production into facilities in Swannanoa, North Carolina and Westminster, South Carolina. The charge represents costs associated with the write-down of certain assets and other expenses. INTEREST EXPENSE. Interest expense increased by $8.5 million to $22.5 million in fiscal year 1997, compared to $14.0 million in fiscal year 1996. The increase was primarily due to $3.5 million of interest on the additional debt incurred as a result of the Merger, with the remaining increase due primarily to interest on the $125.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes") issued by the Company in November 1996. EXTRAORDINARY ITEM. An extraordinary loss of $0.9 million was recorded in fiscal year 1997 related to the write-off of deferred debt issuance costs associated with the Company's previous senior credit facility, which was refinanced in connection with the Merger. LIQUIDITY AND CAPITAL RESOURCES In December 1997, in connection with the Fieldcrest Cannon acquisition, the Company entered into new senior revolving credit and term loan facilities (the "Facilities") with a group of financial and institutional investors for which NationsBank of Texas, N.A. ("NationsBank") acts as the agent. The Facilities consisted of a $350.0 million revolving credit facility (the "Revolver") and a $250.0 million term loan facility (the "Term Loan"). The Term Loan consisted of a $125.0 million Tranche A term loan (the "Tranche A Term Loan") and a $125.0 million Tranche B term loan (the "Tranche B Term Loan"). Effective July 28, 1998, the Company amended the Facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of Leshner allowing the Company to fund the transaction and reduce borrowings under the Revolver. The Revolver and the Tranche A Term Loan expire December 31, 2003, and the Tranche B Term Loan expires December 31, 2004. The Revolver includes $55.0 million of availability for letters of credit. At January 2, 1999, $42.1 million of letters of credit were outstanding. Unused availability under the Revolver was $125.1 million at January 2, 1999. Amounts outstanding under the Revolver and the Tranche A Term Loan presently bear interest at a rate based upon the London Interbank Offered Rate plus 2.00%. The Tranche B Term Loan bears interest on a basis similar to the Tranche A Term Loan, plus an additional margin of .50%. These rates are subject to decrease based upon the Company's achievement of certain ratios of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities during 1998 was 7.78% and the effective rate at January 2, 1999 was 7.52%. The Facilities are guaranteed by each of the domestic subsidiaries of the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The Term Loan is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of the Company (except as specifically provided), 50% of the net cash proceeds of equity issuances by the Company or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the remaining installments of principal. The Facilities contain a number of financial, affirmative and negative covenants which, among other things, require maintenance of certain ratios of funded debt to EBITDA and certain cash flow coverage ratios, and require the Company to maintain a minimum tangible net worth. Other covenants restrict, among other things, the Company's ability to incur additional debt, grant liens, engage in transactions with affiliates, make loans, advances and investments, pay dividends and other distributions to shareholders, dispose of assets, effect mergers, consolidations and dissolutions, and make certain changes in its business. At January 2, 1999, the Company was in compliance with all covenants under the Facilities. In connection with the Merger, the Company issued $185.0 million of 9% Senior Subordinated Notes due 2007 (the "9% Notes") in a private offering. In March 1998, the Company completed an offer to exchange the unregistered 9% Notes previously sold in the private offering for an equal aggregate principal amount of registered 9% Notes. The 9% Notes are due December 15, 2007, with interest payable semiannually commencing June 15, 1998. The Company may at its option 19 redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at a redemption price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%. The 9% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Facilities and rank pari passu to the 10% Notes described below. On November 12, 1996, the Company issued the 10% Notes in a private offering. The 10% Notes are due November 15, 2006, with interest payable semiannually commencing May 15, 1997. The Company used the proceeds from such offering to retire the outstanding indebtedness under the Company's previously existing term loan, to finance the acquisition of certain assets of Fieldcrest Cannon's blanket operations, to temporarily reduce indebtedness under the previous revolving credit facility, and to acquire a warehouse facility. The Company may, at its option, redeem the 10% Notes, in whole or in part, on or after November 15, 2001 at a redemption price of 105.0%, which declines 1.667% annually through November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Facilities. In March 1997, the Company completed an offer to exchange the unregistered 10% Notes previously sold in the private offering for an equal aggregate principal amount of registered 10% Notes. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the Facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. Upon a change in control, the Company will be required to make an offer to repurchase all outstanding 9% Notes and 10% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. The 9% Notes and the 10% Notes are subject to certain covenants which restrict, among other things, the Company's ability to incur additional indebtedness and issue preferred stock, grant liens to secure subordinated indebtedness, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, engage in certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 9% Notes and the 10% Notes, merge or consolidate with any other person, sell stock of subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. At January 2, 1999, the Company was in compliance with all covenants under the 9% Notes and the 10% Notes. As a result of the Merger, the outstanding $104.2 million aggregate principal amount of 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon (the "Fieldcrest Debentures") are convertible, at the option of the holder, into a combination of cash and the Company's common stock. At January 2, 1999, if all outstanding Fieldcrest Debentures were converted, the resulting cash component to be paid to the debtholders would be approximately $63.6 million. The Company expects to utilize funds available under the Revolver to pay any cash payable upon conversion of Fieldcrest Debentures. The Company enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the consolidated financial statements. As of January 3, 1998, the Company had approximately $125.0 million of notional amounts covered under interest rate swap agreements whereby the Company exchanged fixed rates for floating rates. The weighted average fixed and floating rates were 10.0% and 9.5%, respectively. Subsequent to January 3, 1998, the Company terminated the swap agreement covering approximately $125.0 million of indebtedness resulting in a gain of approximately $1.0 million which has been deferred and is being amortized as an adjustment to interest expense over the remaining three-year term of the terminated swap agreement. As of January 2, 1999, the Company had approximately $345.0 million of notional amounts covered under interest rate swap agreements whereby the Company exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.70% and 5.26%, respectively. The fair values of the swaps at January 3, 1998 and January 2, 1999 were zero and $2.1 million, respectively. The fair value of $2.1 million was in favor of the Company. The Company anticipates that its principal uses of cash will be working capital requirements, debt service requirements, payment of dividends (if permitted), and capital expenditures, as well as expenditures relating to acquisitions and 20 integrating acquired businesses. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the Revolver, will be adequate to meet its anticipated cash requirements for fiscal year 1999. There can be no assurance, however, that the Company's business will continue to generate sufficient cash flow from operations in the future to service its debt, and the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. These increased borrowings may result in higher interest payments. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing, if needed, could have a material adverse effect on the Company. The Company spent $133.6 million for capital expenditures in fiscal year 1998. The majority of these funds were for the planned modernizations of the Fieldcrest Cannon towel and sheet manufacturing facilities, upgrading information systems and the purchase of a yarn spinning facility. In fiscal year 1997, the Company spent $20.6 million for capital expenditures, including $13.7 million in the blanket facilities, principally to complete the installation of equipment purchased from Fieldcrest Cannon in November 1996. The Company is currently in the middle of a three-year program to make capital expenditures in excess of $275.0 million by the end of 2000, principally to modernize certain acquired sheet and towel manufacturing facilities through the addition of new machinery and equipment. The Company anticipates that approximately $85.0 million in capital expenditures will be made in fiscal year 1999. The Company currently anticipates that it will continue to pay a quarterly dividend of $.06 per share on its common stock. Through December 31, 1999, the Company anticipates that it will pay dividends on its preferred stock at a rate per annum equal to 3%, or approximately $2.0 million per year. Thereafter, the rate at which dividends will accrue on the preferred stock may increase to 7% or 10% depending on the Company's earnings per share for the 1999 fiscal year. The Company's ability to pay dividends on the common stock and preferred stock is restricted under the terms of the Facilities and the 9% Notes and the 10% Notes, and, in the case of common stock dividends, under the terms of the preferred stock. Accordingly, there can be no assurance that the Company will pay any dividends in the future or, if dividends are paid, as to the amount thereof. NEW ACCOUNTING STANDARD In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of SFAS No. 133 are effective for fiscal years beginning after June 15, 1999, although early adoption is allowed. The Company has not determined the financial impact of adopting this SFAS and has not determined if it will adopt its provisions prior to its effective date. YEAR 2000 CONSIDERATIONS GENERAL Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the Year 2000, thereby causing disruptions in the operations of the Company and its suppliers and customers. This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. 21 STATE OF READINESS SYSTEMS REPLACEMENT PROJECT In 1995, the Company began a project aimed at improving its access to business information through common, integrated computing and reporting systems. In 1996, prior to the Company's acquisition of Fieldcrest Cannon in December 1997, Fieldcrest Cannon began a similar systems replacement project. Each of the Company and Fieldcrest Cannon, in connection with its systems replacement project, elected to implement systems using software applications principally developed by Oracle Corporation ("Oracle") to fulfill its business systems replacement needs. Such software applications replace many of the accounting, reporting and manufacturing systems that are or previously had been in place at the Company and Fieldcrest Cannon. Additionally, each of the Company and Fieldcrest Cannon, in connection with its systems replacement project, identified certain other payroll, manufacturing and warehousing systems to be replaced with software applications from other vendors. The Company believes that the software applications purchased in connection with these business replacement projects are Year 2000 compliant. Following the acquisition of Fieldcrest Cannon, the independent systems replacement projects of the Company and Fieldcrest Cannon were combined, and the combined project (the "Systems Replacement Project") is ongoing with an estimated completion date during the third quarter of fiscal year 1999. The extension of the estimated completion date from the Company's previous estimate of June 1999 is due primarily to acquisitions made in the latter half of fiscal year 1998 as well as software customizations required at certain of the Company's facilities, both of which have broadened the original scope of the project. It is estimated that over 95% of the development of the Oracle software applications is complete, with the implementation of the financial application having been substantially completed as of October 1998. The Company's payroll conversion was completed during the first quarter of fiscal year 1999. The manufacturing and warehousing applications require unique customization to meet the specific needs of each plant; therefore, the development and implementation of this software is expected to continue into the third quarter of fiscal year 1999. YEAR 2000 PLAN In addition to the Systems Replacement Project, the Company, as part of its Year 2000 compliance program, has developed a specific plan (the "Year 2000 Plan") to help ensure that the Company is not adversely affected by the Year 2000 issue. The Year 2000 Plan is divided into the following four major components (each, a "Component"): (1) Information Technology Systems ("IT Systems"); (2) Information Technology Infrastructure ("IT Infrastructure"); (3) Process Control and Instrumentation ("PC&I"); and (4) third party suppliers and customers ("External Agents"). The Year 2000 Plan is being implemented with respect to each Component in the following six general phases: (1) inventory Year 2000 items; (2) assign priorities to identified items; (3) assess the impact of items determined not to be Year 2000 compliant; (4) convert or replace material items that are determined not to be Year 2000 compliant; (5) test material items; and (6) design and implement contingency and business continuation plans for each location. Additionally, the Company retained an independent third party, in the first quarter of fiscal year 1999, to review the Company's Year 2000 Plan and make recommendations as needed. This study is underway with the results to be provided to the Company during the second quarter of fiscal year 1999. For purposes of the Year 2000 Plan, "material items" are those believed by the Company to have a risk involving the safety of individuals, and that may cause damage to property or the environment or significantly impair the Company's ability to manufacture and ship its products. The inventory and priority assessment phases were completed with respect to each Component of the Year 2000 Plan in May 1998. The remainder of the Year 2000 Plan is ongoing, the majority of which will be completed during the third quarter of fiscal year 1999. However, the Company will continue to monitor, review and perform testing in each phase through the end of fiscal year 1999. IT SYSTEMS. IT Systems are comprised primarily of applications software. The Company's applications software is being remediated primarily through the Systems Replacement Project. Applications software that is not remediated through the Systems Replacement Project and is not Year 2000 compliant is being converted internally through the use of custom programming or replaced by the supplier of such software. The Company estimates that the conversion phase with respect to IT Systems was approximately 90% complete as of February 1999 and the remaining conversions will be completed during the third quarter of fiscal year 1999. The Company's estimate remains at 90% due to the software customizations 22 and the additional requirements in converting the newly acquired businesses discussed above. The testing phase with respect to converted software is ongoing and will continue through the end of fiscal year 1999. Vendor software replacements and upgrades are on schedule for completion by June 1999 for the majority of the plant conversions; however, certain vendor software upgrades will not be complete until the third quarter of fiscal year 1999. The testing phase with respect to replacement software is conducted as the software is replaced and will continue through the end of the year. Contingency planning with respect to IT Systems is ongoing with high level planning expected to be completed during the second quarter of fiscal year 1999. Detailed refinement of these plans will continue into the third and fourth quarters, as other system conversions are completed. IT INFRASTRUCTURE. IT Infrastructure consists of hardware and systems software other than applications software. The implementation of the Year 2000 Plan with respect to IT Infrastructure is on schedule, and the Company estimates that approximately 90% of the scheduled activities with respect to IT Infrastructure had been completed as of February 1999. As discussed above, the Company's estimate remains at 90%, due to software customizations and acquisitions broadening the scope of the project. This Component is expected to be substantially complete during the third quarter of fiscal year 1999. The testing phase will continue as the IT Infrastructure is remediated, upgraded or replaced. Contingency planning with respect to IT Infrastructure is ongoing with development and enhancement continuing through the end of the year. PC&I. PC&I involves the hardware, software and associated embedded computer chips that are used in the operation of the Company's facilities. Plans detailing the tasks and resources required to implement the Year 2000 Plan with respect to PC&I are in place. The Company estimates that over 80% of the PC&I vendors have responded to questionnaires indicating their equipment is Year 2000 compliant, and 20% have reported non-compliance. The non-compliant systems have been remediated or are undergoing remediation. However, the Company continues to assess the needs of its newly acquired facilities and expects completion during the third quarter of fiscal year 1999. Contingency planning with respect to PC&I is ongoing and will be based primarily on the results of tests expected to be completed by the end of the third quarter of fiscal year 1999. EXTERNAL AGENTS. The External Agents Component of the Year 2000 Plan involves identifying and prioritizing critical business partners at the direct interface level and communicating with them about their plans and progress in addressing the Year 2000 issue. Detailed evaluations of the most critical third parties have been initiated. The Company is developing contingency plans based upon these evaluations. Contingency planning will continue with the Company's business partners throughout fiscal year 1999. The Company believes the development and implementation of this Component of the Year 2000 Plan is on schedule as of February 1999. COSTS TO ADDRESS THE BUSINESS SYSTEM REPLACEMENTS AND YEAR 2000 To date, the Company estimates it has spent $61.4 million of capital on the Systems Replacement Project of which a portion relates to expenditures made prior to the Merger. It is estimated that an additional $16.0 million of capital spending will be incurred in 1999 to complete the Systems Replacement Project. Expenses incurred to complete remediation of the Year 2000 Plan are not expected to have a material impact on the Company's results of operations or financial position. The Company believes operating cash flows will be adequate to fund any remaining expenditures related to the Systems Replacement Project and the Year 2000 Plan and does not anticipate these needs having a material effect on its liquidity or financial condition. RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES The Company's failure to resolve Year 2000 issues on or before December 31, 1999 could result in system failures or miscalculations causing disruption in operations, including, among other things, a temporary inability to process transactions, send invoices, send and/or receive e-mail and voice mail, or engage in similar normal business activities. Additionally, failure of third parties, upon whom the Company's business relies, to timely remediate their Year 2000 issues could result in disruption of the Company's supply of materials and parts, late, missed or unapplied payments, temporary disruptions in order processing and other general problems related to the Company's daily operations. While the Company believes the Year 2000 Plan will adequately address the Company's internal Year 2000 issues, until the Company receives responses from all significant business partners, the overall risks associated with the Year 2000 issue remain difficult to accurately assess and quantify, and there can be no assurances that the Year 2000 issue will not have a material adverse effect on the Company and its operations. 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on debt and foreign currency exchange rates. See additional disclosures about interest rate swap agreements in the Management's Discussion and Analysis of Financial Condition and Results of Operations above. The Company's market risk sensitive instruments are not entered into for trading purposes. The Company has not experienced any significant changes in market risk since January 2, 1999. The Company's exposure to interest rate risk consists of floating rate debt based on the London Interbank Offered Rate plus an adjustable margin. To lower or limit overall borrowing costs, the Company enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The interest rate swap agreements generally have one to two year terms. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value resulting from changes in market interest rates are not recognized in the consolidated financial statements. The annual impact on the Company's results of operations of a 100 basis point interest rate change on the January 2, 1999 outstanding balance of the variable rate debt would be approximately $5.3 million irrespective of any swaps associated with this debt. The Company's exposure to fluctuations in foreign currency exchange rates is due primarily to a foreign subsidiary domiciled in Canada. The Company's Canadian subsidiary uses the Canadian dollar as its functional currency. The Company generally does not use financial derivative instruments to hedge foreign currency exchange rate risks. The Canadian subsidiary is not material to the Company's consolidated results of operations; therefore, the impact of a 10% change in the exchange rate at January 2, 1999 would not have a significant impact on the Company's results of operations or financial position. 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 None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this Item 10 is set forth at pages 6 through 9 of the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement") under the captions "Director Proposals - Election of Directors" and "Stock Ownership of Management and Certain Beneficial Owners - --Section 16(a) Beneficial Ownership Reporting Compliance" and at page 12 of the 1999 Proxy Statement under the caption "Executive Officers," and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth at pages 11 through 12 and pages 13 through 26 of the 1999 Proxy Statement under the captions "Information Concerning the Board of Directors --Compensation of Directors" and "Executive Compensation" (excluding the information set forth at pages 13 through 17 under the caption "Executive Compensation --Report of the Compensation Committee on Executive Compensation") and incorporated herein by reference. 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth at pages 4 through 5 of the 1999 Proxy Statement under the caption "Stock Ownership of Management and Certain Beneficial Owners" and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is set forth at pages 24 through 26 of the 1999 Proxy Statement under the captions "Executive Compensation - --Employment Agreements" and "--Certain Transactions" and incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. CONSOLIDATED FINANCIAL STATEMENTS: Page Independent Auditors' Report....................................F-2 Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999............................................F-3 Consolidated Statements of Earnings for the years ended December 28, 1996, January 3, 1998 and January 2, 1999.........F-4 Consolidated Statements of Shareholders' Equity for the years ended December 28, 1996, January 3, 1998 and January 2, 1999................................................F-5 Consolidated Statements of Cash Flows for the years ended December 28, 1996, January 3, 1998 and January 2, 1999.........F-6 Notes to Consolidated Financial Statements......................F-7 2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule of the Company for the fiscal years ended December 28, 1996, January 3, 1998 and January 2, 1999 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of the Company: 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 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., 25 and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-36663)) 3.1 Restated Articles of Incorporation of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 4.1 Specimen of Certificate evidencing Common Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 1996) 4.2 Specimen of Certificate evidencing Series A Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 4.3 Indenture, dated November 12, 1996 (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 4.4 Indenture, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 4.5 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 4.6 Second Supplemental Indenture, dated as of July 28, 1998, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.1 Amended and Restated Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.2 First Amendment to Amended and Restated Credit Agreement, dated as of June 19, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.3 Second Amendment to Amended and Restated Credit Agreement, dated as of July 28, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.4 Third Amendment to Amended and Restated Credit Agreement, dated as of March 12, 1999, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent 26 10.5 Term Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named herein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.6 First Amendment to Term Credit Agreement, dated as of June 19, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.7 Second Amendment to Term Credit Agreement, dated as of July 28, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.8 Preferred Stock Purchase Agreement, dated as of September 10, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated September 10, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.9 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of November 21, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated November 21, 1997) 10.10 Purchase Agreement, dated December 15, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.11 Purchase Agreement Supplement, dated December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.12 Registration Rights Agreement, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.7 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.13 Registration Rights Agreement Supplement, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.8 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.14 Registration Rights Agreement, dated as of November 12, 1996, by and among Pillowtex Corporation, each domestic subsidiary of Pillowtex Corporation, and NationsBanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by reference to Exhibit 10.59 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 10.15 Sublicense Agreement, dated as of July 1, 1998, between Pillowtex Corporation and the Ralph Lauren Home Collection (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 27 10.16 Lease Agreement, dated as of September 18, 1995, between Pillowtex Corporation and Sanwa Business Credit Corp. (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q, as amended, for the quarter ended September 30, 1995) 10.17 Agreement of Lease, dated May 23, 1995, between Ten Seventy One Joint Venture and Pillowtex Corporation (incorporated by reference to Exhibit 10.66 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 1995) 10.18 Lease, dated as of November 26, 1996, by and among Torfeaco Industries Limited and Standa Investment Limited (incorporated by reference to Exhibit 10.14 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.19 Indemnity Agreement, dated as of November 26, 1996, between Torfeaco Industries Limited and Standa Investment Limited (incorporated by reference to Exhibit 10.15 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.20 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)) 10.21 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) 10.22 Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.23 Agreement for Modification and Extension of Lease between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.19 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.24 Form of Equipment Leasing Agreement between BTM Financial & Leasing Corporation B-4 and Beacon Manufacturing Company, Manetta Home Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as of June 14, 1996 (incorporated by reference to Exhibit 10 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 10.25* Employment Agreement dated as of January 1, 1993, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.26* Amendment to Employment Agreement, dated as of July 26, 1993, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.26 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.27* Amendment to Employment Agreement, dated as of January 20, 1998, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.28* 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)) 10.29* Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.36 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 28 10.30* Split Dollar Life Insurance Agreement between Pillowtex Corporation and Charles M. Hansen, Jr. dated July 26, 1993 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.31* Pillowtex Corporation 1993 Stock Option Plan (incorporated by reference to Appendix A to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.32* Form of Employment Agreement entered into between Pillowtex Management Services Company and each of Jeffrey D. Cordes, and Scott E. Shimizu (incorporated by reference to Exhibit 10.28 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.33* Form of Employment Agreement entered into between Pillowtex Management Services Company and Ronald M. Wehtje dated November 9, 1998 10.34* Form of Employment Agreement entered into between Fieldcrest Cannon, Inc. and A. Allen Oakley, dated October 9, 1998 10.35* Form of Employment Agreement dated as of January 1, 1998, between Pillowtex Management Services Company and Kevin M. Finlay (incorporated by reference to Exhibit 10.29 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.36* Pillowtex Corporation Supplemental Executive Retirement Plan, effective as of January 1, 1997 (incorporated by reference to Exhibit 10.1.44 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 33-36663) filed on September 29, 1997) 10.37* Pillowtex Corporation Management Incentive Plan (incorporated by reference to Appendix B to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.38* Pillowtex Corporation Deferred Compensation Plan, effective as of February 9, 1998 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.39* Pillowtex Corporation Executive Medical Expense Reimbursement Plan, effective as of January 1, 1998 (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.40 Indenture, dated as of March 15, 1987, relating to the 6% Convertible Subordinated Debentures Due 2012 (incorporated by reference to Exhibit 4.9 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-12436)) 10.41 Yarn Purchase Agreement between Parkdale Mills, Incorporated and Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 21.1 List of Pillowtex Corporation's Principal Operating Subsidiaries 23.1 Consent of KPMG LLP 23.2 Consent of Deloitte & Touche LLP 27 Financial Data Schedule 99.1 Consolidated Financial Statements of The Leshner Corporation as of and for the fiscal years ended September 30, 1995, September 28, 1996 and September 27, 1997 29 99.2 Consolidated Balance Sheets of The Leshner Corporation as of June 28, 1998 and June 29, 1997 and the Related Consolidated Statements of Operations and Earnings Retained in the Business and Cash Flows for the Nine-Month Periods ended June 28, 1998 and June 29, 1997 - ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. (b) Reports On Form 8-K. The Company did not file any Current Reports on Form 8-K during the quarter ended January 2, 1999. 30 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 29, 1999. PILLOWTEX CORPORATION By /s/ Charles M. Hansen, Jr. Charles M. Hansen, Jr. Chairman of the Board and 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 in the capacities indicated on March 29, 1999. Signatures Title /s/ Charles M. Hansen, Jr. Chairman of the Board and Chief - ------------------------------ Executive Officer; Director Charles M. Hansen, Jr. (Principal Executive Officer) /s/ Ronald M. Wehtje Senior Vice President and Chief Financial - ------------------------------ Officer Ronald M. Wehtje (Principal Financial and Accounting Officer) /s/ Jeffrey D. Cordes Director - ------------------------------ Jeffrey D. Cordes /s/ Kevin M. Finlay Director - ------------------------------ Kevin M. Finlay /s/ Scott E. Shimizu Director - ------------------------------ Scott E. Shimizu /s/ Mary R. Silverthorne Director - ------------------------------ Mary R. Silverthorne /s/ William B. Madden Director - ------------------------------ William B. Madden /s/ M. Joseph McHugh Director - ------------------------------ M. Joseph McHugh /s/ Paul G. Gillease Director - ------------------------------ Paul G. Gillease /s/ Ralph W. La Rovere Director - ------------------------------ Ralph W. La Rovere /s/ Mark A. Petricoff Director - ------------------------------ Mark A. Petricoff 31 PILLOWTEX CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements and Financial Statement Schedule Independent Auditors' Report..............................................F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999.....................................................F-3 Consolidated Statements of Earnings for the years ended December 28, 1996, January 3, 1998 and January 2, 1999..............F-4 Consolidated Statements of Shareholders' Equity for the years ended December 28, 1996, January 3, 1998 and January 2, 1999........F-5 Consolidated Statements of Cash Flows for the years ended December 28, 1996, January 3, 1998 and January 2, 1999..............F-6 Notes to Consolidated Financial Statements...........................F-7 Financial Statement Schedule for the years ended December 28, 1996, January 3, 1998 and January 2, 1999: 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 generally accepted auditing standards. 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 January 3, 1998 and January 2, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended January 2, 1999, in conformity with generally accepted accounting principles. 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. KPMG LLP Dallas, Texas February 9, 1999 F-2 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets January 3, 1998 and January 2, 1999 (Dollars in thousands, except for par value) ASSETS 1997 1998 ----------- ----------- Current assets: Cash and cash equivalents $ 4,604 $ 5,561 Receivables (note 11): Trade, less allowances of $14,770 in 1997 and $21,117 in 1998 221,185 246,348 Other 16,468 13,124 Inventories (notes 6 and 11) 359,751 434,281 Assets held for sale 32,614 4,058 Prepaid expenses 6,335 3,785 ----------- ----------- Total current assets 640,957 707,157 Property, plant and equipment, net (notes 7 and 11) 488,841 629,205 Intangible assets, at cost less accumulated amortization of $5,111 in 1997 and $11,866 in 1998 258,867 289,829 Other assets 21,521 27,963 ----------- ----------- $1,410,186 $1,654,154 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable (note 8) $ 111,202 $ 127,575 Accrued expenses (note 8) 113,575 96,250 Deferred income taxes (note 12) 16,068 22,978 Current portion of long-term debt (note 11) 5,616 12,421 ----------- ----------- Total current liabilities 246,461 259,224 Long-term debt, net of current portion (note 11) 785,383 944,493 Deferred income taxes (note 12) 66,340 96,013 Noncurrent liabilities (note 10) 52,413 53,434 ----------- ----------- Total liabilities 1,150,597 1,353,164 Series A redeemable convertible preferred stock, $.01 par value; 65,000 shares issued and outstanding (note 13) 62,882 63,057 Shareholders' equity (notes 11 and 14): Preferred stock, $.01 par value; authorized 20,000,000 shares; only Series A issued - - Common stock, $.01 par value; authorized 30,000,000 shares; 13,967,715 and 14,126,595 shares issued and outstanding in 1997 and 1998, respectively 140 141 Additional paid-in capital 151,095 155,811 Retained earnings 46,328 83,650 Currency translation adjustment (856) (1,669) ----------- ----------- Total shareholders' equity 196,707 237,933 Commitments and contingencies (notes 9, 10 and 15) ----------- ----------- $1,410,186 $1,654,154 =========== ===========
See accompanying notes to consolidated financial statements. F-3 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 28, 1996, January 3, 1998 and January 2, 1999 (Amounts in thousands, except for per share data) 1996 1997 1998 ---------- ---------- ---------- Net sales $ 490,655 $ 579,999 $1,509,841 Cost of goods sold 411,048 485,679 1,228,463 ---------- ---------- ---------- Gross profit 79,607 94,320 281,378 Selling, general and administrative expenses 41,445 52,090 137,307 Restructuring charge (note 3) - 5,986 1,539 ---------- ---------- ---------- Earnings from operations 38,162 36,244 142,532 Interest expense 13,971 22,470 72,288 ---------- ---------- ---------- Earnings before income taxes and extraordinary items 24,191 13,774 70,244 Income taxes (note 12) 9,459 5,538 27,389 ---------- ---------- ---------- Earnings before extraordinary items 14,732 8,236 42,855 Extraordinary items, net of income tax benefit of $391 and $613 in 1996 and 1997, respectively (note 11) (609) (919) - ---------- ---------- ---------- Net earnings 14,123 7,317 42,855 Preferred dividends and accretion (note 13) - 85 2,097 ---------- ---------- ---------- Earnings available for common shareholders $ 14,123 $ 7,232 $ 40,758 ========== ========== ========== Basic earnings per common share (note 4): Before extraordinary items $ 1.39 $ .75 $ 2.89 Extraordinary items (.06) (.08) - ---------- ---------- ---------- Basic earnings per common share $ 1.33 $ .67 $ 2.89 ========== ========== ========== Weighted average common shares outstanding - basic 10,618 10,837 14,082 ========== ========== ========== Diluted earnings per common share (note 4): Before extraordinary items $ 1.39 $ .74 $ 2.52 Extraordinary items (.06) (.08) - ---------- ---------- ---------- Diluted earnings per common share $ 1.33 $ .66 $ 2.52 ========== ========== ========== Weighted average common shares outstanding - diluted 10,634 11,086 17,653 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 28, 1996, January 3, 1998 and January 2, 1999 (Dollars in thousands, except for per share data) Common Stock -------------------- Additional Currency Total Number Par paid-in Retained translation shareholders' of shares value capital earnings adjustment equity ------------ ----- --------- -------- -------- --------- Balances at December 30, 1995 10,617,722 $106 $ 58,427 $29,666 $ (209) $ 87,990 Comprehensive income: Net earnings - - - 14,123 - 14,123 Currency translation adjustment - - - - 15 15 --------- Total comprehensive income 14,138 --------- Common stock dividends declared ($.20 per share) - - - (2,124) - (2,124) ------------ ----- --------- -------- -------- --------- Balances at December 28, 1996 10,617,722 106 58,427 41,665 (194) 100,004 Comprehensive income: Net earnings - - - 7,317 - 7,317 Currency translation adjustment - - - - (662) (662) --------- Total comprehensive income 6,655 --------- Issuance of common stock - acquisitions (note 5) 3,175,181 32 89,676 - - 89,708 Exercise of stock options, including tax benefits of $517 (note 14) 174,812 2 2,992 - - 2,994 Preferred stock dividends (note 13) - - - (85) - (85) Common stock dividends declared ($.24 per share) - - - (2,569) - (2,569) ------------ ----- --------- -------- -------- --------- Balances at January 3, 1998 13,967,715 140 151,095 46,328 (856) $196,707 Comprehensive income: Net earnings - - - 42,855 - 42,855 Currency translation adjustment - - - - (813) (813) --------- Total comprehensive income 42,042 --------- Exercise of stock options, including tax benefits of $1,637 (note 14) 154,458 1 4,545 - - 4,546 Issuance of common stock - convertible debentures 4,422 - 171 - - 171 Accretion of Series A Preferred Stock (note 13) - - - (216) - (216) Preferred stock dividends (note 13) - - - (1,934) - (1,934) Common stock dividends declared ($.24 per share) - - - (3,383) - (3,383) ------------ ----- --------- -------- -------- --------- Balances at January 2, 1999 14,126,595 $141 $155,811 $83,650 $(1,669) $237,933 ============ ===== ========= ======== ======== =========
See accompanying notes to consolidated financial statements. F-5 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 28, 1996, January 3, 1998 and January 2, 1999 (Dollars in thousands) 1996 1997 1998 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 14,123 $ 7,317 $ 42,855 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 12,775 16,064 54,021 Extraordinary items 609 919 - Restructuring charge - 5,986 - Deferred income taxes 2,030 (2,320) 22,058 Loss (gain) on disposal of property, plant and equipment 40 (1,052) 166 Changes in operating assets and liabilities, excluding effects of businesses acquired: Trade receivables (7,040) (8,173) (16,914) Inventories (26,107) (3,900) (56,372) Accounts payable 6,267 (6,236) 12,438 Other assets and liabilities (1,983) 8,781 (3,642) ---------- ---------- ---------- Net cash provided by operating activities 714 17,386 54,610 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 19 4,926 12,308 Purchases of property, plant and equipment (21,040) (20,567) (133,620) Proceeds from disposal of assets held for sale - - 25,935 Payments for businesses purchased, net of cash acquired (4,112) (535,222) (106,746) ---------- ---------- ---------- Net cash used in investing activities (25,133) (550,863) (202,123) ---------- ---------- ---------- Cash flows from financing activities: Increase (decrease) in checks not yet presented for payment (2,526) 6,583 (247) Borrowings on revolving credit loans 62,000 200,600 470,400 Repayments of revolving credit loans (66,600) (146,600) (402,600) Proceeds from the issuance of long-term debt 125,635 435,000 100,000 Retirement of long-term debt (89,357) (2,727) (14,127) Payment of debt and equity issuance costs (3,000) (19,703) (1,849) Proceeds from issuance of redeemable convertible preferred stock - 65,000 - Dividends paid (2,124) (2,569) (5,402) Proceeds from exercise of stock options - 2,477 2,295 ---------- ---------- ---------- Net cash provided by financing activities 24,028 538,061 148,470 ---------- ---------- ---------- Net change in cash and cash equivalents (391) 4,584 957 Cash and cash equivalents at beginning of year 411 20 4,604 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 20 $ 4,604 $ 5,561 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-6 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (1) General Pillowtex Corporation (the "Parent") and its subsidiaries (collectively, with Parent, (the "Company")), is a North American designer, manufacturer and marketer of home textile products, offering a full line of bed pillows, blankets, sheets, pillow cases, mattress pads, down comforters, towels, bath rugs, kitchen textiles and other home textile products. As a leading supplier across all distribution channels, the Company sells its products to most major mass merchants, wholesale clubs, department stores, specialty retailers, catalogs, institutions and international customers. On December 19, 1997, the Company and Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), a textile manufacturer primarily involved in the production of home furnishing products, principally towels and sheets, entered into a merger agreement whereby a wholly owned subsidiary of the Company was merged with and into Fieldcrest Cannon (the "Merger"). Following consummation of the Merger, Fieldcrest Cannon became a wholly owned subsidiary of the Company (see notes 5 and 11). (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the financial statements of Pillowtex Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Fiscal Year The Company's fiscal year ends on the Saturday closest to December 31. Fiscal year 1996 ended December 28, 1996, fiscal year 1997 ended January 3, 1998 and fiscal year 1998 ended January 2, 1999. Such years include the results of operations for 52, 53 and 52 weeks, respectively. (c) Statements of Cash Flows For purposes of reporting cash flows, the Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Supplemental disclosures of cash flow information for fiscal years 1996, 1997 and 1998 follow: 1996 1997 1998 --------- --------- --------- Interest paid $ 15,234 $ 19,207 $ 73,223 ========= ========= ========= Income taxes paid (received) $ 6,483 $ 7,533 $ (5,042) ========= ========= ========= F-7 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (d) Inventories Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) and last-in, first-out (LIFO) methods (see note 6). (e) Derivative Financial Instruments The Company enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the consolidated financial statements. (f) Property, Plant and Equipment Depreciation is provided generally using the straight-line method in amounts sufficient to amortize the cost of the assets over their estimated useful lives as follows: Buildings and improvements 10-39 years Machinery and equipment 5-15 years Data processing equipment 5 years Furniture and fixtures 5-8 years Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the remaining term of the lease using the straight-line method. Renewals and betterments are capitalized and depreciated over the remaining life of the specific property unit. (g) Intangibles Intangible assets consist primarily of goodwill ($243.1 million and $252.0 million net of accumulated amortization of $4.9 million and $10.9 million as of January 3, 1998 and January 2, 1999, respectively) recorded in connection with the Company's acquisitions (see note 5). Goodwill represents the excess of purchase price over the fair value of net identifiable tangible and intangible assets acquired. Amortization is provided using the straight-line method principally over an estimated useful life of 40 years. Other intangible assets consist principally of trademarks and deferred debt issuance costs. Trademarks are amortized using the straight-line method over their useful lives which range from 5 to 40 years. Debt issuance costs are amortized using the interest method over their useful lives which range from 6 to 12 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. F-8 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) The Company believes no impairment of goodwill has occurred and that no reduction of the estimated useful lives is warranted. (h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value (see note 11 regarding the fair value of debt). (j) Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Stock Option Plan In accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", the Company applies the accounting provisions of Accounting Principles Board("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations and provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied. Compensation expense is recorded only if the current market price of the underlying stock exceeds the exercise price on the date of grant. (l) Revenue Recognition Revenue is recognized upon shipment of products. Reserves for sales returns and allowances are recorded in the same accounting period as the related revenues. (m) Advertising Expenses The Company expenses advertising costs as incurred. Advertising F-9 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) expense was approximately $3.2 million, $3.8 million and $19.9 million during fiscal years 1996, 1997 and 1998, respectively. (n) Earnings Per Share Basic earnings per share is computed by dividing earnings available for common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing (i) earnings available for common shareholders as adjusted to add back (if dilutive) convertible preferred dividends and accretion and the after-tax interest recognized in the period associated with convertible debt by (ii) the weighted average number of shares outstanding plus the number of dilutive additional shares that would have been outstanding if potentially dilutive securities had been issued. (o) Foreign Currency Translation and Transactions The Company's foreign subsidiaries use the local currency as the functional currency. The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates. Revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in the consolidated statements of earnings and were not material in any of the years presented. (p) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (q) Comprehensive Income On January 4, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net earnings and foreign currency translation adjustments and is presented in the consolidated statements of shareholders' equity. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year consolidated financial statements have been conformed to the requirements of SFAS No. 130. (3) Restructuring Charge During the fourth quarter of 1997, the Company committed to a plan to consolidate its blanket production into its facilities in Swannanoa, North Carolina and Westminster, South Carolina. The aggregate cost of this restructuring was estimated to be approximately $7.5 million, of which F-10 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) approximately $6.0 million (associated with the write-down of certain assets and other expenses) was accrued in fiscal year 1997, and the remaining $1.5 million (associated with employee severance) was expensed in the first quarter of fiscal year 1998. Expenditures related to the restructuring are substantially complete as of the end of fiscal year 1998. (4) Earnings Per Share The following table reconciles the numerators and denominators of basic and diluted earnings per share for fiscal years 1997 and 1998. The only reconciling item for fiscal year 1996 was the approximately 16,000 share dilutive effect of stock options. 1997 1998 ---------------- ---------------- Earnings Shares Earnings Shares -------- ------ -------- ------ Basic - earnings available for common shareholders $ 7,232 10,837 $40,758 14,082 Effect of dilutive securities: Stock options - 132 - 207 Convertible debentures - - 1,577 656 Convertible preferred stock 85 117 2,097 2,708 ------- ------- ------- ------- Diluted - earnings available for common shareholders plus assumed conversions $ 7,317 11,086 $44,432 17,653 ======= ====== ======= ======
For fiscal years 1996, 1997 and 1998, options to purchase 36,000 shares, zero shares and 0.5 million shares, respectively, were not included in the computations of diluted earnings per share because inclusion would have been antidilutive for the respective periods. (5) Acquisitions Businesses Acquired On July 28, 1998, the Company acquired the net assets of The Leshner Corporation ("Leshner"), a 91 year-old manufacturer of towels and terry-related products, for a purchase price of $41.8 million in cash (including acquisition costs). In connection with the acquisition, the Company retired $32.5 million of outstanding Leshner debt. The acquisition and related debt retirement were financed through the term loan under the senior credit facilities (see note 11). The purchase price exceeded the fair value of net assets acquired by approximately $18.1 million, which is being amortized on a straight line basis over 40 years. The pro forma effects of such transaction, as if it had occurred at the beginning of fiscal year 1997, are not significant. On December 19, 1997, the Company acquired all of the outstanding common and preferred stock of Fieldcrest Cannon in exchange for cash of $335.9 million (including acquisition costs) and approximately 3.2 million shares F-11 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) of common stock of the Company. In connection with the Merger, the Company retired $199.0 million and assumed $107.9 million of outstanding Fieldcrest Cannon debt. The purchase price exceeded the fair value of net assets acquired by approximately $184.8 million, which is being amortized on a straight line basis over 40 years. The acquisitions have been accounted for under the purchase method of accounting and, accordingly, results of operations of Fieldcrest Cannon and Leshner have been included in the consolidated statements of earnings since their respective acquisition dates. Unaudited consolidated condensed pro forma information for fiscal years 1996 and 1997, as if the Fieldcrest Cannon acquisition had occurred on the first day of fiscal year 1996 follow: 1996 1997 ----------- ---------- Net sales $1,522,000 $1,559,000 Earnings before extraordinary items 12,396 18,941 Net earnings 10,868 18,941 Basic earnings per share .65 1.22 Diluted earnings per share .64 1.13
The pro forma results of operations are presented pursuant to applicable accounting rules relating to business combinations and are not necessarily indicative of the actual results that would have been achieved had this transaction occurred as of the beginning of fiscal year 1996, nor are they indicative of future results of operations. Assets Acquired On November 18, 1996, the Company purchased certain assets of Fieldcrest Cannon's blanket operations for $28.3 million in cash. The acquisition included selected equipment ($6.3 million), inventory ($18.0 million) and an exclusive long-term license for the use of certain trademarks and tradenames ($4.0 million). (6) Inventories Inventories consist of the following at January 3, 1998 and January 2, 1999: 1996 1997 ---- ---- Finished goods $ 163,905 $218,439 Work-in-process 120,063 134,428 Raw materials 54,790 58,306 Supplies 20,993 23,108 --------- -------- $ 359,751 $434,281 ========= ========
F-12 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) At January 3, 1998 and January 2, 1999, 40% and 51%, respectively, of inventories were valued at LIFO which approximates current replacement cost. The remaining inventories are valued at FIFO. Inventories are net of related reserves of approximately $9.4 million and $15.3 million at January 3, 1998 and January 2, 1999,respectively. (7) Property, Plant and Equipment Property, plant and equipment are stated at cost and consist of the following at January 3, 1998 and January 2, 1999: 1996 1997 -------- -------- Land $ 10,050 $ 28,812 Buildings and improvements 171,857 182,414 Machinery and equipment 288,069 370,581 Data processing equipment 11,994 29,325 Furniture and fixtures 4,393 6,346 Leasehold improvements 2,434 4,020 Projects in progress 55,915 106,444 -------- -------- 544,712 727,942 Less accumulated depreciation and amortization (55,871) (98,737) -------- -------- $488,841 $629,205 ======== ========
Interest costs of $0.6 million and $4.7 million, incurred during fiscal years 1997 and 1998, respectively, for the purchase and construction of qualifying fixed assets, were capitalized and are being amortized over the related assets' estimated useful lives. (8) Accounts Payable and Accrued Expenses Accounts payable includes $39.3 million and $39.1 million at January 3, 1998 and January 2, 1999, respectively, of checks not yet presented for payment on zero balance disbursement accounts. Accrued expenses consist of the following at January 3, 1998 and January 2, 1999: 1997 1998 -------- -------- Employee-related compensation and benefits $ 39,790 $ 24,974 Insurance and worker's compensation 19,916 24,794 Customer rebates 13,534 14,490 Interest and commitment fees 6,353 7,036 Advertising 4,361 4,435 Royalties and commissions 4,951 4,276 Accrued restructuring 5,484 - Other accrued expenses 19,186 16,245 -------- -------- $113,575 $ 96,250 ======== ========
F-13 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (9) Pension Plans The Company has defined benefit pension plans covering substantially all of its employees with certain union employees not covered under these plans. The plans provide pension benefits based on the employees' compensation and service. The Company's funding policy provides for annual contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. Pension plan assets consist of investments in publicly traded corporate common stocks and bonds, as well as U.S. government obligations. Summarized information for the plans follows: 1997 1998 ---------- ---------- Change in benefit obligation: Benefit obligation at beginning of year $ 7,286 $ 306,950 Acquisitions 297,076 7,240 Service cost 1,058 7,730 Interest cost 1,414 21,070 Actuarial loss 1,118 13,869 Benefits paid (1,002) (18,920) ---------- ---------- Benefit obligation at end of year $ 306,950 $ 337,939 ========== ========== Change in plan assets: Fair value of plan assets at beginning of year $ 6,275 $ 307,772 Acquisitions 298,600 8,903 Actual return on plan assets 3,114 35,085 Employer contributions 785 3,802 Benefits paid (1,002) (18,920) ---------- ---------- Fair value of plan assets at end of year $ 307,772 $ 336,642 ========== ========== Funded status: Benefit obligation $(306,950) $(337,939) Fair value of plan assets 307,772 336,642 Unrecognized transition obligation (52) (43) Unrecognized prior service cost 208 172 Unrecognized net actuarial (gain)/loss (186) 7,102 ---------- ---------- Prepaid benefit cost $ 792 $ 5,934 ========== ==========
F-14 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) 1996 1997 1998 ---------- ---------- ---------- Weighted average assumptions as of December 28, 1996, January 3, 1998 and January 2, 1999: Discount rate 7.75% 7.00% 6.75% Expected return 8.50% 9.00-9.50% 9.00-9.50% Compensation increase rate 4.00% 4.00-4.50% 4.00% Components of net periodic pension cost: Service cost $ 766 $ 1,058 $ 7,730 Interest cost 523 1,414 21,070 Expected return on plan assets (458) (1,622) (28,503) Amortization of transition obligation (8) (8) (8) Amortization of prior service cost 35 35 35 ---------- ---------- ---------- Net periodic pension cost $ 858 $ 877 $ 324 ========== ========== ==========
The Company also sponsors employee savings plans which cover substantially all employees. The Company's matching provisions under these plans vary, with some matches being discretionary. The matching formulas of certain plans can be changed annually. In fiscal years 1996, 1997 and 1998, the Company incurred costs of $0.5 million, $0.1 million and $3.5 million, respectively, to provide matching contributions for plans with matching provisions. F-15 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (10) Postretirement Benefits Other Than Pensions The Company provides medical insurance premium assistance and life insurance benefits to retired employees of Fieldcrest Cannon. The medical and life insurance benefits provided under the plan are fixed amounts determined at the time of retirement and, thus, are unaffected by medical trend rates. Employees become eligible for these benefits when they reach retirement age while working for the Company. The plans are funded as benefits are paid. 1997 1998 --------- --------- Change in benefit obligation: Benefit obligation at beginning of year $ - $ 39,348 Acquisitions 39,260 - Service cost 35 709 Interest cost 114 2,466 Actuarial (gain)/loss 81 (538) Benefits paid (142) (3,895) --------- --------- Benefit obligation at end of year $ 39,348 $ 38,090 ========= ========= Change in plan assets: Fair value of plan assets at beginning of year $ - $ - Acquisitions - - Employer contributions 142 3,895 Benefits paid (142) (3,895) --------- --------- Fair value of plan assets at end of year $ - $ - ========= ========= Funded status: Benefit obligation $(39,348) $(38,090) Unrecognized net actuarial loss - (357) --------- --------- Accrued postretirement benefit cost included in noncurrent liabilities $(39,348) $(38,447) ========= ========= Weighted average assumptions as of January 3, 1998 and January 2, 1999: Discount rate 7.00% 6.75% Expected return N/A N/A Compensation increase rate 4.00% 4.00%
Net periodic postretirement benefit cost for fiscal year 1997 reflects only amounts from the Fieldcrest Cannon acquisition date through January 3, 1998. Components of net periodic postretirement cost: Service cost $ 35 $ 709 Interest cost 114 2,465 Amortization of actuarial gain - (181) ------- ------- Net periodic postretirement benefit cost $ 149 $2,993 ======= =======
F-16 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (11) Long-term Debt Long-term debt consists of the following at January 3, 1998 and January 2, 1999: 1997 1998 --------- --------- Revolver $115,000 $182,800 Term loans 250,000 348,750 9% Senior Subordinated Notes due 2007 185,000 185,000 10% Senior Subordinated Notes due 2006 125,000 125,000 6% convertible subordinated sinking fund debentures due in 2012 (effective rate of 8.72%, net of $17.4 million and $15.6 million in unamortized discount at January 3, 1998 and January 2, 1999, respectively) 95,126 88,594 Industrial revenue bonds with interest rates from 3.60% to 7.85% and maturities from January 4, 1999 through July 1, 2021; generally collateralized by land and buildings 18,050 19,528 Other debt 2,823 7,242 --------- --------- 790,999 956,914 Less current portion (5,616) (12,421) --------- --------- $785,383 $944,493 ========= =========
In December 1997, in connection with the Fieldcrest Cannon acquisition (see note 5), the Company entered into new senior revolving credit and term loan facilities (the "Facilities") with a group of financial and institutional investors for which NationsBank of Texas, N.A. ("NationsBank") acts as the agent. The Facilities consisted of a $350.0 million revolving credit facility (the "Revolver") and a $250.0 million term loan facility (the "Term Loan"). The Term Loan consisted of a $125.0 million Tranche A term loan (the "Tranche A Term Loan") and a $125.0 million Tranche B term loan (the "Tranche B Term Loan"). Effective July 28, 1998, the Company amended the Facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of Leshner allowing the Company to fund the transaction and reduce the Revolver. The Revolver and the Tranche A Term Loan expire December 31, 2003, and the Tranche B Term Loan expires December 31, 2004. The Revolver includes $55.0 million of availability for letters of credit. At January 2, 1999, $42.1 million of letters of credit were outstanding. Unused availability under the Revolver was $125.1 million at January 2, 1999. As of January 2, 1999, amounts outstanding under the Revolver and Tranche A Term Loan were subject to interest at a rate based, at the Company's option, upon either (i) the London Interbank Offered Rate plus a margin of up to 2.25% or (ii) NationsBank's Base Rate (as defined) plus a margin of up to .75%. The Tranche B Term Loan bears interest on a basis similar to the Tranche A Term Loan plus an additional margin ranging from .50% to 1.25%. These rates are subject to decrease based upon the Company's achievement of certain ratios of funded debt to earnings before interest, taxes, F-17 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) depreciation and amortization ("EBITDA"). The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities during fiscal year 1998 was 7.78%, and the effective rate at January 2, 1999 was 7.52%. The Facilities are guaranteed by each of the domestic subsidiaries of the Parent and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Parent and by 65% of the capital stock of the Parent's foreign subsidiaries. The Parent has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The Term Loan is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of the Company (except as specifically provided), 50% of the net cash proceeds of equity issuances by the Company or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the remaining installments of principal. The Facilities contain a number of financial, affirmative and negative covenants which, among other things, require maintenance of certain ratios of funded debt to EBITDA, and certain cash flow coverage ratios, and require the Company to maintain a minimum tangible net worth. Other covenants restrict, among other things, the Company's ability to incur additional debt, grant liens, engage in transactions with affiliates, make loans, advances and investments, pay dividends and other distributions to shareholders, dispose of assets, effect mergers, consolidations and dissolutions, and make certain changes in its business. At January 2, 1999, the Company was in compliance with all covenants under the Facilities. In connection with the December 1997 change in the Facilities, the Company's previous senior credit facility was extinguished and the associated unamortized deferred debt issuance costs of $0.9 million, net of related income tax benefit of $0.6 million, were charged to expense resulting in an extraordinary loss on debt extinguishment. In connection with the Merger, the Company issued $185.0 million of 9% Senior Subordinated Notes due 2007 (the "9% Notes") in a private offering. In March 1998, the Company completed an offer to exchange the unregistered 9% Notes previously sold in the private offering for an equal aggregate principal amount of registered 9% Notes. The 9% Notes are due December 15, 2007, with interest payable semiannually commencing June 15, 1998. The Company may at its option redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at a redemption price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%. The 9% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Facilities and rank pari passu to the 10% Senior Subordinated Notes described below. On November 12, 1996, the Company issued $125.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes") in a private offering. In March 1997, the Company completed F-18 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) an offer to exchange the unregistered 10% Notes previously sold in the private offering for an equal aggregate principal amount of registered 10% Notes. The 10% notes are due November 15, 2006, with interest payable semiannually commencing May 15, 1997. The Company used the proceeds from such offering to retire the outstanding indebtedness under the Company's previously existing term loan, to finance the acquisition of certain assets of Fieldcrest Cannon's blanket operations (see note 5), to temporarily reduce indebtedness under the previous revolving credit facility, and to acquire a warehouse facility. In connection with the retirement of the term loan, the Company charged the related unamortized deferred debt issuance costs to expense resulting in an extraordinary loss on debt extinguishment of $0.6 million, net of related income taxes of $0.4 million. The Company may, at its option, redeem the 10% Notes, in whole or in part, on or after November 15, 2001 at a redemption price of 105.0%, which declines 1.667% annually through November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Facilities. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the Facilities described above (see note 19). The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. Upon a change in control, the Company will be required to make an offer to repurchase all outstanding 9% Notes and 10% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. The 9% Notes and the 10% Notes are subject to certain covenants which restrict, among other things, the Company's ability to incur additional indebtedness and issue preferred stock, grant liens to secure subordinated indebtedness, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, engage in certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 9% Notes and the 10% Notes, merge or consolidate with any other person, sell stock of subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. At January 2, 1999, the Company was in compliance with all covenants under the 9% Notes and the 10% Notes. As of January 3, 1998, the Company had approximately $125.0 million of notional amounts covered under interest rate swap agreements whereby the Company exchanged fixed rates for floating rates. The weighted average fixed and floating rates were 10.0% and 9.5%, respectively. As of January 2, 1999, the Company had approximately $345.0 million of notional amounts covered under interest rate swap agreements whereby the Company exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.70% and F-19 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) 5.26%, respectively. The fair values of the swaps at January 3, 1998 and January 2, 1999 were zero and $2.1 million, respectively. The fair value of $2.1 million was in favor of the Company. The interest rates on indebtedness other than the Facilities differ from current market rates. The carrying and fair values of these financial instruments, estimated by discounting the future cash flows using rates currently available or obtaining market prices as of January 3, 1998 and January 2, 1999 are shown below. The Facilities are at current market rates; therefore, their carrying values approximate fair value. 1997 1998 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Revolver $115,000 $115,000 $182,800 $182,800 Term loans 250,000 250,000 348,750 348,750 9% Senior Subordinated Notes due 2007 185,000 185,000 185,000 189,625 10% Senior Subordinated Notes due 2006 125,000 132,645 125,000 132,500 6% convertible subordinated sinking fund debentures due 2012 95,126 95,126 88,594 85,962 Industrial revenue bonds and other debt 20,873 20,888 26,770 24,120
Aggregate maturities of long-term debt for each of the five years following January 2, 1999 and thereafter, assuming the unpaid principal balance at January 2, 1999 under the Revolver remains unchanged, are as follows: Fiscal year Amount ----------- -------- 1999 $ 12,421 2000 25,904 2001 37,474 2002 45,791 2003 53,970 Thereafter 796,955 (12) Income Taxes The components of income tax expense, excluding the income tax benefit related to extraordinary items, are as follows: 1996 1997 1998 -------- -------- -------- U.S. federal - current $ 6,604 $ 6,385 $ 3,916 U.S. federal - deferred 1,793 (1,478) 17,881 State and foreign taxes - current 825 1,473 1,415 State and foreign taxes - deferred 237 (842) 4,177 -------- -------- -------- $ 9,459 $ 5,538 $27,389 ======== ======== ========
F-20 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) A reconciliation of income tax expense computed using the U.S. federal statutory income tax rate of 35% of earnings before income taxes and extraordinary loss to the actual provision for income taxes follows: 1996 1997 1998 -------- -------- -------- Expected tax at U.S. statutory rate $ 8,467 $ 4,821 $ 24,585 Amortization of goodwill 135 188 1,695 State and foreign taxes, net of federal benefit 555 477 933 Other 302 52 176 -------- -------- -------- $ 9,459 $ 5,538 $ 27,389 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of January 3, 1998 and January 2, 1999 are presented below: 1997 1998 ---------- ---------- Net deferred tax assets: Package design costs $ 351 $ 614 Accrued employee benefits 685 4,423 State deferred taxes 957 1,132 Accruals and allowances 24,537 23,527 Other 20,789 18,192 ---------- ---------- Net deferred tax assets 47,319 47,888 ---------- ---------- Deferred tax liabilities: Inventory costs and reserves (42,716) (49,242) Depreciable assets (79,508) (97,505) State deferred income taxes (6,673) (8,901) Trademarks - (10,500) Goodwill (830) (731) ---------- ---------- Deferred tax liabilities (129,727) (166,879) ---------- ---------- Net deferred tax liabilities $ (82,408) $(118,991) ========== ==========
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 not 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 at January 2, 1999 to be realized as a result of the reversal of existing taxable temporary differences and the generation of taxable income. F-21 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (13) Redeemable Convertible Preferred Stock On December 19, 1997, the Company issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65.0 million less $2.1 million of issue costs. Accretion is being recognized to increase the recorded amount to the redemption amount over the period to the redemption date. Dividends accrue from the issue date through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000, the rate at which dividends will accrue may increase to 7% or 10% depending on the Company's earnings per share for the 1999 fiscal year. The Company may also be required to pay a one-time cumulative dividend in cash or Series A Preferred Stock, from the issue date through December 31, 1999,equal to the difference between the dividends calculated at the 3% rate and dividends calculated at either the 7% or 10% rate, if the fiscal year 1999 earnings per share are less than the predetermined targets. The Series A Preferred Stock is convertible, at any time at the option of the holder, into common stock at a rate calculated by dividing $1,000 plus unpaid dividends per share by $24.00 per share. Each share of Series A Preferred Stock is subject to mandatory redemption in ten and one-half years after the issue date at a redemption price of $1,000 plus accrued and unpaid dividends. The Company has the right after the fourth anniversary of the issue date to call all or a portion of the Series A Preferred Stock at $1,000 per share plus accrued and unpaid dividends times a premium equal to the dividend rate after the fourth anniversary date and declining ratably to the mandatory redemption date. Holders of the Series A Preferred Stock are entitled to limited voting rights only under certain conditions. (14) Stock Options In 1993, the Company established a stock option plan under which options may be granted to eligible employees and nonemployee directors of the Company. Under the stock option plan, the Board of Directors may grant either nonqualified stock options or incentive stock options. At January 2, 1999, there were 2.0 million shares available for grant under the stock option plan. The per share weighted-average fair value of stock options granted during fiscal years 1996, 1997 and 1998 was $4.65, $7.86 and $12.81, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1996 1997 1998 -------- -------- -------- Expected dividend yield 1.14% 1.41 1.06 Stock price volatility 38.82 38.94 36.87 Risk-free interest rate 5.99 6.15 5.48 Expected option term 5 years 5 years 5 years
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated F-22 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1997 1998 -------- -------- -------- Earnings available for common shareholders: As reported $ 14,123 $ 7,232 $ 40,758 Pro forma 13,986 6,720 39,280 Earnings per share: As reported - basic 1.33 .67 2.89 As reported - diluted 1.33 .66 2.52 Pro forma - basic 1.32 .62 2.79 Pro forma - diluted 1.32 .61 2.43
Pro forma net earnings reflects only options granted after January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. All options are granted at an exercise price not less than the fair market value of the common stock at the date of grant. The option period may not be more than ten years from the date the option is granted, and options generally vest over a four-year period. A summary of option activity during fiscal years 1996, 1997 and 1998 follows: Weighted average Shares exercise price ------ ---------------- Outstanding at December 30, 1995 (131 shares exercisable) 437 $14.50 Granted 226 12.59 Canceled (152) 14.33 Outstanding at December 28, 1996 ------ (176 shares exercisable) 511 13.71 Granted 537 16.98 Exercised (175) 14.17 Canceled (131) 14.85 Outstanding at January 3, 1998 ------ (289 shares exercisable) 742 15.76 Granted 562 34.26 Exercised (154) 14.86 Canceled (251) 23.14 Outstanding at January 2, 1999 ------ (142 shares exercisable) 899 25.36 ======
F-23 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) The 142,000 shares that are exercisable at January 2, 1999 have a weighted average exercise price of $14.96. The table below provides weighted average exercise prices and weighted average remaining contractual life of options outstanding at January 2, 1999 segregated based upon ranges of exercise prices. Weighted average Weighted Weighted remaining Number Number average average contractual of options of options exercise price exercise price life outstanding exercisable (outstanding) (exercisable) (outstanding) -------------------------------------------------------------------------- $ 8.88 - $12.75 87 30 $11.67 $11.26 7.12 $14.00 - $19.00 296 106 15.75 15.54 7.46 $21.88 - $31.81 93 6 27.57 23.52 9.33 $33.50 - $44.38 423 - 34.40 - 9.12
(15) Commitments and Contingent Liabilities Manufacturing facilities at certain locations, showrooms, sales offices and warehouse space are leased under noncancelable operating lease agreements. These leases generally require the Company to pay all executory costs such as maintenance and taxes. Rental expense for operating leases was approximately $5.3 million, $7.6 million and $24.7 million during fiscal years 1996, 1997 and 1998, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year), which expire at various dates through 2009, are as follows: Fiscal year Amount ----------- -------- 1999 $22,283 2000 20,966 2001 18,488 2002 16,568 2003 15,678 Thereafter 53,296 From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of all matters currently pending will not have a materially adverse effect on the Company's financial position, results of operations or liquidity. Louisville Bedding Company ("Louisville") filed a complaint for patent infringement against the Company in 1994 alleging that certain of the Company's mattress pad product lines infringed on certain of Louisville's patents. The parties reached a settlement in April 1998, allowing the Company to continue manufacturing and selling its existing Adjust-A-Fit-Registered Trademark- mattress pad product lines without further claims by Louisville. F-24 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (16) Concentration of Credit Risk The Company's customers are primarily retailers located throughout the United States and Canada. Although the Company closely monitors the creditworthiness of its customers, adjusting credit policies and limits as needed, a customer's ability to pay is largely dependent upon the retail industry's economic environment. 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 who are experiencing financial difficulties. However, in the opinion of management of the Company, the allowance for doubtful accounts is adequate, and trade receivables are presented at net realizable value. Sales to the Company's two individual major customers, including their affiliated entities, accounted for approximately 14% and 13% each of net sales in fiscal years 1996 and 1997. These two customers accounted for 24% and 7% each of net sales in fiscal year 1998. (17) Segment Information The Company is organized by functional responsibilities and operates as a single segment. Net sales from bed and bath products were $554.0 million and $26.0 million, respectively, in fiscal year 1997, and $870.1 million and $639.7 million, respectively, in fiscal year 1998. All net sales in fiscal year 1996 related to bed products. Net sales to customers domiciled in foreign countries were $35.1 million, $37.2 million and $118.8 million in fiscal years 1996, 1997 and 1998, respectively. At December 28, 1996, January 3, 1998 and January 2, 1999, the Company had long-lived assets domiciled in foreign countries of $5.6 million, $4.7 million and $3.8 million, respectively. The Company's domestic long-lived assets (including intangibles) at December 28, 1996, January 3, 1998 and January 2, 1999 were $148.5 million, $764.5 million and $943.2 million, respectively. F-25 PILLOWTEX CORPORATION Notes to Consolidated Financial Statements January 3, 1998 and January 2, 1999 (Tables in thousands of dollars, except for per share data) (18) Selected Quarterly Financial Data (Unaudited) The following tables present unaudited financial data of the Company for each quarter of fiscal years 1997 and 1998.
1997 quarter ended ------------------------------------------------- March 29 June 28 September 27 January 3 -------- ------- ------------ --------- Net sales $113,763 $104,894 $151,977 $209,365 Gross profit 18,706 19,701 26,552 29,361 Earnings (loss) before extraordinary item 1,651 1,871 7,050 (2,336) Net earnings (loss) 1,651 1,871 7,050 (3,255) Earnings (loss) per common share - basic .16 .18 .66 (.30) Earnings (loss) per common share - diluted .15 .17 .65 (.30) 1998 quarter ended ------------------------------------------------- April 4 July 4 October 3 January 2 -------- ------- ------------ --------- Net sales $366,375 $332,046 $419,799 $391,621 Gross profit 63,920 58,583 79,866 79,009 Net earnings 5,635 7,092 15,022 15,106 Earnings per common share - basic .37 .47 1.03 1.03 Earnings per common share - diluted .33 .42 .87 .89
F-26 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (18) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following is summarized condensed consolidating financial information for the Company, segregating the Parent and guarantor subsidiaries from nonguarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the Company and guarantees are full, unconditional and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that these financial statements would not provide relevant material additional information to users of the financial statements.
January 3, 1998 January 2, 1999 ------------------------------------------------- ---------------------------------------------------- Non- Non- Guarantor Guarantor Guarantor Guarantor Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli- Financial Position Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated - ------------------- ------ --------- --------- ------- -------- --------- --------- --------- ------- -------- ASSETS: Trade receivables $ - 216,869 4,316 - 221,185 - 240,909 5,439 - 246,348 Receivable from affiliates 668,588 - - (668,588) - 746,839 - - (746,839) - Inventories - 351,720 8,031 - 359,751 - 424,563 9,718 - 434,281 Other current assets - 58,650 1,371 - 60,021 - 25,946 582 - 26,528 -------- --------- ------ --------- ------- --------- --------- ------ ----------- --------- Total current assets 668,588 627,239 13,718 (668,588) 640,957 746,839 691,418 15,739 (746,839) 707,157 Property, plant and equipment, net 657 485,975 2,209 - 488,841 565 627,114 1,526 - 629,205 Intangibles, net 24,256 232,112 2,499 - 258,867 19,102 268,478 2,249 - 289,829 Other assets 241,173 19,564 - (239,216) 21,521 382,558 17,898 - (372,493) 27,963 -------- --------- ------ --------- --------- --------- --------- ------ ----------- --------- Total assets $934,674 1,364,890 18,426 (907,804) 1,410,186 1,149,064 1,604,908 19,514 (1,119,332) 1,654,154 ======== ========= ====== ========= ========= ========= ========= ====== =========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts payable and accrued liabilities $ 85 218,874 5,818 - 224,777 6,425 212,823 4,577 - 223,825 Payable to affiliates - 668,000 588 (668,588) - - 744,000 2,839 (746,839) - Other current liabilities - 21,591 93 - 21,684 8,318 27,002 79 - 35,399 -------- --------- ------ --------- --------- --------- --------- ------ ----------- --------- Total current liabilities 85 908,465 6,499 (668,588) 246,461 14,743 983,825 7,495 (746,839) 259,224 Noncurrent liabilities 675,000 228,550 586 - 904,136 833,331 260,082 527 - 1,093,940 -------- --------- ------ --------- --------- --------- --------- ------ ----------- --------- Total liabilities 675,085 1,137,015 7,085 (668,588) 1,150,597 848,074 1,243,907 8,022 (746,839) 1,353,164 Redeemable convertible preferred stock 62,882 - - - 62,882 63,057 - - - 63,057 Shareholders' equity 196,707 227,875 11,341 (239,216) 196,707 237,933 361,001 11,492 (372,493) 237,933 -------- --------- ------ --------- --------- --------- --------- ------ ----------- --------- Total liabilities and shareholders' equity $934,674 1,364,890 18,426 (907,804) 1,410,186 1,149,064 1,604,908 19,514 (1,119,332) 1,654,154 ======== ========= ====== ========= ========= ========= ========= ====== =========== =========
F-27 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Years Ended ----------------------------------------------------------------------------------------------------- December 28, 1996 January 3, 1998 ------------------------------------------------- -------------------------------------------------- Non- Non- Guarantor Guarantor Guarantor Guarantor Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli- Results from operations Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated - ----------------------- ------ --------- --------- ------- -------- --------- --------- --------- ------- -------- Net sales $78,959 403,386 31,480 (23,170) 490,655 18,759 537,536 29,268 (5,564) 579,999 Cost of goods sold 60,215 345,269 28,734 (23,170) 411,048 11,523 453,149 26,571 (5,564) 485,679 -------- --------- ------ --------- --------- -------- --------- ------- ------- -------- Gross profit 18,744 58,117 2,746 - 79,607 7,236 84,387 2,697 - 94,320 Selling, general and administrative expenses 8,831 30,938 1,676 - 41,445 3,990 46,624 1,476 - 52,090 Restructuring charges - - - - - - 5,986 - - 5,986 -------- --------- ------ --------- --------- -------- --------- ------- ------- -------- Earnings from operations 9,913 27,179 1,070 - 38,162 3,246 31,777 1,221 - 36,244 Equity in earnings of subsidiaries 11,757 - - (11,757) - 5,951 - - (5,951) - Interest expense (income) 5,017 8,973 (19) - 13,971 (764) 23,239 (5) - 22,470 -------- --------- ------ --------- --------- -------- --------- ------- ------- -------- Earnings before income taxes and extraordinary items 16,653 18,206 1,089 (11,757) 24,191 9,961 8,538 1,226 (5,951) 13,774 Income taxes 1,921 7,329 209 - 9,459 1,725 3,687 126 - 5,538 -------- --------- ------ --------- --------- -------- --------- ------- ------- -------- Earnings before extraordinary items 14,732 10,877 880 (11,757) 14,732 8,236 4,851 1,100 (5,951) 8,236 Extraordinary loss (609) - - - (609) (919) - - - (919) -------- --------- ------ --------- --------- -------- --------- ------- ------- -------- Net earnings 14,123 10,877 880 (11,757) 14,123 7,317 4,851 1,100 (5,951) 7,317 Preferred dividends and accretion - - - - - 85 - - - 85 -------- --------- ------ --------- --------- -------- --------- ------- ------- -------- Earnings available for common shareholders $14,123 10,877 880 (11,757) 14,123 7,232 4,851 1,100 (5,951) 7,232 ======== ========= ====== ========= ========= ======== ========= ======= ======= ========
F-28 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Years Ended ------------------------------------------------- January 2, 1999 ------------------------------------------------- Non- Guarantor Guarantor Sub- Sub- Elimi- Consoli- Results from operations Parent sidiaries sidiaries nations dated - ----------------------- ------ --------- --------- ------- ---------- Net sales $ - 1,487,685 27,650 (5,494) 1,509,841 Cost of goods sold - 1,208,888 25,069 (5,494) 1,228,463 -------- --------- ------- --------- ----------- Gross profit - 278,797 2,581 - 281,378 Selling, general and administrative expenses (5,035) 140,800 1,542 - 137,307 Restructuring charges - 1,539 - - 1,539 -------- --------- ------- --------- ----------- Earnings from operations 5,035 136,458 1,039 - 142,532 Equity in earnings of subsidiaries 39,838 - - (39,838) - Interest expense (income) 394 71,912 (18) - 72,288 -------- --------- ------- --------- ----------- Earnings before income taxes and extraordinary items 44,479 64,546 1,057 (39,838) 70,244 Income taxes 1,624 25,673 92 - 27,389 -------- --------- ------- --------- ----------- Earnings before extraordinary items 42,855 38,873 965 (39,838) 42,855 Extraordinary loss - - - - - -------- --------- ------- --------- ----------- Net earnings 42,855 38,873 965 (39,838) 42,855 Preferred dividends and accretion 2,097 - - - 2,097 -------- --------- ------- --------- ----------- Earnings available for common shareholders $40,758 38,873 965 (39,838) 40,758 ======== ========= ======= ========= ===========
F-29 PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data)
Years Ended ----------------------------------------------------------------------------------------------------- December 28, 1996 January 3, 1998 ------------------------------------------------- -------------------------------------------------- Non- Non- Guarantor Guarantor Guarantor Guarantor Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli- Cash Flows Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated - ----------- ------ --------- --------- ------- -------- ------ --------- --------- ------- -------- Net cash provided by (used in) operating activities $ (548) (4,977) 6,239 - 714 1,383 12,330 3,673 - 17,386 Net cash used in investing activities (16,140) (8,421) (572) - (25,133) (157,858) (392,940) (65) - (550,863) Net cash provided by (used in) financing activities 16,286 13,406 (5,664) - 24,028 156,475 385,188 (3,602) - 538,061 --------- ------- -------- ------- ------- --------- --------- ------- ------ -------- Net change in cash and cash equivalents (402) 8 3 - (391) - 4,578 6 - 4,584 Cash and cash equivalents at beginning of period 402 4 5 - 411 - 12 8 - 20 --------- ------- -------- ------- ------- -------- --------- ------- ------ -------- Cash and cash equivalents at end of period $ - 12 8 - 20 - 4,590 14 - 4,604 ========= ======= ======== ======= ======= ======== ========= ======= ====== ======== -------------------------------------------------- January 2, 1999 -------------------------------------------------- Non- Guarantor Guarantor Sub- Sub- Elimi- Consoli- Cash Flows Parent sidiaries sidiaries nations dated - ----------- ------ --------- --------- ------- -------- Net cash provided by (used in) operating activities $ 15,090 40,532 (1,012) - 54,610 Net cash used in investing activities (93,964) (108,069) (90) - (202,123) Net cash provided by (used in) financing activities 78,874 68,501 1,095 - 148,470 --------- --------- --------- ------- --------- Net change in cash and cash equivalents - 964 (7) - 957 Cash and cash equivalents at beginning of period - 4,590 14 - 4,604 --------- --------- --------- ------- --------- Cash and cash equivalents at end of period $ - 5,554 7 - 5,561 ========= ========= ========= ======= =========
F-30 Schedule II PILLOWTEX CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 28, 1996, January 3, 1998 and January 2, 1999 (Dollars in thousands)
Additions Deductions ------------------------- ------------ Balance at Charged to Charged Balance beginning costs and to other Write-offs/ at end Description of period expenses accounts (recoveries) period - ------------------------------------ ----------- ------------ ---------- ------------ --------- Allowance for doubtful accounts: Year ended December 28, 1996 $ 2,768 11,092 (89) 11,296 (1) 2,475 =========== ============ ========== ============ ========= Year ended January 3, 1998 $ 2,475 13,789 11,268 (2) 12,762 (1) 14,770 =========== ============ ========== ============ ========= Year ended January 2, 1999 $ 14,770 26,764 6,570 (2) 26,987 (1) 21,117 =========== ============ ========== ============ ========= Inventory reserves: Year ended December 28, 1996 $ 2,525 2,130 - 1,370 3,285 =========== ============ ========== ============ ========= Year ended January 3, 1998 $ 3,285 4,337 3,168 (2) 1,378 9,412 =========== ============ ========== ============ ========= Year ended January 2, 1999 $ 9,412 11,034 2,908 (2) 8,039 15,315 =========== ============ ========== ============ =========
(1) Accounts written off, less recoveries. (2) Includes reserves for acquired companies as of the date of acquisition. S-1 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 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 Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-36663)) 3.1 Restated Articles of Incorporation of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 4.1 Specimen of Certificate evidencing Common Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 1996) 4.2 Specimen of Certificate evidencing Series A Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 4.3 Indenture, dated November 12, 1996 (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 4.4 Indenture, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 4.5 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 4.6 Second Supplemental Indenture, dated as of July 28, 1998, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.1 Amended and Restated Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.2 First Amendment to Amended and Restated Credit Agreement, dated as of June 19, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.3 Second Amendment to Amended and Restated Credit Agreement, dated as of July 28, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.4 + Third Amendment to Amended and Restated Credit Agreement, dated as of March 12, 1999, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent 10.5 Term Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named herein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.6 First Amendment to Term Credit Agreement, dated as of June 19, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.7 Second Amendment to Term Credit Agreement, dated as of July 28, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Quarterly Report on Form 10-Q dated July 4, 1998) 10.8 Preferred Stock Purchase Agreement, dated as of September 10, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated September 10, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.9 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of November 21, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated November 21, 1997) 10.10 Purchase Agreement, dated December 15, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.11 Purchase Agreement Supplement, dated December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.12 Registration Rights Agreement, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.7 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.13 Registration Rights Agreement Supplement, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.8 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.14 Registration Rights Agreement, dated as of November 12, 1996, by and among Pillowtex Corporation, each domestic subsidiary of Pillowtex Corporation, and NationsBanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by reference to Exhibit 10.59 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 10.15 Sublicense Agreement, dated as of July 1, 1998, between Pillowtex Corporation and the Ralph Lauren Home Collection (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.16 Lease Agreement, dated as of September 18, 1995, between Pillowtex Corporation and Sanwa Business Credit Corp. (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q, as amended, for the quarter ended September 30, 1995) 10.17 Agreement of Lease, dated May 23, 1995, between Ten Seventy One Joint Venture and Pillowtex Corporation (incorporated by reference to Exhibit 10.66 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 1995) 10.18 Lease, dated as of November 26, 1996, by and among Torfeaco Industries Limited and Standa Investment Limited (incorporated by reference to Exhibit 10.14 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.19 Indemnity Agreement, dated as of November 26, 1996, between Torfeaco Industries Limited and Standa Investment Limited (incorporated by reference to Exhibit 10.15 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.20 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)) 10.21 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) 10.22 Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.23 Agreement for Modification and Extension of Lease between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.19 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.24 Form of Equipment Leasing Agreement between BTM Financial & Leasing Corporation B-4 and Beacon Manufacturing Company, Manetta Home Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as of June 14, 1996 (incorporated by reference to Exhibit 10 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 10.25* Employment Agreement dated as of January 1, 1993, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.26* Amendment to Employment Agreement, dated as of July 26, 1993, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.26 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.27* Amendment to Employment Agreement, dated as of January 20, 1998, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.28* 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)) 10.29* Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.36 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.30* Split Dollar Life Insurance Agreement between Pillowtex Corporation and Charles M. Hansen, Jr. dated July 26, 1993 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.31* Pillowtex Corporation 1993 Stock Option Plan (incorporated by reference to Appendix A to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.32* Form of Employment Agreement entered into between Pillowtex Management Services Company and each of Jeffrey D. Cordes, and Scott E. Shimizu (incorporated by reference to Exhibit 10.28 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.33*+ Form of Employment Agreement entered into between Pillowtex Management Services Company and Ronald M. Wehtje dated November 9, 1998 10.34*+ Form of Employment Agreement entered into between Fieldcrest Cannon, Inc. and A. Allen Oakley, dated October 9, 1998 10.35* Form of Employment Agreement dated as of January 1, 1998, between Pillowtex Management Services Company and Kevin M. Finlay (incorporated by reference to Exhibit 10.29 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.36* Pillowtex Corporation Supplemental Executive Retirement Plan, effective as of January 1, 1997 (incorporated by reference to Exhibit 10.1.44 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 33-36663) filed on September 29, 1997) 10.37* Pillowtex Corporation Management Incentive Plan (incorporated by reference to Appendix B to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.38* Pillowtex Corporation Deferred Compensation Plan, effective as of February 9, 1998 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.39* Pillowtex Corporation Executive Medical Expense Reimbursement Plan, effective as of January 1, 1998 (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.40 Indenture, dated as of March 15, 1987, relating to the 6% Convertible Subordinated Debentures Due 2012 (incorporated by reference to Exhibit 4.9 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-12436)) 10.41 Yarn Purchase Agreement between Parkdale Mills, Incorporated and Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 21.1 + List of Pillowtex Corporation's Principal Operating Subsidiaries 23.1 + Consent of KPMG LLP 23.2 + Consent of Deloitte & Touche LLP 27 + Financial Data Schedule 99.1 + Consolidated Financial Statements of The Leshner Corporation as of and for the fiscal years ended September 30, 1995, September 28, 1996 and September 27, 1997 99.2 + Consolidated Balance Sheets of The Leshner Corporation as of June 28, 1998 and June 29, 1997 and the Related Consolidated Statements of Operations and Earnings Retained in the Business and Cash Flows for the Nine-Month Periods ended June 28, 1998 and June 29, 1997 - ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. + Filed herewith electronically EX-10.4 2 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Third Amendment"), dated as of March 12, 1999, is entered into among PILLOWTEX CORPORATION, a Texas corporation (the "Borrower"), the institutions listed on the signature pages hereof that are parties to the Credit Agreement defined below (collectively, the "Lenders"), and NATIONSBANK, N.A. (successor by merger to NationsBank of Texas, N.A.), as Administrative Agent (in said capacity, the "Administrative Agent"). BACKGROUND 1. The Borrower, the Lenders and the Administrative Agent are parties to that certain Amended and Restated Credit Agreement, dated as of December 19, 1997, amended by a First Amendment to Amended and Restated Credit Agreement, dated as of June 19, 1998, and a Second Amendment to Amended and Restated Credit Agreement, dated as of July 28, 1998 (the "Credit Agreement"; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement). 2. The Borrower, the Lenders and the Administrative Agent desire to make certain amendments to the Credit Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrower, the Lenders and the Administrative Agent covenant and agree as follows: 1. AMENDMENTS TO CREDIT AGREEMENT. (1) The definition of "Fieldcrest Cannon Subordinated Debenture Reserve" is hereby amended to read as follows: "'Fieldcrest Cannon Subordinated Debenture Reserve' means an amount equal to 50% of the aggregate amount of cash consideration that may be requested, at any time of determination, by the holders of Fieldcrest Cannon Subordinated Debentures in respect of a conversion thereof." (2) The Notice of Borrowing is hereby amended to be in the form of Exhibit G attached to this Third Amendment. -1- (3) The Notice of Continuation/Conversion is hereby amended to be in the form of Exhibit K attached to this Third Amendment. 2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: (1) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as made on and as of such date; (2) no event has occurred and is continuing which constitutes a Default or an Event of Default; (3) the Borrower has full power and authority to execute and deliver this Third Amendment, and this Third Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable Debtor Relief Laws and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws; (4) neither the execution, delivery and performance of this Third Amendment nor the consummation of any transactions contemplated herein will conflict with any Law, the articles of incorporation, bylaws or other governance document of the Borrower or any of its Subsidiaries, or any indenture, agreement or other instrument to which the Borrower or any of its Subsidiaries or any of their respective property is subject; and (5) no authorization, approval, consent, or other action by, notice to, or filing with, any governmental authority or other Person (including the Board of Directors of the Borrower or any Guarantor), is required for the execution, delivery or performance by the Borrower of this Third Amendment or the acknowledgment of this Third Amendment by any Guarantor. 3. CONDITIONS OF EFFECTIVENESS. This Third Amendment shall be effective as of March 12, 1999, subject to the following: (1) the Administrative Agent shall receive counterparts of this Third Amendment executed and/or consented to by the Required Lenders (as defined in the Intercreditor Agreement); (2) the Administrative Agent shall receive counterparts of this Third Amendment executed by the Borrower and acknowledged by each Guarantor; and (3) the Administrative Agent shall receive, in form and substance satisfactory to the Administrative Agent and its counsel, such other documents, certificates and instruments as the Administrative Agent shall reasonably require. -2- 4. GUARANTOR ACKNOWLEDGMENT. By signing below, each of the Guarantors (i) acknowledges, consents and agrees to the execution and delivery of this Third Amendment, (ii) acknowledges and agrees that its obligations in respect of its Subsidiary Guaranty are not released, diminished, waived, modified, impaired or affected in any manner by this Third Amendment or any of the provisions contemplated herein, (iii) ratifies and confirms its obligations under its Subsidiary Guaranty, and (iv) acknowledges and agrees that it has no claims or offsets against, or defenses or counterclaims to, its Subsidiary Guaranty as a result of this Third Amendment. 5. REFERENCE TO THE CREDIT AGREEMENT. (1) Upon the effectiveness of this Third Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", or words of like import shall mean and be a reference to the Credit Agreement, as amended by this Third Amendment. (2) The Credit Agreement, as amended by this Third Amendment, and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 6. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all reasonable costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Third Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities under the Credit Agreement, as amended by this Third Amendment). 7. EXECUTION IN COUNTERPARTS. This Third Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 8. GOVERNING LAW: BINDING EFFECT. This Third Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon the Borrower and each Lender and their respective successors and assigns. 9. HEADINGS. Section headings in this Third Amendment are included herein for convenience of reference only and shall not constitute a part of this Third Amendment for any other purpose. 10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS THIRD AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, -3- OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK -4- IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment as the date first above written. PILLOWTEX CORPORATION By: -------------------- Name: Title: NATIONSBANK, N.A. (successor by merger to NationsBank of Texas, N.A.), as Administrative Agent and as a Lender, Swing Line Bank and Issuing Bank By: -------------------- Suzanne B. Smith Vice President BANK OF AMERICA NT&SA By: -------------------- Name: Title: THE BANK OF NOVA SCOTIA ATLANTA AGENCY By: -------------------- Name: Title: THE FIRST NATIONAL BANK OF CHICAGO By: -------------------- Name: Title: -5- COMERICA BANK By: -------------------- Name: Title: CREDIT LYONNAIS NEW YORK BRANCH By: -------------------- Name: Title: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: -------------------- Name: Title: THE BANK OF TOKYO-MITSUBISHI, LTD. By: -------------------- Name: Title: BANK ONE, TEXAS, N.A. By: -------------------- Name: Title: BANKBOSTON, N.A. By: -------------------- Name: Title: -6- BHF-BANK AKTIENGESELLSCHAFT By: -------------------- Name: Title: By: -------------------- Name: Title: FIRST UNION NATIONAL BANK By: -------------------- Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By: -------------------- Name: Title: COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By: -------------------- Name: Title: By: -------------------- Name: Title: -7- SOCIETE GENERALE, SOUTHWEST AGENCY By: -------------------- Name: Title: By: -------------------- Name: Title: THE BANK OF NEW YORK By: -------------------- Name: Title: COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE By: -------------------- Name: Title: By: -------------------- Name: Title: BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: -------------------- Name: Title: By: -------------------- Name: Title: -8- FLEET BANK, N.A. By: -------------------- David R. Dubinsky Senior Vice President THE FUJI BANK, LTD. - HOUSTON AGENCY By: -------------------- Name: Title: NATIONAL BANK OF CANADA By: -------------------- Name: Title: By: -------------------- Name: Title: NATIONAL CITY BANK OF KENTUCKY By: -------------------- Don R. Pullen Vice President THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: -------------------- Name: Title: -9- BANK POLSKA KASA OPIEKI, S.A. - PEKAO S.A. GROUP, NEW YORK BRANCH By: -------------------- Name: Title: GUARANTY FEDERAL BANK, F.S.B. By: -------------------- Name: Title: CONSENTED TO BY: BANKERS TRUST COMPANY By: -------------------- Name: Title: MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By: -------------------- Name: Title: SENIOR DEBT PORTFOLIO By: -------------------- Name: Title: AERIES FINANCE LTD. By: -------------------- Name: Title: -10- CRESCENT/MACH I PARTNERS, L.P. By: -------------------- Name: Title: DEEP ROCK & COMPANY By: -------------------- Name: Title: KZH-CRESCENT LLC By: -------------------- Name: Title: CYPRESSTREE INVESTMENT PARTNERS I, LTD., By: -------------------- CypressTree Investment Management Company, Inc., as Portfolio Manager By: -------------------- Name: Title: VAN KAMPEN CLO I, LIMITED By: -------------------- VAN KAMPEN MANAGEMENT, INC., as Collateral Manager By: -------------------- Name: Title: -11- BALANCED HIGH-YIELD FUND I LTD. By: -------------------- BHF-BANK AKTIENGESELLSCHAFT, acting through its New York Branch as attorney-in-fact By: -------------------- Name: Title: By: -------------------- Name: Title: INDOSUEZ CAPITAL FUNDING IV, L.P. By: -------------------- INDOSUEZ CAPITAL LUXEMBOURG, as Collateral Manager By: -------------------- Name: Title: VAN KAMPEN SENIOR INCOME TRUST By: -------------------- Name: Title: -12- INDOSUEZ CAPITAL FUNDING IIA, LIMITED By: -------------------- Indosuez Capital Luxembourg, as Collateral Manager By: -------------------- Name: Title: CYPRESSTREE INSTITUTIONAL FUND, LLC By: -------------------- CypressTree Investment Management Company, Inc., its Managing Member By: -------------------- Name: Title: CYPRESSTREE INVESTMENT FUND, LLC By: -------------------- CypressTree Investment Management Company, Inc., its Managing Member By: -------------------- Name: Title: KZH-CYPRESSTREE-1 LLC By: -------------------- Name: Title: -13- OXFORD STRATEGIC INCOME FUND By: -------------------- Eaton Vance Management, as Investment Advisor By: -------------------- Name: Title: VAN KAMPEN CLO II, LIMITED By: -------------------- Van Kampen Management, Inc., as Collateral Manager By: -------------------- Name: Title: CAPTIVA FINANCE, LTD. By: -------------------- Name: Title: CAPTIVA II FINANCE, LTD. By: -------------------- Name: Title: MOUNTAIN CLO TRUST By: -------------------- Name: Title: -14- CIBC, INC. By: -------------------- Name: Title: BALANCED HIGH-YIELD FUND II LTD. By: -------------------- BHF-Bank Aktiengesellschaft, acting through its New York Branch, as attorney-in-fact By: -------------------- Name: Title: By: -------------------- Name: Title: KZH CRESCENT-3 LLC By: -------------------- Name: Title: FREMONT FINANCIAL CORPORATION By: -------------------- Name: Title: -15- THE DAI-ICHI KANGYO BANK LIMITED, NEW YORK BRANCH By: -------------------- Name: Title: TCW LEVERAGED INCOME TRUST, L.P. By: -------------------- TCW ADVISERS (BERMUDA), LTD., By: -------------------- Name: Title: By: -------------------- TCW INVESTMENT MANAGEMENT COMPANY, as Investment Manager By: -------------------- Name: Title: PROVIDENT CBO I, LIMITED By: -------------------- Provident Investment Management, LLC By: -------------------- Name: Title: -16- ACKNOWLEDGED AND AGREED: PILLOWTEX, INC. PTEX HOLDING COMPANY PILLOWTEX MANAGEMENT SERVICES COMPANY BEACON MANUFACTURING COMPANY MANETTA HOME FASHIONS, INC. TENNESSEE WOOLEN MILLS FIELDCREST CANNON, INC. CRESTFIELD COTTON COMPANY ENCEE, INC. FCC CANADA, INC. FIELDCREST CANNON FINANCING, INC. FIELDCREST CANNON LICENSING, INC. FIELDCREST CANNON INTERNATIONAL, INC. FIELDCREST CANNON SURE FIT, INC. FIELDCREST CANNON TRANSPORTATION, INC. ST. MARYS, INC. AMOSKEAG COMPANY AMOSKEAG MANAGEMENT CORPORATION DOWNEAST SECURITIES CORPORATION BANGOR INVESTMENT COMPANY MOORE'S FALLS CORPORATION THE LESHNER CORPORATION LESHNER OF CALIFORNIA, INC. OPELIKA INDUSTRIES, INC. By: -------------------- Name: Title: -17- EX-10.33 3 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of November 9, 1998, is by and between Pillowtex Management Services Company, a Delaware business trust ("Employer"), and Ronald M. Wehtje ("Employee"). WITNESSETH: WHEREAS, Employee desires to enter into the employment of Employer and Employer desires to employ Employee in the capacity and on the terms set forth below. NOW, THEREFORE, in consideration of the foregoing recital and of the mutual agreements contained herein, and for other valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT AND SCOPE. (a) Commencing as of November 9, 1998 (the "Commencement Date") and continuing throughout the Term of this Agreement, Employer agrees to employ Employee and Employee agrees to serve as the employee of Employer with the title and capacity of Senior Vice President and Chief Financial Officer. As such, Employee's duties shall include responsibility for all financial operations of Pillowtex Corporation, Fieldcrest Cannon, Inc., The Leshner Corporation and their respective subsidiaries, as well as such other responsibilities as may be assigned from time to time by the President and Chief Operating Officer of Employer. Employee shall report to the President and Chief Operating Officer of Employer. (b) Employee's performance of services under this Agreement shall occur primarily at Employer's executive offices at 4111 Mint Way, Dallas, Texas 75237, subject to such travel as is consistent with the office of Senior Vice President and Chief Financial Officer. (c) During the Term of Employee's employment, Employee shall devote Employee's full business time (at least 40 hours per week) exclusively to the performance of Employee's duties as stated in this Agreement and to the furtherance of Employer's business. 2. TERM. (a) The term of this Agreement (the "Term") shall begin on the Commencement Date and shall continue through the third anniversary thereof, subject to automatic extension as provided below and unless terminated earlier in accordance with Section 4. (b) Beginning with the second anniversary date of the Commencement Date and continuing with each anniversary date thereafter, the Term of this Agreement shall automatically be extended in additional, successive one-year increments, with the result that the Term will have a remaining duration of two years upon each and every anniversary. Notwithstanding the foregoing sentence, the Term shall not be extended if either party has previously given the other party written notice of its intent not to extend the Agreement at least 15 months prior to the anniversary upon which the extension would otherwise occur. 3. COMPENSATION. During the Term of this Agreement, Employer shall compensate Employee as set forth below: (a) Employer shall pay to Employee a base salary of $_____________, -1- payable in accordance with Employer's payroll policies in effect from time to time for executive officers generally, subject to all appropriate withholdings. (b) Employee shall be eligible to participate in Employer's incentive bonus plans as they may be amended from time to time to the same extent as executive officers generally. (c) Employee shall be entitled to the greater of three-weeks of paid vacation annually and that amount of vacation to which Employee would be entitled under Employer's vacation policy as it may be amended from time to time. (d) Employee shall be entitled to participate in Employer's health, benefit and welfare plans offered by Employer as they may be amended from time to time to the same extent as executive officers of Employer generally. (e) Employer shall provide Employee with a $_____________ term life insurance policy. (f) Employee shall be eligible to participate in any supplemental executive retirement plan that Employer may adopt. (g) Employer will acquire a club membership at a country club of Employee's choice for the exclusive use of Employee during the Term at an initiation fee of up to $_______. The membership shall remain the property of Employer subject to Employee's right to acquire it upon termination of Employee's employment as set forth below. Employer will pay Employee's membership dues and will reimburse Employee for all expenses and charges incurred at the club for business purposes. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership to Employer, provided, however, that if Employee is terminated for any reason other than for Cause (as defined in Section 4(g)(i)), Employee shall be entitled to acquire the membership from Employer for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. (h) Employer will pay Employee a car allowance of $_______ per month plus an additional amount equal to all federal and state income taxes arising with respect to any portion of the allowance taxable as income to Employee. 4. TERMINATION DURING TERM. Notwithstanding anything to the contrary in Section 2 of this Agreement, Employee's employment under this Agreement may be terminated during the Term as set forth below: (a) Employer may terminate Employee's employment for Cause, in which case the parties' rights and obligations shall be as set forth in Section 5(a) below. (b) Employer may terminate Employee's employment in the absence of Cause and other than upon Employee's Retirement or Permanent Disability, in which case the parties' rights and obligations shall be as set forth in either Section 5(b) or (e) below, as applicable. (c) Employee's employment shall be terminated upon Employee's Permanent Disability, in which case the parties' rights and obligations shall be as set forth in Section 5(c) below. (d) Employee's employment shall be terminated upon Employee's Retirement, in which case the parties' rights and obligations shall be as set forth in Section 5(d) below. (e) In the event of a Change in Control of Employer, Employee may -2- terminate Employee's employment (i) for any reason, for up to six months after the Change in Control of Employer, or (ii) for Good Reason, in which case the parties' rights and obligations shall be as set forth in Section 5(e) below. (f) Employee may terminate Employee's employment at any time for any reason not heretofore enumerated, in which case the parties' rights and obligations shall be as set forth in Section 5(f) below. (g) The following definitions shall apply for purposes of the early termination of the Term of this Agreement: (i) "Cause" shall mean the occurrence of any of the following: (A) Employee's engagement in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of Employer or its affiliates; (B) Employee's engagement in any act involving willful dishonesty, disloyalty, or infidelity against Employer or its affiliates; (C) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; and (D) Employee's willful and continued breach of or failure substantially to perform under any material policy established by the Company with respect to the operation of the Company's business and affairs, or the conduct of the Company's employees. For purposes of this Section 4(g)(i), no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of Employer. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, Employer shall provide Employee a written notice referencing this Section 4(g)(i), setting out with specificity the conduct asserted to constitute Cause. Any disputes arising as to whether Cause existed for Employee's termination shall be resolved through binding arbitration in accordance with Section 9 of this Agreement. (ii) "Change in Control of Employer" means the occurrence during the Term of any of the following events: (A) Pillowtex Corporation, a Texas corporation ("Pillowtex"), is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then- outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such transaction; (B) Pillowtex sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such sale or transfer; (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of Pillowtex; or (D) If, during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the Directors of -3- Pillowtex cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (D) each Director who is first elected, or first nominated for election by Pillowtex's stockholders, by a vote of at least two-thirds of the Directors of Pillowtex (or a committee thereof) then still in office who were Directors of Pillowtex at the beginning of any such period will be deemed to have been a Director of Pillowtex at the beginning of such period. (iii) "Excluded Person" shall mean any of (A) Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate or any person for which any of Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate are deemed to hold beneficial ownership of securities of Pillowtex registered in the name of such person; (B) Pillowtex; (C) any entity in which Pillowtex directly or indirectly owns 50% or more of the outstanding Voting Stock (a "Subsidiary"); or (D) any employee benefit plan sponsored by Pillowtex or any Subsidiary. (iv) "Good Reason" shall mean termination of Employee's employment by Employee after a Change in Control of Pillowtex upon the occurrence of any of the following: (A) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with Employer as existing immediately prior to a Change in Control of Employer; a substantial alteration in the nature or status of Employee's responsibilities from those in effect immediately prior to a Change in Control of Employer; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control of Employer, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control of Employer, or any removal of Employee from or failure to re-elect Employee to any such positions; (B) a reduction by Employer in Employee's base salary in effect immediately prior to a Change in Control of Employer; (C) the requirement by Employer that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control of Employer, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control of Employer; or (D) the taking of any action by Employer which would (1) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control of Employer, or (2) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control of Employer (v) "Permanent Disability" shall mean any physical or mental impairment rendering Employee unable to perform the essential functions of Employee's job (as determined by Employer), with or without reasonable accommodation that does not constitute undue hardship to Employer, and such impairment is permanent or is likely to continue for a period exceeding six consecutive months. If Employee fails to notify Employer of Employee's need for accommodation, Employer is not required to accommodate Employee and may hold Employee to the same standards as persons without a disability. The determination of whether Employee has a Permanent Disability shall be made as set forth below. During any period in which the existence of a Permanent Disability is being determined, Employee shall continue to receive Employee's full base salary at the rate then in effect and all compensation and benefits paid during such period until a Permanent Disability is conclusively determined and this Agreement is terminated in accordance with Section 8 hereof, provided -4- Employee (and Employee's personal and legal representatives) act in good faith and with reasonable diligence in pursuing a determination. This definition is not intended to either expand or limit any rights and protections granted to Employee by law. Employer may require Employee to be examined by a physician, at Employee's own expense, in order to determine whether Employee has a Permanent Disability. If Employer disagrees with the written opinion of this physician ("First Physician"), it may engage, at its own expense, another physician ("Second Physician") to examine Employee. If the First and Second Physicians agree in writing that Employee has not suffered a Permanent Disability, their written opinion shall, except as otherwise set forth in this Section 4(g)(v), be conclusive on the issue of Permanent Disability. If the First and Second Physicians disagree on whether Employee has suffered a Permanent Disability, they shall choose a third consulting physician (whose expense shall be shared equally by Employer and Employee) and the written opinion of a majority of these three physicians shall be conclusive as to the issue of Permanent Disability. In connection with a Permanent Disability determination, Employee hereby consents to any required medical examination and agrees to furnish any medical information requested by any examining physician and to waive any applicable physician-patient privilege that may arise because of such examination. All physicians must be board-certified in the specialty most closely related to the nature of the Permanent Disability alleged to exist. (vi) "Retirement" shall mean termination by Employer or Employee in accordance with Employer's retirement policy (including early retirement, if included in such policy and elected by Employee in writing) generally applicable to its senior executive employees, or in accordance with any other retirement agreement entered into by and between Employee and Employer. 5. COMPENSATION UPON TERMINATION. If Employee's employment is terminated during the Term of this Agreement, Employee shall be entitled to compensation as set forth below: (a) If Employer terminates Employee's employment for Cause, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. (b) If Employer terminates Employee's employment without Cause, then Employer shall pay Employee, not later than the fifth day following the date of termination, a lump sum severance payment equal to the sum of (i) Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (ii) Employee's undiscounted base salary through the remaining duration of the Term or, if greater, for a period of 24 months, at the highest rate in effect during the 12 months immediately preceding the date of Employee's termination; and (iii) the product obtained by multiplying the greater of (A) (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target award level under any successor plan or program) as of the date of Employee's termination by (B) a proration factor (the "Bonus Proration Factor") equal to the quotient obtained by dividing the number of months (but in no event less than 24 months) in the period from the beginning of the most recent plan year for which a bonus has not been paid (but is anticipated to be paid as of the date of the Employee's termination) to the expiration of the Term, by 12. Notwithstanding the foregoing, the provisions of this Section 5(b) shall not apply if Employer terminates Employee's employment without Cause subsequent to a Change in Control of Employer. (c) If Employee's employment is terminated upon Employee's Permanent Disability, Employer shall pay Employee's undiscounted base salary through the -5- date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits, if any, shall be determined in accordance with Employer's employee benefit plans or other insurance programs then in effect. (d) If Employee's employment is terminated upon Employee's Retirement, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits shall be determined in accordance with Employer's retirement policy applicable to its senior executive employees or in accordance with any other retirement agreement entered into by and between Employee and Employer. (e) If, at any time within two (2) years after the effective date of a Change in Control of Employer, Employee's employment (x) is terminated by Employee for any reason during a period of six months beginning on the date of the Change in Control of Employer, or if less, during the remaining duration of the Term; (y) is terminated by Employee for Good Reason; or (z) is terminated by Employer without Cause (and not by reason of Employee's Permanent Disability Retirement, or death), Employee shall be entitled to the compensation and benefits provided below: (i) Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect; (ii) Employer shall pay all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (iii) Employer shall pay as severance pay to Employee, not later than the fifth day following Employee's termination, a lump sum severance payment (together with the payments described in Sections 5(e)(iv) and (v), the "Severance Payments") equal to the sum of (A) the product obtained by multiplying Employee's undiscounted annual base salary at the highest rate in effect during the 12 months immediately preceding Employee's termination by the number of years or fractions thereof (but in no event less than two years) remaining in the Term and (B) the product obtained by multiplying the greater of (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target aware level under any successor plan or program) based upon Employee's annual salary at the highest rate in effect during the 12 months immediately preceding Employee's termination, by the Bonus Proration Factor (as defined in Section 5(b) above); (iv) in lieu of shares of common stock, $0.01 par value, of Pillowtex (the "Shares") issuable upon the exercise of options ("Options"), if any, granted to Employee under any stock option plan of Pillowtex (which Options shall be canceled upon the making of the payment referred to below), Employer shall pay Employee in one sum in cash, not later than the fifth day following the date of Employee's termination, an aggregate amount equal to the product of (A) the difference (to the extent that such differences are a positive number) obtained by subtracting the per Share exercise price of each Option held by Employee, whether or not then fully exercisable, from the higher of (1) the closing price of the Shares, as reported on the New York Stock Exchange on the Date of Termination (or the last trading date prior thereto) or (2) the highest price per Share actually paid in connection with any Change in Control of Employer, and (B) the number of shares covered by each such Option; (v) Employer shall pay Employee the retirement benefits to which Employee is entitled under Employee's retirement policy or other retirement agreement; -6- (vi) Employer shall reimburse Employee for all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in successfully contesting or disputing any such termination or seeking to obtain or enforce any right or benefit provided by this Agreement); and (vii) if Severance Payments become subject to the excise tax (the "Excise Tax") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for in this Section 5(e)(vii)), shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Employee in connection with a Change in Control of Employer and Employee's subsequent termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions resulted in the Change in Control of Employer or any person affiliated with Employer or such person) shall be treated as a "parachute payment" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Employer's independent auditors and reasonably acceptable to Employee such other payments or benefits (in whole or in part) do not constitute parachute payments, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of section 280(G)(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by Employer's independent auditors in accordance with the principles of sections 280(G)(d)(3) and (4) of the Code and the applicable Treasury Regulations. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of Employee's termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Employee's termination of employment, Employee shall repay to Employer, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined. Employee and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (f) If Employee terminates Employee's employment under circumstances in which Section 5(e) does not apply, or if Employee's employment is terminated by reason of his death, Employer shall pay Employee's full base salary through the date of Employee's termination at the rate then in effect and all amounts -7- to which Employee is entitled upon termination of employment under Employer's employee benefit plans. 6. Insurance. If Employee's employment is terminated under the provisions of Section 4(e) of this Agreement, Employee shall participate, for a period of two years from the date of Employee's termination, in all employee benefit plans providing health and dental benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law. If Employee's participation in any such plan is not permitted for any reason, Employer shall arrange to provide Employee, at Employer's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. At the end of such two-year period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. 7. FUTURE EMPLOYMENT. Employee shall not be required to mitigate the amount of any payment provided for in Section 5 hereof by seeking other employment or otherwise, nor shall the amount of any payment provided for in Section 5 hereof be reduced by any compensation earned by Employee as a result of employment by another employer after the date of Employee's termination, or otherwise. 8. NOTICE OF TERMINATION. (a) Any purported termination by Employer or by Employee shall be communicated by a written "Notice of Termination" to the other party. A Notice of Termination shall mean a notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated. (b) The "date of Employee's termination" shall be: (i) if Employee's employment is terminated by reason of Employee's Permanent Disability, the date that is 30 days after the determination of Permanent Disability pursuant to Section 4(g)(v) of this Agreement, (ii) if Employee's employment is terminated for Cause, the date specified in the Notice of Termination, or (iii) if Employee's employment is terminated for any other reason, the date specified in the Notice of Termination, provided such date is not more than 60 days from the date such Notice of Termination is given. 9. ARBITRATION. All disputes or claims arising under this Agreement or in connection with Employee's employment with Employer (including any claims under any federal, state, or local law or ordinance), except for any dispute or claim arising under Sections 10, 11, 12, 13, and 16 of this Agreement, shall be subject to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association, the cost of which shall be borne by the party against whom an arbitration award is entered. 10. NONDISCLOSURE AGREEMENT. Employer, during the term of Employee's employment under this Agreement, shall provide Employee access to, and Employee shall have access to and become familiar with, various trade secrets and proprietary and confidential information consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information (collectively referred to herein as the "Trade Secrets"), which are owned by Employer and its affiliates and are regularly used in the operation of their businesses, but in connection with which Employer and its affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in Employer's industry; (b) are entrusted -8- to Employee after being informed of their confidential and secret status by Employer or its affiliates and because of the fiduciary position occupied by Employee with Employer; (c) have been developed by Employer and its affiliates for and on behalf of Employer and its affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give Employer and its affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of Employer and its affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to Employer and its affiliates. Employee shall not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the Term of this Agreement or at any time thereafter, except as required in the course of Employee's employment under this Agreement. All files, records, documents, information, data and similar items relating to the business of Employer and its affiliates, whether prepared by Employee or otherwise coming into Employee's possession, shall remain the exclusive property of Employer and its affiliates and shall not be removed from the premises of Employer and its affiliates under any circumstances without the prior written consent of the Board of Directors of Employer (except in the ordinary course of business during Employee's period of active employment under this Agreement), and in any event shall be promptly delivered to Employer upon termination of this Agreement. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Chief Executive Officer of Pillowtex. For this purpose, Employee irrevocably nominates and appoints Employer (including any attorney retained by Employer), as Employee's true and lawful attorney-in-fact, to act in Employee's name, place and stead to perform any act that Employee might perform to defend and protect against any disclosure of any Trade Secrets. As used in this Agreement, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, Employer. 11. NON-COMPETITION AGREEMENT. Employee acknowledges and agrees that the training Employee will receive, the experience Employee will gain and the information Employee will acquire regarding the Trade Secrets while employed hereunder will enable Employee to injure Employer if Employee should compete with Employer in a business that is competitive with the business conducted or to be conducted by Employer and its affiliates. For these reasons, Employee hereby agrees that, without the prior written consent of Employer, Employee shall not, during the period of employment with Employer and for a period of two years thereafter, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of Employer or its affiliates, (b) accept employment with or render services to a competitor of Employer or any of its affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by Employer or its affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of Employer or its affiliates or any person or entity whose business Employer or its affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by Employer or its affiliates within the United States, Canada and Mexico. 12. NONEMPLOYMENT AGREEMENT. During the period of employment with -9- Employer and for a period of two years thereafter, Employee shall not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of Employer or its affiliates to leave the employment of Employer or its affiliates, nor shall Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of Employer concerning the names and addresses of the employees of Employer or its affiliates. 13. NONDISPARAGEMENT AGREEMENT. Employee shall not, either during the Term of this Agreement or at any time thereafter, make statements, whether orally or in writing, concerning Employer, any of its directors, officers, employees or affiliates or any of its business strategies, policies or practices, that shall be in any way disparaging, derogatory or critical, or in any way harmful to the reputation of Employer, any such persons or entities or business strategies, policies or practices. 14. SUCCESSORS; BINDING AGREEMENT. (a) Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle Employee to compensation from Employer in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of Employee's termination. As used in this Agreement, "Employer" shall mean Employer as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 14 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of Employee's death, any amounts owed to Employer under this Agreement shall be paid to Employee's surviving spouse, if any, and if none, to Employee's estate. 15. SEVERABILITY. The parties hereto intend all provisions of Sections 10, 11, 12, 13 and 16 hereof to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of Sections 10, 11, 12, 13 and 16 hereof is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Employee agrees that the provisions of each of the foregoing sections constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants and agreements of Employee contained in the non-competition, nondisclosure, nonemployment or nondisparagement agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or -10- by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 16. INVENTIONS. Employee shall promptly disclose, grant and assign to Employer for its sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to the products of Employer or any of its affiliates or capable of beneficial use by Employer or any of its affiliates, which Employee has in the past conceived, developed or acquired, or may conceive, develop or acquire during the term hereof (whether or not during usual working hours), together with all patent applications, letters patent, copyrights and reissues thereof that may at any time be granted upon any such invention, improvement or technical information. In connection therewith, Employee shall promptly at all times during and after the term hereof: (a) execute and deliver such applications, assignments, descriptions and other instruments as may be necessary or proper in the opinion of Employer to vest title to such inventions, improvements, technical information, patent applications and patents or reissues thereof in Employer and to enable it to obtain and maintain the entire right and title thereto throughout the world; and (b) render to Employer, at its expense, all such assistance as it may require in the prosecution of applications for said patents or reissues thereof, in the prosecution or defense of interferences which may be declared involving any said application or patents and in any litigation in which Employer or its affiliates may be involved relating to any such patents, inventions, improvements or technical information. 17. AFFILIATES. Employee will use Employee's best efforts to ensure that no relative of his or corporation of which Employee is an officer, director or shareholder, or other affiliate of his, shall take any action that Employee could not take without violating any provision of this Agreement. 18. REMEDIES. Employee recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of this Agreement would be difficult, and Employee agrees that Employer, in addition to all other remedies it may have, shall have the right to injunctive relief if there is such a breach. 19. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Employer: Pillowtex Management Services Company 4111 Mint Way Dallas, Texas 75237 Attention: President and Chief Operating Officer Facsimile No. (214) 339-8565 Ronald M. Wehtje 774 Mill Creek Road Lancaster, Texas 75146 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. 20. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to -11- the subject matter hereof and contains all of the covenants and agreements between the parties with respect thereto. 21. MODIFICATION. No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the parties hereto. 22. GOVERNING LAW AND VENUE. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE OBLIGATIONS AND UNDERTAKINGS OF THE PARTIES HEREUNDER WILL BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IF ANY ACTION IS BROUGHT TO ENFORCE OR INTERPRET THIS AGREEMENT, VENUE FOR SUCH ACTION SHALL BE IN DALLAS COUNTY, TEXAS. EACH OF THE PARTIES HERETO HEREBY AGREES IRREVOCABLY AND UNCONDITIONALLY TO CONSENT TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS, TEXAS FOR ANY ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND FURTHER AGREES THAT SERVICE OF PROCESS, SUMMONS OR NOTICE BY U.S. REGISTERED MAIL TO THE APPLICABLE ADDRESSES SET FORTH IN SECTION 19 HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS OF ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST SUCH PARTY IN ANY SUCH COURT. 23. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document. 24. COSTS. If any action or law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which Employee or it may be entitled. 25. ASSIGNMENT. Employer shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of Employer's assets or all of its stock, or with which Employer merges or consolidates. The rights, duties and benefits to Employee hereunder are personal to Employee, and no such right or benefit may be assigned by Employee. 26. BINDING EFFECT. This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns. 27. NO WAIVER. The failure by Employer to enforce at any time any of the provisions of this Agreement or to require at any time performance by Employee of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect the validity of this Agreement, or any part hereof, or the right of Employer thereafter to enforce each and every such provision in accordance with the terms of this Agreement. -12- * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PILLOWTEX MANAGEMENT SERVICES COMPANY By:Jeffrey D. Cordes ------------------------------------- Jeffrey D. Cordes President and Chief Operating Officer EMPLOYEE By:Ronald M. Wehtje ------------------------------------- Ronald M. Wehtje GUARANTEE Pillowtex Corporation unconditionally guarantees all obligations of Pillowtex Management Services Company to Employee as set forth in the foregoing Employment Agreement. PILLOWTEX CORPORATION By:Jeffrey D. Cordes ------------------------------------- Jeffrey D. Cordes President and Chief Operating Officer -13- EX-10.34 4 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of October 9, 1998, is by and between Pillowtex Management Services Company, a Delaware business trust ("Employer"), and A. Allen Oakley ("Employee"). WITNESSETH: WHEREAS, Employee desires to enter into the employment of Employer and Employer desires to employ Employee in the capacity and on the terms set forth below. NOW, THEREFORE, in consideration of the foregoing recital and of the mutual agreements contained herein, and for other valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT AND SCOPE. (a) Commencing as of October 9, 1998 (the "Commencement Date") and continuing throughout the Term of this Agreement, Employer agrees to employ Employee and Employee agrees to serve as the employee of Employer with the title and capacity of Senior Vice President of Manufacturing. As such, Employee's duties shall include responsibility for all manufacturing functions of Fieldcrest Cannon, Inc., The Leshner Corporation and their respective subsidiaries, as well as such other responsibilities as may be assigned from time to time by the President and Chief Operating Officer of Employer. Employee shall report to the President and Chief Operating Officer of Employer. (b) Employee's performance of services under this Agreement shall occur primarily at Employer's executive offices at One Lake Circle Drive, Kannapolis, North Carolina 28081, subject to such travel as is consistent with the office of Senior Vice President of Manufacturing. (c) During the Term of Employee's employment, Employee shall devote Employee's full business time (at least 40 hours per week) exclusively to the performance of Employee's duties as stated in this Agreement and to the furtherance of Employer's business. 2. TERM. (a) The term of this Agreement (the "Term") shall begin on the Commencement Date and shall continue through the third anniversary thereof, subject to automatic extension as provided below and unless terminated earlier in accordance with Section 4. (b) Beginning with the second anniversary date of the Commencement Date and continuing with each anniversary date thereafter, the Term of this Agreement shall automatically be extended in additional, successive one-year increments, with the result that the Term will have a remaining duration of two years upon each and every anniversary. Notwithstanding the foregoing sentence, the Term shall not be extended if either party has previously given the other party written notice of its intent not to extend the Agreement at least 15 months prior to the anniversary upon which the extension would otherwise occur. 3. COMPENSATION. During the Term of this Agreement, Employer shall compensate Employee as set forth below: (a) Employer shall pay to Employee a base salary of $_______________, payable in accordance with Employer's payroll policies in effect from time to time for executive officers generally, subject to all appropriate withholdings. -1- (b) Employee shall be eligible to participate in Employer's incentive bonus plans as they may be amended from time to time to the same extent as executive officers generally. (c) Employee shall be entitled to the greater of three-weeks of paid vacation annually and that amount of vacation to which Employee would be entitled under Employer's vacation policy as it may be amended from time to time. (d) Employee shall be entitled to participate in Employer's health, benefit and welfare plans offered by Employer as they may be amended from time to time to the same extent as executive officers of Employer generally. (e) Employer shall provide Employee with a $__________ term life insurance policy. (f) Employee shall be eligible to participate in any supplemental executive retirement plan that Employer may adopt. (g) Employer will acquire a club membership at a country club of Employee's choice for the exclusive use of Employee during the Term. The membership shall remain the property of Employer subject to Employee's right to acquire it upon termination of Employee's employment as set forth below. Employer will pay Employee's membership dues and will reimburse Employee for all expenses and charges incurred at the club for business purposes. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership to Employer, provided, however, that if Employee is terminated for any reason other than for Cause (as defined in Section 4(g)(i)), Employee shall be entitled to acquire the membership from Employer for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. (h) Employer will pay Employee a car allowance of $______ per month plus an additional amount equal to all federal and state income taxes arising with respect to any portion of the allowance taxable as income to Employee. 4. TERMINATION DURING TERM. Notwithstanding anything to the contrary in Section 2 of this Agreement, Employee's employment under this Agreement may be terminated during the Term as set forth below: (a) Employer may terminate Employee's employment for Cause, in which case the parties' rights and obligations shall be as set forth in Section 5(a) below. (b) Employer may terminate Employee's employment in the absence of Cause and other than upon Employee's Retirement or Permanent Disability, in which case the parties' rights and obligations shall be as set forth in either Section 5(b) or (e) below, as applicable. (c) Employee's employment shall be terminated upon Employee's Permanent Disability, in which case the parties' rights and obligations shall be as set forth in Section 5(c) below. (d) Employee's employment shall be terminated upon Employee's Retirement, in which case the parties' rights and obligations shall be as set forth in Section 5(d) below. (e) In the event of a Change in Control of Employer, Employee may terminate Employee's employment (i) for any reason, for up to six months after the Change in Control of Employer, or (ii) for Good Reason, in which case the parties' rights and obligations shall be as set forth in Section 5(e) below. -2- (f) Employee may terminate Employee's employment at any time for any reason not heretofore enumerated, in which case the parties' rights and obligations shall be as set forth in Section 5(f) below. (g) The following definitions shall apply for purposes of the early termination of the Term of this Agreement: (i) "Cause" shall mean the occurrence of any of the following: (A) Employee's engagement in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of Employer or its affiliates; (B) Employee's engagement in any act involving willful dishonesty, disloyalty, or infidelity against Employer or its affiliates; (C) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; and (D) Employee's willful and continued breach of or failure substantially to perform under any material policy established by the Company with respect to the operation of the Company's business and affairs, or the conduct of the Company's employees. For purposes of this Section 4(g)(i), no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of Employer. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, Employer shall provide Employee a written notice referencing this Section 4(g)(i), setting out with specificity the conduct asserted to constitute Cause. Any disputes arising as to whether Cause existed for Employee's termination shall be resolved through binding arbitration in accordance with Section 9 of this Agreement. (ii) "Change in Control of Employer" means the occurrence during the Term of any of the following events: (A) Pillowtex Corporation, a Texas corporation ("Pillowtex"), is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such transaction; (B) Pillowtex sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such sale or transfer; (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of Pillowtex; or (D) If, during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the Directors of Pillowtex cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (D) each Director who is first elected, or first nominated for election by Pillowtex's stockholders, by a vote of at least two-thirds of the Directors of Pillowtex (or a committee -3- thereof) then still in office who were Directors of Pillowtex at the beginning of any such period will be deemed to have been a Director of Pillowtex at the beginning of such period. (iii) "Excluded Person" shall mean any of (A) Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate or any person for which any of Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate are deemed to hold beneficial ownership of securities of Pillowtex registered in the name of such person; (B) Pillowtex; (C) any entity in which Pillowtex directly or indirectly owns 50% or more of the outstanding Voting Stock (a "Subsidiary"); or (D) any employee benefit plan sponsored by Pillowtex or any Subsidiary. (iv) "Good Reason" shall mean termination of Employee's employment by Employee after a Change in Control of Pillowtex upon the occurrence of any of the following: (A) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with Employer as existing immediately prior to a Change in Control of Employer; a substantial alteration in the nature or status of Employee's responsibilities from those in effect immediately prior to a Change in Control of Employer; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control of Employer, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control of Employer, or any removal of Employee from or failure to re-elect Employee to any such positions; (B) a reduction by Employer in Employee's base salary in effect immediately prior to a Change in Control of Employer; (C) the requirement by Employer that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control of Employer, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control of Employer; or (D) the taking of any action by Employer which would (1) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control of Employer, or (2) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control of Employer (v) "Permanent Disability" shall mean any physical or mental impairment rendering Employee unable to perform the essential functions of Employee's job (as determined by Employer), with or without reasonable accommodation that does not constitute undue hardship to Employer, and such impairment is permanent or is likely to continue for a period exceeding six consecutive months. If Employee fails to notify Employer of Employee's need for accommodation, Employer is not required to accommodate Employee and may hold Employee to the same standards as persons without a disability. The determination of whether Employee has a Permanent Disability shall be made as set forth below. During any period in which the existence of a Permanent Disability is being determined, Employee shall continue to receive Employee's full base salary at the rate then in effect and all compensation and benefits paid during such period until a Permanent Disability is conclusively determined and this Agreement is terminated in accordance with Section 8 hereof, provided Employee (and Employee's personal and legal representatives) act in good faith and with reasonable diligence in pursuing a determination. This definition is not intended to either expand or limit any rights and protections granted to -4- Employee by law. Employer may require Employee to be examined by a physician, at Employee's own expense, in order to determine whether Employee has a Permanent Disability. If Employer disagrees with the written opinion of this physician ("First Physician"), it may engage, at its own expense, another physician ("Second Physician") to examine Employee. If the First and Second Physicians agree in writing that Employee has not suffered a Permanent Disability, their written opinion shall, except as otherwise set forth in this Section 4(g)(v), be conclusive on the issue of Permanent Disability. If the First and Second Physicians disagree on whether Employee has suffered a Permanent Disability, they shall choose a third consulting physician (whose expense shall be shared equally by Employer and Employee) and the written opinion of a majority of these three physicians shall be conclusive as to the issue of Permanent Disability. In connection with a Permanent Disability determination, Employee hereby consents to any required medical examination and agrees to furnish any medical information requested by any examining physician and to waive any applicable physician-patient privilege that may arise because of such examination. All physicians must be board-certified in the specialty most closely related to the nature of the Permanent Disability alleged to exist. (vi) "Retirement" shall mean termination by Employer or Employee in accordance with Employer's retirement policy (including early retirement, if included in such policy and elected by Employee in writing) generally applicable to its senior executive employees, or in accordance with any other retirement agreement entered into by and between Employee and Employer. 5. COMPENSATION UPON TERMINATION. If Employee's employment is terminated during the Term of this Agreement, Employee shall be entitled to compensation as set forth below: (a) If Employer terminates Employee's employment for Cause, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. (b) If Employer terminates Employee's employment without Cause, then Employer shall pay Employee, not later than the fifth day following the date of termination, a lump sum severance payment equal to the sum of (i) Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (ii) Employee's undiscounted base salary through the remaining duration of the Term or, if greater, for a period of 24 months, at the highest rate in effect during the 12 months immediately preceding the date of Employee's termination; and (iii) the product obtained by multiplying the greater of (A) (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target award level under any successor plan or program) as of the date of Employee's termination by (B) a proration factor (the "Bonus Proration Factor") equal to the quotient obtained by dividing the number of months (but in no event less than 24 months) in the period from the beginning of the most recent plan year for which a bonus has not been paid (but is anticipated to be paid as of the date of the Employee's termination) to the expiration of the Term, by 12. Notwithstanding the foregoing, the provisions of this Section 5(b) shall not apply if Employer terminates Employee's employment without Cause subsequent to a Change in Control of Employer. (c) If Employee's employment is terminated upon Employee's Permanent Disability, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and -5- benefits, if any, shall be determined in accordance with Employer's employee benefit plans or other insurance programs then in effect. (d) If Employee's employment is terminated upon Employee's Retirement, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits shall be determined in accordance with Employer's retirement policy applicable to its senior executive employees or in accordance with any other retirement agreement entered into by and between Employee and Employer. (e) If, at any time within two (2) years after the effective date of a Change in Control of Employer, Employee's employment (x) is terminated by Employee for any reason during a period of six months beginning on the date of the Change in Control of Employer, or if less, during the remaining duration of the Term; (y) is terminated by Employee for Good Reason; or (z) is terminated by Employer without Cause (and not by reason of Employee's Permanent Disability Retirement, or death), Employee shall be entitled to the compensation and benefits provided below: (i) Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect; (ii) Employer shall pay all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (iii) Employer shall pay as severance pay to Employee, not later than the fifth day following Employee's termination, a lump sum severance payment (together with the payments described in Sections 5(e)(iv) and (v), the "Severance Payments") equal to the sum of (A) the product obtained by multiplying Employee's undiscounted annual base salary at the highest rate in effect during the 12 months immediately preceding Employee's termination by the number of years or fractions thereof (but in no event less than two years) remaining in the Term and (B) the product obtained by multiplying the greater of (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target aware level under any successor plan or program) based upon Employee's annual salary at the highest rate in effect during the 12 months immediately preceding Employee's termination, by the Bonus Proration Factor (as defined in Section 5(b) above); (iv) in lieu of shares of common stock, $0.01 par value, of Pillowtex (the "Shares") issuable upon the exercise of options ("Options"), if any, granted to Employee under any stock option plan of Pillowtex (which Options shall be canceled upon the making of the payment referred to below), Employer shall pay Employee in one sum in cash, not later than the fifth day following the date of Employee's termination, an aggregate amount equal to the product of (A) the difference (to the extent that such differences are a positive number) obtained by subtracting the per Share exercise price of each Option held by Employee, whether or not then fully exercisable, from the higher of (1) the closing price of the Shares, as reported on the New York Stock Exchange on the Date of Termination (or the last trading date prior thereto) or (2) the highest price per Share actually paid in connection with any Change in Control of Employer, and (B) the number of shares covered by each such Option; (v) Employer shall pay Employee the retirement benefits to which Employee is entitled under Employee's retirement policy or other retirement agreement; -6- (vi) Employer shall reimburse Employee for all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in successfully contesting or disputing any such termination or seeking to obtain or enforce any right or benefit provided by this Agreement); and (vii) if Severance Payments become subject to the excise tax (the "Excise Tax") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for in this Section 5(e)(vii)), shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Employee in connection with a Change in Control of Employer and Employee's subsequent termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions resulted in the Change in Control of Employer or any person affiliated with Employer or such person) shall be treated as a "parachute payment" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Employer's independent auditors and reasonably acceptable to Employee such other payments or benefits (in whole or in part) do not constitute parachute payments, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of section 280(G)(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by Employer's independent auditors in accordance with the principles of sections 280(G)(d)(3) and (4) of the Code and the applicable Treasury Regulations. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of Employee's termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Employee's termination of employment, Employee shall repay to Employer, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined. Employee and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (f) If Employee terminates Employee's employment under circumstances in which Section 5(e) does not apply, or if Employee's employment is terminated by reason of his death, Employer shall pay Employee's full base salary through -7- the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. 6. INSURANCE. If Employee's employment is terminated under the provisions of Section 4(e) of this Agreement, Employee shall participate, for a period of two years from the date of Employee's termination, in all employee benefit plans providing health and dental benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law. If Employee's participation in any such plan is not permitted for any reason, Employer shall arrange to provide Employee, at Employer's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. At the end of such two-year period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. 7. FUTURE EMPLOYMENT. Employee shall not be required to mitigate the amount of any payment provided for in Section 5 hereof by seeking other employment or otherwise, nor shall the amount of any payment provided for in Section 5 hereof be reduced by any compensation earned by Employee as a result of employment by another employer after the date of Employee's termination, or otherwise. 8. NOTICE OF TERMINATION. (a) Any purported termination by Employer or by Employee shall be communicated by a written "Notice of Termination" to the other party. A Notice of Termination shall mean a notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated. (b) The "date of Employee's termination" shall be: (i) if Employee's employment is terminated by reason of Employee's Permanent Disability, the date that is 30 days after the determination of Permanent Disability pursuant to Section 4(g)(v) of this Agreement, (ii) if Employee's employment is terminated for Cause, the date specified in the Notice of Termination, or (iii) if Employee's employment is terminated for any other reason, the date specified in the Notice of Termination, provided such date is not more than 60 days from the date such Notice of Termination is given. 9. ARBITRATION. All disputes or claims arising under this Agreement or in connection with Employee's employment with Employer (including any claims under any federal, state, or local law or ordinance), except for any dispute or claim arising under Sections 10, 11, 12, 13, and 16 of this Agreement, shall be subject to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association, the cost of which shall be borne by the party against whom an arbitration award is entered. 10. NONDISCLOSURE AGREEMENT. Employer, during the term of Employee's employment under this Agreement, shall provide Employee access to, and Employee shall have access to and become familiar with, various trade secrets and proprietary and confidential information consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information (collectively referred to herein as the "Trade Secrets"), which are owned by Employer and its affiliates and are regularly used in the operation of their businesses, but in connection with which Employer and its affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in Employer's industry; (b) are entrusted -8- to Employee after being informed of their confidential and secret status by Employer or its affiliates and because of the fiduciary position occupied by Employee with Employer; (c) have been developed by Employer and its affiliates for and on behalf of Employer and its affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give Employer and its affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of Employer and its affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to Employer and its affiliates. Employee shall not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the Term of this Agreement or at any time thereafter, except as required in the course of Employee's employment under this Agreement. All files, records, documents, information, data and similar items relating to the business of Employer and its affiliates, whether prepared by Employee or otherwise coming into Employee's possession, shall remain the exclusive property of Employer and its affiliates and shall not be removed from the premises of Employer and its affiliates under any circumstances without the prior written consent of the Board of Directors of Employer (except in the ordinary course of business during Employee's period of active employment under this Agreement), and in any event shall be promptly delivered to Employer upon termination of this Agreement. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Chief Executive Officer of Pillowtex. For this purpose, Employee irrevocably nominates and appoints Employer (including any attorney retained by Employer), as Employee's true and lawful attorney-in-fact, to act in Employee's name, place and stead to perform any act that Employee might perform to defend and protect against any disclosure of any Trade Secrets. As used in this Agreement, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, Employer. 11. NON-COMPETITION AGREEMENT. Employee acknowledges and agrees that the training Employee will receive, the experience Employee will gain and the information Employee will acquire regarding the Trade Secrets while employed hereunder will enable Employee to injure Employer if Employee should compete with Employer in a business that is competitive with the business conducted or to be conducted by Employer and its affiliates. For these reasons, Employee hereby agrees that, without the prior written consent of Employer, Employee shall not, during the period of employment with Employer and for a period of two years thereafter, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of Employer or its affiliates, (b) accept employment with or render services to a competitor of Employer or any of its affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by Employer or its affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of Employer or its affiliates or any person or entity whose business Employer or its affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by Employer or its affiliates within the United States, Canada and Mexico. -9- 12. NONEMPLOYMENT AGREEMENT. During the period of employment with Employer and for a period of two years thereafter, Employee shall not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of Employer or its affiliates to leave the employment of Employer or its affiliates, nor shall Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of Employer concerning the names and addresses of the employees of Employer or its affiliates. 13. NONDISPARAGEMENT AGREEMENT. Employee shall not, either during the Term of this Agreement or at any time thereafter, make statements, whether orally or in writing, concerning Employer, any of its directors, officers, employees or affiliates or any of its business strategies, policies or practices, that shall be in any way disparaging, derogatory or critical, or in any way harmful to the reputation of Employer, any such persons or entities or business strategies, policies or practices. 14. SUCCESSORS; BINDING AGREEMENT. (a) Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle Employee to compensation from Employer in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of Employee's termination. As used in this Agreement, "Employer" shall mean Employer as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 14 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of Employee's death, any amounts owed to Employer under this Agreement shall be paid to Employee's surviving spouse, if any, and if none, to Employee's estate. 15. SEVERABILITY. The parties hereto intend all provisions of Sections 10, 11, 12, 13 and 16 hereof to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of Sections 10, 11, 12, 13 and 16 hereof is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Employee agrees that the provisions of each of the foregoing sections constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants and agreements of Employee contained in the non-competition, nondisclosure, nonemployment or nondisparagement agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full -10- force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 16. INVENTIONS. Employee shall promptly disclose, grant and assign to Employer for its sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to the products of Employer or any of its affiliates or capable of beneficial use by Employer or any of its affiliates, which Employee has in the past conceived, developed or acquired, or may conceive, develop or acquire during the term hereof (whether or not during usual working hours), together with all patent applications, letters patent, copyrights and reissues thereof that may at any time be granted upon any such invention, improvement or technical information. In connection therewith, Employee shall promptly at all times during and after the term hereof: (a) execute and deliver such applications, assignments, descriptions and other instruments as may be necessary or proper in the opinion of Employer to vest title to such inventions, improvements, technical information, patent applications and patents or reissues thereof in Employer and to enable it to obtain and maintain the entire right and title thereto throughout the world; and (b) render to Employer, at its expense, all such assistance as it may require in the prosecution of applications for said patents or reissues thereof, in the prosecution or defense of interferences which may be declared involving any said application or patents and in any litigation in which Employer or its affiliates may be involved relating to any such patents, inventions, improvements or technical information. 17. AFFILIATES. Employee will use Employee's best efforts to ensure that no relative of his or corporation of which Employee is an officer, director or shareholder, or other affiliate of his, shall take any action that Employee could not take without violating any provision of this Agreement. 18. REMEDIES. Employee recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of this Agreement would be difficult, and Employee agrees that Employer, in addition to all other remedies it may have, shall have the right to injunctive relief if there is such a breach. 19. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Employer: Pillowtex Management Services Company 4111 Mint Way Dallas, Texas 75237 Attention: President and Chief Operating Officer Facsimile No. (214) 339-8565 If to Employee: A. Allen Oakley 18616 Hammock Lane Davidson, North Carolina 28036 Notices delivered personally, by overnight express delivery, local courier or -11- facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. 20. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof and contains all of the covenants and agreements between the parties with respect thereto. 21. MODIFICATION. No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the parties hereto. 22. GOVERNING LAW AND VENUE. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE OBLIGATIONS AND UNDERTAKINGS OF THE PARTIES HEREUNDER WILL BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IF ANY ACTION IS BROUGHT TO ENFORCE OR INTERPRET THIS AGREEMENT, VENUE FOR SUCH ACTION SHALL BE IN DALLAS COUNTY, TEXAS. EACH OF THE PARTIES HERETO HEREBY AGREES IRREVOCABLY AND UNCONDITIONALLY TO CONSENT TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS, TEXAS FOR ANY ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND FURTHER AGREES THAT SERVICE OF PROCESS, SUMMONS OR NOTICE BY U.S. REGISTERED MAIL TO THE APPLICABLE ADDRESSES SET FORTH IN SECTION 19 HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS OF ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST SUCH PARTY IN ANY SUCH COURT. 23. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document. 24. COSTS. If any action or law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which Employee or it may be entitled. 25. ASSIGNMENT. Employer shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of Employer's assets or all of its stock, or with which Employer merges or consolidates. The rights, duties and benefits to Employee hereunder are personal to Employee, and no such right or benefit may be assigned by Employee. 26. BINDING EFFECT. This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns. 27. NO WAIVER. The failure by Employer to enforce at any time any of the provisions of this Agreement or to require at any time performance by Employee of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect the validity of this Agreement, or any part hereof, or the right of Employer thereafter to enforce each and every such provision in accordance with the terms of this Agreement. -12- * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PILLOWTEX MANAGEMENT SERVICES COMPANY By:Jeffrey D. Cordes ----------------------------------- Jeffrey D. Cordes President and Chief Operating Officer EMPLOYEE By:A. Allen Oakley ----------------------------------- A. Allen Oakley GUARANTEE Pillowtex Corporation unconditionally guarantees all obligations of Pillowtex Management Services Company to Employee as set forth in the foregoing Employment Agreement. PILLOWTEX CORPORATION By:Jeffrey D. Cordes ----------------------------------- Jeffrey D. Cordes President and Chief Operating Officer -13- EX-21.1 5 PRINCIPAL OPERATING SUBSIDIARIES State of Incorporation ---------------------- Beacon Manufacturing Company ................ North Carolina Pillowtex Canada, Inc. ...................... Ontario, Canada Fieldcrest Cannon, Inc. ..................... Delaware Encee, Inc. ................................. Delaware The Leshner Corporation. .................... Ohio Opelika Industries, Inc. .................... Alabama Pillowtex, Inc. ............................. Delaware Pillowtex Management Services Company ....... Delaware EX-23.1 6 INDEPENDENT AUDITORS' CONSENT The Board of Directors Pillowtex Corporation: We consent to the incorporation by reference in Registration Statement (nos. 33-65408, 33-84624, 33-81478, 333-39191 and 333-57727) on Form S-8 of Pillowtex Corporation of our report dated February 9, 1999, relating to the consolidated balance sheets of Pillowtex Corporation and subsidiaries as of January 3, 1998 and January 2, 1999, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended January 2, 1999, and related schedule, which report is included in the January 2, 1999 annual report on Form 10-K of Pillowtex Corporation. KPMG LLP Dallas, Texas March 29, 1999 EX-23.2 7 The Board of Directors Pillowtex Corporation We consent to incorporation by reference in Registration Statements Nos. 33-65408, 33-84624, 33-81478, 333-39191 and 333-57727 on Form S-8 of Pillowtex Corporation and subsidiaries of our report dated January 28, 1998 (July 28, 1998 as to Note 8), relating to the consolidated balance sheets of The Leshner Corporation and subsidiaries (a wholly-owned subsidiary of Pillowtex Corporation) as of September 27, 1997 and September 28, 1996 and the related consolidated statements of operations and earnings retained in the business and cash flows for the years ended September 27, 1997, September 28, 1996 and September 30, 1995, which report appears in the annual report on Form 10-K of Pillowtex Corporation and subsidiaries for the year ended January 2, 1999 as an exhibit. DELOITTE & TOUCHE LLP Cincinnati, Ohio March 29, 1999 EX-27 8
5 1,000 12-MOS JAN-02-1999 JAN-04-1998 JAN-02-1999 5,561 0 267,465 21,117 434,281 707,157 727,942 98,737 1,654,154 259,224 956,914 63,057 0 141 237,792 1,654,154 1,509,841 1,509,841 1,228,463 1,228,463 138,846 1,707 72,288 70,244 27,389 42,855 0 0 0 42,855 2.89 2.52
EX-99.1 9 THE LESHNER CORPORATION Consolidated Balance Sheets as of September 27, 1997 and September 28, 1996 and the Related Consolidated Statements of Operations and Earnings Retained in the Business and Cash Flows for Each of the Three Years in the Period Ended September 27, 1997 and Independent Auditors' Report THE LESHNER CORPORATION AND SUBSIDIARY COMPANY TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 2 CONSOLIDATED STATEMENTS OF OPERATIONS AND EARNINGS RETAINED IN THE BUSINESS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 27, 1997 3 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 27, 1997 4 NOTES TO FINANCIAL STATEMENTS 5 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Pillowtex Corporation We have audited the accompanying consolidated balance sheets of The Leshner Corporation and subsidiary company (the "Company") as of September 27, 1997 and September 28, 1996, and the related consolidated statements of operations and earnings retained in the business and of cash flows for each of the three years in the period ended September 27, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of The Leshner Corporation and subsidiary company at September 27, 1997 and September 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 27, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Cincinnati, Ohio January 28, 1998 (July 28, 1998 as to Note 8) -1- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 - --------------------------------------------------------------------------------
LIABILITIES AND ASSETS 1997 1996 STOCKHOLDERS' EQUITY 1997 1996 ------------ ------------ ------------ ------------ CURRENT ASSETS: CURRENT LIABILITIES: Cash $ 41,043 $ 60,108 Current maturities of long-term Accounts receivable (less obligations $ 4,753,511 $ 4,321,622 allowance for doubtful accounts Accounts payable: of $844,000 in 1997 and $135,000 Trade 4,776,856 3,727,514 in 1996) 18,995,565 17,090,826 Other 245,137 230,243 Other receivables 302,383 516,768 Accrued liabilities: Refundable federal income tax 590,265 890,245 Salaries, wages and commissions 1,131,486 1,085,472 Inventories 23,556,965 21,293,021 Taxes other than federal income tax 859,816 1,002,674 Prepaid expenses and other 272,611 565,594 Self insurance 354,419 648,119 Deferred income taxes 892,198 976,769 Interest 126,989 97,048 ------------ ------------ Other 368,138 302,700 Total current assets 44,651,030 41,393,331 ------------ ------------ Total current liabilities 12,616,352 11,415,392 PROPERTY, At cost ------------ ------------ Land and land improvements 711,924 650,432 Buildings and bldg. improvements 10,414,175 10,798,045 LONG-TERM OBLIGATIONS (less Machinery and equipment 35,526,425 27,756,432 current maturities): Furniture and fixtures 2,225,989 2,151,100 Debt 43,666,652 41,126,632 Construction in progress 127,928 1,742,698 Notes payable to shareholders and ------------ ------------ other related parties 2,724,014 2,752,114 Total 49,006,441 43,098,707 Deferred income taxes 1,472,942 1,837,049 Less accumulated depreciation and ------------ ------------ amortization (20,018,990) (17,134,350) Total long-term obligations 47,863,608 45,715,795 ------------ ------------ ------------ ------------ Property, net 28,987,451 25,964,357 ------------ ------------ OTHER ASSETS: STOCKHOLDERS' EQUITY Cash surrender value of life Capital stock: insurance Preferred, 3% cumulative, $100 par (less policy loans of $385,424 value; authorized, 1,500 shares; in 1997 and 1996) 535,122 471,140 outstanding, none Intangible assets (net of Common, $40 stated value; accumulated amortization of authorized, 25,000 shares; $330,358 in 1997 and $275,097 outstanding, 15,000 shares 600,000 600,000 in 1996) 541,956 581,637 Paid-in capital in excess of Deferred pension expense 689,369 548,635 stated value 104,344 104,344 Unexpended bond proceeds - 4,690,687 Earnings retained in the business 14,220,624 15,814,256 ------------ ------------ ------------ ------------ Total other assets 1,766,447 6,292,099 Total stockholders' equity 14,924,968 16,518,600 ------------ ------------ ------------ ------------ TOTAL $75,404,928 $73,649,787 TOTAL $75,404,928 $73,649,787 ============ ============ ============ ============
See notes to consolidated financial statements. -2- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS AND EARNINGS RETAINED IN THE BUSINESS FOR THE YEARS ENDED SEPTEMBER 27, 1997, SEPTEMBER 28, 1996, AND SEPTEMBER 30, 1995 - -------------------------------------------------------------------------------
1997 1996 1995 --------------- --------------- --------------- NET SALES $ 104,924,961 $ 96,438,442 $ 101,187,233 COST OF PRODUCTS SOLD 93,023,688 85,456,398 86,538,165 --------------- --------------- --------------- GROSS PROFIT 11,901,273 10,982,044 14,649,068 SELLING AND GENERAL EXPENSES 10,880,943 9,841,102 10,244,954 --------------- --------------- --------------- INCOME FROM OPERATIONS 1,020,330 1,140,942 4,404,114 --------------- --------------- --------------- OTHER CHARGES (CREDITS): Interest expense 3,765,456 3,364,934 3,310,873 Interest income (116,886) (2,375) (5,026) Miscellaneous, net (194,637) (765,768) (928,748) --------------- --------------- --------------- Total other charges, net 3,453,933 2,596,791 2,377,099 INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES (2,433,603) (1,455,849) 2,027,015 PROVISION (CREDIT) FOR INCOME TAXES (839,971) (435,442) 721,352 --------------- --------------- --------------- NET INCOME (LOSS) (1,593,632) (1,020,407) 1,305,663 EARNINGS RETAINED IN THE BUSINESS, Beginning of year 15,814,256 16,954,663 15,769,000 LESS DIVIDENDS - (120,000) (120,000) --------------- --------------- --------------- EARNINGS RETAINED IN THE BUSINESS, End of year $ 14,220,624 $ 15,814,256 $ 16,954,663 =============== =============== =============== See notes to consolidated financial statements. -3- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 27, 1997, SEPTEMBER 28, 1996, AND SEPTEMBER 30, 1995
1997 1996 1995 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,593,632) $ (1,020,407) $ 1,305,663 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,350,587 2,541,123 2,373,873 Deferred income taxes (279,536) 131,504 351,728 Loss on disposition of property 167,947 36,565 1,169 Changes in assets and liabilities: Decrease (increase) in accounts receivable (1,904,739) 2,895,907 (2,900,161) Decrease (increase) in other receivables 214,385 (431,336) 197,289 Decrease (increase) in refundable federal income tax 299,980 (544,770) (64,913) Decrease (increase) in inventories (2,263,944) 617,300 432,564 Decrease (increase) in prepaid expenses and other 292,983 1,636 (86,617) Decrease (increase) in other assets (204,716) 38,244 (93,480) Increase (decrease) in accounts payable 1,064,236 1,179,487 (268,675) Increase (decrease) in accrued liabilities (295,165) (794,291) 151,239 --------------- --------------- --------------- Net cash provided by (used in) operating activities (1,151,614) 4,650,962 1,399,679 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,982,015) (7,175,859) (927,782) Proceeds from sale of property 40,632 - 13,001 Unexpended proceeds from IRB issuances 4,690,687 (4,690,687) - --------------- --------------- --------------- Net cash used in investing activities (250,696) (11,866,546) (914,781) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 17,178,896 1,656,790 Net proceeds (payments) under revolving line of credit agreements 5,715,573 (1,084,450) 2,347,776 Principal payments on long-term debt (4,305,673) (8,588,715) (4,453,592) Principal payments on notes payable to shareholders and other related parties (220,155) (250,211) (149,250) Proceeds from issuance of notes payable to shareholders and other related parties 206,000 93,000 264,500 Dividends paid - (120,000) (120,000) Payments for bond issuance costs (12,500) (85,373) - --------------- --------------- --------------- Net cash provided by (used in) financing activities 1,383,245 7,143,147 (453,776) --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH (19,065) (72,437) 31,122 CASH: Beginning of year 60,108 132,545 101,423 --------------- --------------- --------------- End of year $ 41,043 $ 60,108 $ 132,545 =============== =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Income taxes $ 20,724 $ 49,661 $ 523,137 Interest 3,735,515 3,716,741 3,132,721 Property acquired through issuance of debt 761,582 - 52,760 New capital leases 786,482 232,784 925,944 See notes to consolidated financial statements. -4- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of The Leshner Corporation ("Leshner") and its wholly-owned subsidiary (the "Company"), Opelika Industries, Inc. ("Opelika"). All material intercompany transactions and balances have been eliminated. FISCAL YEAR - The Company's fiscal year end is the Saturday closest to September 30. DESCRIPTION OF BUSINESS - The Company is a manufacturer, converter and distributor of textile products. Sales to the ten most significant customers represented approximately 45%, 60% and 57% of the Company's total sales in 1997, 1996 and 1995, respectively. A substantial portion of the Company's accounts receivable relates to sales to mass merchandisers, other retailers and institutional distributors. INVENTORIES - Inventories consist principally of manufactured textile materials and are valued at the lower of either standard or estimated cost (which approximate cost on a FIFO basis) or market. INTANGIBLE ASSETS - Intangible assets are being amortized over the estimated periods to be benefited, which range from 2 to 40 years. The carrying value of intangible assets is evaluated periodically as events and circumstances indicate a possible inability to recover its carrying amount. UNEXPENDED BOND PROCEEDS - Unexpended bond proceeds represent funds received from industrial development bond issuances in 1996 which had not yet been expended for their intended purpose. Such funds consist of money market accounts carried at cost which approximates market value and were expended in 1997. DEPRECIATION AND AMORTIZATION - Buildings and building improvements are depreciated over estimated useful lives of 20 to 32 years using principally the straight-line method. Machinery and equipment and furniture and fixtures are depreciated over estimated useful lives of 5 to 15 years using the straight-line and accelerated depreciation methods. Amortization of capital lease balances is included with depreciation expense. The capitalized cost of property under capital leases was $3,298,000 and $3,096,000 at September 27, 1997 and September 28, 1996, respectively. SELF-INSURANCE PLANS - The Company is self-insured for Alabama and Georgia workers' compensation claims and has purchased commercial insurance for individual claims in excess of $300,000 and $250,000, respectively over the life of the claim. Amounts are accrued for estimated future payments applicable to such claims. INCOME TAXES - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable or refundable for the current period plus or minus the change during the current period in deferred tax assets and liabilities. -5- MISCELLANEOUS INCOME - Miscellaneous income primarily represents commission income related to sales of products of other manufacturers and insurance proceeds from various insurance claims. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OTHER RECEIVABLES - At September 27, 1997 and at September 28, 1996, the Company had receivables of approximately $200,000 and $500,000, respectively, for insurance claims recorded as other receivables. 2. INVENTORIES Inventories consisted of the following:
September 27, September 28, 1997 1996 ------------- ------------- Raw materials $ 5,467,725 $ 6,430,163 Work in process 3,751,481 4,051,607 Finished goods 14,337,759 10,811,251 ------------- ------------- Total $ 23,556,965 $ 21,293,021 ============= =============
3. LONG-TERM DEBT Long-term debt at September 27, 1997 and September 28, 1996 consisted of the following:
1997 1996 ----------- ----------- Industrial Revenue Bonds: City of Opelika, interest rates varying from 4.25% to 6.5% annually (6.3% and 6.125% at September 27, 1997 and September 28, 1996, respectively), payable in annual instalments of $600,000 plus interest through January 1998 with a final payment of $605,000 plus interest in January 1999 $ 1,205,000 $ 1,805,000 Macon-Bibb County, variable interest rate, (5.06% and 6.93% at September 27, 1997 and September 28, 1996, respectively) payable in annual instalments of $173,333 plus interest through March 2001 693,333 866,666 Phenix City, interest rates varying from 4.8% to 6.4% annually (6.2% and 6.0% at September 27, 1997 and September 28, 1996, respectively), payable in annual instalments of $170,000 plus interest through March 1999 340,000 510,000 City of Hamilton, approximately 8% per annum, monthly sinking fund payments of $9,877 (interest and principal) through August 1998, net of accumulated sinking fund of $9,131 and $9,180 for 1997 and 1996, respectively 65,869 140,820 -6- City of Opelika, 6.16% per annum, payable in monthly instalments of $67,793, including interest, through August 2002 3,443,333 3,800,000 Pulaski County-Hawkinsville Development Authority, 6.16% per annum, payable in monthly instalments of $80,556, including interest, through August 2002 4,091,561 4,500,000 Notes payable: Bank, floating prime rate plus .35% per annum (8.85% and 8.60% at September 27, 1997 and September 28, 1996, respectively) or 2.35% over the Eurodollar rate per annum (8.07% and 8.05% at September 27, 1997 and September 28, 1996, respectively), loan balance outstanding under the terms of a revolving credit agreement due October 1998 28,827,450 23,111,877 Bank, 7.5% per annum; collateralized by machinery and equipment and payable in monthly instalments of $52,890 including interest, through August 1997 - 560,551 Promissory Note, 8.653% per annum, collateralized by machinery and equipment and payable in monthly instalments of $125,132, including interest, through May 2002 5,748,457 6,707,107 Promissory Note, 8.26% per annum, collateralized by machinery and equipment and payable in monthly instalments of $24,991, including interest, through November 2000 833,124 1,054,190 Promissory Note, 8.26% per annum, collateralized by machinery and equipment and payable in monthly instalments of $8,831, including interest, through December 2002 455,876 515,987 Promissory Note, 8.49% per annum, collateralized by machinery and equipment and payable in monthly instalments of $3,241, including interest, through March 2003 170,461 193,799 Promissory Note, 8.20% rate per annum, collateralized by machinery and equipment and payable in monthly instalments of $8,733, including interest, through December 2001 374,445 - Promissory Note, 9.9% per annum, collateralized by machinery and equipment and payable in monthly instalments of $10,633 through July 2000 314,445 - Promissory Note, variable interest rate (9.02% and 8.90% at September 27, 1997 and September 28, 1996, respectively), collateralized by machinery and equipment and payable in monthly instalments of $1,080, including interest, through November 1999 26,485 35,923 Obligations under capital leases, interest imputed between 7.5% and 10.0% per annum, payable in monthly instalments with maturities ranging through 2001 1,667,724 1,497,679 ----------- ----------- Total 48,257,563 45,299,599 Less current maturities 4,590,911 4,172,967 ----------- ----------- Remainder $43,666,652 $41,126,632 =========== ===========
In January 1992 and March 1992, the Company issued industrial development bonds for $4,205,000 (City of Opelika, Alabama) and for $1,200,000 (City of Phenix City, Alabama), respectively, to finance the continuing modernization of the Opelika yarn making and weaving operations and to expand storage and production facilities at the Phenix City location. -7- Both issues are secured by separate letter of credit facilities provided by a bank. In July 1996, the Company issued additional industrial development bonds for $4,500,000 (The Pulaski County - Hawkinsville Development Authority, Georgia) and $3,800,000 (City of Opelika, Alabama) to finance the acquisition and installation of additional weaving equipment at the Opelika location and acquire terry cloth finishing machines and accessories at the Hawkinsville location. In June 1993, the Company entered into an agreement whereby the Company effectively assumed the outstanding principal balance of $1,386,666 of previously issued Macon-Bibb County Industrial Authority Revenue Bonds, Series 1986 to finance the purchase of a distribution facility in Macon, Georgia. The title to the property financed by the bonds is held by the respective cities/counties until the bonds are fully paid. For accounting purposes, the property is capitalized and depreciated. The Company has a Loan and Security Agreement (the "Agreement") with a bank which expires in April 1998. The Agreement provides the Company with a revolving line of credit, including loans, bankers acceptances and letters of credit, up to maximum of $31,000,000, secured by and not to exceed 85% of qualified accounts receivable and 60% of qualified inventory (as defined in the Agreement). The Agreement bears interest at the floating prime rate plus .35% per annum or, at the option of the Company, 2.35% over the Eurodollar rate per annum. Conversion between the two rates can be made by the Company on specified dates for certain amounts. At September 27, 1997 and September 28, 1996, approximately $22,000,000 and $19,000,000, respectively was at the Eurodollar rate per annum, respectively. The Company must pay a commitment fee of .25% on the unused portion of the credit line and the Agreement contains certain loan covenants. At September 27, 1997 and September 28, 1996, total advances under the Agreement were $28,827,450 and $23,111,877, respectively. In December 1997, the Agreement was extended to October 1, 1998. The industrial development bonds, the Agreement and other notes payable certain covenants restricting certain corporate acts, requiring minimum financial ratios and prohibiting the payment of dividends. As of September 27, 1997, the Company was in violation of several of the required minimum financial ratios. The lenders waived the requirements of the agreements as of September 27, 1997 and for the period through October 1, 1998, as applicable and therefore all debt is classified as current and non-current according to the original repayment terms. Because the majority of the Company's long-term debt has variable interest rates, the fair value of long-term debt approximates carrying value at September 27, 1997 and September 28, 1996. The approximate aggregate amounts of maturities, excluding maturities on notes payable to shareholders and other related parties (see Note 4) are: 1998, $4,591,000; 1999, $33,530,000; 2000, $3,909,000; 2001, $3,480,000; 2002, $2,697,000; and beyond $51,000. 4. NOTES PAYABLE TO SHAREHOLDERS The Company has a 9% note payable to one shareholder through April 2002. The note is payable in monthly instalments of $19,608, including interest. The balance of this note was $881,002 and $1,029,657 at September 27, 1997 and September 28, 1996, respectively. Principal maturities of this note are as follows: 1998, $162,600; 1999, $177,853; 2000, $194,537; 2001, $212,786; and 2002, $133,226. -8- The remaining notes payable to shareholders and other related parties at September 27, 1997 and September 28, 1996 bear interest at 1% over the prime rate (not to exceed 16%) and mature February 1999. Such notes are generally renewed, but are payable immediately upon death. 5. OPERATING LEASES Total rental expense for operating leases was approximately $2,505,000, $3,232,000 and $4,286,000 for 1997, 1996 and 1995, respectively. Most of the Company's operating leases are for weaving and other production equipment and retail stores and contain renewal options. At September 27, 1997 the minimum rental commitments for noncancellable leases which have remaining terms greater than one year totaled approximately $3,531,000. Such commitments are payable as follows: 1998, $1,605,000; 1999, $892,000; 2000, $586,000; 2001, $271,000; 2002, $143,000 and beyond, $34,000. 6. RETIREMENT PLANS The Company has a noncontributory defined benefit plan that covers all salaried and office employees. Benefits are based on years of credited service and compensation levels. Contributions to the plan are based on the frozen entry age actuarial cost method. Pension expense consists of several components that reflect various aspects of the Company's financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. Net pension expense includes the following components for the years ended September 27, 1997, September 28, 1996 and September 30, 1995:
1997 1996 1995 ------------ ------------ ------------ Service cost for current year $ 281,900 $ 273,700 $ 277,000 Interest cost 412,000 382,000 349,000 Actual return on plan assets (1,428,000) (944,000) (1,017,000) Net amortization and deferral 724,000 433,900 588,000 ------------ ------------ ------------ Net pension expense (income) $ (10,100) $ 145,600 $ 197,000 ============ ============ ============
-9- The following table sets forth the plan's funded status and the amount recognized in the Company's balance sheets as of September 27, 1997 September 28, 1996:
1997 1996 ------------ ------------ Actuarial present value of accumulated benefit obligation, including vested benefits of $5,112,741 and $4,785,600 at September 27, 1997 and September 28, 1996, respectively $ 5,328,688 $ 5,005,134 ============ ============ Plan assets at fair market value $ 8,961,240 $ 7,658,332 Actuarial present value of projected benefit obligation for service rendered to date 6,446,755 5,996,475 ------------ ------------ Plan assets in excess of projected benefit obligation 2,514,485 1,661,857 Unrecognized net transition asset at October 1, 1987 ($34,200 being amortized over approximately 16 years) (13,200) (15,300) Unrecognized prior service cost 118,035 129,907 Unrecognized net loss (gain) (1,929,951) (1,227,829) ------------ ------------ Net prepaid pension cost included in the accompanying balance sheets $ 689,369 $ 548,635 ============ ============
At September 27, 1997, September 28, 1996 and September 30, 1995, the discount rate was 7% and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 4%. The expected long-term rate of return on retirement plan assets, consisting principally of U.S. Government and Agency Obligations, common stock and pooled investment funds, was 9.0% in 1997 and 7.5% in 1996 and 1995, respectively. The Company also contributes to Company sponsored and multi-employer defined contribution plans that cover salaried and office employees at Leshner and hourly employees at Opelika. The Company's contributions to these plans were approximately $372,000, $369,000 and $362,000 for the years ended September 27, 1997, September 28, 1996 and September 30, 1995, respectively. -10- 7. INCOME TAXES The provision (credit) for income taxes consists of the following:
1997 1996 1995 ---------- ---------- ---------- Federal: Current $(587,352) $(544,770) $ 360,087 Deferred (249,228) 106,128 322,185 ---------- ---------- ---------- Total (836,580) (438,642) 682,272 ---------- ---------- ---------- State and local: Current 26,917 (22,176) 9,537 Deferred (30,308) 25,376 29,543 ---------- ---------- ---------- Total (3,391) 3,200 39,080 ---------- ---------- ---------- Provision (credit) for income taxes $(839,971) $(435,442) $ 721,352 ========== ========== ==========
The reconciliation of reported income tax expense to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax income is as follows (in millions):
September 27, September 28, September 30, 1997 1996 1995 ------------- ------------- ------------- Statutory federal income tax $ (827,425) $ (494,989) $ 689,185 State income tax (3,391) 10,738 32,547 Other, net (9,155) 48,809 (380) ------------- ------------- ------------- Total $ (839,971) $ (435,442) $ 721,352 ============= ============= =============
The components of deferred tax assets and liabilities were as follows:
September 27, September 28, 1997 1996 ------------- ------------- Deferred tax assets: Net operating loss $ 605,000 $ - Alternative minimum tax credit - 333,615 Asset reserves 413,667 59,600 Accrued liabilities and self insurance reserves 460,625 531,064 Other 343,131 193,107 ------------- ------------- Total deferred tax assets $ 1,822,423 $ 1,117,386 ============= ============= Deferred tax liabilities: Depreciation and fixed assets $ 1,700,453 $ 1,376,543 Capital leases 417,051 350,149 Pension accrual 268,854 228,557 Other 16,809 22,417 ------------- ------------- Total deferred tax liabilities $ 2,403,167 $ 1,977,666 ============= =============
-11- The Company has a federal net operating loss carryover of approximately $1,727,000 generated in the year ended September 27, 1997. This loss will expire in the year 2012 unless used by then. 8. SUBSEQUENT EVENT Effective July 28, 1998, the Company completed a plan of merger with Pillowtex Corporation whereby all of the Company's outstanding shares of common stock were acquired by a subsidiary of Pillowtex Corporation for approximately $33,500,000. * * * * * * -12- EX-99.2 10 THE LESHNER CORPORATION Unaudited Consolidated Balance Sheets as of June 28, 1998 and June 29, 1997 and the Related Unaudited Consolidated Statements of Operations and Earnings Retained in the Business and Cash Flows for the Nine-Month Periods ended June 28, 1998 and June 29, 1997 -1- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY UNAUDITED CONSOLIDATED BALANCE SHEETS JUNE 28, 1998 AND JUNE 29, 1997 (Unaudited) - -------------------------------------------------------------------------------
LIABILITIES AND ASSETS 1998 1997 STOCKHOLDERS' EQUITY 1998 1997 ------------ ------------ ------------ ------------ CURRENT ASSETS: CURRENT LIABILITIES: Cash $ 67,882 $ 119,503 Current maturities of long-term Accounts receivable 15,494,501 17,975,684 obligations $30,719,277 $ 4,660,138 Other receivables 312,472 231,339 Accounts Payable 3,456,962 5,638,455 Refundable federal income tax - 1,005,788 Accrued Liabilities: Inventory 23,523,945 26,407,770 Salaries, wages and commissions 1,139,062 1,323,153 Prepaid expenses and other 169,807 339,824 Taxes other than income tax 970,068 799,661 Deferred income taxes 892,198 976,774 Income tax 749,816 - ------------ ------------ Self insurance 494,347 680,247 Total current assets 40,460,805 47,056,682 Interest 122,048 601,128 Other 396,117 509,406 PROPERTY, At cost: ------------ ------------ Land and land improvements 721,524 710,548 Total current liabilities 38,047,697 14,212,188 Buildings and bldg. improvements 10,625,791 10,153,891 ------------ ------------ Machinery and equipment 36,016,597 34,892,699 Furniture and fixtures 2,026,772 2,192,078 LONG-TERM OBLIGATIONS(less current Construction in progress 6,283 393,301 maturities): ------------ ------------ Debt 11,170,043 44,202,485 Total 49,396,967 48,342,517 Notes payable to stockholders and Less accumulated depreciation and other related parties 2,592,130 2,785,041 amortization (22,337,502) (19,172,706) Deferred income taxes 1,472,942 1,837,049 ------------ ------------ ------------ ------------ Property, net 27,059,465 29,169,811 Total long-term obligations 15,235,115 48,824,575 ------------ ------------ OTHER ASSETS: STOCKHOLDERS' EQUITY Cash surrender value of life Capital stock - common 600,000 600,000 insurance 553,519 493,995 Paid-in capital in excess of Intangible assets, net 508,322 558,234 stated value 104,344 104,344 Deferred pension expense 689,369 734,063 Earnings retained in business 15,284,324 14,271,678 ------------ ------------ ------------ ------------ Total other assets 1,751,210 1,786,292 Total stockholders' equity 15,988,668 14,976,022 ------------ ------------ ------------ ------------ TOTAL $69,271,480 $78,012,785 TOTAL $69,271,480 $78,012,785 ============ ============ ============ ============
See notes to unaudited consolidated financial statements. -2- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND EARNINGS RETAINED IN THE BUSINESS FOR THE NINE-MONTH PERIODS ENDED JUNE 28, 1998 AND JUNE 29, 1997 (Unaudited)
Nine Months Nine Months Ended Ended June 28, 1998 June 29, 1997 --------------- --------------- NET SALES $ 86,234,818 $ 75,513,469 COST OF PRODUCTS SOLD 74,433,882 67,953,093 --------------- --------------- GROSS PROFIT 11,800,936 7,560,376 SELLING AND GENERAL EXPENSES 7,512,349 7,508,603 --------------- --------------- INCOME FROM OPERATIONS 4,288,587 51,773 --------------- --------------- OTHER CHARGES (CREDITS): Interest expense 2,959,799 2,691,296 Interest income (1,590) (115,914) Miscellaneous - net (413,390) 5,204 --------------- --------------- TOTAL OTHER CHARGES, NET 2,544,819 2,580,586 --------------- --------------- EARNINGS (LOSS) BEFORE INCOME TAXES 1,743,768 (2,528,813) INCOME TAX PROVISION (CREDIT) 680,068 (986,235) --------------- --------------- NET INCOME (LOSS) 1,063,700 (1,542,578) EARNINGS RETAINED IN BUSINESS: Beginning of period 14,220,624 15,814,256 --------------- --------------- End of period $ 15,284,324 $ 14,271,678 =============== ===============
See notes to unaudited consolidated financial statements. -3- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED JUNE 28, 1998 AND JUNE 29, 1997 (Unaudited) - -------------------------------------------------------------------------------
Nine Months Nine Months Ended Ended June 28, 1998 June 29, 1997 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,063,700 $ (1,542,578) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,599,355 2,474,448 Loss (gain) on disposal of property 2,574 163,498 Changes in assets and liabilities: Decrease (increase) in accounts receivable 3,501,064 (884,858) Decrease (increase) in refundable federal income tax 590,265 (115,548) Decrease (increase) in inventory 33,020 (5,114,749) Decrease in prepaid expenses and other assets 102,804 225,770 Decrease (increase) in other assets (28,486) 77,146 Increase (decrease) in accounts payable (1,565,031) 1,680,698 Increase in accrued liabilities 1,030,610 777,582 --------------- --------------- Net cash provided by (used in) operating activities 7,329,875 (2,258,591) --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (645,662) (4,601,932) Proceeds from disposal of fixed assets 5,353 - Proceeds from IRB fund - 4,690,687 --------------- --------------- Net cash used in investing activities (640,309) 88,755 --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (payments) under revolving line of credit agreement (3,029,273) 5,504,342 Proceeds from issuance of long-term debt 261,191 Principal payments of long-term debt (3,774,072) (3,318,378) Proceeds from notes payable to stockholders and other related parties - 206,000 Principal payments on notes payable to shareholders and other related parties (120,573) (162,733) --------------- --------------- Net cash provided by (used in) financing activities (6,662,727) 2,229,231 --------------- --------------- NET INCREASE IN CASH 26,839 59,395 CASH - Beginning of period 41,043 60,108 --------------- --------------- CASH - Balance end of period $ 67,882 $ 119,503 =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash refunds during the period for federal income tax $ (573,486) $ (870,694) Cash paid during the period for interest 2,600,740 2,187,216 Property acquired through the issuance of debt and capital leases - 1,218,065
See notes to unaudited consolidated financial statements. -4- THE LESHNER CORPORATION AND SUBSIDIARY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The unaudited consolidated financial statements include the accounts of The Leshner Corporation ("Leshner") and its wholly-owned subsidiary (the "Company"), Opelika Industries, Inc. ("Opelika"). All material intercompany transactions and balances have been eliminated. BASIS OF PRESENTATION - The accompanying unaudited consolidated financial statements of The Leshner Corporation and Subsidiary Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the nine months ended June 28, 1998 and June 29, 1997 are not necessarily indicative of results that may be expected for the full year. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company's annual financial statements for the years ended September 27, 1997 and September 28, 1996. 2. INVENTORIES Inventories consisted of the following:
June 28, June 29, 1996 1997 ------------- ------------- Raw materials $ 3,950,016 $ 5,992,166 Work in process 3,379,082 4,403,131 Finished goods 16,194,847 16,012,473 ------------- ------------- Total $ 23,523,945 $ 26,407,770 ============= =============
Inventories are valued at the lower of either standard or estimated cost (which approximates cost on a FIFO basis) or market. 3. SUBSEQUENT EVENT Effective July 28, 1998, the Company completed a plan of merger with Pillowtex Corporation whereby all of the Company's outstanding shares of common stock were acquired by a subsidiary of Pillowtex Corporation for approximately $33,500,000. * * * * * -5- -----END PRIVACY-ENHANCED MESSAGE-----