-----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, IypU4cKyZQRdCc2UL3EP9LEp8nf9tivFCcMu9078xrsLnuhmH+hSAnKlA2rX9TPw kKuMK8ZOMfQ3fbs4MQ8VlA== 0000896265-99-000015.txt : 19990817 0000896265-99-000015.hdr.sgml : 19990817 ACCESSION NUMBER: 0000896265-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11756 FILM NUMBER: 99694026 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-Q 1 1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 1-11756 PILLOWTEX CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-2147728 (State of incorporation) (IRS Employer Identification No.) 4111 Mint Way Dallas, Texas 75237 (Address of principal executive offices) (Zip Code) (214) 333-3225 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS Outstanding at August 9, 1999 Common Stock, $0.01 par value 14,183,981 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2 PILLOWTEX CORPORATION AND SUBSIDIARIES INDEX Part I - Financial Information Page No. Item 1. Unaudited Interim Consolidated Financial Statements: Consolidated Balance Sheets as of January 2, 1999 and July 3, 1999 3 Consolidated Statements of Earnings for the three months ended July 4, 1998 and July 3, 1999 4 Consolidated Statements of Earnings for the six months ended July 4, 1998 and July 3, 1999 5 Consolidated Statements of Cash Flows for the six months ended July 4, 1998 and July 3, 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20 Signature 21 Index to Exhibits 22 -2- 3 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 2, 1999 and July 3, 1999 (Dollars in thousands, except for par value) (Unaudited)
1998 1999 ASSETS ----------- ----------- Current assets: Cash and cash equivalents. . . . . . . . . . . . . . .$ 5,561 $ 9,032 Receivables: Trade, less allowances of $21,117 and $22,387 in 1998 and 1999, respectively. . . . . . . . . . . . . 246,348 264,082 Other. . . . . . . . . . . . . . . . . . . . . . . . . 13,124 10,945 Inventories. . . . . . . . . . . . . . . . . . . . . . 434,281 509,246 Assets held for sale . . . . . . . . . . . . . . . . . 4,058 4,678 Prepaid expenses . . . . . . . . . . . . . . . . . . . 3,785 6,903 ----------- ----------- Total current assets. . . . . . . . . . . . . . . . 707,157 804,886 Property, plant and equipment, less accum. depreciation of $98,737 and $121,847 in 1998 and 1999, respectively 629,205 640,402 Intangible assets, at cost less accumulated amortization of $11,866 and $15,697 in 1998 and 1999, respectively . . . . . . . . . . . . . . . . 289,829 293,828 Other assets . . . . . . . . . . . . . . . . . . . . . . 27,963 27,028 ----------- ----------- $1,654,154 $1,766,144 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . .$ 127,575 $ 173,588 Accrued expenses . . . . . . . . . . . . . . . . . . . 96,250 78,563 Deferred income taxes. . . . . . . . . . . . . . . . . 22,978 25,320 Current portion of long-term debt. . . . . . . . . . . 12,421 16,926 Income taxes payable . . . . . . . . . . . . . . . . . - 924 ----------- ----------- Total current liabilities . . . . . . . . . . . . . 259,224 295,321 Long-term debt, net of current portion . . . . . . . . . 944,493 1,019,396 Deferred income taxes. . . . . . . . . . . . . . . . . . 96,013 90,133 Noncurrent liabilities . . . . . . . . . . . . . . . . . 53,434 50,523 ----------- ----------- Total liabilities . . . . . . . . . . . . . . . . . 1,353,164 1,455,373 Series A redeemable convertible preferred stock, $.01 par value; 65,000 shares issued and outstanding. . . . 63,057 63,165 Shareholders' equity: Preferred stock, $0.01 par value; authorized 20,000,000 shares; only Series A issued. . . . . . . - - Common stock, $0.01 par value; authorized 55,000,000 shares; 14,126,595 and 14,184,630 shares issued and outstanding in 1998 and 1999, respectively . . . 141 142 Additional paid-in capital . . . . . . . . . . . . . . 155,811 157,067 Retained earnings. . . . . . . . . . . . . . . . . . . 83,650 92,899 Currency translation adjustment. . . . . . . . . . . . (1,669) (1,547) Deferred compensation. . . . . . . . . . . . . . . . . - (955) ----------- ----------- Total shareholders' equity . . . . . . . . . . . . 237,933 247,606 ----------- ----------- $1,654,154 $1,766,144 =========== ===========
See accompanying notes to consolidated financial statements. -3- 4 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended July 4, 1998 and July 3, 1999 (Amounts in thousands, except for per share data) (Unaudited)
1998 1999 ---------- ---------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 332,046 $ 362,468 Cost of goods sold . . . . . . . . . . . . . . . . . . . 275,329 300,908 ---------- ---------- Gross profit. . . . . . . . . . . . . . . . . . . . 56,717 61,560 Selling, general and administrative expenses . . . . . . 28,153 31,103 ---------- ---------- Earnings from operations. . . . . . . . . . . . . . 28,564 30,457 Interest expense . . . . . . . . . . . . . . . . . . . . 17,003 19,735 ---------- ---------- Earnings before income taxes. . . . . . . . . . . . 11,561 10,722 Income taxes . . . . . . . . . . . . . . . . . . . . . . 4,469 3,949 ---------- ---------- Net earnings. . . . . . . . . . . . . . . . . . . . 7,092 6,773 Preferred dividends and accretion. . . . . . . . . . . . 541 540 ---------- ---------- Earnings available for common shareholders. . . . . $ 6,551 $ 6,233 ========== ========== Basic earnings per common share. . . . . . . . . . . . . $ .47 $ .44 ========== ========== Weighted average common shares outstanding - basic . . . 14,083 14,186 ========== ========== Diluted earnings per common share. . . . . . . . . . . . $ .42 $ .40 ========== ========== Weighted average common shares outstanding - diluted . . 17,088 16,914 ========== ========== Dividends declared per common share. . . . . . . . . . . $ .06 $ .06 ========== ==========
See accompanying notes to consolidated financial statements. -4- 5 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Six Months Ended July 4, 1998 and July 3, 1999 (Amounts in thousands, except for per share data) (Unaudited)
1998 1999 ---------- ---------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 698,421 $ 730,975 Cost of goods sold . . . . . . . . . . . . . . . . . . . 580,165 613,201 ---------- ---------- Gross profit. . . . . . . . . . . . . . . . . . . . 118,256 117,774 Selling, general and administrative expenses . . . . . . 61,884 59,239 Restructuring charge . . . . . . . . . . . . . . . . . . 1,539 - ---------- ---------- Earnings from operations. . . . . . . . . . . . . . 54,833 58,535 Interest expense . . . . . . . . . . . . . . . . . . . . 33,798 39,200 ---------- ---------- Earnings before income taxes. . . . . . . . . . . . 21,035 19,335 Income taxes . . . . . . . . . . . . . . . . . . . . . . 8,308 7,309 ---------- ---------- Net earnings. . . . . . . . . . . . . . . . . . . . 12,727 12,026 Preferred dividends and accretion. . . . . . . . . . . . 1,027 1,075 ---------- ---------- Earnings available for common shareholders. . . . . $ 11,700 $ 10,951 ========== ========== Basic earnings per common share. . . . . . . . . . . . . $ .83 $ .77 ========== ========== Weighted average common shares outstanding - basic . . . 14,041 14,167 ========== ========== Diluted earnings per common share. . . . . . . . . . . . $ .75 $ .71 ========== ========== Weighted average common shares outstanding - diluted . . 17,021 16,925 ========== ========== Dividends declared per common share. . . . . . . . . . . $ .12 $ .12 ========== ==========
See accompanying notes to consolidated financial statements. -5- 6 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended July 4, 1998 and July 3, 1999 (Dollars in thousands) (Unaudited)
1998 1999 ---------- ---------- Cash flows from operating activities: Net earnings . . . . . . . . . . . . . . . . . . . . . .$ 12,727 $ 12,026 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization . . . . . . . . . . . . 28,215 27,902 Deferred income taxes . . . . . . . . . . . . . . . . 5,167 1,991 Accretion on debt instruments . . . . . . . . . . . . 643 530 Provision for doubtful accounts . . . . . . . . . . . 826 529 Amortization of deferred compensation . . . . . . . . - 237 Loss on disposal of property, plant and equipment . . 50 65 Changes in operating assets and liabilities: Trade receivables. . . . . . . . . . . . . . . . . 8,400 (18,285) Inventories. . . . . . . . . . . . . . . . . . . . (49,154) (74,436) Accounts payable . . . . . . . . . . . . . . . . . (11,951) 61,771 Accrued expenses . . . . . . . . . . . . . . . . . (9,733) (18,312) Other assets and liabilities . . . . . . . . . . . (406) 576 ---------- ---------- Net cash used in operating activities . . . . . (15,216) (5,406) ---------- ---------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment. . . 12,085 458 Purchases of property, plant and equipment . . . . . . . (53,022) (51,081) Proceeds from disposal of assets held for sale . . . . . 26,195 - Payments for businesses purchased. . . . . . . . . . . . (21,569) - ---------- ---------- Net cash used in investing activities . . . . . (36,311) (50,623) ---------- ---------- Cash flows from financing activities: Decrease in checks not yet presented for payment . . . . (20,612) (15,833) Borrowings on revolving credit loans . . . . . . . . . . 257,700 242,253 Repayments of revolving credit loans . . . . . . . . . . (175,500) (153,293) Retirement of long-term debt . . . . . . . . . . . . . . (8,415) (10,945) Payments of debt issuance costs. . . . . . . . . . . . . (484) (56) Dividends paid . . . . . . . . . . . . . . . . . . . . . (2,724) (2,669) Proceeds from exercise of stock options. . . . . . . . . 2,217 43 ---------- ---------- Net cash provided by financing activities . . . 52,182 59,500 ---------- ---------- Net change in cash and cash equivalents. . . . . . . . . . 655 3,471 Cash and cash equivalents at beginning of period . . . . . 4,604 5,561 ---------- ---------- Cash and cash equivalents at end of period . . . . . . . .$ 5,259 $ 9,032 ========== ========== Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . .$ 33,703 $ 39,943 ========== ========== Income taxes . . . . . . . . . . . . . . . . . . . . .$ (4,821) $ (815) ========== ==========
See accompanying notes to consolidated financial statements. -6- 7 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (Unaudited) (1) Basis of Presentation The accompanying unaudited consolidated financial statements of Pillowtex Corporation, which is referred to in this report as "Parent," and its subsidiaries, which are collectively with Parent, referred to in this report as the "Company," include all adjustments, consisting only of normal, recurring adjustments and accruals, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 30, 1999 for the fiscal year ended January 2, 1999. The three and six month periods ended July 3, 1999 include the results of The Leshner Corporation ("Leshner") which was acquired on July 28, 1998. Certain reclassifications have been made to conform prior year financial statements to the current period classifications. The Company is organized by functional responsibilities and operates as a single segment. (2) Comprehensive Income Comprehensive income consists of net earnings and foreign currency translation adjustments and aggregates $6.8 million and $12.4 million for the three and six month periods ended July 4, 1998. For the three and six month periods ended July 3, 1999 comprehensive income aggregates $6.3 million and $12.1 million, respectively. (3) Inventories Inventories consisted of the following at January 2, 1999 and July 3, 1999:
1998 1999 -------- -------- Finished goods $218,439 $259,928 Work-in-process 134,428 161,064 Raw materials 58,306 61,889 Supplies 23,108 26,365 -------- -------- $434,281 $509,246 ======== ========
-7- 8 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (Unaudited) (4) Earnings Per Share The following table reconciles the numerators and denominators of basic and diluted earnings per share for the three and six month periods ended July 4, 1998 and July 3, 1999. Options to purchase 747,000 shares of common stock at prices ranging from $16.00 to $44.38 per share were outstanding during the three month period ended July 3, 1999, but were not included in the computation of diluted earnings per share because inclusion would have been antidilutive for the period. All outstanding options for the three month period ended July 4, 1998 were included in the computation of diluted earnings per share. Additionally, 681,000 and 633,000 potentially dilutive shares relating to the 6% convertible debentures for the three and six months ended July 4, 1998 and July 3, 1999, respectively, were also not included because inclusion would have been antidilutive for each period.
Three Months Ended Six Months Ended July 4, 1998 July 4, 1998 ------------------ ------------------ Earnings Shares Earnings Shares -------- ------ -------- ------ Basic - earnings available for common shareholders $ 6,551 14,083 $ 11,700 14,041 Effect of dilutive securities: Stock options - 296 - 271 Convertible preferred stock 541 2,709 1,027 2,709 -------- ------ -------- ------ Diluted - earnings available for common shareholders $ 7,092 17,088 $ 12,727 17,021 ======== ====== ======== ======
Three Months Ended Six Months Ended July 3, 1999 July 3, 1999 ------------------ ------------------ Earnings Shares Earnings Shares -------- ------ -------- ------ Basic - earnings available for common shareholders $ 6,233 14,186 $ 10,951 14,167 Effect of dilutive securities: Stock options - 20 - 50 Convertible preferred stock 540 2,708 1,075 2,708 -------- ------ -------- ------ Diluted - earnings available for common shareholders $ 6,773 16,914 $ 12,026 16,925 ======== ====== ======== ======
-8- 9 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Supplemental Condensed Consolidating Financial Information The following table presents condensed consolidating financial information for the Company, segregating the Parent and guarantor subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the Parent and the guarantees are full, unconditional and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that these financial statements would not provide relevant material additional information.
January 2, 1999 ------------------------------------------------------------------------ Non- Guarantor Guarantor Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------ ------------ ------------ ------------ ------------ ------------ Assets: - ------- Trade receivables $ - $ 240,909 $ 5,439 $ - $ 246,348 Receivable from affiliates 746,839 - - (746,839) - Inventories - 424,563 9,718 - 434,281 Other current assets - 25,946 582 - 26,528 ------------ ------------ ------------ ------------ ------------ Total current assets 746,839 691,418 15,739 (746,839) 707,157 Property, plant and equipment, net 565 627,114 1,526 - 629,205 Intangibles, net 19,102 268,478 2,249 - 289,829 Other assets 382,558 17,898 - (372,493) 27,963 ------------ ------------ ------------ ------------ ------------ Total assets $ 1,149,064 $ 1,604,908 $ 19,514 $(1,119,332) $ 1,654,154 ============ ============ ============ ============ ============ Liabilities and Shareholders' Equity: - ------------------------------------- Accounts payable and accrued liabilities $ 6,425 $ 212,823 $ 4,577 $ - $ 223,825 Payables to affiliates - 744,000 2,839 (746,839) - Other current liabilities 8,318 27,002 79 - 35,399 ------------ ------------ ------------ ------------ ------------ Total current liabilities 14,743 983,825 7,495 (746,839) 259,224 Noncurrent liabilities 833,331 260,082 527 - 1,093,940 ------------ ------------ ------------ ------------ ------------ Total liabilities 848,074 1,243,907 8,022 (746,839) 1,353,164 Redeemable convertible preferred stock 63,057 - - - 63,057 Shareholders' equity 237,933 361,001 11,492 (372,493) 237,933 ------------ ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,149,064 $ 1,604,908 $ 19,514 $(1,119,332) $ 1,654,154 ============ ============ ============ ============ ============
-9- 10 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Supplemental Condensed Consolidating Financial Information (Continued)
July 3, 1999 ------------------------------------------------------------------------ Non- Guarantor Guarantor Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------ ------------ ------------ ------------ ------------ ------------ Assets: - ------- Trade receivables $ - $ 259,485 $ 4,597 $ - $ 264,082 Receivable from affiliates 750,932 - - (750,932) - Inventories - 494,199 15,047 - 509,246 Other current assets - 31,283 275 - 31,558 ------------ ------------ ------------ ------------ ------------ Total current assets 750,932 784,967 19,919 (750,932) 804,886 Property, plant and equipment, net 521 638,419 1,462 - 640,402 Intangibles, net 17,651 273,859 2,318 - 293,828 Other assets 474,705 17,444 - (465,121) 27,028 ------------ ------------ ------------ ------------ ------------ Total assets $ 1,243,809 $ 1,714,689 $ 23,699 $(1,216,053) $ 1,766,144 ============ ============ ============ ============ ============ Liabilities and Shareholders' Equity: - ------------------------------------- Accounts payable and accrued liabilities $ 6,005 $ 242,137 $ 4,009 $ - $ 252,151 Payables to affiliates - 744,000 6,932 (750,932) - Other current liabilities 13,628 29,459 83 - 43,170 ------------ ------------ ------------ ------------ ------------ Total current liabilities 19,633 1,015,596 11,024 (750,932) 295,321 Noncurrent liabilities 913,405 246,107 540 - 1,160,052 ------------ ------------ ------------ ------------ ------------ Total liabilities 933,038 1,261,703 11,564 (750,932) 1,455,373 Redeemable convertible preferred stock 63,165 - - - 63,165 Shareholders' equity 247,606 452,986 12,135 (465,121) 247,606 ------------ ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,243,809 $ 1,714,689 $ 23,699 $(1,216,053) $ 1,766,144 ============ ============ ============ ============ ============
-10- 11 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended July 4, 1998 ------------------------------------------------------------------------ Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated - --------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ - $ 327,750 $ 5,101 $ (805) $ 332,046 Cost of goods sold - 270,448 5,686 (805) 275,329 ------------ ------------ ------------ ------------ ------------ Gross profit (loss) - 57,302 (585) - 56,717 Selling, general and administrative (1,671) 29,458 366 - 28,153 ------------ ------------ ------------ ------------ ------------ Earnings (loss) from operations 1,671 27,844 (951) - 28,564 Equity in earnings of subsidiaries 6,775 - - (6,775) - Interest expense 1,184 15,818 1 - 17,003 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 7,262 12,026 (952) (6,775) 11,561 Income taxes 170 4,301 (2) - 4,469 ------------ ------------ ------------ ------------ ------------ Net earnings (loss) 7,092 7,725 (950) (6,775) 7,092 Preferred dividends 541 - - - 541 ------------ ------------ ------------ ------------ ------------ Earnings (loss) available for common shareholders $ 6,551 $ 7,725 $ (950) $ (6,775) $ 6,551 ============ ============ ============ ============ ============ Three Months Ended July 3, 1999 ------------------------------------------------------------------------ Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated - --------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ - $ 356,723 $ 6,886 $ (1,141) $ 362,468 Cost of goods sold - 295,340 6,709 (1,141) 300,908 ------------ ------------ ------------ ------------ ------------ Gross profit - 61,383 177 - 61,560 Selling, general and administrative (1,045) 31,946 202 - 31,103 ------------ ------------ ------------ ------------ ------------ Earnings (loss) from operations 1,045 29,437 (25) - 30,457 Equity in earnings of subsidiaries 6,163 - - (6,163) - Interest expense (income) 107 19,634 (6) - 19,735 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 7,101 9,803 (19) (6,163) 10,722 Income taxes 328 3,638 (17) - 3,949 ------------ ------------ ------------ ------------ ------------ Net earnings (loss) 6,773 6,165 (2) (6,163) 6,773 Preferred dividends 540 - - - 540 ------------ ------------ ------------ ------------ ------------ Earnings (loss) available for common shareholders $ 6,233 $ 6,165 $ (2) $ (6,163) $ 6,233 ============ ============ ============ ============ ============
-11- 12 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Supplemental Condensed Consolidating Financial Information (Continued)
Six Months Ended July 4, 1998 ------------------------------------------------------------------------ Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated - --------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ - $ 688,592 $ 11,285 $ (1,456) $ 698,421 Cost of goods sold - 570,353 11,268 (1,456) 580,165 ------------ ------------ ------------ ------------ ------------ Gross profit - 118,239 17 - 118,256 Selling, general and administrative (1,872) 63,000 756 - 61,884 Restructure charges - 1,539 - - 1,539 ------------ ------------ ------------ ------------ ------------ Earnings (loss) from operations 1,872 53,700 (739) - 54,833 Equity in earnings of subsidiaries 11,544 - - (11,544) - Interest expense 52 33,746 - - 33,798 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 13,364 19,954 (739) (11,544) 21,035 Income taxes 637 7,658 13 - 8,308 ------------ ------------ ------------ ------------ ------------ Net earnings (loss) 12,727 12,296 (752) (11,544) 12,727 Preferred dividends 1,027 - - - 1,027 ------------ ------------ ------------ ------------ ------------ Earnings (loss) available for common shareholders $ 11,700 $ 12,296 $ (752) $ (11,544) $ 11,700 ============ ============ ============ ============ ============ Six Months Ended July 3, 1999 ------------------------------------------------------------------------ Non- Guarantor Guarantor Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated - --------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ - $ 719,386 $ 13,711 $ (2,122) $ 730,975 Cost of goods sold - 602,567 12,756 (2,122) 613,201 ------------ ------------ ------------ ------------ ------------ Gross profit - 116,819 955 - 117,774 Selling, general and administrative (2,087) 60,926 400 - 59,239 ------------ ------------ ------------ ------------ ------------ Earnings from operations 2,087 55,893 555 - 58,535 Equity in earnings of subsidiaries 10,202 - - (10,202) - Interest expense (income) (719) 39,936 (17) - 39,200 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 13,008 15,957 572 (10,202) 19,335 Income taxes 982 6,276 51 - 7,309 ------------ ------------ ------------ ------------ ------------ Net earnings (loss) 12,026 9,681 521 (10,202) 12,026 Preferred dividends 1,075 - - - 1,075 ------------ ------------ ------------ ------------ ------------ Earnings (loss) available for common shareholders $ 10,951 $ 9,681 $ 521 $ (10,202) $ 10,951 ============ ============ ============ ============ ============
-12- 13 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Supplemental Condensed Consolidating Financial Information (Continued)
Six Months Ended July 4, 1998 ------------------------------------------------------------------------ Non- Guarantor Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated - ---------- ------------ ------------ ------------ ------------ ------------ Cash provided by (used in) operating activities $ 9,304 $ (25,775) $ 1,255 $ - $ (15,216) Cash provided by (used in) investing activities 52 (36,321) (42) - (36,311) Cash provided by (used in) financing activities (9,356) 62,757 (1,219) - 52,182 ------------ ------------ ------------ ------------ ------------ Net change in cash and cash equivalents - 661 (6) - 655 Cash and cash equivalents at beginning of period - 4,590 14 - 4,604 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ - $ 5,251 $ 8 $ - $ 5,259 ============ ============ ============ ============ ============ Six Months Ended July 3, 1999 ------------------------------------------------------------------------ Non- Guarantor Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated - ---------- ------------ ------------ ------------ ------------ ------------ Cash provided by (used in) operating activities $ 17,874 $ (19,399) $ (3,881) $ - $ (5,406) Cash provided by (used in) investing activities 44 (50,595) (72) - (50,623) Cash provided by (used in) financing activities (17,918) 73,605 3,813 - 59,500 ------------ ------------ ------------ ------------ ------------ Net change in cash and cash equivalents - 3,611 (140) - 3,471 Cash and cash equivalents at beginning of period - 5,554 7 - 5,561 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ - $ 9,165 $ (133) $ - $ 9,032 ============ ============ ============ ============ ============
-13- 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto, and with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended January 2, 1999. RESULTS OF OPERATIONS NET SALES. Net sales were $362.5 million for the three months ended July 3, 1999, representing an increase of $30.5 million or 9.2%, as compared to $332.0 million for the three months ended July 4, 1998. Net sales for the six months ended July 3, 1999 increased by $32.6 million or 4.7%, to $731.0 million from $698.4 million for the same period of the prior year. The majority of the increase for the second quarter and first half of 1999 is due to the acquisition of Leshner in July of 1998. Net sales for bath products increased both for the second quarter and first half of 1999 when compared to the same periods for 1998. Bedding products also show increases for these two periods except net sales of blankets which were down year over year, which is primarily attributable to exiting the Disney licensed business and the inability to ship products in the first quarter during computer systems conversions in the plants. GROSS PROFIT. Gross profit margins decreased slightly to 17.0% for the three months ended July 3, 1999 from 17.1% for the three months ended July 4, 1998. Gross profit margin for the six months ended July 3, 1999 decreased to 16.1% from 16.9% for the same period in the prior year. The declines in gross profit margin are primarily due to higher costs and unabsorbed overhead expenses associated with the system installations. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses increased $2.9 million to $31.1 million for the three months ended July 3, 1999, compared to $28.2 million for the three months ended July 4, 1998. As a percentage of net sales, SG&A expenses remained nearly flat with a slight increase to 8.6% for the three months ended July 3, 1999 from 8.5% for the three months ended July 4, 1998. The increase in SG&A expenses for the quarter is attributable to increased advertising, travel, and increased expenses of operating the new computer systems in parallel with existing legacy systems. SG&A expenses decreased by $2.6 million from $61.9 million or 8.9% of net sales for the six months ended July 4, 1998 to $59.2 million or 8.1% of net sales for the same period this year. The most significant reason for the decrease is due to lower professional fees and other costs associated with the settlement of a lawsuit in the first half of 1998. INTEREST EXPENSE. Interest expense increased $2.7 million to $19.7 million for the three months ended July 3, 1999, compared to $17.0 million for the three months ended July 4, 1998. Interest expense for the six month period ended July 3, 1999 increased $5.4 million to $39.2 million from $33.8 million for the six month period ended July 4, 1998. The increase is primarily due to the additional debt incurred as a result of the Leshner acquisition and higher working capital requirements. Average interest rates for the three month period ended July 3, 1999 declined to 7.8% from 8.4% for the period ended July 4, 1998. Average interest rates for the six month period ended July 3, 1999 also declined to 7.9% from 8.5% for the same period last year. LIQUIDITY AND CAPITAL RESOURCES The Company anticipates that its principal sources of liquidity will be funds from its operations and funds available under its revolving credit facilities. As of July 3, 1999, the outstanding principal balance under the Company's $350.0 million secured revolving credit facility was $271.8 million, with $36.7 million committed to outstanding letters of credit and $30.5 million committed for future potential payments on the 6% convertible debentures (which amount is equal to 50% of the cash that would have been payable if all of those debentures were converted on that date). As of July 3, 1999, the Company had $11.0 million of availability under its revolving credit facility. The debt outstanding under the revolving credit facility as of July 3, 1999 was $89.0 million higher than at January 2, 1999. This increase was due to seasonal buildups in blanket inventory, to assure product supply during the production and warehousing system implementations at several plants, to ensure adequate stock for new product roll-outs scheduled for the second and third quarters, and to accelerate certain capital projects. As of July 3, 1999 the Company's total debt had increased approximately $172.0 million from the period ending July 4, 1998 due primarily to the acquisition of Leshner, to assure product supply during the production and warehousing system implementations, to ensure adequate stock for new product roll-outs and to accelerate certain capital projects. The Company expects to reduce borrowings for working capital for the rest of 1999 primarily by reducing inventory and accounts receivable; however, the Company can give no assurance that it will be able to reduce inventory as planned. The Company expects a reduction in the manufacturing inefficiencies -14- 15 and shipping problems experienced with the system installations; however, no assurance can be given that the Company will not experience additional difficulties in connection with the installation of these computer systems. As permitted under the terms of the Company's secured revolving credit facility, in May 1999, the Company entered into a $20.0 million senior unsecured revolving credit facility in order to assure adequate working capital availability and continue the current capital expenditure initiatives. On July 27, 1999, the Company amended the senior unsecured facility to increase the amount of funds available to $35.0 million and to extend the original maturity date. The senior unsecured facility is guaranteed on a senior basis by the Company's domestic subsidiaries. The Company is required to pay interest on any amounts borrowed under the senior unsecured facility at a rate which is based upon the London Interbank Offered Rate plus 4.0% or the prime rate plus 2.5% at the Company's option. The senior unsecured facility matures upon termination by the Company at any time or otherwise at the earliest of: a) any increase in the commitment under the secured facility or the Company's existing term loans, the issuance of any capital stock by the Company or its domestic subsidiaries, or other specified events; or b) December 1, 1999. Based upon current and anticipated levels of operations, the Company expects that its cash flow from operations, together with amounts available under the revolving credit facilities, which totaled $31.0 million as of July 3, 1999, will be adequate to meet its anticipated cash requirements in the foreseeable future. In the event that such amounts are not sufficient for future cash requirements, the Company may be required to reduce planned capital expenditures or obtain additional financing. The Company can provide no assurances that financing would be available or, if available, offered on terms acceptable to the Company. As of August 13, 1999, the Company's total long-term debt (including the current portion) was $1,058.3 million. As of that date, $11.0 million of borrowings were outstanding under the senior unsecured revolving credit facility. Instruments governing the Company's debt, including its secured revolving credit facility, require it to maintain specified financial ratios and satisfy financial condition tests. Among other things, the senior secured credit facilities establish a maximum leverage ratio the ratio of total debt to EBITDA (as defined) for four consecutive fiscal quarters that the Company may have as of the end of any fiscal quarter. The maximum leverage ratio (calculated at the end of each fiscal quarter) under this facility is currently 5.25-to-one and declines first to 4.75-to-one commencing with the last fiscal quarter of the 1999 fiscal year and thereafter to 4.25-to-one commencing with the last fiscal quarter of fiscal year 2000. At July 3, 1999, the Company's leverage ratio was 5.17-to-one, based on total debt of $1,036.3 million and EBITDA for the four consecutive fiscal quarters ending July 3, 1999 of $200.4 million (which amount includes $0.4 million of Leshner's pre-acquisition EBITDA as permitted under the secured revolving credit facility). As of July 3, 1999, the Company was in compliance with the specified financial ratios and financial condition tests, including the maximum leverage ratio, imposed on it under its debt instruments; however, the Company can make no assurance that it will be able to maintain that compliance. The Company periodically enters into interest rate swap agreements to minimize the risk of fluctuations in interest rates. As of January 2, 1999 and July 3, 1999, the Company had swap agreements covering approximately $345.0 million of notional amounts exchanging floating rates for fixed rates. The weighted average fixed and floating rates were 4.7% and 5.3%, respectively, at January 2, 1999 and 4.7% and 5.0%, respectively, at July 3, 1999. The fair value of the swaps at January 2, 1999 and July 3, 1999 was $2.1 million and $3.7 million, respectively. The fair values were in favor of the Company. On June 30, 1999, the Company paid a cash dividend of $.06 per share to its common shareholders of record as of June 18, 1999. Additionally, the Company paid preferred dividends in cash in the amount of $481,000 during the second quarter of 1999. -15- 16 Dividends currently accrue on the preferred stock at a rate of 3% per annum and are currently payable in cash or in-kind at the Company's option. To date, the Company has elected to pay such dividends in cash on a quarterly basis. Beginning January 1, 2000, the preferred stock dividend rate may increase depending on the Company's diluted earnings per share, calculated on a pro forma basis as provided in the preferred stock terms, for the 1999 fiscal year which ends January 1, 2000. The following table indicates the dividend rate that will result at January 1, 2000 based on 1999 pro forma earnings per share:
Applicable Dividend Rate at 1999 Pro Forma Earnings Per Share January 1, 2000 --------------------------------- ------------------- $2.70 or greater 3.0% per annum $2.35 to$2.69 7.0% per annum $2.34 or less 10.0% per annum
In addition, if the Company's 1999 pro forma earnings per share are below $2.70, the Company will be obligated to pay a one-time cumulative dividend in shares of the preferred stock in an amount equal to approximately 2,669 shares (or $2.7 million) which is convertible into 111,208 common shares. If the Company's 1999 pro forma earnings per share are below $2.35, this one-time dividend increases to approximately 10,135 shares (or $10.1 million) which is convertible into 422,291 common shares. The Company's diluted earnings per share were $0.71 for the first half of 1999. The Company cannot assure you that the 1999 pro forma earnings per share will be $2.35 or greater. NEW ACCOUNTING STANDARDS In June 1998, 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. As amended by SFAS No. 137, the provisions of SFAS No. 133 are effective for financial statements for fiscal years beginning after June 15, 2000, 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 incorrect results by or at the Year 2000. This could disrupt the Company's operations and those of its suppliers and customers. This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. PILLOWTEX'S READINESS SYSTEMS REPLACEMENT PROJECT. In 1995, the Company began a project to improve its access to business information through common integrated computing and reporting systems. In 1996, before the Company acquired Fieldcrest Cannon, Fieldcrest Cannon had begun a similar project. Each of the Company and Fieldcrest Cannon had decided to use systems using software applications primarily developed by Oracle Corporation. These applications replace many of the accounting, reporting, and manufacturing systems that are, or previously had been, used at the Company and Fieldcrest Cannon. Also, the Company and Fieldcrest Cannon have 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 for these projects are Year 2000 compliant. The Company's system replacement project is expected to be completed toward the end of 1999. Over 95% of the Oracle software development is complete. The financial application was substantially completed in October 1998. The Company's payroll conversion was completed during early 1999. The development -16- 17 and implementation of the manufacturing and warehousing applications requires unique customization to meet the specific needs of each plant and is continuing into the third quarter of 1999. YEAR 2000 PLAN. The Company has developed a specific plan to help ensure that the Company is not negatively affected by Year 2000 problems. The plan is divided into the following components: (1) Information Technology Systems; (2) Information Technology Infrastructure; (3) Process Control and Instrumentation; and (4) third party suppliers and customers. Each component includes 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. The Company hired a consultant in 1999 to review the Company's Year 2000 plan and suggest improvements. The Company identified the most important issues as the safety of individuals, safety of property and the environment, and the Company's ability to manufacture and ship its products. The Company received feedback from the consultant during the second quarter of 1999 and, where appropriate, has acted upon the consultant's suggestions. 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 1999. However, the Company will continue to monitor, review, and perform testing in each phase through the end of 1999. INFORMATION TECHNOLOGY SYSTEMS. Information Technology Systems include mostly applications software. The Company is remediating its applications software mostly through its systems replacement project. Other non-compliant applications software is being converted internally through custom programming or will be replaced by the software supplier. The conversion phase of Information Technology Systems will be completed during the third quarter of 1999. The testing of converted software is ongoing and will continue through the end of 1999. Vendor software replacements and upgrades were completed during the second quarter of 1999 for the majority of the plant conversions. However, certain vendor software upgrades will not be complete until the third quarter of 1999. The testing of converted software will be conducted as the software is replaced and will continue through the end of the year. Contingency planning with respect to Information Technology Systems is ongoing, but the high level planning was completed during the second quarter of 1999. Detailed refinement of these plans will continue into the third and fourth quarters, as other system conversions are completed. INFORMATION TECHNOLOGY INFRASTRUCTURE. Information Technology Infrastructure includes hardware and systems software other than applications software. The Year 2000 plan for Information Technology Infrastructure is on schedule. Substantially all of the changes to Information Technology Infrastructure are complete, and the Company is now in the testing phase which will continue through the end of the year. Contingency planning with respect to Information Technology Infrastructure is ongoing. Development and enhancement will continue through the end of the year. PROCESS CONTROL AND INSTRUMENTATION. The Process Control and Instrumentation component involves the hardware, software, and associated embedded computer -17- 18 chips that are used in the operation of the Company's facilities. The Year 2000 plan with respect to this component is in place. A significant portion of the Process Control and Instrumentation vendors have responded to questionnaires indicating their equipment is Year 2000 compliant. Less than 5% of those vendors, who have responded, have reported non-compliance. The non-compliant systems are prioritized and have been or will be remediated. The Company is following up with those vendors who have not responded to the questionnaires. The Company is still assessing the needs of its newly acquired facilities and expects to complete this assessment during the third quarter of 1999. Contingency planning with respect to this component is ongoing and will be based on the results of tests expected to be completed by the end of the third quarter of 1999. THIRD PARTY SUPPLIERS AND CUSTOMERS. The third party 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 important third parties have been started. The Company is developing contingency plans based upon these evaluations. Contingency planning will continue with the Company's business partners throughout 1999. The Company believes the development and implementation of this component of the Year 2000 plan is on schedule as of July 3, 1999. COSTS TO ADDRESS THE BUSINESS SYSTEM REPLACEMENTS AND YEAR 2000 As of July 3, 1999, the Company had spent approximately $77.0 million on the systems replacement project. A portion of these costs relate to expenditures made prior to the acquisition of Fieldcrest Cannon. The Company estimates that it will spend $26.0 million in 1999 to complete the systems replacement project, of which $22.0 million has been incurred as of July 3, 1999. Expenses to complete remediation are not expected to significantly impact the Company's results of operations or financial position. The Company believes that it will have sufficient operating cash flows for any remaining costs related to the systems replacement project and the Year 2000 plan. The Company does not expect that these costs will affect its liquidity or financial condition; however, the Company can make no assurance that the actual costs will not exceed those estimated above or that it will have available liquidity to fund any such additional costs. 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. Therefore, the Company cannot assure you that the Year 2000 issue will not have a material adverse effect on the Company and its operations. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This filing contains certain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. Because such forward-looking statements are subject to various risks and uncertainties, results may differ materially from those expressed in or implied by such statements. Many of the factors that will determine these results are beyond the Company's ability to control or predict. Factors which could affect the Company's future results and could cause results to differ materially from those expressed in or implied by such forward-looking statements are discussed under the caption "Cautionary Statement Regarding Forward-Looking Statements" in the Company's Annual Report on Form 10-K for its fiscal year ended January 2, 1999. -18- 19 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Company was held on May 5, 1999. The following proposals were voted upon and approved at the Annual meeting: (1) Election of Directors For Three-Year Terms Expiring in 2002:
Votes Votes Broker Cast For Withheld Non-Votes ---------- -------- --------- Paul G. Gillease 12,790,811 85,038 0 Ralph W. La Rovere 12,794,232 81,617 0 Scott E. Shimizu 12,791,367 84,482 0 Mark A. Petricoff 12,784,981 90,868 0
There were no abstentions with respect to the election of directors Charles M. Hansen, Jr., William B. Madden, M. Joseph McHugh, Kevin M. Finlay, Mary R. Silverthorne and Jeffrey D. Cordes continued as directors of the Company. (2) Approval of the amendment to the Restated Articles of Incorporation to increase the number of shares of authorized Common Stock from 30,000,000 shares to 55,000,000 shares: Votes Votes Votes Cast For Against Abstaining ---------- ---------- ---------- 12,077,693 785,527 10,827 -19- 20 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Restated Articles of Incorporation of Pillowtex Corporation, as amended 10.1 Promissory Note dated May 4, 1999 by and between Nationsbank, N.A., as Lender, and Pillowtex Corporation, as Borrower, in the amount of $20,000,000 10.2 First Amendment, dated July 27, 1999, to the Promissory Note, dated May 4, 1999, by and between Bank of America N.A. (formerly Nationsbank, N.A.), as Lender, and Pillowtex Corporation, as Borrower 27.1 Financial Data Schedule (b) Reports on Form 8-K None -20- 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (REGISTRANT) PILLOWTEX CORPORATION BY (SIGNATURE) /s/ Jeffrey D. Cordes (NAME AND TITLE) Jeffrey D. Cordes President, Chief Operating Officer and Director (Principal Financial Officer) (DATE) AUGUST 16, 1999 -21- 22 INDEX TO EXHIBITS
Exhibit Method of Filing - ------- ----------------------------- 3.1 Restated Articles of Incorporation of Pillowtex Corporation, as amended . . . Filed herewith electronically 10.1 Promissory Note dated May 4, 1999 by and between Nationsbank, N.A., as Lender, and Pillowtex Corporation, as Borrower, in the amount of $20,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Filed herewith electronically 10.2 First Amendment, dated July 27, 1999, to the Promissory Note, dated May 4, 1999, by and between Bank of America N.A. (formerly Nationsbank, N.A.), as Lender, and Pillowtex Corporation, as Borrower . . . . Filed herewith electronically 27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . Filed herewith electronically
-22- EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF PILLOWTEX CORPORATION Pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act (the "Act"), Pillowtex Corporation (the "Corporation") hereby adopts Restated Articles of Incorporation, which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date, as further amended by these Restated Articles of Incorporation, and which contain no other change in any provision thereof. ARTICLE ONE. The name of the Corporation is Pillowtex Corporation. ARTICLE TWO. The following amendments to the Articles of Incorporation were adopted by the unanimous written consent of the shareholders of the Corporation as of January 18, 1993: Article V of the Articles of Incorporation is hereby amended to read in its entirety as follows: "ARTICLE V The aggregate number of shares which the corporation is authorized to issue is 50,000,000 shares consisting of 30,000,000 shares of Common Stock, having a par value of $0.01 per share and 20,000,000 shares of Preferred Stock, having a par value of $0.01 per share. The following is a statement of the relative rights, preferences and limitations with respect to the shares of each class of capital stock of the corporation, insofar as the same are fixed in these Articles of Incorporation, and of the authority expressly vested in the Board of Directors of the corporation to divide the Preferred Stock into series and to fix and determine the variations in the relative rights and preferences as between series: A. Preferred Stock 1. The Preferred Stock may, from time to time, be divided into and issued in one or more series. The shares of each series may have such designations, preferences, limitations and relative rights, including voting rights, as are stated herein and in one or more resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided. 1 2 2. To the extent that these Articles of Incorporation do not fix and determine the variations in the relative rights and preferences of the Preferred Stock, both in relation to the Common Stock and as between series of Preferred Stock, the Board of Directors of the corporation is expressly vested with the authority to divide the Preferred Stock into one or more series and, within the limitations set forth in these Articles of Incorporation, to fix and determine the designation, preferences, limitations and relative rights of the shares of any series so established, and, with respect to each such series, to fix by one or more resolutions providing for the issue of such series, the following: (a) The maximum number of shares to constitute such series and the distinctive designation thereof; (b) The annual dividend rate, if any, on the shares of such series and the date or dates from which dividends shall commence to accrue or accumulate as herein provided, and whether dividends shall be cumulative; (c) The price at and the terms and conditions on which the shares of such series may be redeemed, including, without limitation, the time during which shares of the series may be redeemed, the premium, if any, over and above the par value thereof and any accumulated dividends thereon that the holders of shares of such series shall be entitled to receive upon the redemption thereof, which premium may vary at different dates and may also be different with respect to shares redeemed through the operation of any retirement or sinking fund; (d) The liquidation preference, if any, over and above the par value thereof, and any accumulated dividends thereon, that the holders of shares of such series shall be entitled to receive upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation; (e) Whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent and manner in which any such retirement 2 3 or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes, and the terms and provisions relative to the operations of such retirement or sinking fund; (f) The terms and conditions, if any, on which the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of capital stock of the corporation or any series of any other class or classes, or of any other series of the same class, including the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, provided that shares of such series may not be convertible into shares of a series or class that has prior or superior rights and preferences as to dividends or distribution of assets of the corporation upon voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation; (g) The voting rights, if any, on the shares of such series; and (h) Any or all other preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, as shall not be inconsistent with the law or with this Article V. 3. All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if any, shall be cumulative; and all series shall rank equally and be identical in all respects, except as provided in Paragraph 1 of this Section A and except as permitted by the provisions of Paragraph 2 of this Section A. 4. Except to the extent restricted or otherwise provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, no dividends (other than dividends payable in Common Stock) on any class or classes of capital stock of the corporation ranking, with respect to dividends, 3 4 junior to the Preferred Stock, or any series thereof, shall be declared, paid or set apart for payment, until and unless the holders of shares of Preferred Stock of each senior series shall have been paid, or there shall have been set apart for payment, cash dividends, when and as declared by the Board of Directors out of funds of the corporation legally available therefor, at the annual rate, and no more, fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series. 5. To the extent provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, before any payment or distribution of the assets of the corporation (whether capital or surplus) shall be made to or set apart for the holders of any class or classes of capital stock of the corporation ranking junior, as to liquidation rights, to the Preferred Stock, or any series thereof, the holders of the shares of the Preferred Stock shall be entitled to receive payment at the rate fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of the respective series. Unless otherwise provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, for the purposes of this Paragraph 5 and Paragraph 2(d) of this Section A, neither the consolidation nor merger of the corporation with one or more other corporations shall be deemed to be a liquidation, dissolution or winding up. 6. The corporation, at the option of the Board of Directors, may redeem, unless otherwise provided in the resolution establishing a series of Preferred Stock, at such time as is fixed (and if not so fixed, at any time) in the resolution or resolutions adopted by the Board of Directors providing for the issue of a series, the whole or, from time to time, any part of the Preferred Stock of any series then outstanding, at the par value thereof, plus in every case an amount equal to all accumulated dividends, if any (whether or not earned or declared), with respect to each share so redeemed and, in addition thereto, the amount of the premium, if any, payable upon such redemption fixed in the resolution or resolutions adopted by 4 5 the Board of Directors providing for the issue of such series. The Board of Directors shall have full power and authority, subject to the limitations and provisions contained herein and in the Texas Business Corporation Act, to prescribe the terms and conditions upon which the Preferred Stock shall be redeemed from time to time. 7. Shares of Preferred Stock that have been redeemed, purchased or otherwise acquired by the corporation or that, if convertible or exchangeable, have been converted into or exchanged for shares of capital stock of any other class or classes or any series of any other class or classes or of any other series of the same class, shall be cancelled and such shares may not under any circumstances thereafter be reissued as Preferred Stock, and the corporation shall from time to time cause all such acquired shares of Preferred Stock to be cancelled in the manner provided by law. 8. Nothing herein contained shall limit any legal right of the corporation to purchase any shares of the Preferred Stock. B. Common Stock 1. Shares of Common Stock may be issued by the corporation from time to time for such consideration as may lawfully be fixed by the Board of Directors. 2. The Common Stock shall be entitled to one vote per share on all matters. Cumulative voting for directors shall not be permitted and is hereby expressly denied. 3. Subject to the prior rights and preferences of the Preferred Stock set forth in this Article V, or in any resolution or resolutions providing for the issuance of a series of Preferred Stock, and to the extent permitted by the laws of the State of Texas, the holders of Common Stock shall be entitled to receive such cash dividends as may be declared and made payable by the Board of Directors. 5 6 4. After payment shall have been made in full to the holders of any series of Preferred Stock having preferred liquidation rights, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, the remaining assets and funds of the corporation shall be distributed among the holders of the Common Stock according to their respective shares." Article VIII of the Articles of Incorporation is hereby amended to read in its entirety as follows: "ARTICLE VIII The number of directors shall be fixed in the manner provided in the Bylaws of the corporation. The current Board of Directors consists of four directors, and the names and addresses of the persons who are serving as directors until their successors are elected and qualified are: Name Address ---- ------- Mary R. Silverthorne 10640 Lennox Lane Dallas, Texas 75229 Charles M. Hansen, Jr. 4111 Mint Way Dallas, Texas 75237 Scott E. Shimizu 4111 Mint Way Dallas, Texas 75237 Philip J. Souza 4111 Mint Way Dallas, Texas 75237" Article IX of the Articles of Incorporation is hereby amended to read in its entirety as follows: "ARTICLE IX The corporation may purchase, directly or indirectly, its own shares to the extent of the surplus of the corporation." 6 7 Article X of the Articles of Incorporation is hereby amended to read in its entirety as follows: "ARTICLE X A. Approval of Certain Business Combinations. A Business Combination (as hereinafter defined) shall require (I) only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of Paragraph 1 or Paragraph 2 of this Section A are met or (ii) in addition to any affirmative vote required by law or these Articles of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (referred to in this Article X as the "Voting Stock"), voting together as a single class (it being understood that for the purposes of this Article X, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article V of these Articles of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law. 1. Approval by Disinterested Directors. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. Price and Procedure Requirements. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of Common Stock in such Business Combination shall be at least equal to the higher of the following: (I) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder (as hereinafter defined) for any shares of Common Stock or the common stock of any Predecessor Corporation (as hereinafter defined) acquired by it (1) within the two-year 7 8 period immediately prior to the first public announcement of the terms of the proposed Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; and (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such later date is referred to in this Article X as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Paragraph 2(b) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock); (I) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class of Voting Stock or a substantially identical class of stock of any Predecessor Corporation acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, 8 9 dissolution or winding up of the corporation; and (iii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock or stock of a Predecessor Corporation. If the Interested Shareholder has paid for shares of any class of Voting Stock or stock of a Predecessor Corporation with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock or stock of a Predecessor Corporation previously acquired by it. The price determined in accordance with Paragraphs 2(a) and 2(b) of this Section A shall be subject to appropriate adjustment in the event of any special dividend or other disposition of material assets other than in the ordinary course of business, stock dividend, stock split, combination of shares or similar event. Whether specific consideration satisfies this subsection shall be determined by vote of a majority of the Disinterested Directors. (d) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (I) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or upon liquidation; (ii) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (2) an increase in such annual 9 10 rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction that results in such Interested Shareholder becoming an Interested Shareholder. (e) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guaranties, pledges or other financial assistance or any tax credits or other tax advantages provided to or by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall have been mailed to public shareholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). B. Certain Definitions. For purposes of this Article X: 1. "Business Combination" shall mean any transaction that is referred to in any one or more of the following clauses (a) through (e): (a) any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with (I) any Interested Shareholder or (ii) any other corporation (whether or not 10 11 itself an Interested Shareholder) that is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value of $5,000,000 or more; or the issuance or transfer by the corporation or any Subsidiary (in one transaction or series of transactions) of any securities of the corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $5,000,000 or more; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; or (e) any reclassification of securities (including any reverse stock split) or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Equity Security (as hereinafter defined) of the corporation or any Subsidiary that is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder. 2. "Person" shall mean any individual, firm, corporation or other entity. 3. "Interested Shareholder" shall mean any Person (other than the corporation or any 11 12 Subsidiary or employee benefit plan of the corporation or any Subsidiary) that: (a) is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding Voting Stock; or (b) at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or is an assignee of or has otherwise succeeded to any shares of Voting Stock or of capital stock of any Predecessor Corporation that were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 4. A person shall be a "beneficial owner" of any stock that: (a) such Person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns directly or indirectly; or (b) such Person or any of its Affiliates or Associates has (I) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or is beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of such stock. 12 13 5. For the purpose of determining whether a Person is an Interested Shareholder pursuant to Paragraph 3 of this Section B, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of Paragraph 4 of this Section B but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 6. "Affiliate" and "Associate" shall have the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1993. 7. "Subsidiary" means any corporation of which a majority of any class of Equity security is owned, directly or indirectly, by the corporation, provided, however, that for purposes of the definition of Interested Shareholder set forth-in Paragraph 3 of this Section B, the term "Subsidiary" shall mean only a corporation of which a majority of each class of Equity Security is owned, directly or indirectly, by the corporation. 8. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors immediately before the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 9. "Fair Market Value" means: (a) in the case of stock, (I) the highest closing sale price of a share of stock during the 30-day period immediately preceding the date in question on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or (ii) if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period immediately preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system 13 14 then in use, or (iii) if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; or (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. 10. In the event of any Business combination in which the corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs 2 (a) and 2 (b) of Section A of this Article X shall include the shares of Common Stock and the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 11. "Equity Security" shall have the meaning ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on January 1, 1993. 12. A "Predecessor Corporation" includes any corporation of which the corporation was at one time a wholly-owned subsidiary, or of which the corporation would be deemed to be a legal successor in interest (by contract or by merger or other operation of law). C. Powers of the Board of Directors. A majority of the Disinterested Directors shall have the power and duty to determine for the purposes of this Article X, on the basis of information known to them after reasonable inquiry, (1) whether a Person is an Interested Shareholder, (2) the number of shares of Voting Stock beneficially owned by any Person, (3) whether a Person is an Affiliate or Associate of another, (4) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the corporation or any subsidiary in any Business Combination has, an aggregate Fair Market Value of $5,000,000 or more. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article X. 14 15 D. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article X shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. E. Amendment of Article X. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation), the affirmative vote of the holders of 80% or more of the outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, this Article X or any provision hereof." A new Article XI is hereby added to the Articles of Incorporation to read in its entirety as follows: "ARTICLE XI All actions of the shareholders must be taken at an annual or special meeting of shareholders and may not be taken by a consent or consents in writing." A new Article XII is hereby added to the Articles of Incorporation to read in its entirety as follows: "ARTICLE XII Special meetings of shareholders of the corporation may be called only by the Chief Executive Officer or the Board of Directors of the corporation or by the holders of at least 50% of all shares entitled to vote at the proposed meeting." A new Article XIII is hereby added to the Articles of Incorporation to read in its entirety as follows: "ARTICLE XIII The Board of Directors of the corporation only shall have the power to make, alter or repeal the Bylaws of the corporation." A new Article XIV is hereby added to the Articles of Incorporation to read in its entirety as follows: 15 16 "ARTICLE XIV To the fullest extent permitted by Texas statutory or decisional law, as the same exists or may hereafter be amended or interpreted, a director of the corporation shall not be liable to the corporation or its shareholders for any act or omission in such director's capacity as a director. Any repeal or amendment of this Article XIV, or adoption of any other provision of these Articles of Incorporation inconsistent with this Article XIV by the shareholders of the corporation shall be prospective only and shall not adversely affect any limitation on the liability to the corporation or its shareholders of a director of the corporation existing at the time of such repeal, amendment or adoption of an inconsistent provision." A new Article XV is hereby added to the Articles of Incorporation to read in its entirety as follows: "ARTICLE XV No contract or other transactions between the corporation and any other corporation, firm or individual shall be affected or invalidated by the fact that any one or more of the directors or officers of the corporation is or are interested in or is a director or officer of such other corporation, or a member of such firm, and any director or officer, individually or jointly, may be a party to or may be interested in any contract or transaction with the corporation, or in which the corporation is interested, and no contract, act or transaction of the corporation with any person or persons, firms or corporations, shall be affected or invalidated by the fact that any director or officer of the corporation is a party to or interested in such contract, act or transaction, or is in any way connected with such person or persons, firms or corporations, and each and every person who may become a director or officer of the corporation is hereby relieved from any liability that might otherwise exist from contracting with the corporation for the benefit of himself or any firm or corporation in which he may be in any way interested." ARTICLE THREE. Each amendment to the Articles of Incorporation made by these Restated Articles of Incorporation has been effected in conformity with the provisions of the Act. 16 17 ARTICLE FOUR. The number of shares of Common Stock of the Corporation outstanding and entitled to vote was 6,611 at the time of adoption of these Restated Articles of Incorporation. ARTICLE FIVE. The holders of all of the shares of Common Stock outstanding and entitled to vote have signed a written consent to the adoption of these Restated Articles of Incorporation. ARTICLE SIX. The Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Restated Articles of Incorporation: ARTICLE I The name of the corporation is Pillowtex Corporation. ARTICLE II The period of its duration is perpetual. ARTICLE III The purpose for which the corporation is organized is to transact any and all lawful business for which corporations may be incorporated under the Texas Business Corporation Act. ARTICLE IV The address of the initial registered office of the corporation is 4111 Mint Way, Dallas, Texas 75237, and the name of the initial registered agent of the corporation at such address is Jeffrey D. Cordes. ARTICLE V The aggregate number of shares which the corporation is authorized to issue is 50,000,000 shares consisting of 30,000,000 shares of Common Stock, having a par value of $0.01 per share and 20,000,000 shares of Preferred Stock, having a par value of $0.01 per share. The following is a statement of the relative rights, preferences and limitations with respect to the shares of each class of capital stock of the corporation, insofar as the same are fixed in these Articles of Incorporation, and of the authority expressly vested in the Board of Directors of the corporation to 17 18 divide the Preferred Stock into series and to fix and determine the variations in the relative rights and preferences as between series: A. Preferred Stock 1. The Preferred Stock may, from time to time, be divided into and issued in one or more series. The shares of each series may have such designations, preferences, limitations and relative rights, including voting rights, as are stated herein and in one or more resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided. 2. To the extent that these Articles of Incorporation do not fix and determine the variations in the relative rights and preferences of the Preferred Stock, both in relation to the Common Stock and as between series of Preferred Stock, the Board of Directors of the corporation is expressly vested with the authority to divide the Preferred Stock into one or more series and, within the limitations set forth in these Articles of Incorporation, to fix and determine the designation, preferences, limitations and relative rights of the shares of any series so established, and, with respect to each such series, to fix by one or more resolutions providing for the issue of such series, the following: (a) The maximum number of shares to constitute such series and the distinctive designation thereof; (b) The annual dividend rate, if any, on the shares of such series and the date or dates from which dividends shall commence to accrue or accumulate as herein provided, and whether dividends shall be cumulative; The price at and the terms and conditions on which the shares of such series may be redeemed, including, without limitation, the time during which shares of the series may be redeemed, the premium, if any, over and above the par value thereof and any accumulated dividends thereon that the holders of shares of such series shall be entitled to receive upon the redemption thereof, which premium may vary at different dates and may also be different with respect to shares redeemed through the operation of any retirement or sinking fund; (d) The liquidation preference, if any, over and above the par value thereof, and any accumulated dividends thereon, that the holders of shares of such series shall be entitled to receive upon the voluntary or 18 19 involuntary liquidation, dissolution or winding up of the affairs of the corporation; (e) Whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes, and the terms and provisions relative to the operations of such retirement or sinking fund; (f) The terms and conditions, if any, on which the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of capital stock of the corporation or any series of any other class or classes, or of any other series of the same class, including the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, provided that shares of such series may not be convertible into shares of a series or class that has prior or superior rights and preferences as to dividends or distribution of assets of the corporation upon voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation; (g) The voting rights, if any, on the shares of such series; and (h) Any or all other preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, as shall not be inconsistent with the law or with this Article V. 3. All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if any, shall be cumulative; and all series shall rank equally and be identical in all respects, except as provided in Paragraph 1 of this Section A and except as permitted by the foregoing provisions of Paragraph 2. 4. Except to the extent restricted or otherwise provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, no dividends (other than dividends payable in Common Stock) on any class or classes of capital stock of the corporation ranking, with respect to dividends, junior to the Preferred Stock, or any series thereof, shall be declared, 19 20 paid or set apart for payment, until and unless the holders of shares of Preferred Stock of each senior series shall have been paid, or there shall have been set apart for payment, cash dividends, when and as declared by the Board of Directors out of funds of the corporation legally available therefor, at the annual rate, and no more, fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series. 5. To the extent provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation before any payment or distribution of the assets of the corporation (whether capital or surplus) shall be made to or set apart for the holders of any class or classes of capital stock of the corporation ranking junior, as to liquidation rights, to the Preferred Stock, or any series thereof, the holders of the shares of the Preferred Stock shall be entitled to receive payment at the rate fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of the respective series. Unless otherwise provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, for the purposes of this Paragraph 5 and Paragraph 2(d) of this Section A, neither the consolidation nor merger of the corporation with one or more other corporations shall be deemed to be a liquidation, dissolution or winding up. 6. The corporation, at the option of the Board of Directors, may redeem, unless otherwise provided in the resolution establishing a series of Preferred Stock, at such time as is fixed (and if not so fixed, at any time) in the resolution or resolutions adopted by the Board of Directors providing for the issue of a series, the whole or, from time to time, any part of the Preferred Stock of any series then outstanding, at the par value thereof, plus in every case an amount equal to all accumulated dividends, if any (whether or not earned or declared), with respect to each share so redeemed and, in addition thereto, the amount of the premium, if any, payable upon such redemption fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series. The Board of Directors shall have full power and authority, subject to the limitations and provisions contained herein and in the Texas Business Corporation Act, to prescribe the terms and conditions upon which the Preferred Stock shall be redeemed from time to time. 7. Shares of Preferred Stock that have been redeemed, purchased or otherwise acquired by the corporation or that, if convertible or exchangeable, have been converted into or 20 21 exchanged for shares of capital stock of any other class or classes or any series of any other class or classes or of any other series of the same class, shall be cancelled and such shares may not under any circumstances thereafter be reissued as Preferred Stock, and the corporation shall from time to time cause all such acquired shares of Preferred Stock to be cancelled in the manner provided by law. 8. Nothing herein contained shall limit any legal right of the corporation to purchase any shares of the Preferred Stock. B. Common Stock 1. Shares of Common Stock may be issued by the corporation from time to time for such consideration as may lawfully be fixed by the Board of Directors. 2. The Common Stock shall be entitled to one vote per share on all matters. Cumulative voting for directors shall not be permitted and is hereby expressly denied. 3. Subject to the prior rights and preferences of the Preferred Stock set forth in this Article V, or in any resolution or resolutions providing for the issuance of a series of Preferred Stock, and to the extent permitted by the laws of the State of Texas, the holders of Common Stock shall be entitled to receive such cash dividends as may be declared and made payable by the Board of Directors. 4. After payment shall have been made in full to the holders of any series of Preferred Stock having preferred liquidation rights, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, the remaining assets and funds of the corporation shall be distributed among the holders of the Common Stock according to their respective shares. ARTICLE VI No shareholder of the corporation will by reason of his holding shares of stock of the corporation have any preemptive or preferential rights to purchase or subscribe to any shares of any class of stock of the corporation, or any notes, debentures, bonds, warrants, options or other securities of the corporation, now or hereafter to be authorized. 21 22 ARTICLE VII The corporation will not commence business until it has received for the issuance of its shares consideration of the value of one Thousand Dollars ($1,000.00), consisting of money paid, labor done or property actually received. ARTICLE VIII The number of directors shall be fixed in the manner provided in the Bylaws of the corporation. The current Board of Directors consists of four directors, and the names and addresses of the persons who are serving as directors until their successors are elected and qualified are: Name Address ---- ------- [S] [C] Mary R. Silverthorne 10640 Lennox Lane Dallas, Texas 75229 Charles M. Hansen, Jr. 4111 Mint Way Dallas, Texas 75237 Scott E. Shimizu 4111 Mint Way Dallas, Texas 75237 Philip J. Souza 4111 Mint Way Dallas, Texas 75237 ARTICLE IX The corporation may purchase, directly or indirectly, its own shares to the extent of the surplus of the corporation. ARTICLE X A. Approval of Certain Business Combinations. A Business Combination (as hereinafter defined) shall require (I) only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of Paragraph 1 or Paragraph 2 of this Section A are met or (ii) in addition to any affirmative vote required by law or these Articles of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (referred to in this Article X as the "Voting Stock"), voting together as a single class (it being understood that for the purposes of this Article X, each share of the Voting Stock shall have the number of votes granted to 22 23 it pursuant to Article V of these Articles of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law. 1. Approval by Disinterested Directors. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. Price and Procedure Requirements. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of Common Stock in such Business Combination shall be at least equal to the higher of the following: (I) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder (as hereinafter defined) for any shares of Common Stock or the common stock of any Predecessor Corporation (as hereinafter defined) acquired by it (1) within the two-year period immediately prior to the first public announcement of the terms of the proposed Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; and (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such later date is referred to in this Article X as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Paragraph 2(b) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock); 23 24 (I) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class of Voting Stock or a substantially identical class of stock of any Predecessor Corporation acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (iii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock or stock of a Predecessor Corporation. If the Interested Shareholder has paid for shares of any class of Voting Stock or stock of a Predecessor Corporation with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock or stock of a Predecessor Corporation previously acquired by it. The price determined in accordance with Paragraphs 2(a) and 2(b) of this Section A shall be subject to appropriate adjustment in the event of any special dividend or other disposition of material assets other than in the ordinary course of business, stock dividend, stock split, combination of shares or similar event. Whether specific consideration satisfies this subsection shall be determined by vote of a majority of the Disinterested Directors. (d) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (I) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or upon liquidation; (ii) there shall have been (1) no reduction 24 25 in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction that results in such Interested Shareholder's becoming an Interested Shareholder. (e) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guaranties, pledges or other financial assistance or any tax credits or other tax advantages provided to or by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall have been mailed to public stockholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). B. Certain Definitions. For purposes of this Article X: 1. "Business Combination" shall mean any transaction that is referred to in any one or more of the following clauses (a) through (e): (a) any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with (I) any Interested Shareholder or (ii) any other corporation (whether or not itself an Interested Shareholder) that is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or 25 26 (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value of $5,000,000 or more; or the issuance or transfer by the corporation or any Subsidiary (in one transaction or series of transactions) of any securities of the corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $5,000,000 or more; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; or (e) any reclassification of securities (including any reverse stock split) or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Equity Security (as hereinafter defined) of the corporation or any Subsidiary that is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder. 2. "Person" shall mean any individual, firm, corporation or other entity. 3. "Interested Shareholder" shall mean any Person (other than the corporation or any Subsidiary or employee benefit plan of the corporation or any Subsidiary) that: (a) is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding Voting Stock; or (b) at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or 26 27 is an assignee of or has otherwise succeeded to any shares of Voting Stock or of capital stock of any Predecessor Corporation that were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 4. A person shall be a "beneficial owner" of any stock that: (a) such Person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns directly or indirectly; or (b) such Person or any of its Affiliates or Associates has (I) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or is beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of such stock. 5. For the purpose of determining whether a Person is an Interested Shareholder pursuant to Paragraph 3 of this Section B, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of Paragraph 4 of this Section B but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 6. "Affiliate" and "Associate" shall have the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1993. 7. "Subsidiary" means any corporation of which a majority of any class of Equity Security is owned, directly or indirectly, by the corporation, provided, however, that for purposes of the definition of Interested Shareholder set forth in Paragraph 3 of this Section B, the term "Subsidiary" shall 27 28 mean only a corporation of which a majority of each class of Equity Security is owned, directly or indirectly, by the corporation. 8. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors immediately before the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 9. "Fair Market Value" means: (a) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of stock (I) on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or (ii) if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or (iii) if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; or (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. 10. In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs 2(a) and 2(b) of Section A of this Article X shall include the shares of Common Stock and the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 11. "Equity Security" shall have the meaning ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on January 1, 1993. 12. A "Predecessor Corporation" includes any corporation of which the corporation was at one time a wholly-owned subsidiary, or of which the corporation would be deemed to be a legal successor in interest (by contract or by merger or other operation of law). C. Powers of the Board of Directors. A majority of the Disinterested Directors shall have the power and duty to determine for the purposes of this Article X, on the basis of information 28 29 known to them after reasonable inquiry, (1) whether a Person is an Interested Shareholder, (2) the number of shares of Voting Stock beneficially owned by any Person, (3) whether a Person is an Affiliate or Associate of another, (4) whether the assets that are the subject of any Business combination have, or the consideration to be received for the issuance or transfer of securities by the corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $5,000,000 or more. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article X. D. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article X shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. E. Amendment of Article X. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation), the affirmative vote of the holders of 80% or more of the outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, this Article X or any provision hereof. ARTICLE XI All actions of the shareholders must be taken at an annual or special meeting of shareholders and may not be taken by a consent or consents in writing. ARTICLE XII Special meetings of shareholders of the corporation may be called only by the Chief Executive Officer or the Board of Directors of the corporation or by the holders of at least 50% of all shares entitled to vote at the proposed meeting. ARTICLE XIII The Board of Directors of the corporation only shall have the power to make, alter or repeal the Bylaws of the corporation. ARTICLE XIV To the fullest extent permitted by Texas statutory or decisional law, as the same exists or may hereafter be amended or 29 30 interpreted, a director of the corporation shall not be liable to the corporation or its shareholders for any act or omission in such director's capacity as a director. Any repeal or amendment of this Article XIV, or adoption of any other provision of these Articles of Incorporation inconsistent with this Article XIV, by the shareholders of the corporation shall be prospective only and shall not adversely affect any limitation on the liability to the corporation or its shareholders of a director of the corporation existing at the time of such repeal, amendment or adoption of an inconsistent provision. ARTICLE XV No contract or other transactions between the corporation and any other corporation, firm or individual shall be affected or invalidated by the fact that any one or more of the directors or officers of the corporation is or are interested in or is a director or officer of such other corporation, or a member of such firm, and any director or officer, individually or jointly, may be a party to or may be interested in any contract or transaction with the corporation, or in which the corporation is interested, and no contract, act or transaction of the corporation with any person or persons, firms or corporations, shall be affected or invalidated by the fact that any director or officer of the corporation is a party to or interested in such contract, act or transaction, or is in any way connected with such person or persons, firms or corporations, and each and every person who may become a director or officer of the corporation is hereby relieved from any liability that might otherwise exist from contracting with the corporation for the benefit of himself or any firm or corporation in which he may be in any way interested. IN WITNESS WHEREOF, the undersigned Corporation has caused these Restated Articles of Incorporation to be executed as of January 18, 1993. PILLOWTEX CORPORATION By: /s/ CHARLES M. HANSEN, JR. ----------------------------- Charles M. Hansen, Jr. President 30 31 STATEMENT OF CANCELLATION OF TREASURY SHARES To the Secretary of State of the State of Texas: Pursuant to the provisions of Article 4.11 of the Texas Business Corporation Act, the undersigned corporation submits the following statement of cancellation by resolution of its board of directors of shares of the corporation reacquired by it, other than redeemable shares redeemed or purchased: 1. The name of the corporation is Pillowtex Corporation. 2. A resolution was duly adopted by all necessary action on the part of the corporation on February 10, 1993, authorizing the cancellation of 12,545 shares of Common Stock, $0.01 par value per share, held as Treasury Stock of the corporation. The amount of stated capital represented by the shares to be cancelled is One Hundred Twenty-Five and Forty-Five Hundredths Dollars ($125.45). 3. The aggregate number of issued shares, itemized by classes and series and par value, if any, after giving effect to such cancellation is 19,155 itemized as follows:
Class Par Value Number of Shares ----- --------- ---------------- Common Stock $0.01 19,155
4. The amount of the stated capital of the corporation, after giving effect to such cancellation, is $191.55. Dated: February 10, 1993 PILLOWTEX CORPORATION By: /s/ CHARLES M. HANSEN, JR. -------------------------------- Charles M. Hansen, Jr. President 32 ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PILLOWTEX CORPORATION Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, Pillowtex Corporation (the "Company"), hereby adopts the following Articles of Amendment to its Articles of Incorporation. ARTICLE ONE. The name of the corporation is Pillowtex Corporation. ARTICLE TWO. The following amendments to the Amended and Restated Articles of Incorporation was adopted by the shareholders of the Company as of February 15, 1993: (a) Article X of the Amended and Restated Articles of Incorporation be amended to read in its entirety as follows: "ARTICLE X A. Approval of Certain Business Combinations. A Business Combination (as hereinafter defined) during the three-year period immediately following the date that a shareholder became an Interested Shareholder (as hereinafter defined) shall require (I) only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in Paragraph 1, 2, 3 or 4 of this Section A are met, or (ii) in addition to any affirmative vote required by law or these Articles of Incorporation, the affirmative vote of the holders of at least 66-2/3% of the voting power of the then outstanding shares of capital stock of the corporation that are entitled to vote generally in the election of directors (referred to in this Article X as the "Voting Stock") and that are not owned by the Interested Shareholder, voting together as a single class (it being understood that for the purposes of this Article X, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article V of these Articles of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law. 1. Approval by Disinterested Directors. The Business Combination or the transaction that resulted in the shareholder becoming an Interested Shareholder shall 33 have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. Price and Procedure Requirements. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of Common Stock in such Business Combination shall be at least equal to the higher of the following: (I) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder (as hereinafter defined) for any shares of Common Stock acquired by it (1) within the three-year period immediately prior to the first public announcement of the terms of the proposed Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; and (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such later date is referred to in this Article X as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Paragraph 2(b) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock); (I) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested 2 34 Shareholder for any shares of such class of Voting stock acquired by it (1) within the three-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (iii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock. If the Interested Shareholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. The price determined in accordance with Paragraphs 2(a) and 2(b) of this Section A shall be subject to appropriate adjustment in the event of any special dividend or other disposition of material assets other than in the ordinary course of business, stock dividend, stock split, combination of shares or similar event. Whether specific consideration satisfies this subsection shall be determined by vote of a majority of the Disinterested Directors. (d) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business combination: (I) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or upon liquidation; (ii) there shall have been (1) no 3 35 reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock) , except as approved by a majority of the Disinterested Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction that results in such Interested Shareholder's becoming an Interested Shareholder. (e) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guaranties, pledges or other financial assistance or any tax credits or other tax advantages provided to or by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall have been mailed to public stockholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 3. Acquisition of 85% of Voting Stock. Upon consummation of the transaction that resulted in the shareholder becoming an Interested Shareholder, the Interested Shareholder owned at least 85% of the Voting Stock outstanding at the time such transaction commenced. 4. Previously Proposed Business Combinations. The Business Combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required 4 36 hereunder of a proposed transaction that (I) constitutes one of the transactions described in the second sentence of this Paragraph; (ii) is with or by a person who either was not an Interested Shareholder during the previous three years or who became an Interested Shareholder with the approval of the corporation's Board of Directors; and (iii) is approved or not opposed by a majority of the Disinterested Directors then in office (but not less than one) . The proposed transactions referred to in the preceding sentence are limited to (x) a merger or consolidation of the corporation; (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the corporation or of any Subsidiary (as hereinafter defined) (other than to any wholly-owned Subsidiary or to the corporation) having an aggregate Fair Market Value equal to 50% or more of either the aggregate Fair Market Value of all of the assets of the corporation determined on a consolidated basis or the aggregate Fair Market Value of all the outstanding stock of the corporation; or (z) a proposed tender or exchange offer for 50% or more of the outstanding Voting Stock. The corporation shall give not less than 20 days notice to all Interested Shareholders prior to the consummation of any of the transactions described in clauses (x) or (y) of the second sentence of this Paragraph. B. Certain Definitions. For purposes of this Article X: 1. "Business Combination" shall mean any transaction that is referred to in any one or more of the following clauses (a) through (e): (a) any merger or consolidation of the corporation or any Subsidiary with (I) any Interested Shareholder or (ii) any other corporation (whether or not itself an Interested Shareholder) that is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value equal to 10% or more of either the Fair Market Value of all the assets of the corporation determined on a consolidated basis or 5 37 the aggregate Fair Market Value of all the outstanding stock of the corporation; or the issuance or transfer by the corporation or any Subsidiary (in one transaction or series of transactions) of any securities of the corporation or any Subsidiary to any interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof), except (I) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the corporation or any Subsidiary, which securities were outstanding prior to the time that the Interested Shareholder became such, (ii) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the corporation or any Subsidiary, which security is distributed, pro rata, to all holders of a class or series of stock of the corporation subsequent to the time the Interested Shareholder became such, (iii) pursuant to an exchange offer by the corporation to purchase stock made on the same terms to all holders of such stock, or (iv) any issuance or transfer of stock by the corporation, provided however, that in no case under (I) through (iv) shall there be an increase in the Interested Shareholder's proportionate share of the stock of any class or series of the corporation or of the Voting Stock; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; or (e) any reclassification of securities (including any reverse stock split) or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Equity Security (as hereinafter 6 38 defined) of the corporation or any Subsidiary that is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder. 2. "Person" shall mean any individual, firm, corporation or other entity. 3. "Interested Shareholder" shall mean any Person (other than the corporation or any Subsidiary or employee benefit plan of the corporation or any Subsidiary) that: (a) is the beneficial owner, directly or indirectly, of 15% or more of the outstanding Voting Stock; or (b) is an assignee of or has otherwise succeeded to any shares of Voting Stock that were at any time within the three-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 4. A person shall be a "beneficial owner" of any stock that: (a) such Person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns directly or indirectly; or (b) such Person or any of its Affiliates or Associates has (I) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or is beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of such stock. 7 39 5. For the purpose of determining whether a Person is an Interested Shareholder pursuant to Paragraph 3 of this Section B, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of Paragraph 4 of this Section B but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 6. "Affiliate" and "Associate" shall have the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1993. 7. "Subsidiary" means any corporation of which a majority of any class of Equity Security is owned, directly or indirectly, by the corporation, provided, however, that for purposes of the definition of Interested Shareholder set forth in Paragraph 3 of this Section B, the term "Subsidiary" shall mean only a corporation of which a majority of each class of Equity Security is owned, directly or indirectly, by the corporation. 8. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors immediately before the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 9. "Fair Market Value" means: (a) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of stock (I) on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or (ii) if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or (iii) if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; or (b) in the 8 40 case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. 10. In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs 2(a) and 2(b) of Section A of this Article X shall include the shares of Common Stock and the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 11. "Equity Security" shall have the meaning ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on January 1, 1993. 12. "Announcement Date" shall have the meaning set forth in Section A(2)(a)(I) of this Article X. 13. "Determination Date" shall have the meaning set forth in Section A(2)(a)(ii) of this Article X. 14. "Voting Stock" shall have the meaning set forth in the first paragraph of Section A of this Article X. C. Powers of the Board of Directors. A majority of the Disinterested Directors shall have the power and duty to determine for the purposes of this Article X, on the basis of information known to them after reasonable inquiry, (1) whether a Person is an Interested Shareholder, (2) the number of shares of Voting Stock beneficially owned by any Person, (3) whether a Person is an Affiliate or Associate of another, (4) whether the assets that are the subject of any Business Combination have an aggregate Fair Market Value equal to 10% or more of either the Fair Market Value of all the assets of the corporation determined on a consolidated basis or the aggregate Fair Market Value of all the outstanding stock of the corporation. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article X. D. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article X shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. E. Amendment of Article X. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of 9 41 the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation), the affirmative vote of the holders of 80% or more of the outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, this Article X or any provision hereof." (b) Article XIII of the Amended and Restated Articles of Incorporation be amended to read in its entirety as follows: "ARTICLE XIII The Bylaws of the corporation may be amended or repealed or new Bylaws may be adopted by the affirmative vote of either (a) the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, or (b) the majority of the directors present at any meeting of the Board of Directors of the corporation at which a quorum is present. Notwithstanding any other provisions of these Articles of Incorporation or the Bylaws of the corporation (and notwithstanding that a lesser percentage may be specified by law, these Articles of Incorporation or the Bylaws of the corporation), the affirmative vote of the holders of at least 80% of the outstanding capital stock of the corporation, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, this Article XIII or any provision hereof." ARTICLE THREE. The number of shares of Common Stock of the Company outstanding and entitled to vote was 6,505,224 at the time of the adoption of this amendment. ARTICLE FOUR. The holders of all of the shares of Common Stock outstanding and entitled to vote have signed a written consent to the adoption of this amendment. 10 42 DATED as of the 15th day of February, 1993. PILLOWTEX CORPORATION By: /s/ CHARLES M. HANSEN, JR. ------------------------------- Charles M. Hansen, Jr., President 11 43 ARTICLES OF CORRECTION TO THE ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PILLOWTEX CORPORATION Pursuant to Article 1302-7.01 et seq of the Texas Miscellaneous Corporation Laws Act, these Articles of Correction are adopted to correct a document which is an inaccurate record of corporate action, contains an inaccurate or erroneous statement, or was defectively or erroneously executed, sealed, acknowledged, or verified. ARTICLE ONE The name of the corporation is Pillowtex Corporation. ARTICLE TWO The document to be corrected is the Articles of Amendment to the Amended and Restated Articles of Incorporation of Pillowtex Corporation filed in the Office of the Secretary of State of Texas on February 17, 1993. ARTICLE THREE The Articles are erroneous, inaccurate, or incomplete because they erroneously state in Article Four that holders of all of the shares of Common Stock outstanding and entitled to vote have signed a written consent to the adoption of the Articles of Amendment. ARTICLE FOUR These Articles of Correction correct the Articles of Amendment by substituting the following for Article Four in its entirety: "ARTICLE FOUR. At a special meeting of shareholders called for the purpose of voting on adoption of this amendment, the holders of 6,284,808 shares of Common Stock outstanding and entitled to vote voted for this amendment and the holders of -0- shares of Common Stock outstanding and entitled to vote voted against this amendment." 44 IN WITNESS WHEREOF, these Articles of Correction are dated as of March 12, 1993. PILLOWTEX CORPORATION By: /s/ STEPHEN P. RICHMAN ------------------------------- Stephen P. Richman, Vice President 2 45 ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PILLOWTEX CORPORATION Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, Pillowtex Corporation (the "Company"), hereby adopts the following Articles of Amendment to its Articles of Incorporation. ARTICLE ONE. The name of the corporation is Pillowtex corporation. ARTICLE TWO. The following amendments to the Amended and Restated Articles of Incorporation were adopted by the shareholders of the Company as of March 12, 1993: (a) Article XI of the Amended and Restated Articles of Incorporation be amended to read in its entirety as follows: "ARTICLE XI [INTENTIONALLY LEFT BLANK]" (b) Article XII of the Amended and Restated Articles of Incorporation be amended to read in its entirety as follows: "ARTICLE XII Special meetings of shareholders of the corporation may be called only by the Chief Executive Officer, the President or the Board of Directors of the corporation or by the holders of at least 50% of all shares entitled to vote at the proposed meeting." ARTICLE THREE. The number of shares of Common Stock of the Company outstanding and entitled to vote was 6,505,224 at the time of the adoption of this amendment. ARTICLE FOUR. At a special meeting of shareholders called for the purpose of voting on adoption of this amendment, the holders of 6,284,808 shares of Common Stock outstanding and entitled to vote voted for this amendment and the holders of -0- shares of Common Stock outstanding and entitled to vote voted against this amendment. 46 IN WITNESS WHEREOF, these Articles of Amendment are dated as of March 12, 1993. PILLOWTEX CORPORATION By: /s/ STEPHEN P. RICHMAN ------------------------------------ Stephen P. Richman, Vice President 2 47 STATEMENT 0F CANCELLATION OF TREASURY SHARES To the Secretary of State of the State of Texas: Pursuant to the provisions of Article 4.11 of the Texas Business Corporation Act, the undersigned corporation submits the following statement of cancellation by resolution of its board of directors of shares of the corporation reacquired by it, other than redeemable shares redeemed or purchased: 1. The name of the corporation is Pillowtex Corporation. 2. A resolution was duly adopted by all necessary action on the part of the corporation on March 25, 1993, authorizing the cancellation of 12,343,296 shares of Common Stock, $0.01 par value per share, held as Treasury Stock of the corporation. The amount of stated capital represented by the shares to be cancelled is One Hundred Twenty-Three Thousand Four Hundred Thirty-Two and Ninety-Six Hundredths Dollars ($123,432.96). 3. The aggregate number of issued shares, itemized by classes and series and par value, if any, after giving effect to such cancellation is 10,590,224 itemized as follows:
Class Par Value Number of Shares ----- --------- ---------------- Common Stock $0.01 10,590,224
4. The amount of the stated capital of the corporation, after giving effect to such cancellation, is $105,902.24 Dated: March 25, 1993 PILLOWTEX CORPORATION By: /s/ CHARLES M. HANSEN, JR. ---------------------------------- Charles M. Hansen, Jr. President 48 STATEMENT OF RESOLUTION FOR SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK OF PILLOWTEX CORPORATION PURSUANT TO ARTICLE 2.13 OF THE TEXAS BUSINESS CORPORATION ACT I, Jeffrey D. Cordes, President of Pillowtex Corporation, a corporation organized and existing under the Texas Business Corporation Act (the "Company"), DO HEREBY CERTIFY that at a meeting of the Board of Directors on December 15, 1997, at which meeting a quorum was present, the following resolution was adopted: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of Article V of the Company's Restated Articles of Incorporation, as amended, a series of Preferred Stock, par value $0.01 per share, of the Company be, and hereby is, created, and the designations, preferences, and relative rights of the shares of such series, and the qualifications, limitations or restrictions thereof, be, and hereby are, as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Redeemable Convertible Preferred Stock" (the "Preferred Stock") and the number of shares constituting such series initially shall be 200,000. Section 2. Definitions. For purposes of this Statement of Resolution, the following definitions shall apply: "1999 EPS" shall mean EPS for the twelve month fiscal year of the Company ending January 1, 2000. "1999 Pro Forma EPS" shall mean 1999 EPS calculated on a pro forma basis assuming (I) the dividend rate on the Preferred Stock for calendar 1997 (if applicable) and calendar 1998 was the Adjusted 1998 Dividend Rate; (ii) the dividend rate on the Preferred Stock for calendar 1999 was (a) 10.0% of Stated Value per annum if 1999 EPS is less than $2.35, (b) 7.0% of Stated Value per annum if 1999 EPS is greater than, or equal to, $2.35 but less than $2.70, and 3.0% of Stated Value per annum if 1999 EPS is greater than, or equal to, $2.70; and (iii) any incremental dividends included pursuant to clauses (I) and (ii) which were not paid when due (in either cash or shares of Preferred Stock) were paid in additional shares of Preferred Stock (including the effect of all dividends earned on unpaid dividends). "Adjusted 1998 Dividend Rate" shall mean (I) if 1999 EPS is equal to, or greater than, $2.35 (as adjusted pursuant to Section 3), 3% of Stated Value per annum, or (ii) if 1999 EPS is less than $2.35 (as adjusted pursuant to Section 3), 10% of Stated Value per annum. 49 "Affiliate" of any specified Person shall mean: (a) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person; or (b) any other Person which beneficially owns or holds ten percent or more of any class of the share capital normally entitled to vote in the election of directors of such specified Person; or any other Person of which ten percent or more of the share capital normally entitled to vote in the election of directors of such Person is beneficially owned or held by such specified Person or a subsidiary of such specified Person; or (d) any other Person who is a director or officer (I) of such specified Person; (ii) of any Subsidiary of such specified Person or (iii) of any Person described in paragraph (a) above; and for purposes of this definition, "control" of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Aggregate Dividends Owed" shall mean the aggregate amount of dividends which would have been paid on the Preferred Stock from the Issue Date through and including the last Dividend Payment Date prior to the Final Determination Date assuming (I) the dividend rate on the Preferred Stock for calendar 1997 (if applicable) and calendar 1998 was (a) 3.0% of Stated Value per annum if 1999 Pro Forma EPS is equal to, or greater than, $2.35 (as adjusted pursuant to Section 3), or (b) 10.0% of Stated Value per annum if 1999 Pro Forma EPS is less than $2.35 (as adjusted pursuant to Section 3); (ii) the dividend rate on the Preferred Stock for calendar 1999 was the Applicable Dividend Rate; and (iii) any incremental dividends included in calculating dividends pursuant to clauses (I) and (ii) which were not paid when due (in either cash or shares of Preferred Stock) were paid in additional shares of Preferred Stock (including the effect of all dividends earned on unpaid dividends). "Aggregate Dividends Paid" shall mean the aggregate amount of dividends actually paid (whether in cash or additional shares of Preferred Stock) from the Issue Date through and including the last Dividend Payment Date prior to the Final Determination Date, including amounts actually paid in cash pursuant to Section 3(c). "Applicable Dividend Rate" shall have the meaning assigned to it in Section 3. "Asset Sales" shall mean the sale or conveyance of assets in one or a series of related transactions (other than inventory sold in the ordinary course of business) having a fair market value in excess of $1,000,000. A "Bankruptcy Event" shall be deemed to have occurred with respect to a Person if such Person shall: 2 50 (I) generally fail to pay, or admit in writing its inability to pay, its debts as they become due; (ii) apply for, consent to or acquiesce in, the appointment of a liquidator, trustee, receiver, sequestrator or other custodian for itself or any of its material Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; (iii) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a liquidator, trustee, receiver, sequestrator or other custodian for itself or any of its material Subsidiaries or for a substantial part of the property of any thereof and such appointment shall not be discharged within 30 days; (iv) commence, or permit or suffer to exist the commencement of, any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of such Person or any of its material Subsidiaries, and, if such case or proceeding is not commenced by such Person or any such Subsidiaries, such case or proceeding shall be consented to or acquiesced in by such Person or any of its material Subsidiaries or shall result in the entry of any order for relief or shall remain for 30 days undismissed; or (v) take any action to authorize any of the foregoing. "Board" shall mean the Board of Directors of the Company. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York. "Capital Stock" shall mean any class or series of capital stock of the Company. "Catch Up Dividend" shall have the meaning set forth in Section 3(d). "Change of Control" shall have the meaning assigned to it in the Indenture except that any transaction or series of transactions in which the Apollo Purchasers (as defined in the Purchase Agreement) or their Affiliates or any transferees of any of the foregoing (either individually or as part of a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) acquire 50% or more of the Company's capital stock shall not be deemed a Change of Control. "Company" shall mean Pillowtex Corporation, a Texas corporation. "Common Stock" shall mean the Common Stock, par value $0.01, of the Company. 3 51 "Common Stock's Fair Market Value" shall mean (I) if the Common Stock is listed on a national securities exchange, the closing sale price per share on the principal exchange on which the Common Stock is listed as reported by such exchange, (ii) if the Common Stock is quoted in the National Market System, the closing sale price per share as reported by NASDAQ or (iii) if the Common Stock is traded in the over-the- counter market but not quoted in the National Market System, the average of the closing bid and asked quotations per share as reported by NASDAQ, or any other nationally accepted reporting medium if NASDAQ quotations shall be unavailable. "Control Notice" shall have the meaning assigned to it in Section 6(c)(ii). "Conversion Date" shall have the meaning assigned to it in Section 7(c). "Conversion Price" shall mean $24.00 per share; provided that if the Determination Price is less than $23.00 then the Conversion Price shall equal the Determination Price plus $1.00; provided further, that the Conversion Price shall, in any event, be subject to adjustment from time to time as provided in Section 7. "Determination Price" shall mean the average of the closing sales prices of the Company's Common Stock as reported on the New York Stock Exchange Composite Transactions List for each of the 20 consecutive trading days immediately preceding the fifth trading day prior to the Closing Date (as defined in the Agreement and Plan of Merger dated September 10, 1997 among the Company, a Company Subsidiary and the Target). "Dividend Adjustment Amount" shall mean the difference between (I) the Aggregate Dividends Owed and (ii) the Aggregate Dividends Paid. "Dividend Increase" shall have the meaning assigned to it in Section 3. "Dividend Payment Date" means each of March 31, June 30, September 30 and December 31 upon which quarterly dividend payments are due. "EPS" for any fiscal year shall mean the Company's diluted earnings per share (as calculated based on Financial Accounting Standard Board Statement No. 128) as included in the Company's audited financial statements for such fiscal year, as adjusted to exclude the following items set forth, included or reflected in such audited statements (a) the after-tax effect of any changes in GAAP from September 5, 1997, other than the effects of Financial Accounting Standards Board Statement No. 128, (b) the after-tax effect of any extraordinary gains or losses, and the after-tax effect of gains on Asset Sales. "Event of Noncompliance" shall have the meaning assigned to it in Section 10. "Final Determination Date" shall have the meaning assigned to it in Section 3. 4 52 "GAAP" shall mean generally acceptable accounting principles consistently applied in the United States, unless any other jurisdiction is specified, in which case it shall be the equivalent set of accounting principles for such jurisdiction. "Indenture" means the Indenture dated as of November 12, 1996, between the Company, certain guarantors described therein and Bank One, Columbus, N.A., as trustee, relating to the Series A and Series B 10% Senior Subordinated Notes of the Company. "Issue Date" shall mean the date of original issuance of the Preferred Stock. "Junior Securities" shall mean Capital Stock of the Company that, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank junior to the Preferred Stock. "Liquidation Preference" shall have the meaning assigned to it in Section 4. "Majority of the Preferred Stock" shall mean more than 50% of the outstanding shares of Preferred Stock. "Mandatory Redemption Date" shall have the meaning assigned to it in Section 5(b). "Mandatory Redemption Price" shall have the meaning assigned to it in Section 5(b). "Optional Redemption Date" shall have the meaning assigned to it in Section 5(a)(I). "Optional Redemption Price" shall have the meaning assigned to it in Section 5(a)(I). "Parity Securities" shall mean Capital Stock of the Company that, with respect to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company, ranks on a parity with the Preferred Stock and has a mandatory redemption date on or after the Mandatory Redemption Date. "Participating Holder" shall have the meaning assigned to it in Section 6(c)(ii). "Permitted Indebtedness" shall mean (I) term loans issued pursuant to the Company's senior credit facilities contemplated in Section 9.8(b) of the Purchase Agreement, (ii) the subordinated debt contemplated in Section 9.8 of the Purchase Agreement, (iii) $22 million of the Company's and the Target's industrial revenue bonds, (iv) approximately $125 million of the Company's 10% Senior Subordinated Notes due 2006 under the Indenture and (v) approximately $117.8 million principal amount of the Target's 6% Convertible Subordinated Debentures due 2012 ("6% Notes") (reduced to the extent such 6% Notes have theretofore been converted in accordance with their terms). "Person" shall include all natural persons, corporations, business trusts, associations, companies, partnerships, joint ventures and other entities and governments and agencies and political subdivisions. 5 53 "Preferred Stock" shall mean the Series A Redeemable Convertible Preferred Stock of the Company. "Purchase Agreement" shall mean the Purchase Agreement dated as of September 10, 1997 among the Company and the purchasers named therein pursuant to which 65,000 shares of Preferred Stock are to be issued, including all schedules and exhibits thereto, as such Purchase Agreement may be from time to time amended, modified or supplemented. "Reclassification" shall mean any capital reorganization of the Company, any reclassification of the Common Stock, the consolidation of the Company with or the merger of the Company with or into any other Person, a statutory share exchange having an effect similar to a merger or consolidation, the sale, lease or other transfer of all or substantially all of the assets of the Company to any other Person or any similar transaction. The subdivision or combination of shares of Common Stock issuable upon conversion of shares of Preferred Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a "Reclassification" of the Common Stock for the purposes of Section 7(d)(iv). "Senior Securities" shall mean Capital Stock of the Company that, with respect to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company, ranks senior to the Preferred Stock or Capital Stock that, with respect to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company ranks on a parity with the Preferred Stock and has a mandatory redemption date prior to the Mandatory Redemption Date. "Special Redemption Date" shall have the meaning assigned to it in Section 5(a)(ii). "Special Redemption Price" shall have the meaning assigned to it in Section 5(a)(ii). "Stated Value" shall be an amount equal to $1,000 per share of Preferred Stock. "Subsidiary" means, as to any Person, (a) any corporation 51% or more of the outstanding shares of capital stock of which having ordinary voting power for the election of directors is owned directly or indirectly by such Person and (b) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has 51% or more of an equity interest at the time. "Target" shall mean Fieldcrest Cannon, Inc., a Delaware corporation. "Target Acquisition" shall have the meaning assigned to it in the Purchase Agreement. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. 6 54 Section 3. Dividends. The holders of the outstanding shares of Preferred Stock shall be entitled to receive, when, as and if declared by the Board, out of funds legally available therefor, distributions in the form of dividends on each share of Preferred Stock as set forth below: (a) Right to Dividends. (I) Subject to the provisions of this Section 3, beginning on the Issue Date through and including December 31, 1999, at a rate per annum of 3% of Stated Value; (ii) Beginning on January 1, 2000 through and including the Mandatory Redemption Date, at a rate (the "Applicable Dividend Rate") per annum based upon 1999 Pro Forma EPS as follows: (A) if 1999 Pro Forma EPS is less than $2.35, then the dividend rate shall be 10.0% of Stated Value per annum; (B) if 1999 Pro Forma EPS is greater than, or equal to, $2.35 but less than $2.70, then the dividend rate shall be 7.0% of Stated Value per annum; and if 1999 Pro Forma EPS is greater than or equal to $2.70, then the dividend rate shall be 3.0% of Stated Value per annum; in each case subject to increase as set forth herein. Each of the $2.35 and $2.70 targets for 1999 Pro Forma EPS set forth above shall be (A) appropriately adjusted for (x) subdivisions and combinations of shares of Common Stock, (y) Reclassifications and (z) dividends on Common Stock payable in shares of Common Stock subsequent to the Issue Date and (B) reduced by an amount equal to (rounded to the nearest hundredth) (x) 0.065 multiplied by (y)(I) $23.00 minus (ii) the Determination Price, but the provisions of this clause (B) shall only be applicable if the Determination Price is less than $23.00. (b) Determination of 1999 EPS and 1999 Pro Forma EPS. The Company will promptly (and in any event within 5 Business Days) after determination of 1999 EPS (which date of determination shall be no later than March 31, 2000), determine 1999 Pro Forma EPS and send to each record holder of Preferred Stock at its record address a written statement of its calculation of 1999 EPS and 1999 Pro Forma EPS (including each adjustment thereto for the items described in clauses (a) through of the definition of EPS in Section 2 hereof and any adjustments pursuant to the definition of 1999 Pro Forma EPS in Section 2 hereof), and a negative assurance letter from the Company's auditors to the effect that they have reviewed such 1999 EPS and 1999 Pro Forma EPS calculations and that nothing has come to the auditors' attention that would cause them to believe that 1999 EPS and 1999 Pro Forma EPS were not calculated as required by this Statement of Resolution. In the event that the holders of a Majority of the Preferred Stock disagree with the calculation of 1999 EPS and/or 1999 Pro Forma EPS ("Disagreeing Holders"), such Disagreeing Holders (or their duly appointed representative) shall notify the Company in writing of such disagreement within 30 days after the applicable notice of such 1999 EPS and 1999 Pro Forma EPS figures have been sent by the Company. Failure to send such notice of disagreement within such time period shall be deemed acceptance of the Company's 1999 EPS and 1999 Pro Forma EPS figures absent fraud. Upon receipt of such notice of disagreement, the Company shall provide to the Disagreeing Holders and their representatives (including accountants) access to the books and records of the Company used to calculate such 1999 EPS and 1999 Pro Forma EPS figures during reasonable business hours, as well as the auditors that reviewed such calculations and the work papers relating to the audit of 7 55 the Company's financial statements and the review of the 1999 EPS and 1999 Pro Forma EPS calculations. If, within 30 days of the Company's receipt of such notice of disagreement, agreement as to the proper 1999 EPS and 1999 Pro Forma EPS calculations cannot be reached, the calculation of such 1999 EPS and 1999 Pro Forma EPS figures shall be promptly determined by a "big-six" accounting firm, which does not audit the Company and which is mutually acceptable to holders of a majority of the shares held by the Disagreeing Holders and the Company. The Company and such Disagreeing Holders shall promptly (and in any event within 30 days after the expiration of the 30-day period described in the preceding sentence) appoint such accounting firm, and such accounting firm shall use its reasonable best efforts to calculate such 1999 EPS and 1999 Pro Forma EPS figures within 30 days after its appointment and produce such calculation in writing. The scope of such accounting firm's review of (I) the 1999 EPS calculation shall be limited to the items described in clauses (a) through of the definition of EPS in Section 2 hereof and (ii) the 1999 Pro Forma EPS calculation shall be limited to any adjustments pursuant to the definition of 1999 Pro Forma EPS in Section 2 hereof. Absent fraud, such accounting firm's calculation of the 1999 EPS and 1999 Pro Forma EPS figures shall be binding on the Company and all holders of Preferred Stock for all purposes of this Statement of Resolution. If such accounting firm's calculation of either of the 1999 EPS figure or the 1999 Pro Forma EPS figure is lower than that calculated by the Company, the Company shall bear the fees and expenses of such accounting firm. If such accounting firm's calculation of both of the 1999 EPS figure and 1999 Pro Forma EPS figure is equal to or higher than that calculated by the Company, the Disagreeing Holders shall bear the fees and expenses of such accounting firm. Estimated Dividend Payments. Notwithstanding anything herein to the contrary, the Company may at its option pay dividends in cash during each quarterly period during calendar years 1998 and 1999 at a rate in excess of 3% of Stated Value per annum. (d) Dividend Adjustment. Following the date on which the final determination of 1999 EPS and 1999 Pro Forma EPS is made ("Final Determination Date"), as contemplated by Section 3(b), the Company will promptly (and in any event within five Business Days) determine the Aggregate Dividends Paid and the Aggregate Dividends Owed. If the Aggregate Dividends Paid is less than the Aggregate Dividends Owed, the Company will, prior to the expiration of such five-Business-Day period, pay to the holders of Preferred Stock a number of additional shares of Preferred Stock (the "Catch Up Dividend") with a Stated Value equal to the Dividend Adjustment Amount. In determining dividends payable on the next succeeding Dividend Payment Date following the Final Determination Date, the Company shall assume that the shares of Preferred Stock outstanding at the prior Dividend Payment Date included all additional shares issued in the Catch Up Dividend. If the Aggregate Dividends Paid is more than the Aggregate Dividends Owed, then the Dividend Adjustment Amount shall be offset against dividends payable on the next succeeding Dividend Payment Date or Dividend Payment Dates, as the case shall be. (e) Dividends Cumulative; Compounding. All dividends shall be cumulative, whether or not declared, on a daily basis from the Issue Date and shall be payable quarterly, in arrears, on each Dividend Payment Date commencing December 31, 1997. Dividends (in the form of additional dividends due) will compound quarterly on all unpaid dividends from the Dividend Payment Date with respect thereto until the date of payment at the Applicable Dividend Rate (as adjusted in accordance with this Section 3). 8 56 (f) Payment in Kind; Fractional Shares. From the Issue Date through the fifth anniversary of the Issue Date, dividends declared may be paid, at the Company's option, either in cash or in additional shares of Preferred Stock (other than the Catch Up Dividend, which shall be paid in additional shares of Preferred Stock). Fractional shares of Preferred Stock shall not be issued in certificated form, but shall be deemed outstanding on the books of the Company and held of record by the appropriate stockholder for all purposes, including the payment of dividends. Uncertificated fractional shares held of record by a stockholder, when aggregating a whole share, shall be issued in whole share increments. After the fifth anniversary of the Issue Date, dividends are payable only in cash. The number of shares of Preferred Stock to be issued in circumstances when dividends are paid in the form of additional shares of Preferred Stock shall equal (x) the cash amount of the dividend that would have been payable had the dividend in question been paid in cash, divided by (y) the Stated Value, rounded to the nearest hundredth of a full share. (g) Increase in Rate. In the event that after the fifth anniversary of the Issue Date, the Company shall fail to pay dividends in cash on the Dividend Payment Date when due, the Applicable Dividend Rate applicable to any period in which any such dividends remain unpaid shall be increased by 0.5% of Stated Value per quarter for each quarter in which any such dividends remain unpaid (such rate increase, the "Dividend Increase"). The Applicable Dividend Rate plus the Dividend Increase applicable to any period shall not exceed the lesser of (I) 18.0% of Stated Value per annum and (ii) the maximum rate permitted by applicable law. After a Dividend Increase, when the Company pays all accrued and unpaid dividends, and upon the payment of dividends on the next Dividend Payment Date at the rate in effect prior to giving effect to any Dividend Increase, the annual dividend rate shall be decreased to the otherwise Applicable Dividend Rate. All dividends shall be paid pro rata to the holders entitled thereto. Section 4. Liquidation Rights of Preferred. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its shareholders, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made in respect of any other class of Capital Stock of the Company (other than Parity Securities) whether currently authorized or hereafter created, an amount equal to $1,000 per share plus an amount equal to all accrued and unpaid dividends thereon, whether or not earnings are available in respect of such dividends or such dividends have been declared, to and including the date full payment shall be tendered to the holders of the Preferred Stock with respect to such liquidation, dissolution or winding-up, and no more (the "Liquidation Preference"). If upon any liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary, the assets to be distributed to the holders of the Preferred Stock, along with the holders of Parity Securities, if any, shall be insufficient to permit the payment to such shareholders of the full preferential amounts aforesaid, then all of the assets of the Company shall be distributed ratably to the holders of the Preferred Stock and such Parity Securities on the basis of the amount due on such liquidation if there were sufficient assets held by each such shareholder. Neither a consolidation or merger of the Company with or into any other company nor a merger of any other company with or into the Company, nor a sale or transfer of all or any part of the Company's assets for cash, securities or other property, will be considered a liquidation, dissolution or winding-up of the Company. 9 57 Section 5. Redemptions. (a) Optional Redemption. (I) The Company may, at the option of the Board of Directors, redeem, to the extent of funds legally available therefor, at any time on or after the fourth anniversary of the Issue Date, in whole or in part, in the manner provided for in Section 5 hereof, any or all of the shares of the Preferred Stock, at a redemption price per share equal to (x) the Liquidation Preference plus (y) (A) the Redemption Premium (as defined below) multiplied by (B) the Liquidation Preference (minus any accrued and unpaid dividends from the Dividend Payment Date prior to the Optional Redemption Date). The "Redemption Premium" shall equal the Applicable Dividend Rate on the Preferred Stock on the fourth anniversary of the Issue Date and shall decline ratably (pursuant to the table attached hereto as Annex I) from the fourth anniversary of the Issue Date to the Mandatory Redemption Date so that at the Mandatory Redemption Date the Redemption Premium of the Preferred Stock under this Section 5(a)(I) (y) shall be equal to zero. The redemption price per share determined under this Section 5(a)(I) is referred to herein as the "Optional Redemption Price" and the date fixed for redemption in accordance with Section 5 below is the "Optional Redemption Date." In the event of a redemption pursuant to this Section 5(a)(I) of only a portion of the then outstanding shares of the Preferred Stock, the Company shall effect such redemption on a pro rata basis according to the number of shares held by each record holder of the Preferred Stock, except that the Company may redeem such shares held by holders of fewer than 10 shares (or shares held by holders who would hold less than 10 shares as a result of such pro rata redemption), without regard to the pro rata requirements of this sentence. (ii) To the extent a Change of Control has occurred and the Company has received a Control Notice from Participating Holders, the Company may, at the option of the Board, redeem, to the extent of funds legally available therefor all, but not less than all, of the Preferred Stock held by such Participating Holders on a date fixed by the Company, which date shall be no less than 20 days nor more than 90 days after receipt of the Control Notice or if the Control Notice is received more than 20 days prior to the date of the Change of Control no later than the date of the Change of Control (the "Special Redemption Date") in the manner provided for in Section 5 below at a redemption price per share equal to 101% of the Liquidation Preference (including, without limitation, an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Special Redemption Date to the Special Redemption Date) (the "Special Redemption Price"). (b) Mandatory Redemption. On June 30, 2008 (the "Mandatory Redemption Date") the Company shall redeem, to the extent of funds legally available therefor, in the manner provided for in Section 5 hereof, all of the shares of the Preferred Stock then outstanding at a redemption price per share equal to the Liquidation Preference (including, without limitation, an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the Mandatory Redemption Date to the Mandatory Redemption Date) (the "Mandatory Redemption Price"). 10 58 Procedures for Redemption. (I) At least thirty (30) days and not more than sixty (60) days prior to the date fixed for any redemption of the Preferred Stock in accordance with Section 5(a)(I) or Section 5(b) and at least five days prior to the Special Redemption Date for any redemption of the Preferred Stock in accordance with Section 5(a)(ii), written notice (the "Redemption Notice") shall be given by first class mail, postage prepaid, to each holder of record on the mailing date of such notice at such holder's address as it appears on the stock books of the Company (and by facsimile, if a record holder has provided a facsimile contact); provided that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Preferred Stock to be redeemed except as to the holder or holders to whom the Company has failed to give said notice or to whom such notice was defective. Any holder of Preferred Stock may exercise its conversion rights under Section 7(a) at any time up until 5:00 p.m. New York City time on the Business Day prior to the date fixed for redemption in accordance with this Section 5 (the "Redemption Date") and if not exercised prior to such time, such redemption right shall expire unless the Company defaults in making the payment due on redemption. The Redemption Notice shall state: (A) whether the redemption is pursuant to Section 5(a)(I), 5(a)(ii) or 5(b) hereof; (B) the Optional Redemption Price, the Special Redemption Price or Mandatory Redemption Price, as the case may be; whether all or less than all the outstanding shares of the Preferred Stock are to be redeemed and the total number of shares of the Preferred Stock being redeemed; (D) the Redemption Date; (E) that the holder is to surrender to the Company or its transfer agent, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Preferred Stock to be redeemed; and (F) that dividends on the shares of the Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price, the Special Redemption Price or the Mandatory Redemption Price, as the case may be. (ii) Each holder of Preferred Stock shall surrender the certificate or certificates representing such shares of Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price, Special Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. 11 59 (iii) On and after the Redemption Date, unless the Company defaults in the payment of the applicable redemption price, dividends on the Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and all rights of the holders of redeemed shares shall terminate with respect thereto on the Redemption Date, other than the right to receive the Optional Redemption Price, Special Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. Section 6. Voting Rights. (a) General. The holders of Preferred Stock, except as otherwise required under Texas law or as set forth in Sections 6(b) and 6 below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the shareholders of the Company. (b) Amendments to Articles of Incorporation; Mergers and Similar Transactions. So long as any shares of the Preferred Stock are outstanding, the Company shall not (I) amend its Restated Articles of Incorporation (including this Statement of Resolution) so as to: (A) affect adversely the specified rights, preferences, privileges or voting rights of holders of shares of Preferred Stock (including any adjustment to the Stated Value) or (B) authorize the issuance of additional shares of any class of Senior Securities (or amend the provisions of any existing class of Capital Stock to make such class of Capital Stock Senior Securities) or (ii) merge, consolidate or enter into any other Reclassification that would (A) materially affect adversely the special or relative rights, preferences, privileges or voting rights of the Preferred Stock (including any adjustment to the Stated Value), or (B) result in a breach of any of the Company's obligations under this Statement of Resolution, without, in any such case, the affirmative vote or consent of holders of at least a Majority of the Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing (to the extent permitted under the Company's Restated Articles of Incorporation) or by resolution adopted at an annual or special meeting of shareholders. Notwithstanding the foregoing, any amendment to the Restated Articles of Incorporation (including this Statement of Resolution) that would alter in any material respect the dividend rates, liquidation preference, redemption rights or conversion rights of the Preferred Stock shall require the affirmative vote or consent of each holder of Preferred Stock. Election of Directors. (I) The foregoing notwithstanding, in the event of the Company's failure to pay dividends in accordance with Section 3, or the occurrence of one or more Events of Noncompliance, within 10 Business Days of such failure or such event, as the case may be, the Company shall notify each holder of Preferred Stock thereof in writing, and the number of directors constituting the Board shall thereupon be automatically increased so that the number of new directorships of the Board so created will constitute at least 25.0% (rounded up to the nearest whole number) of the entire Board, after giving effect to such increase, and the holders of the Preferred Stock shall have, in addition to the other voting rights provided herein, the exclusive and special right, voting separately as a class, to elect directors to fill such newly created directorships (and to fill any vacancy in such directorships until such time as the special voting rights provided by this Section 6(c)(I) shall terminate as set forth below). If the event giving rise to the special voting rights was a failure to pay dividends or an Event of Noncompliance described in Section 10(a)(iii), the special voting rights will continue until all 12 60 accrued and unpaid dividends have been paid in full or all Events of Noncompliance have been cured, as the case may be, subject to revesting in the event of any future failure to pay dividends in accordance with the terms hereof or a subsequent Event of Noncompliance. Except as provided in the prior sentence, the special voting rights provided by this Section 6(c)(I) shall continue as long as any Preferred Stock is outstanding. If the special voting rights provided by this Section 6(c)(I) terminate, the terms of the additional directors elected by the holders of Preferred Stock pursuant to this Section 6(c)(I) shall terminate and the number of directors constituting the Board shall then be decreased to such number as constituted the whole Board immediately prior to the occurrence of the event giving rise to such special voting rights. The special voting rights provided in this Section 6(c)(I) shall not preclude or affect the exercise of any other rights or remedies provided hereby or by agreement, by law or otherwise upon the occurrence of any event giving rise to such special rights. (ii) The foregoing notwithstanding, the Company will give notice to each holder of Preferred Stock within five days after the Company becomes aware of any Change of Control that has occurred or is reasonably likely to occur and, if a Change of Control occurs, the holders of a Majority of the Preferred Stock shall, by written notice to the Company and the other holders of Preferred Stock delivered before or 15 days after the Change of Control (a "Control Notice") have the right to elect a majority of the Board in accordance with this Section 6(c)(ii), unless the Company has theretofore redeemed shares of any holder of Preferred Stock participating in a Control Notice (each, a "Participating Holder") in accordance with Section 5(a)(ii). Any holder of Preferred Stock may, at any time within ten days after receipt of the Control Notice, elect to become a Participating Holder by delivery of written notice of such election to the Company and the other Participating Holders. If a Control Notice is received by the Company and the Company has not redeemed the shares of Preferred Stock held by all Participating Holders, upon the later to occur of (I) the occurrence of such Change of Control and (ii) the date that the Company's redemption rights under Section 5(a)(ii) shall have expired, the number of directors constituting the Board shall thereupon be automatically increased by such number as will be necessary to constitute a majority of the total number of the members, after giving effect to such increase, of such Board, and the holders of the Preferred Stock shall have, in addition to the other voting rights provided herein, the exclusive, special and continuing right, voting separately as a class, to elect directors to fill such newly created directorships (and to fill any vacancy in such directorships) and to continually elect at least a majority of the Board as long as any Preferred Stock is outstanding. (iii) The directors to be elected (or if such directors have been previously elected and any vacancy shall exist, such vacancy to be filled) by the holders of Preferred Stock (voting as a class) shall be elected (or filled) at (I) annual meetings of the shareholders of the Company, or (ii) a special meeting of the holders of Preferred Stock for the purpose of electing such directors (or filling any such vacancy), to be called by the Secretary of the Company upon the written request of the holders of record of 10% or more of the number of shares of Preferred Stock then outstanding; provided, however, that if the Secretary of the Company shall fail to call any such meeting within 10 days after any such request, such meeting may be called by any holder of Preferred Stock designated for that purpose by the holders of record of 10% or more of the number of shares of Preferred Stock then outstanding. At any meeting or at any adjournment thereof held for the purpose of electing directors at which the holders of shares of Preferred Stock shall have the special voting right provided by this Section 6(c), the presence, in person or by proxy, of the holders of the equivalent of a Majority of the Preferred Stock shall be required to constitute a quorum for the election of any 13 61 director by the holders of the Preferred Stock exercising such special right. The special right of holders of shares of Preferred Stock under this Section 6 may be exercised by the written consent of the holders of shares of Preferred Stock then outstanding in accordance with the law of the Company's jurisdiction of incorporation at such time to the extent permitted by the Company's Restated Articles of Incorporation. (iv) The foregoing notwithstanding, in the case of any vacancy in the office of a director occurring among the directors elected by the holders of the Preferred Stock pursuant to Section 6(c), the remaining director or directors so elected by the holders of the Preferred Stock may, by affirmative vote of a majority thereof (or the remaining director so elected if there is only one such director), elect a successor or successors to hold the office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of the Preferred Stock, or any director so elected as provided in the next preceding sentence hereof, shall be removed during the aforesaid term of office, whether with or without cause, only by the affirmative vote of the holders of a Majority of the Preferred Stock. (v) The Company shall promptly take all necessary action to facilitate the implementation of the rights of the holders of Preferred Stock to appoint directors that are provided for under this Section 6. Section 7. Conversion Rights. The Preferred Stock shall be convertible into Common Stock as follows: (a) Optional Conversion. Subject to and upon compliance with the provisions of this Section 7, the holder of any shares of Preferred Stock shall have the right at such holder's option, at any time or from time to time, to convert any shares of Preferred Stock into the number of fully paid and nonassessable shares of Common Stock set forth in Section 7(b). (b) Conversion Price. Each share of Preferred Stock converted pursuant to Section 7(a) shall be converted into such number of shares of Common Stock as is determined by dividing (I) the sum of (A) $1,000 plus (B) any dividends on such share of Preferred Stock which such holder is entitled to receive, but has not yet received (including, without limitation, an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Conversion Date to the Conversion Date), by (ii) the Conversion Price in effect on the Conversion Date. The Conversion Price shall be subject to adjustment as set forth in Section 7(d). Mechanics of Conversion. The holder of any shares of Preferred Stock may exercise the conversion right specified in Section 7(a) as to any part thereof by surrendering to the Company or any transfer agent of the Company the certificate or certificates for the shares to be converted, accompanied by written notice stating that the holder elects to convert all or a specified portion of the shares represented thereby. Conversion shall be considered to have been effected on the date when a holder of Preferred Stock delivers notice of an election to convert shares of Preferred Stock to the Company accompanied by certificates representing such shares, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 7(d), as promptly as practicable thereafter (and after surrender of the certificate or certificates evidencing the shares of Preferred 14 62 Stock or delivery to the Company of an affidavit and indemnity with respect to such certificates), the Company shall issue and deliver to or upon the written order of such holder a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash with respect to any fractional interest in a share of Common Stock as provided in Section 7(h) hereof. Subject to the provisions of Section 7(d), the Person in whose name the certificate or certificates for Common Stock are to be issued shall be considered to have become a holder of record of such Common Stock on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate evidencing shares of Preferred Stock surrendered for conversion, the Company shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Company, a new certificate covering the number of shares of Preferred Stock representing the unconverted portion of the certificate so surrendered. The Company will use its best efforts to deliver all stock certificates required by this Section 7 within three business days after the Conversion Date. (d) Conversion Price Adjustments. The Conversion Price shall be subject to adjustment from time to time as follows: (I) Stock Dividends. If the number of shares of Common Stock outstanding at any time after the date of issuance of Preferred Stock is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then immediately after the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend or the effective date of such subdivision or split-up, as the case may be, the Conversion Price shall be appropriately reduced so that the holder of any shares of Preferred Stock thereafter converted shall be entitled to receive the number of shares of Common Stock of the Company which he would have received immediately following such action had such shares of Preferred Stock been converted immediately prior thereto. (ii) Combination of Stock. If the number of shares of Common Stock outstanding at any time after the date of issuance of Preferred Stock is decreased by a combination of the outstanding shares of Common Stock, then immediately after the effective date of such combination, the Conversion Price shall be appropriately increased so that the holder of any shares of Preferred Stock thereafter converted shall be entitled to receive the number of shares of Common Stock which he would have received immediately following such action had such shares of Preferred Stock been converted immediately prior thereto. (iii) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Issue Date makes or issues, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities or other rights of the Company other than a dividend or other distribution payable solely in shares of Common Stock, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities or other rights of the Company which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained 15 63 such securities or other rights receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 7 with respect to the rights of the holders of the Preferred Stock. (iv) Reclassification, etc. In case of any Reclassification, each share of Preferred Stock shall, after such Reclassification, be convertible into the number of shares of stock or other securities or property to which the holder of the Common Stock issuable (at the time of such Reclassification) upon conversion of such share of Preferred Stock would have been entitled upon such Reclassification; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interests thereafter of the holders of the shares of Preferred Stock shall be appropriately adjusted so as to be applicable, as nearly as possible, to any shares of stock or other securities or property thereafter deliverable on the conversion of the shares of Preferred Stock. If the holders of Common Stock have an election with respect to the stock, securities or other property to be received upon a Reclassification, the same election shall be afforded to the holders of Preferred Stock. (v) Rounding of Calculations. All calculations under this Section 7(d) shall be made to the nearest cent or to the nearest one hundredth (1/100th) of a share, as the case may be. (vi) Timing of Issuance of Additional Common Stock Upon Certain Adjustments. In any case in which the provisions of this Section 7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event by (A) issuing to the holder of any shares of Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such conversion before giving effect to such adjustment, and (B) paying to such holder any amount of cash in lieu of a fractional share of Common Stock pursuant to Section 7(h) hereof; provided, however, that the Company upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares and such cash upon the occurrence of the event requiring such adjustment. (e) Statement Regarding Adjustments. Whenever the Conversion Price shall be adjusted as provided in Section 7(d), the Company shall forthwith file, at the office of any transfer agent for such Preferred Stock and at the principal office of the Company, a statement showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each holder of shares of Preferred Stock at the address appearing on the Company's records. Each such statement shall be signed by the Company's independent public accountants. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section 7(f). (f) Notice to Holders. In the event the Company shall propose to take any action of the type described in Section 7(d)(I), (ii), (iii), or (iv) the Company shall give notice to each holder of shares of Preferred Stock affected by such action in the manner set forth in this Section 7(f), which 16 64 notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten days prior to the date so fixed, and in the case of any other action, such notice shall be given at least 15 days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. (g) Costs. The Company shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of shares of Common Stock of the Company upon conversion of any shares of Preferred Stock; provided, however, that the Company shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Preferred Stock in respect of which such shares are being issued. (h) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. In lieu of any fractional share to which the holder would otherwise be entitled, the Company shall pay cash equal to the product of such fraction multiplied by the Common Stock's Fair Market Value on the date of conversion. (I) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (j) Notices. All notices and other communications required by the provisions of this Section 7 shall be in writing and shall be deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight delivery service, cable, telegram, facsimile transmission or telex to each holder of record at the address of such holder appearing on the books of the Company. Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the fourth calendar day after posting, in the case of overnight delivery service, on the date of actual delivery and, in the case of notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the case may be, personal delivery. 17 65 (k) No Dilution or Impairment. The Company shall not amend its Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against dilution or other impairment. Section 8. Restrictions and Limitations. (a) So long as any shares of Preferred Stock remain outstanding and except as set forth below, the Company shall not, and shall not permit any Subsidiary to, without the vote or written consent by the holders of a Majority of the Preferred Stock: (I) (A) Declare or pay any dividend or make any other payment or distribution on account of the Equity Interests of the Company (other than in respect of the Preferred Stock) or any of its Subsidiaries (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Subsidiaries) or to the direct or indirect holders of the Equity Interests of the Company or any of its Subsidiaries in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Senior Securities or Parity Securities (except that dividends payable on Parity Securities issued in accordance with the provisions hereof solely in Parity Securities of the same class or series, as the case may be, shall be permitted) of the Company, dividends or distributions payable to the Company or any Subsidiary of the Company or dividends or distributions made by a Subsidiary of the Company to all holders of its Common Stock on a pro rata basis)); and (B) Make any payment on or in respect of, or purchase, redeem, defease or otherwise acquire or retire for value any Equity Interests (other than the Preferred Stock in accordance with Section 5 or any Equity Interests owned by the Company or any Subsidiary of the Company) except at Stated Maturity. All such payments and other actions set forth in clauses (A) and (B) above shall be collectively referred to as "Restricted Payments". Notwithstanding the foregoing, the Company shall be permitted to make Restricted Payments if, at the time of and after giving effect to such Restricted Payment: (I) No Event of Noncompliance shall have occurred and be continuing or would occur as a consequence thereof; and (II) The Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 8 (a)(v); and 18 66 (III) Such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Issue Date (excluding Restricted Payments permitted by clauses (v) and (w) of the next succeeding paragraph), is less than the sum of (I) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) commencing on the Issue Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the Issue Date of Equity Interests of the Company or of debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or convertible debt securities) sold to a Subsidiary of the Company or conversion of the 6% Notes) subject to the provisions of Section 8(a)(vii), plus (iii) $7.5 million. The foregoing provisions will not prohibit (u) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Section 8(a)(I); (v) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Parity Securities); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (ii) of paragraph (III) above; (w) the defeasance, redemption or repurchase of Junior Securities or Parity Securities with the net cash proceeds from the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Parity Securities); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (ii) of paragraph (III) above; (x) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement in effect as of the Issue Date; provided that (A) the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $250,000 in any 12-month period plus the aggregate cash proceeds received by the Company during such 12-month period from any reissuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries, and (B) no Event of Noncompliance shall have occurred and be continuing immediately after such transaction; and (y) so long as no Event of Noncompliance shall have occurred and be continuing, ordinary dividends paid by the Company in respect of its Common Stock in an aggregate amount not to exceed $2.5 million since the Issue Date. The amount of all Restricted Payments (other than cash) shall be the fair market value (evidenced by a resolution of the Board of Directors or a committee of the Board of Directors having at least one Independent director set forth in an Officers' Certificate delivered to each holder of Preferred Stock) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later than the date of making any Restricted Payment, the Company shall deliver to each holder of Preferred Stock an Officers' Certificate stating that such Restricted Payment is permitted and setting 19 67 forth the basis upon which the calculations required by this Section 8(a)(I) were computed, which calculations may be based upon the Company's latest available financial statements. For purposes of this Section 8(a)(I), capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture as in effect on the Issue Date. (ii) Authorize or issue, or obligate itself to issue, any Senior Securities; (iii) Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Preferred Stock; (iv) Enter any agreement, contract or understanding or otherwise incur any obligation which by its terms would violate, be in conflict with, restrict or burden the rights of the holders of Preferred Stock, or the Company's ability to perform its obligations hereunder; (v) Directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Indebtedness) or issue any Parity Securities (other than as contemplated by Section 3) unless the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Parity Securities are issued would have been at least 1.75 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Parity Securities had been issued, as the case may be, at the beginning of such four-quarter period. The foregoing provisions will not apply to: (A) the incurrence by the Company of Indebtedness under the Credit Agreement (and guarantees thereof by the Guarantors) in an aggregate principal amount at any time outstanding (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Subsidiaries thereunder) not to exceed the greater of (x) $600.0 million and (y) the sum of (A) 80% of the Eligible Receivables and (B) 65% of Eligible Inventory, less, in the case of each of clause (x) and clause (y), the aggregate amount of all Net Proceeds of Asset Sales applied to permanently reduce the commitments with respect to such Indebtedness pursuant to Section 4.10 of the Indenture as in effect on the Issue Date; (B) the incurrence by the Company of Permitted Indebtedness; the incurrence by the Company or any of its Subsidiaries of Indebtedness represented by Capital Lease Obligations (whether or not incurred pursuant to sale and leaseback transactions), mortgage financing or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Subsidiary, in an aggregate principal amount not to exceed $15.0 million at any time outstanding; 20 68 (D) the incurrence by the Company or any of its Subsidiaries of Indebtedness ("Refinancing Indebtedness") in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Permitted Indebtedness or Indebtedness that was permitted to be incurred hereunder, provided that the principal amount (or accreted value, if applicable) of such Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness extended, refinanced, renewed, replaced, defeased or refunded; (E) the incurrence by the Company or any of its Wholly Owned Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Subsidiaries; (F) the incurrence by the Company of Hedging Obligations that are incurred in the ordinary course of business for the purpose of fixing or hedging interest rate risk; (G) the incurrence by the Company of Hedging Obligation under commodity hedging and currency exchange agreements; provided that, such agreements were entered into in the ordinary course of business for the purpose of limiting risks that arise in the ordinary course of business; (H) the incurrence of Indebtedness of a guarantor represented by guarantees of Indebtedness of the Company that has been incurred in accordance with the terms hereof; and (I) the incurrence by the Company of Indebtedness or the issuance by the Company of Junior Securities or Parity Securities (in addition to Indebtedness, Junior Securities or Parity Securities permitted by any other clause of this Section 8(a)(v)) in an aggregate principal amount (or accreted value, as applicable) at any time outstanding not to exceed $20.0 million. For purposes of this Section 8(a)(v), capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture as in effect on the Issue Date. (vi) Make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (A) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person and (B) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving the aggregate consideration in excess of $2.0 million, the Company delivers to each holder of Preferred Stock a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (A) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and with respect to an Affiliate Transaction or series of related Affiliate Transactions involving aggregate 21 69 consideration in excess of $5.0 million, the Company delivers to each holder of Preferred Stock an opinion as to the fairness to the holders of Preferred Stock of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that (w) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors or the payment of fees and indemnities to directors of the Company and its Restricted Subsidiaries in the ordinary course of business and consistent with the past practices of the Company or such Subsidiary, (x) loans or advances to employees in the ordinary course of business, (y) transactions between or among the Company and/or its Wholly Owned Subsidiaries and (z) Restricted Payments that are permitted by the provisions of Section 8(a)(I), in each case, shall not be deemed Affiliate Transactions. For purposes of this Section 8(a)(vi), capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture as in effect on the Issue Date. (vii) Make any Restricted Investment (as such term is defined in the Indenture as in effect on the Issue Date) unless the Company could borrow an additional $1.00 of Indebtedness under the Fixed Charge Coverage Ratio in Section 8(a)(v) above; except that, notwithstanding the foregoing, the Company shall be permitted to make a Restricted Investment if (x) such Restricted Investment is made after the Issue Date and is sold for cash or otherwise liquidated or repaid for cash, in an amount equal to the lesser of (a) the cash return of capital with respect to such Restricted Investment (less the cost of disposition) and (b) the initial amount of such Restricted Investment or (y) such Restricted Investment is in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than any Senior Securities and Parity Securities); provided that the amount of any such net cash proceeds that are utilized for any such Restricted Investment made under (x) and (y) above shall be excluded from Section 8(a)(I)(III)(ii). Section 9. No Reissuance of Preferred Stock. No share or shares of Preferred Stock acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Company shall be authorized to issue. Section 10. Events of Noncompliance. (a) Definition. An Event of Noncompliance will be deemed to have occurred if: (I) the Company fails to make any redemption payment with respect to the Preferred Stock which it is obligated to make hereunder, whether or not such payment is legally permissible; (ii) the Company breaches or otherwise fails to perform or observe the provisions of Section 8; 22 70 (iii) the Company breaches or otherwise fails to perform or observe any other covenant or agreement set forth herein or any covenant or agreement set forth in the Purchase Agreement (other than a covenant or agreement set forth in Section 5.14 (the breach of which Section 5.14 shall not be considered an Event of Noncompliance under this Section 10(a)(iii)) or in Article 7 of the Purchase Agreement) and such breach or failure to perform or observe continues for a period of 60 days after notice thereof from any holder of Preferred Stock; or the Company breaches or otherwise fails to perform or observe any covenant or agreement set forth in Article 7 of the Purchase Agreement and such breach or failure to perform or observe continues for a period of 30 days after notice thereof from any holder of Preferred Stock; or (iv) a Bankruptcy Event occurs with respect to the Company or any Subsidiary. The Company shall promptly (and in any event within five days) after learning of (x) any failure by the Company to observe any covenant or agreement contained herein or in the Purchase Agreement or (y) any Event of Noncompliance, give notice thereof to each holder of Preferred Stock. (b) Consequences of Certain Events of Noncompliance. (I) If an Event of Noncompliance (other than the failure to pay timely dividends, which affects the dividend rate of the Preferred Stock as provided in Section 3) has occurred, the dividend rate on the Preferred Stock shall increase immediately to the lesser of (A) 18% per annum and (B) the maximum rate permitted by applicable law, and shall remain at such rate as long as any Preferred Stock is outstanding; provided, however, that if the Event of Noncompliance is one under Section 10(a)(iii), upon the cure of such Event of Noncompliance, the dividend rate shall be that which would otherwise be applicable but for the application of this Section 10(b)(I). (ii) If any Event of Noncompliance has occurred, each holder of Preferred Stock will also have (A) rights pursuant to Section 6(c)(I), (B) any other rights which such holder may have been afforded under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law. Section 11. Waivers. With the written consent of holders of a Majority of the Preferred Stock (or each holder of Preferred Stock to the extent required pursuant to the last sentence of Section 6(b)), the obligations of the Company and the rights of the holders of the Preferred Stock under this Statement of Resolution may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely). Upon the effectuation of each such waiver, the Company shall promptly give written notice thereof to the holders of Preferred Stock who have not previously consented thereto in writing. 23 71 ANNEX 1
APPLICABLE DIVIDEND RATE -------------------------------------------------------- REDEMPTION PREMIUM APPLICABLE DURING THE 3% 7% 10% FOLLOWING YEARS AFTER THE ISSUE DATE: -- -- --- 1 Non-Call Non-Call Non-Call 2 Non-Call Non-Call Non-Call 3 Non-Call Non-Call Non-Call 4 Non-Call Non-Call Non-Call 5 3.000% 7.000% 10.000% 6 2.400% 5.600% 8.000% 7 1.800% 4.200% 6.000% 8 1.200% 2.800% 4.000% 9 0.600% 1.400% 2.000% 10 0.000% 0.000% 0.000%
To the extent a different Applicable Dividend Rate applies, a similar ratable decline shall apply. 24 72 I, THE UNDERSIGNED, being the President of Pillowtex Corporation, do hereby execute this Statement of Resolution, declaring and certifying under penalties of perjury that the facts herein stated are true, and accordingly have hereunto set my hand this 18th day of December, 1997. /s/ JEFFREY D. CORDES ---------------------------------------- Jeffrey D. Cordes President ATTEST: /s/ BRENDA SANDERS ---------------------------------------- Brenda Sanders Assistant Secretary 25 73 ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PILLOWTEX CORPORATION Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, Pillowtex Corporation (the "Company") hereby adopts the following Articles of Amendment to the Articles of Incorporation. ARTICLE ONE. The name of the corporation is Pillowtex Corporation. ARTICLE TWO. The following amendment to the Amended and Restated Articles of Incorporation was adopted by shareholders of the Company as of May 5, 1999: (a) The first paragraph of Article V of the Amended and Restated Articles of Incorporation be amended to read as follows: ARTICLE V The aggregate number of shares which the corporation is authorized to issue is 75,000,000 shares consisting of 55,000,000 shares of Common Stock, having a par value of $0.01 per share, and 20,000,000 shares of Preferred Stock, having a par value of $0.01 per share." [The remainder of Article V is not being amended.] ARTICLE THREE. The number of shares of Common Stock of the Company outstanding and entitled to vote was 14,183,852 at the time of the adoption of this amendment. ARTICLE FOUR. At the 1999 Annual Meeting of Shareholders, the holders of 12,077,693 shares of Common Stock outstanding and entitled to vote voted for this amendment and the holders of 785,527 shares of Common Stock outstanding and entitled to vote voted against this amendment. IN WITNESS WHEREOF, these Articles of Amendment are dated as of June 3, 1999. PILLOWTEX CORPORATION /s/ Brenda Sanders ---------------------------------- Brenda Sanders Corporate Secretary EX-10.1 3 PROMISSORY NOTE 1 PROMISSORY NOTE Dallas, Texas May 4, 1999 Borrower: PILLOWTEX CORPORATION, a Texas corporation Commitment: $20,000,000.00 Borrower, for value received, promises to pay to the order of NATIONSBANK, N.A. ("Lender"), at its principal office in Dallas, Texas, or at any other place designated to Borrower in writing by Lender an amount, in lawful money of the United States of America in immediately available funds, up to the Commitment (or such lesser amount as provided in Section 1.2 hereof) on the Maturity Date (except as otherwise required to be paid earlier pursuant to this Note), together with interest on the unpaid principal balance of each Advance evidenced by this Note at the applicable rates herein set forth. This Note is issued upon the following terms and conditions: ARTICLE I THE ADVANCES 1.1 Definitions. Defined terms used herein shall have the meaning given to them above and in Article III hereof. 1.2 The Advances. Lender agrees, upon the terms and subject to the conditions of this Note and provided that (a) no Default or Event of Default has occurred and is continuing, and (b) the Unused Portion (as defined in the Credit Agreement) is zero, to make Advances to Borrower for the purposes set forth in Section 5.8 of the Credit Agreement from time to time in an aggregate amount not to exceed the Commitment. Subject to Section 1.9 hereof, Advances may be repaid and then reborrowed. Any Advance shall, at the option of Borrower as provided in Section 1.3 hereof (and, in the case of Eurodollar Advances, subject to availability and to the provisions of Section 1.14 hereof), be made as a Base Rate Advance or a Eurodollar Advance; provided that there shall not be more than five Eurodollar Advances outstanding at any one time. On the Maturity Date unless sooner paid as provided herein, the outstanding Advances shall be repaid in full. 2 1.3 Manner of Borrowing and Disbursement. (1) Each Borrowing shall be made on notice, given not later than 1:00 p.m. (Dallas time) (I) in the case of such a Borrowing comprised of Base Rate Advances, on the date of the proposed Borrowing, and (ii) in the case of such a Borrowing comprises of Eurodollar Advances on the second Business Day prior to the date of the proposed Borrowing, in each case by Borrower to Lender. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telephone (confirmed by sending a Notice of Borrowing by one of the following means) telex, telecopier or cable, in substantially the form of Exhibit "A" attached hereto, specifying therein the requested (A) date of such Borrowing, (B) Type of Advances comprising such Borrowing, aggregate amount of such Borrowing, and (D) in the case of such a Borrowing consisting of Eurodollar Advances, the Interest Period for each such Advance. Provided (a) no Default or Event of Default has occurred and is continuing, and (b) the Unused Portion (as defined in the Credit Agreement) is zero, Lender will make such funds available to Borrower by depositing such funds received in the general deposit account of Borrower with Lender. (2) Borrower may on any Business Day, subject to the notice provisions of Section 1.3(a) hereof and the provisions of Section 1.14 hereof, Convert all or any portion of the Advances of one Type; provided, however, that (I) any Conversion of any Eurodollar Advances into Base Rate Advances shall be made on, and only on, the last day of the Interest Period for such Eurodollar Advance, and any Conversion of one Advance into another Advance shall be in an amount not less than the minimum amount specified in Section 1.3(d) hereof and (ii) no Conversion into Eurodollar Advances shall be permitted at any time that a Default or Event of Default has occurred and is continuing. Each such notice of Conversion shall, within the restrictions specified above, specify (I) the date of such Conversion, (ii) the Advance to be Converted and (iii) if such Conversion is into Eurodollar Advances, the duration of the initial Interest Period for such Advances. Each notice of Conversion shall be irrevocable and binding on Borrower. (3) If prior to the end of any Interest Period for any Eurodollar Advance Borrower shall fail to give timely notice of the continuance or Conversion thereof, each such Eurodollar Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance. If any notice given by Borrower pursuant to Section 1.3(a) hereof for a Eurodollar Advance or any notice given by Borrower pursuant to Section 1.3(b) hereof shall fail to designate an Interest Period, such notice shall be deemed to have designated an Interest Period of one (1) month for Eurodollar Advances. (4) The aggregate amount of Base Rate Advances to be made by Lender on any day shall be in a principal amount which is at least $100,000 and which is an integral multiple of $50,000. The aggregate amount of Eurodollar Advances having the same Interest Period and to be made by Lender on any day shall be in a principal amount which is at least $1,000,000 any which is an integral multiple of $100,000. (5) Each Notice of Borrowing shall be irrevocable and binding on Borrower. In the case of any Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Advances, Borrower shall indemnify Lender against any loss, cost or expense incurred by Lender as a result of any failure of Borrower to borrow any Eurodollar Advances after a Notice of Borrowing has been given in accordance with Section 1.3(a) hereof, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Lender to fund the Advances to be made by Lender as part of such Borrowing when such Advances, as a result of such failure, are not made on such date. The obligations of Borrower under this Section 1.3(e) shall survive termination of this Note. 3 1.4 Interest. (1) Borrower shall pay interest on the outstanding principal amount of Base Rate Advances at a rate per annum equal to the Base Rate; provided, however, if the amount of interest payable for the account of Lender on any interest payment date in respect of the immediately preceding interest computation period would exceed the Maximum Amount, the amount of interest payable on such interest payment date shall be automatically reduced to the Maximum Amount. If the amount of interest payable for the account of Lender in respect of any interest computation period is reduced pursuant to the immediately preceding sentence and the amount of interest payable for its account in respect of any subsequent interest computation period would be less than the Maximum Amount, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to such Maximum Amount; provided that at no time shall the aggregate amount by which interest paid for the account of Lender has been increased pursuant to this sentence exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to the immediately preceding sentence. Interest on Base Rate Advances shall be paid quarterly in arrears on each Quarterly Date and on the Maturity Date. (2) Borrower shall pay interest on each Eurodollar Advance at a rate per annum equal to the Eurodollar Rate for such Eurodollar Advance. Interest on each Eurodollar Advance shall be payable on the last day of the Interest Period for such Eurodollar Advance and on the Maturity Date. (3) During the continuance of any Event of Default, Borrower shall pay, on demand, interest on the principal amount of all Advances outstanding and on all other Obligations due and unpaid hereunder at a rate per annum equal to the Base Rate plus 2%; provided, however, if the amount of interest payment for the account of Lender on any interest payment date in respect of the immediately preceding interest computation period would exceed the Maximum Amount, the amount of interest payable on such interest payment date shall be automatically reduced to the Maximum Amount. If the amount of interest payable for the account of Lender in respect of any interest computation period is reduced pursuant to the immediately preceding sentence and the amount of interest payable for its account in respect of any subsequent interest computation period would be less than the Maximum Amount, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to the Maximum Amount; provided that at no time shall the aggregate amount by which interest paid for the account of Lender has been increased pursuant to this sentence exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to the immediately preceding sentence. 4 1.5 Commitment Fee. Subject to Section 2.4 hereof, Borrower agrees to pay to Lender a per annum Commitment Fee (which shall be payable in arrears on each Quarterly Date and on the Maturity Date), in an amount equal to the product of 0.50% multiplied by the daily average unused portion of the Commitment commencing on the date of this Note. The Commitment Fee shall be payable monthly in arrears on the last day of each month during the term of this Note, commencing on the first such date occurring after the date of this Note and on the Maturity Date. 1.6 Prepayment. (1) Borrower may, from time to time, prepay the outstanding principal amount of the Advances in whole or in part without penalty or premium, provided, however, that (I) each partial prepayment shall be in an aggregate principal amount not less than $100,000 or an integral multiple of $50,000 in excess thereof, (ii) no such prepayment of a Eurodollar Advance shall be made other than on the last day of the Interest Period therefor unless Borrower, simultaneously with such prepayment, pays the compensation required pursuant to Section 1.9 hereof and (iii) each prepayment of the principal amount of a Eurodollar Advance shall also include accrued interest to the date of such prepayment on the principal amount prepaid. Borrower shall notify Lender (which notice may be telephonic promptly followed by written notice) by 1:00 p.m. (Dallas time) on the date of the proposed payment (or two Business Days prior the date of the proposed prepayment of a Eurodollar Advance). Any notice of prepayment shall be irrevocable. (2) On or before the date of any reduction of the Commitment, Borrower shall prepay applicable outstanding Advances in an amount necessary to reduce the sum of outstanding Advances to an amount less than or equal to the lesser of the Commitment as so reduced. Borrower shall first prepay all Base Rate Advances and shall thereafter prepay Eurodollar Advances. To the extent that any prepayment requires that a Eurodollar Advance be repaid on a date other than the last day of its Interest Period, Borrower shall reimburse Lender in accordance with Section 1.9 hereof. 1.7 Reduction of Commitment. (1) Borrower shall have the right, without payment of any premium or penalty, at any time upon not less than three (3) Business Days' notice to Lender (if telephonic, to be confirmed by telecopy or in writing on or before the date of reduction or termination) to terminate or reduce the Commitment, in whole or in part, provided that (I) each partial termination shall be in an aggregate amount which is an integral multiple of $2,000,000, and (ii) no such reduction in the Commitment shall cause any Eurodollar Advance to be repaid prior to the last day of its Interest Period. Once reduced or terminated, the Commitment may not be increased. 5 (2) On the Maturity Date, the Commitment shall automatically reduce to zero. 1.8 Payment of Principal of Advances. Borrower agrees to pay the principal amount of the Advances to Lender as follows: (1) The principal amount of each Eurodollar Advance shall be due and payable on its Payment Date, which principal payment may be made by means of a Refinancing Advance. (2) On the date of reduction of the Commitment pursuant to Section 1.7 hereof, including the Maturity Date, the aggregate amount of the Advances outstanding on such date of reduction in excess of the Commitment as reduced shall be due and payable, which principal payment may not be made by means of Refinancing Advances. (3) The principal amount of all Advances, all accrued interest and fees thereon, and all other Obligations related thereto, shall be due and payable in full, or to the extent not otherwise required to be paid earlier herein, on the Maturity Date. 1.9 Reimbursement. If (a) any payment of principal of, or Conversion of, any Eurodollar Advance is made by Borrower to or for the account of Lender other than on the last day of the Interest Period for such Advance, or (b) Borrower shall fail to Convert into or continue a Eurodollar Advance on the date specified in the notice thereof (other than as a result of any wrongful act or omission of Lender), Borrower shall, upon demand by Lender, pay to Lender any and all amounts required to compensate Lender for any and all additional losses, costs and expenses that it may reasonably incur as a result of such payment, Conversion or failure to borrow, Convert or continue, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Lender to fund or maintain such Advance. Lender shall deliver to Borrower a certificate setting forth calculation of the additional amounts or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, Lender may use any reasonable averaging and attribution methods. (1) The obligations of Borrower under this Section 1.9 shall survive any termination of this Note. 1.10 Payments and Computations. (1) Borrower shall make each payment hereunder not later than 12:00 noon (Dallas time) on the day when due in Dollars to Lender at Lender's principal office in same day funds. 6 (2) Interest on Base Rate Advances and the Commitment Fee shall be calculated on the basis of a 365 or 366 day year, as appropriate. Subject to Section 2.4 hereof, interest on Eurodollar Advances shall be calculated on the basis of actual days elapsed but computed as if each year consisted of 360 days. Such computations shall be made including the first day but excluding the last day occurring in the period for which such interest or Commitment Fee is payable. Each determination by Lender of an interest rate, fee or commission hereunder shall be conclusive and binding for all purposes, absent manifest error. (3) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation or payment of interest, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (4) Borrower agrees to pay principal, interest, fees and all other amounts due under this Note without deduction for set-off or counterclaim or any deduction whatsoever. (5) If some but less than all amounts due from Borrower are received by Lender, Lender shall apply such amounts in the following order of priority: (I) to the payment of all fees then due and payable; (ii) to the payment of interest then due and payable on the Advances; and (iii) to the payment of principal then due and payable on the Advances. 1.11 Calculation of Rates. The provisions of this Note relating to calculation of the Eurodollar Rate are included only for the purpose of determining the rate of interest or other amounts to be paid hereunder that are based upon such rate, it being understood that Lender shall be entitled to fund and maintain its funding of all or any part of a Eurodollar Advance as it sees fit. 1.12 Booking Advances. Lender shall make, carry or transfer Advances at, to or for the account of any of its branch offices or the office of any affiliate. 1.13 Taxes. (1) Any and all payments by Borrower hereunder shall be made, in accordance with Section 1.10 hereof, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges and withholdings, and all liabilities with respect thereto, excluding, in the case of Lender, taxes imposed on, based upon or measured by its overall net income, net worth or capital, and franchise taxes, doing business taxes or minimum taxes imposed on it, (I) by the jurisdiction under the laws of which Lender is organized and in which it has its applicable lending office or any political subdivision thereof; (ii) by any other jurisdiction, or any political subdivision thereof, other than those imposed by reason of (A) an asserted relation of such jurisdiction to the transactions contemplated by this 7 Note, (B) the activities of Borrower in such jurisdiction, or the activities in connection with the transactions contemplated by this Note of Lender; and (iii) in the case of Lender, any Taxes in the nature of transfer, stamp, recording or documentary taxes resulting from a transfer (other than as a result of foreclosure) by Lender of all or any portion of its interest in this Note (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to Lender, (x) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 1.13) Lender receives an amount equal to the sum it would have received had no such deductions been made, (y) Borrower shall make such deductions and (z) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (2) In addition, Borrower agrees to pay any and all stamp and documentary taxes and any and all other excise and property taxes, charges and similar levies (other than Taxes described in clause (iii) of the first sentence of Section 1.13(a) hereof) that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Note (hereinafter referred to as "Other Taxes"). (3) Borrower will indemnify Lender for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 1.13) paid by Lender and all liabilities (including penalties, additions to tax, interest and reasonable expenses) arising therefrom or with respect thereto whether or not such Taxes or Other Taxes were correctly or legally asserted, other than penalties, additions to tax, interest and expenses arising as a result of gross negligence or wilful misconduct on the part of Lender, provided, however, that Borrower shall have no obligation to indemnify Lender unless and until Lender shall have delivered to Borrower a certificate setting forth in reasonable detail the basis of Borrower's obligation to indemnify Lender pursuant to this Section 1.13. This indemnification shall be made within 30 days from the date Lender makes written demand therefor. (4) Within 30 days after the date of any payment of Taxes, Borrower will furnish to Lender the original or a certified copy of a receipt evidencing payment thereof. If no Taxes are payable in respect of any payment hereunder, Borrower will furnish to Lender a certificate from each appropriate taxing authority, or an opinion of counsel acceptable to Lender, in either case stating that such payment is exempt from or not subject to Taxes, provided, however, that such certificate or opinion need only be given if: (I) Borrower makes any payment from any account located outside the United States, or (ii) the payment is made by a payor that is not a United States Person. For purposes of this Section 1.13 the terms "United States" and "United States Person" shall have the meanings set forth in Section 7701 of the Code. 8 (5) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 1.13 shall survive the payment in full of principal and interest hereunder. (6) If Lender claims any additional amounts payable pursuant to this Section 1.13, it shall use its reasonable best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its lending office, if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of Lender in good faith, be materially disadvantageous to Lender. (7) Lender agrees that (I) it will take all reasonable actions by all usual means to maintain all exemptions, if any, available to it from United States withholding taxes (whether available by treaty, existing administrative waiver, by virtue of the location of Lender's lending office) and (ii) otherwise cooperate with Borrower to minimize amounts payable by Borrower under this Section 1.13; provided, however, Lender shall not be obligated by reason of this Section 1.13(g) to contest the payment of any Taxes or Other Taxes or to disclose any information regarding its tax affairs or tax computations or reorder its tax or other affairs or tax or other planning. Subject to the foregoing, to the extent Borrower pays sums pursuant to this Section 1.13 and Lender receives a refund of any or all of such sums, such refund shall be applied to reduce any amounts then due and owing under this Note or, to the extent that no amounts are due and owing under this Note at the time such refunds are received, Lender shall promptly pay over all such refunded sums to Borrower, provided that no Default or Event of Default is in existence at such time. 1.14 Increased Costs, Etc. (1) If, due to either (I) the introduction of or any change (other than any change which is taken into account in the calculation of the Eurodollar Rate) in or in the interpretation or administration of any Law or (ii) the compliance with any guideline or request from any central bank or other governmental authority, in any case introduced, changed, interpreted or requested after the date hereof (whether or not having the force of Law), there shall be any increase in the cost to Lender of agreeing to make or making, funding or maintaining Eurodollar Advances to Borrower or there shall be any reduction in the amount received or receivable by Lender hereunder (whether of principal, interest or otherwise), then Borrower shall from time to time, upon demand by Lender pay to Lender additional amounts sufficient to compensate Lender for such increased cost. A certificate as to the amount of such increased costs or reductions, submitted to Borrower by Lender, shall be conclusive and binding for all purposes, absent manifest error. (2) If Lender determines that compliance with any Law or any guideline of request from any central bank or Tribunal (other than as set forth in the Risked-Based Capital Guidelines issued by the Board of Governors of the Federal Reserve System, in the form in effect on the date of this Agreement, in 9 Appendix A to Part 208 of the Federal Reserve Board's Regulation H, 12 CFR Part 208, and in Appendix B to Part 225 of the Federal Reserve Board's Regulation Y, 12 CFR Part 225 (collectively, "Capital Adequacy Guidelines"), but not excluding from this Section 1.14(b) any increase in cost as a result of any amendment, modification or change in interpretation or administration of the Capital Adequacy Guidelines subsequent to the date of this Note) (whether or not having the force of Law) affects or would affect the amount of capital required or expected to be maintained by Lender or any corporation controlling Lender or has or would have the effect of reducing the rate of return on Lender's capital or on the capital of the corporation controlling Lender and that the amount of such capital is increased, or the return on such capital is decreased, by or based upon the existence of Lender's commitment to lend hereunder and other commitments of this type, then, upon demand by Lender, Borrower shall pay to Lender, from time to time as specified by Lender, additional amounts sufficient to compensate Lender or such controlling corporation in the light of such circumstances, to the extent that Lender or such controlling corporation reasonably determines such increase in capital, or reduction in the return on capital, to be allocable to the existence of Lender's commitment to lend hereunder. A certificate as to such amounts submitted to Borrower by Lender shall be conclusive and binding for all purposes, absent manifest error. (3) If Lender notifies Borrower that the Eurodollar Rate for any Interest Period for any Eurodollar Advances will not adequately reflect the cost to such Lender of making, funding or maintaining its Eurodollar Advances for such Interest Period, (I) each such Eurodollar Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of Lender to make or continue, or to Convert Advances into, Eurodollar Advances shall be suspended until Lender notifies Borrower that it has determined that the circumstances causing such suspension no longer exist. (4) Notwithstanding any other provision of this Note, if the introduction of or any change in or in the interpretation or administration of any Law shall make it unlawful, or any central bank or other governmental authority shall assert that it is unlawful, for Lender to perform its obligations hereunder to make Eurodollar Advances or to continue to fund or maintain Eurodollar Advances hereunder, then, on notice thereof and demand therefor by Lender to Borrower, (I) each Eurodollar Advance will automatically, upon such demand, Convert into a Base Rate Advance and (ii) the obligation of Lender to make or continue, or to Convert Advances into, Eurodollar Advances shall be suspended until Lender notifies Borrower that it has determined that the circumstances causing such suspension no longer exist. (5) Upon the occurrence and during the continuance of any Default or Event of Default, (I) each Eurodollar Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of Lender to make or continue, or to Convert Advances into, Eurodollar Advances shall be suspended. (6) The obligations of Borrower under this Section 1.14 shall survive any termination of this Agreement. 10 (7) Any certificate delivered to Borrower by Lender pursuant to this Section 1.14 shall include in reasonable detail the basis for Lender's demand for additional compensation. Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to reduce or eliminate any such additional compensation which may thereafter accrue and which efforts would not, in the sole determination of Lender, be otherwise disadvantageous to Lender. 1.15 Senior Indebtedness. The obligations of Borrower evidenced by this Note constitute senior indebtedness of Borrower in right of payment and is not subordinated in right of payment to any other indebtedness of Borrower. ARTICLE II MISCELLANEOUS 1.16 Waivers and Consents. Borrower and all endorsers, sureties and guarantors of this Note hereby severally waive demand and notice of demand, presentment for payment, protest, notice of protest, notice of acceleration of and notice of intention to accelerate the maturity of this Note, diligence in collecting, the bringing of any suit against any Person, and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any holder hereof, whether before or after maturity. 1.17 Expenses. If this Note is placed in the hands of an attorney for collection after default, or if all or any part of the indebtedness evidenced hereby is proved, established or collected in any court or in any bankruptcy, receivership, debtor relief, probate or other court proceedings, Borrower and all endorsers, sureties and guarantors of this Note jointly and severally agree to pay reasonable attorneys' fees and collection costs to the holder hereof in addition to the principal and interest payable hereunder. In addition, Borrower agrees to pay Lender all reasonable costs and expenses, including reasonable attorneys' fees, incurred by Lender in connection with the preparation of this Note, making the Advances hereunder, and in connection with all amendments, consents and waivers related to the Advances and requests therefor by Borrower. 1.18 Governing Law. This Note is payable and performable in Dallas County, Texas, and shall be construed and enforced in accordance with and governed by the laws of the State of Texas and the federal laws of the United States of America. Without excluding any other jurisdiction, Borrower agrees that the courts of the State of Texas sitting in Dallas, Texas and the federal courts sitting in Dallas, Texas will have jurisdiction over proceedings in connection herewith. 11 1.19 Interest and Charges. Interest paid or agreed to in this Note or in any other documents executed in connection herewith shall not exceed the Maximum Amount, and, in any contingency whatsoever, if Lender shall receive anything of value deemed interest under Applicable Law which would exceed the Maximum Amount, the excessive interest shall be applied to the reduction of unpaid principal or refunded to Borrower, if it exceeds unpaid principal. 1.20 Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, except that Borrower shall not have the right to assign its rights or obligations hereunder or any interest herein without the prior written consent of Lender. Lender may assign to one or more banks, all or any part of, or may grant participations to one or more banks in or to all or part of, any Advance or Advances and this Note, and to the extent of any such assignment or participation (unless where otherwise stated) the assignee or participant of such assignment or participation shall have the rights and benefits with respect to each Advance or Advances and this Note, as it would have if it was Lender hereunder. 1.21 Titles. The titles to Sections in this Note are inserted for convenience only and do not constitute a part of the text hereof. 1.22 Remedies. If an Event of Default shall have occurred and be continuing: (1) With the exception of an Event of Default specified in Section 8.1(f) or (g) of the Credit Agreement, Lender may at its election, terminate the Commitment and/or by written notice to Borrower declare the principal of and interest on the Advances and all other amounts owed under this Note to be forthwith due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. (2) Upon the occurrence of an Event of Default specified in Section 8.1(f) or (g) of the Credit Agreement, such principal, interest and other amounts shall thereupon and concurrently therewith become due and payable and the Commitment shall forthwith terminate, all without any action by Lender and without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Note to the contrary notwithstanding. (3) Lender may exercise all of the rights granted to it under this Note and under Applicable Law. (4) The rights of Lender hereunder shall be cumulative, and not exclusive. 12 ARTICLE III DEFINITIONS 1.23 As used in and for all purposes of this Note, the terms defined in this Article III shall have the following meanings, and the singular shall include the plural, and vice versa, unless otherwise specifically required by the context: "Advance" means any amount advanced by Lender to Borrower pursuant to Section 1.2 hereof on the occasion of any borrowing, including without limitation any Refinancing Advance. "Applicable Law" means (a) in respect of any Person, all provisions of constitutions, statutes, rules, regulations and final orders of governmental bodies or regulatory agencies applicable to such Person and its properties, including, without limiting the foregoing, all orders and decrees of all tribunals in proceedings or actions to which the Person in question is a party, and (b) in respect of contracts relating to interest or finance charges that are made or performed in the State of Texas, "Applicable Law" shall mean the laws of the United States of America, including without limitation 12 USC '' 85 and 86, as amended from time to time, and any other statute of the United States of America now or at any time hereafter prescribing the maximum rates of interest on loans and extensions of credit, and the laws of the State of Texas, including, without limitation, Art. 1H, if applicable, and if Art. 1H is not applicable, Art. 1D, and any other statute of the State of Texas prescribing maximum rates of interest and extensions of credit; provided that the parties hereto agree pursuant to Texas Finance Code Section 346.004 that the provisions of Chapter 346 of the Texas Finance Code shall not apply to this Note or any other Note Documents. "Art. 1D" means Article 5069-1D, Title 79, Revised Civil Statutes of Texas, 1925, as amended. "Art. 1H" means Article 5069-1H, Title 79, Revised Civil Statutes of Texas, 1925, as amended. "Base Rate" means an interest rate per annum for each day equal to the sum of (a) 2.50% plus (b) higher of (I) the Prime Rate in effect on such day or (ii) the Federal Funds Rate in effect on such day plus 1/2%, each without notice to Borrower. "Base Rate Advance" means any Advance bearing interest at the Base Rate. "Borrowing" means any borrowing hereunder of a Base Rate Advance or a Eurodollar Advance. "Business Day" means a day on which banks are open for the transaction of business in Dallas, Texas and, with respect to any Eurodollar Advance, also a day on which commercial banks are open for international business (including dealings in Dollar deposits) in London, England. "Commitment" means $20,000,000, as reduced from time to time pursuant to Section 1.7 hereof. 13 "Commitment Fee" means the fee described in Section 1.5 hereof. "Conversion", "Convert" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 1.3(b) hereof. "Credit Agreement" means that certain Amended and Restated Credit Agreement, dated as of December 19, 1997, among Borrower, the lenders party thereto and NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as Administrative Lender, as amended, modified, supplemented or restated from time to time. "Debtor Relief Laws" has the meaning given to such term in the Credit Agreement. "Default" has the meaning given to such term in the Credit Agreement. "Eurodollar Advances" means Advances which bear interest at the Eurodollar Rate. "Eurodollar Rate" means an interest rate per annum equal to the sum of (I) 4.00% plus (ii) a rate per annum determined pursuant to the following formula: London Interbank Rate ------------------------------------ 100% - Eurodollar Reserve Percentage "Eurodollar Reserve Percentage" means the reserve requirement including any supplemental and emergency reserves (expressed as a percentage) applicable to member banks of the Federal Reserve System in respect of "Eurocurrency liabilities" under Regulation D of the Board of Governors of the Federal Reserve System, or such substituted or amended reserve requirement as may be hereafter applicable to member banks of the Federal Reserve System. "Event of Default" means (I) the occurrence of an "Event of Default" as defined in the Credit Agreement (whether or not the Credit Agreement is still in effect), (ii) the failure of Borrower to pay any interest under this Note or any fees payable hereunder or any other costs, expenses or other amounts payable hereunder when due, and such failure is not cured within one Business Day from the date such payment is due, (iii) the failure of Borrower to pay any principal under this Note when due, (iv) the failure or refusal of Borrower or any Guarantor to comply with any of the covenants contained in this Note or any Guaranty, or (v) any representation or warranty made under this Note or any Guaranty shall prove to have been incorrect or misleading in any material respect when made. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of Dallas on the Business Day next succeeding such day, provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Lender on such day on such transactions as determined by Lender. 14 "Guarantor" has the meaning set forth in the Credit Agreement. "Highest Lawful Rate" means at the particular time in question the maximum rate of interest which, under Applicable Law, Lender is then permitted to charge on the Obligations. If the maximum rate of interest which, under Applicable Law, the Lenders are permitted to charge on the Obligations shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each change in the Highest Lawful Rate without notice to Borrower. For purposes of determining the Highest Lawful Rate under the Applicable Law of the State of Texas, the applicable rate ceiling shall be (a) the weekly rate ceiling described in and computed in accordance with the provisions of Art. 1H, or (b) either the quarterly ceiling or the annualized ceiling computed pursuant to Art. 5069-1D.008, Title 79, Revised Civil Statutes of Texas, as amended; provided, however, that at any time the weekly rate ceiling, the quarterly ceiling or the annualized ceiling shall be less than 18% per annum or more than 24% per annum, the provisions of Art. 5069-1D.009(a) and (b), Title 79, Revised Civil Statutes of Texas, as amended, shall control for purposes of such determination, as applicable. "Interest Period" means, with respect to any Eurodollar Advance, the period beginning on the date an Advance is made or continued as or Converted into a Eurodollar Advance and ending one or two months thereafter (as Borrower shall select): (1) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (2) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. "Law" has the meaning given to such term in the Credit Agreement. "London Interbank Rate" means, for any Eurodollar Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "London Interbank Rate" shall mean, for any Eurodollar Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. 15 "Maturity Date" means the earliest of (a) the occurrence of a Prepayment Event, (b) the date which is 90 days from the date of this Note or the date of termination in whole of the Commitment hereunder. "Maximum Amount" means the maximum amount of interest which, under Applicable Law, Lender is permitted to charge on the Obligations. "Necessary Authorization" has the meaning given to such term in the Credit Agreement. "Obligations" means all obligations of any nature (whether matured or unmatured, fixed or contingent) of Borrower to Lender under this Note. "Payment Date" means the last day of any Interest Period for any Eurodollar Advance. "Person" means an individual, corporation, partnership, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Prepayment Event" means any increase in the commitment under the Credit Agreement after the date of this Note or the issuance of any Capital Stock (as defined in the Credit Agreement) of the Borrower or any of its Subsidiaries after the date of this Note. "Prime Rate" means, at any time, the prime interest rate announced or published by Lender from time to time as its reference rate for the determination of interest rates for loans of varying maturities in United States dollars to United States residents of varying degrees of creditworthiness and being quoted at such time by Lender as its "prime rate;" it being understood that such rate may not be the lowest rate of interest charged by Lender. "Quarterly Date" means the last day of each March, June, September and December commencing with the first such day after the date of this Note. "Refinancing Advance" means any Advance which is used to pay the principal amount (or any portion thereof) of an Advance at the end of its Interest Period and which, after giving effect to such application, does not result in an increase in the aggregate amount of outstanding Advances. 16 "Term Credit Agreement" means that certain Term Credit Agreement, dated as of December 19, 1997, among Borrower, the Lenders party thereto and NationsBank, N.A. (successors by merger to NationsBank of Texas, N.A.), an Administrator Lender, as amended, modified, supplemented or restated from time to time. "Tribunal" has the meaning given to such term in the Credit Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants as follows: 1.24 Corporate Authority and No Violation. The execution, delivery and performance by Borrower of this Note (a) is within its corporate powers, (b) has been duly authorized by all necessary corporate action, and does not and will not (I) contravene its certificate of incorporation or bylaws, (ii) violate any other applicable requirement of law, or any order or decree of any governmental authority or arbitrator, (iii) conflict with or result in the breach of, or constitute a default under, or result in or permit the termination or acceleration of, any of its agreements, (iv) result in the creation or imposition of any Lien upon any of its property or (v) require the consent of, authorization by, approval of, notice to, or filing or registration with, any Person not already obtained. 1.25 Binding Obligation. This Note has been duly executed and delivered by Borrower and is the legal, binding and valid obligation of Borrower enforceable against it in accordance with its terms, subject to the following qualifications: (I) equitable principles generally (whether considered in a proceeding at law or in equity), and (ii) Debtor Relief Laws (insofar as any such law relates to the bankruptcy, insolvency or similar event of Borrower). 1.26 Credit Agreement Representations and Warranties. For purposes hereof, all of the representations and warranties of Borrower set forth in Article 4 of the Credit Agreement (the "Credit Agreement Representations and Warranties") are hereby reaffirmed by Borrower and are incorporated herein as written, mutatis mutandis. The Borrower hereby represents and warrants that the Credit Agreement Representations and Warranties are true and correct in all material respects as though made on and as of the date of this Note. 17 ARTICLE V COVENANTS Until the termination of the Commitment and payment of all outstanding Obligations in full, Borrower will comply with all of the covenants and agreements set forth in Articles 5, 6 and 7 of the Credit Agreement as in effect on the date of this Note. For purposes of this Note, all of the covenants and agreements of Borrower set forth in Articles 5 (except for Section 5.8), 6 and 7 of the Credit Agreement and all definitions relating thereto are hereby reaffirmed and adopted by Borrower and are incorporated herein as written and agreed upon as of the date of this Note, mutatis mutandis, which phrase for purposes hereof means (a) the phrase "Prior to the Release Date" appearing in the first paragraph of each of said Articles shall be deemed to read "Until the termination of the Commitment and payment of all outstanding Obligations in full", and (b) each reference in such Article to "Lenders", "each Lender" and "Administrative Lender" shall be deemed to be a reference to Lender. In the event of termination of the Credit Agreement prior to the payment in full of all Obligations under this Note and termination of the Commitment, Borrower covenants and agrees that the covenants and agreements of Borrower contained in Articles 5, 6 and 7 of the Credit Agreement shall nevertheless remain in full force and effect and be binding upon Borrower, and Borrower shall continue to perform, observe and comply with all of the covenants and agreements of Borrower set forth in Articles 5, 6 and 7 of the Credit Agreement. Except for amendments, modifications and waivers provided up to the date hereof, no amendment, modification or waiver with respect to Articles 5, 6 and 7 of the Credit Agreement shall be effective with respect to such Articles as they are incorporated herein without the written consent of Lender. ARTICLE VI FINAL AGREEMENT THIS NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. PILLOWTEX CORPORATION /s/ Jeffrey D. Cordes ------------------------- President and COO NATIONSBANK, N.A. /s/ Suzanne B. Smith -------------------------- Vice President 18 EXHIBIT "A" NOTICE OF BORROWING NationsBank, N.A. [Date] 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Suzanne B. Smith Ladies and Gentlemen: The undersigned refers to the Promissory Note in the maximum principal amount of $20,000,000, dated as of May 4, 1999 (said Note, as it may be amended or otherwise modified from time to time, being the "Note"; the terms defined therein being used herein as therein defined), payable by Pillowtex Corporation to the order of NationsBank, N.A. and hereby gives you notice pursuant to Section 1.3 of the Note that the undersigned hereby requests _____ Borrowing[s] under the Note, and in that connection sets forth below the information relating to [each] such Borrowing (a "Proposed Borrowing") as required by Section 1.3 of the Note: Proposed Borrowing: (1) The Business Day of such Proposed Borrowing is _______________, 19___. (2) The Type of Advances comprising such Proposed Borrowing is [Base Rate Advances [to the extent of an aggregate amount of $___________]] [Eurodollar Advances [to the extent of an aggregate amount of $___________]]. (3) The aggregate amount of such Proposed Borrowing is $____________. (4) [The initial Interest Period for each [Eurodollar Advance] made as part of such Proposed Borrowing is _____ [months]]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing, before and after giving effect thereto and to the application of the proceeds therefrom: (A) the representations and warranties specified in Article 4 of the Note are true and correct in all material respects as though made on and as of such date; and (B) no event has occurred and is continuing or would result from such Proposed Borrowing, which constitutes a Default or Event of Default. Very truly yours, PILLOWTEX CORPORATION By: Name: Title: EX-10.2 4 1 FIRST AMENDMENT TO PROMISSORY NOTE THIS FIRST AMENDMENT TO PROMISSORY NOTE (this "First Amendment"), dated as of July 27, 1999, is entered into between PILLOWTEX CORPORATION, a Texas corporation ("Borrower"), and BANK OF AMERICA, N.A. (formerly known as NationsBank N.A.) ("Lender"). A. Borrower executed that certain Promissory Note, dated May 4, 1999, in the maximum principal amount of $20,000,000, payable to the order of Lender (the "Promissory Note"; the terms defined in the Promissory Note and not otherwise defined herein shall be used herein as defined in the Promissory Note). B. Borrower and Lender desire to amend the Promissory Note. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, Borrower and Lender covenant and agree as follows; I. AMENDMENTS TO PROMISSORY NOTE. (a) The amount of the Commitment set forth in the beginning of the Promissory Note is hereby increased from $20,000,000 to $35,000,000. (b) The definition of "Commitment" set forth in Article III of the Promissory Note is hereby amended to read as follows; "Commitment" means $35,000,000, as reduced from time to time pursuant to Section 1.7 hereof. The definition of "Maturity Date" set forth in Article III of the Promissory Note is hereby amended to read as follows: "Maturity Date" means the earliest of (a) the occurrence of a Prepayment Event, (b) December 1, 1999, or the date of termination in whole of the Commitment hereunder." 2. REPRESENTATIONS AND WARRANTIES TRUE: NO EVENT OF DEFAULT. By its execution and delivery hereof, Borrower represents and warrants that, as of the date hereof and after giving effect to the amendment provided in the foregoing Section 1: (a) the representations and warranties contained in the Promissory Note are true and correct on and as of the date hereof as if made on and as of such date; 2 (b) no event has occurred and is continuing which constitutes a Default or an Event of Default; Borrower has full power and authority to execute and deliver this First Amendment, and this First Amendment and the Promissory Note, as amended hereby, constitute 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; and (d) no authorization, approval, consent or other action by, notice to, or filing with, any governmental authority or other Person, is required for the execution, delivery or performance by Borrower of this First Amendment or the acknowledgment of this First Amendment by any Person that executed a Guaranty Agreement (each such Person being a "Guarantor"). 3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective as of July 27,1999, subject to the following: (a) Lender shall have received counterparts of this First Amendment executed by Borrower and acknowledged by each Guarantor; and (b) Lender shall have received an amendment fee from Borrower in consideration for this First Amendment in the amount of $262,500 (which fee shall be fully-earned when paid, and non-refundable for any reason). 4. GUARANTOR ACKNOWLEDGMENT. By signing below, each Guarantor (I) acknowledges, consents and agrees to the execution, delivery and performance by Borrower of this First Amendment, (ii) acknowledges and agrees that its obligations in respect of its Guaranty Agreement are not released, diminished, waived, modified, impaired or affected in any manner by this First Amendment or any of the provisions contemplated herein, (iii) ratifies and confirms its obligations under its Guaranty Agreement (including, without limitation, with respect to the Commitment as increased hereby), and (iv) acknowledges and agrees that it has no claim or offsets against, or defenses or counterclaims to, its obligations under its Guaranty Agreement. 5. REFERENCE TO THE PROMISSORY NOTE (a) Upon the effectiveness of this First Amendment, each reference in the Promissory Note to "this Note", "hereunder", or words of like import shall mean and be a reference to the Promissory Note, as affected and amended by this First Amendment. (b) The Promissory Note, as amended by this First Amendment, shall remain in full force and effect and are hereby ratified and confirmed. 2 3 6. COSTS EXPENSES AND TAXES. Borrower agrees to pay on demand all costs and expenses of Lender in connection with the preparation, reproduction, execution and delivery of the First Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for Lender). 7. EXECUTION IN COUNTERPARTS. This First 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 when taken together shall constitute but one and the same instrument. 8. GOVERNING LAW: BINDING EFFECT. This First Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon Borrower and Lender and their respective successors and assigns. 9. HEADINGS. Section headings in this First Amendment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. 10. ENTIRE AGREEMENT. THE PROMISSORY NOTE, AS AMENDED BY THIS FIRST AMENDMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AS TO THE SUBJECT MATTER HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK 3 4 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date first above written. PILLOWTEX CORPORATION /s/ Jeffrey D. Cordes ----------------------------------- By Jeffrey D. Cordes President and COO BANK OF AMERICA, N.A. /s/ Dirdre B. Doyle ----------------------------------- By: Dierdre B. Doyle Principal 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 SF, INC. (formerly known as Fieldcrest Cannon Sure Fit, Inc.) FIELDCREST CANNON TRANSPORTATION, INC. ST. MARYS, INC. -4- 5 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 /s/ Jeffrey D. Cordes - ------------------------------- By: Jeffrey D. Cordes President and COO EX-27.1 5
5 1,000 6-MOS JAN-01-2000 JAN-03-1999 JUL-03-1999 9,032 0 286,469 22,387 509,246 804,886 762,249 121,847 1,766,144 295,321 1,019,396 63,165 0 142 247,464 1,766,144 730,975 730,975 613,201 613,201 59,239 529 39,200 19,335 7,309 12,026 0 0 0 12,026 .77 .71
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