-----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, V2hDxKc2qle92Hjtco8pfm0WSF1T3OHkYtQScgv7idDu6D6s+ormLfUYGMdgZiCD r4WyDW7uObjLDGPV7JzNYQ== 0000930661-01-000863.txt : 20010402 0000930661-01-000863.hdr.sgml : 20010402 ACCESSION NUMBER: 0000930661-01-000863 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010330 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-K405 SEC ACT: SEC FILE NUMBER: 001-11756 FILM NUMBER: 1587628 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-K405 1 0001.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities - ------ Exchange Act of 1934 For the fiscal year ended December 30, 2000 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) (I.R.S. Employer Identification No.) 4111 Mint Way, Dallas, Texas 75237 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 333-3225 ________________ Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Common Stock, $0.01 par value None Securities Registered Pursuant to Section 12(g) of the Act: None ________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 20, 2001 was $2,260,389. As of March 20, 2001, Registrant had 14,250,892 shares of Common Stock outstanding. __________________ DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- Unless the context otherwise requires, references to "Pillowtex" or the "Company" include Pillowtex Corporation and its subsidiaries. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements identified by the use of the words "will," "would," "could," "should," "anticipates," "believes," "expects," "estimates," "intends" or similar expressions and other statements that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. Factors which could cause the Company's actual results in future periods to differ materially from those expressed in or implied by such statements include, but are not limited to, the following: - - The cash generated by the Company from operations and cash available from borrowing under its debtor-in-possession financing facility may not be sufficient to fund the operations of the Company until such time as the Company is able to propose a plan of reorganization that will be acceptable to creditors and other parties in interest and confirmed by the Bankruptcy Court. - - Actions may be taken by creditors or other parties in interest that may have the effect of preventing or unduly delaying confirmation of a plan of reorganization in connection with the Company's bankruptcy proceedings. - - The Bankruptcy Court may not confirm the Company's plan of reorganization, when proposed. - - The plan of reorganization proposed by the Company and approved by the Bankruptcy Court may not be viable. - - The Company's senior management may be required to expend a substantial amount of time and effort structuring a plan of reorganization, which could have a disruptive impact on management's ability to focus on the operation of the Company's business. - - The Company may not be able to obtain sufficient financing to meet future obligations. - - The Company's access to capital markets will likely be limited for the foreseeable future. - - The Company may have difficulty in attracting and retaining customers, top management and other key personnel and labor as a result of the Company's bankruptcy proceedings. - - The Company may have difficulty in maintaining existing or creating new relationships with suppliers or vendors as a result of its pending bankruptcy proceedings; suppliers to the Company may stop providing supplies or services to the Company or provide such supplies or services only on "cash on delivery," "cash on order" or other terms that could have an adverse impact on the Company's cash flow. - - The Company faces significant competitive pressures. - - The price and availability of certain raw materials used by the Company are subject to rapid and significant change. - - The Company may be affected by changes in general retail industry conditions. - - The Company's success may depend in part on the goodwill associated with and protection of the brand names owned by the Company. Certain of these factors, as well as other such factors, are discussed herein in greater detail under "Item 1. Business - Risk Factors" below. In making these forward-looking statements, the Company does not undertake to update them in any manner except as may be required by law. 1 PART I ITEM 1. BUSINESS -------- General Founded in 1954, Pillowtex is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex's extensive product offerings include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products. As a leading supplier across all distribution channels, Pillowtex sells its products to mass merchants, department stores, and specialty retailers. It provides its customers with a centralized "one-stop" source for their home textile merchandise. Pillowtex also markets its products to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet. Pillowtex, through its operating subsidiaries, manufactures and markets its products utilizing established and well-recognized Pillowtex-owned brand names. In addition, through licensing agreements, Pillowtex currently has rights to manufacture and, in some instances, market bedding products under other well- known brand names. Pillowtex also manufactures products for customers under their own brand names. Pillowtex's diverse portfolio of top brand names allows it to differentiate Pillowtex's products from those of its competitors. Pillowtex also provides distinct brand names for different channels of retail distribution and for different price points. Pillowtex is organized into three major operating divisions: Bed and Bath Division; Pillow and Pad Division; and Blanket Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, towels, bath rugs and kitchen textile products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters and mattress pads. The Blanket Division manufactures and sells blanket products. See footnote 18 of the notes to the Company's consolidated financial statements for additional information regarding segments. Proceedings Under Chapter 11 of the Bankruptcy Code On November 14, 2000 (the "Petition Date"), Pillowtex Corporation and substantially all of its domestic subsidiaries (collectively, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The chapter 11 cases pending for the Debtors (the "Chapter 11 Cases") are being jointly administered for procedural purposes. In conjunction with the commencement of the Chapter 11 Cases, the Debtors sought and obtained several orders from the Bankruptcy Court which were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 Cases. The most significant of these orders (i) permit the Debtors to operate their consolidated cash management system during the Chapter 11 Cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 Cases, (ii) authorize payment of prepetition employee salaries, wages, and benefits and reimbursement of prepetition employee business expenses, (iii) authorize payment of prepetition sales, payroll, and use taxes owed by the Debtors, (iv) authorize payment of certain prepetition obligations to customers, and (v) authorize payment of certain prepetition obligations to critical vendors to aid the Debtors in maintaining operation of their business. On December 6, 2000, the Bankruptcy Court also entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150.0 million debtor- in-possession financing facility (the "DIP Financing Facility") with Bank of America, N.A. as agent for a syndicate of financial institutions comprised of certain of the Company's prepetition senior secured lenders, and to grant first priority priming liens and mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" below for a further discussion regarding the DIP Financing Facility. The Debtors are currently operating their businesses as debtors-in- possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The 2 Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. The United States trustee for the District of Delaware has appointed an Official Committee of Unsecured Creditors in accordance with the provisions of the Bankruptcy Code. The Bankruptcy Code provides that the Debtors have exclusive periods during which only they may file and solicit acceptances of a plan of reorganization. The exclusive period of the Debtors to file a plan for reorganization expired on March 14, 2001; however, the Debtors have requested the Bankruptcy Court to extend such exclusive period until July 16, 2001. A hearing regarding the extension is scheduled for April 6, 2001. If the Debtors fail to file a plan of reorganization during the exclusive period or, after such plan has been filed, if the Debtors fail to obtain acceptance of such plan from the requisite impaired classes of creditors and equity holders during the exclusive solicitation period, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file their own plan of reorganization for the Debtors. After a plan of reorganization has been filed with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors and equity holders. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (i) with respect to each impaired class of creditors and equity holders, each holder in such class has accepted the plan or will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation, (ii) each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence), and (iii) confirmation of the plan is not likely to be followed by a liquidation or a need for further financial reorganization of the Debtors or any successors to the Debtors unless the plan proposes such liquidation or reorganization. If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the "cram down" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made. As a result of the amount of prepetition indebtedness and the availability of the "cram down" provisions, the holders of the Company's capital stock may receive no value for their interests under the plan of reorganization. Because of such possibility, the value of the Company's outstanding capital stock is highly speculative. See "- Risk Factors - The Value Of Pillowtex's Capital Stock Is Highly Speculative" below. Since the Petition Date, the Debtors have conducted business in the ordinary course. Management is in the process of stabilizing the business of the Debtors and evaluating their operations as part of the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by impaired creditors and equity holders and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in the financial statements. The Debtors are in the process of reviewing their operations and identifying assets for disposition. The administrative and reorganization expenses resulting from the Chapter 11 Cases will unfavorably affect the Debtors' results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 Cases. See "- Risk Factors - Pillowtex Faces Significant Challenges in Connection With Its Bankruptcy Reorganization," "- Risk Factors - Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access to Additional Financing," and "- Risk Factors - Pillowtex Is Subject To Restrictions On The Conduct Of Its Business" below. 3 Competitive Strengths Notwithstanding the foregoing, Pillowtex is one of the largest firms in the home textile industry and has significant competitive strengths. Pillowtex has: . one of the largest market shares in North America in bath towel, bed pillow, blanket, and down comforter products; and . a significant market share in each of the sheet, pillowcase, mattress pad, fashion bedding, bath rug, and kitchen textile products. Pillowtex's management team believes the following competitive strengths enhance Pillowtex's position in the marketplace: . Pillowtex Owns Industry Leading Brands. Pillowtex owns some of the most recognizable brand names in the industry, including Royal Velvet(R), Cannon(R), Fieldcrest(R), Royal Family(R), Charisma(R), St. Mary's(R), Touch of Class(R), Royal Velvet Big & Soft(R), and Beacon(R). This diverse portfolio of top brand names enables Pillowtex to assist its customers in coordinating their product offerings and differentiating such offerings from those of their competitors. . Pillowtex Has Established Strong Customer Relationships. Pillowtex has established relationships with substantially all of the 50 top home textile retailers in North America. Notwithstanding the Chapter 11 Cases, Pillowtex expects these relationships to remain strong and create a stable base from which Pillowtex can pursue future business and new product introductions. However, no assurance can be given in this regard. See "- Risk Factors - Pillowtex Faces Risk Of Loss Of Material Customers" below. . Pillowtex Has Developed Creative Merchandising Strategies. Through partnerships with its customers, Pillowtex has developed extensive merchandising programs. These partnerships have resulted in the creation of successful new products, product mix strategies, point-of-sale concepts, and advertising campaigns. Retail customers are increasingly demanding exclusive or specially designed product lines to differentiate their product offerings from those of other retailers. Pillowtex will continue to collaborate with its retail customers to design products and marketing programs responsive to individual customer's needs. Products General Pillowtex has expanded beyond its traditional pillow operations largely through strategic acquisitions, including the 1997 acquisition of Fieldcrest Cannon and the 1998 acquisition of The Leshner Corporation ("Leshner"). As a result of all these acquisitions, Pillowtex's extensive product offerings now include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products. Bed and Bath and Other Textile Products Sheets and Other Fashion Bedding. Pillowtex produces a wide variety of sheets, ranging from muslin to the finest 360-thread count 100% pima cotton sheets. Its principal brand names for this product line include Cannon(R), Fieldcrest(R), Royal Velvet(R), and Charisma(R). Pillowtex's sheeting strengths include solid color sheets with coordinating decorative bedding accessories. In addition to sheets, Pillowtex's fashion bedding products consist of matching synthetic fill comforters, comforter covers, and pillow shams along with coordinated ruffled or pleated bed skirts. Retail prices of Pillowtex's sheets vary widely based on size, thread count, and fabric type. Towels. Pillowtex's bathroom textile products include bath, hand, and fingertip towels, washcloths, and bath mats. Royal Velvet(R), Fieldcrest(R), Cannon(R), Charisma(R), Royal Velvet Big & Soft(R), and St. Mary's(R) are well- known, high quality towel brand names. These brand names provide Pillowtex with a strong market position in substantially all key sectors of the North American market. Pillowtex is also recognized as the color leader in the towel industry as it markets 40 colors in its 4 Royal Velvet(R) franchise. In the marketplace, Pillowtex differentiates its towels by using fine ring spun cotton yarns to produce Royal Velvet(R) towels and pima cotton yarns for Charisma(R) towels. The towel line includes solid colors, woven stripes, and fancy jacquards, as well as printed towels. Retail prices of Pillowtex's towels range widely based on, among other things, size, weight, and yarn type. Bath Rugs. Pillowtex also markets a variety of bath and accent rugs in conjunction with its towel offerings. These products come in a variety of sizes and are marketed under the Royal Velvet(R), Cannon(R), Fieldcrest(R), Royal Family(R), and Charisma(R) brands, as well as under private labels. Kitchen Products. Pillowtex is a leading manufacturer and marketer of kitchen textile products in North America. Pillowtex's kitchen products include terry towels, terry dish cloths, waffle weave and flat woven dish cloths, bar mops, utility cloths, pot holders, and oven mitts. A variety of constructions include yarn-dye checks, stripes, and plaids coordinating with piece-dye solids as well as printed fashion motifs. Fabricated pot holders, oven mitts, and other coordinating accessories accompany most of Pillowtex's kitchen ensembles. Other Bedroom Textiles. Pillowtex also offers a variety of other complementary bedroom textile products, including featherbeds, pillow protectors, decorative pillows, and window treatments. These products represent a source of additional profitability as "add-on" sales for retailers. Pillows and Pads Bed Pillows. Pillowtex is a leading manufacturer and marketer of bed pillows in North America. Pillowtex produces and markets a broad line of traditional bed pillows, as well as specially designed products such as body pillows. Pillowtex offers products at various levels of quality and price. Pillowtex's products range from synthetic pillows sold at relatively low retail prices to fine white goose down pillows sold at much higher price points. Pillowtex is a leading feather and down pillow manufacturer in North America. These products contain quality goose and duck down, or blends of feather and down, in a range of grades. These materials, known as "natural fill," have gained popularity for their loft and resiliency. Pillowtex also manufactures and markets a full line of bed pillows featuring staple (cut and crimped), tow (continuous filament), and cluster (individual ball) synthetic fiber fills. Pillowtex is a leading supplier of premium synthetic bed pillows in North America. Down Comforters. Pillowtex was a pioneer in marketing down comforters in the United States, and is now a leading manufacturer and marketer of down comforters in North America. Down comforters have become increasingly popular for both their insulation and fashion qualities, selling well in both warm and cool climates. They are sold at department stores, specialty stores, and mass merchants at a variety of prices. Increasingly popular higher-end comforters typically offer more down fill, have higher thread count shells, and feature more appealing "surface interest," such as damask, dots, stripes, and checks. Mattress Pads. Pillowtex is a leading manufacturer and marketer of mattress pads in North America. It produces and markets a complete line of mattress pads, including sizes for adults and children, natural and synthetic filled, flat, fitted, and stretch-to-fit mattress pads (adjustable fit mattress pads made with Lycra(R), a multidirectional stretch material manufactured by E.I. DuPont de Nemours & Co.). Blankets Pillowtex is a leading producer of adult blankets in North America. It manufactures woven and non-woven conventional and thermal weave blankets and throws in a wide assortment of fibers, including cotton, wool blend, acrylic, and polyester. Pillowtex also markets infant blankets with products ranging from non-woven receiving blankets to the finest Supima(R) cotton crib blankets. Marketing And Sales Pillowtex markets its products to mass merchants, department stores, and specialty retail stores, as well as to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the internet. 5 Pillowtex's top ten customers accounted for approximately 61.9% of its total net sales in 2000. Wal-Mart Stores, Inc. (including Sam's Club stores) accounted for approximately 24.5% of Pillowtex's total net sales in 2000. No other customer accounted for more than 10% of Pillowtex's total net sales in 2000. Consistent with industry practice, Pillowtex does not operate under long- term written supply contracts with its customers. See "- Risk Factors -Pillowtex Faces Risk Of Loss Of Material Customers" below. Pillowtex segments its Fieldcrest Cannon portfolio of brand names by distribution channel in order to solidify the perceived value of such brands and maintain their integrity. Royal Velvet(R), Charisma(R), Fieldcrest(R), and Royal Family(R) brand name bed and bath products are distributed primarily through leading department stores, specialty home furnishing stores, and catalog merchants. St. Mary's(R) and Cannon(R) brand name bed and bath products are distributed through mass merchants. Pillowtex's Royal Velvet(R), Charisma(R), and Cannon(R) brand names receive national consumer advertising. Pillowtex sells private brands primarily through large chain stores. It also sells a smaller amount of unbranded products to institutional and government customers. Pillowtex's current international business is concentrated in Canada. However, Pillowtex also sells its products in other foreign markets, including Asia, Australia, Europe, Mexico, and South America. Sales outside the United States accounted for approximately 4.9% of total sales in 2000, 6.0% in 1999 and 7.8% in 1998. During each of the last three years, less than 5% of the Pillowtex's assets have been located outside the United States. In order to maximize product exposure and increase sales, Pillowtex works closely with its major customers to assist them in merchandising and promoting Pillowtex's products to the consumer. In addition to frequent personal consultation with the employees of such customers, Pillowtex meets periodically with the senior management of these customers. Pillowtex assists them in developing joint merchandising programs, new products, product mix strategies, point-of-sale concepts, and advertising campaigns specifically tailored to that customer's needs. Pillowtex also provides its customers merchandising assistance with store layouts, fixture designs, point-of-sale displays, and advertising materials. Pillowtex's electronic data interchange system allows customers to place, and Pillowtex to fill, track, and bill, orders by computer. This system enables Pillowtex to ship products on a "quick response" basis. Pillowtex sells products under its Royal Velvet(R) brand name over the Internet at www.royalvelvet.com. In addition, Pillowtex operates an online ------------------- outlet store at www.cannonoutlet.com. -------------------- Trademarks And License Agreements Pillowtex manufactures and markets products: . under its proprietary Pillowtex-owned trademarks and trade names; . under some licensed trademarks and trade names; and . under customer-owned private labels. Pillowtex regards its trademarks and trade names as valuable assets and vigorously protects them against infringement. See "- Risk Factors - Pillowtex Is Dependent On Specific Brand Names" below. Pillowtex uses trademarks, trade names, and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors. From time to time, Pillowtex enters into license agreements with third parties for the use of third party trademarks and trade names on products manufactured by Pillowtex. These licenses generally require the payment of royalties based on net sales. Pillowtex currently holds a license to manufacture and, in certain cases, sell certain of its products under the Ralph Lauren trademark in the United States, Canada and, in certain cases, Mexico. Pillowtex's license with Polo/Ralph Lauren Corporation expires on June 30, 2001 and will not be renewed. See "- Risk Factors - Pillowtex Faces Risks Related To Loss Of A Key License" below. Pillowtex manufactures products for some customers under the customer's private labels. Products manufactured under customer-owned private labels are marketed by the customer. Pillowtex occasionally identifies product lines for which it is more advantageous for Pillowtex to license third parties to use its brand names for use in the manufacture and sale of these products. These license agreements require third parties to 6 pay royalties to Pillowtex based upon product sales and generally require payments of minimum annual royalties. In January 1998, Pillowtex entered into a license agreement with Ex-Cell Home Fashions, Inc. whereby Pillowtex granted Ex- Cell an exclusive license to manufacture, sell, and distribute shower curtains and bath accessories under some of Pillowtex's trademarks and trade names. In January 1999, Pillowtex entered into a license agreement with Bardwil Industries, Inc. under which Pillowtex granted Bardwil an exclusive license to manufacture, sell, and distribute tablecloths and other table-top accessories under some of Pillowtex's trademarks and trade names. Product Development Pillowtex's product development staff creates and develops products with new or superior performance characteristics in cooperation with various outside sources, including its suppliers and customers. Pillowtex's ability to develop products responsive to individual customers' needs is an important competitive advantage. As a result, Pillowtex commits time and resources to identifying new materials, designs, and products from a variety of domestic and international vendors. Manufacturing And Distribution General Pillowtex operates an extensive network of facilities in Texas, Alabama, California, Georgia, Illinois, Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Virginia, and Toronto, Canada in connection with the manufacture and distribution of Pillowtex's product lines. This nationwide manufacturing and distribution network enables Pillowtex to ship its products cost effectively to all major cities in North America. In addition, Pillowtex operates 38 retail outlet stores that sell certain of Pillowtex's products directly to customers. These stores sell both first quality merchandise and seconds or "off-goods" at competitive retail prices. Bed, Bath and Other Textile Products Sheets and Other Fashion Bedding. Pillowtex produces bed sheet products at its facilities in Kannapolis and Concord, North Carolina, and Union City, South Carolina. These facilities provide a full range of Pillowtex's sheet products for substantially all channels of distribution. Pillowtex spins cotton and synthetic fibers into yarn and weaves the yarn into greige cloth for finishing, dyeing, cutting, and sewing. Pillowtex produces synthetic fill comforters and other decorative bedding products, such as pillow shams and decorative pillows, at its Eden, North Carolina and Rocky Mount, North Carolina facilities. The product is later packaged for shipment to retail customers. Towels. Pillowtex produces bath towels at its facilities in Alabama, Georgia, North Carolina, and Virginia. Cotton and synthetic fibers are spun into yarns, and then woven into fabric or greige cloth. The fabric is then finished, dyed, cut, and sewn into finished towel products. Pillowtex's Fieldale, Virginia facility generally produces the higher quality products for department and specialty stores. The Columbus, Georgia and Phenix City, Alabama facilities generally support Pillowtex's mass merchant business. The Kannapolis, North Carolina facility produces both types of products and, as a result, supports both distribution channels. Bath Rugs. Pillowtex produces bath rugs in its Scottsboro, Alabama facility. Pillowtex punches tufted yarn into fabric and cuts it to a uniform height. Pillowtex then applies a latex coating to the underside of the fabric to hold the fibers. Finally, the product is dyed, cut, and finished. Kitchen Products. Pillowtex manufactures its kitchen textile products at its facilities in Phenix City, Alabama and Kannapolis, North Carolina. Other Bedroom Textiles. Pillowtex manufactures other complementary bedroom textile products, such as featherbeds, pillow protectors, decorative pillows, and window treatments, at one or more of the facilities described above. Pillows and Pads Bed Pillows. The hub of the network for bed pillows is located in Dallas, Texas, where Pillowtex operates one of the largest feather and down processing facilities in North America. State-of-the-art computerized washing and sorting equipment process feather and down. Pillowtex later sorts these products into a variety of mixtures and grades used in manufacturing natural fill pillows and comforters. Pillowtex ships raw materials, along with imported products, to its regional facilities for 7 final assembly and distribution to customers. Pillowtex also operates an automated sewing facility in Dallas, Texas, where high speed computerized machines cut and sew fabric into pillow shells. Many of Pillowtex's regional manufacturing facilities produce natural fill and synthetic fill pillows. Pillowtex assembles natural fill pillows by blowing processed feather and down into the pillow shell and sewing the open seam closed. Pillowtex produces synthetic fill pillows on machines known as garnets. Garnets pull, comb, and expand compressed polyester fibers. Once expanded, Pillowtex inserts the fibers into a pillow shell and sews the open seam shut. Down Comforters. Pillowtex manufactures its line of natural fill comforters at its California, Illinois, Mississippi, Pennsylvania, and Toronto, Canada locations using processed down from the Dallas facility. Mattress Pads. Pillowtex manufactures mattress pads at the California, Mississippi, Pennsylvania, and Toronto, Canada facilities by two automated methods. The traditional quilt sewing method uses high-speed equipment that sews the top, bottom, and fill material together. The sonic method fuses the top, bottom, and fill material together. Blankets Pillowtex spins yarn and produces blankets at manufacturing facilities in North Carolina and South Carolina. These plants provide full vertical production capability, including spinning, weaving, dyeing, and finishing. Quality Control Programs Pillowtex has quality control programs in place to ensure that its products meet quality standards established both internally and by its customers. Pillowtex devotes significant resources to support its quality improvement efforts. Each manufacturing facility has a quality control team that identifies and resolves quality issues. Pillowtex attempts to maintain close contact with customer quality control or other appropriate personnel to ensure that Pillowtex understands the customers' requirements. Pillowtex also has programs with its major suppliers to ensure the consistency of purchased raw materials by imposing strict standards and materials inspection, and by requiring rapid response to Pillowtex's complaints. Raw Materials And Imports General The principal raw materials that Pillowtex uses in manufacturing its various product lines are: . cotton; . feather and down; . synthetic (polyester and acrylic) fibers; and . cotton and polyester-cotton blend fabrics. A wide variety of sources offer these materials and Pillowtex currently expects no significant shortage of these materials. Management believes that its relationships with its suppliers are generally good, notwithstanding the Chapter 11 Cases. See "- Risk Factors-Pillowtex Is Dependent On Specific Raw Materials" below. Cotton Domestic cotton merchants are Pillowtex's primary source of cotton. Pillowtex uses significant quantities of cotton. To reduce the effect of potential price fluctuations in cotton prices, Pillowtex makes commitments for a portion of its anticipated future purchases of cotton. At December 30, 2000, the Company had $119.3 million in outstanding commitments for the future purchases of cotton. Feathers and Down Pillowtex imports feather and down from several sources outside the United States. Pillowtex purchases a majority of these products from China, where feather and down are by-products of ducks and geese raised for food. Pillowtex generally 8 purchases feather and down from its suppliers in China on open credit terms without letters of credit. Pillowtex also purchases some feather and down from suppliers in Europe. Synthetic Fibers Domestic fiber producers are Pillowtex's primary source of synthetic fibers. Pillowtex purchases synthetic fiber from, among others, E.I. DuPont de Nemours & Co. ("DuPont"), Wellman, Inc., Solutia, Inc. and Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations, Pillowtex makes commitments for a portion of its anticipated future purchases of synthetic fibers. Fabric Pillowtex uses fabric purchased from third parties in the production of pillow shells, comforter covers, and various other products. Although the Company believes that fabric is a commodity-type product, it currently purchases large quantities of pillow ticking fabric from a single supplier, Santee Print Works, to control costs and assure quality. Consistent with industry practice, Pillowtex and Santee Print Works have not entered into a long-term supply contract. However, to reduce the effect of potential price fluctuations, the Company occasionally makes commitments for future purchases from Santee Print Works. In addition, Pillowtex imports the majority of its down comforter shells from China and India. Other Some of Pillowtex's stretch-to-fit mattress pads use Lycra(R) skirting. Because of DuPont's patent on Lycra(R), it is the exclusive supplier of this material. Management believes that the risk that DuPont will cease to manufacture and sell Lycra(R) is minimal. Competition Pillowtex participates in a highly competitive industry. It competes with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial, distribution, and marketing resources than does the Company. Pillowtex competes on the basis of quality, brand names, price and service. See "-Competitive Strengths" above. Government Regulation Pillowtex must comply with various federal, state, and local environmental laws and regulations governing the discharge, storage, handling, and disposal of various substances. The Company must also comply with federal and state laws and regulations that require certain of its products to bear product content labels containing specified information, including their place of origin and fiber content. In addition, a variety of federal, state, local, and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other general business matters, govern Pillowtex's operations. Laws and regulations may change, and Pillowtex cannot predict what effect, if any, changes in various laws and regulations might have on its business. Backlog A number of factors affect the amount of Pillowtex's backlog orders at any particular time. These factors include seasonality and scheduling of the manufacturing and shipment of products. In general, Pillowtex's electronic data interchange and "quick response" capabilities have resulted in shortened lead times between submission of purchase orders and delivery and have lowered the level of backlog orders. Consequently, Pillowtex believes that the amount of its backlog is not an appropriate indicator of levels of future production. 9 Employees As of March 1, 2001, Pillowtex had approximately 12,500 employees. As of March 1, 2001, Pillowtex Corporation and/or certain of its subsidiaries had entered into the following collective bargaining agreements:
Approximate Number of Bargaining Unit Union Location Covered Expiration Employees ----- ---------------- ---------- --------------- Union of Needletrades, Industrial and Textile Workers Phenix City, Alabama; 02/01/03 6,427 Columbus, Georgia; Concord, North Carolina; Eden, North Carolina; Kannapolis, North Carolina; Salisbury, North Carolina; and Fieldale, Virginia Union of Needletrades, Industrial and Textile Workers Phenix City, Alabama; 10/01/01 386 Hawkinsville, Georgia; and Macon, Georgia Union of Needletrades, Industrial and Textile Workers Toronto, Ontario, Canada 08/31/03 112 Union of Needletrades, Industrial and Textile Workers Scottsboro, Alabama 12/01/04 239 United Auto Workers Tunica, Mississippi 07/31/03 319 Warehouse, Mail Order, Office, Technical Chicago, Illinois 01/31/03 143 And Professional Employees (Teamsters)
As of March 1, 2001, approximately 53% of Pillowtex's employees had chosen to have union dues deducted from their paychecks. As of June 16, 2000, the Union of Needletrades, Industrial and Textile Workers (UNITE) was certified as bargaining agent for 155 of the Company's employees at its Rocky Mount, North Carolina facility. However, as of March 20, 2001, no collective bargaining agreement covering this facility had been finalized. Pillowtex believes that it generally has good relationships with both its union and non-union employees. Risk Factors Pillowtex and its businesses are subject to a number of risks including those enumerated below. Any or all of such risks could have a material adverse effect on the business, financial condition, results of operations, or prospects of Pillowtex. See also "Cautionary Statement Regarding Forward-Looking Statements" above. Pillowtex Faces Significant Challenges In Connection With Its Bankruptcy Reorganization On November 14, 2000, Pillowtex Corporation and substantially all of its domestic subsidiaries, including Fieldcrest Cannon, filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Chapter 11 Cases are being jointly administered for procedural purposes. Since the Petition Date, the Debtors have been operating their business as debtors-in-possession pursuant to the Bankruptcy Code. Pillowtex management is continuing the process of stabilizing the businesses of the Debtors and evaluating the Debtors' operations before beginning the development of a plan of reorganization. As described above, after a plan of reorganization is filed with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to creditors and equity holders in order to solicit acceptance of the plan and, following such solicitation, the Bankruptcy Court will consider whether to confirm the plan. When proposed, the Company's plan of reorganization may not receive the requisite acceptance by creditors and equity holders or the Bankruptcy Court may not confirm the proposed plan. Moreover, even if a plan of reorganization receives the requisite acceptance by creditors and equity holders and is approved by the Bankruptcy Court, the plan may not be viable. In addition, due to the nature of the reorganization process, actions may be taken by creditors or other parties in interest that may have the effect of preventing or unduly delaying confirmation of a plan of reorganization in connection 10 with the Chapter 11 Cases. Accordingly, Pillowtex can provide no assurance as to whether or when a plan of reorganization may be confirmed in the Chapter 11 Cases. Pillowtex's Financial Statements Assume It Will Continue As A "Going Concern" Even Though There Is Substantial Doubt In This Regard Pillowtex's consolidated financial statements included elsewhere in this Annual Report have been prepared assuming Pillowtex will continue as a "going concern." Because of the Chapter 11 Cases and the circumstances leading to the filing thereof, there is substantial doubt about Pillowtex's ability to continue as a "going concern." The continuation of the Company as a "going concern" is dependent upon, among other things, confirmation of a plan of reorganization, Pillowtex's ability to comply with the terms of DIP Financing Facility and Pillowtex's ability to generate sufficient cash from operations and financing arrangements to meet its obligations. If the "going concern" basis was not appropriate for Pillowtex's consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used. In addition, the amounts reported in the consolidated financial statements included elsewhere in this Annual Report do not reflect adjustments to the carrying value of assets or the amount and classification of liabilities that ultimately may be necessary as the result of a plan of reorganization. Adjustments necessitated by a plan of reorganization could materially change the amounts reported in the consolidated financial statements included elsewhere in this Annual Report. Pillowtex Faces Uncertainty Regarding The Adequacy Of Its Capital Resources And Has Limited Access To Additional Financing In addition to the cash requirements necessary to fund ongoing operations, Pillowtex anticipates that it will incur significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. However, as a result of the uncertainty surrounding Pillowtex's current circumstances, it is difficult to predict Pillowtex's actual liquidity needs at this time. Although, based on current and anticipated levels of operations, and efforts to reduce inventories and accounts receivable, Pillowtex's management believes that Pillowtex's cash flow from operations, together with amounts available under the DIP Financing Facility, will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Cases, ultimately such amounts may not be sufficient to fund operations until such time as Pillowtex is able to propose a plan of reorganization that will receive the requisite acceptance by creditors and equity holders and be confirmed by the Bankruptcy Court. In the event that cash flows and available borrowings under the DIP Financing Facility are not sufficient to meet future cash requirements, Pillowtex may be required to reduce planned capital expenditures or seek additional financing. Pillowtex can provide no assurance that reductions in planned capital expenditures would be sufficient to cover shortfalls or that additional financing would be available or, if available, offered on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to additional financing is, and for the foreseeable future will likely continue to be, very limited. As the foregoing indicates, Pillowtex's long-term liquidity requirements and the adequacy of its capital resources are difficult to predict at this time, and ultimately cannot be determined until a plan of reorganization has been developed and is confirmed by the Bankruptcy Court in the Chapter 11 Cases. Pillowtex Is Subject To Restrictions On The Conduct Of Its Business The Debtors are operating their businesses as debtors-in-possession pursuant to the Bankruptcy Code. Under applicable bankruptcy law, during the pendency of the Chapter 11 Cases, the Debtors will be required to obtain the approval of the Bankruptcy Court prior to engaging in any transaction outside the ordinary course of business. In connection with any such approval, creditors and other parties in interest may raise objections to such approval and may appear and be heard at any hearing with respect to any such approval. Accordingly, although the Debtors may sell assets and settle liabilities (including for amounts other than those reflected on the Debtors' financial statements), with the approval of the Bankruptcy Court, there can be no assurance that the Bankruptcy Court will approve any sales or settlements proposed by the Debtors. The Bankruptcy Court also has the authority to oversee and exert control over the Debtors' ordinary course operations. In addition, the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum operating cash flow, as well as other covenants that limit, among other things, indebtedness, liens, sales of assets, capital expenditures, and investments and prohibit, among other things, dividend payments. The DIP Financing Facility provides that the net proceeds of 11 certain asset sales outside the ordinary course of business will be applied to reduce prepetition indebtedness under Pillowtex's senior secured credit facilities and that the net proceeds of other asset sales outside the ordinary course of business will be applied as a permanent reduction of the DIP Financing Facility. As a result of the restrictions described above, the ability of Pillowtex to respond to changing business and economic conditions may be significantly restricted and Pillowtex may be prevented from engaging in transactions that might otherwise be considered beneficial to Pillowtex. The Value Of Pillowtex's Capital Stock Is Highly Speculative As a result of the amount of prepetition indebtedness and the availability of the "cram down" provisions of the Bankruptcy Code described above, the holders of Pillowtex's capital stock may receive no value for their interests under a plan of reorganization. Because of such possibility, the value of Pillowtex's capital stock is highly speculative and any investment in such capital stock would pose a high degree of risk. Potential investors in Pillowtex's capital stock should consider the highly speculative nature of Pillowtex's capital stock prior to making any investment decision with respect to such capital stock. Pillowtex Is Dependent On Specific Raw Materials Cotton is the primary raw material used in Pillowtex's business. Cotton is an agricultural product and, as a result, its availability is subject to weather conditions and other factors affecting agricultural markets. Historically, there have been periods of rapid and significant movement in the price of cotton both upward and downward. Other raw materials on which Pillowtex is dependent include the raw feathers and down that it uses to produce natural fill pillows and down comforters. China is currently Pillowtex's primary source of raw feather and down. In fiscal year 2000, based on cost, approximately 88.5% of the raw feathers and down that Pillowtex used to produce natural fill pillows and down comforters was imported from China. The raw materials used by Pillowtex are generally available from a number of sources. No significant shortage of these materials is currently anticipated. However, Pillowtex uses significant quantities of these raw materials, which are subject to price fluctuations. Pillowtex cannot be certain that shortages of these materials will not occur in the future, which could increase the cost or delay the shipment of its products. Moreover, Pillowtex cannot be certain that it will be able to pass on any increase in the price of raw materials to its customers. Pillowtex may have difficulty in maintaining existing or creating new relationships with suppliers or vendors as a result of the Chapter 11 Cases. Pillowtex's suppliers and vendors may stop providing supplies or services to Pillowtex or provide such supplies or services only on "cash on delivery," "cash on order," or other terms that could have an adverse impact on Pillowtex's short-term cash flow. In addition, Pillowtex's relationships with its suppliers in China could be disrupted or adversely affected due to a number of factors, including governmental regulation, fluctuation in exchange rates, and changes in economic and political conditions in China. If Pillowtex's supply sources in China were disrupted for any reason, Pillowtex believes, based on existing market conditions, that it could establish alternative supply relationships. However, because establishing these relationships involves numerous uncertainties relating to delivery requirements, price, payment terms, quality control, and other matters, Pillowtex is unable to predict whether such relationships would be on satisfactory terms. Pillowtex's relationships with its suppliers in China are also subject to risks associated with changes in United States legislation and regulation relating to imports, including quotas, duties, and taxes, and other charges or restrictions on imports. Products that Pillowtex imports from China currently receive normal, nondiscriminatory tariff treatment accorded goods from countries granted "normal trade" status. Under the Trade Act of 1974, the President of the United States is authorized, upon making specified findings, to waive certain restrictions that would otherwise render China ineligible for normal trade relations treatment. The President has waived these provisions each year since 1979. Normal trade status was accordingly renewed in June 2000. Pursuant to legislation enacted in October 2000 (P.L. 106-286), the President can grant permanent normal trade relations treatment to the products of China after China joins the World Trade Organization. However, until that occurs, China will continue to undergo the annual Congressional renewal process of its normal trade relations status. Congress will continue to monitor these activities and could encourage the President to reconsider the renewal of normal trade status for China in the future. Pillowtex cannot be certain that China will continue to enjoy this status in the future. Raw materials and finished products entering the United States from China without the benefit of normal trade relations would be subject to significantly higher tariffs. 12 Pillowtex May Be Affected By Adverse Retail Industry Conditions Pillowtex sells its products to a number of department stores and other major retailers who have experienced financial difficulties during past years. Some of these retailers have previously sought protection under the Bankruptcy Code. In addition, some of Pillowtex's current retail customers may seek protection under the Bankruptcy Code or state insolvency laws in the future. As a result of these financial difficulties and bankruptcy and insolvency proceedings, Pillowtex may be unable to collect some or all amounts owed by these retail customers. In addition, all or part of the operations of a retail customer that seeks bankruptcy or other debtor protection may be discontinued or sales of Pillowtex's products to the customer may be curtailed or terminated as a result of bankruptcy or insolvency proceedings. Pillowtex Is Dependent On Specific Brand Names In fiscal year 2000, sales of products bearing Pillowtex's principal proprietary brand names of Royal Velvet (R), Cannon (R), Charisma (R) Royal Velvet Big & Soft (R), Fieldcrest (R), Royal Family (R), Caldwell (R), and St. Mary's (R) made up a substantial portion of its net sales. Accordingly, Pillowtex's future success may depend in part upon the goodwill associated with these brand names. Pillowtex's principal brand names are registered in the United States and certain foreign countries. However, Pillowtex cannot be certain that the steps taken by it to protect its proprietary rights in such brand names will be adequate to prevent their misappropriation in the United States or abroad. In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as do the laws of the United States. Pillowtex Faces Risk Related To Loss Of Key License Pillowtex's license to manufacture and, in certain cases, sell certain of its products under the Ralph Lauren trademark expires on June 30, 2001 and will not be renewed. The Company has made provision for an orderly transition out of the license; however, there can be no assurance that the loss of this license will not have an adverse effect on the business, financial condition, results of operations, or prospects of the Company. Pillowtex Faces Risks Of Loss Of Material Customers In fiscal year 2000, Pillowtex's top ten customers accounted for approximately 61.9% of its total net sales and net sales to Wal-Mart Stores, Inc. (including Sam's Club stores) accounted for approximately 24.5% of its total net sales. No other single customer accounted for more than 10% of total net sales during this period. Consistent with industry practice, Pillowtex does not operate under a long-term written supply contract with Wal-Mart or any of its other customers. As a result of the Chapter 11 Cases, Pillowtex may have added difficulty retaining its customers such as Wal-Mart. The loss of Wal-Mart as a customer could have a materially adverse effect on Pillowtex's business, financial condition, results of operations, or prospects. Pillowtex Faces Risks Related To Organized Labor As of March 1, 2001, Pillowtex had approximately 12,500 employees. As of that date, approximately 61% of Pillowtex's employees were in bargaining units covered by collective bargaining agreements and approximately 53% of Pillowtex's employees had chosen to have union dues deducted from their pay checks. Since 1991, the Union of Needletrades, Industrial and Textile Workers (UNITE) had campaigned to organize hourly workers of Pillowtex plants in Concord, North Carolina, Kannapolis, North Carolina, and Salisbury, North Carolina. In June 1999, UNITE was elected as a bargaining representative for hourly workers at those plants. In February 2000, Pillowtex and UNITE entered into a contract covering employees at those plants, as well as the employees represented by UNITE at Pillowtex's plants in Eden, North Carolina; Phenix City, Alabama; Columbus, Georgia; and Fieldale, Virginia. Pillowtex cannot be certain that it will not face similar campaigns at other plants in the future or as to the effect that any such campaign would have on the productivity of its workforce or labor costs. 13 Pillowtex's Business Is Seasonal Pillowtex's business is subject to a pattern of seasonal fluctuation. Sales and earnings from operations generated during the second half of a given fiscal year generally are expected to be higher than sales and earnings from operations generated during the first half of the year. Accordingly, Pillowtex's needs for working capital generally are expected to increase in the second half of the year. As a result, total debt levels generally tend to peak in the third and fourth quarters, falling off again in the first quarter of the following year. The amount of Pillowtex's sales generated during the second half of the year generally will depend upon a number of factors, including the level of retail sales for home textile furnishings during the fall and winter, weather conditions affecting the sales of down comforters and blankets, general economic conditions, and other factors beyond Pillowtex's control. Pillowtex May Have Difficulty Attracting And Retaining Personnel Pillowtex believes that its future success will be highly dependent upon its ability to attract and retain skilled managers and other personnel. While it has experienced no problems to date, as a result of the Chapter 11 Cases, Pillowtex may have added difficulty attracting such personnel in the future. Pillowtex's Reorganization Will Require Substantial Effort By Management Pillowtex's senior management may be required to expend a substantial amount of time and effort structuring a plan of reorganization, which could have a disruptive impact on management's ability to focus on the operation of Pillowtex's business. 14 ITEM 2. PROPERTIES ---------- The following table summarizes certain information concerning certain of the facilities used by Pillowtex in connection with the manufacture and distribution of its product lines:
Approx. Square Owned/ Location Principal Use Feet Leased - -------- ------------- ---- ------ Dallas, Texas Headquarters and feather and down processing for Pillow and Pad Division 104,000 Owned Dallas, Texas Manufacturing and distribution for Pillow and Pad Division 150,000 Owned Phenix City, Alabama Manufacturing and warehouse for Bed and Bath Division 777,681 Owned Phenix City, Alabama Manufacturing for Bed and Bath Division 220,000 Owned Scottsboro, Alabama Manufacturing and warehouse for Bed and Bath Division 272,800 Owned Los Angeles, California Manufacturing and distribution for Pillow and Pad Division 320,000 Leased Columbus, Georgia Manufacturing and warehouse for Bed and Bath Division 727,246 Owned Hawkinsville, Georgia Manufacturing and warehouse for Bed and Bath Division 260,000 Owned Macon, Georgia Warehouse for Bed and Bath Division 220,000 Owned Chicago, Illinois Manufacturing and distribution for Pillow and Pad Division 121,000 Owned Tunica, Mississippi Manufacturing and distribution for Pillow and Pad Division 288,000 Owned New York, New York Sales office and showroom for all divisions 64,490 Leased Asheville, North Carolina Warehouse for Blanket Division 117,000 Leased Concord, North Carolina Manufacturing for Bed and Bath Division 696,963 Owned Eden, North Carolina Manufacturing and warehouse for Bed and Bath Division 529,273 Owned Eden, North Carolina Warehouse for Bed and Bath Division 411,531 Owned Eden, North Carolina Warehouse for Bed and Bath Division 27,241 Owned Kannapolis, North Carolina Manufacturing for Bed and Bath Division 682,407 Owned Kannapolis, North Carolina Manufacturing and warehouse for Bed and Bath Division and offices for all divisions 5,863,041 Owned Newton, North Carolina Manufacturing and distribution for Blanket Division 297,000 Leased Rockwell, North Carolina Manufacturing for Bed and Bath Division 98,240 Owned Rocky Mount, North Carolina Manufacturing and distribution for Bed and Bath Division 139,000 Owned Rocky Mount, North Carolina Manufacturing and distribution for Bed and Bath Division 78,000 Leased Salisbury, North Carolina Manufacturing for Bed and Bath Division 229,361 Owned China Grove, North Carolina Manufacturing and warehouse for Bed and Bath Division 567,000 Owned Swannanoa, North Carolina Manufacturing, distribution, warehouse and office for Blanket Division 1,425,000 Owned Tarboro, North Carolina Manufacturing and warehouse for Bed and Bath Division 370,000 Owned Hanover, Pennsylvania Manufacturing and distribution for Pillow and Pad Division 291,000 Owned Mauldin, South Carolina Warehouse and distribution for Blanket Division 746,600 Owned Union City, South Carolina Manufacturing for Bed and Bath Division 95,700 Owned Westminster, South Carolina Manufacturing, distribution, warehouse and office for Blanket Division 652,000 Owned Westminster, South Carolina Warehouse for Blanket Division 29,000 Leased Fieldale, Virginia Manufacturing and warehouse for Bed and Bath Division 973,253 Owned Martinsville, Virginia Warehouse for Bed and Bath Division 100,000 Leased Toronto, Ontario, Canada Manufacturing and distribution for Pillow and Pad Division 60,000 Leased Toronto, Ontario, Canada Manufacturing, distribution, warehouse and office for Pillow and Pad Division 106,000 Leased
In addition to the locations listed above, Pillowtex maintains warehousing and distribution centers in the states where its manufacturing facilities are located. It also maintains approximately 38 retail outlets and small sales and marketing offices in other states. Pillowtex also owns various other properties, both developed and undeveloped, which are unrelated to its manufacturing operations. Fieldcrest Cannon acquired these properties throughout the years for investment or as part of specific acquisitions. Pillowtex has listed some of these properties for sale and has leased others to third parties. Pillowtex believes that its facilities are generally well maintained, in good operating condition, and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS ----------------- Pillowtex is involved in various claims and lawsuits incidental to its business; however, the outcome of such suits is not expected to have a material adverse effect on Pillowtex's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS --------------------------------------------------------------------- The Company's common stock, par value $0.01 per share ("Common Stock"), was traded on the New York Stock Exchange (the "NYSE") under the symbol "PTX" until the NYSE suspended trading of the Common Stock on November 14, 2000. The following table sets forth for the periods indicated the high and low sales prices on the NYSE of the Common Stock:
Fiscal Year: High Low ---- --- 2000 Fourth Quarter (through 11/13/00)........... $ 2 15/16 $ 1/2 Third Quarter............................... 5 1 1/4 Second Quarter.............................. 6 7/16 3 1/2 First Quarter............................... 6 2/16 3 14/16 1999 Fourth Quarter.............................. $ 7 1/4 $ 2 3/4 Third Quarter............................... 17 5/8 6 3/4 Second Quarter.............................. 19 7/16 11 9/16 First Quarter............................... 28 3/8 11 3/8
After the NYSE suspended trading in the Common Stock, the Common Stock began trading on the over-the-counter electronic bulletin board (the "OTCBB") under the symbol "PTEXQ.OB." During the period from the time trading commenced on the OTCBB to the last day of Pillowtex's fiscal year 2000, the reported bid price for the Common Stock on the OTCBB ranged from a high of $0.625 to a low of $0.25. The quotations reflect inter-dealer prices without retail mark-up, mark- down or commission and may not represent actual transactions. As of March 20, 2001, Pillowtex had approximately 1,043 holders of record of Common Stock. Pillowtex paid quarterly dividends of $0.06 per share of Common Stock in each of the first three quarters of fiscal year 1999 and has paid no dividends on the Common Stock since the third quarter of fiscal year 1999. Under the terms of the DIP Financing Facility, Pillowtex is prohibited from paying dividends on the Common Stock. See "Item 1. Business - Risk Factors -Pillowtex Is Subject To Restrictions On The Conduct Of Its Business." Pillowtex does not expect to pay dividends on the Common Stock for the foreseeable future. 16 ITEM 6. SELECTED FINANCIAL DATA ----------------------- SELECTED FINANCIAL DATA (In thousands of dollars, except per share data) The selected financial data presented below are derived from Pillowtex's consolidated financial statements for the five years ended December 30, 2000. The data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Annual Report.
Year Ended Statement of Operations Data: 2000 1999 1998 (1) 1997 (2) 1996 Net sales $ 1,349,627 $ 1,552,068 $ 1,509,841 $ 579,999 $ 490,655 Cost of goods sold 1,349,259 1,371,790 (3) 1,246,449 (3) 485,679 411,048 ---------- ---------- ---------- ---------- --------- Gross profit 368 180,278 263,392 94,320 79,607 Selling, general and administrative expenses 128,396 118,432 119,321 52,090 41,445 Impairments of long-lived assets and restructuring charges 112,711 2,000 1,539 5,986 - ---------- ---------- ---------- ---------- --------- Earnings (loss) from operations (240,739) 59,846 142,532 36,244 38,162 Interest expense 107,061 87,279 72,288 22,470 13,971 ---------- ---------- ---------- ---------- --------- Earnings(loss) before reorganization items, income taxes and extraordinary items (347,800) (27,433) 70,244 13,774 24,191 Reorganization items 19,368 - - - - ---------- ---------- ---------- ---------- --------- Earnings(loss) before income taxes and extraordinary items (367,168) (27,433) 70,244 13,774 24,191 Income tax expense (benefit) (104,760) (7,901) 27,389 5,538 9,459 ---------- ---------- ---------- ---------- --------- Earnings(loss) before extraordinary items (262,408) (19,532) 42,855 8,236 14,732 Extraordinary items, net - - - (919) (609) ---------- ---------- ---------- ---------- --------- Net earnings(loss) (262,408) (19,532) 42,855 7,317 14,123 Preferred dividends and accretion 8,928 12,294 2,097 85 - Earnings(loss) available for common shareholders $ (271,336) $ (31,826) $ 40,758 $ 7,232 $ 14,123 ========== ========== ========= ========== ========= Basic earnings(loss) per common share: Before extraordinary items $ (19.04) $ (2.25) $ 2.89 $ 0.75 $ 1.39 Extraordinary items - - - (0.08) (0.06) ---------- ---------- --------- ---------- --------- Basic earnings(loss) per common share $ (19.04) $ (2.25) $ 2.89 $ 0.67 $ 1.33 ========== ========== ========= ========== ========= Weighted average common shares outstanding - basic 14,252 14,154 14,082 10,837 10,618 ========== ========== ========= ========== ========= Diluted earnings(loss) per common share: Before extraordinary items $ (19.04) $ (2.25) $ 2.52 $ 0.74 $ 1.39 Extraordinary items - - - (0.08) (0.06) ---------- ---------- --------- ---------- --------- Diluted earnings(loss) per common share $ (19.04) $ (2.25) $ 2.52 $ 0.66 $ 1.33 ========== ========== ========= ========== ========= Weighted average common shares outstanding - diluted 14,252 14,154 17,653 11,086 10,634 ========== ========== ========= ========== ========= Operating Data: Depreciation and amortization $ 65,965 $ 60,074 $ 54,021 $ 16,064 $ 12,775 Capital expenditures 33,197 89,737 133,620 20,567 21,040 Preferred Stock cash dividends - 1,456 2,019 - - Common Stock cash dividends - 2,555 3,383 2,569 2,124 Balance Sheet Data: Working capital $ (246,830) (4) $ 404,732 $ 447,933 $ 394,496 $ 150,506 Property, plant and equipment, net 535,391 644,821 629,205 488,841 94,267 Total assets 1,338,871 1,683,389 1,654,154 1,410,186 375,714 Long-term debt, net of current portion - 965,323 944,493 785,383 194,851 Redeemable convertible preferred stock 82,827 73,898 63,057 62,882 - Shareholders' equity (deficit) (63,451) 207,389 237,933 196,707 100,004
(1) Amounts set forth in 1998 reflect the inclusion of The Leshner Corporation from July 28, 1998. (2) Amounts set forth in 1997 reflect the results of operations for a 53-week period, and the inclusion of Fieldcrest Cannon, Inc. from December 19, 1997 (3) Information technology costs associated with the Company's manufacturing systems of $12.8 million and $9.4 million have been reclassified from selling, general and administrative expense to cost of goods sold in the 1999 and 1998 consolidated statements of operations to conform with the 2000 presentation. (4) Includes long-term debt in default of $660.8 million. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Overview Pillowtex is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex manufactures and markets home textile furnishings for the bedroom, bathroom, and kitchen. Pillowtex operates a network of manufacturing, purchasing, and distribution facilities in the U.S. and Canada with approximately 12,500 employees. Pillowtex markets its products to mass merchants, department stores, and specialty retailers as well as wholesale clubs, catalog merchants, institutional distributors, and international customers and over the Internet. The Company is organized into three major manufacturing divisions that it considers operating segments: Bed and Bath Division, Blanket Division, and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding, towels, bath rugs, and kitchen products. The Blanket Division manufactures and sells blanket products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. Proceedings Under Chapter 11 of the Bankruptcy Code On November 14, 2000, Pillowtex Corporation and substantially all of its domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code. For further discussion of the Chapter 11 Cases, see "Item 1. Proceedings Under Chapter 11 of the Bankruptcy Code" above and Notes to Consolidated Financial Statements included elsewhere in this Annual Report. The Debtors are currently operating their business as debtors-in-possession pursuant to the Bankruptcy Code. Since the Petition Date, the Debtors have continued to conduct business in the ordinary course. Management is in the process of stabilizing the business of the Debtors and evaluating their operations in connection with the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by impaired creditors and equity holders and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. During the pendency of the Chapter 11 cases, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected on the Debtors' financial statements. The Debtors are in the process of reviewing their operations and identifying assets for disposition. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject as permitted by the Bankruptcy Code. The Debtors cannot presently or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. The administrative and reorganization expenses resulting from the Chapter 11 Cases will unfavorably affect the Debtors' results of operations. Future results of operations may also be affected by other factors related to the Chapter 11 Cases. Basis of Presentation Pillowtex's consolidated financial statements included elsewhere in this Annual Report have been prepared on a "going concern" basis in accordance with United States generally accepted accounting principles. The "going concern" basis of presentation assumes that Pillowtex will continue in operation for the foreseeable future and will be able to realize upon its assets and discharge its liabilities in the normal course of business. Because of the Chapter 11 Cases and the circumstances leading to the filing thereof, there is substantial doubt about the appropriateness of the use of the "going concern" assumption. Pillowtex's ability to realize the carrying value of its assets and discharge its liabilities are subject to substantial uncertainty. Pillowtex's consolidated financial statements included elsewhere in this Annual Report do not reflect adjustments that would be necessary if the "going concern" basis was not appropriate. If the "going concern" basis was not appropriate for Pillowtex's consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported, and the balance sheet classifications used. The appropriateness of the "going concern" basis is dependent upon, among other things, confirmation of a plan of reorganization, Pillowtex's ability to comply with the terms of the DIP Financing Facility, and Pillowtex's ability to 18 generate sufficient cash flow from operations and financing arrangements to meet its obligations. Results of Operations The following table presents certain historical statements of operations data as a percentage of net sales for the periods indicated.
Year Ended -------------------------------------- December 30, January 1, January 2, 2000 2000 1999 ---- ---- ---- Net sales............................ 100.0% 100.0% 100.0% Cost of goods sold................... 94.9 88.1 82.6 Inventory write-downs................ 5.1 0.3 - ------ ----- ----- Gross profit......................... 0.0 11.6 17.4 Selling, general and administrative expenses.......... 9.5 7.6 7.9 Impairment of long-lived assets and restructuring charge......... 8.4 0.2 0.1 ------ ----- ----- Earnings (loss) from operations...... (17.9) 3.8 9.4 Interest expense..................... 7.9 5.6 4.8 Reorganization items................. 1.4 - - ------ ----- ----- Earnings (loss) before income taxes.. (27.2)% (1.8)% 4.6% ====== ===== =====
19 Fiscal Year 2000 Compared to Fiscal Year 1999 Net Sales. Net sales were down from $1,552.1 million in 1999 to $1,349.6 --------- million in 2000, a decrease of $202.5 million or 13.0%. Net sales for the Company's operating segments are below (in millions):
Net Sales ------------------------------ 2000 1999 ---------- ---------- Bed and Bath $ 942.6 $1,095.4 Pillow and Pad 286.7 304.0 Blanket 90.6 119.6 Other (a) 29.7 33.1 ---------- ---------- Total $1,349.6 $1,552.1 ========== ==========
(a) Includes retail stores The general slow down in the U.S. economy in the last quarter of 2000, and Pillowtex's filing of the Chapter 11 Cases were the primary contributors to the sharp decline in sales volume for the fourth quarter of 2000 across all segments. Other factors that adversely affected sales in earlier quarters of 2000 were increased competition from imports, higher inventory levels held by many of our customers and an unexpected softening in demand in the Company's institutional and regional discount markets. In addition, approximately $53.0 million of the sales decrease is attributable to the loss of a specific customer during 2000 affecting all three segments. Gross Profit. Gross profit decreased $179.9 million from $180.3 million in ------------ 1999 to $0.4 million in 2000. Gross profit by operating segment is as follows (in millions):
Gross Profit (Loss) ------------------------------ 2000 1999 --------- --------- Bed and Bath $ 7.4 $122.0 Pillow and Pad 22.3 57.7 Blanket (37.8) (10.2) Other (a) 8.5 10.8 --------- --------- Total $ 0.4 $180.3 ========= =========
(a) Includes retail stores During the fourth quarter of 2000, the Company recorded a charge for inventory write-downs of $69.2 million to reduce certain inventories to net realizable value. This charge resulted from a number of factors, including a slow down in the retail environment and increased pressure due to the filing of the Chapter 11 Cases to liquidate excess, obsolete and distressed inventory in a shorter time frame than in the past. In 1999, the Company recorded a charge for inventory write-downs of $4.9 million to reduce certain inventory at the Blanket Division to net realizable value. Excluding the impairment charges, gross margin decreased to 5.1% in 2000, compared to 11.9% in 1999. In response to declines in sales volume, the Company reduced production levels, including idling several plants in the Bed and Bath and Blanket divisions in the fourth quarter. This resulted in higher unabsorbed overhead expenses of approximately $43.0 million in 2000. In addition, the Company experienced higher raw material costs, principally chemicals, packaging, feathers and cotton. The Company's gross margin continues to experience downward pressure from the slowing U.S. economy, and increased competition from abroad. Selling, General and Administrative ("SG&A"). SG&A expenses for fiscal -------------------------------------------- year 2000 increased $10.0 million to $128.4 million from $118.4 million in 1999. This increase is due to higher bad debt expense in 2000 resulting from the deteriorating creditworthiness of certain of the Company's customers, severance payments made to the Company's former chief executive officer and higher professional fees related to the Company's financial difficulties prior to the Petition Date, partially offset by strict cost controls. 20 Impairment of Long-Lived Assets. During the fourth quarter of 2000, the ------------------------------- Company decided to permanently idle and sell certain manufacturing facilities and equipment and as a result determined that the carrying value of such assets was impaired. The Company also determined that given the expected future operating results of the Blanket Division, the carrying value of its long-lived assets and goodwill was also impaired. The Company recorded an asset impairment charge of $112.7 million to reduce the carrying value of these assets to their estimated fair values. This impairment charge consisted of approximately $38.3 million for goodwill associated with the Company's Blanket Division and $74.4 million for the impairment of property, plant and equipment. The impairment consists of the following (in millions): Fixed Assets: Blanket Division impairment $ 50.0 Facilities and equipment permanently idled as a result of management's rationalization of production capacity: Facilities 4.6 Equipment 18.1 Miscellaneous corporate assets 1.7 ------ Total fixed assets 74.4 Goodwill 38.3 ------ Total $112.7 ======
During the fourth quarter of 2000 the Blanket Division experienced reduced customer order levels and increased pressure from competitors attempting to gain market share. As a result of these factors and the current financial condition of the Company, management decided that it should review its strategic options with respect to this business, including the possible sale of this business. The impairment reflects management's estimate of the fair value of the assets as determined by the present value of expected future cash flows to be generated by the assets, including their ultimate disposition. The impairment of the other manufacturing facilities and equipment resulted from management's rationalization of production capacity in connection with filing of the Chapter 11 Cases. The impairment reflects management's estimate of the fair value of the assets as determined by the present value of expected future cash flows to be generated by the assets, including their ultimate disposition. As the reorganization process continues, it is possible that additional asset impairments may be required and that these impairments may be material to the Company's financial position and results of operations. Certain of the permanently idled facilities and equipment are included in assets held for sale in the accompanying balance sheet as of December 30, 2000, at a carrying value of $5.3 million. Management expects to sell these assets during the second and third quarters of 2001. Management expects to incur certain exit costs to close certain of the idled facilities in 2001. These costs include severance, equipment relocation costs and facility closure costs. The costs are estimated to total approximately $5.0 million and will be incurred and recognized in the second and third quarters of 2001. Interest Expense. Interest expense increased $19.8 million to $107.1 ---------------- million in 2000, compared to $87.3 million in 1999. This increase in interest expense was the result of an approximately $69 million increase in average outstanding debt, additional fees, expenses and higher interest rates from restructuring the Company's debt and approximately $2.9 million in interest cost related to purchase commitments on certain cotton contracts. The Company's average interest rate increased from 8.2% in 1999 to 10.1% for 2000. Interest expense excludes approximately $4.0 million related to the Company's debt that is subject to compromise for the period from the Petition Date through December 30, 2000. Reorganization Items. During the fourth quarter of 2000, Pillowtex -------------------- recognized a $19.4 million charge associated with filing of the Chapter 11 Cases. Approximately $17.6 million of this charge relates to the non-cash write- off of the unamortized discount on the Fieldcrest Cannon, Inc. 6% Convertible Subordinated Sinking Fund Debentures due 2012 (the "6% Convertible Debentures") and the non-cash write-off of deferred financing costs associated with other unsecured debt classified as subject to compromise. In addition, the Company incurred $1.8 million in fees payable to professionals retained to assist with the Chapter 11 Cases. 21 Preferred Dividends. Under the terms of the Company's Series A Redeemable ------------------- Convertible Preferred Stock, the rate at which dividends accrue increased to 18% on November 14, 2000 as a result of the filing of the Chapter 11 Cases. Fiscal Year 1999 Compared to Fiscal Year 1998 Net Sales. For fiscal 1999, net sales were $1,552.1 million, an increase --------- of $42.2 million, or 2.8%, compared to $1,509.8 million in fiscal 1998. Sales for the Company's operating segments are as follows (in millions):
Net Sales -------------------------------- 1999 1998 ----------- ----------- Bed and Bath $1,095.4 $1,035.9 Pillow and Pad 304.0 297.5 Blanket 119.6 140.9 Other (a) 33.1 35.5 ----------- ----------- Total $1,552.1 $1,509.8 =========== ===========
(a) Other includes retail stores The increase in Bed and Bath Division sales is principally attributable to the inclusion of a full year of operations of Leshner, which was acquired on July 28, 1998. Excluding the increase in the Bed and Bath Division, the resulting $14.1 million decrease in 1999 from 1998 was primarily the result of lower blanket sales caused by an unusually warm winter in North America. Gross Profit. Gross profit decreased $83.1 million from $263.4 million to ------------ $180.3 million. Gross profit by operating segment is as follows (in millions):
Gross Profit (Loss) 1999 1998 -------------------------------- Bed and Bath $122.0 $192.7 Pillow and Pad 57.7 54.8 Blanket (10.2) 3.1 Other (a) 10.8 12.8 ---------- ---------- Total $180.3 $263.4 ========== ==========
(a) Includes retail stores Excluding an inventory write-down in the Blanket division of $4.9 million in 1999, gross profit margin dropped to 11.6% in fiscal 1999 from 17.4% in fiscal 1998. This decrease was primarily the result of higher cost of goods sold generated from unabsorbed overhead expenses related to the installation of new computer systems and equipment, the idling of certain manufacturing equipment, and a change in the sales mix generated by Pillowtex's inventory reduction program, which reduced product margins. Selling, General, and Administrative. SG&A decreased $0.9 million to ------------------------------------ $118.4 million in 1999, compared to $119.3 million in 1998. The decrease is primarily due to the lower professional fees and other costs associated with the settlement of a lawsuit in early 1998. Impairment of Long-Lived Assets. During the third quarter of 1999, ------------------------------- Pillowtex recorded a $2.0 million non-cash pre-tax charge to adjust the carrying value of the Opelika facility, which was closed in the first quarter of 1999, to its estimated fair value. Restructuring Charge. There were no restructuring charges recorded in -------------------- 1999. The $1.5 million recorded in 1998 related to the severance and other employee-related cost associated with the consolidation of blanket production into the Company's facilities in Swannanoa, North Carolina and Westminster, South Carolina. Interest Expense. Interest expense increased by $15.0 million to $87.3 ---------------- million in fiscal 1999, compared to $72.3 22 million in fiscal 1998. The increase is primarily the result of additional debt incurred in connection with the Leshner acquisition, capital expenditures for plant and computer system upgrades, higher working capital requirements, and the payment of waiver and amendment fees to Pillowtex's senior lenders. Pillowtex's average interest rate for the year was down slightly from 8.4% in 1998 to approximately 8.2% in 1999. Preferred Dividends. Under the terms of the Company's Series A Redeemable ------------------- Convertible Preferred Stock, beginning January 1, 2000, the rate at which dividends will accrue increased to 10% as a result of the Company's earnings per share for the 1999 fiscal year falling below predetermined targets. The Company was also required to pay a one-time cumulative dividend in Series A Redeemable Convertible Preferred Stock, from the issue date through December 31, 1999, equal to the difference between the dividends calculated at the 3% rate and dividends calculated at the 10% rate. Charges in the aggregate amount of $10.1 million were recorded in the third and fourth quarters of 1999. Liquidity and Capital Resources DIP Financing Facility On December 6, 2000, the Bankruptcy Court entered the DIP Financing Order authorizing the Debtors to enter into the $150.0 million DIP Financing Facility and to grant first priority primary liens, mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. The Company obtained the reduction in the amount of the facility based upon its determination that, as a result of its improved liquidity position, it did not need as much availability as originally provided by the facility and its desire to reduce the amount of its monthly unused commitment fee. Under the terms of the DIP Financing Facility, as amended, a $125.0 million revolving credit facility, including up to $60.0 million for postpetition letters of credit, is available to the Company until the earliest of (a) November 14, 2001, (b) the date on which the plan of reorganization becomes effective, (c) any material non-compliance with any of the terms of the DIP Financing Order, (d) any event of default that shall have occurred under the DIP Financing Facility, or (e) consummation of a sale of substantially all of the assets of the Company pursuant to an order of the Bankruptcy Court shall have occurred. Upon the satisfaction of certain conditions, the November 14, 2001 maturity date could be extended for an additional period of six months upon payment of an extension fee equal to 0.50% of the portion of the DIP Financing Facility being extended. Amounts borrowed under the DIP Financing Facility bear interest at the option of the Company at the rate of London Interbank Offered Rate ("LIBOR") plus 3.50% or Bank of America's Base Rate (which is the higher of Federal Funds Rate or Prime Rate plus, in either case, 0.05%) plus 1.00%. In addition to a facility fee and an underwriting fee of 0.50% each, there is an unused commitment fee of 0.50%, a letter of credit fee of 3.50%, and a letter of credit fronting fee of 0.20%. The DIP Financing Facility is secured by a first priority priming lien on the real and personal assets of the Company that also secure the prepetition senior secured credit facilities described below and a junior lien on certain plant and equipment that secure six industrial revenue bond facilities described below (the "IRB Facilities") aggregating approximately $14.9 million as of December 30, 2000, and certain obligations to the Pension Benefit Guaranty Corporation. The documentation evidencing the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum operating cash flow, as well as other covenants that limit, among other things, indebtedness, liens, sales of assets, capital expenditures, investments, and prohibit dividend payments. The net proceeds of certain asset sales outside the ordinary course of business reduce prepetition indebtedness under the senior secured credit facilities; otherwise, the net proceeds of asset sales outside the ordinary course of business are applied as a permanent reduction of the DIP Financing Facility. As of December 30, 2000, the Company had $17.9 million in letters of credit outstanding under the DIP Financing Facility. Availability under the DIP Financing Facility as of December 30, 2000, was $107.1 million. As prepetition letters of credit expire under the Company's senior secured revolving credit facility described below, to the extent they are renewed, they will be reissued under the DIP Financing Facility. Senior Debt Facilities In December 1997, in connection with the Fieldcrest Cannon acquisition, the Company entered into senior secured revolving credit and term loan facilities with a group of financial and institutional investors for which Bank of America, N.A. acts as the administrative and collateral agent. These facilities consisted of a $350.0 million revolving credit facility and a $250.0 million term loan facility. The term loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, the Company amended these facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of 23 Leshner, allowing the Company to fund the transaction and reduce borrowings under the revolving credit facility. Effective March 12, 1999, the revolving credit facility was amended to permit the Company to use for working capital one-half of a $61.0 million portion of the facility held as contingency reserve for cash payments required upon conversion of the 6% Convertible Debentures, thereby increasing availability under that facility. Effective October 1, 1999, the revolving credit facility was further amended to permit the Company to use the other half of the contingency reserve for working capital, thereby increasing availability under that facility. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under its senior debt facilities. The Company obtained a series of temporary waivers of this non-compliance. Effective as of December 7, 1999, the Company agreed to certain amendments to the senior debt facilities, principally related to cash management, additional collateral, adjustments to restrictive covenants, and borrowings under, and uses of proceeds from, the revolving credit facility. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance with financial covenants and the senior debt facilities were further amended to shorten their terms to maturity and accelerate the related amortization schedule for repayment of principal, to eliminate reinstatement of the contingency reserve requirement referred to above, to increase the applicable interest rate margins (subject to reduction if the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") exceeded a specified level for the 2000 fiscal year), to add a covenant requiring that EBITDA must exceed specified levels for future fiscal periods and eliminate all other financial covenants, to modify certain restrictive covenants, to limit borrowings under the revolving credit facility based on a formula tied to 45% of eligible inventory plus 80% of eligible accounts receivable, and to provide for a series of reductions in the commitment under the revolving credit facility. On September 30, 2000, and prior to the Petition Date, the Company was not in compliance with its EBITDA financial covenant under the senior debt facilities. The Company obtained from its senior lenders a temporary waiver of such non-compliance through November 7, 2000, during which time the Company engaged in active discussions with its senior lenders to obtain an extended or permanent waiver of such non-compliance. The Company was unable to reach such an agreement with its senior lenders and the waiver expired on November 7, 2000. On November 8, 2000, the agent for the senior lenders delivered a notice of default to the Company that declared an event of default under the senior debt facilities based upon such non-compliance with its EBITDA financial covenant. The senior lenders did, however, forbear from exercising rights and remedies under the senior debt facilities and agreed to continue to make available to the Company the unused credit capacity under the revolving credit facility until December 7, 2000. In addition, on November 8, 2000, the senior lenders issued a Payment Blockage Notice to the Company and the indenture trustee for the Company's 10% Senior Subordinated Notes due 2006 (the "10% Notes") prohibiting payment by the Company of the semi-annual interest payment in the aggregate amount of approximately $6.25 million due to the holders of the 10% Notes on November 15, 2000. In addition, the Company was obligated to make a semi-annual interest payment on its 9% Senior Subordinated Notes due 2007 (the "9% Notes") on December 15, 2000 aggregating $8.3 million, which payment the senior lenders likewise indicated they would also block. As a result of the circumstances confronting the Company and its inability to refinance the senior debt facilities or obtain additional capital, the Debtors filed the Chapter 11 Cases on November 14, 2000. As of December 30, 2000, the Company had $14.6 million in letters of credit outstanding under the prepetition revolving credit facility. As these prepetition letters of credit expire, to the extent they are renewed, they will be reissued under the DIP Financing Facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities for fiscal year 2000 was 9.8%. The senior debt facilities expire on January 31, 2002. The senior debt facilities are guaranteed by each of the domestic subsidiaries of the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. Overline Facility In May 1999, the Company entered into a $20.0 million senior unsecured revolving credit facility (overline facility) in order to obtain additional working capital availability. On July 27, 1999, the overline facility was amended to increase the amount of funds available to $35.0 million. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under the overline facility, the covenants of which are incorporated by reference to the senior debt facilities described above. The Company obtained a series of temporary 24 waivers of this non-compliance and extensions of the maturity date. Effective as of December 7, 1999, the Company agreed to certain amendments to the overline facility, resulting in the overline facility being secured by the assets securing the senior debt facilities described above. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance and the overline facility was amended to lengthen its term to maturity, to impose an amortization schedule for the repayment of principal, and to increase the applicable interest rate margins (subject to reduction if EBITDA exceeded a specified level for the 2000 fiscal year). The overline facility is guaranteed on a senior basis by the Company's domestic subsidiaries. Amounts borrowed under the overline facility bear interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the Company's option. The overline facility matures upon termination by the Company at any time or otherwise at the earliest of: (i) any increase in the commitment under the senior debt facilities described above, the issuance of any capital stock by the Company or its domestic subsidiaries, or other specified events; or (ii) January 31, 2002. For the reasons discussed above with respect to the default under the senior debt facilities, the Company is also in default under the overline facility. Senior Subordinated Debt In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million of the 9% Notes, with interest payable semiannually commencing June 15, 1998. The 9% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 10% Notes described below. On November 12, 1996, the Company issued $125.0 million of the 10% Notes, with interest payable semiannually commencing May 15, 1997. The 10% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 9% Notes. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the senior debt facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. As a result of the filing of the Chapter 11 Cases, the Company is in default under the indentures governing both the 9% Notes and the 10% Notes. Fieldcrest Cannon 6% Convertible Debentures As a result of the Company's acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Debentures are convertible, at the option of the holders, into a combination of cash and the Common Stock. During the fourth quarter of 1999, the Company notified the holders of the 6% Convertible Debentures that it was not practicable or prudent for payments to be made in respect of the conversion of the 6% Convertible Debentures and advised holders that had given notice of conversion and surrendered their 6% Convertible Debentures that they could rescind their notice of conversion, return to the Company any Common Stock that had been issued to them, and have their 6% Convertible Debentures reinstated. Although many holders did rescind and return their Common Stock, other holders could not rescind because they had already sold their Common Stock. As of September 30, 2000, the cash component remaining to be paid in respect of the 6% Convertible Debentures that had been surrendered without subsequent rescission was approximately $5.2 million. Including the cash component just mentioned, as of September 30, 2000, approximately $90.4 million aggregate principal amount of the 6% Convertible Debentures remained outstanding, including 6% Convertible Debentures that had been surrendered without subsequent rescission. If all such outstanding 6% Convertible Debentures were converted at such date, including those surrendered without subsequent rescission, the resulting cash component to be paid to the holders of the 6% Convertible Debentures would have been approximately $57.2 million. Prior to the Petition Date, the Company was prohibited under the terms of the indentures governing the 9% Notes and the 10% Notes from making payments in respect of the 6% Convertible Debentures except for interest payments and payments at maturity or pursuant to sinking fund obligations. In an effort to address both (i) the unpaid cash portion of the conversion consideration owing to those holders of 6% Convertible Debentures who had surrendered their debentures for conversion but had not been paid the cash portion of the conversion consideration (the "Cash Claimants") and (ii) the cash payment prohibition in respect of any future conversions, the Company initiated discussions with certain holders of the 6% Convertible Debentures regarding a potential restructuring of the 6% Convertible Debentures. Notwithstanding 25 months of effort, the parties to those discussions were unable to agree upon a mutually satisfactory comprehensive restructuring of the 6% Convertible Debentures and amounts owing to the Cash Claimants. In September 2000, the Company notified the holders of the 6% Convertible Debentures of its plan for making payments to the Cash Claimants. Pursuant to the plan, the Company agreed to pay out as a "scheduled payment" cash in the amount of approximately $3.8 million annually to the Cash Claimants, which is the amount of cash sufficient to complete the conversion of $6.25 million principal amount of the 6% Convertible Debentures annually and utilize such converted 6% Convertible Debentures as a credit to satisfy its annual sinking fund obligation under the indenture governing the 6% Convertible Debentures. As part of the plan and in accordance with the terms of the indenture governing the 6% Convertible Debentures, the Company agreed to pay out cash to the Cash Claimants in order to complete and finalize Debenture conversions and utilize such converted Debentures as credits to satisfy its annual sinking fund obligations as follows: (i) approximately $3.8 million on September 28, 2000, (ii) approximately $3.8 million on March 16, 2001, and (iii) the balance owing to Cash Claimants on March 18, 2002. Under the plan, these cash payments would be made by the Company to the Cash Claimants in the order the 6% Convertible Debentures were presented for conversion, i.e., on a first to convert, first to be paid basis. The unpaid cash portion for each Cash Claimant would be evidenced by a non-interest bearing subordinated promissory note executed by Fieldcrest Cannon (the "Cash Claimant Notes"). Pursuant to the plan, the Company made the first scheduled payment on September 28, 2000. As of December 30, 2000, the aggregate principal amount of the outstanding Cash Claimant Notes was $5.2 million. As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in default under the indenture governing the 6% Debentures and the Cash Claimant Notes. Industrial Revenue Bonds The Company has obligations in respect of six industrial revenue bond facilities. The IRB Facilities are secured by liens on specified plants and equipment. As of December 30, 2000, $14.9 million of bonds in the aggregate were outstanding under the IRB Facilities. As a result of the default on the senior debt facilities and the filing of the Chapter 11 Cases, the Company is in default of its obligations under each of the IRB Facilities. Adequacy of Capital Resources As discussed above, the Debtors are operating their businesses as debtors- in-possession under chapter 11 of the Bankruptcy Code. In addition to the cash requirements necessary to fund ongoing operations, the Company anticipates that it will incur significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. As a result of the uncertainty surrounding Pillowtex's current circumstances, it is difficult to predict the Company's actual liquidity needs at this time. However, based on current and anticipated levels of operations, and efforts to reduce inventories and accounts receivable, the Company anticipates that its cash flow from operations, together with amounts available under the DIP Financing Facility, will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Cases. In the event that cash flows and available borrowings under the DIP Financing Facility are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenditures or seek additional financing. The Company can provide no assurances that reductions in planned capital expenditures would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to additional financing is, and for the foreseeable future will likely continue to be, very limited. The Company's long-term liquidity requirements and the adequacy of the Company's capital resources are difficult to predict at this time, and ultimately cannot be determined until a plan of reorganization has been developed and confirmed by the Bankruptcy Court in connection with the Chapter 11 Cases. In addition, the amounts reported in the consolidated financial statements included elsewhere in this Annual Report do not reflect adjustments to the carrying value of assets or the amount and classification of liabilities that ultimately may be necessary as the result of a plan of reorganization. Adjustments necessitated by the confirmation of plan of reorganization could materially change the amounts reported in the consolidated financial statements included elsewhere in this Annual Report. Pursuant to the Bankruptcy Code, approximately $492.1 million of prepetition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. New Accounting Standard During June 1998, Statement of Financial Accounts Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of SFAS No. 133, as amended by SFAS Nos. 137 and 138, are effective for fiscal years beginning after June 15, 2000. The Company adopted the provisions of the Standards on December 31, 2000. The Company's management has reviewed the terms of material contracts and financial instruments and determined that the adoption of SFAS No. 133, as amended, did not have a material impact on its financial position or results of operations. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------------------------- Pillowtex is exposed to market risk from changes in interest rates on debt and foreign currency exchange rates. Pillowtex's exposure to interest rate risk consists of floating rate debt based on the LIBOR plus an adjustable margin. To lower or limit overall borrowing costs, the Company often enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The interest rate swap agreements generally have one to two year terms. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which Pillowtex's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value resulting from changes in market interest rates are not recognized in the consolidated financial statements. Pillowtex had no swap agreements in place at December 30, 2000. The annual impact on the Company's results of operations of a 100 basis point interest rate change on the December 30, 2000 outstanding balance of the variable rate debt would be approximately $6.8 million. This same calculation for 1999 was $6.4 million. Pillowtex's exposure to fluctuations in foreign currency exchange rates is due primarily to a foreign subsidiary domiciled in Canada. Pillowtex's Canadian subsidiary uses the Canadian dollar as its functional currency. Pillowtex generally does not use financial derivative instruments to hedge foreign currency exchange rate risks. The Canadian subsidiary is not material to Pillowtex's consolidated results of operations; therefore, the impact of a 10% change in the exchange rate at December 30, 2000 would not have a significant impact on the Company's results of operations or financial position. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The financial statements are set forth herein commencing on page F-1. Schedule II to the financial statements is set forth herein on page S-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT ---------------------------------------------- DIRECTORS OF THE REGISTRANT The following is a list of directors, their ages, positions and business experience as of March 20, 2001.
Name and Position Age Experience - ----------------- --- ---------- Ralph W. LaRovere 65 Mr. LaRovere became a director of the Company in May 1997. He has served as Chairman of the Board of the Company since November 2000. He retired from J.C. Penney Company, Inc. after a 36-year career having served as Vice President and Director of Merchandising for the Home and Leisure Division. He also served in various management positions in New York, Los Angeles, and Dallas. Paul G. Gillease 68 Mr. Gillease became a director of the Company in October 1993. From 1989 until retiring in late 1993, Mr. Gillease was Vice President and General Manager of DuPont Textiles, a division of E.I. DuPont de Nemours & Company. He also served in a variety of marketing and business management positions with DuPont. Mr. Gillease is a member of the Board of Galey & Lord, Inc. and Guilford Mills, Inc. William B. Madden 62 Mr. Madden became a director of the Company in February 1993. He has been the President of Madden Securities Corporation, a general securities and investment banking firm, located in Dallas, Texas, since 1986. Mr. Madden is also Chairman of the Board of Mercantile Bank and Trust and a director of E. W. Blanch Holdings, Inc. M. Joseph McHugh 63 Mr. McHugh became a director of the Company in February 1993. He acted as interim Chief Financial Officer of the Company from November 1999 through April 2000. Mr. McHugh retired in December 1998 from Triangle Pacific Corp., a manufacturer and distributor of hardwood flooring and kitchen and bathroom cabinets, where he served as a Director and as President and Chief Operating Officer from November 1994 until his retirement. From 1981 until November 1994, he served as Senior Executive Vice President and Chief Financial Officer of Triangle Pacific Corp. A. Allen Oakley 47 Mr. Oakley has been a director of the Company since May 2000. He joined Fieldcrest Mills in 1976 and served in various managerial capacities before being elected Executive Vice President - Manufacturing of the Company in May 2000. Mark A. Petricoff 62 Mr. Petricoff was elected a director of the Company in November 1998 to fill a vacancy. He was a 39- year employee and former President and Chief Executive Officer of The Leshner Corporation, a towel manufacturer acquired by the Company in July 1998. Scott E. Shimizu 47 Mr. Shimizu served as a member of the Board of Directors from May 1994 to May 1995 and was re- elected in February 1996 to fill a vacancy. He has served as Executive Vice President since 1988 and since 1992 he has served as Executive Vice President - Sales & Marketing.
28 Mary R. Silverthorne 65 Mrs. Silverthorne has been a director of the Company since December 1992. She has for many years been actively involved in charitable and civic activities and is a director of the Retina Foundation of the Southwest (Dallas), the Foundation Fighting Blindness, Reading and Radio Resources and the Assistance League of Dallas. She has not been engaged in business activities during the past five years. Anthony T. Williams 54 Mr. Williams has been a director of the Company since August 2000. He joined the Company in May 2000 as Executive Vice President and Chief Financial Officer and was elected President and Chief Operating Officer in November 2000. From November 1995 until December 1998, Mr. Williams was Vice President Finance of LucasVarity Light Vehicle Braking Systems, the world's second largest independent manufacturer of braking systems to the automotive industry.
EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers of the Company, their ages, position and business experience as of March 20, 2001.
Name and Position (1) Age Experience - ----------------- --- ---------- Ralph W. LaRovere 65 See "Item 10. Directors and Executive Officers of the Registrant -Directors of the Registrant" above. Anthony T. Williams 54 See "Item 10. Directors and Executive Officers of the Registrant -Directors of the Registrant" above. Scott E. Shimizu 47 See "Item 10. Directors and Executive Officers of the Registrant -Directors of the Registrant" above. Michael R. Harmon 53 Mr. Harmon joined the Company in March 2001 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Harmon spent 13 years at Galey & Lord, Inc., a $1 billion manufacturer of textiles, where he last served as Executive Vice President and Chief Financial Officer. Robert F. Haase 57 Mr. Haase joined the Company as Executive Director - Operations in January 2001. Prior to joining the Company, he was Chief Engineer and Operations Director for the electronics division of Ford Motor Company where he managed the engineering and manufacturing operations of a 13,000-employee division with seven manufacturing plants located throughout the world. Mr. Haase was with Ford Motor Company for 32 years. A. Allen Oakley 47 See "Item 10. Directors and Executive Officers of the Registrant -Directors of the Registrant" above. Richard A. Grissinger 57 Mr. Grissinger joined Fieldcrest Cannon, Inc. in 1995 as Business Manager of the Bath Division. Following the acquisition of Fieldcrest Cannon, Inc. by the Company in 1997, he became Vice President of Marketing for Department Store Specialty Business. In 1998, he was promoted to Senior Vice President of Marketing - Bath and in March 2000 he became Senior Vice President of Marketing.
29 Richard L. Dennard 52 Mr. Dennard joined the Company as Vice President of Purchasing for Utility Bedding in January 1996. The following year, his responsibilities increased as Vice President for Blankets and Utility Bedding. In 1998, following the acquisition by the Company of Fieldcrest Cannon, Inc., he assumed responsibility of purchasing for the entire operation and in August 1999, he was promoted to Senior Vice President - Purchasing and Logistics. Deborah G. Poole 46 Ms. Poole joined the Company in February 1999 as Vice President and Chief Information Officer. From 1991 until she joined the Company, she was Corporate Vice President, Information Services with Guilford Mills, Inc., a textile manufacturer. Donald Mallo 51 Mr. Mallo joined the Company in September 2000 as Vice President of Human Resources. Prior to joining the Company, Mr. Mallo served from 1998 through 1999 as the Senior Vice President Human Resources of Grove Worldwide LLC, a leading manufacturer of construction cranes and aerial work platforms. From 1993 to 1998, Mr. Mallo was the Executive Vice President Human Resources and Counsel for Foamex International, Inc., a large manufacturer of polyurethane foam products for the automotive, furniture, bedding and medical supply industries. From 1985 until its acquisition by Foamex in 1993, Mr. Mallo was Vice President - Employee Relations for General Felt Industries, Inc., a manufacturer of carpet cushions and related products. John F. Sterling 37 Mr. Sterling joined the Company in May 1997 as Associate General Counsel and was promoted to Vice President and General Counsel in November 1999. For eight years prior to joining the Company, he was an attorney with the law firm of Thompson & Knight. Henry T. Pollock 60 Mr. Pollock served the Company from June 2000 to November 2000 as a consultant in finance and treasury. In November 2000, he joined the Company full-time and in March 2001, he became Vice President and Treasurer of the Company. Prior to his service to the Company, Mr. Pollock was assistant treasurer for Varity Corporation, a $2.5 billion world-wide manufacturer of brake systems and diesel engines. Brenda A. Sanders 50 Ms. Sanders, Corporate Secretary, joined the Company in August 1997. In 1996, she was Director of Corporate Governance and Assistant Corporate Secretary for Amre, Inc., a home remodeling company. From 1991 through 1995, she was Director of Corporate Securities Administration and Assistant Corporate Secretary for E-Systems, Inc., a defense electronics company.
___________________________ (1) All Executive Officers serve at the pleasure of the Board of Directors. 30 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires directors and officers of the Company, and persons who own more than 10 percent of the Common Stock, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of such stock. Directors, officers and beneficial owners of more than 10 percent of the Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all Section 16(a) filing requirements applicable to its directors, officers and beneficial owners of more than 10 percent of its Common Stock were met during the year ended December 30, 2000. 31 ITEM 11. EXECUTIVE COMPENSATION ---------------------- Summary Compensation Table The following table sets forth the compensation paid or accrued by the Company to the Chief Executive Officer and each of the four other most highly compensated executive officers for their services in 2000, 1999 and 1998.
Long Term Annual Compensation Compensation - ---------------------------------------------------------------------------------------------------------- Other Restricted Securities All Other Name and Annual Stock Under- Compen- Principal Position Year Salary Bonus Compen- Awards lying sation ($) ($) sation ($) ($) Options ($) (2) (3) (#) (4) - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Charles M.Hansen, Jr.(1) 2000 750,000 - 170,267 - 100,000 5,026,805 - ---------------------------------------------------------------------------------------------------------- Former Chairman of the 1999 900,000 - 131,783 237,842 - 8,858 - ---------------------------------------------------------------------------------------------------------- Board, Chief Executive 1998 900,000 - 155,114 - - 7,100 - ---------------------------------------------------------------------------------------------------------- Officer & Chief Opera- - ---------------------------------------------------------------------------------------------------------- ting Officer - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Scott E. Shimizu 2000 375,000 - - - - 6,271 - ---------------------------------------------------------------------------------------------------------- Executive Vice President- 1999 375,000 - - 63,426 50,000 3,041 - ---------------------------------------------------------------------------------------------------------- Sales & Marketing 1998 375,000 - - - 22,000 5,139 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- A. Allen Oakley 2000 300,000 - - - - 8,004 - ---------------------------------------------------------------------------------------------------------- Executive Vice President- 1999 300,000 12,000 - 52,844 62,000 844 - ---------------------------------------------------------------------------------------------------------- Manufacturing 1998 217,000 50,000 - - 23,000 - - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Richard A. Grissinger 2000 275,000 - - - 7,500 5,627 - ---------------------------------------------------------------------------------------------------------- Senior Vice President - 1999 275,000 - - 26,422 - 2,678 - ---------------------------------------------------------------------------------------------------------- Marketing 1998 200,000 - - - 20,000 - - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Richard L. Dennard 2000 275,000 - - - 40,000 5,302 - ---------------------------------------------------------------------------------------------------------- Senior Vice President - 1999 225,000 35,000 - - 11,000 - - ---------------------------------------------------------------------------------------------------------- Purchasing and Logistics 1998 200,000 75,000 - - 12,000 - - ----------------------------------------------------------------------------------------------------------
FOOTNOTES: (1) Mr. Hansen resigned from all positions held with the Company and its subsidiaries effective October 26, 2000. Since Mr. Hansen's departure, the Company has not elected or appointed an individual to replace him as the Company's Chief Executive Officer; however, the Board of Directors has appointed a Management Committee consisting of Ralph W. LaRovere, M. Joseph McHugh, Mark A. Petricoff, Anthony T. Williams, and Scott E. Shimizu to fulfil the duties of the Chief Executive Officer. No additional compensation is paid to the members for their participation on the Management Committee. Mr. LaRovere acts as Chairman of the Management Committee. (2) Certain of the Company's executive officers receive personal benefits in addition to salary and cash bonuses. In 2000, the amount for Mr. Hansen includes $105,545 for personal use of the company airplane, $14,605 for car allowance, and $50,117 for income tax reimbursement. The amount of personal benefits has been omitted from the table for each named executive officer for whom the aggregate amount of any benefits did not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus reported for the named executive officer. Personal benefit amounts paid that do not exceed 25% of the total personal benefits received have been omitted from this footnote. (3) Based on the closing bid price of the Common Stock on December 29, 2000, the aggregate number and value of all restricted stock holdings on such date were: 1,441 shares and $403 for Mr. Shimizu; 1,201 shares and $336 for Mr. Oakley; 600 shares and $168 for Mr. Grissinger; and 841 shares and $235 for Mr. Dennard. No dividends were paid on the restricted stock in 2000. Restrictions on restricted stock awards lapse with respect to one-half of the shares on each of the first and second anniversary dates of the award. The restricted stock was issued on February 8, 1999; accordingly, one-half of the shares awarded vested on February 8, 2000 and one-half vested on February 8, 2001. The unvested portion of Mr. Hansen's restricted stock award was forfeited as a result of his resignation. 32 (4) For 2000, the amount for Mr. Shimizu includes $1,687 for medical insurance and $1,350 for group term life insurance; the amount for Mr. Oakley includes $3,440 for medical insurance and $1,014 for group term life insurance; and the amounts for Mr. Dennard and Mr. Grissinger include $690 and $1,969, respectively, for group term life insurance. The amount indicated in 2000 for Mr. Hansen includes $16,105 for a payout under the Company's Supplemental Executive Retirement Plan made to Mr. Hansen upon his departure from the Company in accordance with the terms of the Supplemental Executive Retirement Plan, $10,475 for group term life and medical insurance, $4,850,000 paid upon his departure from the Company pursuant to terms of a separation agreement entered into between the Company and Mr. Hansen, $69,231 for earned but unused vacation and $75,392 for the portion of the cash surrender value of a split dollar life insurance policy which Mr. Hansen was entitled to following the cancellation of the policy after his departure from the Company. The amounts for 2000 also include company contributions to the Pillowtex Corporation 401(k) Plan, a qualified ERISA plan ($5,602 for Mr. Hansen; $3,234 for Mr. Shimizu; $3,550 for Mr. Oakley; $3,658 for Mr. Grissinger; and $4,612 for Mr. Dennard). Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(1) - -------------------------------------------------------------------------------------------------------- % of Total Number of Options Securities Granted to Underlying Employees Exercise Options in Fiscal Price Expiration 5% 10% Name Granted(#) Year ($/Sh) Date ($) ($) (2) - -------------------------------------------------------------------------------------------------------- Charles M. Hansen, Jr.(3) 100,000 20.5 4.3125 6/28/2010 - - Scott E. Shimizu - - - - - - A. Allen Oakley - - - - - - Richard A. Grissinger 7,500 1.5 4.3125 6/28/2010 20,341 51,548 Richard L. Dennard 40,000 8.2 4.3125 6/28/2010 108,484 274,920
FOOTNOTES: (1) The values shown are based on the indicated assumed annual rates of appreciation compounded annually. Actual gains realized, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and overall stock market conditions. There can be no assurance that the values shown in this table will be achieved. (2) 25% of the option award vests on each of the first four anniversary dates of the grant. If a "change in control" of the Company occurs, the options become exercisable in full. The definition of "change in control" for this purpose is the same as in the Company's Supplemental Executive Retirement Plan and is more fully described under "Item 11. Executive Compensation -Supplemental Executive Retirement Plan" below. (3) All option awards granted to Mr. Hansen in 2000 were forfeited upon his resignation from the Company. 33 Aggregated Option Exercises In Fiscal 2000 and Option Values at December 30, 2000
Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options Options at at December 30, 2000 December 30, 2000 (#) ($) -------------------------------------------------------------------- Shares Acquired Value Name on Realized Exercisable Unexercisable Exercisable Unexercisable Exercise (#) ($) - ------------------------------------------------------------------------------------------------------------------------------- Charles M. Hansen, Jr. - - - - - - Scott E. Shimizu - - 55,000 54,000 - - A. Allen Oakley - - 27,000 28,000 - - Richard A. Grissinger - - 10,000 17,500 - - Richard L. Dennard - - 20,000 56,125 - -
Pension Plan The Company maintains defined benefit pension plans covering substantially all of its employees, other than employees of the Company's Canadian subsidiary, Pillowtex Canada Inc., and other employees subject to collective bargaining agreements. The Company funds the pension plans through annual contributions in an amount between the minimum required and the maximum amount that can be deducted for federal income taxes. Prior to January 1, 2000, the Company maintained a pension plan for qualified employees in its Pillow and Pad Division, as well as separate pension plans for qualified employees of two of its subsidiaries, Fieldcrest Cannon, Inc. and The Leshner Corporation. On January 1, 2000, the Company merged the pension plans into two new plans covering all of the qualified salaried and hourly employees of the Company. Certain of the named executive officers have always been subject to the surviving plan; however, prior to January 1, 2000, Charles M. Hansen, Jr., Scott E. Shimizu, and Richard L. Dennard were subject to one of the plans that was merged out of existence (the Prior Pillowtex Plan). Pursuant to the terms of the new consolidated plan, such participants' benefits for their years of service prior to January 1, 2000 will continue to be determined using the benefit provisions of the Prior Pillowtex Plan. Accordingly, a separate table is presented to determine the annual benefits available to Mr. Hansen, Mr. Shimizu, and Mr. Dennard for their years of service prior to January 1, 2000. 34 The following tables present certain information concerning annual benefits provided under the pension plans.
For Years of Service Under Prior Plan Formula (1) - ------------------------------------------------------------------------------------------------------------------------ Years of Service Average ------------------------------------------------------------------------------------------------ Compensation*(2) 5 10 15 20 25 30 35 40 - ------------------------ $125,000 $5,373 $10,745 $16,118 $21,490 $26,863 $32,235 $37,608 $42,980 $150,000 $6,623 $13,245 $19,868 $26,490 $33,113 $39,735 $46,358 $52,980 $175,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980 $200,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980 $250,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980 $275,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980 $300,000 $7,623 $15,245 $22,868 $30,490 $38,113 $45,735 $53,358 $60,980
___________________________ *Average Compensation is equal to the average of the highest five years of compensation out of the last ten years of employment.
For Years of Service Under Current Plan Formula (1) - ------------------------------------------------------------------------------------------------------------------------ Years of Service Career Average ------------------------------------------------------------------------------------------------ Compensation**(2) 5 10 15 20 25 30 35 40 - ------------------------ $125,000 $ 9,375 $18,750 $28,125 $37,500 $42,188 $46,875 $51,563 $56,250 $150,000 $11,250 $22,500 $33,750 $45,000 $50,625 $56,250 $61,875 $67,500 $175,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500 $200,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500 $250,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500 $275,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500 $300,000 $12,750 $25,500 $38,250 $51,000 $57,375 $63,750 $70,125 $76,500
___________________________ **Career Average Compensation is equal to the average of all years of compensation, where years before 1991 are considered to equal 1991 compensation. FOOTNOTES: (1) Estimated years of service as of January 1, 2001 for the named executive officers are as follows:
Years of Service ------------------------------------------------------------------ Name Prior Formula Current Formula ----------------------------- Charles M. Hansen, Jr. 35 1 Scott E. Shimizu 18 1 A. Allen Oakley 0 25 Richard A. Grissinger 0 7 Richard L. Dennard 4 1
(2) An employee's compensation for purposes of determining pension benefits is calculated on substantially the same basis as the employee's cash compensation set forth in the Summary Compensation Table. The Internal Revenue Service maximum compensation allowed for benefits for the 2000 plan year is $170,000. Therefore, fiscal 2000 compensation for all employees would be limited to $170,000. Benefits under the pension plan are integrated with Social Security and are computed as straight life annuities. The benefits shown are not offset by any other Company benefits or by Social Security. 35 Supplemental Executive Retirement Plan The Supplemental Executive Retirement Plan (SERP) provides supplemental retirement income to executive employees of the Company who are selected by the Compensation Committee of the Board of Directors. Scott E. Shimizu and A. Allen Oakley are covered by the SERP. When combined with the pension plan and social security benefits, the SERP is designed to provide a targeted retirement benefit equal to 50% of an executive's final average compensation. However, the executive's actual benefit will be determined solely by the vested balance of the executive's account balance under the SERP. Final average compensation is the projected total cash compensation for the five consecutive years of service with the Company ending at age 65. An amount is credited each year to a retirement account that will accumulate a balance sufficient to pay the supplemental retirement benefit when the participant reaches age 65, assuming each credited amount earns 12% per year compounded. On the date of the contribution each year, the annual accrual amount is divided by the market value per share of Common Stock on that date to produce a number of hypothetical shares. Each participant's supplemental retirement account is deemed to be invested solely in hypothetical shares of Common Stock and the balance of a participant's account as of any date can be determined by multiplying the number of hypothetical shares credited to the participant's account by the market value of Common Stock on that date. In the event of a change in control of the Company, the balance of each participant's account will be converted from hypothetical shares to a hypothetical fixed-income investment earning 12% per annum. In general, a "change in control" occurs when (i) the Company is no longer an independent publicly owned corporation or sells or disposes of all or substantially all of its assets; (ii) a person becomes the beneficial owner of 35% or more of the Company's voting stock; (iii) the Company does not survive a merger or consolidation; or (iv) during any consecutive two- year period, at least a majority of the incumbent directors are not directors who have served continuously since the beginning of the two-year period unless the election of directors, or nomination by the Company's shareholders, was approved by a vote of at least two-thirds of the incumbent directors who have been in office continuously since the beginning of the two-year period. Vesting under the SERP occurs at the same rate as vesting under the Company's pension plan. Immediate vesting in both plans occurs in the event of a participant's disability or a change in control of the Company. Payments under the SERP will be made in a single lump-sum cash payment unless the participant elects in advance to receive installment payments. If a participant dies before benefits are scheduled to begin, benefits will be paid to the beneficiary designated by the participant, or, if no beneficiary was designated, to the surviving spouse or to the participant's estate if there is no surviving spouse. The SERP may be amended or discontinued at any time by the Compensation Committee of the Board of Directors or by the full Board. Any amendment may reduce prospectively the earnings factor to be applied to a participant's account, or may change the hypothetical investment of account balances from hypothetical shares of Common Stock to any other hypothetical investment but may not decrease a participant's account balance as of the date of the amendment. In the event of a change in control, the SERP may not be amended in a way that would adversely affect a participant's existing or future benefit without the participant's written consent. Assuming retirement at age 65, the estimated annual accrual amounts for the SERP participants are as follows: Scott E. Shimizu $16,436 A. Allen Oakley $10,750 The SERP is unfunded. All benefits payable to a participant under the SERP will be paid from the general assets of the Company. As a result of the filing of the Chapter 11 Cases, each participant has the status of a general unsecured creditor with respect to the obligation of the Company to make payments under the SERP relating to prepetition contributions. The Compensation Committee may change the discount rates and actuarial assumptions that are used to calculate credits and targeted benefits under the SERP. 36 Employment Agreements On January 1, 1998, the Company entered into a new employment agreement with Scott E. Shimizu, Executive Vice President - Sales and Marketing. This employment agreement replaced a previously existing agreement and provides for an initial base salary of $375,000. On October 9, 1998, the Company entered into an employment agreement with A. Allen Oakley, Executive Vice President of Manufacturing, for an initial base salary of $300,000. On September 1, 1999, the Company entered into an employment agreement with Richard L. Dennard, Senior Vice President - Purchasing and Logistics, for an initial base salary of $225,000. Each of these employment agreements contains the following provisions: . Participation in the incentive bonus plans of the Company, as well as, in case of Messrs. Shimizu and Oakley, the Supplemental Executive Retirement Plan; . An initial employment term of three years with an automatic extension of one year on each anniversary date beginning with the second anniversary date so that the term will have a remaining duration of two years upon each and every anniversary. The automatic extensions will terminate if either party gives the other written notice at least 15 months prior to the anniversary date of its intent not to extend the agreement. . Payment of base salary through the remaining employment term, but not less than for a two-year period, and certain benefits under the incentive bonus plans if the Company terminates the executive's employment without cause. . Payment of certain amounts, including severance payments, on the occurrence of termination of employment by the executive for "good reason" or termination by the Company without "cause" following a "change in control." On December 15, 1999, the Company entered into an employment agreement with Richard A. Grissinger, Senior Vice President - Marketing, for an initial base salary of $275,000. Mr. Grissinger's employment agreement provides for an initial two year term with an automatic extension of one year unless terminated by either party giving the other at least six months written notice prior to the end of the initial term or any extension of the term. The employment agreement also provides for Mr. Grissinger's participation in the Company's incentive bonus plans and the payment of certain amounts on the occurrence of termination of employment by Mr. Grissinger for "good reason" or termination by the Company without "cause" following a "change in control." Each employment agreement also includes certain noncompetition, nondisclosure, and nonsolicitation provisions. It is currently contemplated that each of the Company's executives who currently has an employment agreement, including Messrs. Dennard, Grissinger, Oakley, and Shimizu, will enter into a new employment agreement that supersedes the prior agreement and which provides for benefits that are consistent with those provided in the Company's Key Employee Retention Program described below. In connection with Mr. Hansen's resignation, the Company and Mr. Hansen entered into a Separation Agreement dated as of October 26, 2000. Pursuant to the terms of the Separation Agreement, the Company paid Mr. Hansen a lump sum payment of $4.85 million upon his resignation from all positions held with the Company and its subsidiaries, which payment was in full satisfaction of all amounts owed by the Company to Mr. Hansen under the terms of his employment agreement with the Company. In addition, Mr. Hansen released the Company from any claims he may have had against the Company prior to the date of the Separation Agreement. Pursuant to the terms of the Separation Agreement, certain obligations of Mr. Hansen under his employment agreement, including the noncompetition provision, remain in effect. Key Employee Retention Program On March 6, 2001, the Bankruptcy Court entered an order authorizing the Company to implement a key employee retention program consisting of (i) a retention incentive plan (the "Retention Incentive Plan"), (ii) an emergence performance bonus plan (the "Emergence Performance Bonus Plan"); and (iii) an employee severance plan (the "Severance Plan") (collectively, the "Retention Program"). The purpose of the Retention Program is to provide the incentives necessary for the Company to retain its management team and other key employees and to otherwise address 37 concerns regarding potential key employee attrition during the Company's financial restructuring process. The Retention Program is designed to provide the Company's key employees with competitive financial incentives to, among other things, (a) remain in their current positions with the Company through the effective date of a plan or plans of reorganization in the Chapter 11 Cases ("Emergence"), (b) assume the additional administrative and operational burdens imposed on the Company by the Chapter 11 Cases and (c) use their best efforts to improve the Company's financial performance and facilitate the Company's successful reorganization. The Retention Incentive Plan is designed for the purpose of retaining key management employees through Emergence. Under the Retention Incentive Plan, eligible employees are classified into one of four "groups" based on the determination of the Company's management as to the importance of each employee's contributions to the continued operations and successful restructuring of the Company's business. Depending on the group, each employee is eligible to earn a specified retention incentive payment (a "Retention Incentive Payment"), payable on the following four dates (collectively, the "Vesting Dates") if the employee remains actively employed by the Company on such Vesting Dates: (i) 25% of the total Retention Incentive Payment will be paid in the month following the Bankruptcy Court's approval of the Retention Program, (ii) 25% of the total Retention Incentive Payment will be paid on the first anniversary of the Petition Date (i.e., November 14, 2001); (iii) 25% of ---- the total Retention Incentive Payment will be paid on the earlier of (a) six months after the second payment is made or (b) confirmation of a plan of reorganization, and (iv) 25% of the total Retention Incentive Payment will be paid 30 days after confirmation of a plan of reorganization; provided, however, that the final payment to Group 1 participants will be adjusted downward if cumulative EBITDA (as defined in the DIP Financing Facility) for the 12 months preceding the confirmation of a plan or reorganization is less than $50 million. In general, an eligible employee must be employed by the Company on a Vesting Date to earn and receive a Retention Incentive Payment (or the applicable portion of a Retention Incentive Payment). If, however, an eligible employee is terminated by the Company without cause, the employee will receive his or her entire Retention Incentive Payment, which will be paid on the same schedule as if the employee had not been terminated. Group 1 participants, which include the President and five other senior executives, will be eligible for a retention payment equal to 60% of their base pay. Group 2 participants will be eligible for a retention payment equal to 50% of their base pay. Group 3 participants will be eligible for a retention payment equal to 35% of their base pay. Group 4 participants will be eligible for a retention payment equal to 20% of their base pay. In addition, a discretionary retention pool of $500,000 will be available for non-union employees not included in Groups 1 through 4. Messrs. Dennard, Oakley and Shimizu each participate in the Retention Incentive Plan and is a member of Group 1. Mr. Grissinger participates in the Retention Incentive Plan and is a member of Group 2. The Emergence Performance Bonus Plan provides for an additional incentive payment (the "Emergence Payment") to certain management employees who are particularly essential to the implementation of the Company's restructuring to remain with the Company through the plan negotiation and confirmation process. Payments under the Emergence Performance Bonus plan are tied directly to two factors: the amount of the distribution made under a confirmed plan of reorganization to unsecured creditors and the length of the Chapter 11 Cases, both of which are of primary importance to the Company's creditors. The employees eligible for participation in the Emergence Performance Bonus Plan currently consists of eight members of the Company's senior management. The amount of the Emergence Payment paid to a participant under the Emergence Performance Bonus Plan is determined by multiplying the participant's base salary by two factors. The first factor (the "Recovery Multiplier") equals the percentage of all consideration to be received by the unsecured creditors on all of their unsecured claims, as reasonably estimated as of the date of confirmation of the plan of reorganization. Accordingly, the Recovery Multiplier ranges from 0% to 100%. The second factor (the "Speed Multiplier") is based upon the length of the Chapter 11 Cases, and is calculated by dividing 18 by the number of months the Company is in bankruptcy. Regardless of this calculation, the Speed Multiplier cannot be less than one or more than two. The Emergence Payment is payable 30 days after confirmation of a plan. The participants are entitled to receive payment if they are terminated without cause prior to confirmation of a plan. Messrs. Dennard, Oakley and Shimizu each participates in the Emergence Performance Bonus Plan. As a complement to the Retention Incentive Plan, the Severance Plan was adopted to continue a modified version of the Company's prepetition severance program (the "Prepetition Severance Program"). Under the Prepetition Severance Program, the Company provided severance benefits under three separate policies, including through employment agreements with certain senior executives. The purpose of the Severance Plan is to integrate all these severance arrangements into one plan that will supersede prior plans and the severance provisions of the executives' employment agreements. The Severance Plan is designed to ensure basic financial security notwithstanding possible job loss by providing eligibility for severance benefits ("Severance Benefits") for employees at all levels. The Severance Plan covers all full-time employees of the Company. The majority of the covered employees are not eligible to participate in any other components of the Retention Program. Under the Severance Plan, the Company will pay Severance Benefits to eligible employees whose employment is involuntarily terminated after the Petition Date for reasons other than death, 38 disability, retirement or cause. With certain exceptions set forth below, employees will be eligible to receive Severance Benefits equal to 1 week's salary for each completed year of service, with a minimum of two-weeks salary and a maximum of 26 weeks salary. Moreover, all employees will be entitled to receive medical insurance, life insurance and other benefits currently provided under the Prepetition Severance Policy. Executives in Group 2 of the Retention Incentive Plan will be entitled to receive the greater of their contractual severance amount (except as provided below with respect to executives with two- year severance agreements), the formula amount or 16 weeks salary. Executives with employment agreements that provide for a severance payment equal to two years salary will have their severance payment offset by the amount of the Retention Incentive Payment received by the employee, and a portion of the total severance payment will be subject to certain mitigation requirements. In all cases where employees currently have employment contracts, the change in control provisions contained in those agreements will be standardized so that a benefit is payable only in the event a change-in-control detrimentally affects the employee. Restricted Stock Awards In February 1999, the Board of Directors, on the recommendation of the Compensation Committee, approved the grant of restricted stock awards to certain key employees of the Company. Upon the award of restricted stock, the Company makes an immediate transfer to the executive of a specific number of shares, and no payment from the executive is required. Restricted stock will be forfeited by the executive if the executive voluntarily terminates employment during the restriction period, or if the executive is terminated for poor performance or other "cause." Restrictions on the awards lapse with respect to one-half of the shares on each of the first and second anniversary dates of the awards. Stock representing the award is issued and held in custody by the Company or an agent until the restrictions lapse. During the restriction period, holders of the awards are entitled to receive dividends declared on the Common Stock and have voting rights but they may not sell or transfer the Common Stock representing the restricted award. In the event of a change in control of the Company (as such term is used in the Company's Supplemental Executive Retirement Plan), all restrictions lapse. The restrictions also lapse if the executive's employment is involuntarily terminated for a reason other than poor performance or other "cause." All of the named executive officers, including the Chief Executive Officer, received restricted stock awards. The restricted stock was issued on February 8, 1999; accordingly, one-half of the shares awarded vested on February 8, 2000 and one-half vested on February 8, 2001. Compensation Committee Interlocks and Insider Participation The Compensation Committee consists entirely of non-employee directors. Mr. Madden, Mr. Petricoff, Mrs. Silverthorne, Mr. Gillease and Mr. LaRovere, until his appointment as Chairman of the Board in November 2000, served on the Compensation Committee during 2000. Compensation of Directors Directors who are not officers of the Company or any of its subsidiaries receive an annual fee of $35,000. For each committee meeting attended, committee members are paid a fee of $1,000 and committee chairmen are paid a fee of $2,500. The Company also reimburses directors for travel, lodging and related expenses they incur in attending Board and committee meetings. The Company provides no retirement benefits to non-employee directors. Directors who are also employees of the Company receive no additional compensation from the Company for services rendered in their capacity as directors. The 1993 Pillowtex Corporation Stock Option Plan (the "Stock Option Plan") allows for the grant of nonqualified stock options to directors who are not employees. Under the Stock Option Plan, the exercise price of options granted thereunder may not be less than 100% of the fair market value per share of Common Stock on the date the option is granted. As of December 29, 2000, Messrs. Madden and Gillease had each been granted options to purchase a total of 17,072 shares of Common Stock and Mr. Petricoff 7,500 shares, all at prices ranging from $5.0625 to $33.50. Mr. McHugh has been granted options to purchase a total of 67,072 shares of Common Stock at prices ranging from $4.5625 to $33.50 per share. All options granted under the Stock Option Plan, including those granted to directors who are not employees, vest 25% on the first through the fourth anniversary dates of the grant and terminate on the tenth anniversary date. Mrs. Silverthorne does not participate in the Stock Option Plan. From November 1999 through April 2000, Mr. McHugh performed the duties of interim chief financial officer of the Company. Mr. McHugh was paid a consulting fee of $1,500 per day and reimbursement of travel and entertainment expenses. Mr. McHugh was also granted options to purchase 50,000 shares of Common Stock at the option price of $4.5625 per share. The Company paid Mr. McHugh a total of $103,500 under this arrangement during 2000. 39 Following the resignation of Mr. Hansen as Chairman, President, and Chief Executive Officer in October 2000, Mr. LaRovere was hired by the Company to perform the duties of Chairman of the Board. Mr. LaRovere is paid a salary of $20,000 per month, as well as a monthly car allowance of $1,000. He receives no additional compensation as a member of the Board of Directors. As of December 29, 2000, Mr. LaRovere had been granted a total of 13,572 shares at prices ranging from $5.0625 to $33.50. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table lists certain information concerning the beneficial ownership of the Company's Common Stock, as of March 20, 2001, by the following persons: . Each person known by the Company to own beneficially more than 5% of the outstanding Common Stock; . The executive officers whose names appear in the table set forth under "Item 11. Executive Compensation - Summary Compensation Table" above; . Each director of the Company; and . All executive officers and directors as a group. Except as otherwise indicated, the Company believes that the owners named below have sole voting and investment power of the shares of Common Stock listed.
Number of Shares Name Beneficially Owned Percent of Class - ----------------------------------------------------------------------------------------------------------- Charles M. Hansen, Jr. (1) 2,643,410 18.5% John H. Silverthorne Marital Trust B(2) 2,268,893 15.9% Mary R. Silverthorne (2) 634,241 4.4% Paul G. Gillease (3) 16,571 * Ralph W. LaRovere (3) 33,354 * William B. Madden (3) 15,947 * M. Joseph McHugh (3) 28,947 * Mark A. Petricoff (3) 2,540 * Anthony T. Williams (3) 10,000 * Scott E. Shimizu (3) 67,441 * A. Allen Oakley (3) 34,951 * Richard A. Grissinger (3) 16,201 * Richard L. Dennard (3) 26,375 * Jeffrey M. Hollander (4) 3,393,375 19.2% Dimensional Fund Advisors Inc.(5) 888,246 6.2% All executive officers and directors as a group (18 persons) (3) 3,175,594 21.9%
__________ * Less than 1%. FOOTNOTES: (1) Mr. Hansen's last published address is 4111 Mint Way, Dallas, Texas 75237. Mr. Hansen's stock ownership is based on his most recent Statement of Beneficial Changes of Ownership on Form 4, which was filed with the SEC by Mr. Hansen on October 31, 2000. (2) The address of the John H. Silverthorne Marital Trust B and Mrs. Silverthorne is 4111 Mint Way, Dallas, Texas 75237. Under the rules and regulations of the SEC, Mrs. Silverthorne may be deemed the beneficial owner of the shares held by the John H. Silverthorne Marital Trust B because she is its independent trustee. In addition, Mrs. Silverthorne, in her capacity as trustee, may be deemed the beneficial owner of 42,857 shares held by the John H. Silverthorne Family Trust A. Mrs. Silverthorne disclaims beneficial ownership of any shares other than 591,384 shares she holds of record. 40 (3) Includes options which are currently exercisable or become exercisable within 60 days after March 20, 2001 to purchase the number of shares of Common Stock indicated for the following persons: Mr. Dennard (26,375); Mr. Gillease (11,447); Mr. Madden (11,447); Mr. McHugh (23,947); Mr. LaRovere (7,054); Mr. Petricoff (2,500); Mr. Williams (10,000); Mr. Shimizu (66,000); Mr. Oakley (33,750); and Mr. Grissinger (15,000). (4) The address of Jeffrey M. Hollander is 6560 W. Rogers Circle, Suite 19, Boca Raton, Florida 33487. As reported in Schedule 13D filed by Mr. Hollander with the SEC on February 23, 2001, Mr. Hollander is the holder of 81,441 shares of the Company's Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"). As of March 20, 2001, the shares of Series A Preferred Stock held by Mr. Hollander are convertible into a total of 3,393,375 shares of Common Stock As reported in Schedule 13D filed by Mr. Hollander with the SEC on February 23, 2001. (5) The address of Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, Santa Monica, California 90401. As reported in a Schedule 13G filed by Dimensional Fund Advisors, Inc. with the SEC on February 2, 2001, Dimensional Fund Advisors, Inc. beneficially owned and had sole voting and dispositive power with respect to the shares indicated. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- From November 1999 through April 2000, M. Joseph McHugh, a director of the Company, performed the duties of interim chief financial officer. Mr. McHugh was paid a consulting fee of $1,500 per day plus reimbursement of travel and entertainment expenses. He was paid a total of $103,500 by the Company under this arrangement during 2000. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- (a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements: Page --------------------------------- Independent Auditors' Report................................................. F-2 Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000...... F-3 Consolidated Statements of Operations for the years ended December 30, 2000, January 1, 2000 and January 2, 1999....................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 30, 2000, January 1, 2000 and January 2, 1999........... F-5 Consolidated Statements of Cash Flows for the years ended December 30, 2000, January 1, 2000 and January 2, 1999....................... F-6 Notes to Consolidated Financial Statements................................... F-7 2. Financial Statement Schedule. The following financial statement schedule of Pillowtex for the fiscal years ended December 30, 2000, January 1, 2000 and January 2, 1999 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Pillowtex: Schedule II - Valuation and Qualifying Accounts.............................. S-1 3. Index to Exhibits -----------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 2.1 Agreement and Plan of Merger, dated as of September 10, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-36663)) 2.2 Amendment to Agreement and Plan of Merger, dated as of September 23, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-36663)) 3.1 Restated Articles of Incorporation of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999) 3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended 4.1 Specimen of Certificate evidencing Common Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 1996) 4.2 Specimen of Certificate evidencing Series A Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 42 4.3 Indenture, dated November 12, 1996, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Bank One, Columbus, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 4.4 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Bank One, N.A. (formerly known as Bank One, Columbus, N.A.), as Trustee (incorporated by reference to Exhibit 4.4 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 4.5 Second Supplemental Indenture, dated as of July 28, 1998, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Bank One, N.A. (formerly known as Bank One, Columbus, N.A.), as Trustee (incorporated by reference to Exhibit 4.5 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 4.6 Resignation, Appointment and Acceptance Agreement, dated as of January 19, 2000, by and among Bank One, N.A. (formerly known as Bank One, Columbus, N.A.), as prior Trustee, U.S. Bank National Association, as successor Trustee, and Pillowtex Corporation, as Issuer (incorporated by reference to Exhibit 4.6 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 4.7 Indenture, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 4.8 Supplemental Indenture, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 4.9 Second Supplemental Indenture, dated as of July 28, 1998, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 4.10 Resignation, Appointment and Acceptance Agreement dated April 14, 2000 by and among Pillowtex Corporation, as Issuer, Norwest Bank Minnesota, as Resigning Trustee, and U.S. Bank National Association, as Successor Trustee, (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended April 1, 2000) 10.1 Amended and Restated Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.2 First Amendment to Amended and Restated Credit Agreement, dated as of June 19, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.3 Second Amendment to Amended and Restated Credit Agreement, dated as of July 28, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.4 Third Amendment to Amended and Restated Credit Agreement, dated as of March 12, 1999, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as 43 Administrative Agent (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 1999) 10.5 Fourth Amendment to Amended and Restated Credit Agreement, dated as of October 8, 1999, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the Quarterly period ended October 2, 1999) 10.6 Waiver and Fifth Amendment to Amended and Restated Credit Agreement, dated as of December 9, 1999, to be effective as of December 7, 1999, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 7, 1999) 10.7 Sixth Amendment and Waiver to Amended and Restated Credit Agreement, dated as of February 15, 2000, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.7 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.8 Waiver and Seventh Amendment to Amended and Restated Credit Agreement, dated as of March 31, 2000, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.8 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.9 Term Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named herein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.10 First Amendment to Term Credit Agreement, dated as of June 19, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.11 Second Amendment to Term Credit Agreement, dated as of July 28, 1998, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.12 Third Amendment to Term Credit Agreement, dated as of May 5, 1999, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the Quarterly period ended October 2, 1999) 10.13 Fourth Amendment to Term Credit Agreement, dated as of October 8, 1999, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the Quarterly period ended October 2, 1999) 10.14 Waiver and Fifth Amendment to Term Credit Agreement, dated as of December 9, 1999, to be effective as of December 7, 1999, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 7, 1999) 10.15 Sixth Amendment and Waiver to Amended and Restated Credit Agreement, dated as of February 15, 2000, among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.15 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 44 10.16 Waiver and Seventh Amendment to Term Credit Agreement, dated as of March 31, 2000 among Pillowtex Corporation, certain Lenders named therein, and Bank of America N.A. (formerly NationsBank, N.A.), as Administrative Agent (incorporated by reference to Exhibit 10.16 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.17 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 (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the Quarterly period ended July 3, 1999) 10.18 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 (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the Quarterly period ended July 3, 1999) 10.19 Third Amendment, dated as of December 7, 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 (incorporated by reference to Exhibit 10.3 to Pillowtex Corporation's Current Report on Form 8-K dated December 7, 1999) 10.20 Fourth Amendment, dated as of February 15, 2000, 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 (incorporated by reference to Exhibit 10.20 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.21 Fifth amendment dated as of March 31, 2000 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 (incorporated by reference to Exhibit 10.21 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.22 Consent dated as of December 7, 1999, by and between Bank of America N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex Corporation, as Borrower (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Current Report on Form 8-K dated December 7, 1999) 10.23 Consent dated as of February 15, 2000, by and between Bank of America N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex Corporation, as Borrower (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.24 Consent dated as of March 31, 2000, by and between Bank of America N.A. (formerly NationsBank, N.A.), as Lender, and Pillowtex Corporation, as Borrower (incorporated by reference to Exhibit 10.24 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.25 Post-Petition Credit Agreement dated as of November 14, 2000, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, N.A., as Administrative Agent 10.26 First Amendment to Post-Petition Credit Agreement dated as of March 6, 2001, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, N.A., as Administrative Agent 10.27 Preferred Stock Purchase Agreement, dated as of September 10, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated September 10, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.28 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of November 21, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated November 21, 1997) 45 10.29 Purchase Agreement, dated December 15, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.30 Purchase Agreement Supplement, dated December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.31 Registration Rights Agreement, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.7 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.32 Registration Rights Agreement Supplement, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.8 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1)) 10.33 Registration Rights Agreement, dated as of November 12, 1996, by and among Pillowtex Corporation, each domestic subsidiary of Pillowtex Corporation, and NationsBanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by reference to Exhibit 10.59 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 10.34 Sublicense Agreement, dated as of July 1, 1998, between Pillowtex Corporation and the Ralph Lauren Home Collection (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.35 Lease Agreement, dated as of September 18, 1995, between Pillowtex Corporation and Sanwa Business Credit Corp. (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q, as amended, for the quarter ended September 30, 1995) 10.36 Industrial Lease, dated as of November 23, 1992, between Angel and Jean Echevarria and Pillowtex Corporation (incorporated by reference to Exhibit 10.21 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.37 Second Amendment to Lease entered into in September 1997 between Angel and Jean Echevarria and Pillowtex Corporation (incorporated by reference to Exhibit 10.17 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.38 Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.39 Agreement for Modification and Extension of Lease between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.19 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.40 Form of Equipment Leasing Agreement between BTM Financial & Leasing Corporation B-4 and Beacon Manufacturing Company, Manetta Home Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as of June 14, 1996 (incorporated by reference to Exhibit 10 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 10.41* Form of Confidentiality and Noncompetition Agreement (incorporated by reference to Exhibit 10.27 to Pillowtex Corporation's Registration Statement on Form-S-1 (No. 33-57314)) 46 10.42* Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.36 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.43* Pillowtex Corporation 1993 Stock Option Plan (incorporated by reference to Appendix A to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.44* Form of Employment Agreement entered into between Pillowtex Management Services Company and Scott E. Shimizu (incorporated by reference to Exhibit 10.28 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.45* Form of Employment Agreement entered into between Fieldcrest Cannon, Inc. and A. Allen Oakley, dated October 9, 1998 (incorporated by reference to Exhibit 10.34 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 2, 1999) 10.46* Form of Employment Agreement dated as of January 1, 1998, between Pillowtex Management Services Company and Kevin M. Finlay (incorporated by reference to Exhibit 10.29 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.47* Form of Employment Agreement entered into between Fieldcrest Cannon, Inc. and Richard A Grissinger (incorporated by reference to Exhibit 10.51 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 1, 2000) 10.48* Pillowtex Corporation Supplemental Executive Retirement Plan, effective as of January 1, 1997 (incorporated by reference to Exhibit 10.1.44 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 33-36663) filed on September 29, 1997) 10.49* Pillowtex Corporation Management Incentive Plan (incorporated by reference to Appendix B to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.50* Pillowtex Corporation Deferred Compensation Plan, effective as of February 9, 1998 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 10.51* Pillowtex Corporation Executive Medical Expense Reimbursement Plan, effective as of January 1, 1998 (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998) 10.52* Separation Agreement dated as of October 26, 2000 by and between Pillowtex Corporation and Charles M. Hansen, Jr. 10.53 Indenture, dated as of March 15, 1987, relating to the 6% Convertible Subordinated Debentures Due 2012 (incorporated by reference to Exhibit 4.9 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-12436)) 10.54 Yarn Purchase Agreement between Parkdale Mills, Incorporated and Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 21.1 List of Pillowtex Corporation's Principal Operating Subsidiaries 23.1 Consent of KPMG LLP 47 b) Reports On Form 8-K. ------------------- During the quarter ended December 30, 2000, Pillowtex filed the following Current Reports on Form 8-K: Current Report on Form 8-K, dated November 14, 2000 and filed November 16, 2000, reporting information under "Item 3. Bankruptcy or Receivership" regarding the filing of the Chapter 11 Cases. Current Report on Form 8-K, dated December 6, 2000 and filed on December 12, 2000, reporting information under "Item 5. Other Events" regarding the approval by the Bankruptcy Court of the DIP Financing Facility. _______________ * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2001. PILLOWTEX CORPORATION By /s/ Anthony T. Williams ------------------------------------- Anthony T. Williams President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2001. Signatures Title ---------- ----- /s/ Ralph W. LaRovere Chairman of the Board; Director - ------------------------ Ralph W. LaRovere /s/ Anthony T. Williams President and Chief Operating Officer; Director - ------------------------ (Principal Executive and Financial Officer) Anthony T. Williams /s/ Paul G. Gillease Director - ------------------------ Paul G. Gillease /s/ William B. Madden Director - ------------------------ William B. Madden /s/ M. Joseph McHugh Director - ------------------------ M. Joseph McHugh /s/ A. Allen Oakley Director - ------------------------ A. Allen Oakley /s/ Mark A. Petricoff Director - ------------------------ Mark A. Petricoff /s/ Scott E. Shimizu Director - ------------------------ Scott E. Shimizu /s/ Mary R. Silverthorne Director - ------------------------ Mary R. Silverthorne /s/ Stephen D. Chanslor Controller - ------------------------ (Principal Accounting Officer) Stephen D. Chanslor 49 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Independent Auditors' Report............................................... F-2 Consolidated Financial Statements: - --------------------------------- Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000.. F-3 Consolidated Statements of Operations for years ended December 30, 2000, January 1, 2000 and January 2, 1999................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for years ended December 30, 2000, January 1, 2000 and January 2, 1999...... F-5 Consolidated Statements of Cash Flows for years ended December 30, 2000, January 1, 2000 and January 2, 1999................... F-6 Notes to Consolidated Financial Statements............................... F-7 Financial Statement Schedule for years ended December 30, 2000, January 1, 2000 and January 2, 1999 Schedule II - Valuation and Qualifying Accounts......................... S-1 F-1 Independent Auditors' Report The Board of Directors and Shareholders Pillowtex Corporation: We have audited the consolidated financial statements of Pillowtex Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pillowtex Corporation and subsidiaries as of December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for the each of the years in the three-year period ended December 30, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming Pillowtex Corporation will continue as a going concern. As discussed in the Note 1 to the consolidated financial statements, on November 14, 2000, Pillowtex Corporation, and substantially all of its subsidiaries (collectively, the Companies) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Chapter 11). The Companies are currently operating their business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in Delaware (the Bankruptcy Court), and continuation of the Company as a going concern is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the requisite parties under the United States Bankruptcy Code and confirmation by the Bankruptcy Court, the ability to comply with the debtor-in-possession financing facility, and the ability to generate sufficient cash from operations and obtain financing arrangements to meet future obligations. In addition, the Companies have experienced operating losses and negative operating cash flows and are currently in default under all of their pre-petition debt agreements. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. (signed) KPMG LLP Dallas, Texas February 22, 2001, except as to the second paragraph of note 11 which is as of March 6, 2001 F-2 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Balance Sheets December 30, 2000 and January 1, 2000 (in thousands of dollars, except for par value)
ASSETS (note 11) 2000 1999 ------------------ -------------------- Current assets: Cash and cash equivalents $ 32,157 4,854 Receivables (note 17): Trade, less allowances of $43,249 in 2000 and $33,351 in 1999 212,727 268,499 Other 6,261 17,923 Inventories (note 6) 278,807 423,052 Assets held for sale (note 3) 5,281 1,595 Prepaid expenses 5,323 5,502 ------------------ -------------------- Total current assets 540,556 721,425 Property, plant and equipment, net (notes 3 and 7) 535,391 644,821 Intangible assets, at cost less accumulated amortization of $27,802 in 2000 and $26,355 in 1999 (note 2) 233,480 288,856 Other assets 29,444 28,287 ------------------ -------------------- Total assets $ 1,338,871 1,683,389 ================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities not subject to compromise: Current liabilities: Accounts payable (note 8) $ 34,909 119,848 Accrued expenses (note 8) 58,458 73,238 Deferred income taxes (note 13) - 37,848 Current portion of long-term debt (note 11) 33,229 85,759 Long-term debt in default (note 11) 660,790 - ------------------ -------------------- Total current liabilities 787,386 316,693 Long-term debt, net of current portion (note 11) - 965,323 Deferred income taxes (note 13) - 67,720 Noncurrent liabilities (note 10) 40,016 52,366 ------------------ -------------------- Total liabilities not subject to compromise 827,402 1,402,102 Liabilities subject to compromise (note 12) 492,093 - ------------------ -------------------- Total liabilities 1,319,495 1,402,102 Series A redeemable convertible preferred stock, $.01 par value; 81,411 and 65,475 shares issued and outstanding for 2000 and 1999 respectively (note 14) 82,827 73,898 Shareholders' equity (deficit) (notes 11 and 15): Preferred stock, $.01 par value; authorized 20,000,000 shares; only Series A issued - - Common stock, $.01 par value; authorized 55,000,000 shares; 14,252,069 and 14,261,886 shares issued and outstanding in 2000 and 1999, respectively 143 143 Additional paid-in capital 160,120 160,515 Retained earnings (accumulated deficit) (222,067) 49,269 Currency translation adjustment (1,647) (1,731) Deferred compensation - (807) ------------------ -------------------- Total shareholders' equity (deficit) (63,451) 207,389 ------------------ -------------------- Commitments and contingencies (notes 9, 10 and 16) Total liabilities and shareholders' equity (deficit) $ 1,338,871 1,683,389 ================== ====================
See accompanying notes to consolidated financial statements. F-3 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Operations Years ended December 30, 2000, January 1, 2000 and January 2, 1999 (in thousands of dollars, except for per share data)
2000 1999 1998 ----------- ----------- ----------- Net sales $ 1,349,627 $ 1,552,068 $ 1,509,841 Cost of goods sold (including inventory write-downs of $69,193 and $4,900 in 2000 and 1999 respectively) 1,349,259 1,371,790 1,246,449 ----------- ----------- ----------- Gross profit 368 180,278 263,392 Selling, general and administrative expenses 128,396 118,432 119,321 Impairment of long-lived assets (note 3) 112,711 2,000 - Restructuring charge (note 3) - - 1,539 ----------- ----------- ----------- Earnings (loss) from operations (240,739) 59,846 142,532 Interest expense (contractual interest of $111,061 in 2000) 107,061 87,279 72,288 ----------- ----------- ----------- Earnings (loss) before reorganization items and income taxes (347,800) (27,433) 70,244 Reorganization items (note 20) 19,368 - - ----------- ----------- ----------- Earnings (loss) before income taxes (367,168) (27,433) 70,244 Income tax expense (benefits) (note 13) (104,760) (7,901) 27,389 ----------- ----------- ----------- Net earnings (loss) (262,408) (19,532) 42,855 Preferred dividends and accretion (note 14) 8,928 12,294 2,097 ----------- ----------- ----------- Earnings (loss) available for common shareholders $ (271,336) $ (31,826) $ 40,758 =========== =========== =========== Earnings (loss) per common share (note 4): Basic $ (19.04) $ (2.25) $ 2.89 =========== =========== =========== Diluted $ (19.04) $ (2.25) $ 2.52 =========== =========== =========== Weighted average common shares outstanding (note 4) Basic 14,252 14,154 14,082 =========== =========== =========== Diluted 14,252 14,154 17,653 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Shareholders' Equity (Deficit) Years ended December 30, 2000, January 1, 2000 and January 2, 1999 (in thousands of dollars, except for per share data)
Common Stock Retained Total ------------------- Additional earnings Currency shareholders' Number Par paid-in (accumulated Deferred translation equity of shares value capital deficit) compensation adjustment (deficit) ------------ ------- ------------- ------------- -------------- ----------- --------------- Balance at January 3, 1998 13,967,715 $ 140 $ 151,095 $ 46,328 $ - $ (856) $ 196,707 Comprehensive income: Net earnings 42,855 - 42,855 Currency translation adjustments - (813) (813) ------------- Total comprehensive income 42,042 ------------- Exercise of stock options, including tax benefits of $1,637 (note 15) 154,458 1 4,545 - - - 4,546 Issuance of common stock - convertible debentures 4,422 - 171 - - - 171 Accretion of Series A Preferred Stock (note 14) - - - (216) - - (216) Preferred stock dividends (note 14) - - - (1,934) - - (1,934) Common stock dividends declared ($.24 per share) - - - (3,383) - - (3,383) ---------- ------- ------------ ------------ ------------ ---------- ------------- Balance at January 2, 1999 14,126,595 141 155,811 83,650 - (1,669) 237,933 Comprehensive loss: Net loss (19,532) (19,532) Currency translation adjustments - (62) (62) ------------- Total comprehensive loss - - - - - - (19,594) ------------- Exercise of stock options, Including tax benefits 3,375 - 49 - - - 49 of $6 (note 15) Issuance of restricted stock 46,398 - 1,190 - (807) - 383 Issuance of common stock - convertible debentures 85,518 2 3,465 - - - 3,467 Accretion of Series A Preferred Stock (note 14) - - - (216) - - (216) Preferred stock dividends (note 14) - - - (12,078) - - (12,078) Common stock dividends declared ($.18 per share) - - - (2,555) - - (2,555) ---------- ------- ------------ ------------ ------------ ---------- ------------- Balance at January 1, 2000 14,261,886 143 160,515 49,269 (807) (1,731) 207,389 Comprehensive loss: Net loss (262,408) (262,408) Currency translation adjustments 84 84 ------------- Total comprehensive loss - - - - - - (262,324) ------------- Restricted stock - amortization and forfeitures (15,469) - (586) - 807 - 221 Issuance of common stock - convertible debentures 5,652 - 191 - - - 191 Accretion of Series A Preferred Stock (note 14) - - - (216) - - (216) Preferred stock dividends (note 14) - - - (8,712) - - (8,712) ---------- ------- ------------ ------------ ------------ ---------- ------------- Balance at December 30, 2000 14,252,069 $ 143 $ 160,120 $ (222,067) $ - $ (1,647) $ (63,451) ========== ======= ============ ============ ============ ========== =============
See accompanying notes to consolidated financial statements. F-5 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Cash Flows Years ended December 30, 2000, January 1, 2000 and January 2, 1999 (in thousands of dollars)
2000 1999 1998 ------------- ------------ ------------ Cash flows from operating activities: Net earnings (loss) $ (262,408) $ (19,532) $ 42,855 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 65,965 60,074 54,021 Long-lived asset impairment 112,711 2,000 - Write-down of inventory 69,193 4,900 - Reorganization items 17,528 - - Deferred income taxes (104,760) (8,356) 22,058 Other, net 1,403 65 1,705 Changes in assets and liabilities excluding effects of businesses acquired: Trade receivables 51,111 (23,240) (16,914) Inventories 75,052 5,732 (56,372) Accounts payable and accrued expenses (11,638) (12,641) 12,438 Other assets and liabilities 20,808 532 (5,181) ---------- ---------- ---------- Net cash provided by operating activities 34,965 9,534 54,610 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 4,523 472 12,308 Purchases of property, plant and equipment (33,197) (89,737) (133,620) Proceeds from disposal of assets held for sale 402 5,679 25,935 Payments for businesses purchased - - (106,746) ---------- ---------- ---------- Net cash used in investing activities (28,272) (83,586) (202,123) ---------- ---------- ---------- Cash flows from financing activities: Decrease in checks not yet presented for payment (8,427) (18,592) (247) Borrowings on revolving credit loans 849,413 383,028 470,400 Repayments of revolving credit loans (736,078) (271,028) (402,600) Proceeds from the issuance of other long-term debt - - 100,000 Retirement of long-term debt (82,198) (16,095) (14,127) Payments of debt and equity issuance costs (2,100) - (1,849) Dividends paid - (4,011) (5,402) Proceeds from exercise of stock options - 43 2,295 ---------- ---------- ---------- Net cash provided by financing activities 20,610 73,345 148,470 ---------- ---------- ---------- Net change in cash and cash equivalents 27,303 (707) 957 Cash and cash equivalents at beginning of period 4,854 5,561 4,604 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 32,157 $ 4,854 $ 5,561 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-6 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (1) General Pillowtex Corporation ("Parent") together with its subsidiaries (collectively, with Parent, the "Company"), is a North American designer, manufacturer and marketer of home textile products, offering a full line of utility and fashion bedding and complementary bedroom textile products as well as a full line of bathroom and kitchen textile products. As a supplier across all distribution channels, the Company sells its products to mass merchants, department stores, specialty retailers, catalog merchants, institutions and international customers and on the internet. The Company is organized into three major divisions: Bed and Bath, Blanket and Pillow and Pad and Other. On November 14, 2000 (the "Petition Date"), Pillowtex Corporation and substantially all of its domestic subsidiaries (collectively, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The chapter 11 cases pending for the Debtors (the "Chapter 11 Cases") are being jointly administered for procedural purposes. In conjunction with the commencement of the Chapter 11 Cases, the Debtors sought and obtained several orders from the Bankruptcy Court which were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 Cases. The most significant of these orders (i) permit the Debtors to operate their consolidated cash management system during the Chapter 11 Cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 Cases, (ii) authorize payment of prepetition employee salaries, wages, and benefits and reimbursement of prepetition employee business expenses, (iii) authorize payment of prepetition sales, payroll, and use taxes owed by the Debtors, (iv) authorize payment of certain prepetition obligations to customers, and (v) authorize payment of certain prepetition obligations to critical vendors to aid the Debtors in maintaining operation of their business. On December 6, 2000, the Bankruptcy Court also entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150.0 million debtor-in-possession financing facility (the "DIP Financing Facility") with Bank of America, N.A. as agent for a syndicate of financial institutions comprised of certain of the Company's prepetition senior secured lenders, and to grant first priority priming liens and mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. See Note 11. The Debtors are currently operating their businesses as debtors-in- possession pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect prepetition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. In addition, as debtors-in- possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a prepetition basis prior to the Petition Date. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. The United States trustee for the District of Delaware has appointed an Official Committee of Unsecured Creditors in accordance with the provisions of the Bankruptcy Code. The Bankruptcy Code provides that the Debtors have exclusive periods during which only they may F-7 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) file and solicit acceptances of a plan of reorganization. The exclusive period of the Debtors to file a plan for reorganization expired on March 14, 2001; however, the Debtors have requested the Bankruptcy Court to extend such exclusive period until July 16, 2001. A hearing regarding the extension is scheduled for April 6, 2001. If the Debtors fail to file a plan of reorganization during the exclusive period or, after such plan has been filed, if the Debtors fail to obtain acceptance of such plan from the requisite impaired classes of creditors and equity holders during the exclusive solicitation period, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders, or an indenture trustee, may file their own plan of reorganization for the Debtors. After a plan of reorganization has been filed with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors and equity holders. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (i) with respect to each impaired class of creditors and equity holders, each holder in such class has accepted the plan or will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation, (ii) each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence), and (iii) confirmation of the plan is not likely to be followed by a liquidation or a need for further financial reorganization of the Debtors or any successors to the Debtors unless the plan proposes such liquidation or reorganization. If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the "cram down" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan notwithstanding the non- acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made. As a result of the amount of prepetition indebtedness and the availability of the "cram down" provisions, the holders of the Company's capital stock may receive no value for their interests under the plan of reorganization. Since the Petition Date, the Debtors have conducted business in the ordinary course. Management is in the process of stabilizing the business of the Debtors and evaluating their operations as part of the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by impaired creditors and equity holders and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, the Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in the financial statements. The Debtors are in the process of reviewing their operations and identifying assets for disposition. The administrative and reorganization expenses resulting from the Chapter 11 Cases will unfavorably affect the Debtors' results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 Cases. The accompanying consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7) assuming that the Company will continue as a going concern. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to comply with the DIP Financing Facility, its ability to return to profitability, generate sufficient cash flows from operations and obtain financing sources to meet future obligations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. F-8 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Additionally, the amounts reported on the consolidated balance sheet could materially change because of changes in business strategies and the effects of any proposed plan of reorganization. In the Chapter 11 Cases, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 Cases, have been segregated and classified as liabilities subject to compromise in the accompanying consolidated balance sheet. Generally, all actions to enforce or otherwise effect repayment of pre-Chapter 11 liabilities as well as all pending litigation against the Debtors are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for such liabilities are subject to an approval plan of reorganization and accordingly are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Cases are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 Cases or that it is probable that it will be an allowed claim. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the financial statements of Parent and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Fiscal Year The Company's fiscal year ends on the Saturday closest to December 31. Fiscal year 1998 ended January 2, 1999, fiscal year 1999 ended January 1, 2000 and fiscal year 2000 ended December 30, 2000. Each year includes the results of operations for 52 weeks. (c) Statements of Cash Flows For purposes of reporting cash flows, the Company considers all short- term investments with original maturities of three months or less to be cash equivalents. Supplemental disclosures of cash flow information for years 2000, 1999 and 1998 follow: 2000 1999 1998 --------- --------- --------- Interest paid $ 87,535 87,906 73,223 ========= ========= ========= Income taxes paid (refunded) $ (2,706) 769 (5,042) ========= ========= ========= (d) Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) and last-in, first-out (LIFO) methods (see note 6). (e) Derivative Financial Instruments and Hedging Activities During June 1998, Statement of Financial Accounts Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The provisions of SFAS No. 133, as amended by SFAS Nos. 137 and 138, are effective for fiscal years beginning after June 15, 2000. The Company adopted the provisions of the Standards on December 31, 2000. The Company's management has reviewed the terms of material contracts and financial instruments and determined that the adoption of SFAS No. 133, as amended, did not have a material impact on its financial position or results of operations. The Company enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the consolidated financial statements. F-9 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (f) Property, Plant and Equipment Depreciation is provided generally using the straight-line method in amounts sufficient to amortize the cost of the assets over their estimated useful lives as follows: Buildings and improvements 10-39 years Machinery and equipment 5-15 years Data processing equipment and software 5-10 years Furniture and fixtures 5-8 years Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease using the straight-line method. Renewals and betterments are capitalized and depreciated over the remaining life of the specific property unit. (g) Intangibles Intangible assets consist primarily of goodwill ($199.1 million and $244.4 million, net of accumulated amortization of $16.8 million and $17.5 million as of December 30, 2000 and January 1, 2000, respectively) recorded in connection with the Company's acquisitions (see note 5). Goodwill represents the excess of purchase price over the fair value of net assets acquired. Amortization is provided using the straight-line method principally over an estimated useful life of 40 years. Other intangible assets consist principally of trademarks and deferred debt issuance costs. Trademarks are amortized using the straight-line method over their useful lives, which range from 5 to 40 years. Debt issuance costs are amortized using the effective interest method over the terms of the related debt (see note 20). The Company assesses the recoverability of goodwill by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. The discount rate used will be based on the Company's cost of capital. Other than the impairment described in note 3, the Company believes no impairment of goodwill has occurred and that no reduction of the estimated useful lives is warranted. (h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value. The fair value of other financial instruments are included in note 11. (j) Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or F-10 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Stock Option Plan In accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company applies the accounting provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provides pro forma net income and earnings per share disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied. Compensation expense is recorded only if the current market price of the underlying stock exceeds the exercise price on the date of grant. (l) Revenue Recognition Revenue is recognized upon shipment of products. Reserves for sales returns and allowances are recorded in the same accounting period as the related revenues. (m) Advertising Expense The Company expenses advertising costs as incurred. Advertising expense was approximately $24.9 million, $24.9 million and $19.9 million during 2000, 1999 and 1998, respectively. (n) Earnings Per Share Basic earnings per share is computed by dividing earnings available for common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing (i) earnings available for common shareholders as adjusted to add back (if dilutive) convertible preferred dividends and accretion and the after-tax interest recognized in the period associated with convertible debt by (ii) the weighted average number of shares outstanding plus the number of dilutive additional shares that would have been outstanding if potentially dilutive securities had been issued. (o) Foreign Currency Translation and Transactions The Company's foreign subsidiaries use the local currency as the functional currency and translate their assets and liabilities into U.S. dollars using current exchange rates. Revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders' equity (deficit). Foreign currency transaction gains and losses are included in the consolidated statements of operations and were not material in any of the years presented. (p) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See notes 1, 3, 12 and 16 for significant estimates, assumptions and unresolved uncertainties as a result of the Chapter 11 Cases. F-11 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (q) Comprehensive Income Comprehensive income consists of net earnings (loss) and foreign currency translation adjustments and is presented in the consolidated statements of shareholders' equity (deficit). (r) Reclassifications Approximately $12.8 million and $9.4 million of information technology expenses associated with the Company's manufacturing systems have been reclassified in 1999 and 1998 from selling, general and administrative expenses to cost of goods sold to conform with the presentation used in 2000. 3) Impairment of Long-lived Assets and Restructuring Charge Impairment of Long-Lived Assets - During the fourth quarter of 2000, the Company decided to permanently idle and sell certain manufacturing facilities and equipment and as a result determined that the carrying value of such assets was impaired. The Company also determined that given the expected future operations of the Blanket Division, the carrying value of its long- lived assets and goodwill was also impaired. The Company recorded an asset impairment charge of $112.7 million to reduce the carrying value of these assets to their fair values. This impairment charge consisted of $38.3 million for goodwill associated with the Company's Blanket Division and $74.4 million for the impairment of property, plant and equipment. The impairment of long-lived assets consists of the following: Fixed Assets: Blanket Division impairment $ 50,000 Facilities and equipment permanently idled as a result of management's rationalization of production capacity: Facilities 4,600 Equipment 18,100 Miscellaneous corporate assets 1,700 -------- Total fixed assets 74,400 Goodwill 38,311 -------- Total $112,711 ======== During the fourth quarter of 2000 the Blanket Division experienced reduced customer order levels and increased pressures from competitors attempting to gain market share. As a result of these factors and the current financial condition of the Company, management decided that it should review its strategic options with respect to this business, including the possible sale of this business. The impairment reflects management's estimate of the fair value of the assets as determined by the present value of expected future cash flows to be generated by the assets, including their ultimate disposition. The impairment of the other manufacturing facilities and equipment resulted from management's rationalization of production capacity in connection with filing of the Chapter 11 Cases. The impairment reflects management's estimate of the fair value of the assets as determined by the present value of expected future cash flows to be generated by the assets, including their ultimate disposition. As the reorganization process continues, it is possible that additional asset impairments may be required and that these impairments may be material to the Company's financial position and results of operations. Certain of the permanently idled facilities and equipment were included in the assets held for sale in F-12 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) the accompanying balance sheet as of December 30, 2000, at a carrying value of $5.3 million. Management expects to sell these assets during the second and third quarters of 2001. Management expects to incur certain exit costs to close certain of the idled facilities in 2001. These costs include severance, equipment relocation costs and facility closure costs. The costs are estimated to total approximately $5.0 million and will be incurred and recognized in the second and third quarters of 2001. During 1999, a $2.0 million impairment charge was recorded to reduce the carrying value of the Opelika facility, which was closed in the first quarter of 1999, to its estimated fair value. Restructuring Charge - During the fourth quarter of 1997, the Company committed to a plan to consolidate its blanket production into its facilities in Swannanoa, North Carolina and Westminster, South Carolina. The aggregate cost of this restructuring was estimated to be approximately $7.5 million, of which approximately $6.0 million (associated with the impairment of certain assets and other expenses) was recognized in 1997, and the remaining $1.5 million (associated with employee severance) was expensed in the first quarter of 1998. Expenditures related to the restructuring were substantially complete as of the end of 1998. (4) Earnings Per Share The following table reconciles the numerators and denominators of basic and diluted earnings per share for 2000, 1999 and 1998. In 2000 and 1999, losses rendered all potentially dilutive securities anti-dilutive, therefore basic and diluted per share losses for those years are the same. In 1998, options for 500,000 shares were not included in the computation of diluted earnings per share because including them would have been anti-dilutive.
2000 1999 1998 --------------------- --------------------- -------------------- Loss Shares Loss Shares Earnings Shares --------------------- --------------------- -------------------- Basic - earnings (loss) available for common shareholders $ (271,336) 14,252 $ (31,826) 14,154 $ 40,758 14,082 Effect of dilutive securities: Stock options - - - - - 207 Convertible debentures - - - - 1,577 656 Convertible preferred stock - - - - 2,097 2,708 --------------------- --------------------- -------------------- Diluted - earnings (loss) available for common shareholders plus assumed conversions $ (271,336) 14,252 $ (31,826) 14,154 $ 44,432 17,653 ===================== ===================== ====================
(5) Acquisitions On July 28, 1998, the Company acquired the net assets of The Leshner Corporation ("Leshner"), a 91 year-old manufacturer of towels and terry- related products, for a purchase price of $41.8 million in cash (including acquisition costs). In connection with the acquisition, the Company retired $32.5 million of outstanding Leshner debt. The acquisition and related debt retirement were financed through the term loan under the senior credit facilities (see note 11). The purchase price exceeded the fair value of net assets acquired by approximately $27.8 million, which is being amortized on a straight-line basis over 40 years. The acquisition has been accounted for under the purchase method of accounting, and, accordingly, results of operations of Leshner have been included in the consolidated statements of operations since the acquisition date. F-13 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (6) Inventories Inventories consist of the following at December 30, 2000 and January 1, 2000: 2000 1999 ----------- ----------- Finished goods $ 130,841 218,381 Work-in-process 93,967 136,924 Raw materials 41,706 44,424 Supplies 12,293 23,323 ----------- ----------- $ 278,807 423,052 =========== =========== At December 30, 2000 and January 1, 2000 and, 71% and 57%, respectively, of inventories were valued at LIFO which approximates current replacement cost. The remaining inventories are valued at FIFO. Inventories are net of related reserves of approximately $74.7 million and $17.2 million at December 30, 2000 and January 1, 2000, respectively. During the fourth quarter of 2000 the Company recorded a $69.2 million write-down of excess, obsolete and distressed inventory. This charge was reflected in cost of goods sold and resulted from (i) a slow down in the retail environment, (ii) the impact of the filing of the Chapter 11 Cases on November 14, 2000 and (iii) the decision to review the Company's strategic alternatives with respect to the Blanket Division. The Chapter 11 Cases have increased the pressure on the Company to liquidate its excess, obsolete and distressed inventory in a shorter timeframe than in the past. As a result, the Company estimates it will receive lower prices when selling such inventory and have less flexibility to pursue alternative uses for such inventory. During 1999, the Company recorded a $4.9 million write-down to reduce certain inventory at the Blanket Division to its net realizable value. (7) Property, Plant and Equipment Property, plant and equipment are stated at cost and consist of the following at December 30, 2000 and January 1, 2000: 2000 1999 --------- --------- Land $ 27,671 29,912 Buildings and improvements 167,143 196,048 Machinery and equipment 376,254 405,495 Data processing equipment and software 100,782 95,866 Furniture and fixtures 5,991 6,673 Leasehold improvements 2,567 4,090 Projects in progress 8,562 57,120 --------- --------- 688,970 795,204 Less accumulated depreciation and amortization (153,579) (150,383) --------- --------- $ 535,391 644,821 ========= ========= The significant components of the decrease in property, plant and equipment at December 30, 2000 are impairments and reclassifications to assets held for sale of $79.6 million, disposals of $4.8 million, and depreciation of $58.2 million, all of which are partially offset by capital expenditures of $33.2 million. Interest costs of $0.9 million, $5.6 million and $4.7 million, incurred during 2000, 1999 and 1998, respectively, for the purchase and construction of qualifying fixed assets, were capitalized and are being amortized over the related assets' estimated useful lives. F-14 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (8) Accounts Payable and Accrued Expenses Accounts payable includes $12.1 million and $20.5 million at December 30, 2000 and January 1, 2000, respectively, of checks not yet presented for payment on zero balance disbursement accounts. Accrued expenses consist of the following at December 30, 2000 and January 1, 2000: 2000 1999 ------------ ------------ Employee-related compensation and benefits $ 10,658 18,313 Insurance and worker's compensation 12,428 15,812 Customer rebates 8,692 14,162 Interest and commitment fees 3,731 6,972 Advertising 7,699 795 Royalties and commissions 306 4,115 Other accrued expenses 14,944 13,069 ------------ ------------ $ 58,458 73,238 ============ ============ At December 30, 2000, certain accrued expenses have been classified as liabilities subject to compromise (see note 12). (9) Pension Plans The Company has defined benefit pension plans covering substantially all of its employees except certain union employees who are not covered under these plans. The plans provide pension benefits based on the employees' compensation and years of service. The Company's funding policy provides for annual contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. Pension plan assets consist of investments in publicly traded corporate common stocks and bonds, as well as U.S. government obligations. Summarized information for the plans follows: F-15 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data)
2000 1999 -------------- ------------- Change in benefit obligation: Benefit obligation at beginning of year $ 296,889 337,939 Service cost 6,667 7,615 Plan amendments - 773 Interest cost 22,740 21,892 Actuarial (gain) loss 4,973 (48,420) Benefits paid $ (20,770) (22,910) -------------- ------------- Benefit obligation at end of year $ 310,499 296,889 ============== ============= Change in plan assets: Fair value of plan assets at beginning of year $ 370,840 336,642 Actual return on plan assets 15,283 57,108 Benefits paid (20,770) (22,910) -------------- ------------- Fair value of plan assets at end of year $ 365,353 370,840 ============== ============= Funded status: Benefit obligation $ (310,499) (296,889) Fair value of plan assets 365,353 370,840 Unrecognized transition asset (26) (35) Unrecognized prior service cost 805 909 Unrecognized net actuarial gain (37,285) (64,044) -------------- ------------- Prepaid benefit cost $ 18,348 10,781 ============== =============
2000 1999 1998 ----------- --------- ----------- Weighted average assumptions as of December 30, 2000, January 1, 2000 and January 2, 1999: Discount rate 7.75% 8.00% 6.75% Expected return 9.00-9.50% 9.00-10.50% 9.00-9.50% Compensation increase rate 3.50% 4.00% 4.00% Components of net periodic pension cost: Service cost $ 6,667 7,615 7,730 Interest cost 22,740 21,892 21,070 Expected return on plan assets (34,272) (34,379) (28,503) Recognized net actuarial (gain) (2,798) (2) - Amortization of transition asset (8) (8) (8) Amortization of prior service cost 104 35 35 ---------- --------- --------- Net periodic pension cost $ (7,567) (4,847) 324 ========== ========= =========
The Company also sponsors employee savings plans that cover substantially all employees. The Company's matching provisions under these plans vary, with some matches being discretionary. The matching formulas of certain plans can be changed annually. In 2000, 1999 and 1998, the Company incurred costs of $3.0 million, $3.2 million and $3.5 million respectively, to provide matching contributions for those plans with matching provisions. F-16 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (10) Postretirement Benefits Other Than Pensions The Company provides medical insurance premium assistance and life insurance benefits to retired employees of Fieldcrest Cannon. The medical and life insurance benefits provided under the plan are fixed amounts determined at the time of retirement and, thus, are unaffected by medical trend rates. Employees become eligible for these benefits when they reach retirement age while working for the Company. The plans are funded as benefits are paid.
2000 1999 ------------------------ -------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 34,418 38,090 Service cost 497 582 Interest cost 2,311 2,430 Actuarial gain (3,361) (3,947) Benefits paid (2,218) (2,737) ----------------------- -------------------- Benefit obligation at end of year $ 31,647 34,418 ======================= ==================== Change in plan assets: Fair value of plan assets at beginning of year $ - - Employer contributions 2,218 2,737 Benefits paid (2,218) (2,737) ----------------------- -------------------- Fair value of plan assets at end of year $ - - ======================= ==================== Funded status: Benefit obligation $ (31,647) (34,418) Unrecognized net actuarial gain (7,294) (4,275) ----------------------- -------------------- Accrued postretirement benefit cost included in accrued expenses and noncurrent liabilities $ (38,941) (38,693) ======================= ====================
2000 1999 1998 ---------------------------------------------------- Weighted average assumptions as of December 30, 2000, January 1, 2000 and, January 2, 1999: Discount rate 7.75% 8.00% 6.75% Compensation increase rate 3.50% 4.00% 4.00% Components of net periodic postretirement cost: Service cost $ 497 582 709 Interest cost 2,311 2,430 2,465 Amortization of actuarial gain (342) (28) (181) --------------------------------------------------- Net periodic postretirement benefit cost $ 2,466 2,984 2,993 ===================================================
F-17 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (11) Long-term Debt and Liquidity Long-term debt consists of the following at December 30, 2000 and January 1, 2000:
2000 1999 ----------------- ----------------- Revolver $ 373,398 259,800 Overline Credit Facility 35,000 35,000 Term loans 268,090 341,500 DIP Financing Facility - - Industrial revenue bonds with interest rates from 3.60% to 7.85% and maturities through July 1, 2021; generally collateralized by land and buildings 14,925 16,814 9% Senior Subordinated Notes due 2007 185,000 185,000 10% Senior Subordinated Notes due 2006 125,000 125,000 6% Convertible Subordinated Sinking Fund Debentures due in 2012 (effective rate of 8.72%, $14.3 million in unamortized discount at January 1, 2000) 90,417 82,205 Other debt 2,606 5,763 ----------------- ----------------- Total debt 1,094,436 1,051,082 Less: Current portion (33,229) (85,759) Long-term debt in default (660,790) - Liabilities subject to compromise (see note 12) (400,417) - ----------------- ----------------- Total long-term debt $ - 965,323 ================= =================
DIP Financing Facility On December 6, 2000, the Bankruptcy Court entered the DIP Financing Order authorizing the Debtors to enter into the $150.0 million DIP Financing Facility and to grant first priority primary liens, mortgages, security interests, liens (including priming liens), and superiority claims on substantially all of the assets of the Debtors to secure the DIP Financing Facility. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the amount of the facility to $125.0 million. Under the terms of the DIP Financing Facility, as amended, a $125.0 million revolving credit facility, including up to $60.0 million for postpetition letters of credit, is available to the Company until the earliest of (a) November 14, 2001, (b) the date on which the plan of reorganization becomes effective, (c) any material non-compliance with any of the terms of the DIP Financing Order, (d) any event of default that shall have occurred under the DIP Financing Facility, or (e) consummation of a sale of substantially all of the assets of the Company pursuant to an order of the Bankruptcy Court shall have occurred. Upon the satisfaction of certain conditions, the November 14, 2001 maturity date could be extended for an additional period of six months upon payment of an extension fee equal to 0.50% of the portion of the DIP Financing Facility being extended. Amounts borrowed under the DIP Financing Facility bear interest at the option of the Company at the rate of London Interbank Offered Rate ("LIBOR") plus 3.50% or Bank of America's Base Rate (which is the higher of Federal Funds Rate or Prime Rate plus, in either case, 0.05%) plus 1.00%. In addition to a facility fee and an underwriting fee of 0.50% each, there is an unused commitment fee of 0.50%, a letter of credit fee of 3.50%, and a letter of credit fronting fee of 0.20%. The DIP Financing Facility is secured by a first priority priming lien on the real and personal assets of the Company F-18 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) that also secure the prepetition senior secured credit facilities described below and a junior lien on certain plant and equipment that secure six industrial revenue bond facilities described below (the "IRB Facilities") aggregating approximately $14.9 million as of December 30, 2000, and certain obligations to the Pension Benefit Guaranty Corporation. The documentation evidencing the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum operating cash flow, as well as other covenants that limit, among other things, indebtedness, liens, sales of assets, capital expenditures, investments, and prohibit dividend payments. The net proceeds of certain asset sales outside the ordinary course of business reduce prepetition indebtedness under the senior secured credit facilities; otherwise, the net proceeds of asset sales outside the ordinary course of business are applied as a permanent reduction of the DIP Financing Facility. As of December 30, 2000, the Company had $17.9 million in letters of credit outstanding under the DIP Financing Facility. Availability under the DIP Financing Facility as of December 30, 2000, was $107.1 million. As prepetition letters of credit expire under the Company's senior secured revolving credit facility described below, to the extent they are renewed, they will be reissued under the DIP Financing Facility. Senior Debt Facilities In December 1997, in connection with the Fieldcrest Cannon acquisition, the Company entered into senior secured revolving credit and term loan facilities with a group of financial and institutional investors for which Bank of America, N.A. acts as the administrative and collateral agent. These facilities consisted of a $350.0 million revolving credit facility and a $250.0 million term loan facility. The term loan facility consisted of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term Loan. Effective July 28, 1998, the Company amended these facilities by increasing the Tranche B Term Loan to $225.0 million. The increase occurred in conjunction with the acquisition of Leshner, allowing the Company to fund the transaction and reduce borrowings under the revolving credit facility. Effective March 12, 1999, the revolving credit facility was amended to permit the Company to use for working capital one-half of a $61.0 million portion of the facility held as contingency reserve for cash payments required upon conversion of the 6% Convertible Debentures, thereby increasing availability under that facility. Effective October 1, 1999, the revolving credit facility was further amended to permit the Company to use the other half of the contingency reserve for working capital, thereby increasing availability under that facility. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under its senior debt facilities. The Company obtained a series of temporary waivers of this non-compliance. Effective as of December 7, 1999, the Company agreed to certain amendments to the senior debt facilities, principally related to cash management, additional collateral, adjustments to restrictive covenants, and borrowings under, and uses of proceeds from, the revolving credit facility. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance with financial covenants and the senior debt facilities were further amended to shorten their terms to maturity and accelerate the related amortization schedule for repayment of principal, to eliminate reinstatement of the contingency reserve requirement referred to above, to increase the applicable interest rate margins (subject to reduction if the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") exceeded a specified level for the 2000 fiscal year), to add a covenant requiring that EBITDA must exceed specified levels for future fiscal periods and eliminate all other financial covenants, to modify certain restrictive covenants, to limit borrowings under the revolving credit facility based on a formula tied to 45% of eligible inventory plus 80% of eligible accounts receivable, and to provide for a series of reductions in the commitment under the revolving credit facility. On September 30, 2000, and prior to the Petition Date, the Company was not in compliance with its EBITDA financial covenant under the senior debt facilities. The Company obtained from its senior lenders a temporary waiver of such non-compliance through November 7, 2000, during which time the Company engaged in active discussions with its senior lenders to obtain an extended or permanent waiver of such non-compliance. The Company was unable to reach such an agreement with its senior lenders and the waiver expired on November 7, 2000. On November 8, 2000, the agent for the senior lenders delivered a notice of default to the Company that declared an event of default under the senior debt facilities based upon such non-compliance with its EBITDA financial covenant. The senior lenders did, however, forbear from F-19 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) exercising rights and remedies under the senior debt facilities and agreed to continue to make available to the Company the unused credit capacity under the revolving credit facility until December 7, 2000. In addition, on November 8, 2000, the senior lenders issued a Payment Blockage Notice to the Company and the indenture trustee for the Company's 10% Senior Subordinated Notes due 2006 (the "10% Notes") prohibiting payment by the Company of the semi-annual interest payment in the aggregate amount of approximately $6.25 million due to the holders of the 10% Notes on November 15, 2000. In addition, the Company was obligated to make a semi-annual interest payment on its 9% Senior Subordinated Notes due 2007 (the "9% Notes") on December 15, 2000 aggregating $8.3 million, which payment the senior lenders likewise indicated they would also block. As a result of the circumstances confronting the Company and its inability to refinance the senior debt facilities or obtain additional capital, the Debtors filed the Chapter 11 Cases on November 14, 2000. As of December 30, 2000, the Company had $14.6 million in letters of credit outstanding under the prepetition revolving credit facility. As these prepetition letters of credit expire, to the extent they are renewed, they will be reissued under the DIP Financing Facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan currently bear interest at a rate based upon LIBOR plus 3.50%. The Tranche B Term Loan bears interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.50%. The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities for 2000 was 10.1%. The senior debt facilities expire on January 31, 2002. The senior debt facilities are guaranteed by each of the domestic subsidiaries of the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. Overline Facility In May 1999, the Company entered into a $20.0 million senior unsecured revolving credit facility (overline facility) in order to obtain additional working capital availability. On July 27, 1999, the overline facility was amended to increase the amount of funds available to $35.0 million. At the end of the third and fourth quarters of its 1999 fiscal year, the Company was not in compliance with certain financial covenants under the overline facility, the covenants of which are incorporated by reference to the senior debt facilities described above. The Company obtained a series of temporary waivers of this non-compliance and extensions of the maturity date. Effective as of December 7, 1999, the Company agreed to certain amendments to the overline facility, resulting in the overline facility being secured by the assets securing the senior debt facilities described above. Effective as of March 31, 2000, the Company obtained a permanent waiver of its prior non-compliance and the overline facility was amended to lengthen its term to maturity, to impose an amortization schedule for the repayment of principal, and to increase the applicable interest rate margins (subject to reduction if EBITDA exceeded a specified level for the 2000 fiscal year). The overline facility is guaranteed on a senior basis by the Company's domestic subsidiaries. Amounts borrowed under the overline facility bear interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3.0%, at the Company's option. The overline facility matures upon termination by the Company at any time or otherwise at the earliest of: (i) any increase in the commitment under the senior debt facilities described above, the issuance of any capital stock by the Company or its domestic subsidiaries, or other specified events; or (ii) January 31, 2002. For the reasons discussed above with respect to the default under the senior debt facilities, the Company is also in default under the overline facility. F-20 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) Senior Subordinated Debt In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million of the 9% Notes, with interest payable semiannually commencing June 15, 1998. The 9% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 10% Notes described below. On November 12, 1996, the Company issued $125.0 million of the 10% Notes, with interest payable semiannually commencing May 15, 1997. The 10% Notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior indebtedness, and rank pari passu with the 9% Notes. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the senior debt facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. As a result of the filing of the Chapter 11 Cases, the Company is in default under the indentures governing both the 9% Notes and the 10% Notes. See Note 12. Fieldcrest Cannon 6% Convertible Debentures As a result of the Company's acquisition of Fieldcrest Cannon, the outstanding 6% Convertible Debentures are convertible, at the option of the holders, into a combination of cash and the Common Stock. During the fourth quarter of 1999, the Company notified the holders of the 6% Convertible Debentures that it was not practicable or prudent for payments to be made in respect of the conversion of the 6% Convertible Debentures and advised holders that had given notice of conversion and surrendered their 6% Convertible Debentures that they could rescind their notice of conversion, return to the Company any Common Stock that had been issued to them, and have their 6% Convertible Debentures reinstated. Although many holders did rescind and return their Common Stock, other holders could not rescind because they had already sold their Common Stock. As of September 30, 2000, the cash component remaining to be paid in respect of the 6% Convertible Debentures that had been surrendered without subsequent rescission was approximately $5.2 million. Including the cash component just mentioned, as of September 30, 2000, approximately $90.4 million aggregate principal amount of the 6% Convertible Debentures remained outstanding, including 6% Convertible Debentures that had been surrendered without subsequent rescission. If all such outstanding 6% Convertible Debentures were converted at such date, including those surrendered without subsequent rescission, the resulting cash component to be paid to the holders of the 6% Convertible Debentures would have been approximately $57.2 million. Prior to the Petition Date, the Company was prohibited under the terms of the indentures governing the 9% Notes and the 10% Notes from making payments in respect of the 6% Convertible Debentures except for interest payments and payments at maturity or pursuant to sinking fund obligations. In an effort to address both (i) the unpaid cash portion of the conversion consideration owing to those holders of 6% Convertible Debentures who had surrendered their debentures for conversion but had not been paid the cash portion of the conversion consideration (the "Cash Claimants") and (ii) the cash payment prohibition in respect of any future conversions, the Company initiated discussions with certain holders of the 6% Convertible Debentures regarding a potential restructuring of the 6% Convertible Debentures. Notwithstanding months of effort, the parties to those discussions were unable to agree upon a mutually satisfactory comprehensive restructuring of the 6% Convertible Debentures and amounts owing to the Cash Claimants. In September 2000, the Company notified the holders of the 6% Convertible Debentures of its plan for making payments to the Cash Claimants. Pursuant to the plan, the Company agreed to pay out as a "scheduled payment" cash in the amount of approximately $3.8 million annually to the Cash Claimants, which is the amount of cash sufficient to complete the conversion of $6.25 million principal amount of the 6% Convertible Debentures annually and utilize such converted 6% Convertible Debentures as a credit to satisfy its annual sinking fund obligation under the indenture governing the 6% Convertible Debentures. As part of the plan and in accordance with the terms of the indenture governing the 6% Convertible F-21 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) Debentures, the Company agreed to pay out cash to the Cash Claimants in order to complete and finalize Debenture conversions and utilize such converted Debentures as credits to satisfy its annual sinking fund obligations as follows: (i) approximately $3.8 million on September 28, 2000, (ii) approximately $3.8 million on March 16, 2001, and (iii) the balance owing to Cash Claimants on March 18, 2002. Under the plan, these cash payments would be made by the Company to the Cash Claimants in the order the 6% Convertible Debentures were presented for conversion, i.e., on a first to convert, first to be paid basis. The unpaid cash portion for each Cash Claimant would be evidenced by a non-interest bearing subordinated promissory note executed by Fieldcrest Cannon (the "Cash Claimant Notes"). Pursuant to the plan, the Company made the first scheduled payment on September 28, 2000. As of December 30, 2000, the aggregate principal amount of the outstanding Cash Claimant Notes was $5.2 million. As a result of the filing of the Chapter 11 Cases, Fieldcrest Cannon is in default under the indenture governing the 6% Debentures and the Cash Claimant Notes. See note 12. Industrial Revenue Bonds The Company has obligations in respect of six industrial revenue bond facilities. The IRB Facilities are secured by liens on specified plants and equipment. As of December 30, 2000, $14.9 million of bonds in the aggregate were outstanding under the IRB Facilities. As a result of the default on the senior debt facilities and the filing of the Chapter 11 Cases, the Company is in default of its obligations under each of the IRB Facilities. Adequacy of Capital Resources As discussed above, the Debtors are operating their businesses as debtors-in-possession under chapter 11 of the Bankruptcy Code. In addition to the cash requirements necessary to fund ongoing operations, the Company anticipates that it will incur significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. As a result of the uncertainty surrounding Pillowtex's current circumstances, it is difficult to predict the Company's actual liquidity needs at this time. However, based on current and anticipated levels of operations, and efforts to reduce inventories and accounts receivable, the Company anticipates that its cash flow from operations, together with amounts available under the DIP Financing Facility, will be adequate to meet its anticipated cash requirements during the pendency of the Chapter 11 Cases. In the event that cash flows and available borrowings under the DIP Financing Facility are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenditures or seek additional financing. The Company can provide no assurances that reductions in planned capital expenditures would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to additional financing is, and for the foreseeable future will likely continue to be, very limited. The Company's long-term liquidity requirements and the adequacy of the Company's capital resources are difficult to predict at this time, and ultimately cannot be determined until a plan of reorganization has been developed and confirmed by the Bankruptcy Court in connection with the Chapter 11 Cases. Fair Value The carrying and fair values of the Company's financial instruments, estimated by discounting the future cash flows using rates currently available or obtaining market prices as of December 30, 2000 and January 1, 2000, are shown below. F-22 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data)
2000 1999 ------------------------------------- -------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------- ----------------- ------------------ --------------- Revolver $ 373,398 233,374 259,800 259,800 Overline Credit Facility 35,000 21,875 35,000 35,000 Term loans 268,090 167,556 341,500 341,500 Industrial revenue bonds and other debt 17,531 10,957 22,577 20,064 9% Senior Subordinated Notes due 2007 185,000 9,250 185,000 64,750 10% Senior Subordinated Notes due 2006 125,000 6,625 125,000 45,000 6% convertible subordinated sinking fund debentures due 2012 90,417 3,617 82,205 28,785 ---------------- ----------------- ------------------ ---------------- Total $ 1,094,436 453,254 1,051,082 794,899 ================ ================= ================== ===============
As of January 1, 2000, the Company had approximately $345.0 million of notional amounts covered under interest rate swap agreements whereby the Company exchanged floating rates for fixed rates. The weighted average fixed and floating rates were 4.70% and 5.96%, respectively. As of December 30, 2000, the Company had no swap agreements in place. The fair value of the swap agreements at January 1, 2000 was $4.0 million. Scheduled Maturities Aggregate maturities of long-term debt for each of the five years following December 30, 2000 and thereafter, assuming the unpaid principal balance at December 30, 2000 under the revolving credit facilities remains unchanged and based on the contractual terms of the instruments prior to the filing of the Chapter 11 Cases, are as follows: Year Amount ---------- 2001 $ 37,043 2002 655,255 2003 6,710 2004 6,710 2005 6,250 Thereafter 382,468 (12) Liabilities Subject to Compromise The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Cases are identified below. The amounts set forth below may vary significantly from the stated amounts of proofs of claim that may be filed with the Bankruptcy Court and may be subject to future adjustments depending on Bankruptcy Court action, further developments with respect to potential disputed claims, determination as to the value of any collateral securing claims, or other events. In addition, other claims may arise from the rejection of additional leases and executory contracts by the Debtors. F-23 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) 9% Senior Subordinated Notes due 2007 185,000 10% Senior Subordinated Notes due 2006 125,000 6% Convertible Subordinated Sinking Fund Debentures due 2012 90,417 ----------------- Total long-term debt 400,417 ----------------- Interest accrued on above notes and debentures 14,448 Accounts payable 55,322 Nonqualified pension plan liability 11,673 Other accrued expenses 10,233 ----------------- $ 492,093 =================
As a result of the filing of the Chapter 11 Cases, no principal or interest payments will be made on unsecured prepetition debt without Bankruptcy Court approval or until a plan of reorganization providing for the repayment terms has been confirmed by the Bankruptcy Court and becomes effective. Therefore, interest of $4.0 million on prepetition unsecured obligations has not been accrued after the Petition Date. (13) Income Taxes The components of income tax expense (benefit) are as follows:
2000 1999 1998 --------------- --------------- ---------------- U.S. federal - current $ - (600) 3,916 U.S. federal - deferred (96,326) (6,362) 17,881 State and foreign taxes - current - 200 1,415 State and foreign taxes - deferred (8,434) (1,139) 4,177 --------------- --------------- ---------------- $ (104,760) (7,901) 27,389 =============== =============== ================
A reconciliation of income tax expense (benefit) computed using the U.S. federal statutory income tax rate of 35% of earnings/(loss) before income taxes to the actual provision for income taxes is as follows:
2000 1999 1998 --------------- --------------- ---------------- Expected tax at U.S. statutory rate $ (128,508) (9,602) 24,585 Amortization of goodwill 1,956 2,308 1,695 State and foreign taxes, net of federal effect (11,597) (610) 933 Change in valuation allowance 32,666 - - Other 723 3 176 --------------- --------------- ---------------- $ (104,760) (7,901) 27,389 =============== =============== ================
F-24 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and (liabilities) as of January 1, 2000 and December 30, 2000 are presented below:
2000 1999 ------------------- ------------------- Deductible temporary differences & carryforwards: Package design costs $ 72 1,114 Accrued employee benefits 11,865 390 State deferred income taxes 18,613 899 Accruals and allowances 19,363 21,006 Operating losses and credit carryforwards 98,774 26,293 Other 5,236 10,182 ------------------- ------------------- Total gross deferred tax assets 153,923 59,884 Less valuation allowance (32,666) - ------------------- ------------------- Net deferred tax assets 121,257 59,884 ------------------- ------------------- Taxable temporary differences: Inventory costs and reserves (25,561) (45,870) Depreciable assets (72,338) (97,787) State deferred income taxes (13,613) (9,333) Trademarks (9,745) (12,128) Goodwill - (334) ------------------- ------------------- Total gross deferred tax liabilities (121,257) (165,452) ------------------- ------------------- Net deferred tax liabilities $ - (105,568) =================== ===================
At December 30, 2000, the Company has $262.8 million of federal and state operating loss carryforwards expiring 2006 through 2020, $1.9 million general business tax credit carryforward expiring 2005 through 2020 and $6.7 million unused alternative minimum tax credit carryforward that does not expire. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance, at December 30, 2000 to be realized as a result of the reversal of existing taxable temporary differences. As part of the above analysis, a $32.6 million valuation allowance was established during the year ended December 30, 2000. (14) Redeemable Convertible Preferred Stock On December 19, 1997, the Company issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65.0 million less $2.1 million of issue costs. Accretion is being recognized to increase the recorded amount to the redemption amount over the period to the redemption date. Dividends accrued from the issue date through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000, the rate increased to 10% as a result of the Company's earnings per share for 1999 falling below predetermined targets. During the third and fourth quarters of 1999, the Company accrued and paid in kind a one-time cumulative dividend on the Series A Preferred Stock, from the issue date through December 31, 1999, equal to the difference between the dividends calculated at the 3% rate and dividends calculated at the 10% rate, or 10,135 shares of Series A Preferred Stock. Under the terms of the Series A Preferred Stock, dividends can be paid in cash or additional shares of Series A Preferred Stock until December 2002, at which time they must be paid in cash. Under the DIP Financing Facility, the Company is F-25 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) prohibited from paying any dividends on the Series A Preferred Stock. A total of 81,411 shares of Series A Preferred Stock were outstanding as of December 30, 2000. The commencement of the Chapter 11 Cases constitutes an "Event of Noncompliance" under the terms of the Series A Preferred Stock. The terms of the Series A Preferred Stock provide that upon the occurrence of an Event of Noncompliance, the dividend rate on such stock will increase immediately to the lesser of 18% per annum and the maximum rate permitted by law. Accordingly, as of the Petition date, dividends on the Series A Preferred Stock began accruing at 18% per year, compounding quarterly. The Series A Preferred Stock is convertible, at any time at the option of the holder, into Common Stock at a rate calculated by dividing $1,000 plus unpaid dividends per share by $24.00 per share. Each share of Series A Preferred Stock is subject to mandatory redemption in ten and one-half years after the issue date at a redemption price of $1,000 plus accrued and unpaid dividends. The Company has the right after the fourth anniversary of the issue date to call all or a portion of the Series A Preferred Stock at $1,000 per share plus accrued and unpaid dividends times a premium equal to the dividend rate after the fourth anniversary date and declining ratably to the mandatory redemption date. Holders of the Series A Preferred Stock are entitled to limited voting rights only under certain conditions. (15) Stock Options In 1993, the Company established a stock option plan under which options may be granted to eligible employees and non-employee directors of the Company. Under the stock option plan, the Board of Directors may grant either nonqualified stock options or incentive stock options. At December 30, 2000, there were 541,000 shares available for grant under the stock option plan. The per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $2.52, $6.46 and $12.81 respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 1998 -------------------- -------------------- -------------- Expected dividend yield 0.0% 0.0% 1.06% Stock price volatility 60.51 46.53 36.87 Risk-free interest rate 6.33 5.35 5.48 Expected option term 5 years 5 years 5 years
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 ----------------- ------------------- --------------- Earnings (loss) available for common shareholders: As reported $ (271,336) (31,826) 40,758 Pro forma (272,951) (33,410) 39,280 Earnings (loss) per share: As reported - basic $ (19.04) (2.25) 2.89 As reported - diluted (19.04) (2.25) 2.52 Pro forma - basic (19.15) (2.36) 2.79 Pro forma - diluted (19.15) (2.36) 2.43
All options are granted at an exercise price not less than the fair market value of the common stock at the date of grant. The option period may not be more than ten years from the date the option is granted, and options generally vest over a four-year period. F-26 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) A summary of option activity during 1998, 1999 and 2000 follows:
Weighted average Shares exercise price ---------------- ------------------------- Outstanding at January 3, 1998 (289 shares exercisable) 742 $15.76 Granted 562 34.26 Exercised (154) 14.86 Canceled (251) 23.14 ---------------- Outstanding at January 2, 1999 (142 shares exercisable) 899 25.36 Granted 418 14.32 Exercised (3) 12.72 Canceled (272) 22.00 ---------------- Outstanding at January 1, 2000 1,042 20.80 (296 shares exercisable) Granted 506 4.38 Canceled (408) 5.44 Outstanding at December 30, 2000 ---------------- (387 shares exercisable) 1,140 15.03 ================
The table below provides weighted average exercise prices and weighted average remaining contractual life of options outstanding at December 30, 2000, segregated based upon ranges of exercise prices.
Weighted average Weighted Weighted remaining Number Number average average contractual of options of options exercise price exercise price life outstanding exercisable (outstanding) (exercisable) (outstanding) -------------------------------------------------------------------------------- $2.56 - $4.32 392 25 $ 4.18 $ 4.31 9.11 $4.56 - $15.63 245 109 8.73 12.13 6.89 $15.88 - $31.81 290 146 20.58 19.59 6.91 $33.50 - $44.38 213 107 34.71 34.71 6.92
(16) Commitments and Contingent Liabilities Manufacturing equipment and facilities at certain locations, showrooms, sales offices and warehouse space are leased under non-cancelable operating lease agreements. These leases generally require the Company to pay all executory costs such as maintenance and taxes. Rental expense for operating leases was approximately $37.8 million, $36.4 million and $24.7 million during 2000, 1999 and 1998, respectively. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year), which expire at various dates through 2009, are as follows: Year Amount ---------- 2001 $ 24,685 2002 21,819 2003 20,735 2004 19,856 2005 17,064 Thereafter 22,151 F-27 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) At December 30, 2000, the Company had $119.3 million in outstanding cotton purchase commitments. From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of all matters currently pending will not have a materially adverse effect on the Company's financial position, results of operations, or liquidity. As described in note 1, as debtors-in-possession, the Debtors have the right to assume or reject executory contracts and leases. The Debtors are in the process of reviewing their executory contracts and leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. Such rejections could result in additional liabilities subject to compromise. (17) Concentration of Risk The Company's customers are primarily retailers located throughout the United States and Canada. Although the Company closely monitors the creditworthiness of its customers, adjusting credit policies and limits as needed, a customer's ability to pay is largely dependent upon the retail industry's economic environment. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The Company has trade receivables which are due from certain customers who are experiencing financial difficulties. However, in the opinion of management of the Company, the allowance for doubtful accounts is adequate, and trade receivables are presented at net realizable value. Sales to the Company's two individual major customers, including their affiliated entities, each accounted for approximately 26.5% and 8.4% of net sales in 2000. These two customers each accounted for approximately 20.5% and 9.6% of net sales in 1999 and 23.6% and 6.9% of net sales in 1998. As a result of the Chapter 11 Cases, the Company may have added difficulty retaining its customers, such as these major customers. Pillowtex may have difficulty in maintaining existing or creating new relationships with suppliers or vendors as a result of the Chapter 11 Cases. Pillowtex's suppliers and vendors may stop providing supplies or services to Pillowtex or provide such supplies or services only on "cash on delivery," "cash on order," or other terms that could have an adverse impact on Pillowtex's short-term cash flow. (18) Segment Information The Company manufactures textile products for the bedroom, bathroom and kitchen and markets them to department stores, discount stores, specialty shops and certain institutional customers and over the internet. The Company is organized into three major divisions that it considers operating segments: Bed and Bath, Blanket, and Pillow and Pad. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, towels, bath rugs and kitchen textile products. The Blanket Division manufactures and sells blanket products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters and mattress pads. Other includes the Company's retail stores and corporate activities. The accounting policies of the divisions are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates division performance based on gross profit. Interdivisional sales are not material. F-28 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) Information about the Company's divisions is presented below:
Year Ended December 30, 2000 ---------------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other(1) Total --------------- ------------- ------------ ------------ ------------- Net sales $ 942,604 286,666 90,623 29,734 1,349,627 Gross profit (2) 7,370 22,252 (37,785) 8,531 368 Depreciation & amortization (3) 42,122 4,414 6,168 13,261 65,965 Total assets 1,005,071 118,268 47,830 167,702 1,338,871 Capital expenditures 22,884 899 733 8,681 33,197
Year Ended January 1, 2000 ---------------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other(1) Total --------------- ------------- ------------ ------------ ------------- Net sales $ 1,095,344 303,969 119,634 33,121 1,552,068 Gross profit (4) 121,967 57,690 (10,235) 10,856 180,278 Depreciation & amortization (3) 40,809 5,081 7,763 6,421 60,074 Total assets 1,170,803 146,920 191,119 174,547 1,683,389 Capital expenditures 46,815 5,670 6,230 31,022 89,737
Year Ended January 2, 1999 ---------------------------------------------------------------------------- Bed Pillow and and Bath Pad Blanket Other(1) Total --------------- ------------- ------------ ------------ ------------- Net sales $ 1,035,932 297,473 140,924 35,512 1,509,841 Gross profit 192,687 54,829 3,096 12,780 263,392 Depreciation & amortization (3) 38,115 5,300 8,133 2,473 54,021 Total assets 1,123,693 160,434 216,474 153,553 1,654,154 Capital expenditures 81,445 3,784 10,647 37,744 133,620
(1) Includes retail stores and miscellaneous Corporate activities. Corporate amounts include primarily data processing equipment and software and other enterprise-wide assets not allocated to the segments. (2) Includes inventory write-downs of $39.8 million in the Bed and Bath Division, $8.2 million in the Pillow and Pad Division, $19.7 million in the Blanket Division and $1.5 million in Other (3) Depreciation and amortization expense for the Bed and Bath division includes approximately $5.5 million of amortization expense in 2000, 1999 and 1998 related to goodwill included in segment assets that is excluded from gross profit. The amounts included for Other consists primarily of Corporate activity depreciation and amortization that is included in selling, general and administrative expense in the Company's consolidated statement of operations. (4) Includes inventory write-downs of $4.9 million in the Blanket Division. F-29 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) The Company's principal geographic market is North America, primarily the United States. During the three years ended December 30, 2000, more than 90% of the Company's net sales were derived from within the United States. In addition, more than 90% of the Company's long-lived assets are domiciled within the United States. (19) Selected Quarterly Financial Data (Unaudited) The following tables present unaudited financial data of the Company for each quarter of 2000 and 1999.
2000 quarter ended --------------------------------------------------------------------------------------- April 1 July 1 September 30 December 30 ---------------- --------------- -------------------- ------------------- Net sales $ 345,160 341,940 357,436 305,091 Gross profit (loss) 39,095 39,512 29,472 (107,711) Net loss (9,727) (6,118) (16,268) (230,295) Loss per common share - basic (.82) (.57) (1.29) (16.36) Loss per common share - diluted (.82) (.57) (1.29) (16.36)
1999 quarter ended ------------------------------------------------------------------------------------- April 3 July 3 October 2 January 1 ---------------- --------------- -------------------- ------------------- Net sales $ 368,508 362,468 415,806 405,286 Gross profit 52,465 56,257 35,579 35,977 Net earnings (loss) 5,253 6,773 (11,079) (20,479) Earnings (loss) per common share - basic .33 .44 (1.45) (1.57) Earnings (loss) per common share - diluted .31 .40 (1.45) (1.57)
The gross profit for the quarter ended December 30, 2000, includes charges for inventory write-downs of $69.2 million, along with unabsorbed overhead resulting from idling plants and lower average selling prices, both of which were related to initiatives to reduce inventories. The net loss includes the effects of the items previously described, a charge for impairment of long-lived assets of $112.7 million, higher interest costs and bank fees associated with the amendments and waivers to the senior credit facility and professional fees and other costs associated with the filing of the Chapter 11 Cases. (20) Reorganization Items During the fourth quarter of 2000, Pillowtex recognized a $19.4 million charge associated with the Chapter 11 Cases. Approximately $17.6 million of this charge relates to the non-cash write-off of the unamortized discount on the 6% Convertible Debentures and the non-cash write-off of deferred financing fees associated with other unsecured debt classified as subject to compromise. In addition, the Company incurred $1.8 million for fees payable to professionals retained to assist with the filing of the Chapter 11 Cases. F-30 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 30, 2000 and January 1, 2000 (Tables in thousands of dollars, except for per share data) (21) Supplemental Condensed Consolidating Financial Information The following is summarized condensed consolidating financial information for Pillowtex, segregating the Parent and guarantor subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of Pillowtex and guarantees are full, unconditional and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that these financial statements would not provide relevant material additional information to users of the financial statements. The combined parent and guarantor subsidiaries information shown below approximates the financial information of the Debtors.
December 30, 2000 --------------------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Elimination Consolidated --------------------------------------------------------------------------------------- Assets: Trade receivables - 204,836 7,891 - 212,727 Receivable from Affiliates $ 787,590 - - (787,590) - Inventories - 271,919 6,888 - 278,807 Other current assets - 48,213 809 - 49,022 ----------- --------- ---------- ---------- ----------- Total current assets 787,590 524,968 15,588 (787,590) 540,556 Property, plant and equipment, net 320 534,087 984 - 535,391 Intangibles 6,622 224,652 2,206 - 233,480 Other assets 214,090 53,967 - (238,613) 29,444 ----------- --------- ---------- ---------- ----------- Total assets $ 1,008,622 1,337,674 18,778 (1,026,203) 1,338,871 =========== ========= ========== ========== =========== Liabilities and shareholders' equity (deficit): Accounts payable and accrued liabilities $ 4,151 86,335 2,881 - 93,367 Payable to affiliates - 779,207 8,383 - - Other current liabilities 984 32,369 (124) (787,590) 33,229 Long-term debt in default 660,790 - - - 660,790 ---------- --------- ---------- ---------- ----------- Total current liabilities 665,925 897,911 11,140 (787,590) 787,386 Noncurrent liabilities - 39,910 106 40,016 ---------- --------- ---------- ---------- ----------- Total liabilities 665,925 937,821 11,246 (787,590) 827,402 Liabilities subject to compromise 323,321 168,772 - - 492,093 Redeemable convertible preferred stock 82,827 - - - 82,827 Shareholders' equity (deficit) (63,451) 231,081 7,532 (238,613) (63,451) ---------- --------- ---------- ---------- ----------- Total Liabilities and Shareholders' Equity (Deficit) $1,008,622 1,337,674 18,778 (1,026,203) 1,338,871 ========== ========= ========== ========== ===========
January 1, 2000 -------------------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Elimination Consolidated -------------------------------------------------------------------------------------- Assets: Trade receivables - 260,870 7,629 - 268,499 Receivable from Affiliates $ 747,324 - (747,324) Inventories - 406,801 16,251 - 423,052 Other current assets - 29,769 105 - 29,874 ---------- --------- ---------- ---------- ----------- Total current assets 747,324 697,440 23,985 747,324) 721,425 Property, plant and equipment, net 467 642,833 1,521 - 644,821 Intangibles 16,831 269,710 2,315 - 288,856 Other assets 493,579 18,930 - (484,222) 28,287 ---------- --------- ---------- ---------- ----------- Total assets 1,258,201 1,628,913 27,821 (1,231,546) 1,683,389 ========== ========= ========== ========== =========== Liabilities and shareholders' equity: Accounts payable and accrued liabilities 6,482 182,218 4,386 - 193,086 Payable to affiliates - 736,720 10,604 (747,324) - Other current liabilities 85,579 37,951 77 - 123,607 ---------- --------- ---------- ---------- ----------- Total current liabilities 92,061 956,889 15,067 (747,324) 316,693 Noncurrent liabilities 884,852 200,446 110 - 1,085,409 ---------- --------- ---------- ---------- ----------- Total liabilities 976,914 1,157,335 15,177 (747,324) 1,402,102 Redeemable convertible preferred stock 73,898 - - - 73,898 Shareholders' equity 207,389 471,578 12,644 (484,222) 207,389 ---------- --------- ---------- ---------- ----------- Total Liabilities and Shareholders' Equity $1,258,201 1,628,913 27,821 (1,231,546) 1,683,389 ========== ========= ========== ========== ===========
F-31 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements January 1, 2000 and December 30, 2000 (Tables in thousands of dollars, except for per share data)
December 30, 2000 ---------------------------------------------------------- Guarantor Non- Subsidi- Guarantor Elimin- Consoli- Results of operations Parent aries Subsidiaries ations dated - ------------------------------- ----------------------------------------------------------- Net sales - 1,361,783 26,236 (38,392) 1,349,627 Cost of goods sold - 1,358,287 29,364 (38,392) 1,349,259 ----------------------------------------------------------- Gross Profit - 3,496 (3,128) - 368 Selling, general and administrative expenses (2,306) 129,770 932 - 128,396 Impairments of long-lived assets - 112,711 - - 112,711 ----------------------------------------------------------- Earnings (loss) from operations 2,306 (238,985) (4,060) - (240,739) Equity in earnings(loss) of subsidiaries (245,609) - - 245,609 - Interest expense 15,259 90,750 1,052 - 107,061 ----------------------------------------------------------- Earnings(loss) before reorganization items and income tax (258,562) (329,735) (5,112) 245,609 (347,800) Reorganization items 8,380 10,988 - - 19,368 ----------------------------------------------------------- Earnings (loss) before income taxes (266,942) (340,723) (5,112) 245,609 (367,168) Income taxes (4,534) (100,226) - - (104,760) ----------------------------------------------------------- Net earnings (loss) (262,408) (240,497) (5,112) 245,609 (262,408) Preferred dividends and accretion 8,928 - - - 8,928 ----------------------------------------------------------- Earnings(loss) available for common shareholders (271,336) (240,497) (5,112) 245,609 (271,336) =========================================================== January 1, 2000 ---------------------------------------------------------- Guarantor Non- Subsidi- Guarantor Elimin- Consoli- Results of operations Parent aries Subsidiaries ations dated - ------------------------------- ----------------------------------------------------------- Net sales $ - 1,534,272 25,902 (8,106) 1,552,068 Cost of goods sold - 1,354,987 24,909 (8,106) 1,371,790 ----------------------------------------------------------- Gross Profit - 179,285 993 - 180,278 Selling, general and administrative expenses (5,477) 135,877 856 - 131,256 Impairments of long-lived assets - 2,000 - - 2,000 ----------------------------------------------------------- Earnings from operations 5,477 54,232 137 - 59,846 Equity in earnings(loss) of subsidiaries (21,793) - - 21,793 - Interest expense (income) 1,998 85,301 (20) - 87,279 ----------------------------------------------------------- Earnings(loss) before income tax (18,314) (31,069) 157 21,793 (27,433) Income taxes 1,218 (9,042) (77) - (7,901) ----------------------------------------------------------- Net earnings(loss) (19,532) (22,027) 234 21,793 (19,532) Preferred dividends and accretion 12,294 - - - 12,294 ----------------------------------------------------------- Earnings(loss) available for common shareholders (31,826) (22,027) 234 21,793 (31,826) =========================================================== January 2, 1999 ---------------------------------------------------------- Guarantor Non- Subsidi- Guarantor Elimin- Consoli- Results of operations Parent aries Subsidiaries ations dated - ------------------------------- ----------------------------------------------------------- Net sales - 1,487,685 27,650 (5,494) 1,509,841 Cost of goods sold - 1,226,874 25,069 (5,494) 1,246,449 ----------------------------------------------------------- Gross Profit - 260,811 2,581 - 263,392 Selling, general and administrative expenses (5,035) 140,800 1,542 - 137,307 Restructuring Charges - 1,539 - - 1,539 Impairments - - - - ----------------------------------------------------------- Earnings from operations 5,035 136,458 1,039 - 142,532 Equity in earnings(loss) of subsidiaries 39,838 - - (39,838) Interest expense (income) 394 71,912 (18) - 72,288 ----------------------------------------------------------- Earnings(loss) before income tax 44,479 64,546 1,057 (39,838) 70,244 Income taxes 1,624 25,673 92 - 27,389 ----------------------------------------------------------- Net earnings(loss) 42,855 38,873 965 (39,838) 42,855 Preferred dividends and accretion 2,097 - - - 2,097 ----------------------------------------------------------- Earnings(loss) available for common shareholders 40,758 38,873 965 (39,838) 40,758 ===========================================================
F-32 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements January 1, 2000 and December 30, 2000 (Tables in thousands of dollars, except for per share data)
Years ended ----------------------------------------------------------------------------------------------------------- December 30, 2000 January 1, 2000 ----------------------------------------------------------------------------------------------------------- Cash Flows Non- Non- Guarantor Guarantor Guarantor Guarantor Subsidi- Subsidi- Elimin- Consoli- Subsidi- Subsidi- Elimin- Consoli- Parent aries aries ations dated Parent aries aries ations dated ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ (15,259) 49,993 231 - 34,965 $(32,752) 50,172 (7,886) - 9,534 Net cash provided by (used in) investing activities - (28,045) (227) - (28,272) 98 (83,569) (115) - (83,586) Net cash provided by (used in) financing activities 15,259 5,355 (4) - 20,610 32,654 32,697 7,994 - 73,345 ------------------------------------------------------ ----------------------------------------------- Net change in cash and cash equivalents - 27,303 - - 27,303 - (700) (7) - (707) Cash and cash equivalents at beginning of period - 4,854 - - 4,854 - 5,554 7 - 5,561 ------------------------------------------------------ ----------------------------------------------- Cash amd cash equivalents end of period $ - 32,157 - - 32,157 $ - 4,854 - - 4,854 ====================================================== ===============================================
Years ended -------------------------------------------------------- January 2, 1999 -------------------------------------------------------- Cash Flows Non- Guarantor Guarantor Subsidi- Subsidi- Elimin- Consoli- Parent aries aries ations dated -------------------------------------------------------- Net cash provided by (used in) operating activities $ 15,090 40,532 (1,012) - 54,610 Net cash used in investing activities (93,964) (108,069) (90) - (202,123) Net cash provided by (used in) financing activities 78,874 68,501 1,095 - 148,470 ---------------------------------------------------- Net change in cash and cash equivalents - 964 (7) - 957 Cash and cash equivalents at beginning of period - 4,590 14 - 4,604 ---------------------------------------------------- Cash amd cash equivalents end of period $ - 5,554 7 - 5,561 ====================================================
F-33 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements January 1, 2000 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Valuation and Qualifying Accounts Years ended December 30, 2000, January 1, 2000 and January 2, 1999
Additions Deductions --------------------------------------- ------------------ Balance at beginning of Charged to Charged to Write-offs/ Balance at period Expense Other Recoveries end Accounts of period ----------------- ----------------- ----------------- ------------------ ----------------- Allowance for: Returns & Allowances and Doubtful Accounts Year ended 2000 33,351 52,381 - 42,483 (1) 43,249 ================= ================= ================= ================== ================= Year ended 1999 21,117 45,355 - 33,121 (1) 33,351 ================= ================= ================= ================== ================= Year ended 1998 14,770 26,764 6,570 (2) 26,987 (1) 21,117 ================= ================= ================= ================== ================= Inventory reserves: Year ended 2000 17,207 81,218 - 23,705 74,720 ================= ================= ================= ================== ================= Year ended 1999 15,315 14,302 - 12,410 17,207 ================= ================= ================= ================== ================= Year ended 1998 9,412 11,034 2,908 (2) 8,039 15,315 ================= ================= ================= ================== ================= (1) Accounts written off, less recoveries (2) Includes reserves for acquired company as of the date of acquisition
S-1 EX-3.2 2 0002.txt AMENDED AND RESTATED BYLAWS Exhibit 3.2 Amended and Restated Bylaws OF PILLOWTEX CORPORATION (with Amendments through November 6, 2000) TABLE OF CONTENTS ARTICLE I OFFICES Section 1 Principal Office............................................................. 1 Section 2 Other Offices................................................................ 1 ARTICLE: II SHAREHOLDERS Section 1 Time and Place of Meetings................................................... 1 Section 2 Annual Meetings.............................................................. 1 Section 3 Special Meetings............................................................. 1 Section 4 Notice....................................................................... 1 Section 5 Closing of Share Transfer Records and Fixing Record Dates for Matters Other than Consents to Action...................................................... 2 Section 6 Fixing Record Dates for Consents to Action................................... 2 Section 7 List of Shareholders......................................................... 2 Section 8 Quorum....................................................................... 2 Section 9 Order of Business............................................................ 3 Section 10 New Business................................................................. 3 Section 11 Voting....................................................................... 4 Section 12 Action by Consent............................................................ 5 Section 13 Presence at Meetings by Means of Communications Equipment..................................................... 5 ARTICLE III DIRECTORS Section 1 Powers....................................................................... 6 Section 2 Number, Election and Terms of Directors; Board Action................................................................. 6 Section 3 Resignations................................................................. 6 Section 4 Shareholder Nomination of Director Candidates................................................................... 6 Section 5 Removal...................................................................... 7 Section 6 Vacancies.................................................................... 7 Section 7 Place of Meetings............................................................ 8 Section 8 Annual Meetings.............................................................. 8 Section 9 Regular Meetings............................................................. 8 Section 10 Special Meetings............................................................. 8 Section 11 Quorum and Voting............................................................ 8
ii Section 12 Committees of the Board of Directors......................................... 9 Section 13 Action by Unanimous Consent.................................................. 9 Section 14 Presence at Meetings by Means of Communications Equipment..................................................... 9 ARTICLE IV NOTICES Section 1 Form of Notice............................................................... 9 Section 2 Waiver....................................................................... 9 Section 3 When Notice Unnecessary...................................................... 10 ARTICLE V OFFICERS Section 1 General...................................................................... 10 Section 2 Election..................................................................... 10 Section 3 Chairman of the Board........................................................ 10 Section 4 President.................................................................... 11 Section 5 Division Presidents.......................................................... 11 Section 6 Vice Presidents.............................................................. 11 Section 7 Assistant Vice Presidents.................................................... 11 Section 8 Secretary.................................................................... 12 Section 9 Assistant Secretaries........................................................ 12 Section 10 Treasurer.................................................................... 12 Section 11 Assistant Treasurers......................................................... 12 Section 12 Bonding...................................................................... 13 ARTICLE VI CERTIFICATES REPRESENTING SHARES Section 1 Form of Certificates......................................................... 13 Section 2 Lost certificates............................................................ 13 Section 3 Transfer of Shares........................................................... 13 Section 4 Registered Shareholders...................................................... 14 ARTICLE: VII INDEMNIFICATION Section 1 General...................................................................... 14 Section 2 Insurance.................................................................... 14
iii ARTICLE VIII GENERAL PROVISIONS Section 1 Distributions and Share Dividends............................................ 15 Section 2 Reserves..................................................................... 15 Section 3 Fiscal Year.................................................................. 15 Section 4 Seal......................................................................... 15 Section 5 Resignation.................................................................. 15 ARTICLE IX AMENDMENTS TO BYLAWS........................................................................ 16
iv ARTICLE I OFFICES Section 1. Principal Office. The principal office of the Corporation shall be in Dallas County, Texas, or such other county as the Board of Directors may from time to time designate. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II SHAREHOLDERS Section 1. Time and Place of Meetings. Meetings of the shareholders shall be held at such time and at such place, within or without the State of Texas, as shall be determined by the Board of Directors. Section 2. Annual Meetings. Annual meetings of shareholders shall be held on such date and at such time as shall be determined by the Board of Directors. At each annual meeting the shareholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the Chief Executive Officer or the Board of Directors, and shall be called by the Chief Executive Officer, the President or the Secretary at the request in writing of the holders of not less than fifty percent (50%) of the voting power represented by all the shares issued, outstanding and entitled to be voted at the proposed special meeting, unless the Articles of Incorporation provide for a different percentage, in which event such provision of the Articles of Incorporation shall govern. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 4. Notice. Written or printed notice stating the place, day and hour of any shareholders' meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the Chief Executive officer, President, Secretary or the officer or person calling the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the shareholder at his address as it appears on the share transfer records of the Corporation. Section 5. Closing of Share Transfer Records and Fixing Record Dates for Matters other than Consents to Action. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any distribution or share dividend, or in order to make a determination of shareholders for any other proper purpose (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders), the Board of Directors of the Corporation may provide that the share transfer records shall be closed for a stated period but not to exceed, in any case, 60 days. If the share transfer records shall be closed for the purpose 1 of determining shareholders, such records shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the share transfer records, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 60 days and, in the case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer records are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a distribution other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or share dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 5, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of share transfer records and the stated period of closing has expired. Section 6. Fixing Record Dates for Consents to Action. Unless a record date shall have previously been fixed or determined pursuant to this Section 6, whenever action by shareholders is proposed to be taken by consent in writing without a meeting of shareholders, the Board of Directors may fix a record date for the purpose of determining shareholders entitled to consent to that action, which record date shall not precede, and shall not be more than ten days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors and the prior action of the Board of Directors is not required by the Texas Business Corporation Act (herein called the "Act"), the record date for determining shareholders entitled to consent to action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation as provided in Section 12 of this Article II. Delivery shall be by hand or by certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the Chief Executive Officer of the Corporation. If no record date shall have been fixed by the Board of Directors and prior action of the Board of Directors is required by the Act, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts a resolution taking such prior action. Section 7. List of Shareholders. The officer or agent of the Corporation having charge of the share transfer records for shares of the corporation shall make, at least ten days before each meeting of the shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of voting shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office or principal place of business of the Corporation and shall be subject to inspection by any shareholder at any time during the usual business hours of the Corporation. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer records shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer records or to vote at any meeting of shareholders. Failure to comply with the requirements of this Section 7 shall not affect the validity of any action taken at such meeting. Section 8. Quorum. With respect to any matter, a quorum shall be present at a meeting of shareholders if the holders of shares having a majority of the voting power represented by all issued and outstanding shares entitled to vote on that matter are present in person or represented by proxy, unless otherwise provided by the Articles of Incorporation in accordance with the Act. 2 Once a quorum is present at a meeting of shareholders, the shareholders represented in person or by proxy at the meeting may conduct such business as may properly be brought before the meeting until it is adjourned, and the subsequent withdrawal from the meeting of any shareholder or the refusal of any shareholder represented in person or by proxy to vote shall not affect the presence of a quorum at the meeting. If, however, a quorum shall not be present at any meeting of shareholders, the shareholders entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting, without notice (other than announcement at the meeting at which the adjournment is taken of the time and place of the adjourned meeting), until such time and to such place as may be determined by a vote of the holders of a majority of the shares represented in person or by proxy at such meeting until a quorum shall be present. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 9. Order of Business. The order of business at annual meetings of shareholders and, so far as practicable, at other meetings of shareholders shall be determined by the Chief Executive Officer. Section 10. New Business. At an annual meeting of shareholders, only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the annual meeting. For any new business proposed by the Board of Directors to be properly brought before the annual meeting, such new business shall be approved by the Board of Directors and shall be stated in writing and filed with the Secretary of the Corporation at least five days before the date of the annual meeting, and all business so approved, stated and filed shall be considered at the annual meeting. Any shareholder may make any other proposal at the annual meeting, but unless properly brought before the annual meeting such proposal shall not be acted upon at the annual meeting. For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must have given proper and timely notice thereof in writing to the Secretary of the Corporation as specified herein. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not later than the date that corresponds to 120 days prior to the date the Corporation's proxy statement was released to shareholders in connection with the previous year's annual meeting of shareholders. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (c) the class and number of shares of the stock that are held of record, beneficially owned and represented by proxy on the date of such shareholder notice and on the record date of the meeting (if such date shall have been made publicly available) by the shareholder and by any other shareholders known by such shareholder to be supporting such proposal on such dates, (d) any financial interest of the shareholder in such proposal and (e) all other information that would be required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such shareholder or shareholders were participants in a solicitation subject to Section 14 of the Securities Exchange Act of 1934, as amended. The Board of Directors may reject any shareholder proposal not made strictly in accordance with the terms of this Section 10. Alternatively, if the Board of Directors fails to consider the validity of any shareholder proposal, the presiding officer of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that the shareholder proposal was not made in strict accordance with the terms of this Section 10 and, if he should so determine, he shall so declare at the annual meeting and any such business or proposal not properly brought 3 before the annual meeting shall not be acted upon at the annual meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. Section 11. Voting. When a quorum is present at any meeting, the vote of the holders of a majority of the shares entitled to vote on a matter, present in person or represented by proxy at such meeting, shall decide such matter brought before such meeting and shall be the act of the shareholders, unless the vote of a greater number is required by the Act, the Articles of Incorporation or these Bylaws. Unless otherwise provided in the Articles or Incorporation or these Bylaws in accordance with the Act, directors of the Corporation shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. At every meeting of the shareholders, each shareholder shall be entitled to such number of votes, in person or by proxy, for each share having voting power held by such shareholder, as is specified in the Articles of Incorporation (including the resolution of the Board of Directors (or a committee thereof) creating such shares, except to the extent that the voting rights of the shares of any class or series are limited or denied by the Articles of Incorporation. At each election of directors, every shareholder shall be entitled (a) to cast, in person or by proxy, the number of votes to which the shares owned by him are entitled for as many persons as there are directors to be elected and for whose election he has a right to vote or (b) unless prohibited by the Articles of Incorporation and subject to the immediately succeeding sentence of this paragraph, to cumulate the votes to which the shares owned by him are entitled by giving one candidate as many votes as the number of such directors multiplied by the shares owned by him shall equal or by distributing such votes on the same principle among any number of such candidates. Cumulative voting shall not be allowed in an election of directors unless a shareholder who intends to cumulate his votes shall have given written notice of such intention to the Secretary of the Corporation on or before the day preceding the election at which such shareholder intends to cumulate his votes; all shareholders entitled to vote cumulatively may cumulate their votes if any shareholder gives such written notice. Every proxy shall be in writing and be executed by the shareholder. A telegram, telex, cablegram or similar transmission by the shareholder, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for the purposes of this Section 11. No proxy shall be valid after 11 months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless (i) the proxy form conspicuously states that the proxy is irrevocable and (ii) the proxy is coupled with an interest, as defined in the Act and other Texas law. Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name as trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without being transferred into his name, if such authority is contained in an appropriate order of the court that appointed the receiver. 4 A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Treasury shares, shares of the Corporation's stock owned by another corporation the majority of the voting stock of which is owned or controlled by the Corporation, and shares of its own stock held by the Corporation in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time. Section 12. Action by Consent. Unless otherwise limited by the Act or the Articles of Incorporation, any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the action that is the subject of the consent. In addition, if the Articles of Incorporation so provide, any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of any action by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. Every written consent signed by the holders of less than all the shares entitled to vote with respect to the action that is the subject of the consent shall bear the date of signature of each shareholder who signs the consent. No written consent signed by the holders of less than all the shares entitled to vote with respect to the action that is the subject of the consent shall be effective to take the action that is the subject of the consent unless, within 60 days after the date of the earliest dated consent delivered to the Corporation as set forth below in this Section 12, the consent or consents signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take the action that is the subject of the consent are delivered to the Corporation by delivery to its registered office, registered agent, principal place of business, transfer agent, registrar, exchange agent or an officer or agent of the Corporation having custody of the records in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the Chief Executive Officer of the Corporation. A telegram, telex, cablegram or similar transmission by a shareholder, or a photographic, photostatic, facsimile or similar reproduction of a writing signed by a shareholder, shall be regarded as signed by the shareholder for the purposes of this Section 12. Section 13. Presence at Meetings by Means of Communications Equipment. Shareholders may participate in and hold a meeting of the shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 13 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 5 ARTICLE III DIRECTORS Section 1. Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which shall have and may exercise all powers of the Corporation and take all lawful acts as are not by the Act, the Articles of Incorporation or these Bylaws directed or required to be exercised or taken by the shareholders. Section 2. Number, Election and Terms of Directors; Board Action. The number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors. Commencing with the first shareholders' meeting after adoption of these Restated Bylaws at which directors are elected, the directors shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the 1995 annual meeting of shareholders, the term of office of the second class to expire at the 1996 annual meeting of shareholders and the term of office of the third class to expire at the 1997 annual meeting of shareholders, with each director to hold office until his or her successor shall been duly elected and qualified. At each annual meeting of shareholders, commencing with the 1995 annual meeting, (i) directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election, with each director to hold office until his or her successor shall been duly elected and qualified and (ii) if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. Section 3. Resignations. Any director may resign at any time by giving written notice of his resignation to the Corporation, effective at the time specified therein or, if not specified, immediately upon its receipt by the Corporation. Unless otherwise specified in the notice, acceptance of a resignation shall not be necessary to make it effective. Section 4. Shareholder Nomination of Director Candidates. If a person is to be elected to the Board of Directors because of a vacancy existing on the Board, nomination shall be made only by the Board of Directors or of a nominating committee of the Board of Directors (the Board of Directors as a whole or such committee of the Board being referred to herein as the "nominating committee") pursuant to the affirmative vote of the majority of the entire membership of the nominating committee. The nominating committee shall also make nominations for the directors to be elected by the shareholders of the Corporation at an annual meeting of the shareholders as provided in this Section 4. Only persons nominated in accordance with the procedures set forth in this Section 4 shall be eligible for election as directors at an annual meeting. The nominating committee shall select the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death, incapacity, disqualification or other inability to serve as a management nominee, the nominating committee shall deliver written nominations to the Secretary at least 30 days prior to the date of the annual meeting. Management nominees substituted as a result of the death, incapacity, disqualification or other inability to serve as a management nominee shall be delivered to the Secretary as promptly as practicable, provided the nominating committee selects the management nominees, no nominees for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders 6 are made in accordance with the provisions of this Section 4. Ballots bearing the names of all the persons nominated for election as directors at an annual meeting in accordance with the procedures set forth in this Section 4 by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, except in the case of a management nominee substituted as a result of the death, incapacity, disqualification or other inability to serve as a management nominee, if the nominating committee shall fail or refuse to nominate a slate of directors at least 30 days prior to the date of the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. No person shall be elected as a director of the Corporation unless nominated in accordance with the terms set forth in this Section 4. Nominations of individuals for election to the Board of Directors of the Corporation at an annual meeting of shareholders may be made by any shareholders of the Corporation entitled to vote for the election of directors at that meeting who complies with the procedures set forth in this section 4. To be timely, a shareholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the corporation not less than 50 days prior to the date of the annual meeting of shareholders nor more than 60 days prior to the date of such annual meeting; provided, however, that if less than 50 days' notice or prior public disclosure of the date of the annual meeting is given or made, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (a) the day on which such notice of the date of the annual meetings was mailed or (b) the day on which such public disclosure was made. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or re-election as a director (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the classes and number of shares of capital stock of the Corporation that are owned of record and beneficially owned by such person on the date of such notice and (D) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors pursuant to Section 14 under the Securities Exchange Act of 1934, as amended; and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such shareholder and any other shareholders known by such shareholder to be supporting such nominees and (B) the classes and number of shares of capital stock of the Corporation that are owned of record and beneficially owned by such shareholder on the date of such notice and by any others known by such shareholder to be supporting such nominees on the date of such notice. The Board of Directors may reject any nomination by a shareholder not made in strict accordance with the terms of this Section 4. Alternatively, if the Board of Directors fails to consider the validity of any nominations by a shareholder, the presiding officer of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that a nomination was not made in strict accordance with the terms of this Section 4, and, if he should so determine, he shall so declare at the annual meeting and the defective nomination shall be disregarded. Section 5. Removal. Any director may be removed, with cause, at any time, by the affirmative vote by written ballot of 80% of the voting interest of the shareholders of record of the Corporation entitled to vote, given at an annual meeting or at a special meeting of the shareholders called for that purpose. The vacancy in the Board of Directors caused by any such removal shall be filled by the Board of Directors as provided in section 6 of this Article III. Section 6. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled only by a majority of the directors then in office though less than a quorum or by a sole remaining director; provided that the directors may not fill more than two such directorships during any period between two successive annual 7 meetings of shareholders. Directors so chosen shall hold office until the annual meeting next after their election or until their successors are elected and qualified, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by the Act. Section 7. Place of Meetings. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Texas. Section 8. Annual Meetings. The first meeting of each newly elected Board of Directors shall be held, without further notice, immediately following the annual meeting of shareholders at the same place, unless by the majority vote or unanimous consent of the directors then elected and serving, such time or place shall be changed. Section 9. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may determine. Section 10. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chief Executive Officer and shall be called by the Secretary on the written request of a majority of the incumbent directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place for holding any special meeting of the Board of Directors called by such person or persons. Notice of any special meeting shall be given at least 24 hours previous thereto if given either personally (including written notice delivered personally or telephone notice) or by telex, telecopy, telegram or other means of immediate communication, and at least 72 hours previous thereto if given by written notice mailed or otherwise transmitted to each director at the address of his business or residence. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Any director may waive notice of any meeting, as provided in Section 2 of Article IV of these Bylaws. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 11. Quorum and Voting. At all meetings of the Board of Directors, the presence of a majority of the number of directors fixed in the manner provided in Section 2 of this Article III shall constitute a quorum for the transaction of business, unless a different number or portion is required by law, the Articles of Incorporation or these Bylaws. At all meetings of committees of the Board of Directors (if one or more be designated in the manner described in Section 12 of this Article ITT) the presence of a majority of the number of directors fixed from time to time by resolution of the Board of Directors to serve as members of such committees shall constitute a quorum for the transaction of business. The affirmative vote of at least a majority of the directors present and entitled to vote at any meeting of the Board of Directors or a committee of the Board of Directors at which there is a quorum shall be the act of the Board of Directors or the committee, except as may be otherwise specifically provided by the Act, the Articles of Incorporation or these Bylaws. Directors may not vote by proxy at any meeting of the Board of Directors. Directors with an interest in a business transaction of the corporation and directors who are directors or officers or have a financial interest in any other corporation, partnership, association or other organization with which the Corporation is transacting business may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee of the Board of Directors to authorize such business transaction. If a quorum shall not be present at any meeting of the Board of Directors or a committee thereof, a majority of the directors present thereat may adjourn the meeting, without notice other than announcement at the meeting, until such time and to such place as may be determined by such majority of directors, until a quorum shall be present. 8 Section 12. Committees of the Board of Directors. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate from among its members one or more committees, each of which shall be composed of one or more of its members, and may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the Board of Directors, replace absent or disqualified members at any meeting of that committee. Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee or in the Articles of Incorporation or these Bylaws, shall have and may exercise all of the authority of the Board of Directors of the Corporation, except where action of the Board of Directors is required by the Act or by the Articles of Incorporation. Any member of a committee of the Board of Directors may be removed, for or without cause, by the affirmative vote of a majority of the whole Board of Directors. If any vacancy or vacancies occur in a committee of the Board of Directors caused by death, resignation, retirement, disqualification, removal from office or otherwise, the vacancy or vacancies shall be filled by the affirmative vote of a majority of the whole Board of Directors. Such committee or committees shall have such name or names as may be designated by the Board of Directors and shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. Section 13. Action by Unanimous Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent, setting forth the action so taken, is signed by all the members of the Board of Directors or the committee, as the case may be, and such written consent shall have the same force and effect as a unanimous vote at a meeting of the Board of Directors. Section 14. Presence at Meetings by Means of Communications Equipment. Members of the Board of Directors of the Corporation or any committee designated by the Board of Directors, may participate in and hold a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 14 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV NOTICES Section 1. Form of Notice. Whenever under the provisions of the Act, the Articles of Incorporation or these Bylaws, notice is required to be given to any director or shareholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice exclusively, but any such notice may be given in writing, by mail, postage prepaid, or by telex, telecopy or telegram or other means of immediate communication, addressed or transmitted to such director or shareholder at such address as appears on the books of the Corporation. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same be thus deposited, postage prepaid, in the United States mail as aforesaid. Any notice required or permitted to be given by telex, telecopy, telegram or other means of immediate communication shall be deemed to be given at the time of actual delivery. Section 2. Waiver. Whenever under the provisions of the Act, the Articles of Incorporation or these Bylaws, any notice is required to be given to any director or shareholder of the 9 Corporation, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Section 3. When Notice Unnecessary. Whenever, under the provisions of the Act, the Articles of Incorporation or these Bylaws, any notice is required to be given to any shareholder, such notice need not be given to the shareholder if: (a) notice of two consecutive annual meetings and all notices meetings held during the period between those annual, if any, or (b) all (but in no event less than two) payments (if sent by class mail) of distributions or interest on during a 12-month period, have been mailed to that person, addressed at his address as shown on the records of the Corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given. If such a person delivers to the Corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated. ARTICLE V OFFICERS Section 1. General. The elected officers of the Corporation shall be a President and a Secretary. The Board of Directors may also elect or appoint a Chairman of the Board, a Chief Executive Officer, one or more Division Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant secretaries, a Treasurer, one or more Assistant Treasurers, and such other officers as may be deemed necessary, all of whom shall also be officers. Two or more offices may be held by the same person. Section 2. Election. The Board of Directors shall elect the officers of the Corporation at each annual meeting of the Board of Directors. The Board of Directors may appoint such other officers and agents as it shall deem necessary and shall determine the salaries of all officers and agents from time to time. The officers shall hold office until their successors are chosen and qualified. No officer need be a member of the Board of Directors except the Chairman of the Board, if one be elected. Any officer elected or appointed by the Board of Directors may be removed, with or without cause, at any time by a majority vote of the whole Board. Election or appointment of an officer or agent shall not of itself create contract rights. Section 3. Chairman of the Board and Chief Executive Officer. The Chairman of the Board shall preside, when present, at all meetings of shareholders and at all meetings of the Board of Directors and shall perform such other duties as may be assigned to him by the Board of Directors. The Chairman of the Board shall be the highest ranking officer of the Corporation. The Chief Executive Officer of the Corporation, which may be the Chairman of the Board if the Board of Directors so determines, shall have general and active control of all its business, in each case subject to the provisions of these Bylaws. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors, and the shareholders are carried into effect. The Chief Executive Officer shall rank higher than all other officers of Corporation, except for the Chairman of the Board. In the absence of a Chairman of the Board, the Chief Executive Officer 10 shall be the highest ranking officer of the Corporation, and shall have the duties and responsibilities, and the authority and power, of the Chairman of the Board. Each of the Chairman of the Board and the Chief Executive Officer shall have general authority to execute bonds, deeds and contracts in the name of the Corporation and affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the Corporation as the proper conduct of operations may require, subject to the provisions of these Bylaws; to remove or suspend any employee or agent who shall have been employed or appointed under his authority or under authority of an officer subordinate to him; to suspend for cause, pending final action by the authority which shall have elected or appointed him, any officer subordinate to him; and, in general, to exercise all of the powers and authority usually appertaining to an officer of a corporation holding such office, except as otherwise provided in these Bylaws. Section 4. President. In the absence of a Chairman of the Board and a Chief Executive Officer, the President shall be the highest ranking officer of the Corporation, and shall have the duties and responsibilities, and the authority and power, of the Chairman of the Board and Chief Executive Officer. The President shall be the Chief Operating Officer of the Corporation and as such shall have, subject to review and approval of the Chairman of the Board and the Chief Executive Officer, in each case if one be elected, the responsibility for the operation of the Corporation. Section 5. Division Presidents. In the absence of a Chief Executive Officer and a President or in the event of their inability or refusal to act, each Division President shall perform the duties of the Chief Executive Officer or the President with respect to matters affecting his respective division, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer or the President. Each Division President shall be the Chief Operating Officer of his respective division and shall have, subject to the review and approval of the Chief Executive Officer and the President, in each case if one be elected, the responsibilities for the operations of such division and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the Chief Operating Officer may from time to time prescribe. Section 6. Vice Presidents. In the absence of a President and Division Presidents or in the event of their inability or refusal to act, the Vice President, if any (or in the event there be more than one, the Vice Presidents in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice President shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President may form time to time prescribe. The Vice President in charge of finance, if any, shall also perform the duties and assume the responsibilities described in Section 10 of this Article for the Treasurer, and shall report directly to the Chief Executive Officer of the Corporation. Section 7. Assistant Vice Presidents. In the absence of a Vice President or in the event of his inability or refusal to act, the Assistant Vice President, if any (or, if there be more than one, the Assistant Vice Presidents in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of that Vice President, and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer, the Chief Operating Officer or the Vice President under whose supervision he is appointed may from time to time prescribe. 11 Section 8. Secretary. The Secretary shall attend and record minutes of the proceedings of all meetings of the Board of Directors and any committees thereof and all meetings of the shareholders. He shall file the records of such meetings in one or more books to be kept by him for that purpose. Unless the Corporation has appointed a transfer agent or other agent to keep such a record, the Secretary shall also keep at the Corporation's registered office or principal place of business a record of the original issuance of shares issued by the Corporation and a record of each transfer of those shares that have been presented to the Corporation for registration of transfer. Such records shall contain the names and addresses of all past and current shareholders of the Corporation and the number and class of shares issued by the Corporation held by each of them. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent is properly accountable. He shall have authority to sign stock certificates and shall generally perform all the duties usually appertaining to the office of the secretary of a corporation. Section 9. Assistant Secretaries. In the absence of the Secretary or in the event of his inability or refusal to act, the Assistant Secretary, if any (or, if there be more than one, the Assistant Secretaries in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time prescribe. Section 10. Treasurer. The Treasurer, if any (or the Vice President in charge of finance, if one be elected), shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as. shall be satisfactory to the Board or Directors for the faithful performance of the duties of his office and for the restoration of the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. The Treasurer shall be under the supervision of the Vice President in charge of finance, if any, and he shall perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer or any such Vice President in charge of finance. Section 11. Assistant Treasurers. In the absence of the Treasurer or in the event of his inability or refusal to act, the Assistant Treasurer, if one be elected (or, if there shall be more than one, the Assistant Treasurers in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of the Treasurer 12 and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive officer or the Treasurer may from tine to time prescribe. Section 12. Bonding. If required by the Board of Directors, all or certain of the officers shall give the Corporation a bond, in such form, in such sum and with such surety or sureties as shall be satisfactory to the Board, for the faithful performance of the duties of their office and for the restoration to the Corporation, in case of their death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Corporation. ARTICLE VI CERTIFICATES REPRESENTING SHARES Section 1. Form of Certificates. The Corporation shall deliver certificates representing all shares to which shareholders are entitled. Certificates representing shares of the Corporation shall be in such form as shall be approved and adopted by the Board of Directors and shall be numbered consecutively and entered in the share transfer records of the Corporation as they are issued. Each certificate shall state on the face thereof that the Corporation is organized under the laws of the State of Texas, the name of the registered holder, the number and class of shares, and the designation of the series, if any, which said certificate represents, and either the par value of the shares or a statement that the shares are without par value. Each certificate shall also set forth on the back thereof a full or summary statement of matters required by the Act or the Articles of Incorporation to be described on certificates representing shares, and shall contain a conspicuous statement on the face thereof referring to the matters set forth on the back thereof. Certificates shall be signed by the Chairman of the Board, the Chief Executive Officer, President or any Vice President and the Secretary or any Assistant Secretary, and may be sealed with the seal of the Corporation. Either the seal of the Corporation or the signatures of the Corporation's officers or both may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on such certificate or certificates, shall cease to be such officer or officers of the corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation or its agents, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed the certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation. Section 2. Lost Certificates. The Corporation may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing the issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of the lost or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form; in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Transfer of Shares. Shares of stock shall be transferable only on the share transfer records of the Corporation by the holder thereof in person or by his duly authorized attorney. Subject to any restrictions on transfer set forth in the Articles of Incorporation, these Bylaws or any agreement among shareholders to which this Corporation is a party or has notice, upon surrender to the Corporation or to the transfer agent of the Corporation of a certificate 13 representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Shareholders. Except as otherwise provided in the Act or other Texas law, the Corporation shall be entitled to regard the person in whose name any shares issued by the Corporation are registered in the share transfer records of the Corporation at any particular time (including, without limitation, as of the record date fixed pursuant to Section 5 or Section 6 of Article II hereof) as the owner of those shares and, accordingly. shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof. ARTICLE VII INDEMNIFICATION Section 1. General. The Corporation shall indemnify persons who are or were directors or officers of the Corporation both in their capacities as directors and officers of the Corporation and, if serving at the request of the Corporation as a director, officer, trustee, employee, agent or similar functionary of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by them in connection with or resulting from (a) any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (collectively, a "Proceeding"), (b) an appeal in such a Proceeding or (c) any inquiry or investigation that could lead to such a Proceeding, all to the full extent permitted by Article 2.02-1 of the Act. The Corporation shall pay or reimburse, in advance of the final disposition of the Proceeding, to all persons who are or were directors or officers of the corporation all reasonable expenses incurred by such persons who were, are or are threatened to be made named defendants or respondents in a Proceeding to the full extent permitted by Article 2.02-1 of the Act. The Corporation shall indemnify persons who are or were employees or agents (other than directors or officers) of the Corporation, or persons who are not or were not employees or agents of the Corporation but who are or were serving at the request of the Corporation as directors, officers, trustees, employees, agents or similar functionaries of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise (collectively, along with the directors and officers of the Corporation, such persons are referred to herein as "Corporate Functionaries") against any and all liability and reasonable expense that may be incurred by them in connection with or resulting from (a) any Proceeding, (b) an appeal in such a Proceeding or (c) any inquiry or investigation that could lead to such a Proceeding, all to the full extent permitted by Article 2.02-1 of the Act. The rights of indemnification provided for in this Article vii shall be in addition to all rights to which any corporate Functionary may be entitled under any agreement or vote of shareholders or as a matter of law or otherwise. Section 2. Insurance. The Corporation may purchase or maintain insurance on behalf of any Corporate Functionary against any liability asserted against him and incurred by him in such a capacity or arising out of his status as a Corporate Functionary, whether or not the Corporation would have the power to indemnify him against the liability under the Act or these Bylaws; provided, however, that if the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the Corporation would not have the 14 power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the corporation. Without limiting the power of the Corporation to procure or maintain any kind of insurance or arrangement, the Corporation may, for the benefit of persons indemnified by the Corporation, (i) create a trust fund, (ii) establish any form of self-insurance, (iii) secure its indemnification obligation by grant of any security interest or other lien on the assets of the Corporation or (iv) establish a letter of credit, guaranty or surety arrangement. Any such insurance or other arrangement may be procured, maintained or established within the Corporation or its affiliates or with any insurer or other person deemed appropriate by the Board of Directors of the Corporation regardless of whether all or part of the stock or other securities thereof are owned in whole or in part by the Corporation. In the absence of fraud, the judgment of the Board of Directors of the Corporation as to the terms and conditions of such insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive, and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on any ground, regardless of whether directors participating in approving such insurance or other arrangement shall be beneficiaries thereof. ARTICLE VIII GENERAL PROVISIONS Section 1. Distributions and Share Dividends. Distributions or share dividends to the shareholders of the Corporation, subject to the provisions of the Act and the Articles of Incorporation and any agreements or obligations of the Corporation, if any, may be declared by the Board of Directors at any regular or special. meeting. Distributions may be declared and paid in cash or in property (other than shares or rights to acquire shares of the Corporation), provided that all such declarations and payments of distributions, and all declarations and issuances of share dividends, shall be in strict compliance with all applicable laws and the Articles of Incorporation. Section 2. Reserves. There may be created by resolution of the Board of Directors out of the surplus of the Corporation such reserve or reserves as the Board of Directors from time to time, in its discretion, deems proper to provide for contingencies, or to equalize distributions or share dividends, or to repair or maintain any property of the Corporation, or for such other proper purpose as the Board shall deem beneficial to the Corporation, and the Board may increase, decrease or abolish any reserve in the same manner in which it was created. Section 3. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 4. Seal. The Corporation shall have a seal which may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Corporation shall have authority to affix the seal to any document requiring it. Section 5. Resignation. Any director, officer or agent of the Corporation may resign by giving written notice to the President or the Secretary. The resignation shall take effect at the time specified therein, or immediately if no time is specified therein. Unless specified in such notice, the acceptance of such resignation shall not be necessary to make it effective. 15 ARTICLE IX AMENDMENTS TO BYLAWS Unless otherwise provided by the Articles of Incorporation of the Corporation, these Bylaws 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. 16 EX-10.25 3 0003.txt POST-PETITION CREDIT AGREEMENT Ex. 10.25 POST-PETITION CREDIT AGREEMENT among PILLOWTEX CORPORATION PILLOWTEX, INC. PTEX HOLDING COMPANY PILLOWTEX MANAGEMENT SERVICES COMPANY BEACON MANUFACTURING COMPANY MANETTA HOME FASHIONS, INC. TENNESSEE WOOLEN MILLS, INC. 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. AMOSKEAG MANAGEMENT CORPORATION DOWNEAST SECURITIES CORPORATION BANGOR INVESTMENT COMPANY MOORE'S FALLS CORPORATION THE LESHNER CORPORATION LESHNER OF CALIFORNIA, INC. OPELIKA INDUSTRIES, INC., Borrowers --------------------------------- BANK OF AMERICA, N.A., Administrative Agent and the LENDERS party hereto Dated as of November 14, 2000 ---------------------------------- $150,000,000 Credit Facility TABLE OF CONTENTS -----------------
Page ---- SECTION 1. DEFINITIONS................................................................................ 2 ----------- 1.1 Defined Terms.............................................................................. 2 ------------- 1.2 Other Definitional Provisions.............................................................. 14 ----------------------------- SECTION 2. COMMITMENTS................................................................................ 15 ----------- 2.1 Commitments................................................................................ 15 ----------- 2.2 Letter of Credit Commitments............................................................... 15 ---------------------------- 2.3 Certain Limitations........................................................................ 15 ------------------- 2.4 Voluntary Commitment Reductions............................................................ 16 ------------------------------- 2.5 Fees....................................................................................... 16 ---- 2.6 Use of Proceeds............................................................................ 17 --------------- SECTION 3. LETTERS OF CREDIT.......................................................................... 17 ----------------- 3.1 Issuances and Extensions................................................................... 17 ------------------------ 3.2 Participating Interests.................................................................... 18 ----------------------- 3.3 Payments in Respect of Letters of Credit................................................... 18 ---------------------------------------- 3.4 Actions Upon Maturity...................................................................... 18 --------------------- 3.5 Further Assurances......................................................................... 19 ------------------ 3.6 Obligations Absolute....................................................................... 19 -------------------- 3.7 Assignments................................................................................ 19 ----------- 3.8 Participations............................................................................. 19 -------------- SECTION 4. GENERAL PROVISIONS APPLICABLE TO DIP LOANS................................................. 20 ------------------------------------------ 4.1 Procedure for DIP Loan Borrowings.......................................................... 20 --------------------------------- 4.2 Repayments and Prepayments................................................................. 21 -------------------------- 4.3 Treatment of Asset Sales................................................................... 22 ------------------------ 4.4 Interest Rates and Payment Dates........................................................... 22 -------------------------------- 4.5 Computation of Interest and Fees........................................................... 22 -------------------------------- 4.6 Pro Rata Treatment and Payments............................................................ 23 ------------------------------- 4.7 Additional Costs........................................................................... 24 ---------------- 4.8 Limitation on Eurodollar Loans............................................................. 26 ------------------------------ 4.9 Illegality................................................................................. 26 ---------- 4.10 Base Rate Loans Pursuant to Sections 4.7, 4.8 and 4.9...................................... 26 ----------------------------------------------------- 4.11 Compensation............................................................................... 27 ------------ 4.12 Extension of Termination Date.............................................................. 27 ----------------------------- SECTION 5. REPRESENTATIONS AND WARRANTIES............................................................. 28 ------------------------------ 5.1 Financial Condition........................................................................ 28 ------------------- 5.2 No Change.................................................................................. 28 --------- 5.3 Corporate Existence; Compliance with Law................................................... 28 ----------------------------------------
ii 5.4 Corporate Power; Authorization............................................................. 29 ------------------------------ 5.5 Enforceable Obligations.................................................................... 29 ----------------------- 5.6 No Legal Bar............................................................................... 29 ------------ 5.7 No Material Litigation..................................................................... 30 ---------------------- 5.8 Investment Company Act..................................................................... 30 ---------------------- 5.9 Federal Regulation......................................................................... 30 ------------------ 5.10 Taxes...................................................................................... 30 ----- 5.11 Subsidiaries............................................................................... 30 ------------ 5.12 Ownership of Property; Liens............................................................... 31 ---------------------------- 5.13 ERISA...................................................................................... 31 ----- 5.14 Patents, Copyrights, Permits, Trademarks and Licenses...................................... 32 ----------------------------------------------------- 5.15 Environmental Matters...................................................................... 32 --------------------- 5.16 Accuracy and Completeness of Information................................................... 33 ---------------------------------------- SECTION 6. CONDITIONS PRECEDENT....................................................................... 33 -------------------- 6.1 Conditions to Initial DIP Loans and Letters of Credit...................................... 33 ----------------------------------------------------- 6.2 Conditions to All DIP Loans and Letters of Credit.......................................... 35 ------------------------------------------------- SECTION 7. AFFIRMATIVE COVENANTS...................................................................... 35 --------------------- 7.1 Financial Statements....................................................................... 36 -------------------- 7.2 Certificates; Other Information............................................................ 37 ------------------------------- 7.3 Payment of Obligations..................................................................... 38 ---------------------- 7.4 Conduct of Business and Maintenance of Existence........................................... 38 ------------------------------------------------ 7.5 Maintenance of Property; Insurance......................................................... 39 ---------------------------------- 7.6 Inspection of Property; Books and Records; Discussions..................................... 39 ------------------------------------------------------ 7.7 Notices.................................................................................... 39 ------- 7.8 Environmental Laws......................................................................... 40 ------------------ 7.9 Cash Concentration Account................................................................. 41 -------------------------- 7.10 Financial Advisor.......................................................................... 41 ----------------- SECTION 8. NEGATIVE COVENANTS............................................................................... 42 ------------------ 8.1 Indebtedness............................................................................... 42 ------------ 8.2 Limitation on Liens........................................................................ 42 ------------------- 8.3 Limitation on Contingent Obligations....................................................... 43 ------------------------------------ 8.4 Prohibition of Fundamental Changes......................................................... 43 ---------------------------------- 8.5 Prohibition on Sale of Assets.............................................................. 43 ----------------------------- 8.6 Limitation on Investments, Loans and Advances.............................................. 43 --------------------------------------------- 8.7 Limitation on Dividends.................................................................... 44 ----------------------- 8.8 Transactions with Affiliates............................................................... 44 ---------------------------- 8.9 Foreign Exchange Contracts................................................................. 44 -------------------------- 8.10 Limitation on Creation of and Investments in Subsidiaries.................................. 44 --------------------------------------------------------- 8.11 DIP Financing.............................................................................. 44 ------------- 8.12 Alteration of Rights of Lenders............................................................ 45 ------------------------------- 8.13 Chapter 11 Claims.......................................................................... 45 ----------------- 8.14 Change in Management....................................................................... 45 --------------------
iii 8.15 Capital Expenditures....................................................................... 45 -------------------- 8.16 Asset Coverage Ratio....................................................................... 45 -------------------- 8.17 Operating Cash Flow........................................................................ 45 ------------------- SECTION 9. EVENTS OF DEFAULT.......................................................................... 45 ----------------- 9.1 Events of Default.......................................................................... 45 ----------------- SECTION 10. THE AGENT; ISSUER.......................................................................... 48 ----------------- 10.1 Appointment................................................................................ 48 ----------- 10.2 Delegation of Duties....................................................................... 49 -------------------- 10.3 Exculpatory Provisions..................................................................... 49 ---------------------- 10.4 Reliance by Administrative Agent........................................................... 49 -------------------------------- 10.5 Notice of Default.......................................................................... 49 ----------------- 10.6 Non-Reliance on Administrative Agent and Other Lenders..................................... 50 ------------------------------------------------------ 10.7 Indemnification............................................................................ 50 --------------- 10.8 The Administrative Agent in its Individual Capacity........................................ 51 --------------------------------------------------- 10.9 Successor Administrative Agent............................................................. 51 ------------------------------ 10.10 Bank of America as Issuer of Letters of Credit............................................. 51 ---------------------------------------------- SECTION 11. MISCELLANEOUS.............................................................................. 51 ------------- 11.1 Amendments and Waivers..................................................................... 51 ---------------------- 11.2 Notices.................................................................................... 52 ------- 11.3 No Waiver; Cumulative Remedies............................................................. 54 ------------------------------ 11.4 Survival of Representations and Warranties................................................. 54 ------------------------------------------ 11.5 Payment of Expenses and Taxes.............................................................. 54 ----------------------------- 11.6 Successors and Assigns; Participations; Purchasing Lenders................................. 55 ---------------------------------------------------------- 11.7 Adjustments; Set-Off....................................................................... 58 -------------------- 11.8 Counterparts............................................................................... 59 ------------ 11.9 Governing Law; No Third-Party Rights....................................................... 59 ------------------------------------ 11.10 WAIVER OF JURY TRIAL....................................................................... 59 -------------------- 11.11 Additional Grant of Lien................................................................... 59 ------------------------ 11.12 Interest................................................................................... 59 -------- 11.13 No Duty.................................................................................... 60 ------- 11.14 No Fiduciary Relationship.................................................................. 60 ------------------------- 11.15 Equitable Relief........................................................................... 60 ---------------- 11.16 No Waiver; Cumulative Remedies............................................................. 61 ------------------------------ 11.17 Severability............................................................................... 61 ------------ 11.18 Headings................................................................................... 61 -------- 11.19 Non-Application of Chapter 346 of Texas Finance Code....................................... 61 ---------------------------------------------------- 11.20 Construction............................................................................... 61 ------------ 11.21 Independence of Covenants.................................................................. 61 ------------------------- 11.22 NO ORAL AGREEMENTS......................................................................... 61 ------------------
iv v vi SCHEDULES AND EXHIBITS ====================== Schedules - --------- A - Commitment Percentages 5.7 - Litigation 5.10 - Tax Matters 5.11 - Subsidiaries 5.13 - ERISA 5.14 - Intellectual Property 5.15 - Environmental Matters Exhibits - -------- A - Cash Management Order B - Commitment Transfer Supplement C - Interim Order vii viii POST-PETITION CREDIT AGREEMENT ------------------------------ THIS POST-PETITION CREDIT AGREEMENT, dated as of November 14, 2000, is entered into among PILLOWTEX CORPORATION (the "Parent Corporation"), PILLOWTEX, ------------------ INC., PTEX HOLDING COMPANY, PILLOWTEX MANAGEMENT SERVICES COMPANY, BEACON MANUFACTURING COMPANY, MANETTA HOME FASHIONS, INC., TENNESSEE WOOLEN MILLS, INC., 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., AMOSKEAG MANAGEMENT CORPORATION, DOWNEAST SECURITIES CORPORATION, BANGOR INVESTMENT COMPANY, MOORE'S FALLS CORPORATION, THE LESHNER CORPORATION, LESHNER OF CALIFORNIA, INC., and OPELIKA INDUSTRIES, INC. (collectively, with the Parent Corporation, the "Borrowers"), the several --------- lenders from time to time parties hereto (collectively, the "Lenders") and Bank ------- of America, N.A., as Administrative Agent (in such capacity, the "Administrative -------------- Agent"). - ----- W I T N E S S E T H: WHEREAS, on November 14, 2000 (the "Filing Date") the Parent Corporation ----------- filed with the United States Bankruptcy Court for the District of Delaware, a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") (the "Voluntary Bankruptcy Case"); --------------- ------------------------- WHEREAS, on the Filing Date, the other Borrowers filed with the United States Bankruptcy Court for the District of Delaware voluntary petitions for relief under Chapter 11 of the Bankruptcy Code; WHEREAS, the Borrowers have requested that the Lenders from time to time after the Effective Date (as hereinafter defined) and prior to the Termination Date (as hereinafter defined) make DIP Loans (as hereinafter defined) to the Borrowers and issue or participate in Letters of Credit (as hereinafter defined) for the account of one or more of the Borrowers up to the Total Credit Commitment (as hereinafter defined) subject to the terms and conditions set forth herein; and WHEREAS, the Lenders are willing, on the terms and conditions hereinafter set forth, to make such DIP Loans and issue or participate in such Letters of Credit; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. DEFINITIONS. ----------- 1.1 Defined Terms. As used in this Agreement, the following terms shall ------------- have the following meanings: "Adjusted Eurodollar Rate": for any Eurodollar Loan for any Interest Period ------------------------ therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) determined by the Administrative Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Affiliate": of any Person: (a) any Person (other than a Subsidiary) --------- which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person, whether by ownership of securities, contract, proxy or otherwise or (ii) to direct or cause the direction of the management and policies of such Person, whether by ownership of securities, contract, proxy or otherwise. "Agreement": this Post-Petition Credit Agreement, as amended, supplemented --------- or modified from time to time. "Applicable Margin": a per annum percentage equal to (a) 3.50% with ----------------- respect to Eurodollar Loans and (b) 1.00% for Base Rate Loans. "Authorized Representative": with respect to any Borrower, any of the ------------------------- Chief Executive Officer, President, Chief Operating Officer, any Vice President, the Chief Financial Officer, Treasurer, or any other Person expressly designated by the Board of Directors of such Borrower (or the appropriate committee thereof) as an Authorized Representative of such Borrower. "Bankruptcy Code": as defined in the first recital. --------------- "Bankruptcy Court": the United States Bankruptcy Court for the District of ---------------- Delaware or such other court as shall have jurisdiction over the Chapter 11 Cases. "Base Rate": for any day, a per annum interest rate equal to the higher of --------- (a) the sum of 0.50% plus the Federal Funds Rate on such day or (b) the Prime Rate on such day. The Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Prime Rate or Federal Funds Rate, as applicable, to account for such change. "Base Rate Loans": DIP Loans that bear interest at rates based upon the --------------- Base Rate. "Benefitted Lender": as defined in Section 11.7. ----------------- ------------ "Bank of America": Bank of America, N.A. --------------- 2 "Borrowers": as defined in the preamble. --------- "Borrowing": the making of DIP Loans or issuance of Letters of Credit on --------- any Business Day in accordance with Sections 2, 3 and 4. ------------- - "Borrowing Date": any Business Day, (a) specified in a notice pursuant to -------------- Section 4.1 as a date on which the Designated Notification Borrower requests the - ----------- Lenders to make DIP Loans hereunder or (b) on which the Issuing Bank issues a Letter of Credit in accordance with the provisions of Section 3 and the L/C --------- Application submitted therefor. "Budget": the Consolidated monthly financial statement projections, ------ including professional fees and expenses, covering the period commencing on the Filing Date and continuing through the Scheduled Termination Date, delivered to the Administrative Agent concurrently herewith, as the same may be amended from time to time with the consent of the Borrowers, the Administrative Agent, the Issuing Bank and the Required Lenders. "Business Day": a day other than a Saturday, Sunday or other day on which ------------ commercial lenders in Dallas, Texas or Kannapolis, North Carolina, are authorized or required by law to close, and with respect to any Eurodollar Loan, a day on which commercial banks are open for the transaction of commercial banking business (including dealings in Dollar deposits) in London, England. "Capital Expenditures": for any period, expenditures made by the Borrowers -------------------- to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements during such period and the aggregate amount of items leased or acquired under Financing Leases at the capitalized cost of the item) computed in accordance with GAAP. "Carve-Out": as defined in the Interim Order. --------- "Cash Equivalents": (a) obligations issued or fully guaranteed or insured ---------------- by the United States Government or any state thereof, the District of Columbia or the Commonwealth of Puerto Rico or any agency or instrumentality thereof having maturities of not more than 12 months from the date of acquisition, (b) certificates of deposit and Eurodollar time deposits with maturities of 12 months or less from the date of acquisition, bankers' acceptances with maturities not exceeding 12 months and other interest bearing deposits or accounts, in each case with any Lender or with any commercial bank organized under the laws of the United States of America or any state thereof, the District of Columbia or the Commonwealth of Puerto Rico, each having capital and surplus in excess of $100,000,000, (c) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (a) and (b) entered into with any financial institution meeting the qualifications specified in clause (b) above, (d) commercial paper issued by any Lender or any Affiliate of any Lender and commercial paper rated A/1 or the equivalent thereof by Standard & Poor's Ratings Group or P-1 or the equivalent thereof by Moody's Investors Service, Inc. on the date of investment and in each case maturing within 12 months after the date of acquisition; and (e) money market funds that invest in any of the foregoing clauses (a)-(d). 3 "Cash Management Order": an order entered by the Bankruptcy Court --------------------- substantially in the form of Exhibit A. --------- "Change in Law": with respect to any Lender, the Administrative Agent or ------------- the Issuing Bank, the adoption of any law, rule, regulation, policy, guideline or directive (whether or not having the force of law) or any change therein or in the interpretation or application thereof by any Governmental Authority having jurisdiction over such Lender, the Administrative Agent or the Issuing Bank, in each case after the Effective Date. "Changes in Accounts Receivable": The difference between the net book ------------------------------ value of accounts receivable (as reported in accordance with GAAP) at the beginning of a reporting period and the end of said reporting period on a consolidated basis for the Borrowers and their Subsidiaries excluding any changes caused by non-cash charges that are not also included in EBITDA during the reporting period. "Changes in Inventory": The difference between the net book value of -------------------- inventory (as reported in accordance with GAAP) at the beginning of a reporting period and the end of said reporting period on a consolidated basis for the Borrowers and their Subsidiaries excluding any changes caused by non-cash charges that are not also included in EBITDA during the reporting period. "Changes in Post-Petition Accounts Payable": The difference between the ----------------------------------------- book value of post-petition accounts payable (as reported in accordance with GAAP) at the beginning of a reporting period and the end of said reporting period on a consolidated basis for the Borrowers and their Subsidiaries. "Chapter 11 Cases": the Voluntary Bankruptcy Case of the Parent ---------------- Corporation and the chapter 11 cases of the other Borrowers under Case Nos. 00- 04211 (SLR) in the Bankruptcy Court. "Code": the Internal Revenue Code of 1986, as amended from time to time. ---- "Commitment": with respect to each Lender, such Lender's obligation ---------- pursuant to this Agreement to make DIP Loans and issue (or participate in the issuance of) Letters of Credit. "Commitment Percentage": relative to any Lender, the percentage set forth --------------------- opposite its name in the column labeled "Commitment Percentage" on Schedule A ---------- attached hereto. "Commitment Transfer Supplement": a supplement substantially in the form ------------------------------ of Exhibit B attached hereto. --------- "Commonly Controlled Entity": an entity, whether or not incorporated, -------------------------- which is under common control with the Parent Corporation within the meaning of Section 414(b) or (c) of the Code. "Company Property": as defined in Section 5.12. ---------------- ------------- 4 "Consolidated": refers to the consolidation of the accounts of the Parent ------------ Corporation and its Subsidiaries in accordance with GAAP, including principles of consolidation. "Consummation Date": with respect to a plan of reorganization for one or ----------------- more of the Borrowers proposed pursuant to Section 1121 et seq. of the -- ---- Bankruptcy Code, as the case may be, the earlier of the date on which (i) the effective date of such plan of reorganization occurs, as the case may be, or (ii) "substantial consummation" (as defined in Section 1101(2) of the Bankruptcy Code) of such plan of reorganization shall have occurred, as the case may be. "Contingent Obligation": as to any Person, any obligation of such Person --------------------- guaranteeing or in effect guaranteeing any Indebtedness, Financing Leases, dividends or other obligations ("primary obligations") of any other Person (the ------------------- "primary obligor") in any manner, whether directly or indirectly, including, --------------- without limitation, any obligation of such Person, whether or not contingent (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the -------- ------- term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business and customary indemnities given in connection with asset sales in the ordinary course of business. The amount of any Contingent Obligation with respect to any Borrower or any of its Subsidiaries shall be deemed to be an amount equal to the stated or determinable amount (based on the maximum reasonably anticipated net liability in respect thereof as determined by such Borrower in good faith) of the primary obligation or portion thereof in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated net liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Borrower in good faith. "Contractual Obligation": as to any Person, any provision of any security ---------------------- issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of the property owned by it is bound. "Controlled Group": all members of a controlled group of corporations or ---------------- all members of a controlled group of trades or businesses (whether or not incorporated) under common control, which together with the Borrowers, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA. "Default": any of the events specified in Section 9, whether or not any ------- --------- requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Designated Notification Borrower": Pillowtex Corporation, a Texas -------------------------------- corporation, or other Borrower designated by each of the Borrowers to be the Designated Notification Borrower upon notice to the Administrative Agent and the Lenders in accordance with the terms of Section 11.2. ------------ 5 "Designated Post-Petition Loans": as defined in the Interim Order. ------------------------------ "DIP Financing Documents": the collective reference to this Agreement, all ----------------------- Letters of Credit, each order and each other instrument, document or agreement required to be delivered pursuant hereto or thereto. "DIP Loans": as defined in Section 2.1 --------- "Dollars" and "$": dollars in lawful currency of the United States of ------- - America. "Earnings From Operations": the meaning given to such term pursuant to ------------------------ GAAP. "EBITDA": for any period, determined in accordance with GAAP on a ------ consolidated basis for the Borrowers and their Subsidiaries the sum of (a) Earnings From Operations plus (b) depreciation and amortization to the extent included in determining Earnings From Operations, plus (c) professional fees incurred outside the ordinary course of business including legal counsel, financial advisors, human resource consultants, manufacturing consultants, and cash management consultants to the extent included in determining Earnings From Operations, plus (d) non-cash charges associated with the permanent closure of a facility or facilities to the extent included in determining Earnings From Operations, plus, (e) cash charges associated with the permanent closure of a facility or facilities to the extent included in determining Earnings From Operations, plus (f) non-cash charges associated with the write-down or adjustment of net asset values including goodwill to the extent included in determining Earnings From Operations, plus (g) other non-cash charges (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period except as noted in (d) and (e), above) to the extent included in determining Earnings From Operations, plus (h) payments or accruals related to a Bankruptcy Court approved key employee retention program, plus (i) payments for severance made prior to the Filing Date to the extent deducted in determining Earnings From Operations. "Effective Date": the first date on which all of the conditions precedent -------------- contained in Section 6.1 hereof are satisfied or waived. ----------- "Environmental Laws": any and all applicable Federal, state, local or ------------------ municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or other applicable requirements of any Governmental Authority regulating, or imposing liability or standards of conduct concerning environmental protection matters, as now or may at any time hereafter be in effect, including, without limitation, any applicable provisions of the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act of 1986, the Emergency Planning and Community Right to Know Act, the Resource Conservation and Recovery Act of 1976, the Safe Drinking Water Act, and the Toxic Substances Control Act, together, in each case, with each amendment, supplement or other modification thereto, and the regulations adopted and publications promulgated thereunder and all substitutions therefor. "ERISA": the Employee Retirement Income Security Act of 1974, as amended ----- from time 6 to time. "Eurodollar Loans": DIP Loans the interest rates on which are determined ---------------- on the basis of rates referred to in the definition of "Eurodollar Rate". "Eurodollar Rate": for any Interest Period with respect to any Eurodollar --------------- Loan: (a) the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate that appears on the page of the Telerate screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) if the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) if the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by the Administrative Agent as the rate of interest (rounded upward to the next 1/100th of 1%) at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Loan being made, continued or converted by Administrative Agent and with a term equivalent to such Interest Period would be offered by Administrative Agent's London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Event of Default": any of the events specified in Section 9, provided ---------------- --------- that any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Federal Funds Rate": 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 the Administrative Agent on such day on such transactions from three federal funds brokers of recognized standing selected by it. 7 "Fee Property": as defined in Section 5.12. ------------ ------------ "Filing Date": as defined in the first recital. ----------- "Final Order": an order of the Bankruptcy Court which contains ----------- substantially the same provisions as the Interim Order. "Financing Lease": (a) any lease of property, real or personal, the --------------- obligations under which are capitalized on a Consolidated balance sheet of the Parent Corporation and its Subsidiaries in accordance with GAAP, and (b) any other such lease to the extent that the then present value of any rental commitment thereunder should, in accordance with GAAP, be capitalized on a balance sheet of the lessee. "Financing Orders": collectively, the Interim Order and the Final Order. ---------------- "Foreign Subsidiary": any Subsidiary of any Borrower which is not ------------------ organized under the laws of any state of the United States of America or the District of Columbia. "GAAP": generally accepted accounting principles in the United States of ---- America in effect from time to time. "Governmental Authority": any nation or government, any state or other ---------------------- political subdivision thereof or any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials": any hazardous materials, hazardous wastes, ------------------- hazardous or toxic substances, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, gasoline and any other petroleum products (including crude oil or any fraction thereof). "Highest Lawful Rate": with respect to each Lender, the maximum ------------------- nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the DIP Loans or on other Indebtedness under laws applicable to such Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "Indebtedness": of a Person, at a particular date, (a) all indebtedness of ------------ such Person for borrowed money or for the deferred purchase price of property or services, (b) the undrawn face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder and unpaid reimbursement obligations with respect thereto, (c) all liabilities (other than Lease Obligations) secured by any Lien on any property owned by such Person, even though such Person has not assumed or become liable for the payment thereof, (d) a) all indebtedness of such Person under Financing Leases and (e) all indebtedness of such Person arising under acceptance facilities; but, in each case, excluding trade and other accounts payable and accrued 8 expenses payable arising from and after the Filing Date in the ordinary course of business which are not overdue for a period of more than 120 days or, if overdue for more than 120 days, as to which a dispute exists and adequate reserves in conformity with GAAP have been established on the books of such Person. "Insolvency": with respect to a Multiemployer Plan, the condition that ---------- such Plan is insolvent within the meaning of such term as used in Section 4245 of ERISA. "Interest Period": with respect to any Eurodollar Loan, the period --------------- commencing on the date such Eurodollar Loan is made and ending on the numerically corresponding day in the first, second, or third calendar month thereafter, as the Designated Notification Borrower may select as provided in Section 4.1(a) (or such longer period as may be requested by the Designated - -------------- Notification Borrower and agreed to by the Required Lenders), except that each Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) no Interest Period for any DIP Loan may end after the Scheduled Termination Date; (ii) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans would otherwise be for a shorter period, such DIP Loans shall not be available hereunder. "Interim Order": an order of the Bankruptcy Court substantially in the ------------- form of Exhibit C attached hereto. --------- "Issuing Bank": initially Bank of America and thereafter any other Lender ------------ appointed by the Parent Corporation and approved by the Administrative Agent (such approval not to be unreasonably withheld) that agrees to serve as issuer of Letters of Credit hereunder. "Key Management": Scott Shimizu and Anthony Williams. -------------- "L/C Application": with respect to any Letter of Credit, a letter of --------------- credit application in the Issuing Bank's then customary form completed to the reasonable satisfaction of the Issuing Bank, together with the proposed form of such Letter of Credit (which shall comply with the provisions of Section 3.1 ----------- hereof) and such other certificates, documents and other papers as reasonably required by the Issuing Bank. "L/C Obligations": at any time, the aggregate amount of obligations of the --------------- Borrowers to reimburse the Issuing Bank for any payments made by the Issuing Bank under any Letters of Credit that have not at that time been reimbursed by the Borrowers pursuant to Section 3.3. ----------- "L/C Participating Interest": an undivided participating interest in the -------------------------- Stated Amount of each issued and outstanding Letter of Credit and the L/C Application relating thereto and any L/C 9 Obligations with respect thereto. "Lease Obligations": of the Borrowers and their Subsidiaries, as of the ----------------- date of any determination thereof, the rental commitments of the Borrowers and their Subsidiaries determined on a Consolidated basis, if any, under leases for real and/or personal property (net of rental commitments from sub-leases thereof under which no default by the sublessees has occurred and is continuing), excluding however, obligations under Financing Leases. "Leased Property": as defined in Section 5.12. --------------- ------------ "Lenders": as defined in the preamble. ------- "Letter of Credit Commitment": $60,000,000. --------------------------- "Letter of Credit Facility": the facility described in Section 3 providing ------------------------- --------- for the issuance by the Issuing Bank for the account of one or more of the Borrowers of Letters of Credit in an aggregate Stated Amount at any time outstanding not in excess of the Letter of Credit Commitment. "Letter of Credit Liability": on any date, an amount equal to the sum of -------------------------- (i) the aggregate Stated Amount of all issued and undrawn Letters of Credit plus ---- (ii) the aggregate amount of all L/C Obligations. "Letter of Credit": an irrevocable letter of credit issued pursuant to ---------------- this Agreement under which the Issuing Bank agrees to make payments in Dollars for the account of any Borrower, in respect of obligations incurred pursuant to contracts made or performances undertaken or to be undertaken or like matters relating to contracts to which any Borrower is or proposes to become a party in the ordinary course of business, including, without limiting the foregoing, for insurance purposes or in respect of advance payments or as bid or performance bonds or in connection with industrial revenue bonds or for any other purpose for which a standby letter of credit might customarily be issued. "Lien": any mortgage, pledge, hypothecation, assignment, deposit ---- arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing except for the filing of financing statements in connection with Lease Obligations incurred by the Borrowers or their Subsidiaries to the extent that such financing statements relate to the property subject to such Lease Obligations). "Material Adverse Effect": (a) a material adverse change in, or a material ----------------------- adverse effect upon, the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Borrowers and their Subsidiaries taken as a whole, other than the commencement of the Voluntary Bankruptcy Case or the Chapter 11 Cases or (b) a material adverse effect upon the validity, binding effect or enforceability against any Borrowers of any DIP Financing 10 Document. "Monthly Payment Date": the last Business Day of each month, commencing -------------------- November 30, 2000. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in ------------------ Section 4001(a)(3) of ERISA. "Non-Funding Lender": as defined in Section 4.6(b). ------------------ -------------- "Notice of Borrowing": as defined in Section 4.1. ------------------- ----------- "Obligations": all obligations owing to, and rights of, the Administrative ----------- Agent and/or any Lender pursuant to the DIP Financing Documents, including without limitation, the DIP Loans and the L/C Obligations. "Operating Cash Flow": the sum of (i) EBITDA, plus (ii) Changes in ------------------- Accounts Receivable, plus (iii) Changes in Inventory, plus (iv) Changes in Post- Petition Accounts Payable, less (v) Pre-Petition Accounts Payable Payments. "Parent Corporation": as defined in the preamble. ------------------ "Participants": as defined in Section 11.6(b). ------------ --------------- "Participating Lender": any Lender (other than the Issuing Bank) with -------------------- respect to its L/C Participating Interest in each Letter of Credit. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to ---- Subtitle A of Title IV of ERISA. "Permitted Liens": Liens permitted to exist under Section 8.2. --------------- ----------- "Person": an individual, partnership, corporation, limited liability ------ company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": any pension plan which is covered by Title IV of ERISA and in ---- respect of which the Parent Corporation or a Commonly Controlled Entity is an "employer" as defined in Section 3(5) of ERISA. - --------- "Post-Petition Collateral": as defined in the Interim Order. ------------------------ "Pre-Petition Accounts Payable Payments": Cash payments during a -------------------------------------- reporting period made for the satisfaction of accounts payable owed as of the Filing Date. "Pre-Petition Agent": as defined in the Interim Order. ------------------ 11 "Pre-Petition Collateral": as defined in the Interim Order. ----------------------- "Pre-Petition Indebtedness": as defined in the Interim Order. ------------------------- "Prime Rate": at any time, the prime interest rate announced or published ---------- by the Administrative Agent from time to time as its reference rate for the determination of interest rates for loans of varying maturities in Dollars to United States residents of varying degrees of creditworthiness and being quoted at such time by the Administrative Agent as its "prime rate;" it being understood that such rate may not be the lowest rate of interest charged by the Administrative Agent. "Properties": the real property of the Borrowers subject to the Liens in ---------- favor of the Lenders pursuant to the DIP Financing Documents. "Purchasing Lenders": as defined in Section 11.6(c). ------------------ --------------- "Register" as defined in Section 11.6(d). -------- --------------- "Regulation D": Regulation D of the Board of Governors of the Federal ------------ Reserve System, as from time to time in effect. "Regulation U": Regulation U of the Board of Governors of the Federal ------------ Reserve System, as from time to time in effect. "Regulation X": Regulation X of the Board of Governors of the Federal ------------ Reserve System, as from time to time in effect. "Reorganization": with respect to a Multiemployer Plan, the condition that -------------- such Plan is in reorganization as such term is used in Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ---------------- ERISA or the regulations thereunder. "Required Lenders": as of any date, Lenders on such date having Credit ---------------- Exposures (as defined below) aggregating in excess of 50% of the aggregate Credit Exposures of all Lenders on such date. The "Credit Exposure" of each Lender shall be equal to the aggregate principal amount of the DIP Loans owing to such Lender plus the aggregate unutilized amounts of such Lender's Commitment Percentage of the Total Credit Commitment plus the amount of such Lender's Commitment Percentage of the Letter of Credit Liability; provided that if any -------- Lender with a Commitment shall have failed to pay to the Issuing Bank its Commitment Percentage of any drawing under any Letter of Credit resulting in outstanding L/C Obligations, such Lender's Credit Exposure attributable to Letters of Credit and L/C Obligations shall be deemed to be held by the Issuing Bank for purposes of this definition. "Requirement of Law": as to any Person, the Articles or Certificate of ------------------ Incorporation and 12 By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property, or to which such Person or any of its property is subject. "Reserve Requirement": at any time, the maximum rate at which reserves ------------------- (including, without limitation, any marginal, special, supplemental or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate (as the case may be) is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Scheduled Termination Date": November 14, 2001, subject to extension in -------------------------- accordance with Section 4.12. ------------ "Single Employer Plan": any Plan which is not a Multiemployer Plan. -------------------- "Stated Amount": of each Letter of Credit, the maximum amount available to ------------- be drawn thereunder (in each case determined without regard to whether any conditions to drawing could then be met). "Stated Expiry Date": as defined in Section 3.1. ------------------ ----------- "Subsidiary": as to any Person, any corporation or other entity of which ---------- shares of stock (or analogous ownership interests) of each class having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation or other entity are at the time owned by such Person or by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. (A Subsidiary shall be deemed wholly-owned by a Person who owns all of the shares of stock (or analogous ownership interests) entitled to vote for the election of directors or other managers of such Subsidiary except for directors' qualifying shares.) "Superpriority Claims": Indebtedness or other claims arising out of credit -------------------- obtained or debt incurred by one or more Borrowers having priority in accordance with the provisions of Section 364(c)(1) of the Bankruptcy Code over any or all administrative expenses of the kind specified in Section 503(b) or 507(b) of the Bankruptcy Code. "Termination Date": the date of occurrence of a Termination Event. ---------------- "Termination Event": (i) any material non-compliance by the Borrowers with ----------------- any of the terms or provisions of either of the Financing Orders, (ii) any Event of Default shall have occurred 13 and any notice required to cause the DIP Loans to become due and payable shall have been given, (iii) consummation of a sale of substantially all of the Borrowers' assets pursuant to an order of the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code approving such sale, (iv) the Consummation Date or (v) the Scheduled Termination Date. "Total Credit Commitment": $150,000,000 (which amount includes the Letter ----------------------- of Credit Commitment), as such sum may be reduced from time to time. "Transferee": as defined in Section 11.6(f). ---------- --------------- "Type": with respect to any DIP Loan, a Base Rate Loan or a Eurodollar ---- Loan. "Uniform Customs": the Uniform Customs and Practice for Documentary --------------- Credits (1993 Revision), International Chamber of Commerce Publication No. 500, and any amendments thereof. "Voluntary Bankruptcy Case": as defined in the first recital. ------------------------- 1.2 Other Definitional Provisions. ----------------------------- (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any other DIP Financing Document or any certificate or other document made or delivered pursuant hereto. (b) As used herein, in any other DIP Financing Document and in any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrowers and their Subsidiaries not defined herein, and accounting terms partly defined herein to the extent not defined, shall have the respective meanings given to them under GAAP. All computations determining compliance with financial covenants or terms, including definitions used therein, shall be prepared in accordance with GAAP in effect at the time of the preparation of, and in conformity with those used to prepare, the historical financial statements delivered to the Administrative Agent pursuant to Section 7.1. If at any time the ----------- computations for determining compliance with financial covenants or provisions relating thereto utilize GAAP different than those then being utilized in the financial statements then being delivered to the Administrative Agent, such financial statements shall be accompanied by a reconciliation statement with respect to such computations. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to the singular and plural forms of such terms. (e) Whenever the knowledge of the Borrowers is referenced herein, such knowledge shall refer to the actual knowledge of the officers and directors of the Borrowers, 14 but shall not refer to the knowledge of any other employees of the Borrowers. SECTION 2. COMMITMENTS. ----------- 2.1 Commitments. Subject to the terms and conditions of this Agreement ----------- (including, without limitation, those contained in Section 2.3 and Section 6), ----------- --------- each Lender severally and for itself alone agrees that it will, in accordance with the terms and provisions hereof, from time to time on any Business Day occurring during the period commencing on the Effective Date until, but not including, the Termination Date, make loans to the Borrowers requested by the Designated Notification Borrower in an aggregate principal amount at any time outstanding not to exceed such Lender's Commitment Percentage of the Total Credit Commitment (each such loan made pursuant to this Section 2.1 being ----------- referred to as a "DIP Loan", and collectively as the "DIP Loans"). Subject to -------- --------- the terms and conditions of this Agreement, the Borrowers may borrow, repay and reborrow hereunder on a Business Day occurring during the period commencing on the Effective Date until, but (as to Borrowings and re-Borrowings) not including, the Termination Date. 2.2 Letter of Credit Commitments. Subject to the terms and conditions of ---------------------------- this Agreement (including, without limitation, those contained in Section 2.3 ----------- and Section 6), each Lender severally and for itself alone agrees that it will, --------- in accordance with the terms and provisions hereof, from time to time on any Business Day occurring during the period commencing on the Effective Date until (but not including) the Termination Date, issue (in the case of the Issuing Bank) or participate in (in the case of all other Lenders) Letters of Credit for the account of one or more of the Borrowers requested by the Designated Notification Borrower under the Letter of Credit Facility in an aggregate Stated Amount at any time outstanding not to exceed such Lender's Commitment Percentage of the Letter of Credit Commitment. 2.3 Certain Limitations. Notwithstanding anything to the contrary in this ------------------- Section 2 or otherwise, no Lender (or the Issuing Bank, in the case of Letters - --------- of Credit) shall be permitted or required to (a) make any DIP Loan or issue, extend or participate in any Letter of Credit if, after giving effect thereto, the sum of (i) the aggregate outstanding principal amount of all DIP Loans, plus (ii) the ---- Letter of Credit Liability would exceed the Total Credit Commitment; or (b) issue, extend or participate in any Letter of Credit if, after giving effect to such issuance or extension, the Letter of Credit Liability would exceed $60,000,000. 2.4 Voluntary Commitment Reductions. At their option, the Borrowers may ------------------------------- reduce the Total Credit Commitment upon three Business Days' prior written notice to the Administrative Agent. Any such reduction shall be in an amount of $1,000,000 or an integral multiple thereof. 2.5 Fees. The Borrowers agree to pay the fees set forth in this Section ---- ------- 2.5. - --- (a) Facility Fee; Underwriting Fee. On the Effective Date, the ------------------------------ Borrowers shall pay in the aggregate to the Administrative Agent (i) a non- refundable facility fee, equal to 15 0.50% of the Total Credit Commitment, which amount Administrative Agent shall hold in escrow until either (A) 30 days after the Effective Date, or (B) entry of the Final Order, whichever first occurs, at which time the Administrative Agent shall distribute such facility fee to the Lenders party hereto on such distribution date for the pro rata account of each -------- such Lender in accordance with its Commitment Percentage and (ii) for the pro rata account of each Lender party hereto on the Effective Date, in -------- accordance with its Commitment Percentage, a non-refundable underwriting fee, equal to 0.50% of the Total Credit Commitment. (b) Unused Capacity Fee. For the period of time commencing on the ------------------- Effective Date until, but not including, the Termination Date, the Borrowers agree to pay in the aggregate to the Administrative Agent for the pro rata account of each Lender in accordance with its Commitment -------- Percentage a non-refundable unused commitment fee. Such unused commitment fee will be payable in arrears by the Borrowers, on each Monthly Payment Date and on the Termination Date. Each payment of such unused commitment fee shall be determined for the calendar month (or portion of a calendar month commencing on the date hereof or ending on the Termination Date) preceding and including the date such payment is due and shall be equal to the product of (i) 0.50%, per annum, multiplied by (ii) the amount by which the average daily Total Credit Commitment exceeds the sum of (A) the average daily principal amount outstanding under DIP Loans plus (B) the average daily Letter of Credit Liability. (c) Letter of Credit Fee. The Borrowers agree to pay letter of credit -------------------- fees as follows: (i) to the Administrative Agent for the pro rata account of --- ---- each Lender (including the Issuing Bank) in accordance with its Commitment Percentage, a non-refundable letter of credit fee at the rate of 3.5% per annum on the aggregate undrawn and available amount under all outstanding Letters of Credit; and (ii) to the Issuing Bank for its own account, an issuing fee of 0.20% per annum on the aggregate Stated Amount of Letters of Credit issued, and all reasonable "fronting" or correspondent bank fees incurred by the Issuing Bank, in connection with any Letter of Credit issued by the Issuing Bank, together with all other customary and administrative fees and all reasonable amendment and extension fees which may be charged, from time to time, by the Issuing Bank in respect of any Letters of Credit. Such letter of credit fees shall be payable: (iii) with respect to those fees described in clause (i) above: (A) on the first Monthly Payment Date following the issuance of any Letter of Credit for the period from the date of such issuance of any Letter of Credit to (but not including) such Monthly Payment Date, and 16 (B) thereafter for Letters of Credit, on each Monthly Payment Date for the period from the immediately preceding Monthly Payment Date up to (but not including) such Monthly Payment Date; (iv) with respect to those fees described in clause (ii), on the date of issuance (or amendment or extension) of the Letter of Credit with respect to which such fees are incurred or the date of incurrence, as the case may be. (d) Administrative Agent's Fee. The Borrowers shall pay to the -------------------------- Administrative Agent for its own account an agency fee equal to $5,000 per month, payable monthly in advance on the first Business Day of each month. 2.6 Use of Proceeds. From and after the Effective Date, the proceeds of --------------- the DIP Loans, the Designated Post-Petition Loans and the issuance of the Letters of Credit shall be used by the Borrowers to finance the ongoing working capital and general corporate requirements of the Borrowers and their Subsidiaries in a manner not materially inconsistent with the Budget. SECTION 3. LETTERS OF CREDIT. ----------------- 3.1 Issuances and Extensions. Subject to the terms and conditions of ------------------------ this Agreement, the Issuing Bank shall issue Letters of Credit, and extend the Stated Expiry Dates of outstanding Letters of Credit, in accordance with the provisions of this Section 3 and the L/C Applications submitted therefor, --------- respectively. The Issuing Bank will make available the original of each Letter of Credit to the beneficiary thereunder (with a copy to the relevant Borrower) which it issues hereunder and will notify the beneficiary under any Letter of Credit of any extension of the Stated Expiry Date thereof. Notwithstanding anything to the contrary herein, each Letter of Credit shall be (i) stated to expire (including all rights of any Borrower or any beneficiary named in such Letter of Credit to require renewal) on a date (its "Stated Expiry Date") no ------------------ later than one year after the date such Letter of Credit was issued, (ii) subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of Texas, and (iii) in such form as shall be reasonably acceptable to the Issuing Bank. 3.2 Participating Interests. Effective in the case of each Letter of ----------------------- Credit as of the date of the issuance thereof, the Issuing Bank agrees to allot and does allot, to itself and each other Lender, and each Lender severally and irrevocably agrees to take and does take in such Letter of Credit and the related L/C Application and all L/C Obligations in respect thereof, an L/C Participating Interest in a percentage equal to such Lender's Commitment Percentage. 3.3 Payments in Respect of Letters of Credit. ---------------------------------------- (a) The Borrowers agree within one Business Day after demand by the Issuing Bank and otherwise in accordance with the terms of the L/C Application relating thereto, (i) to reimburse the Issuing Bank for any payment made by the Issuing Bank under any Letter of Credit and (ii) to pay interest on any unreimbursed portion of any such payment from the date of such payment until reimbursement in full thereof at a rate per annum equal to the Base Rate, plus the Applicable Margin For Base Rate Loans payable on each Monthly Payment Date. 17 (b) In the event that the Issuing Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor within one Business Day after demand of the Issuing Bank, and otherwise in accordance with the terms of the L/C Application relating to such Letter of Credit, the Issuing Bank shall promptly notify the Administrative Agent who shall then promptly notify each other Lender. Forthwith upon its receipt of any such notice, each other Lender shall transfer to the Administrative Agent, in immediately available funds, an amount equal to such other Lender's Commitment Percentage of the L/C Obligation arising from such unreimbursed payment, and the Administrative Agent shall then promptly transfer such funds to the Issuing Bank. (c) Whenever, at any time after the Issuing Bank has made a payment under any Letter of Credit and has received from any other Lender such other Lender's Commitment Percentage of the L/C Obligation arising therefrom, the Issuing Bank receives any reimbursement on account of such L/C Obligation or any payment of interest or fees on account thereof, the Issuing Bank shall distribute to the Administrative Agent who shall then distribute to such other Lender its Commitment Percentage thereof in like funds as received; provided, however, that in the event that the receipt by -------- ------- the Issuing Bank of such reimbursement or such payment of interest (as the case may be) is required to be returned, such other Lender shall return to the Issuing Bank any portion thereof previously distributed by the Issuing Bank to it in like funds as such reimbursement or payment is required to be returned by the Issuing Bank. 3.4 Actions Upon Maturity. If the Termination Date occurs prior to the --------------------- expiration of any Letter of Credit, (a) each such Letter of Credit shall be replaced and returned to the Administrative Agent undrawn and marked "canceled" on or prior to the Termination Date, (b) the applicable Borrower shall, on or before the Termination Date, secure its obligations under such Letter of Credit with a back-to-back letter of credit that is in an amount equal to 105% of the face amount of such Letter of Credit, in form and substance, and issued by a financial institution, reasonably satisfactory to the Administrative Agent or (c) the applicable Borrower shall, on or before the Termination Date, provide cash collateral with respect to such Letter of Credit in an amount equal to 105% of the face amount of such Letter of Credit by depositing cash in such amount into an account established by the Borrowers under the sole and exclusive control of the Administrative Agent, such cash to be remitted to the applicable Borrower upon the expiration, cancellation or other termination or satisfaction of the applicable Borrower's reimbursement obligations with respect to such Letter of Credit. 3.5 Further Assurances. The Borrowers hereby agree, from time to time, to ------------------ do and perform any and all acts and to execute any and all further instruments reasonably requested by the Issuing Bank more fully to effect the purposes of this Agreement and the issuance of Letters of Credit hereunder. 3.6 Obligations Absolute. The payment obligations of the Borrowers under -------------------- this Agreement with respect to the Letters of Credit shall be joint and several, unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: 18 (a) the existence of any claim, set-off, defense or other right which any Borrower may have at any time against any beneficiary, or any transferee, of any Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, the Administrative Agent or any Lender, or any other Person, whether in connection with this Agreement, any DIP Financing Document, the transactions contemplated herein, or any unrelated transaction; (b) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent or invalid or any statement therein being untrue or inaccurate in any respect; (c) payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate or other document which does not comply with the terms of such Letter of Credit or is insufficient in any respect; or (d) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. Nothing contained in this Section 3.6 shall relieve the Issuing Bank of ----------- liability for its gross negligence or willful misconduct. 3.7 Assignments. No Participating Lender's participation in any Letter ----------- of Credit or any of its rights or duties hereunder shall be subdivided, assigned or transferred (other than in connection with a transfer of a corresponding portion or all of such Participating Lender's Commitment in accordance with Section 11.6). - ------------ 3.8 Participations. Each Lender's obligation to purchase participating -------------- interests pursuant to Section 3.2 shall be absolute and unconditional and shall ----------- not be affected by any circumstance, including, without limitation, (i) any set- off, counterclaim, recoupment, defense or other right which such Lender may have against the Issuing Bank, any Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of an Event of Default; (iii) any adverse change in the condition (financial or otherwise) of any Borrower; (iv) any breach of this Agreement by any Borrower or any other Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 4. GENERAL PROVISIONS APPLICABLE TO DIP LOANS. ------------------------------------------ 4.1 Procedure for DIP Loan Borrowings. --------------------------------- (a) Notices of Borrowing. The Borrowers may request DIP Loans on -------------------- any Business Day; provided that, with respect to any such Borrowing, the -------- Designated Notification Borrower shall give the Administrative Agent irrevocable written notice, or irrevocable telephonic notice followed immediately by written notice, which notice must be received by the Administrative Agent (i) not later than 12:00 noon. Dallas, Texas time on the Borrowing Date for each Base Rate Loan and (ii) not later than 12:00 noon Dallas, Texas 19 time, at least three Business Days prior to the Borrowing Date for each Eurodollar Loan borrowing, continuation or conversion, specifying (a) the Borrowing Date, (b) the Type of DIP Loan being requested, (c) the amount of such Borrowing, and (d) in the case of Eurodollar Loans, the duration of the Interest Period therefor (a "Notice of Borrowing"). Upon receipt of ------------------- such Notice of Borrowing the Administrative Agent shall promptly notify each Lender. Not later than 2:00 p.m., Dallas, Texas time, on the Borrowing Date specified in such notice, each Lender shall make available to the Administrative Agent at the office of the Administrative Agent specified in Section 11.2 (or at such other location as the Administrative Agent may ------------ direct) an amount in immediately available funds equal to the amount of the DIP Loan to be made by such Lender. DIP Loan proceeds received by the Administrative Agent hereunder shall promptly be made available to the Designated Notification Borrower by the Administrative Agent's crediting the account of the Designated Notification Borrower, at the office of the Administrative Agent specified in Section 11.2, with the aggregate amount ------------ actually received by the Administrative Agent from the Lenders and in like funds as received by the Administrative Agent. Each Borrowing shall be in an aggregate minimum amount of $500,000 and integral multiples of $50,000 for Base Rate Loans, and $1,000,000 and integral multiples of $100,000 for Eurodollar Loans. (b) Continuation Options. Subject to the provisions made in this -------------------- Section 4.1(b), the Borrowers may elect to continue all or any part of any -------------- Eurodollar Loan beyond the expiration of the then current Interest Period relating thereto by giving advance notice through the Designated Notification Borrower as provided in Section 4.1(a) to the Administrative -------------- Agent (which shall promptly notify the Lenders) of such election, specifying the amount of such DIP Loan to be continued and the Interest Period therefor. In the absence of such a timely and proper election, the Borrowers shall be deemed to have elected to convert such Eurodollar Loan to a Base Rate Loan pursuant to Section 4.1(c). All or any part of any -------------- Eurodollar Loan may be continued as provided herein, provided that (i) any continuation of any such DIP Loan shall be (as to each DIP Loan as continued for an applicable Interest Period) in amounts of at least $1,000,000 or any whole multiple of $100,000 in excess thereof and (ii) no Event of Default shall have occurred and be continuing. If an Event of Default shall have occurred and be continuing, each Eurodollar Loan shall be converted to a Base Rate Loan on the last day of the Interest Period applicable thereto. (c) Conversion Options. The Borrowers may elect to convert all or any ------------------ part of any Eurodollar Loan on the last day of the then current Interest Period relating thereto to a Base Rate Loan by giving advance notice through the Designated Notification Borrower to the Administrative Agent (which shall promptly notify the Lenders) of such election. Subject to the provisions made in this Section 4.1(c), the Borrowers may elect to convert -------------- all or any part of any Base Rate Loan at any time and from time to time to a Eurodollar Loan by giving advance notice through the Designated Notification Borrower to the Administrative Agent as provided in Section ------- 4.1(a) (which shall promptly notify the Lenders) of such election. All or ------ any part of any outstanding DIP Loan may be converted as provided herein, provided that (i) any conversion of any Base Rate Loan into a Eurodollar Loan shall be (as to each such DIP Loan into which there is a conversion for an applicable Interest Period) in amounts of at least $1,000,000 or any whole multiple of $100,000 in excess thereof, (ii) no Event of 20 Default shall have occurred and be continuing. If an Event of Default shall have occurred and be continuing, no Base Rate Loan may be converted into a Eurodollar Loan, and (iii) no more than eight Interest Periods may be in effect at any time. 4.2 Repayments and Prepayments. The Borrowers promise to make payment in -------------------------- full in cash of all unpaid principal of each DIP Loan and all other unpaid obligations hereunder, including, without limitation, the Letter of Credit Liability and all accrued and unpaid interest and fees required to be paid hereunder, on the Termination Date. This Agreement evidences the Borrowers' joint and several obligations and no note is required to evidence such obligations. Prior to the Termination Date, the Borrowers (a) may prepay Base Rate Loans upon not less than one (1) Business Day's prior notice to the Administrative Agent (which shall promptly notify the Lenders), which notice shall specify the prepayment date (which shall be a Business Day) and the amount of the prepayment (which shall be at least $500,000 or the remaining aggregate principal balance outstanding on the DIP Loans) and shall be irrevocable and effective only upon receipt by the Administrative Agent, provided that interest on the principal prepaid, accrued to the prepayment date, shall be paid on the prepayment date, and may prepay Eurodollar Loans on the same conditions as for Base Rate Loans (except that prior notice to the Administrative Agent shall be not less than three (3) Business Days for Eurodollar Loans) and in addition such prepayments of Eurodollar Loans shall be subject to the terms of Section ------- 4.11 and shall be in an amount equal to all of the Eurodollar Loans for the ---- Interest Period prepaid; (b) shall make prepayments in accordance with the terms of the Financing Orders; and (c) shall make a mandatory prepayment of all DIP Loans in an aggregate amount equal to the excess, if any, on any date of (i) the sum of (x) the aggregate outstanding principal amount of all DIP Loans and (y) the Letter of Credit Liability, over ---- (ii) the Total Credit Commitment (as reduced from time to time in accordance with this Agreement). No payment of principal of any DIP Loans shall cause a reduction in the Total Credit Commitment. Prepayments permitted or required under this Section 4.2 shall be ----------- without premium or penalty, except that the Borrowers shall be required to pay the amounts required under Section 4.11 for prepayment ------------ of Eurodollar Loans. 4.3 Treatment of Asset Sales. All net cash proceeds realized from asset ------------------------ sales during the Chapter 11 Cases shall be applied in accordance with the Financing Orders. 4.4 Interest Rates and Payment Dates. -------------------------------- (a) Subject to Section 4.4(b) hereof, all DIP Loans shall bear -------------- interest at a rate per annum equal to (i) the Base Rate (as in effect from time to time) plus the Applicable Margin 21 if such a DIP Loan is a Base Rate Loan, but in no event to exceed the Highest Lawful Rate, and (ii) the Adjusted Eurodollar Rate for each Interest Period relating thereto (as in effect from time to time) plus the Applicable Margin if such a DIP Loan is a Eurodollar Loan, but in no event to exceed the Highest Lawful Rate. (b) Upon the occurrence and during the continuance of an Event of Default, all DIP Loans and all other amounts outstanding under this Agreement, shall bear interest at a rate per annum which is 2% above the otherwise applicable rate. (c) Interest on Base Rate Loans shall be payable in arrears on each Monthly Payment Date. Interest on each Eurodollar Loan shall be payable on the last day of the Interest Period therefor and, if such Interest Period is longer than one month, at one-month intervals following the first day of such Interest Period. Upon the occurrence and during the continuance of an Event of Default, interest shall be payable on demand of the Administrative Agent. 4.5 Computation of Interest and Fees. Interest on Eurodollar Loans and -------------------------------- fees shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which such interest is payable, unless such calculation would exceed the Highest Lawful Rate, in which case interest shall be calculated on the per annum basis of a year of 365 or 366 days, as the case may be. Interest on Base Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day) occurring in the period for which such interest is payable. 22 4.6 Pro Rata Treatment and Payments. ------------------------------- (a) Each Borrowing of DIP Loans by the Borrowers from the Lenders and any reduction of the Total Credit Commitment hereunder and any payments in respect of principal, interest or fees hereunder shall be made pro rata -------- according to the Commitment Percentage of the Lenders with respect to the DIP Loans borrowed or the Total Credit Commitment to be reduced. (b) If any Lender (a "Non-Funding Lender") has (x) failed to make a ------------------ DIP Loan required to be made by it hereunder, and the Administrative Agent has determined that such Lender is not likely to make such a DIP Loan or (y) given notice to any Borrower or Administrative Agent that it will not make, or that it has disaffirmed or repudiated any obligation to make, any DIP Loan, in each case by reason of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or otherwise, (i) any payment made on account of the principal of the DIP Loans outstanding shall be made as follows: (A) in the case of any such payment made on any date when and to the extent that, in the reasonable determination of the Administrative Agent, the Borrowers would be able, under the terms and conditions hereof, to reborrow the amount of such payment and to satisfy any applicable conditions precedent set forth in Section 6 to such --------- reborrowing, such payment shall be made on account of the outstanding DIP Loans held by the Lenders other than the Non-Funding Lender pro --- rata according to the respective outstanding principal amounts of the ----- DIP Loans of such Lenders; and (B) otherwise, such payment shall be made on account of the outstanding DIP Loans held by the Lenders pro rata according to the -------- respective outstanding principal amounts of such DIP Loans; and (C) any payment made on account of interest on the DIP Loans shall be made pro rata according to the respective amounts of accrued -------- and unpaid interest due and payable on the DIP Loans with respect to which such payment is being made. The Borrowers agree to give the Administrative Agent such assistance in making any determination pursuant to subparagraph (A) of this paragraph as the Administrative Agent may reasonably request. Any such determination by the Administrative Agent shall be conclusive and binding on the Lenders absent manifest error. (c) All payments (including prepayments) to be made by the Borrowers on account of principal, interest and fees shall be made without set-off or counterclaim and shall be made to the Administrative Agent, for the account of the Lenders at the Administrative Agent's office, Bank of America, N.A., 901 Main Street, 14th Floor, Dallas, Texas 75202, in Dollars and in immediately available funds. The Administrative Agent shall promptly distribute such payments in accordance with the provisions of this Section ------- 4.6 promptly upon receipt in like funds as received. If any payment --- hereunder would become due and payable on a day other than a Business Day, such payment would become due and payable on the next succeeding Business Day and, with respect to payments of principal, interest thereon 23 shall be payable at the then applicable rate during such extension. (d) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing Date that such Lender will not make the amount that would constitute its Commitment Percentage of the Borrowing on such date available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such Borrowing Date in accordance with Section 4.1 and the Administrative Agent may, in reliance upon such ----------- assumption, make available to the Borrowers a corresponding amount. If such amount is made available to the Administrative Agent by such Lender on a date after such Borrowing Date, such Lender shall pay to the Administrative Agent on demand an amount equal to the product of (i) the daily average Federal Funds Rate during such period as quoted by the Administrative Agent, times (ii) the amount of such Lender's Commitment Percentage of such Borrowing, times (iii) a fraction the numerator of which is the number of days that elapse from and including such Borrowing Date to the date on which such Lender's Commitment Percentage of such Borrowing shall have become immediately available to the Administrative Agent and the denominator of which is 360. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection 4.6(d) shall be conclusive, absent manifest error. If such Lender's Commitment Percentage of such Borrowing is not in fact made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date and the Administrative Agent has made such amount available to the Borrowers, then Administrative Agent shall be entitled to recover such amount with interest thereon at the rate per annum applicable to DIP Loans hereunder, on demand, from the Borrowers, without prejudice to any rights which the Borrowers or the Administrative Agent may have against such Lender hereunder. Nothing contained in this subsection 4.6(d) shall relieve any Lender which has failed to make available its ratable portion of any Borrowing hereunder from its obligation to do so in accordance with the terms hereof. (e) The failure of any Lender to make any DIP Loan to be made by it on any Borrowing Date shall not relieve any other Lender of its obligation, if any, hereunder to make its DIP Loan on such Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make any DIP Loan to be made by such other Lender on such Borrowing Date. 4.7 Additional Costs. ---------------- (a) Eurodollar Regulations, etc. The Borrowers shall pay directly to --------------------------- each Lender from time to time such amounts as such Lender may reasonably determine to be necessary to compensate such Lender for any costs which it determines are attributable to its making or maintaining of any Eurodollar Loans or issuing or participating in Letters of Credit hereunder or its obligation to make any Eurodollar Loans or issue or participate in any Letters of Credit hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Eurodollar Loans, Letters of Credit or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from ---------------- any Change in Law which: (i) changes the basis of taxation of any amounts payable to such Lender under this Agreement in respect of any of such Eurodollar 24 Loans or Letters of Credit (other than taxes imposed on the overall net income of such Lender or of its applicable lending office for any of such Eurodollar Loans by the jurisdiction in which such Lender has its principal office or applicable lending office); or (ii) imposes or modifies any reserve, special deposit, minimum capital, capital ratio or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of such Lender, or the Commitment or DIP Loans of such Lender or the Eurodollar interbank market; or (iii) imposes any other condition affecting this Agreement (or any of such extensions of credit or liabilities) or such Lender's Commitment or DIP Loans. Each Lender will notify the Administrative Agent and the Borrowers of any event occurring after the date hereof which will entitle such Lender to compensation pursuant to this Section 4.7(a) as promptly as practicable -------------- after it obtains knowledge thereof and determines to request such compensation, and will designate a different lending office for the DIP Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender, provided that such Lender shall have no obligation to so designate a lending office located in the United States. If any Lender requests compensation from the Borrowers under this Section 4.7(a), the Borrowers -------------- may, by notice to such Lender, suspend the obligation of such Lender to make additional DIP Loans of the Type with respect to which such compensation is requested until the Change in Law giving rise to such request ceases to be in effect (in which case the provisions of Section ------- 4.10 shall be applicable). ---- (b) Change in Law. Without limiting the effect of the provisions of ------------- Section 4.7(a), in the event that at any time, by reason of (i) any Change -------------- in Law or (ii) any other circumstances arising after the date hereof affecting (A) any Lender, (B) the Eurodollar interbank market or (C) such Lender's position in such market, the Adjusted Eurodollar Rate, as determined in good faith by such Lender, will not adequately and fairly reflect the cost to such Lender of funding its Eurodollar Loans, then, if such Lender so elects, by notice to the Borrowers and the Administrative Agent, the obligation of such Lender to make additional Eurodollar Loans shall be suspended until such Change in Law or other circumstances ceases to be in effect (in which case the provisions of Section 4.10 shall be ------------ applicable). (c Capital Adequacy. Without limiting the effect of the foregoing ---------------- provisions of this Section 4.7 (but without duplication), the Borrowers ----------- shall pay directly to any Lender from time to time on request such amounts as such Lender may reasonably determine to be necessary to compensate such Lender or its parent or holding company for any costs which it determines are attributable to the maintenance by such Lender or its parent or holding company (or any applicable lending office), pursuant to any Requirement of Law following any Change in Law, of capital in respect of its Commitment or its DIP Loans or any interest held by it in any Letter of Credit, such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender or its parent or holding company (or any applicable lending office) to a level below that which such Lender or its parent or holding company (or any applicable lending office) could have achieved but for such Requirement of Law. Such Lender will notify the Borrowers that it is entitled to compensation pursuant to this Section 4.7(c) as promptly as practicable -------------- after it determines to request such compensation. 25 (d Compensation Procedure. Any Lender notifying the Borrowers of ---------------------- the incurrence of additional costs under this Section 4.7 shall in such ----------- notice to the Borrowers and the Administrative Agent set forth in reasonable detail the basis and amount of its request for compensation. Determinations and allocations by each Lender for purposes of this Section ------- 4.7: (i) (A) of the effect of any Change in Law pursuant to Section 4.7(a) --- -------------- or (b), or of the effect of capital maintained pursuant to Section 4.7(c); --- -------------- (B) on its costs or rate of return of maintaining DIP Loans or its obligation to make DIP Loans or issue Letters of Credit; or (C) on amounts receivable by it in respect of DIP Loans or Letters of Credit, and (ii) of the amounts required to compensate such Lender under this Section 4.7, ----------- shall be conclusive and binding for all purposes, provided that such determinations and allocations are made on a reasonable basis. Any request for additional compensation under this Section 4.7 shall be paid by the ----------- Borrowers promptly upon receipt by the Borrowers of the notice described in this Section 4.7(d). -------------- 4.8 Limitation on Eurodollar Loans. Anything herein to the contrary ------------------------------ notwithstanding, if, on or prior to the determination of any Eurodollar Rate for any Interest Period: (a the Administrative Agent determines (which determination shall be conclusive, absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 are not being provided in the relevant amounts or for the ----------- relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (b the Administrative Agent determines (which determination shall be conclusive, absent manifest error) that the relevant rates of interest referred to in the definition of "Eurodollar Rate" in Section 1.1 upon the ----------- basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not sufficient to adequately cover the cost to the Lenders of making or maintaining Eurodollar Loans; then the Administrative Agent shall give the Borrowers prompt notice thereof, and so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans. 4.9 Illegality. Notwithstanding any other provision of this Agreement, in ---------- the event that it becomes unlawful for any Lender or its applicable lending office to honor its obligation to make or maintain Eurodollar Loans hereunder, then such Lender shall promptly notify the Borrowers thereof and such Lender's obligation to make Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 4.10 shall be applicable). ------------ 4.10 Base Rate Loans Pursuant to Sections 4.7, 4.8 and 4.9. If the ----------------------------------------------------- obligation of any Lender to make Eurodollar Loans shall be suspended pursuant to Sections 4.7, 4.8 or 4.9 ("Affected Loans"), all Affected Loans which would - ----------------- --- -------------- otherwise be made by such Lender shall be made instead as Base Rate Loans (and, if an event referred to in Section 4.7(b) or Section 4.9 has occurred and such -------------- ----------- Lender so requests by notice to the Borrowers, all Affected Loans of such Lender then outstanding shall be automatically converted into Base Rate Loans on the date specified by such 26 Lender in such notice) and, to the extent that Affected Loans are so made as (or converted into) Base Rate Loans, all payments of principal which would otherwise be applied to such Lender's Affected Loans shall be applied instead to its Base Rate Loans. 4.11 Compensation. The Borrowers shall pay to each Lender promptly upon ------------ receipt of written request of such Lender (which request shall set forth, in reasonable detail, the basis for requesting such amounts and which shall be conclusive and binding for all purposes provided that such determinations are made on a reasonable basis), such amount or amounts as shall compensate it for any loss, cost, expense or liability which such Lender determines are attributable to: (a any payment, prepayment or conversion of a Eurodollar Loan properly made by such Lender or the Borrowers for any reason (including, without limitation, the acceleration of the DIP Loans) on a date other than the last day of the Interest Period for such DIP Loan; or (b any failure by the Borrowers for any reason (including but not limited to, the failure of any of the conditions precedent specified in Section 6 to be satisfied) to borrow, continue or convert a Eurodollar Loan --------- from such Lender on the date for such borrowing, continuation or conversion specified in the relevant notice given pursuant to Section 4.1. ----------- Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the principal amount so paid, prepaid or converted or not borrowed for the period from the date of such payment, prepayment or conversion or failure to borrow to the last day of the Interest Period for such DIP Loan (or, in the case of a failure to borrow, the Interest Period for such DIP Loan which would have commenced on the date specified for such borrowing) at the applicable rate of interest for such DIP Loan provided for herein over (ii) the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender). 4.12 Extension of Termination Date. The Borrowers may, upon 30 days prior ----------------------------- written notice through the Designated Notification Borrower to the Administrative Agent, extend the Termination Date for one six month period if and only if (i) on the proposed extension date, no Default or Event of Default shall have occurred and be continuing; (ii) concurrent with delivery of the notice required hereunder, the Borrowers deliver to the Administrative Agent and the Lenders (x) a three year revised business plan, in form and substance reasonably satisfactory to the Administrative Agent, and (y) a new budget (and proposed financial covenants) for the next six month period, in form and substance reasonably satisfactory to the Administrative Agent; (iii) prior to the proposed extension date, the Borrowers shall have filed a motion in the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code seeking approval of a process for the sale or other disposition of certain assets of the Borrowers previously identified to the Administrative Agent and the Lenders, such motion to be in form and substance reasonable satisfactory to the Administrative Agent; (iv) prior to the proposed extension date, the Borrowers shall have used its best efforts to have filed a motion in the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code seeking approval of a process for the sale or other disposition of certain assets of the Borrowers previously 27 identified to the Administrative Agent and the Lenders, such motion to be in form and substance reasonable satisfactory to the Administrative Agent; and (v) on the proposed extension date, the Borrowers shall have paid to the Administrative Agent, for the pro rata benefit of the Lenders, an extension fee in an amount equal to 0.50% of the Total Credit Commitment as of the date of the proposed extension. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ In order to induce the Administrative Agent and the Lenders to enter into this Agreement and to make the DIP Loans and to induce the Issuing Bank to issue, and the Participating Lenders to participate in, the Letters of Credit, the Borrowers hereby represent and warrant to each Lender and Administrative Agent that: 5.1 Financial Condition. The unaudited Consolidated balance sheet of the ------------------- Parent Corporation and its Subsidiaries as at September 30, 2000 and the related unaudited Consolidated statements of income and of cash flows for the periods ended on such date, certified by the chief financial officer or controller of the Parent Corporation, copies of which have heretofore been furnished to each Lender, present fairly the Consolidated financial condition of the Parent Corporation and its Consolidated Subsidiaries as at such date, and the Consolidated results of their operations and their Consolidated cash flows for the period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or such officer, as the case may be, and as disclosed therein). 5.2 No Change. Since September 30, 2000 (a) other than the commencement --------- of the Chapter 11 Cases and all events and circumstances leading thereto and associated therewith (including, without limitation, vendors and suppliers to the Borrowers refusing to extend credit to the Borrowers and requiring that goods and services be paid for in cash, all of which has caused the Borrowers to deplete virtually all available cash and to utilize substantially all available credit) or as otherwise disclosed in the financial statements previously provided to the Lenders or in the Budget, there has been no change, which has had or could reasonably be expected to have a Material Adverse Effect and (b) no dividends or other distributions have been declared, paid or made upon the capital stock of the Borrowers nor has any of the capital stock of the Borrowers been redeemed, retired, purchased or otherwise acquired for value by any of the Borrowers. 5.3 Corporate Existence; Compliance with Law. Each of the Borrowers, ---------------------------------------- except in each case as such may be affected by the commencement of the Chapter 11 Cases and all events and circumstances associated therewith, (a) is a corporation or other Person duly organized and validly existing under the laws of the jurisdiction of its organization, (b) has full legal power and authority and possesses all governmental franchises, licenses, permits, authorizations and approvals necessary to enable it to use its corporate name and to own, lease or otherwise hold its properties and assets and to carry on its business as now conducted other than such franchises, licenses, permits, authorizations and approvals the lack of which, individually or in the aggregate, would not have a Material Adverse Effect, (c) is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership, leasing or holding of its properties makes such 28 qualification necessary, except such jurisdictions where the failure so to qualify would not have a Material Adverse Effect, and (d) is in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority or instrumentality, domestic or foreign, except where noncompliance would not have a Material Adverse Effect. No Borrower has received any written communication from a Governmental Authority that alleges that any of the Borrowers or any of the Borrowers' Subsidiaries is not in compliance, in all material respects, with all material Federal, state, local or foreign laws, ordinances, rules and regulations. 5.4 Corporate Power; Authorization. Subject to the approval of the ------------------------------ Bankruptcy Court pursuant to the Financing Orders, the Borrowers have legal power and authority to make, deliver and perform each of the DIP Financing Documents to which they are a party, and, subject to the approval of the Bankruptcy Court pursuant to the Financing Orders, the Borrowers have the legal power and authority and legal right to borrow hereunder and to have Letters of Credit issued for their respective accounts hereunder. The Borrowers have taken all necessary legal action to authorize the execution, delivery and performance of each of the DIP Financing Documents to which they are a party and the Borrowers have taken all necessary legal action to authorize the Borrowings hereunder and the issuance of Letters of Credit for their respective accounts hereunder. Except for the approval of the Bankruptcy Court pursuant to the Financing Orders, no consent or authorization of, or filing with, any Person (including, without limitation, any Governmental Authority) is required in connection with the execution, delivery or performance by the Borrowers, or for the validity or enforceability against the Borrowers, of any DIP Financing Document except for consents, authorizations and filings which have been obtained or made and are in full force and effect and except such consents, authorizations and filings, the failure to obtain or perform which would not have a Material Adverse Effect. 5.5 Enforceable Obligations. Each DIP Financing Document delivered on or ----------------------- prior to the date hereof (i) has been duly executed and delivered on behalf of the Borrowers that are parties thereto and (ii) subject to the approval of the Bankruptcy Court pursuant to the Financing Orders, constitutes the legal, valid and binding obligation of the Borrowers, as the case may be, and is enforceable against the Borrowers in accordance with its terms. 5.6 No Legal Bar. Subject to the approval of the Bankruptcy Court ------------ pursuant to the Financing Orders, the execution, delivery and performance of each DIP Financing Document, the use of the proceeds of the DIP Loans, the Designated Post-Petition Loans and drawings under the Letters of Credit and the transactions contemplated by or in respect of such use of proceeds will not violate any Requirement of Law or any Contractual Obligation other than those violations existing on the Filing Date applicable to or binding upon the Borrowers or any of their respective properties or assets in any manner which, individually or in the aggregate, (i) would have a material adverse effect on the ability of the Borrowers to perform their obligations under the DIP Financing Documents to which they are a party, (ii) would give rise to any liability on the part of the Administrative Agent or any Lender, or (iii) would have a Material Adverse Effect, and will not result in the creation or imposition of any Lien on any of their properties or assets pursuant to any Requirement of Law applicable to any of them, as the case may be, or any of their Contractual Obligations, except for the Liens arising hereunder and under the Financing Orders. 5.7 No Material Litigation. Except as set forth on Schedule 5.7 and for ---------------------- ------------ the motion(s) 29 brought by the Borrowers seeking entry of the Financing Orders by the Bankruptcy Court, no litigation by, investigation known to the Borrowers by, or proceeding of, any Governmental Authority is pending against any of the Borrowers with respect to the validity, binding effect or enforceability of any DIP Financing Document, the DIP Loans and Designated Post-Petition Loans made hereunder or pursuant to the Financing Orders, the use of proceeds thereof or of any drawings under a Letter of Credit and the other transactions contemplated hereby or in respect of such use of proceeds. Except for the commencement of the Chapter 11 Cases and the filing and prosecution of claims therein, no lawsuits, claims, proceedings or investigations are pending or, to the best knowledge of the Borrowers, threatened as of the Effective Date against or affecting the Borrowers or any of their Subsidiaries or any of their respective properties, assets, operations or businesses, in which there is a probability of an adverse determination, which is reasonably likely, if adversely decided, to have a Material Adverse Effect. 5.8 Investment Company Act. Neither any Borrower nor any of their ---------------------- Subsidiaries is an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). 5.9 Federal Regulation. No part of the proceeds of any of the DIP Loans, ------------------ the Designated Post-Petition Loans or any drawing under a Letter of Credit will be used for any purpose which violates the provisions of Regulation U or X. Neither any Borrower nor any of their Subsidiaries is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U. 5.10 Taxes. Except as set forth on Schedule 5.10, the Borrowers have filed ----- ------------- or caused to be filed all material tax returns which, to the best knowledge of the Borrowers, are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against them or any of their property and all other taxes, fees or other charges imposed on them or any of their property by any Governmental Authority (other than (i) for which an extension for filing is available and the Borrowers have taken necessary steps to qualify for such extension, (ii) where the failure to file would not have a Material Adverse Effect, and (iii) the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrowers or their Subsidiaries, as the case may be); except Permitted Liens, no tax Lien has been filed, and, to the best knowledge of the Borrowers, no written claim is being asserted, with respect to any such tax, fee or other charge. 5.11 Subsidiaries. The Subsidiaries of the Borrowers listed on Schedule ------------ -------- 5.11 constitute all of the Subsidiaries of the Parent Corporation as of the - ---- Effective Date. 5.12 Ownership of Property; Liens. Each Borrower has good title to all its ---------------------------- material assets (other than real property or interests in real property, or goods sold on a consignment basis), except where the failure to have such title would not have a Material Adverse Effect, in each case free and clear of all Liens of any nature whatsoever except Permitted Liens. With respect to real property or interests in real property, each of the Borrowers has (i) good and marketable fee title to all of its owned real property, except where the failure to have such title would not have a Material Adverse 30 Effect (each, a "Fee Property"), and (ii) a valid leasehold interest in all of ------------ the real property leased by it, except where the failure to have such leasehold interest would not have a Material Adverse Effect (each, a "Leased Property", --------------- each such Fee Property and each such Leased Property being referred to individually as a "Company Property" in this Section 5.12), in each case free ---------------- ------------ and clear of all Liens, easements, covenants, rights-of-way and other similar restrictions of any nature whatsoever, except (A) Permitted Liens, (B) easements, covenants, rights-of-way and other similar restrictions of record, (C) any conditions that may be shown by a current, accurate survey or physical inspection of any Company Property made prior to the Effective Date, (D) any immaterial condemnation or eminent domain proceeding affecting any real property that does not prevent such real property from being utilized by the Borrowers or any of their Subsidiaries substantially for the purposes for which it was being utilized prior to such proceeding, and (E) (I) zoning, building and other similar restrictions, (II) Liens that have been placed by any developer, landlord or other third party on property over which the Borrowers or any of their Subsidiaries have easement rights or on any Leased Property and subordination or similar agreements relating thereto, and (III) unrecorded easements, covenants, rights-of-way or other similar restrictions, none of which items set forth in clauses (I), (II) and (III), individually or in the aggregate, materially impair the continued use and operation of the property to which they relate in the business of the Borrowers and their Subsidiaries, taken as a whole, as now conducted. 5.13 ERISA. Except as set forth on Schedule 5.13, none of the Borrowers ----- ------------- nor any of their Subsidiaries or any Commonly Controlled Entity would be liable for any amount pursuant to Sections 4062, 4063 or 4064 of ERISA if any Plan were to terminate. Neither the Borrowers nor any Commonly Controlled Entity has incurred any material liability under Title IV of ERISA in connection with the termination of, withdrawal from or failure to fund any Plan or Multiemployer Plan which will remain a liability of the Borrowers after the Effective Date. To the best knowledge of the Borrowers, none of the Borrowers, nor any of their Subsidiaries, or any director, officer or employee of any of the foregoing, or any of the Plans, or any trust created thereunder, or any fiduciary thereof, has engaged in a transaction in connection with which the Borrowers, any of their Subsidiaries, or any director, officer or employee of any of the foregoing, or any fiduciary of the Plans or any such trust could be subject to either a material liability or civil penalty assessed pursuant to Sections 409, 502(i) or 502(l) of ERISA or a material tax imposed pursuant to Sections 4975 or 4976 of the Code with respect to any Plan. Except as set forth on Schedule 5.13, to the ------------- best knowledge of the Borrowers, each of the Plans has been operated and administered in all material respects in accordance with applicable laws, including but not limited to ERISA and the Code. There are no material pending or, to the best knowledge of the Borrowers, threatened claims by or on behalf of any of the Plans or any fiduciary thereof with respect to a Plan, by any employee or beneficiary covered under any such Plan or fiduciary of any such Plan, or otherwise involving any such Plan or any such fiduciary (other than routine claims for benefits). No condition exists and no event has occurred with respect to any Multiemployer Plan which presents a material risk of a complete or partial withdrawal under Subtitle E of Title IV of ERISA, nor have the Borrowers or any Commonly Controlled Entity been notified that any such Plan is insolvent or in reorganization within the meaning of Section 4241 of ERISA. Except as set forth on Schedule 5.13, neither the Borrowers nor any Commonly ------------- Controlled Entity has been a party to any transaction or agreement to which the provisions of Section 4204 of ERISA were applicable. Except as set forth on Schedule 5.13, neither the Borrowers nor any of their Subsidiaries are obligated - ------------- to contribute, on behalf of any current or former employee of the Borrowers, to a Multiemployer Plan. None of the Plans or any trust 31 established thereunder which is sponsored by the Borrowers or any of their Subsidiaries has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each of the Plans. No contribution failure has occurred with respect to any Plan sufficient to give rise to a lien under Section 302(f) of ERISA. 5.14 Patents, Copyrights, Permits, Trademarks and Licenses. Schedule 5.14 ----------------------------------------------------- ------------- sets forth a true and complete list of all material patents, trademarks (registered or unregistered), trade names, service marks and copyrights and applications therefor owned, used or filed by or licensed to the Borrowers and, with respect to such material registered trademarks, contains a list of all jurisdictions in which such trademarks are registered or applied for and all registration and application numbers. Except as disclosed on Schedule 5.14, the ------------- Borrowers own or have the right to use the patents, trademarks (registered or unregistered), trade names, service marks, copyrights and applications therefor referred to in such Schedule. To the best knowledge of the Borrowers, no material claims are pending by any Person with respect to the ownership, validity, enforceability or use of any such patents, trademarks (registered or unregistered), trade names, service marks, copyrights, or applications therefor, challenging or questioning the validity or effectiveness of any of the foregoing, in any jurisdiction, domestic or foreign. 5.15 Environmental Matters. --------------------- (a Except as disclosed in Schedule 5.15, and subject to clause (f) ------------- below, to the best knowledge of the Borrowers, (i) the Fee Properties do not contain, in, on or under, including, without limitation, the soil and groundwater under the Properties, any Hazardous Materials, and (ii) none of the Borrowers or any of their subsidiaries have placed any Hazardous Materials on any Leased Properties, in each case which result in a currently existing violation of Environmental Laws. (b Except as disclosed in Schedule 5.15 and subject to clause (f) ------------- below, to the best knowledge of the Borrowers, the Borrowers and their Subsidiaries are not in material violation of any Environmental Law which could materially interfere with the continued operation of any of the Properties or materially impair the fair saleable value of any thereof. (c Except as disclosed in Schedule 5.15, and subject to clause (f) ------------- below, neither the Borrowers nor any of their Subsidiaries have received any complaint, notice of violation, alleged violation, notice of investigation or of potential liability under Environmental Laws with regard to any of the Properties which has not been cured, nor do the Borrowers or any of their Subsidiaries have knowledge that any Governmental Authority is contemplating delivering to the Borrowers or any of their Subsidiaries any such notice. (d Except as disclosed in Schedule 5.15, and subject to clause (f) ------------- below, and for violations which have been cured, to the best knowledge of the Borrowers, Hazardous Materials have not been generated, treated, stored, disposed of (in the case of Leased Properties, by the Borrowers or any of their Subsidiaries), at, on or under any of the Properties in violation of any Environmental Laws nor, to the best knowledge of the Borrowers, have any Hazardous Materials been transported (in the case of Leased Properties, 32 by the Borrowers or any of their Subsidiaries) from any of the Properties to any other location in violation of any Environmental Laws. (e Except as disclosed in Schedule 5.15, and subject to clause (f) ------------- below, there are no governmental administrative actions or judicial proceedings pending under any Environmental Law to which any Borrower or any Subsidiary thereof is a party with respect to any of the Properties, nor, to the best knowledge of the Borrowers, are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding against any Borrower or any Subsidiary thereof under any Environmental Law with respect to any of the Properties. (f Each of the representations and warranties set forth in paragraphs (a) through (e) of this Section 5.15 is true and correct with ------------ respect to each parcel of Property, except to the extent that the facts and circumstances giving rise to any such failure to be so true and correct would not have any reasonable likelihood of having a Material Adverse Effect. 5.16 Accuracy and Completeness of Information. The factual statements ---------------------------------------- contained in the financial statements referred to in Section 7.1, the DIP ----------- Financing Documents and any other certificates or documents furnished or to be furnished to the Administrative Agent or the Lenders from time to time in connection with this Agreement, taken as a whole, do not and will not, to the best knowledge of the Borrowers, as of the date when made, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which the same were made, all except as otherwise qualified herein or therein, such knowledge qualification being given only with respect to factual statements made by Persons other than the Borrowers. SECTION 6. CONDITIONS PRECEDENT. -------------------- 6.1 Conditions to Initial DIP Loans and Letters of Credit. The obligation ----------------------------------------------------- of each Lender to make its initial DIP Loan, or the obligation of the Issuing Bank to issue its initial Letter of Credit, whichever occurs first, is subject to the satisfaction or waiver pursuant to Section 11.1 immediately prior to or ------------ concurrently with the making of such DIP Loan or the issuance of such Letter of Credit, as the case may be, of the following conditions: (a the Administrative Agent shall have received a counterpart of this Agreement for each Lender duly executed and delivered by a duly authorized officer of each of the Borrowers; (b the consummation of the transactions contemplated hereby or entered into in contemplation hereof, shall not contravene, violate or conflict with, nor involve any Lender in a violation of, any Requirement of Law; (c all consents, authorizations and filings, if any, required in connection with the execution, delivery and performance by the Borrowers, and the validity and enforceability against the Borrowers, of the DIP Financing Documents to which they are a party, shall have 33 been obtained or made, and such consents, authorizations and filings shall be in full force and effect, except such consents, authorizations and filings, the failure to obtain which would not have a Material Adverse Effect; (d the Administrative Agent shall have received each additional document and other information regarding the assets, business, liabilities, financial position, projection, results of operations or business prospects of the Borrowers as are customary for transactions of this type or are reasonably requested by the Lenders; (e the Administrative Agent shall have received, with a copy for each Lender, the Budget, which shall be in form and substance satisfactory to the Lenders and the Administrative Agent; (f the Borrowers shall have paid all fees then due and payable under this Agreement, including, without limitation, the invoiced and unpaid fees and expenses of Richards Layton & Finger, Winstead Sechrest & Minick P.C. and PricewaterhouseCoopers LLP; (g the Administrative Agent shall have received, with a copy for each Lender, a copy of the Interim Order, entered by the Bankruptcy Court and the Interim Order shall be in full force and effect and shall not have been vacated, stayed, reversed, modified or amended; (h the Administrative Agent shall have received resolutions of the Board of Directors of each Borrower certified by its Secretary, an Assistant Secretary or other officer which authorize the execution, delivery, and performance by such Borrower of this Agreement and the other DIP Financing Documents to which such Borrower is or is to be a party; and (i the Administrative Agent shall have received a certificate of incumbency certified by the Secretary, an Assistant Secretary or other officer of each Borrower certifying the names of the officers of each Borrower authorized to sign this Agreement and each of the other DIP Financing Documents to which such Borrower is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such officers; 6.2 Conditions to All DIP Loans and Letters of Credit. The obligation of ------------------------------------------------- each Lender to make any DIP Loan and the obligation of the Issuing Bank to issue any Letter of Credit is subject to (i) Section 2.3 and (ii) the satisfaction or ----------- waiver pursuant to Section 11.1 immediately prior to or concurrently with the ------------ making of such DIP Loan or the issuance of such Letter of Credit, as the case may be, of the following conditions precedent on the relevant Borrowing Date: (a the Administrative Agent shall have received a Notice of Borrowing if required by Section 4; --------- (b each of the representations and warranties made in or pursuant to Section 5 or which are contained in any other DIP Financing Document shall --------- be true and correct in all material respects on and as of such Borrowing Date as if made on and as of such date (unless 34 stated to relate to a specific earlier date, in which case, such representations and warranties shall be true and correct in all material respects as of such earlier date); (c in the case of the issuance of Letters of Credit, the applicable Borrower or Borrowers shall have executed and delivered to the Issuing Bank a L/C Application in form and substance reasonably acceptable to the Issuing Bank, together with such other instruments and documents as it shall request; (d no Default or Event of Default shall have occurred and be continuing on such Borrowing Date or after giving effect to such DIP Loan to be made or such Letter of Credit to be issued on such Borrowing Date; (e if the amount of the DIP Loan or Letter of Credit requested in a Notice of Borrowing or L/C Application, as applicable, together with the aggregate outstanding principal amount of all DIP Loans and the Letter of Credit Liability would exceed the amount approved under the Interim Order after the entry thereof then (x) the Administrative Agent shall have received a date stamped copy of the Final Order entered by the Bankruptcy Court, in form and substance reasonably satisfactory to the Lenders with such changes thereto as may be approved by the Administrative Agent and their counsel and (y) the Final Order shall be in full force and effect and shall not have been vacated, stayed, reversed, modified or amended; and (f the Borrowers shall have paid all reasonable fees, costs, taxes and expenses due under this Agreement, including those required by Section ------- 11.5 hereof. ---- Each Borrowing hereunder shall constitute a representation and warranty by the Borrowers as of the date of such Borrowing that the conditions in clauses (b) and (d) and of this Section 6.2 have been satisfied. ----------- SECTION 7. AFFIRMATIVE COVENANTS. --------------------- The Borrowers hereby agree that, so long as any of the Lenders' Commitments remain in effect, any DIP Loan, L/C Obligation or Letter of Credit remains outstanding and unpaid, any amount (unless cash in an amount equal to such amount has been deposited to a cash collateral account established by the Administrative Agent) remains available to be drawn under any Letter of Credit or any other amount is owing to any Lender or Administrative Agent, each Borrower shall: 7.1 Financial Statements. Furnish to the Administrative Agent in -------------------- accordance with a reporting format acceptable to the Administrative Agent: (a as soon as practical, but in any event within 90 days after the end of each fiscal year of the Parent Corporation, the audited Consolidated balance sheet of the Parent Corporation and its Subsidiaries as at the end of such fiscal year and the related audited Consolidated statements of stockholders' equity, cash flows and income of the Parent Corporation and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous year; 35 (b as soon as practical, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Parent Corporation, the unaudited Consolidated balance sheet of the Parent Corporation and its Subsidiaries as at the end of such quarter and the related unaudited Consolidated statements of income and cash flows of the Parent Corporation and its Subsidiaries for such quarterly period and the portion of the fiscal year of the Parent Corporation and its Subsidiaries through such date subject only to usual year-end adjustments and the absence of footnotes, setting forth in each case in comparative form the figures for the corresponding quarter in, and year to date portion of, the previous year, certified by the chief financial officer, controller or treasurer of the Parent Corporation as being fairly stated in all material respects; (c as soon as practical, but in any event within 20 Business Days after the end of each fiscal month of each year, commencing as of the fiscal month ending with December 2, 2000, the unaudited Consolidated balance sheet of the Parent Corporation and its Subsidiaries as at the end of such month and the related unaudited Consolidated statement of income of the Parent Corporation and its Subsidiaries for such month and for the portion of the fiscal year of the Parent Corporation and its Subsidiaries through such date in the form and detail similar to those customarily prepared by management of the Parent Corporation for internal use, setting forth in each case (a) detailed results of operations and cash flow, and (b) in comparative form the Consolidated figures for the corresponding month of, and year to date portion of, the previous year and the figures for such periods in the Budget, certified by the chief financial officer, controller or treasurer of the Parent Corporation as being fairly stated in all material respects; (d as soon as practical, but in any event not later than February 28, 2001, monthly financial statement projections for fiscal 2001, adjusted for asset sales and showing budgeted performance for such fiscal year, in form and detail satisfactory to the Administrative Agent; (e as soon as practical, but in any event no later than 20 Business Days after the end of each fiscal month, a preliminary report detailing Capital Expenditures made by the Borrowers and their Subsidiaries during such month, in form and detail satisfactory to the Administrative Agent; (f as soon as practical, but in any event no later than Friday of each week, a funds flow forecast detailing projected receipts and disbursements of the Borrowers and their Subsidiaries for the following 13- week period; (g as soon as practical, but in any event no later than Friday of each week, a variance report containing explanations for all material variances from the prior week's forecast of receipts and disbursements; (h as soon as practical, but in any event no later than Friday of each week, a liquid assets report, including an accounts receivable aging, a good faith estimate of finished goods, work-in-process and raw materials inventory, and a listing of cash balances for the 36 Borrowers and their Subsidiaries as of the previous Friday; (i as soon as practical, but in any event no later than Friday of each week, a report (in form and detail consistent with past practice) on the status of trade credit; (j as soon as practical, but in any event no later than Friday of each week, an operational flash report outlining significant operational results from the prior week; (k as soon as practical, but in any event no later than 20 Business Days after the end of each fiscal month of the Parent Corporation, beginning with the fiscal month ending December 2, 2000, a certificate of an Authorized Representative of the Parent Corporation, in form and detail satisfactory to the Administrative Agent, demonstrating compliance with Section 8.16 and Section 8.17 as of the end of such fiscal month; ------------ ------------ (l as soon as practical, but in any event no later than the last day of each fiscal month of the Parent Corporation, beginning with the fiscal month ending December 2, 2000, a certificate of an Authorized Representative of the Parent Corporation, in form and detail satisfactory to the Administrative Agent, demonstrating compliance with Section 8.16 as ------------ of the end of the second week of such fiscal month; (m any other information that the Administrative Agent or any Lender may reasonably request; All financial statements and reports required to be delivered pursuant to this Section 7.1 shall be complete and correct in all material respects (subject, in the case of interim statements, to normal year-end audit adjustments) and shall be prepared in reasonable detail and in accordance with GAAP. 7.2 Certificates; Other Information. Furnish to the Administrative Agent: ------------------------------- (a concurrently with the delivery of the Consolidated financial statements referred to in Section 7.1(a), a letter from the Borrowers' -------------- independent certified public accountants reporting on such financial statements stating that in making the examination necessary to express their opinion on such financial statements no knowledge was obtained of any Default or Event of Default, except as specified in such letter; (b concurrently with each delivery of the financial statements referred to in Section 7.1(a), (b) and (c), a certificate of an Authorized ------------------- --- Representative of the Parent Corporation stating that, to the best of such officer's knowledge, the Borrowers and their respective Subsidiaries have observed or performed all of their covenants and other agreements, and satisfied every material condition, contained in this Agreement and the other DIP Financing Documents to be observed, performed or satisfied by them, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate; (c promptly upon receipt thereof, copies of all final reports submitted to the Borrowers or to any of their Subsidiaries by the Borrowers' independent certified public 37 accountants in connection with each annual, interim or special audit of the books of the Borrowers or their Subsidiaries made by such accountants, including, without limitation, any final comment letter submitted by such accountants to management in connection with their annual audit; (d promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available to the public generally by the Borrowers and all regular and periodic reports and all final registration statements and final prospectuses, if any, filed by the Borrowers with any securities exchange or with the Securities and Exchange Commission or any Governmental Authority succeeding to any of its functions; (e all materials, statements and reports required of the Borrowers pursuant to the Financing Orders; and (f promptly, such additional financial and other information as the Administrative Agent or any Lender may from time to time reasonably request. 7.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or ---------------------- before maturity or before they become delinquent, as the case may be, all its post-Filing Date obligations and liabilities of whatever nature, except (a) when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the relevant Borrower or any of its Subsidiaries, as the case may be, (b) for delinquent obligations which do not have a Material Adverse Effect and (c) for trade and other accounts payable in the ordinary course of business which are not overdue for a period of more than 60 days or, if overdue for more than 60 days, as to which a dispute exists and adequate reserves in conformity with GAAP have been established on the books of the relevant Borrower or any of its Subsidiaries, as the case may be. 7.4 Conduct of Business and Maintenance of Existence. Continue to engage ------------------------------------------------ in business of the same general type as now conducted by it, and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges, franchises, copyrights, trademarks and trade names necessary or desirable in the normal conduct of its business except for rights, privileges, franchises, copyrights, trademarks and trade names the loss of which would not in the aggregate have a Material Adverse Effect, and except as otherwise permitted hereunder; and comply with all applicable Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, have a Material Adverse Effect. 7.5 Maintenance of Property; Insurance. ---------------------------------- (a Subject to Sections 8.4 and 8.5 , keep all property useful and ------------ --- necessary in its business in good working order and condition (ordinary wear and tear excepted); and (b Maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and with only such deductibles as are usually maintained by, and against at least such risks (but including, in any event, public liability and 38 product liability insurance) as are usually insured against in the same general area, by companies engaged in the same or a similar business; and furnish to the Administrative Agent, upon reasonable written request of the Administrative Agent or any Lender, full information as to the insurance carried. 7.6 Inspection of Property; Books and Records; Discussions. Keep proper ------------------------------------------------------ books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities which permit financial statements to be prepared in conformity with GAAP and all Requirements of Law; and permit representatives of Administrative Agent or any Lender upon reasonable notice to visit and make a reasonable inspection of any of its properties and reasonably examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be requested upon reasonable notice, and to discuss the business, operations, assets and financial and other condition of the Borrowers and their Subsidiaries with officers and employees thereof and with their independent certified public accountants. 7.7 Notices. Promptly upon becoming aware thereof give notice to the ------- Administrative Agent: (a of the occurrence of any Default or Event of Default then known to such Borrower; (b of any (i) default or event of default under any instrument or other agreement, guarantee or collateral document of any Borrower or any Subsidiary of any Borrower which default or event of default has arisen after the Filing Date and has not been waived and would have a Material Adverse Effect, or (ii) litigation, investigation or proceeding which may exist at any time between any Borrower or any Subsidiary of any Borrower and any Governmental Authority, or receipt of any notice of any environmental claim or assessment against any Borrower or any Subsidiary of any Borrower by any Governmental Authority, which in any such case would have a Material Adverse Effect; (c of the commencement of any litigation or proceeding against any Borrower or any Subsidiary of any Borrower (i) in which more than $500,000 of the amount claimed is not covered by insurance or (ii) in which injunctive or similar relief is sought which if obtained would have a Material Adverse Effect; (d of the following events, as soon as practicable after, and in any event within 30 days after, any Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Single Employer Plan which Reportable Event could reasonably result in material liability to the Borrowers and their Subsidiaries taken as a whole, or (ii) the institution of proceedings or the taking of any other action by PBGC, any Borrower or any Commonly Controlled Entity to terminate, withdraw or partially withdraw from any Plan and, with respect to a Multiemployer Plan, the Reorganization or Insolvency of the Plan, in each of the foregoing cases which could reasonably result in material liability to the Borrowers and their Subsidiaries taken as a whole, and in addition to such notice, deliver to the Administrative Agent and each Lender whichever of the following may be 39 applicable: (A) a certificate of an Authorized Representative of the Parent Corporation setting forth details as to such Reportable Event and the action that the Borrowers or such Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or (B) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be; and (e of a Material Adverse Effect arising after the Filing Date known to such Borrower, including, without limitation, the default in any license or other agreement, other than such a default arising solely from commencement of the Chapter 11 Cases and all events and circumstances leading thereto and associated therewith. Each notice pursuant to this Section 7.7 shall be accompanied by a statement of ----------- an Authorized Representative setting forth details of the occurrence referred to therein and (in the cases of clauses (a) through (e)) stating what action the Borrowers propose to take with respect thereto. 7.8 Environmental Laws. ------------------ (a Comply with, and use its reasonable efforts to insure compliance by all its tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply with and maintain, and use its reasonable efforts to insure that all its tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, registrations or permits required by Environmental Laws, except to the extent that failure to do so would not have any reasonable likelihood of having a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply with all lawful orders and directives of all Governmental Authorities respecting Environmental Laws, except to the extent that the same are being contested in good faith by appropriate proceedings; and (c) DEFEND, INDEMNIFY AND HOLD HARMLESS EACH AGENT AND EACH LENDER, AND THEIR RESPECTIVE EMPLOYEES, AGENTS, OFFICERS AND DIRECTORS (COLLECTIVELY, THE "LENDER PARTIES"), FROM AND AGAINST ANY CLAIMS, DEMANDS, -------------- PENALTIES, FINES, LIABILITIES, SETTLEMENTS, DAMAGES, COSTS AND EXPENSES OF WHATEVER KIND OR NATURE KNOWN OR UNKNOWN, CONTINGENT OR OTHERWISE ACTUALLY ASSERTED AGAINST OR INCURRED BY THE LENDER PARTIES (OR ANY ONE OR MORE OF THEM), ARISING OUT OF, OR IN ANY WAY RELATING TO THE VIOLATION OF OR NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS APPLICABLE TO THE REAL PROPERTY OWNED OR OPERATED BY THE BORROWERS OR ANY SUBSIDIARY OF THE BORROWERS, OR ANY ORDERS, REQUIREMENTS OR DEMANDS OF GOVERNMENTAL AUTHORITIES RELATED THERETO, INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEY'S AND CONSULTANT'S FEES, INVESTIGATION AND LABORATORY FEES, COURT COSTS AND 40 LITIGATION EXPENSES, EXCEPT TO THE EXTENT THAT ANY OF THE FOREGOING ARISE OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SEEKING INDEMNIFICATION THEREFOR OR RELATE TO VIOLATIONS OR ALLEGED VIOLATIONS OF ENVIRONMENTAL LAWS OR HAZARDOUS MATERIALS FIRST USED, RELEASED, SPILLED, EMITTED OR OTHERWISE LOCATED ON ANY REAL PROPERTY OWNED OR OPERATED BY THE BORROWERS OR SUBSIDIARY OF THE BORROWERS AFTER SUCH PROPERTY IS TRANSFERRED TO A LENDER PARTY OR ITS SUCCESSOR OR ASSIGN BY FORECLOSURE, DEED-IN-LIEU OF FORECLOSURE OR SIMILAR TRANSFER UNLESS CAUSED BY THE BORROWERS OR SUBSIDIARY OF THE BORROWERS. 7.9 Cash Concentration Account. All cash collateral and proceeds of DIP -------------------------- Loans together with all Cash Collateral (as defined in the Interim Order) shall be deposited and maintained in only such accounts permitted by the Cash Management Order, and applied in accordance with the Financing Orders. Except upon the occurrence and during the continuance of an Event of Default, the Administrative Agent shall not exercise any right of setoff, counterclaim or other similar right against any Borrower's cash concentration account. 7.10 Financial Advisor. Subject to approval by the Bankruptcy Court, ----------------- continue the employment of E&Y Capital Advisors LLC (f/k/a E&Y Restructuring LLC) as the Borrowers' outside financial advisor or retain such other Person as financial advisor who is reasonably acceptable to the Required Lenders on terms reasonably acceptable to the Required Lenders and approved by the Bankruptcy Court. SECTION 8. NEGATIVE COVENANTS. ------------------ The Borrowers hereby agree that each Borrower shall not, directly or indirectly so long as any of the Lenders' Commitments remain in effect or any DIP Loan or L/C Obligation remains outstanding and unpaid, any amount (unless cash in an amount equal to such amount has been deposited indefeasibly in a cash collateral account established by the Administrative Agent) remains available to be drawn under any Letter of Credit or any other amount is owing to any Lender or Administrative Agent hereunder (it being understood that each of the permitted exceptions to each of the covenants in this Section 8 is in addition --------- to, and not overlapping with, any other of such permitted exceptions except to the extent expressly provided): 8.1 Indebtedness. Create, incur, assume or suffer to exist any ------------ Indebtedness, except: (a) Indebtedness outstanding on the Effective Date; (b) Indebtedness owing (i) to the Borrowers by any of the other Borrowers, or (ii) to any of the Borrower's Foreign Subsidiaries by any other Foreign Subsidiary, which Indebtedness is subordinated to the Obligations and evidenced by any entry on the financial records of the Borrowers and any such Subsidiary; (c) Indebtedness consisting of performance bonds or surety or appeal bonds 41 provided by the Borrowers or any of their Subsidiaries in the ordinary course of business and which do not secure other Indebtedness; and (d) Indebtedness in connection with the DIP Loans, the Designated Post-Petition Loans, the Financing Orders, the Letters of Credit and this Agreement. 8.2 Limitation on Liens. Create, incur, assume or suffer to exist any ------------------- Lien upon any of its property, assets, income or profits, whether now owned or hereafter acquired, except: (a) Liens in favor of the Administrative Agent and the Lenders pursuant to the DIP Financing Documents and bankers' liens arising by operation of law; (b) Liens existing on the Effective Date; and (c) Liens permitted under the Financing Orders; (d) Liens described in Section 5.12(ii)(A)-(E); ----------------------- (e) Liens for taxes, assessments, governmental changes, levies or claims that are not yet delinquent or that are being diligently contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on such Borrower's books, but only so long as no foreclosure, restraint, sale or similar proceedings have been commenced with respect thereto; (f) Liens of carriers, warehousemen, mechanics, laborers, landlords and materialmen and other similar Liens incurred in the ordinary course of business or by operation of law for sums not yet due or being contested in good faith, if such reserve or appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (g) Liens incurred or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, pensions or other social security programs or similar legislation; and (h) the Carve-Out (as defined in the Financing Orders). 8.3 Limitation on Contingent Obligations. Create, incur, assume or suffer ------------------------------------ to exist any Contingent Obligation except: (a) Contingent Obligations existing on the Effective Date; and (b) Contingent Obligations in favor of the Issuing Bank or any Lender in respect of Letters of Credit. 8.4 Prohibition of Fundamental Changes. Enter into any merger or ---------------------------------- consolidation or amalgamation (other than in connection with a plan of reorganization), or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or engage in any type of business other than 42 of the same general type now conducted by it, except any Borrower (other than the Parent Corporation) may liquidate or dissolve into another Borrower. 8.5 Prohibition on Sale of Assets. Convey, sell, lease, assign, transfer ----------------------------- or otherwise dispose of (including through a transaction of merger or consolidation of any Subsidiary of the Borrowers) any of its property, business or assets (including, without limitation, tax benefits, receivables and leasehold interests), whether now owned or hereafter acquired, except for (a) sales of inventory made in the ordinary course of business, and (b) sales of assets approved by the Bankruptcy Court after a hearing, provided that the -------- ---- proceeds of any such sale are applied in accordance with the Financing Orders. 8.6 Limitation on Investments, Loans and Advances. Make any advance, --------------------------------------------- loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of, or make any other investment in (including, without limitation, any acquisition of all or any substantial portion of the assets, and any acquisition of a business or a product line, of other companies, other than the acquisition of inventory in the ordinary course of business), any Person (other than another Borrower), except: (a) any of the foregoing existing on the Effective Date; (b) any of the foregoing permitted by the Cash Management Order; (c) the Borrowers and their Subsidiaries may invest in, acquire and hold Cash Equivalents; (d) Investments arising from transactions by the Borrowers or any of their Subsidiaries with customers or suppliers in the ordinary course of business, including endorsements of negotiable instruments, debt obligations and other investments received in connection with the bankruptcy or reorganization of customers and suppliers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers; and (e) any Borrower or any of its Subsidiaries may acquire and hold receivables owing to it, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms. 8.7 Limitation on Dividends. Declare any dividends on any shares of any ----------------------- class of stock, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of any class of stock, or any warrants or options to purchase such stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrowers or any of their Subsidiaries; except that Subsidiaries may pay dividends to the Borrowers. 8.8 Transactions with Affiliates. Enter into any transaction, including, ---------------------------- without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate except for transactions which are not prohibited under this Agreement and which are in the ordinary 43 course of the applicable Borrower's or applicable Subsidiary's business and which are upon fair and reasonable terms no less favorable to such Borrower or such Subsidiary than it would obtain in a hypothetical comparable arm's length transaction with a Person not an Affiliate. 8.9 Foreign Exchange Contracts. Enter into any foreign currency exchange -------------------------- contracts, except as permitted under the Cash Management Order or otherwise approved by the Bankruptcy Court after a hearing. 8.10 Limitation on Creation of and Investments in Subsidiaries. Except as --------------------------------------------------------- set forth in the Budget or the Cash Management Order, make any advance, loan, extension of credit or capital contribution to, purchase any stock, bonds, notes, debentures or other securities of, or make any other investment in, any Subsidiary not a Borrower, or create, merge or consolidate with, or sell or otherwise transfer all or any assets of the Borrowers or any Subsidiary of the Borrowers to, any Subsidiary not a Borrower. 8.11 DIP Financing. Incur or apply to the Bankruptcy Court for authority ------------- to incur, or suffer to exist, any (i) indebtedness having the priority afforded by Section 364(c) or (d) of the Bankruptcy Code (including any Superpriority Claims) other than the financing provided for under this Agreement and the other DIP Financing Documents or as authorized pursuant to the Financing Orders or (ii) obligation to make adequate protection payments, or otherwise provide adequate protection, other than (A) as contemplated by the Financing Orders or (B) as approved by the Required Lenders. 8.12 Alteration of Rights of Lenders. Limit, affect or modify, or apply to ------------------------------- the Bankruptcy Court to limit, affect or modify, any of the Administrative Agent's or the Lenders' rights with respect to the Obligations, including rights with respect to the Post-Petition Collateral and the priority thereof. 8.13 Chapter 11 Claims. Except as permitted under the Financing Orders, ----------------- apply to the Bankruptcy Court for the authority to incur, create, assume, suffer or permit any claim, Lien or encumbrance (other than Permitted Liens) against the Borrowers, or any of their assets in the Chapter 11 Cases to be pari passu ---- ----- with, or senior to, the Liens and claims of the Lenders granted and arising hereunder and under the Financing Orders. 8.14 Change in Management. Permit the removal or replacement of any member -------------------- of Key Management. 8.15 Capital Expenditures. Make Capital Expenditures in excess of (a) -------------------- $28,750,000 in the aggregate from the date hereof through the Scheduled Termination Date, and (b) $14,000,000 in the aggregate during any fiscal quarter. 8.16 Asset Coverage Ratio. Permit, at any time, determined in accordance -------------------- with GAAP on a consolidated basis for the Borrowers and their Subsidiaries, the ratio of (a) the sum of (i) the net book value of accounts receivable, plus (ii) the net book value of inventory, plus (iii) the book value of owned land, real property, equipment, leasehold improvements and other fixed assets, net of depreciation, plus (iv) cash on hand, to (b) the outstanding principal amount of all Pre-Petition Indebtedness and the Obligations, to be less than 1.5 to 1.0, measured twice monthly pursuant to the 44 reporting requirements set forth in Section 7.1. 8.17 Operating Cash Flow. Allow Operating Cash Flow for the period ------------------- beginning October 1, 2000 through each respective reporting date indicated below to be less than the amounts indicated below measured monthly beginning January 31, 2001 pursuant to the reporting requirements set forth in Section 7.1. ----------- January 31, 2001 $ 16,000,000 February 28, 2001 $ 34,000,000 March 31, 2001 $ 46,000,000 April 30, 2001 $ 55,000,000 May 31, 2001 $ 65,000,000 June 30, 2001 $ 68,000,000 July 31, 2001 $ 72,000,000 August 30, 2001 $ 78,000,000 September 30, 2001 $ 87,000,000 October 31, 2001 $105,000,000 SECTION 9. EVENTS OF DEFAULT. ------------------ 9.1 Events of Default. Upon the occurrence and during the continuance of ----------------- any of the following events: (a) Borrowers shall fail to (i) pay any principal of any DIP Loan when due in accordance with the terms hereof or to reimburse the Issuing Bank for any draw under any Letter of Credit in accordance with Section 3.3 ----------- or (ii) pay any interest on any DIP Loan or any other amount payable hereunder when any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by any of the Borrowers in any DIP Financing Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) Any Borrower shall default in the observance or performance of any covenant, agreement, obligation or restriction applicable to such Borrower contained in this Agreement or any other DIP Financing Document (other than as described in clauses (a) and (b) above), and Administrative Agent has sent notice of such default to Borrowers; or (d) The Bankruptcy Court shall enter an order with respect to any of the Borrowers dismissing its Chapter 11 Case or converting it to a case under Chapter 7 of the Bankruptcy Code, or, without the prior written consent of the Administrative Agent, appointing a trustee in its Chapter 11 Case or appointing a responsible officer or an examiner with enlarged powers relating to the operation of such Borrower's business (beyond those set forth in Section 1106(a)(3) or (4)) under Bankruptcy Code Section 1106(b); or (e) The Bankruptcy Court shall enter an order granting relief from the automatic 45 stay applicable under Section 362 of the Bankruptcy Code to the holder of any Lien in any assets of any of the Borrowers having an aggregate value in excess of $1,000,000; or (f) Any Borrower shall apply for authority to amend, supplement, stay, vacate or otherwise modify any of the Financing Orders without the consent of the Required Lenders and the Administrative Agent, and Administrative Agent has sent notice of such default to Borrowers; or (g) Any Borrower shall support (in any such case by way of any motion or other pleading filed with the Bankruptcy Court or any other writing to another party-in-interest executed by or on behalf of any Borrower) any other Person's opposition of, any motion made in the Bankruptcy Court by any Lender seeking confirmation of the amount of such Lender's claim or the validity and enforceability of the Liens in favor of such Lender (including, without limitation, the Liens securing Pre-Petition Indebtedness owed to such Lender); or (h) Any Borrower shall seek to, or shall support (in any such case by way of any motion or other pleading filed with the Bankruptcy Court or any other writing to another party-in-interest executed by or on behalf of any Borrowers) any other Person's motion to, disallow in whole or in part any Lender's claim in respect of the Pre-Petition Indebtedness or the Obligations or to challenge the validity, perfection and enforceability of the Liens in favor of the Pre-Petition Agent or any Lender (including, without limitation, the Liens securing Pre-Petition Indebtedness owed to such Lender); or (i) From and after the date of entry thereof, the Interim Order shall cease to be in full force and effect (or shall have been vacated, stayed, reversed, modified or amended), in each case without the consent of the Required Lenders and the Administrative Agent, and the Final Order shall not have been entered prior to such cessation (or vacatur, stay, reversal, modification or amendment); or (j) The Final Order shall not have been entered by the Bankruptcy Court on or before December 8, 2000; or (k) From and after the date of entry thereof, the Final Order shall cease to be in full force and effect or shall have been vacated, stayed, reversed, modified or amended, in each case without the consent of the Required Lenders and the Administrative Agent; or (l) Any of the Borrowers or any Subsidiary thereof shall make any payments on any Indebtedness of such Borrower or Subsidiary (other than as permitted under the Financing Orders or permitted hereunder) arising before the Filing Date, except as expressly allowed by order of the Bankruptcy Court; or (m) Any of the Borrowers shall fail to comply with the terms of the Financing Orders in any material respect; or (n) One or more judgments or decrees shall be entered against (i) any of the 46 Borrowers involving in the aggregate a post-Filing Date liability (not paid or fully covered by insurance) of $500,000 or more or (ii) any Subsidiary of any of the Borrowers which would have a Material Adverse Effect, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within the time required by the terms of such judgment; or (o) Any DIP Financing Document shall cease, for any reason, to be in full force and effect or any of the Borrowers or any of their Subsidiaries shall so assert in writing, or any DIP Financing Document shall cease to be effective to grant a perfected Lien on any material item of collateral described therein with the priority purported to be created thereby; then, and in any such event, so long as any such Event of Default shall be continuing, either or both of the following actions may be taken upon five calendar days' written notice by the Administrative Agent to the Designated Notification Borrower: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall declare the Commitment and the Letter of Credit Commitment to be reduced to zero, and the Lenders' Commitments, including, the Issuing Bank's obligations to issue the Letters of Credit, to be terminated forthwith, whereupon the Commitment and the Letter of Credit Commitment shall be immediately reduced to zero and the Lenders' Commitments and such obligations shall be immediately terminated; provided that the Lenders shall not be -------- ---- obligated to lend hereunder, and the Issuing Bank shall have no obligation to issue Letters of Credit, at any time after an Event of Default has occurred and is continuing, irrespective of whether the Commitments have been terminated; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall (A) declare all or a portion of the DIP Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement to be due and payable forthwith, whereupon the same shall immediately become due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest, or other formalities of any kind, all of which are hereby expressly waived by each Borrower, (B) declare all or a portion of the obligations of the Borrowers in respect of the Letters of Credit, although contingent and unmatured, to be due and payable forthwith, whereupon the same shall immediately become due and payable and/or demand that the Borrowers discharge any or all of the obligations supported by the Letters of Credit by paying or prepaying any amount due or to become due in respect of such obligations, and (C) foreclose or otherwise enforce any lien granted to the Administrative Agent for the benefit of itself and the Lenders to secure payment and performance of the Obligations in accordance with the terms of the DIP Financing Documents. All payments under this Section 9 on account of undrawn --------- Letters of Credit shall be made by Borrowers directly to a cash collateral account established by the Administrative Agent for such purpose for application to the Borrowers' reimbursement obligations under Section 3, the applicable L/C --------- Application and this Section 9 as drafts are presented under the Letters of --------- Credit with the balance, if any (after reserving adequate funds to pay all reimbursement obligations that may arise as a result of outstanding, undrawn, Letters of Credit), to be applied to the Borrowers' obligations under this Agreement as the Administrative Agent shall determine with the approval of the Required Lenders. Except as expressly provided above in this Section 9, --------- presentment, notice, notice of dishonor, notice of acceleration, notice of intent to accelerate, demand, protest and all other notices of any kind are hereby expressly waived. Furthermore, notwithstanding anything contained in this Section 9, upon the occurrence of an Event of Default under subsection (d) --------- or (e) of Section 9.1, the Commitments ----------- 47 and Letter of Credit Commitments of all of the Lenders shall automatically terminate, and the outstanding principal of and accrued unpaid interest on the DIP Loans and all other obligations of the Borrowers under the DIP Financing Documents shall thereupon become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest, or other formalities of any kind, all of which are hereby expressly waived by each Borrower. SECTION 10. THE AGENT; ISSUER. ----------------- 10.1 Appointment. Each Lender hereby irrevocably (i) designates and ----------- appoints Bank of America as the Administrative Agent under this Agreement, and (ii) irrevocably authorizes Bank of America, as Administrative Agent for such Lender, each to take such actions on its behalf under the provisions of the DIP Financing Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of the DIP Financing Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the DIP Financing Documents or otherwise exist against the Administrative Agent. 10.2 Delegation of Duties. The Administrative Agent may execute any of -------------------- its duties under this Agreement and each of the other DIP Financing Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by any of them with reasonable care. 10.3 Exculpatory Provisions. Neither the Administrative Agent nor any of ---------------------- its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the DIP Financing Documents (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any of the Borrowers or any officer thereof contained in the DIP Financing Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, the DIP Financing Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of the DIP Financing Documents or for any failure of any of the Borrowers to perform its obligations thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, any DIP Financing Document, or to inspect the properties, books or records of any of the Borrowers. 10.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been 48 signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrowers), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any DIP Loan as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under any DIP Financing Document unless it shall first receive such advice or concurrence of the Required Lenders (or, where unanimous consent of the Lenders is expressly required hereunder, such Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under any DIP Financing Document in accordance with a request of the Required Lenders (or such other number of Lenders as is expressly required thereby), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the DIP Loans. 10.5 Notice of Default. The Administrative Agent shall not be deemed to ----------------- have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received written notice from a Lender or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall promptly give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and -------- until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as they shall deem advisable in the best interests of the Lenders. 10.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender ------------------------------------------------------ expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact, financial advisors, or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including any review of the affairs of the Borrowers, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrowers and their Subsidiaries and made its own decision to make its DIP Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under the DIP Financing Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrowers and their Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or 49 responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrowers which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact, financial advisors, or Affiliates. 10.7 Indemnification. THE LENDERS AGREE TO INDEMNIFY THE ADMINISTRATIVE --------------- AGENT IN ITS CAPACITY AS SUCH (TO THE EXTENT NOT REIMBURSED BY THE BORROWERS AND WITHOUT LIMITING THE OBLIGATION OF THE BORROWERS TO DO SO), RATABLY IN ACCORDANCE WITH EACH LENDER'S COMMITMENT PERCENTAGE, FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME (INCLUDING WITHOUT LIMITATION AT ANY TIME FOLLOWING THE PAYMENT OF THE DIP LOANS) BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THE DIP FINANCING DOCUMENTS OR ANY DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER OR IN CONNECTION WITH ANY OF THE FOREGOING; PROVIDED THAT NO LENDER SHALL BE LIABLE -------- FOR THE PAYMENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING SOLELY FROM THE ADMINISTRATIVE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE AGREEMENTS IN THIS SECTION 10.7 SHALL SURVIVE THE PAYMENT OF ------------ THE DIP LOANS AND ALL OTHER AMOUNTS PAYABLE HEREUNDER. 10.8 The Administrative Agent in its Individual Capacity. The --------------------------------------------------- Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrowers and their Subsidiaries as though the Administrative Agent was not the Administrative Agent hereunder. With respect to its DIP Loans made or renewed by it and its L/C Participating Interests, the Administrative Agent shall have the same rights and powers, duties and liabilities under the DIP Financing Documents as any Lender and may exercise the same as though it was not the Administrative Agent and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 10.9 Successor Administrative Agent. The Administrative Agent may resign ------------------------------ as Administrative Agent upon 30 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under the DIP Financing Documents, then the Required Lenders shall appoint from among the Lenders a successor agent to the Administrative Agent for the Lenders which successor agent shall be approved by the Parent Corporation, which shall not unreasonably withhold its approval, whereupon such successor agent shall succeed to the rights, powers and duties of the resigning Administrative Agent and the term "Administrative Agent" shall mean such successor agent effective upon its appointment, and the former Administrative Agent's rights, powers and duties as the Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement. After the 50 retiring Administrative Agent's resignation hereunder as Agent the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to ---------- be taken by it while it was Agent under the DIP Financing Documents. 10.10 Bank of America as Issuer of Letters of Credit. Each Lender hereby ---------------------------------------------- acknowledges that the provisions of this Section 10 shall apply to Bank of ---------- America and to any Lender that succeeds Bank of America as the Issuing Bank, in their respective capacities as issuers of the Letters of Credit, in the same manner as such provisions are expressly stated to apply to the Administrative Agent. SECTION 11. MISCELLANEOUS. ------------- 11.1 Amendments and Waivers. No DIP Financing Document nor any terms ---------------------- thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 11.1. With the written consent of the Required ------------ Lenders, the Administrative Agent and the Borrowers may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provisions to any DIP Financing Document in which they are parties or changing in any manner the rights of the Lenders or of any such Borrower or any Subsidiary of any Borrower thereunder or waiving, on such terms and conditions as the Administrative Agent may specify in such instrument, any of the requirements of any such DIP Financing Document or any Default or Event of Default and its consequences; provided, however, that: -------- ------- (a) no such waiver and no such amendment, supplement or modification shall extend the maturity of any DIP Loan or L/C Obligation, or reduce the rate or extend the time of payment of interest thereon, or change the method of calculating interest thereon, or reduce any fee payable to the Lenders hereunder, or reduce the principal amount of any DIP Loan or L/C Obligation, or increase the Commitment or the Letter of Credit Commitment, or change the Commitment Percentages, or amend, modify or waive any provision of this Section 11.1 or reduce the percentage specified in ------------ the definition of Required Lenders or consent to the assignment or transfer by any Borrower of any of its rights and obligations under any DIP Financing Document or effect the release of all or a substantial part of the Pre-Petition Collateral and/or the Post-Petition Collateral, in each case, without the written consent of each Lender affected thereby; (b) no such waiver and no such amendment, supplement or modification shall amend, modify or waive any provision of Section 10 ---------- without the written consent of the Administrative Agent and the Issuing Bank; and (c) no such waiver and no such amendment, supplement or modification shall amend, modify or waive any provision of Section 3 --------- without the written consent of the Issuing Bank. Any such waiver and any such amendment, supplement or modification described in this Section 11.1 shall apply equally to each of the Lenders and shall be ------------ binding upon each of the Borrowers and each of their Subsidiaries, the Lenders, the Administrative Agent and all future holders of DIP Loans. Any extension of a Letter of Credit by the Issuing Bank shall be treated 51 hereunder as a new Letter of Credit. In the case of any waiver, the Borrowers, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the outstanding DIP Loans, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 11.2 Notices. All notices, requests and demands to or upon the respective ------- parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three Business Days after being deposited in the mail, postage prepaid, or one day after being entrusted to a reputable commercial overnight delivery service, or, in the case of telecopy notice, when sent, confirmation of receipt received, addressed as follows in the case of each of the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders, or to such other address as may be hereafter notified by such respective parties hereto: The Borrowers: Pillowtex Corporation One Lake Circle Drive Kannapolis, NC 28081 Attn: Anthony T. Williams Telephone: (704) 939-2000 Telecopier: (704) 939-2597 With copies to: Pillowtex Corporation 4111 Mint Way Dallas, TX 75236 Attn: John F. Sterling, Esq. Telephone: (214) 333-3225 Telecopier: (214) 467-0823 Jones, Day, Reavis & Pogue 2727 North Harwood Street Dallas, TX 75201-1515 Attn: Thomas E. Gillespie, Esq. Telephone: (214) 969-5076 Telecopier: (214) 969-5100 Bank of America, in its capacities as Administrative Agent, Issuing Bank and Lender: Bank of America, N.A. 901 Main Street, 66th Floor Dallas, Texas 75202 Attn: William E. Livingstone, IV Telephone: (214) 209-2023 Telecopier: (214) 209-3533 52 With a copy to: Winstead Sechrest & Minick, P.C. 5400 Renaissance Tower 1201 Elm Street Dallas, Texas 75270 Attn: Ira D. Einsohn, Esq. Telephone: (214) 745-5223 Telecopier: (214) 745-5390 The Other Lenders: At the addresses set forth on the signature pages hereof and the signature page of each Commitment Transfer Supplement provided that any notice, request or demand to or upon the Administrative Agent, - -------- the Issuing Bank or the Lenders, as the case may be, shall not be effective until received. 11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay ------------------------------ in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 11.4 Survival of Representations and Warranties. All representations and ------------------------------------------ warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement, the making of the DIP Loans and the issuance of Letters of Credit. 11.5 Payment of Expenses and Taxes. The Borrowers agree (a) to pay or ----------------------------- reimburse the Administrative Agent on a monthly basis, for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, the DIP Financing Documents and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, and accountants, financial advisors, engineers and environmental consultants to the Administrative Agent, (b) to pay or reimburse the Lenders for all of their reasonable out-of-pocket costs and expenses (including travel expenses but excluding fees and expenses of outside counsel) incurred in connection with the enforcement or preservation of any rights under any DIP Financing Document, (c) after an Event of Default has occurred and is continuing, to pay or reimburse each Lender, the Issuing Bank and the Administrative Agent for all their reasonable costs and expenses incurred in connection with, and to pay, indemnify, and hold the Administrative Agent, the Issuing Bank and each Lender harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever arising out of or in connection with, the enforcement or preservation of any rights under any DIP Financing Document and any such other documents, including, without limitation, 53 reasonable fees and disbursements of counsel to the Administrative Agent, the Issuing Bank and each Lender incurred in connection with the foregoing and in connection with advising the Administrative Agent and the Issuing Bank with respect to their respective rights and responsibilities under this Agreement and the documentation relating thereto, (d) to pay, indemnify, and to hold the Administrative Agent, the Issuing Bank and each Lender harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes (other than withholding taxes), if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, any DIP HOLD Financing Document and any such other documents, and (e) TO PAY, INDEMNIFY, AND THE ADMINISTRATIVE AGENT, THE ISSUING BANK AND EACH LENDER AND THEIR RESPECTIVE OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, REASONABLE FEES AND DISBURSEMENTS OF COUNSEL) WHICH MAY BE INCURRED BY OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT, THE ISSUING BANK OR THE LENDERS (X) ARISING OUT OF OR IN CONNECTION WITH ANY INVESTIGATION, LITIGATION OR PROCEEDING RELATED TO THIS AGREEMENT, THE OTHER DIP FINANCING DOCUMENTS, THE PROCEEDS OF THE DIP LOANS OR THE DESIGNATED POST-PETITION LOANS AND THE TRANSACTIONS CONTEMPLATED BY OR IN RESPECT OF SUCH USE OF PROCEEDS, OR ANY OF THE OTHER TRANSACTIONS CONTEMPLATED HEREBY, WHETHER OR NOT THE ADMINISTRATIVE AGENT, THE ISSUING BANK OR ANY OF THE LENDERS IS A PARTY THERETO, OR (Y) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING BY REASON OF OR IN CONNECTION WITH THE EXECUTION AND DELIVERY OR TRANSFER OF, OR PAYMENT OR FAILURE TO MAKE PAYMENTS UNDER, LETTERS OF CREDIT (IT BEING AGREED THAT NOTHING IN THIS SECTION 11.5 IS INTENDED TO LIMIT THE BORROWERS' OBLIGATIONS PURSUANT TO - ------------ SECTION 3.3) (ALL THE FOREGOING, COLLECTIVELY, THE "INDEMNIFIED LIABILITIES"); - ----------- ----------------------- PROVIDED THAT THE BORROWERS SHALL HAVE NO OBLIGATION HEREUNDER WITH RESPECT TO - -------- INDEMNIFIED LIABILITIES OF THE ADMINISTRATIVE AGENT, THE ISSUING BANK OR ANY LENDER OR ANY OF THEIR RESPECTIVE OFFICERS AND DIRECTORS ARISING SOLELY FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE ADMINISTRATIVE AGENT, THE ISSUING BANK OR THE LENDERS OR THEIR RESPECTIVE DIRECTORS OR OFFICERS. THE AGREEMENTS IN THIS SECTION 11.5 SHALL SURVIVE REPAYMENT OF THE DIP LOANS AND ALL OTHER ------------ AMOUNTS PAYABLE HEREUNDER. 11.6 Successors and Assigns; Participations; Purchasing Lenders. ---------------------------------------------------------- (a) This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Lenders, the Issuing Bank and the Administrative Agent, and their respective successors and assigns, except that the Borrowers may not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of each Lender. 54 (b) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more Lenders or other entities ("Participants") participating interests in any DIP Loan ------------ owing to such Lender, any L/C Participating Interest of such Lender, or any Commitment or other interest of such Lender hereunder. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such DIP Loan for all purposes under this Agreement and the Borrowers and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. The Borrowers agree that if amounts outstanding under this Agreement and the DIP Loans are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any DIP Loan to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or any DIP Loan; provided that, such right of setoff -------- shall be subject to the obligation of such Participant to share with the Lenders, and the Lenders agree to share with such Participant, as provided in Section 11.7. The Borrowers also agree that each Participant shall be ------------ entitled to the benefits of Sections 3.4 and 4.6 with respect to its ------------ --- participation in the Commitment, the Letter of Credit Commitment, the DIP Loans and the Letters of Credit, outstanding from time to time; provided -------- that, no Participant shall be entitled to receive any greater amount pursuant to such subsections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. Each Lender agrees that the participation agreement pursuant to which any Participant acquires its participating interest (or any other document) may afford voting rights to such Participant only with respect to matters requiring the consent of all of the Lenders hereunder. (c) Any Lender may, in the ordinary course of its business and in accordance with applicable law, (i) at any time sell all or any part of its rights and obligations under this Agreement and the DIP Loans to any Lender or any Affiliate thereof; provided that, in the event of a sale of less -------- than all of such rights and obligations, (x) such assigning Lender after any such sale to any other Lender or any Affiliate of such Lender shall retain a Commitment of at least $5,000,000 (or such lesser amount as the Administrative Agent may determine) and (y) such sale shall be of corresponding proportions of the Commitments, DIP Loans and L/C Participating Interests held by such assigning Lender immediately prior to such sale, and, (ii) with the consent of the Administrative Agent (such consent not to be unreasonably withheld), sell to one or more additional banks or financial institutions ("Purchasing Lenders"), all or any part of ------------------ its rights and obligations under this Agreement and the DIP Loans, pursuant to a Commitment Transfer Supplement, executed by such Purchasing Lender and such transferor Lender (and, in the case of a Purchasing Lender that is not then a Lender or an Affiliate thereof, by the Administrative Agent), and delivered to the Administrative Agent for its acceptance and recording in the Register together with a registration and processing fee to the Administrative Agent of $5,000 in cash; provided that (A) each such -------- 55 sale pursuant to clause (ii) of this Section 11.6(c) shall be in an amount --------------- of at least $5,000,000 (or such lesser amount as the Administrative Agent may determine) and (B) in the event of a sale of less than all of such rights and obligations, (x) such Lender after any such sale shall retain a Commitment of at least $5,000,000 (or such lesser amount as the Administrative Agent may determine) and (y) such sale shall be of corresponding proportions of the Commitments, DIP Loans and L/C Participating Interests held by such assigning Lender immediately prior to such sale. Upon such execution, delivery, acceptance and recording, from and after the Transfer Effective Date as defined in the Commitment Transfer Supplement, (x) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Commitment Transfer Supplement, have (in addition to any such rights and obligations theretofore held by it) the rights and obligations of a Lender hereunder with Commitments as set forth therein, and (y) the transferor Lender thereunder shall, to the extent of the interest transferred, as reflected in such Commitment Transfer Supplement, be released from its obligations under this Agreement (and, in the case of a Commitment Transfer Supplement covering all or the remaining portion of a transferor Lender's rights and obligations under this Agreement, such transferor Lender shall cease to be a party hereto). Such Commitment Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement and the DIP Loans. (d) The Administrative Agent shall maintain at its address referred to in Section 11.2 a copy of each Commitment Transfer Supplement delivered to ------------ it and a register (the "Register") for the recordation of the names and -------- addresses of the Lenders and the Commitment of, the principal amount of DIP Loans owing to, and the L/C Participating Interests of, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register as the owner of the DIP Loan or L/C Participating Interest recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders at any reasonable time and from time to time upon reasonable prior notice and, upon request by any Borrower, the Administrative Agent will provide a copy of the Register promptly to such Borrower or its counsel. (e) Upon its receipt of a Commitment Transfer Supplement executed by a transferor Lender and a Purchasing Lender (and, in the case of a Purchasing Lender that is not then a Lender or an Affiliate thereof, by the Administrative Agent), together with payment to the Administrative Agent of a registration and processing fee of $5,000, the Administrative Agent shall (i) promptly accept such Commitment Transfer Supplement and (ii) on the Transfer Effective Date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrowers. (f) Each Lender and the Administrative Agent shall use reasonable efforts to 56 protect the confidentiality of any confidential information concerning the Borrowers and their Affiliates in accordance with such Lender's or the Administrative Agent's, as the case may be, customary practices. Notwithstanding the foregoing, the Borrowers authorize each Lender to disclose to any Participant or Purchasing Lender (each, a "Transferee") and ----------- any prospective Transferee any and all financial information in such Lender's possession concerning the Borrowers and their Affiliates which has been delivered to such Lender by or on behalf of the Borrowers pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrowers in connection with such Lender's credit evaluation of the Borrowers and their Affiliates prior to becoming a party to this Agreement, subject to any such Transferee or prospective Transferee agreeing to use reasonable efforts to protect the confidentiality of any confidential information concerning the Borrowers and their Affiliates in accordance with practices and procedures not materially less favorable to the Borrowers than the confidentiality practices and procedures of the Lender from whom such Transferee received such information. (g) If, pursuant to this Section 11.6, any interest in this Agreement ------------ or any DIP Loan is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Lender (for the benefit of the transferor Lender, the Administrative Agent, the Issuing Bank and the Borrowers) that under applicable law and treaties no taxes will be required to be withheld by any Agent, the Issuing Bank, any Borrower or the transferor Lender with respect to any payments to be made to such Transferee in respect of the DIP Loans or L/C Participating Interests, (ii) to furnish to the transferor Lender (and, in the case of any Purchasing Lender registered in the Register, the Administrative Agent, the Issuing Bank and the Borrowers) either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 or any successor form (wherein such Transferee claims entitlement to complete exemption from U.S. Federal withholding tax on all interest payments hereunder), and (iii) to agree (for the benefit of the transferor Lender, the Administrative Agent, the Issuing Bank and the Borrowers) to provide the transferor Lender (and, in the case of any Purchasing Lender registered in the Register, the Administrative Agent, the Issuing Bank and the Borrowers) a new Form 4224 or Form 1001 or any successor form upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. 11.7 Adjustments; Set-Off. If any Lender (a "Benefitted Lender") shall at -------------------- ----------------- any time receive any payment of all or part of any of its DIP Loans or L/C Participating Interests, as the case may be, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by setoff, or otherwise) in a greater proportion than any such payment to and collateral received by any other Lender, if any, in respect of such other Lender's DIP Loans or L/C Participating Interests, as the case may be, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders such portion of each such other Lender's DIP Loans or L/C Participating Interests, as the case may be, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment 57 or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits - -------- ------- is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrowers agree that each Lender so purchasing a portion of another Lender's DIP Loans and/or L/C Participating Interests may exercise all rights of payment (including, without limitation, rights of setoff) with respect to such portion as fully as if such Lender were the direct holder of such portion. The Administrative Agent shall promptly give the Designated Notification Borrower notice of any set-off; provided that the -------- failure to give such notice shall not affect the validity of such set-off. 11.8 Counterparts. This Agreement may be executed by one or more of the ------------ parties to this Agreement on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Designated Notification Borrower and the Administrative Agent. This Agreement shall become effective with respect to the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders when the Administrative Agent shall have received copies of this Agreement executed by the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders, or, in the case of any Lender, shall have received telephonic confirmation from such Lender stating that such Lender has executed counterparts of this Agreement or the signature pages hereto and sent the same to the Administrative Agent. 11.9 Governing Law; No Third-Party Rights. This Agreement and the rights ------------------------------------ and obligations of the parties under this Agreement, including, without limitation, the DIP Loans, shall be governed by, and construed and interpreted in accordance with, the law of the State of Texas, except to the extent governed by the Bankruptcy Code. This Agreement is solely for the benefit of the parties hereto and their respective successors and assigns, and, except as set forth in Section 11.6, no other Persons shall have any right, benefit, priority or - ------------ interest under, or because of the existence of, this Agreement. 11.10 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE ISSUING BANK, THE -------------------- ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE DIP FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 11.11 Additional Grant of Lien. All loans, advances and any other ------------------------ indebtedness or obligations, contingent or absolute (including, without limitation, the principal thereof, interest thereon, and costs and expenses owing in connection therewith) which may now or from time to time hereafter be owing by the Borrowers to the Administrative Agent or the Lenders under any of the DIP Financing Documents shall be secured as set forth in the Financing Orders. 11.12 Interest. It is the intention of the parties hereto that each -------- Lender shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to any Lender under laws applicable to it (including the laws of the United States of America and the State of Texas or any other jurisdiction whose laws may be mandatorily applicable to such Lender notwithstanding the other provisions of this Agreement), then, in that event, 58 notwithstanding anything to the contrary in any of the DIP Financing Documents or any agreement entered into in connection with or as security for the DIP Financing Documents, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to any Lender that is contracted for, taken, reserved, charged or received by such Lender under any of the DIP Financing Documents or agreements or otherwise in connection with the DIP Financing Documents shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be canceled automatically and if theretofore paid shall be credited by such Lender on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by such Lender to the Borrowers); and (ii) in the event that the maturity of the DIP Financing Documents is accelerated by reason of an election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to any Lender may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically by such Lender as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by such Lender on the principal amount of the Indebtedness (or, to the extent that the principal amount of the Indebtedness shall have been or would thereby be paid in full, refunded by such Lender to the Borrowers). All sums paid or agreed to be paid to any Lender for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by law applicable to such Lender, be amortized, prorated, allocated and spread throughout the full term of the DIP Loans evidenced by the DIP Financing Documents until payment in full so that the rate or amount of interest on account of any DIP Loans hereunder does not exceed the maximum amount allowed by such applicable law. If at any time and from time to time (i) the amount of interest payable to any Lender on any date shall be computed at the Highest Lawful Rate applicable to such Lender pursuant to this Section 11.12 and (ii) ------------- in respect of any subsequent interest computation period the amount of interest otherwise payable to such Lender would be less than the amount of interest payable to such Lender computed at the Highest Lawful Rate applicable to such Lender, then the amount of interest payable to such Lender in respect of such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate applicable to such Lender until the total amount of interest payable to such Lender shall equal the total amount of interest which would have been payable to such Lender if the total amount of interest had been computed without giving effect to this Section 11.12. To the extent that Chapter 303 of ------------- the Texas Finance Code is relevant for the purpose of determining the Highest Lawful Rate, such Lender elects to determine the applicable rate ceiling under such Chapter by the indicated weekly rate ceiling from time to time in effect. 11.13 No Duty. All attorneys, accountants, appraisers, and other ------- professional Persons and consultants retained by the Administrative Agent and the Lenders shall have the right to act exclusively in the interest of the Administrative Agent and the Lenders and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to the Borrowers or any of the Borrowers' shareholders or any other Person. 11.14 No Fiduciary Relationship. The relationship between each Borrower ------------------------- and each Lender is solely that of debtor and creditor, and neither the Administrative Agent nor any Lender has any fiduciary or other special relationship with each Borrower, and no term or condition of any of the DIP Financing Documents shall be construed so as to deem the relationship between each Borrower 59 and any Lender to be other than that of debtor and creditor. 11.15 Equitable Relief. Each Borrower recognizes that in the event the ---------------- Borrowers fail to pay, perform, observe, or discharge any or all of the Indebtedness, any remedy at law may prove to be inadequate relief to the Administrative Agent and the Lenders. Each Borrower therefore agrees that the Administrative Agent and the Lenders, if the Administrative Agent or the Lenders so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 11.16 No Waiver; Cumulative Remedies. No failure on the part of the ------------------------------ Administrative Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other DIP Financing Documents are cumulative and not exclusive of any rights and remedies provided by law. 11.17 Severability. Any provision of this Agreement held by a court of ------------ competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. 11.18 Headings. The headings, captions, and arrangements used in this -------- Agreement are for convenience only and shall not affect the interpretation of this Agreement. 11.19 Non-Application of Chapter 346 of Texas Finance Code. The ---------------------------------------------------- provisions of Chapter 346 of the Texas Finance Code are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other DIP Financing Documents or to the transactions contemplated hereby. 11.20 Construction. Each Borrower, the Administrative Agent, and each ------------ Lender acknowledges that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other DIP Financing Documents with its legal counsel and that this Agreement and the other DIP Financing Documents shall be construed as if jointly drafted by the parties hereto. 11.21 Independence of Covenants. All covenants hereunder shall be given ------------------------- independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default if such action is taken or such condition exists. 11.22 NO ORAL AGREEMENTS. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN ------------------ DOCUMENTS REFERRED TO HEREIN REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL 60 AGREEMENTS AMONG THE PARTIES HERETO. 61 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. BORROWERS: PILLOWTEX CORPORATION PILLOWTEX, INC. PTEX HOLDING COMPANY PILLOWTEX MANAGEMENT SERVICES COMPANY BEACON MANUFACTURING COMPANY MANETTA HOME FASHIONS, INC. TENNESSEE WOOLEN MILLS, INC. 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. AMOSKEAG MANAGEMENT CORPORATION DOWNEAST SECURITIES CORPORATION BANGOR INVESTMENT COMPANY MOORE'S FALLS CORPORATION THE LESHNER CORPORATION LESHNER OF CALIFORNIA, INC. OPELIKA INDUSTRIES, INC. By: /s/ Anthony T. Williams Name: Anthony T. Williams Title: President & CFO Post-Petition Credit Agreement Signature Page ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent, Issuing Bank and a Lender By: /s/ William E. Livingston, IV William E. Livingstone, IV Managing Director Post-Petition Credit Agreement Signature Page LENDERS: GOLDMAN SACHS CREDIT PARTNERS L.P. THE BANK OF NOVA SCOTIA By: /s/ David Salsalton By: /s/ D.N. Gillespie Name: David Salsalton Name: D.N. Gillespie Title: Authorized Signatory Title: Managing Director ING BARING (U.S.) CAPITAL, LLC CREDIT LYONNAIS - NEW YORK BRANCH By: /s/ Joseph Adamo By: /s/ John-Charles Van Essche Name: Joseph Adamo Name: John-Charles Van Essche Title: Associate Title: Vice President MARINER LDC BANK ONE, TEXAS, N.A. By: /s/ (Signature Illegible) By: /s/ Carl F. Shafer Name: Name: Carl F. Shafer Title: Director Title: Vice President FLEET NATIONAL BANK, (formerly known as Fleet Bank, N.A.) By: /s/ H. Michael Wills Name: H. Michael Wills Title: Authorized Officer Post-Petition Credit Agreement Signature Page SCHEDULE A ---------- COMMITMENT PERCENTAGES ---------------------- LENDER: COMMITMENT PERCENTAGE: ====== ===================== BANK OF AMERICA, N.A. 36.666667% CREDIT LYONNAIS - NEW YORK BRANCH 16.666667% FLEET NATIONAL BANK 16.666667% THE BANK OF NOVA SCOTIA 13.333333% BANK ONE, TEXAS, N.A. 6.666667% GOLDMAN SACHS CREDIT PARTNERS L.P. 3.333333% ING BARING (U.S.) CAPITAL, LLC 3.333333% MARINER LDC 3.333333% TOTAL: 100% ===== ==== EXHIBIT A --------- CASH MANAGEMENT ORDER --------------------- [See Attached] EXHIBIT B --------- COMMITMENT TRANSFER SUPPLEMENT ------------------------------ [See Attached] EXHIBIT C --------- INTERIM ORDER ------------- [See Attached] EX-10.26 4 0004.txt FIRST AMENDMENT TO POST-PETITION CREDIT AGREEMENT Ex. 10.26 FIRST AMENDMENT TO POST-PETITION CREDIT AGREEMENT THIS FIRST AMENDMENT TO POST-PETITION CREDIT AGREEMENT (this "Amendment"), dated as of March 6, 2001, is entered into among PILLOWTEX CORPORATION, PILLOWTEX, INC., PTEX HOLDING COMPANY, PILLOWTEX MANAGEMENT SERVICES COMPANY, BEACON MANUFACTURING COMPANY, MANETTA HOME FASHIONS, INC., TENNESSEE WOOLEN MILLS, INC., 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., AMOSKEAG MANAGEMENT CORPORATION, DOWNEAST SECURITIES CORPORATION, BANGOR INVESTMENT COMPANY, MOORE'S FALLS CORPORATION, THE LESHNER CORPORATION, LESHNER OF CALIFORNIA, INC., and OPELIKA INDUSTRIES, INC. (collectively, the "Borrowers"), the institutions listed on the signature pages hereof that are parties to the Credit Agreement defined below (collectively, the "Lenders"), and BANK OF AMERICA, N.A., as Administrative Agent for itself and the Lenders (in said capacity, the "Administrative Agent"). BACKGROUND ---------- A. The Borrowers, the Lenders and the Administrative Agent are parties to that certain Post-Petition Credit Agreement, dated as of November 14, 2000 (as amended through the date hereof, the "Credit Agreement"). Terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement. B. The Borrowers, the Lenders and the Administrative Agent desire to make certain amendments to the Credit Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrowers, the Lenders and the Administrative Agent covenant and agree as follows: 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby amended ------------------------------ as follows: (a) Section 1.1 is amended by inserting the definition of "Blankets ----------- Division" in alphabetical order therein, as follows: "Blankets Division": Assets used in the Borrowers' manufacturing ----------------- of woven and non-woven conventional and thermal weave blankets and throws, including without limitation, such assets located at or otherwise related to plants in Swannanoa and Newton, North Carolina and Westminster and Mauldin, South Carolina. (b) Section 1.1 is amended by entirely amending the definition of ----------- "Total Credit Commitment" as follows: "Total Credit Commitment": $125,000,000 (which amount includes ----------------------- the Letter of Credit Commitment), as such sum may be reduced from time to time. (c) Section 8.16 is entirely amended, as follows: ------------ Section 8.16 Asset Coverage Ratio. Permit, at any time, -------------------- determined in accordance with GAAP on a consolidated basis for the Borrowers and their Subsidiaries, the ratio of (a) the sum of (i) the net book value of accounts receivable, plus (ii) the net book value of inventory, plus (iii) the book value of owned land, real property, equipment, leasehold improvements and other fixed assets, net of depreciation, plus (iv) cash on hand, to (b) the outstanding principal amount of all Pre-Petition Indebtedness and the Obligations, to be less than (a) 1.31 (plus any Gain Factor plus any Blankets Factor) to 1.00 at all times on and before June _____, 2001, and (b) 1.34 (plus any Gain Factor plus any Blankets Factor) to 1.00 at all times thereafter, measured twice monthly pursuant to the reporting requirements set forth in Section 7.1. For purposes of this Section 8.16, the term "Gain Factor" shall mean, at any time, an amount equal to the result obtained by dividing (A) any gain reported by the Parent Corporation in connection with any sales of assets outside the ordinary course of business, by (B) the total amount of assets actually reported by the Parent Corporation as the numerator of the ratio described herein. For purposes of this Section 8.16, the term "Blankets Factor" shall mean, at any time after the sale of substantially all of the Blankets Division as a going concern at or above the aggregate book value of the assets being sold, an amount equal to the result obtained by dividing (A) $15,000,000 by (B) the total amount of assets actually reported by the Parent Corporation as the numerator of the ratio described herein. 2. AMENDMENT FEE. Borrowers shall pay to the Administrative Agent, for ------------- the pro rata benefit of the Lenders that execute and deliver this Amendment to the Administrative Agent (or its counsel) not later than 5:00 p.m., Dallas time, March 6, 2001, an amendment fee in an amount equal to the product of (a) 0.20% multiplied by (b) an amount equal to such Lender's portion of the Total Credit Commitment. Such amendment fee shall be paid in immediately available funds and shall be payable only if the conditions set forth in Section 4 of this Amendment --------- have been satisfied -2- and shall be due and payable to each Lender eligible for payment pursuant to the preceding sentence no later than two Business Days after the conditions set forth in Section 4 of this Amendment have been satisfied. The Borrower agrees --------- that the failure to pay the amendment fee provided in this Section 2 shall, --------- after the expiration of any applicable grace period, be an Event of Default under Section 9.1(a)(ii) of the Credit Agreement. ------------------ 3. REPRESENTATIONS AND WARRANTIES. By its execution and delivery hereof, ------------------------------ the Borrowers represent and warrant to the Lenders that, as of the date hereof: (a) after giving effect hereto, the representations and warranties contained in the Credit Agreement and the other DIP Financing Documents are true and correct on and as of the date hereof as if made on and as of such date; (b) after giving effect hereto, no event has occurred and is continuing which constitutes an Event of Default; (c) the Borrowers have legal power and authority to execute and deliver this Amendment, and this Amendment constitutes the legal, valid and binding obligation of the Borrowers, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy or other 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; (d) neither the execution, delivery and performance of this Amendment nor the consummation of any transactions contemplated herein will conflict with any Requirement of Law or Contractual Obligation; and (e) no authorization, approval, consent, or other action by, notice to, or filing with, any Governmental Authority or other Person (including the Board of Directors of any Borrower), is required for the execution, delivery or performance by the Borrowers of this Amendment. 4. CONDITIONS OF EFFECTIVENESS. This Amendment shall be effective as of --------------------------- the date of the Credit Agreement, so long as each of the following conditions precedent shall have been satisfied: (a) the Administrative Agent shall receive counterparts of this Amendment executed by the Required Lenders and the Borrowers; (b) the Bankruptcy Court shall have entered an order approving the terms of this Amendment; -3- (c) the representations and warranties set forth in Section 3 of this --------- Amendment shall be true and correct; and (d) the Administrative Agent shall receive, in form and substance satisfactory to the Administrative Agent and its counsel, such other documents, certificates and instruments as the Administrative Agent shall reasonably require. 5. REFERENCE TO CREDIT AGREEMENT. Upon the effectiveness of this ----------------------------- Amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended by this Amendment. 6. COUNTERPARTS; EXECUTION VIA FACSIMILE. This Amendment may be executed ------------------------------------- in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Amendment may be validly executed and delivered by facsimile or other electronic transmission. 7. GOVERNING LAW: BINDING EFFECT. This Amendment shall be governed by ----------------------------- and construed in accordance with the laws of the State of Texas and shall be binding upon the Borrowers, the Administrative Agent, each Lender and their respective successors and assigns. 8. HEADINGS. Section headings in this Amendment are included herein for -------- convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9. DIP FINANCING DOCUMENT. This Amendment is a DIP Financing Document ---------------------- and is subject to all provisions of the Credit Agreement applicable to DIP Financing Documents, all of which are incorporated in this Amendment by reference the same as if set forth in this Amendment verbatim. 10. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE OTHER DIP ------------------ FINANCING DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ================================================================================ REMAINDER OF PAGE LEFT INTENTIONALLY BLANK ================================================================================ -4- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. BORROWERS: PILLOWTEX CORPORATION PILLOWTEX, INC. PTEX HOLDING COMPANY PILLOWTEX MANAGEMENT SERVICES COMPANY BEACON MANUFACTURING COMPANY MANETTA HOME FASHIONS, INC. TENNESSEE WOOLEN MILLS, INC. 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. AMOSKEAG MANAGEMENT CORPORATION DOWNEAST SECURITIES CORPORATION BANGOR INVESTMENT COMPANY MOORE'S FALLS CORPORATION THE LESHNER CORPORATION LESHNER OF CALIFORNIA, INC. OPELIKA INDUSTRIES, INC. By: /s/ Anthony T. Williams Name: Anthony T. Williams Title: President, Chief Operating Officer & CFO First Amendment to Post-Petition Credit Agreement Signature Page ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent, Issuing Bank and a Lender By: /s/ William E. Livingstone, IV William E. Livingstone, IV Managing Director First Amendment to Post-Petition Credit Agreement Signature Page LENDERS: THE BANK OF NOVA SCOTIA GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ Olivia L. Braun By: (Signature Illegible) Name: Olivia L. Braun Name:______________________________ Title: Director Title:_____________________________ CREDIT LYONNAIS - NEW YORK BRANCH ING BARING (U.S.) CAPITAL, LLC By: /s/ John-Charles Van Essche By: ____________________________ Name: John-Charles Van Essche Name:______________________________ Title: Vice President Title:_____________________________ BANK ONE, TEXAS, N.A. MARINER LDC By: /s/ Carl F. Shafer By: (Signature Illegible) Name: Carl F. Shafer Name:______________________________ Title: Vice President Title: Director FLEET NATIONAL BANK, (formerly known BHF (USA) CAPITAL CORPORATION as Fleet Bank, N.A.) By: _______________________________ By: /s/ Christopher J. Ruzzi Name:_________________________________ Name: Christopher J. Ruzzi Title:________________________________ Title: Vice President FRANKLIN FLOATING RATE TRUST By: (Signature Illegible) Name:______________________________ By: _______________________________ Title: Associate Name:_________________________________ Title:________________________________ First Amendment to Post-Petition Credit Agreement Signature Page GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ William S. Richardson Name: William S. Richardson Title: Duly Authorized Signatory GUARANTY BUSINESS CREDIT CORPORATION By: ______________________________ Name:________________________________ Title:_______________________________ WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION, successor by consolidation to Wells Fargo Bank (Texas), National Association By: ______________________________ Name:________________________________ Title:_______________________________ BANK OF AMERICA, N.A. (Trading) By: ______________________________ Name:________________________________ Title:_______________________________ FOOTHILL INCOME TRUST II, L.P. By: (Signature Illegible) Name:________________________________ Title:_______________________________ First Amendment to Post-Petition Credit Agreement Signature Page EX-10.52 5 0005.txt SEPARATION AGREEMENT EXHIBIT 10.52 SEPARATION AGREEMENT This Separation Agreement is made as of the 26th day of October, 2000, by and between Pillowtex Corporation, a Texas corporation (the "Company"), and Charles M. Hansen, Jr. (the "Executive"). R E C I T A L S WHEREAS, the Executive is currently employed by the Company as its Chairman of the Board and Chief Executive Officer pursuant to the terms of an Employment Agreement dated as of January 1, 1993, and subsequently amended on July 26, 1993, and January 20, 1998 (the "Employment Agreement"); and WHEREAS, with the Company's consent, the Executive has decided to resign as Chairman and Chief Executive Officer of the Company, and as a director of the Company, on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained in this Agreement, the parties agree as follows: 1. Resignation. The Executive hereby resigns (i) as Chairman and Chief Executive Officer of the Company, (ii) from all other offices with, and as a director of, the Company, its subsidiaries and other affiliates (the Company and its subsidiaries and affiliates collectively referred to in this Agreement as "Pillowtex"), and (iii) from all committees of and fiduciary positions with respect to Pillowtex, all such resignations to be effective as of 3 p.m. Central Time, October 26, 2000 (the "Effective Date"). From and after the Effective Date, the Executive will cease to be an employee of Pillowtex. The Executive agrees that he will not seek to be reelected to the Board of Directors of the Company after the Effective Date unless he is nominated for election by the Board. 2. Separation Payments and Benefits. (a) Upon execution of this Agreement by the Executive, the Company will pay to the Executive, in a single lump sum payment, the sum of $4.85 million in full satisfaction of all amounts owed to the Executive under the Employment Agreement for the period from November 1, 2000, through June 20, 2005, and for the extended noncompetition agreements described in Section 5(e). The Executive will continue to be paid his base salary through October 31, 2000, in accordance with the Company's normal payroll practices. (b) Health care expenses incurred by the Executive and/or his spouse from and after the Effective Date will be reimbursed in accordance with the following provisions. Health care expenses incurred through the date on which the Executive and/or his spouse attains age 65, will be reimbursed subject to substantially similar terms, conditions and limitations that are applied to employees of the Company generally under the Company's basic health care plan as in effect from time to time, provided the Executive or his spouse continues to pay the health care plan premium then charged to active employees of the Company for such coverage. Thereafter, health care expenses incurred by the Executive and his spouse will continue to be reimbursed for their lives, subject to substantially similar terms, conditions and limitations that are applied to employees of the Company generally under the Company's basic health care plan as in effect from time to time provided the Executive or his spouse, if she survives him, pays the health care plan premium charged for COBRA continuation coverage as in effect from time to time. In addition, the Executive and his spouse will be entitled to reimbursement under the Company's senior executive medical plan as in effect on the Effective Date for health care expenses incurred after the Effective Date and on or before the date the Executive and/or his spouse attains age 65, provided, however, that the Company will not be obligated to reimburse any such expenses to the extent such expenses for each of the Executive and his spouse exceed $10,000 in any calendar year. (c) Nothing contained in Section 2(b) will limit the Company's right to amend or modify any provision of its health care plans or to change the terms and conditions of its health care benefits, provided that any such amendment, modification or other change made by the Company applies to its senior executives and employees generally and not just to the Executive or his spouse. Subject to the foregoing, the Company may provide health care benefits for the Executive and his spouse by continuing the participation of the Executive and/or his spouse in the Company's health care plans or under a substitute but comparable arrangement. (d) The spouse entitled to benefits under this Agreement is the spouse to whom the Executive is married on the Effective Date and not any other individual to whom the Executive may be married after the Effective Date. (e) The amounts payable to the Executive and his spouse under the foregoing provisions of this Section 2 will be paid from the general assets of the Company, and nothing contained in this Agreement will require the Company to set aside or hold in trust any funds for the benefit of the Executive or his surviving spouse, who will have the status of general unsecured creditors with respect to the obligation of the Company to make payments under this Agreement. Any funds of the Company available to pay benefits under this Agreement will be subject to the claims of general creditors of the Company and may be used for any purpose by the Company. ( f) The Executive will be entitled to indemnification for a period of at least three years after the Effective Date with respect to his services as an officer and director of Pillowtex on the same basis and subject to the same terms as other officers and directors of Pillowtex. The Company will continue its present directors and officers liability insurance coverage for a period of not less than three years after the Effective Date and will include the Executive as a covered person under such insurance coverage. (g) The Company will make available to the Executive at no cost the services of his current secretary for a period of 90 days following the Effective Date. (h) The Executive and his spouse may each purchase Company product for their personal use at "SIC value" until their deaths. 3. Return of Property. The Executive understands and agrees that all books, handbooks, manuals, files, papers, memoranda, letters, facsimile or other communications that he has in his possession and that were written, authorized, signed, received or transmitted in his 2 capacity as an employee of Pillowtex are and remain the property of the Company. In addition, the Executive acknowledges that he has returned to the Company all confidential information of the Company in his possession and all property of the Company other than the following items which the Executive may retain: (i) all office and home computers, (ii) the Executive's office furniture, (iii) the Company-leased automobile currently made available to the Executive and (iv) country club memberships purchased by the Company and held in the Executive's name. The Executive will be responsible for and will fully discharge all expenses that are incurred with respect to such country club memberships from and after the Effective Date. The Company will take all action necessary to transfer title of such property to the Executive, provided that title to the Company-leased automobile will be transferred to the Executive no later than the end of the lease period, and the Executive will take all action necessary to transfer title to the Company of all property to be returned to the Company. Prior to the transfer of title to the Company-leased automobile, the Company will continue to pay all related lease payments, and the Executive and his spouse will have the exclusive use of the automobile. The Executive acknowledges that he will not be entitled to the use of Company airplanes, apartments, condominiums, boats or other Company property after the Effective Date except as expressly provided in this Section 3. 4. Assistance and Cooperation. At all times following the Effective Date the Executive will cooperate with Pillowtex in the defense of any threatened or pending litigation or in the investigation or proceeding by any governmental agency that relates to events that occurred while he was an employee of Pillowtex. The Executive will not receive any additional compensation for such assistance and cooperation but will be entitled to reimbursement by the Company for all reasonable out-of-pocket expenses incurred in providing such assistance and cooperation, including any reasonably necessary legal fees. 5. Termination of Prior Agreements. The provisions of this Agreement supersede the provisions of that certain Retention and Supplemental Retirement Agreement dated as of June 28, 2000, between the Executive and the Company and the provisions of the Employment Agreement, and the Executive and the Company acknowledge and agree that such agreements will terminate as of the Effective Date, except that: (a) The Executive will be entitled to payment for base salary (but not for any bonus or other incentive pay) accrued through the Effective Date and for any unused vacation earned as of the Effective Date in accordance with the Company's vacation policy. (b) The Executive will be entitled to reimbursement for expenses incurred through the Effective Date in accordance with the Company's expense reimbursement policy applicable to other executive officers of the Company, as approved by the Company's Management Committee, which approval will not be unreasonably withheld. (c) The Executive will be entitled to the tax-offset payment described in Section 6(f) of the Employment Agreement with respect to any amounts described in that Section that have accrued as of the Effective Date, such tax-offset payment to be paid concurrently with the reimbursement of expenses as provided in Section 5(b). (d) The provisions of Section 8 ("Nondisclosure Agreement"), Section 11 ("Severability"), Section 13 ("Remedies"), Section 14 ("Acknowledgements") and Section 15 3 ("Assignment of Inventions") of the Employment Agreement will survive the termination of the Employment Agreement and will continue to be enforc eable in accordance with their terms. (e) The provisions of Section 9 ("Noncompetition Agreement") and Section 10 ("Nonemployment") of the Employment Agreement will survive the termination of the Employment Agreement and will continue to be enforceable for a period of three years after the Effective Date and otherwise in accordance with their terms. 6. Split Dollar Life Insurance. The Executive and the Company have entered into a Split Dollar Life Insurance Agreement dated July 26, 1993 (the "Split Dollar Agreement") with respect to a whole life insurance policy (the "Policy") in the face amount of $3 million insuring the life of the Executive. Pursuant to the terms of the Split Dollar Agreement, the Executive will have a period of 90 days after the Effective Date in which to repay to the Company the principal and accrued interest under the promissory note described in the Split Dollar Agreement and have the Company release its interest in the Policy. If the Executive does not elect to repay the principal and interest on the promissory note during such 90-day period, the Company will surrender the Policy to the insurer, and the proceeds received by the Company as a result of such surrender will be distributed to the Company and to the Executive as provided in Section 8 of the Split Dollar Agreement. 7. Nondisparagement. Pillowtex as an entity and each of its directors and executive officers while directors and executive officers of Pillowtex will not publicly disparage the Executive in any formal public statement or encourage or induce others to publicly disparage the Executive. The Executive agrees that he will not publicly disparage or encourage or induce others to publicly disparage Pillowtex or any of its past and present officers, directors, shareholders agents and employees. For purposes of this Agreement, the term "disparage" includes without limitation comments or statements to the press, Pillowtex employees or any individual or entity with whom Pillowtex has a business relationship that could be reasonably expected to adversely affect in any manner (i) the conduct of the business of Pillowtex (including without limitation any business plans or prospects), (ii) the business reputation of Pillowtex or any of its officers or directors or (iii) the Executive's personal or business reputation. 8. Mutual General Release. (a) In consideration of the payments to be made to and the benefits to be conferred on the Executive under this Agreement, the Executive, for himself, his heirs, executors, administrators, and assigns, releases the Company, its current, former and successor subsidiaries, parent corporations, affiliates and partners, and each of their officers, directors, employees, agents, representatives, insurance carriers, benefit plans, fiduciaries and attorneys, or any other related parties, from, and agrees not to sue any of the foregoing with respect to, any claims, known or unknown, that he has, or that anyone claiming for him might have or claim to have, with respect to, concerning or arising out of his employment with Pillowtex, his resignation as an officer of the Company and his termination of employment with Pillowtex or any other event occurring before the d ate of execution of this Agreement. These claims include, but are not limited to, claims arising under any employment agreement, retirement agreement, employment law or regulation, including Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Employee Retirement 4 Income Security Act of 1974, as amended; or any other federal, state or local civil rights, employee benefit, labor contract, tort, or common law. The Company acknowledges that the Executive is waiving only those claims that he has or believes he might have as of the Effective Date and not any claims that might arise in the future. (b) In consideration of the Executive's agreements hereunder, Pillowtex and its successors and assigns releases the Executive, his spouse, their heirs, executors, administrators, and assigns, from, and agrees not to sue any of the foregoing with respect to, any claims, known or unknown, that it has, or that anyone claiming for or through Pillowtex might have or claim to have, with respect to or arising out of the employment of the Executive at any time by Pillowtex or with respect to the Executive's service as an officer, director, employee or shareholder of Pillowtex or any other event occurring before the Effective Date. The Executive acknowledges that Pillowtex is waiving only those claims that it has or believes it might have as of the Effective Date and not any claims that might arise in the future. (c) Notwithstanding the foregoing, (i) the release contained in Section 8(a) will not apply to (A) any right the Executive has to indemnification under the Company's Certificate of Incorporation, By-laws, directors and officers liability insurance or otherwise with regard to the Executive's service as an officer or director of Pillowtex, (B) any rights the Executive has accrued under any employee benefit plan maintained by Pillowtex and (C) any rights of the Executive under this Agreement; and (ii) the release contained in Section 8(b) will not apply to any rights of the Company under this Agreement. (d) The Executive acknowledges that he has been advised to consult with an attorney prior to signing this Agreement. The Executive further acknowledges that he has been given at least 21 days to consider signing this Agreement and that he may voluntarily choose to sign the Agreement before the end of the 21-day period. The Executive understands that he will have seven days after he signs this Agreement during which he may revoke for any reason the portion of the release contained in Section 8(a) that relates to claims arising under the Age Discrimination in Employment Act of 1967, as amended, by delivering a notice of revocation to the Company, to the attention of the General Counsel, at the Company's executive offices at 4111 Mint Way, Dallas, Texas 75237. Any such revocation will have no effect on the remaining portions of such release or on any other provision of this Agreement, which will remain enforceable by the Company. 9. Miscellaneous. (a) This Agreement supersedes any and all other agreements, either oral or written, between the parties with respect to the Executive's resignation as an officer of, and his termination of employment by, the Company and contains all of the agreements between the parties with respect to such resignation and termination. Any modification or amendment to this Agreement will be valid only if it is in writing and is executed by the Executive and the Company. (b) In the event of a material breach of this Agreement by the Executive, the Company will not be obligated to make any further payments or provide any additional benefits to the Executive or his spouse. 5 (c) In the event that any part of the Company's obligations to the Executive under this Agreement are abrogated or set aside for any reason whatsoever, the Company agrees that the Executive will be deemed to have a fully liquidated claim against the Company in the full amount of any such abrogation or set-aside. (d) All amounts paid to the Executive pursuant to this Agreement will be subject to withholding for taxes as required by applicable law. (e) This Agreement may be executed in counterparts, each of which will constitute an original, but all of which will constitute one document. (f) This Agreement will be binding upon and inure to the benefit of and be enforceable against the parties, and their respective successors, executors, administrators, personal representatives, heirs and assigns. (g) The parties acknowledge and agree that this Agreement is to be performed in Dallas, Dallas County, Texas. This Agreement will be governed by, and construed in accordance with, the laws of the State of Texas, without regard to conflicts of laws principles. Each of the parties waives any right such party may have to a trial by jury. If any action is brought to enforce or interpret this Agreement, venue for such action will be in Dallas County, Texas. Each of the parties agrees irrevocably and unconditionally to consent to submit to the exclusive jurisdiction of the courts of the State of Texas and of the United States of America located in Dallas, Texas for any actions, suits or proceedings arising out of or relating to this Agreement. (h) The Company agrees that, in connection with any press release or filing with the Securities and Exchange Commission relating to this Agreement, it will describe the Executive's departure from Pillowtex as his resignation as Chairman and Chief Executive Officer and as a director of the Company without further characterization. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PILLOWTEX CORPORATION By ---------------------------------------- Name: Anthony T. Williams Title: Executive Vice President and Chief Financial Officer 6 EXECUTIVE ---------------------------------------- Charles M. Hansen, Jr. 7 EX-21.1 6 0006.txt PRINCIPAL OPERATING SUBSIDIARIES EXHIBIT 21.1 PRINCIPAL OPERATING SUBSIDIARIES State of Incorporation ---------------------- Beacon Manufacturing Company North Carolina Pillowtex Canada Inc. Ontario, Canada Fieldcrest Cannon, Inc. Delaware Encee, Inc. Delaware The Leshner Corporation Ohio Opelika Industries, Inc. Alabama Pillowtex, Inc. Delaware Pillowtex Management Services Company Delaware EX-23.1 7 0007.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Pillowtex Corporation: We consent to the incorporation by reference in Registration Statements (nos. 33-65408, 33-84624, 33-81478, 333-39191 and 333-57727) on Form S-8 of Pillowtex Corporation of our report dated February 22, 2001, except as to the second paragraph of note 11 which is as of March 6, 2001, relating to the consolidated balance sheets of Pillowtex Corporation and subsidiaries as of December 30, 2000 and January 1, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 30, 2000, and related financial statement schedule, which report is included in the December 30, 2000 annual report on Form 10-K of Pillowtex Corporation. Our aforementioned report contains an explanatory paragraph that states that the Company and substantially all of its subsidiaries (collectively, the Companies) have filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Chapter 11) and are currently operating their business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in Delaware (the Bankruptcy Court), and continuation of the Company as a going concern is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the requisite parties under the United States Bankruptcy Code and confirmation by the Bankruptcy Court, the ability to comply with the debtor-in-possession financing facility, and the ability to generate sufficient cash from operations and obtain financing arrangements to meet future obligations. In addition, the Companies have experienced operating losses and negative operating cash flows and are currently in default under all of their pre-petition debt agreements. These matters raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. KPMG LLP Dallas, Texas March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----