-----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, Twr/ZaEIM36Dbd+Uyq1HgsL9dNzSsXwIw/KZ5Ee5HwQan15Xrx32uhT1jyTQEnKt YzFJ5sinDoQtbTYBBy++0g== 0001021408-02-004298.txt : 20020415 0001021408-02-004298.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-004298 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11756 FILM NUMBER: 02591046 BUSINESS ADDRESS: STREET 1: ONE LAKE CIRCLE DRIVE CITY: KANNAPOLIS STATE: NC ZIP: 28081 BUSINESS PHONE: 704-939-4619 MAIL ADDRESS: STREET 1: ONE LAKE CIRCLE DRIVE CITY: KANNAPOLIS STATE: NC ZIP: 28081 10-K 1 d10k.txt PILLOWTEX ================================================================================ 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 29, 2001 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.) One Lake Circle Drive, Kannapolis, North Carolina 28081 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (704) 939-2000 ---------------- 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 20, 2002 was $226,782. As of March 20, 2002, 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: . If the Company is unable to obtain confirmation of a plan of reorganization and emerge from bankruptcy protection prior to the scheduled termination of its current debtor-in-possession financing facility on June 30, 2002, no assurance can be given that the Company will have access to sufficient cash to fund its operations following such a date. . 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, as proposed. . The plan of reorganization proposed by the Company, even if confirmed 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 in connection with the reorganization process, 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. . Although the Company has not experienced such problems to date, the Company could have difficulty in attracting and retaining customers, top management, and other key personnel and labor as a result of its bankruptcy proceedings or other factors. . 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. The Company also markets its products to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet. Pillowtex, through its operating subsidiaries, manufactures and markets its products utilizing established and well-recognized Pillowtex-owned brand names. In addition, through licensing agreements, Pillowtex currently has rights to manufacture and market bedding products under other well-known brand names. The Company also manufactures products for customers under their own brand names. Pillowtex's diverse portfolio of top brand names allows it to differentiate Pillowtex's products from those of its competitors. Pillowtex also provides distinct brand names for different channels of retail distribution and for different price points. Pillowtex is organized into two major operating divisions: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, towels, bath rugs, and kitchen textile products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. See note 18 of the notes to the Company's consolidated financial statements included elsewhere in this Annual Report for financial information regarding segments. Proceedings Under Chapter 11 of the Bankruptcy Code On November 14, 2000 (the "Petition Date"), Pillowtex 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. 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 and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved the Bankruptcy Court for rejection. During 2001, the Company accrued $15.8 million for the estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection. Approximately $10.3 million of the prepetition liability relating to the rejected contracts and leases have been reflected as reorganization items, and the remaining $5.5 million has been included in the loss from discontinued operations in the accompanying consolidated statement of operations for 2001. The Company expects to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. 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. 2 On December 28, 2001, the Debtors filed with the Bankruptcy Court a Joint Plan of Reorganization and related Disclosure Statement. On February 26, 2002, the Debtors filed with the Bankruptcy Court a First Amended Joint Plan of Reorganization and related Disclosure Statement. On March 1, 2002, the Debtors filed with the Bankruptcy Court a Second Amended Joint Plan of Reorganization and related Disclosure Statement. On March 11, 2002, the Debtors filed with the Bankruptcy Court a revised version of the Second Amended Joint Plan of Reorganization (as so revised, the "Plan") and related Disclosure Statement (as so revised, the "Disclosure Statement") incorporating certain nonmaterial clarifications and modifications to reflect, among other things, events occurring subsequent to March 1, 2002. The primary objectives of the Plan are to: (a) alter the Debtors' debt and equity structures to permit the Debtors to emerge from the Chapter 11 Cases with viable capital structures; (b) maximize the value of the ultimate recoveries to all creditor groups on a fair and equitable basis; and (c) settle, compromise, or otherwise dispose of certain claims and interests on terms that the Debtors believe to be fair and reasonable and in the best interests of their respective estates, creditors, and equity holders. The Plan provides for, among other things: . the cancellation of certain indebtedness in exchange for cash, common stock in reorganized Pillowtex (the "New Common Stock"), and/or warrants to purchase shares of New Common Stock ("New Warrants"); . the cancellation of "Designated Post-Petition Loans" (as such term is defined in the Plan) having an aggregate principal amount of $150 million in exchange for the issuance by reorganized Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the "Exit Term Loan"); . the cancellation without consideration of Pillowtex's common stock and preferred stock that was issued and outstanding immediately prior to the Petition Date; . the assumption, assumption and assignment, or rejection of executory contracts or unexpired leases to which any Debtor is a party; . the reinstatement of approximately $11.4 million principal amount of industrial revenue bonds; . the selection of boards of directors of the reorganized Debtors; . the merger of Pillowtex with and into a new Delaware corporation, with the new Delaware corporation as the surviving corporation; and . the corporate restructuring of certain of Pillowtex's subsidiaries to simplify the Company's corporate structure. For a more detailed discussion of the Plan, reference is hereby made to the Disclosure Statement and the Plan itself, copies of which are filed as exhibits to the Company's Current Report on Form 8-K dated March 11, 2002 and are also available on the Company's website at www.pillowtex.com. ----------------- Under the terms of the Plan, there are significant conditions precedent to both the confirmation of the Plan by the Bankruptcy Court and the subsequent effectiveness of the Plan. Conditions to the confirmation of the Plan include, among others, the receipt by the Debtors of a commitment for a revolving credit facility (the "Exit Financing Revolver Facility") on terms and conditions satisfactory to the Debtors and the unanimous consent of the holders of Designated Post-Petition Loans to the treatment thereof under the Plan as described in the immediately preceding paragraph. Conditions to the effectiveness of the Plan include, among others, the execution and delivery of the documentation effectuating the Exit Financing Revolver Facility and the execution and delivery of the documentation effectuating the Exit Term Loan. There can be no assurance that these conditions will be satisfied. It is presently anticipated that (a) the Exit Financing Revolver Facility will be a senior asset-based revolving credit facility in the amount of $200 million, including a $60 million letter of credit sub-facility, secured by a first priority lien on the accounts receivable, inventory, and trademarks of the reorganized Debtors and a second priority lien on the primary collateral that secures the Exit Term Loan and (b) the Exit Term Loan will be a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures that Exit Financing Revolver Facility. The principal amount of the Exit Term Loan may be immediately reduced utilizing borrowings under the Exit Financing Revolver Facility depending on borrowing base availability thereunder. 3 The Bankruptcy Court has entered an order approving the Disclosure Statement as containing "adequate information" for creditors of the Debtors in accordance with section 1125 of the Bankruptcy Code. The Boards of Directors of Pillowtex and each of the other Debtors, as well as the Official Committee of Unsecured Creditors, believe that the Plan is in the best interests of the Company's creditors. On or about March 11, 2002, the Debtors commenced delivery of copies of the Plan and Disclosure Statement to parties in interest as required pursuant to the Bankruptcy Code. The Debtors have until 4:00 p.m., Eastern Time, on April 19, 2002 (the "Voting Deadline") to solicit acceptance of the Plan. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the Plan. The Bankruptcy Court has scheduled a confirmation hearing for the Plan on May 1, 2002 at 4:30 p.m., Eastern Time. There can be no assurance that the Plan will receive the requisite acceptance by creditors or that the Bankruptcy Court will confirm the Plan. To confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (a) 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, (b) each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence), and (c) 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 will receive no value for their interests under the Plan. The Bankruptcy Code provides that the Debtors have exclusive periods during which only they may file and solicit acceptances of a plan of reorganization. These "exclusive periods" may be extended for "cause." As a result of several extensions, the Debtors have the exclusive right until May 15, 2002 to solicit acceptance of the Plan. Unless such period is again extended by the Bankruptcy Court, if the Debtors fail to obtain acceptance of the Plan from the requisite impaired classes of creditors by May 15, 2002, 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. Since the Petition Date, the Debtors have conducted business in the ordinary course. 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 continuing to review their operations and to identify assets for disposition. On September 6, 2001, the Company sold the majority of the inventory and fixed assets associated with its Blanket Division (see note 5 of the notes to the Company's consolidated financial statements included elsewhere in this Annual Report). 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. Business Plan and Strategy The Company has developed a business plan and strategy with a view toward maintaining and improving the Company's position in the highly competitive home textile marketplace. The Company's business plan centers around four broad initiatives: branding and marketing; capacity rationalization; strategic sourcing; and total quality management. 4 Branding and Marketing The Company intends to develop and creatively market its strong portfolio of brands, including Cannon(R), Fieldcrest(R), Royal Velvet(R), and Charisma(R). The Company has already begun to change the focus of its business from that of a manufacturer of home textiles to a marketer of its own brands. Historically, brand development has been weak within the home textile industry leaving the domestic producers with a lack of influence in the retail market. As retailers continue to look for more product value and an increasing level of services, brands are expected to play a more important role in building and retaining loyalty and in providing the consumer with a level of assurance of reliability and quality. As a consequence, the Company will focus on developing more intimate relationships with both retailers and consumers with respect to marketing, product development, and customer service. Management believes that in so doing it can improve the profitability and economic returns on the Company's established brand names and its business as a whole. Capacity Rationalization The Company continuously reviews its manufacturing capacities to determine whether individual plants, processes, or facilities can be maintained on a profitable basis given prevailing market dynamics. In addition to the steps already taken by the Company during fiscal years 2000 and 2001, the Company's business strategy will incorporate further rationalization of manufacturing capacity to (a) concentrate production on higher margin products, (b) eliminate uneconomic facilities, and (c) continue to provide quality service to its entire domestic customer base. In connection with this strategy, the Company continues to examine the economics behind its historic involvement in all aspects of the manufacturing supply chain and has already begun to outsource certain components of its operations. Through outsourcing of cost disadvantaged processes, the Company will focus its manufacturing operations on its core competencies, which are (i) weaving and finishing of higher margin sheeting and towel product lines and (ii) the pillow and pad businesses. Strategic Sourcing The Company's business strategy is based on establishing long-term partnerships with a select number of overseas textile suppliers, initially to support the domestic markets and subsequently to extend the relationships to international markets under the umbrella of the Company's portfolio of brands. By combining its manufacturing expertise, market reach, and reputation with low cost overseas manufacturing capabilities, management believes it will be able to supply the domestic market while further improving the Company's overall profitability. These potential partners, some of whom have already been identified, will serve as an extension of the Company's United States-based facilities, employing production and technical expertise transferred from the Company and utilizing the capabilities of the Company's information technology to maintain the highest quality customer service standards. See "Risk Factors -- Relationships with Suppliers and Vendors" for a description of the risks that may affect the implementation of this initiative. Total Quality Management The Company is introducing the concept of "total quality management" to each and every business process. This concept requires a commitment to excellence by all personnel within the organization, with customers, both internal and external, becoming the core focus of all employees. Customers define quality, which the Company believes to be a key ingredient to success. As a consequence, every aspect of the Company's business will be viewed from the customers' perspective. This initiative supports the Company's drive for operational excellence but is also designed to enable it to operate as a single entity with all employees focused on exceeding each customer's expectations and on becoming the undisputed leader in customer service. 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. As indicated above, Pillowtex sold its blanket business in September 2001. 5 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 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. 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.). 6 Marketing and Sales Pillowtex markets its products to mass merchants, department stores, and specialty retail stores, as well as to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet. Pillowtex's top ten customers accounted for approximately 72% of its total net sales in 2001. Wal-Mart Stores, Inc. and its affiliated entity, Sam's Club stores, accounted for approximately 25% and 6%, respectively, of Pillowtex's total net sales in 2001. No other customer accounted for 10% or more of Pillowtex's total net sales in 2001. Consistent with industry practice, Pillowtex does not operate under long-term written supply contracts with its customers. See "- Risk Factors - Risk of Loss of Material Customers" below. Pillowtex segments its portfolio of brand names by distribution channel to solidify the perceived value of such brands and maintain their integrity. Royal Velvet(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. Cannon(R) brand name bed and bath products are distributed across a wide variety of distribution channels, while St. Mary's(R) brand name bed and bath products are distributed primarily 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 2% of total sales in 2001, 5% in 2000 and 6% in 1999. During each of the last three years, less than 5% of the Pillowtex's assets have been located outside the United States. 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 ("EDI") allows customers to place, and Pillowtex to fill, track, and bill, orders by computer. This system enables Pillowtex to ship products on a "quick response" basis. Pillowtex sells products under its Charisma(R) brand name over the Internet at www.charismahome.com and 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 - Dependence on Specific Brand Names" below. Pillowtex uses trademarks, trade names, and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors. From time to time, Pillowtex enters into license agreements with third parties for the use of third party trademarks and trade names on products manufactured by Pillowtex. These licenses generally require the payment of royalties based on net sales. Pillowtex currently holds a sublicense from Revman Industries Inc. to manufacture and sell certain Pillowtex products under the Tommy Hilfiger trademark in the United States, Canada, and Mexico. Pillowtex's sublicense with Revman Industries Inc. expires on December 31, 2003, subject to extension of up to four additional years as provided in the sublicense. 7 Pillowtex manufactures products for some customers under the customer's private labels. Products manufactured under customer-owned private labels are marketed by the customer. Pillowtex occasionally identifies product lines for which it is more advantageous for Pillowtex to license third parties to use its brand names for use in the manufacture and sale of these products. These license agreements require third parties to pay royalties to Pillowtex based upon product sales and generally require payments of minimum annual royalties. In January 1998, Pillowtex entered into a license agreement with Ex-Cell Home Fashions, Inc. whereby Pillowtex granted Ex-Cell an exclusive license to manufacture, sell, and distribute shower curtains and bath accessories under some of Pillowtex's trademarks and trade names. In January 1999, Pillowtex entered into a license agreement with Bardwil Industries, Inc. under which Pillowtex granted Bardwil an exclusive license to manufacture, sell, and distribute tablecloths and other table-top accessories under some of Pillowtex's trademarks and trade names. In September 2001, in connection with the sale of assets associated with its Blanket Division, Pillowtex entered into a license agreement with the purchaser of those assets under which Pillowtex granted the purchaser an exclusive license to manufacture, sell, and distribute blankets under some of Pillowtex's trademark 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 28 retail outlet stores that sell certain of Pillowtex's products directly to customers. These stores sell both first quality merchandise and seconds or "off-goods" at competitive retail prices. Bed, Bath, and Other Textile Products Sheets and Other Fashion Bedding. Pillowtex produces bed sheet products at its facilities in Kannapolis, China Grove, and Concord, North Carolina, and Union, South Carolina. These facilities provide a full range of Pillowtex's sheet products for substantially all channels of distribution. Pillowtex spins cotton and synthetic fibers into yarn and weaves the yarn into greige cloth for finishing, dyeing, cutting, and sewing. Pillowtex produces synthetic fill comforters and other decorative bedding products, such as pillow shams and decorative pillows, at its Eden, North Carolina facility. The product is later packaged for shipment to retail customers. Towels. Pillowtex produces bath towels at its facilities in Alabama, 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. On March 1, 2002, Pillowtex announced the closing of the towel finishing operations at its Phenix City, Alabama and Columbus, Georgia facilities. The towel warping departments in Columbus, Georgia will be moved to an existing weaving facility in Phenix City, Alabama, which will continue to operate. The closings, which are anticipated to be completed by June 1, 2002, will eliminate the jobs of approximately 980 employees. The majority of the lost production at the Phenix City finishing plant will be replaced by increased production at Pillowtex's towel finishing operation in Kannapolis, North Carolina, where approximately 200 employees are expected to be hired. Bath Rugs. Pillowtex produces bath rugs at its Scottsboro, Alabama facility. Pillowtex punches tufted yarn into fabric and cuts it to a uniform height. Pillowtex then applies a latex coating to the underside of the fabric to hold the fibers. Finally, the product is dyed, cut, and finished. 8 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. Pillowtex's facility in Dallas, Texas is 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 final assembly and distribution to customers. Many of Pillowtex's regional manufacturing facilities produce natural fill and synthetic fill pillows. Pillowtex assembles natural fill pillows by blowing processed feather and down into the pillow shell and sewing the open seam closed. Pillowtex produces synthetic fill pillows on machines known as garnets. Garnets pull, comb, and expand compressed polyester fibers. Once expanded, Pillowtex inserts the fibers into a pillow shell and sews the open seam shut. Pillowtex will be closing its automated sewing facility in Dallas, Texas and consolidating the facility's operations into its other pillow and pad facilities. The closing is anticipated to be completed by May 31, 2002 and will eliminate the jobs of approximately 97 employees. 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. 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; . yarn; and . cotton and polyester-cotton blend fabrics. A wide variety of sources offer these materials, and Pillowtex currently expects no significant shortage of these materials. Management believes that its relationships with its suppliers are generally good, notwithstanding the Chapter 11 Cases. See "- Risk Factors - Dependence on Specific Raw Materials" below. 9 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 29, 2001, the Company had $43.1 million in outstanding commitments for the future purchases of cotton, pursuant, in part, to contracts that have been accepted in connection with the Chapter 11 Cases. The contracts governing the commitments meet the normal purchases or normal sales exclusion provided for in derivative accounting and as such, the contracts are not accounted for as derivative instruments. Feathers and Down Pillowtex imports feather and down from several sources outside the United States. Pillowtex purchases a majority of these products from China, where feather and down are by-products of ducks and geese raised for food. Pillowtex generally purchases feather and down from its suppliers in China on open credit terms without letters of credit. Pillowtex also purchases some feather and down from suppliers in Europe. Synthetic Fibers Domestic fiber producers are Pillowtex's primary source of synthetic fibers. To reduce the effect of potential price fluctuations, Pillowtex makes commitments for a portion of its anticipated future purchases of synthetic fibers. Yarn Pillowtex uses significant quantities of yarn in its operations, some of which is produced internally and some of which is purchased from third party suppliers. To reduce the effect of potential fluctuations in price and to ensure a timely supply of quality product, Pillowtex makes commitments for a portion of its anticipated future purchases of yarn. In this regard, Pillowtex has entered into a long-term supply contact with Parkdale America, LLC, one of the nation's largest yarn suppliers. Fabric Pillowtex uses fabric purchased from third parties in the production of pillow shells, comforter covers, and various other products. In addition, Pillowtex imports the majority of its down comforter shells from China and India. Other Some of Pillowtex's stretch-to-fit mattress pads use Lycra(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 resources than does the Company. Pillowtex competes on the basis of quality, brand names, service, and price. Government Regulation Pillowtex must comply with various federal, state, and local environmental laws and regulations governing the discharge, storage, handling, and disposal of various substances. The Company must also comply with federal and state laws and regulations that require certain of its products to bear product content labels containing specified information, including their place of origin and fiber content. In addition, a variety of federal, state, local, and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other general business matters, govern Pillowtex's operations. Laws and regulations may change, and Pillowtex cannot predict what effect, if any, changes in various laws and regulations might have on its business. Backlog A number of factors affect the amount of Pillowtex's backlog orders at any particular time. These factors include seasonality and scheduling of the manufacturing and shipment of products. In general, Pillowtex's EDI and "quick 10 response" capabilities have resulted in shortened lead times between submission of purchase orders and delivery and have lowered the level of backlog orders. Consequently, Pillowtex believes that the amount of its backlog is not an appropriate indicator of levels of future sales. Employees As of March 1, 2002, Pillowtex had approximately 9,200 employees. As of March 1, 2002, 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 ----- ---------------- ---------- --------- Workers Union of Needletrades, Industrial and Textile Phenix City, Alabama; 02/01/03 6,244 Workers Columbus, Georgia; Concord, North Carolina; Eden, North Carolina; Kannapolis, North Carolina; China Grove, North Carolina; Salisbury, North Carolina; and Fieldale, Virginia Union of Needletrades, Industrial and Textile Workers Macon, Georgia 02/01/03 333 Union of Needletrades, Industrial and Textile Workers Toronto, Ontario, Canada 08/31/03 68 Union of Needletrades, Industrial and Textile Workers Scottsboro, Alabama 01/22/04 230 United Auto Workers Tunica, Mississippi 07/31/03 316 Warehouse, Mail Order, Office, Technical Chicago, Illinois 01/31/03 161 and Professional Employees (Teamsters)
As of March 1, 2002, approximately 54% of Pillowtex's employees had chosen to have union dues deducted from their paychecks. Pillowtex believes that generally it 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 Bankruptcy Court. 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. As described above, the Debtors have filed the Plan with the Bankruptcy Court, and the Disclosure Statement has been sent to creditors to solicit acceptance of the Plan. Following such solicitation, the Bankruptcy Court will consider whether to confirm the plan. There can be no assurance that the Plan will receive the requisite acceptance by creditors, that the conditions to confirmation set forth in the Plan will be satisfied, that the Bankruptcy Court will confirm the Plan, or that the conditions to effectiveness set forth in the Plan will be satisfied. Moreover, even if the Plan receives the requisite acceptance by creditors, is confirmed by the Bankruptcy Court, and does become effective, there can be no assurance that reorganized Pillowtex will be able to successfully implement the business plan and strategy on which the Plan is based. In addition, due to the terms of the Plan and 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 the Plan or another plan of reorganization in connection with the Chapter 11 Cases. Accordingly, Pillowtex can provide no assurance as to whether or when the Plan or another plan of reorganization may be confirmed in the Chapter 11 Cases. 11 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, Pillowtex's ability to obtain confirmation of the Plan or another plan of reorganization, Pillowtex's ability to comply with the terms of its debtor-in-possession financing facility (the "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 the Plan or another plan of reorganization. Adjustments necessitated by the Plan or another plan of reorganization could materially change the amounts reported in the consolidated financial statements included elsewhere in this Annual Report. For information regarding potential adjustments that would be necessitated by the Plan, reference is made to the Disclosure Statement, a copy of which is filed as an exhibit to the Company's Current Report on Form 8-K dated March 11, 2002. 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 has incurred, and will continue to incur, significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. However, based on current and anticipated levels of operations and continued efforts to reduce inventories, and assuming consummation of the Plan on or prior to June 30, 2002, 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. The DIP Financing Facility is currently scheduled to terminate on June 30, 2002, and accordingly, if the Plan is not consummated in accordance with its terms on or prior to such date, Pillowtex would be required to obtain a further extension of the DIP Financing Facility or alternative financing. Pillowtex can provide no assurance that such an extension would be granted or that alternative financing would be available on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to alternative financing in such a scenario would be very limited. Furthermore, in the event that cash flows, together with available borrowings under the DIP Financing Facility or alternative financing arrangements, are not sufficient to meet the Company's cash requirements, Pillowtex may be required to reduce planned capital expenditures; however, Pillowtex can provide no assurance that such reductions would be sufficient to cover any cash shortfalls. Management of the Debtors believes that, assuming consummation of the Plan in accordance with its terms and achievement of the Debtors' business plan and strategy, reorganized Pillowtex will have sufficient liquidity for the reasonably foreseeable future to service post-reorganization indebtedness and conduct its business as contemplated by the Debtors' business plan and strategy. 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 earnings before interest, taxes, depreciation and amortization ("EBITDA"), 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 12 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 reduction of the DIP Financing Facility. Moreover, assuming consummation of the Plan in accordance with its terms, the Exit Financing Revolver Facility and the Exit Term Loan will contain covenants imposing operating and financial restrictions on the reorganized Debtors, requiring asset sale proceeds and excess cash flow to be utilized to prepay such indebtedness and restricting the ability of reorganized Pillowtex to pay dividends. As a result of the restrictions described above, the ability of Pillowtex or reorganized Pillowtex to respond to changing business and economic conditions may be significantly restricted, and Pillowtex or reorganized Pillowtex may be prevented from engaging in transactions that might otherwise be considered beneficial. Holders Of Pillowtex's Capital Stock To Receive No Value Under Plan As a result of the amount of prepetition indebtedness and the availability of the "cram down" provisions of the Bankruptcy Code described above, the Plan provides that Pillowtex's presently outstanding capital stock will be cancelled without consideration. Accordingly, the holders of Pillowtex's capital stock will receive no value for their interests under the Plan. Potential investors in Pillowtex's presently outstanding capital stock should consider the proposed treatment of Pillowtex's capital stock under the Plan prior to making any investment decision with respect to such capital stock. Dependence 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. See "-- Dependence on Supply Sources in 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. Relationships with Suppliers and Vendors Pillowtex may have difficulty in maintaining existing or creating new relationships with suppliers or vendors as a result of the Chapter 11 Cases. In the event that the DIP Financing Facility was to terminate and, at the time of such termination, alternative financing was not available, Pillowtex's suppliers and vendors might stop providing supplies or services to Pillowtex or provide such supplies or services only on "cash on delivery," "cash on order," or other terms that could have an adverse impact on Pillowtex's short-term cash flow. In addition, Pillowtex's business plan and strategy centers around, among other initiatives, strategic sourcing. There can be no assurance that Pillowtex or reorganized Pillowtex will be able to successfully implement the strategic sourcing initiative included in the business plan and strategy. Dependence on Supply Sources in China In fiscal year 2001, based on cost, approximately 85% of the raw feathers and down that Pillowtex used to produce natural fill pillows and down comforters was imported from China. Pillowtex's relationships with its suppliers in China could be disrupted or adversely affected due to a number of factors, including governmental regulation, fluctuation in exchange rates, and changes in economic and political conditions in China. If Pillowtex's supply sources in China were disrupted for any reason, Pillowtex believes, based on existing market conditions, that it could establish alternative supply relationships. However, because establishing these relationships involves numerous uncertainties relating to delivery requirements, price, payment terms, quality control, and other matters, Pillowtex is unable to predict whether such relationships would be on equally satisfactory terms. 13 Adverse Retail Industry Conditions Pillowtex sells its products to a number of major retailers that have experienced financial difficulties during past years. Some of these retailers have previously sought protection under the Bankruptcy Code. In addition, some of 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. There can be no assurance that Pillowtex or reorganized Pillowtex will not be adversely affected by retail industry conditions. Dependence On Specific Brand Names In fiscal year 2001, 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, the future success of Pillowtex and reorganized Pillowtex 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. Risk Of Loss Of Material Customers In fiscal year 2001, Pillowtex's top ten customers accounted for approximately 72% of its total net sales. Net sales to Wal-Mart Stores, Inc. ("Wal-Mart") and its affiliated entity, Sam's Club stores, accounted for approximately 25% and 6%, respectively, of its total net sales. Other than Wal-Mart, no customer accounted for 10% or more of the Company's total net sales during this period. Consistent with industry practice, Pillowtex does not operate under a long-term written supply contract with Wal-Mart or any of its other customers. The loss of Wal-Mart or another large customer could have a materially adverse effect on the business, financial condition, results of operations, or prospects of Pillowtex and reorganized Pillowtex. Labor Relations As of March 1, 2002, Pillowtex had approximately 9,200 employees. As of that date, approximately 75% of Pillowtex's employees were in areas covered by collective bargaining agreements, and approximately 54% of those employees had chosen to have union dues deducted from their pay checks. Since 1991, the Union of Needletrades, Industrial and Textile Workers (UNITE) 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 or reorganized Pillowtex 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. Seasonality of Business Pillowtex's business is subject to a pattern of seasonal fluctuation. Sales and earnings from operations generated during the second half of a given fiscal year generally are expected to be higher than sales and earnings from operations generated during the first half of the year. Accordingly, the need for working capital generally is expected to increase in the second half of the year. As a result, total debt levels generally tend to peak in the third and fourth quarters, falling off again in the first quarter of the following year. The amount of sales generated during the second half of the year generally will depend upon a number of factors, including the level of retail sales for home textile furnishings during the fall and winter, weather conditions affecting the sales of down comforters, general economic conditions, and other factors beyond Pillowtex's control. The seasonality of the business may impact the results of operations achieved by Pillowtex and reorganized Pillowtex. 14 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 not experienced problems to date, no assurance can be given that Pillowtex and reorganized Pillowtex will not have difficulty attracting and retaining such personnel in the future as a result of the Chapter 11 Cases or other factors. Pillowtex's Reorganization Will Require Substantial Effort By Management Pillowtex's senior management has been and may continue to be required to expend a substantial amount of time and effort in connection with the reorganization process, which could have a disruptive impact on management's ability to focus on the operation of the Company's business. 15 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 Feather and down processing for Pillow and Pad Division 104,000 Owned and administrative offices 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 Scottsboro, Alabama Warehouse for Bed and Bath Division 135,000 Leased 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 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 Concord, North Carolina Manufacturing for Bed and Bath Division 696,963 Owned Eden, North Carolina Manufacturing and warehouse for Bed and Bath Division 529,273 Owned Eden, North Carolina Warehouse for Bed and Bath Division 411,531 Owned Kannapolis, North Carolina Manufacturing for Bed and Bath Division 682,407 Owned Kannapolis, North Carolina Headquarters and manufacturing and warehouse for Bed and Bath 5,863,041 Owned Division Rockwell, North Carolina Manufacturing for Bed and Bath Division 98,240 Owned China Grove, North Carolina Manufacturing and warehouse for Bed and Bath Division 567,000 Owned Hanover, Pennsylvania Manufacturing and distribution for Pillow and Pad Division 291,000 Owned Mauldin, South Carolina Warehouse and distribution for Bed and Bath Division 746,600 Owned Union, South Carolina Manufacturing for Bed and Bath Division 95,700 Owned 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
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 28 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. On March 1, 2002, Pillowtex announced the closing of the towel finishing operations at its Phenix City, Alabama and Columbus, Georgia facilities. The towel warping departments in Columbus, Georgia will be moved to an existing weaving facility in Phenix City, Alabama, which will continue to operate. The closings, which are anticipated to be completed by June 1, 2002, will eliminate the jobs of approximately 980 employees. The majority of the lost production at the Phenix City finishing plant will be replaced by increased production at Pillowtex's towel finishing operation in Kannapolis, North Carolina, where approximately 200 employees are expected to be hired. In addition, Pillowtex will be closing its automated sewing facility in Dallas, Texas and consolidating the facility's operations into its other pillow and pad facilities. The closing is anticipated to be completed by May 31, 2002 and will eliminate the jobs of approximately 97 employees. Pillowtex believes that its facilities are generally well maintained, in good operating condition, and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS ----------------- The discussion of the Chapter 11 Cases set forth in "Item 1. Business - Proceedings Under Chapter 11 of the Bankruptcy Code" is incorporated herein by this reference. In addition, Pillowtex is involved in various claims and lawsuits incidental to its business; however, the outcome of such suits is not expected to have a material adverse effect on the financial position or results of operations of Pillowtex or reorganized Pillowtex. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. 16 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 and then subsequently de-listed the Common Stock from trading on the NYSE on January 23, 2001. 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." The following table sets forth for the periods indicated the high and low reported bid prices on the OTCBB of the Common Stock:
Fiscal Year: High Low ---- --- 2001 Fourth Quarter ............................. $ 3/16 $ 1/16 Third Quarter .............................. 3/16 1/8 Second Quarter ............................. 3/16 1/16 First Quarter .............................. 11/16 1/8 2000 Fourth Quarter (from 11/14/00) ............. $ 1/2 $ 1/4
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
The quotations reflect inter-dealer prices without retail mark-up, markdown, or commission and may not represent actual transactions. As of March 20, 2002, Pillowtex had approximately 1,036 holders of record of Common Stock. Pillowtex paid no dividends on the Common Stock during fiscal years 2000 or 2001. 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 any further dividends on the Common Stock. Assuming consummation of the Plan in accordance with its terms, Pillowtex's outstanding capital stock, including the Common Stock, will be cancelled without consideration. See "Item 1. Business -- Risk Factors -- Holders Of Pillowtex's Capital Stock To Receive No Value Under Plan." 17 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 fiscal years ended 2001. 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. The selected financial data presented for 1997 through 2000 have been restated to reflect the Blanket Division as a discontinued operation.
Year Ended Statement of Operations Data: 2001 2000 1999 1998(1) 1997(2) Net sales $ 1,031,055 $ 1,259,004 $ 1,432,434 $ 1,368,825 $ 378,851 Cost of goods sold 992,540 1,222,572 1,241,903(3) 1,112,148(3) 302,700 ----------- ----------- ----------- ----------- ----------- Gross profit 38,515 36,432 190,531 256,677 76,151 Selling, general, and administrative expenses 92,275 126,353 114,020 111,807 50,436 Impairment of long-lived assets and restructuring charges 51,720 24,400 2,000 -- -- ----------- ----------- ----------- ----------- ----------- Earnings (loss) from operations (105,480) (114,321) 74,511 144,870 25,715 Interest and other expenses 64,666 107,062 87,279 72,283 22,461 ----------- ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations before reorganization items, income taxes and extraordinary items (170,146) (221,383) (12,768) 72,587 3,254 Reorganization items 31,401 19,368 -- -- -- ----------- ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations before income taxes and extraordinary items (201,547) (240,751) (12,768) 72,587 3,254 Income tax expense (benefit) -- (93,361) (2,740) 28,230 1,695 ----------- ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations before extraordinary items (201,547) (147,390) (10,028) 44,357 1,559 Earnings (loss) from discontinued operations, net (21,214) (115,018) (9,504) (1,502) 6,677 ----------- ----------- ----------- ----------- ----------- Earnings (loss) before extraordinary items (222,761) (262,408) (19,532) 42,855 8,236 Extraordinary items, net -- -- -- -- (919) ----------- ----------- ----------- ----------- ----------- Net earnings (loss) (222,761) (262,408) (19,532) 42,855 7,317 Preferred dividends and accretion 16,358 8,928 12,294 2,097 85 ----------- ----------- ----------- ----------- ----------- Earnings (loss) available for common shareholders $ (239,119) $ (271,336) $ (31,826) $ 40,758 $ 7,232 =========== =========== =========== =========== =========== Basic earnings (loss) per common share: Continuing operations $ (15.29) $ (10.97) $ (1.58) $ 3.00 $ 0.13 Discontinued operations (1.49) (8.07) (0.67) (0.11) 0.62 Extraordinary items -- -- -- -- (0.08) ----------- ----------- ----------- ----------- ----------- Basic earnings (loss) per common share $ (16.78) $ (19.04) $ (2.25) $ 2.89 $ 0.67 =========== =========== =========== =========== =========== Weighted average common shares outstanding - basic 14,251 14,252 14,154 14,082 10,837 =========== =========== =========== =========== =========== Diluted earnings (loss) per common share: Continuing operations $ (15.29) $ (10.97) $ (1.58) $ 2.39 $ 0.13 Discontinued operations (1.49) (8.07) (0.67) (0.09) 0.61 Extraordinary items -- -- -- -- (0.08) ----------- ----------- ----------- ----------- ----------- Diluted earnings (loss) per common share $ (16.78) $ (19.04) $ (2.25) $ 2.30 $ 0.66 =========== =========== =========== =========== =========== Weighted average common shares outstanding - diluted 14,251 14,252 14,154 17,653 11,086 =========== =========== =========== =========== =========== Operating Data: Depreciation and amortization $ 53,785 $ 57,517 $ 51,941 $ 45,888 $ 7,397 Capital expenditures 12,832 33,197 89,737 133,620 20,567 Preferred stock cash dividends -- -- 1,456 2,019 -- Common stock cash dividends -- -- 2,555 3,383 2,569 Balance Sheet Data: Working capital $ (365,917)(4) $ (237,376)(4) $ 511,139 $ 557,968 $ 503,127 Property, plant and equipment, net 453,440 525,990 577,947 559,851 421,998 Total assets 1,087,627 1,335,769 1,671,776 1,644,736 1,393,866 Long-term debt, net of current portion 645 -- 965,323 944,493 785,359 Redeemable convertible preferred stock 99,185 82,827 73,898 63,057 62,882 Shareholders' equity (deficit) (329,118) (63,451) 207,389 237,933 196,707
(1) Amounts set forth in 1998 reflect the inclusion of Leshner 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 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 2001 and 2000 presentation. (4) Includes long-term debt in default of $671.8 million in 2001 and $694.0 million in 2000. 18 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 9,200 employees. Pillowtex markets its products to mass merchants, department stores, and specialty retailers, as well as wholesale clubs, catalog merchants, institutional distributors, and international customers, and over the Internet. The Company is organized into two major manufacturing divisions that it considers operating segments: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding, towels, bath rugs, and kitchen products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. 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. Business -- Proceedings Under Chapter 11 of the Bankruptcy Code" above and the notes to the Company's consolidated financial statements included elsewhere in this Annual Report. Since the Petition Date, the Debtors have conducted business in the ordinary course. On or about March 11, 2002, the Debtors commenced delivery of copies of the Plan and Disclosure Statement to parties in interest as required pursuant to the Bankruptcy Code. The Debtors have until the Voting Deadline to solicit acceptance of the Plan. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the Plan. There can be no assurance that the Plan will be confirmed or become effective. For a brief overview of the Plan and the conditions to the confirmation and effectiveness thereof, see "Item 1. Business -- Proceedings Under Chapter 11 of the Bankruptcy Code." See also "Item 1. Business -- Risk Factors -- Pillowtex Faces Significant Challenges In Connection With Its Bankruptcy Reorganization." 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. On September 6, 2001, the Company sold the majority of the inventory and fixed assets associated with its Blanket Division. The Debtors are in the process of reviewing their executory contracts and unexpired leases and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. During 2001, the Company accrued $15.8 million for the estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection. Approximately $10.3 million of the prepetition liability relating to the rejected contracts and leases have been reflected as reorganization items, and the remaining $5.5 million has been included in the loss from discontinued operations in the accompanying consolidated statement of operations for 2001. The Company expects to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. 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. Basis of Presentation The consolidated financial statements included elsewhere in this Annual Report 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, the Company's ability to (a) obtain confirmation of the Plan or another plan of reorganization, (b) comply with the terms of the DIP Financing Facility, and (c) generate sufficient cash from operations and financing sources 19 to meet its future obligations. 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 resolution of these uncertainties. While under the protection of Chapter 11 of the Bankruptcy Code, 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 the Plan or another plan of reorganization. In the Chapter 11 Cases, substantially all unsecured and under-secured liabilities as of the Petition Date are subject to compromise or other treatment under the Plan or another plan of reorganization, which must be confirmed by the Bankruptcy Court as described above. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities, as well as all pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The last date by which claims against the Company had to be filed in the Bankruptcy Court if the claimants wished to receive any distribution in the Chapter 11 Cases, i.e., the bar date, was July 23, 2001. Differences between amounts shown by the Debtors and claims filed by creditors will be investigated and amicably resolved, adjudicated before the Bankruptcy Court, or resolved through another dispute resolution process. The ultimate amount of and settlement terms for liabilities subject to compromise are subject to the terms of the Plan or another plan of reorganization, as confirmed by the Bankruptcy Court, 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. Critical Accounting Policies Management considers certain accounting policies related to sales returns and allowances, inventory, and impairment of long-lived assets to be "critical" because they have a significant impact in portraying the Company's financial condition and results of operations and require management's most difficult, subjective, and complex judgments due to the need to make estimates about the effects of matters that are inherently uncertain. See note 1 in the notes to the consolidated financial statements included elsewhere in this Annual Report for a detailed discussion of the application of all accounting policies adopted by the Company. Sales returns and allowances require management to estimate the eventual expense of all returns and other sales allowances for products shipped and recorded in net sales each period. Management bases its estimate of the expense to be recorded each period on historical returns and allowance levels. At December 29, 2001, a reserve of $7.1 million was recorded and included as an allowance against trade accounts receivable. This allowance includes $2.1 million for returns and allowances not yet claimed by customers, but which management believes is necessary based on historical deductions levels. Management does not believe the likelihood is significant that materially higher deduction levels will result given its experience with the sales and returns deduction activities of its customers in the past few years. Inventory requires management to estimate the net realizable value of the Company's obsolete and slow moving inventory at the end of each period. Management bases its net realizable value estimate on the actual proceeds received for similar inventory items in the most recent three-month period in the Company's Bed and Bath Division and a review of the age of inventory on hand in its Pillow and Pad Division. The Company's determination of the net realizable value of inventory assumes that approximately 35% of the cost of obsolete and slow moving inventory is recovered. Given the Company's experiences in the past few years with selling obsolete and slow moving inventory to various promotional and alternative markets, management does not believe the likelihood is significant that materially higher inventory reserves are required. If the assumptions made by management in estimating sales returns and allowances and inventory reserves do not reflect the actual expenses to be incurred, net sales and gross profit could be reduced significantly. When management determines that a long-lived asset has been impaired, an estimate of the fair value is required. The methodology used to determine fair value depends on whether the asset will continue to be used in the business or will be sold. The impairment charges recorded by the Company in fiscal 2001 primarily relate to assets that will be sold. Assets held for sale are recorded at their estimated fair values. Management bases its estimate of the fair value on available information from the sale of similar assets in similar locations and appraisals. Given the 20 significant number of recent plant closures in the textile industry in the geographic areas where the Company operates, the likelihood is remote that historical sales levels will be achieved, and management attempts to take this into consideration when determining fair values. Management continually reviews its fair value estimates and records further impairment charges for assets held for sale when management determines, based on new and reliable information, that such charges are appropriate. At December 29, 2001, the Company has $6.1 million in assets held for sale, of which $4.1 million relates to real property and $2.0 million relates to machinery and equipment. While management has exercised its good faith business judgment in determining such amounts, based on the fluctuations in fair values for transactions completed in 2001 and the adjustments recorded by the Company during fiscal 2001, management believes the likelihood is reasonably possible that the Company will not fully recover these balances and that additional impairment charges may be required in subsequent periods. Results of Operations The following table presents certain historical statements of operations data as a percentage of net sales for the periods indicated. The consolidated statements of operations for the years ended December 30, 2000 and January 1, 2000 have been restated to present the Blanket Division as a discontinued operation.
Year Ended --------------------------------------------- December 29, December 30, January 1, 2001 2000 2000 ---- ---- ---- Net sales....................... 100.0% 100.0% 100.0% Cost of goods sold.............. 96.3 93.2 86.7 Inventory write-downs........... -- 3.9 -- ----- ----- ---- Gross profit.................... 3.7 2.9 13.3 Selling, general, and administrative expenses..... 9.0 10.0 8.0 Impairment of long-lived assets. and restructuring charges... 5.0 2.0 0.1 ----- ----- ---- Earnings (loss) from continuing operations.................. (10.3) (9.1) 5.2 Interest and other expenses..... 6.3 8.5 6.1 Reorganization items............ 3.0 1.5 -- ----- ----- ---- Loss from continuing operations before income taxes (19.6)% (19.1)% (0.9)% ===== ===== ====
The operating results of the Company's segments are disclosed in note 18 to the consolidated financial statements included elsewhere in this Annual Report. Fiscal Year 2001 Compared to Fiscal Year 2000 Net Sales. Net sales were down from $1,259.0 million in 2000 to $1,031.1 --------- million in 2001, a decrease of $227.9 million or 18.1%. Approximately $86.0 million of the decrease in net sales in 2001 is attributable to the loss of a specific customer in August 2000, which affected the Company's two major divisions. In addition, the Company's license agreement with Ralph Lauren, which expired on June 30, 2001, contributed approximately $23 million to the sales decrease experienced in 2001. Excluding the impact of these decreases, net sales decreased 9.4% in 2001 as compared to 2000. This decrease is due to the continued slow down in the US economy and increased competition from imports. Gross Profit. Gross profit increased $2.1 million from $36.4 million in ------------ 2000 to $38.5 million in 2001. During the fourth quarter of 2000, the Company recorded a charge for inventory write-downs of $49.5 million to reduce certain inventories to net realizable value. This charge resulted from a number of factors, including a 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. Gross margin decreased to 3.7% in 2001, compared to 6.8% in 2000, excluding the inventory write-downs in 2000. The decrease is due to the decline in sales volume, increased unabsorbed overhead costs due to inventory reduction initiatives, increased levels of customer deductions, and lower selling prices. The Company's gross margin continues to experience downward pressure from the slowing U.S. economy and increased competition from abroad. 21 Selling, General, and Administrative ("SG&A") Expense. SG&A expense in ----------------------------------------------------- 2001 decreased $34.1 million from $126.4 million in 2000 to $92.3 million in 2000. The decrease is primarily the result of management's continued focus on cost controls, particularly in travel, salaries and general fees and services. In addition, SG&A expense in 2000 included severance payments to the Company's former chief executive officer and higher bad debt expense resulting from the deteriorating creditworthiness of certain of the Company's customers. Impairment of Long-Lived Assets. The Company incurred charges for ------------------------------- impairment of long-lived assets of $41.0 million in 2001, compared to $24.4 million in 2000. The 2001 charge included $36.5 million related to real property and equipment at facilities closed during 2001 and $4.5 million related to assets held for sale. During 2001, the Company announced the closure of facilities in Hawkinsville, Georgia; Rocky Mount, North Carolina; Kannapolis, North Carolina; Columbus, Georgia; Phenix City, Alabama; Tarboro, North Carolina and Toronto, Canada. The 2000 charge included $4.6 million related to real property and $19.8 million related to equipment and miscellaneous corporate assets. The impairment of the manufacturing facilities and equipment resulted from management's rationalization of production capacity in connection with filing of the Chapter 11 Cases. The impairment 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. Restructuring Charges. During 2001, the Company incurred $10.8 million in --------------------- restructuring charges. Approximately $6.5 million of such charges relate to severance and related benefits associated with employees terminated at the closed facilities discussed above. In addition to the facility closures, the Company implemented an enhanced early retirement plan for certain salaried employees. The Company also undertook a reduction in force among its salaried employees. The charge associated with the early retirement plan and reduction in force was $4.3 million. These actions were undertaken in an effort to reduce manufacturing capacity and lower costs. The annual savings expected to be realized by the facility closures, early retirement plan and reduction in force are approximately $20.0 to $30.0 million. Interest and Other Expenses. Interest and other expenses decreased $42.4 --------------------------- million to $64.7 million in 2001, compared to $107.1 million in 2000. The primary reason for the overall decrease in interest and other expenses in 2001 resulted from the Company's filing of the Chapter 11 Cases, which enabled the Company to cease the payment and accrual of interest on all unsecured debt, partially offset by other financing costs. The interest on such unsecured prepetition debt was approximately $34.3 million in 2001 and $4.0 million in 2000. In addition, the average interest rates on the Company's debt have decreased in comparison to 2000. The average interest rate in 2001 was 7.8%, compared to 10.1% in 2000. Reorganization Items. During 2001, the Company incurred $31.4 million of -------------------- reorganization items associated with the Chapter 11 Cases. The charge consists of $17.1 million of fees payable to professionals retained to assist with the Chapter 11 Cases, $10.3 million for rejected contracts and leases and $5.4 million for a key employee retention program for the Company's management team and other key employees, offset by net interest income of $1.4 million. During 2000, Pillowtex incurred $19.4 million of reorganization items. The charge consists of $17.6 million related to the non-cash write-off of the unamortized discount on the Fieldcrest Cannon, Inc. 6% Convertible Subordinated Debentures due 2012 (the "6% Convertible Debentures") and the non-cash write-off of deferred financing costs associated with other unsecured debt classified as subject to compromise. In addition, the Company incurred $1.8 million in fees payable to professionals retained to assist with the Chapter 11 Cases. Loss from Discontinued Operations. The loss from operations of the Blanket --------------------------------- Division was $18.3 million in 2001, compared to $115.0 million in 2000. The 2000 loss included a charge of $88.3 million for impairment of long-lived assets, consisting of $50.0 million related to real property and equipment and $38.3 million related to goodwill, and a charge for inventory write-downs of $19.7 million. These charges were incurred to reflect the Blanket Division at its net realizable value. The loss on disposal incurred in 2001 was $3.0 million. Fiscal Year 2000 Compared to Fiscal Year 1999 Net Sales. Net sales were down from $1,432.4 million in 1999 to $1,259.0 --------- million in 2000, a decrease of $173.4 million or 12.1%. 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 22 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 the Company's customers and an unexpected softening in demand in the Company's institutional and regional discount markets. In addition, approximately $50 million of the sales decrease was attributable to the loss of a specific customer during 2000, affecting both the Bed and Bath and Pillow and Pad Divisions. Gross Profit. Gross profit decreased $154.1 million from $190.5 million in ------------ 1999 to $36.4 million in 2000. During the fourth quarter of 2000, the Company recorded a charge for inventory write-downs of $49.5 million to reduce certain inventories to net realizable value. This charge resulted from a number of factors, including a 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. Excluding the impairment charges, gross margin decreased to 6.8% in 2000, compared to 13.3% in 1999. In response to declines in sales volume, the Company reduced production levels, including idling several plants in the Bed and Bath 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. Selling, General, and Administrative ("SG&A") Expenses. SG&A expenses for ------------------------------------------------------ fiscal year 2000 increased $12.4 million to $126.4 million from $114.0 million in 1999. This increase was 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. 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 impairment charge of $24.4 million included $4.6 million related to real property and $19.8 million related to equipment and miscellaneous corporate assets. Interest and Other Expenses. Interest and other expenses increased $19.8 --------------------------- million to $107.1 million in 2000, compared to $87.3 million in 1999. This increase in interest and other expenses 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 excluded 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 related to the non-cash write-off of the unamortized discount on 6% Convertible Debentures and the non-cash write-off of deferred financing costs associated with other unsecured debt classified as subject to compromise. In addition, the Company incurred $1.8 million in fees payable to professionals retained to assist with the Chapter 11 Cases. Loss from Discontinued Operations. The Blanket Division generated a loss --------------------------------- of $115.0 million in 2000 compared to a loss of $9.5 million in 1999. The 2000 loss included a charge of $88.3 million for impairment of long-lived assets, consisting of $50.0 million related to real property and equipment and $38.3 million related to goodwill, and a charge for inventory write-downs of $19.7 million. These charges were incurred to reflect the Blanket Division at its net realizable value. The 1999 loss included an inventory write-down charge of $4.9 million. Liquidity and Capital Resources DIP Financing Facility On December 12, 2000, the Bankruptcy Court entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150.0 million debtor-in-possession financing facility, including a $60.0 million letter of credit sub-facility, (i.e., the "DIP Financing Facility") with Bank of America, N.A. as agent for a syndicate of financing 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. Under the DIP Financing Order, the Debtors were required to remit (or were deemed to have remitted) to the prepetition lenders as payment in respect of the prepetition senior debt facilities described below all cash collateral constituting proceeds of the 23 prepetition collateral up to $150 million. All such cash collateral so remitted (or deemed remitted) was required to be re-advanced (or was deemed re-advanced) to the Debtors on a postpetition basis as the Designated Post-Petition Loans. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the size of the facility to $125.0 million, including the $60.0 million letter of credit sub-facility. The Company obtained the reduction in the size of the DIP Financing 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. On August 13, 2001, the Debtors and the lenders under the DIP Financing Facility entered into an amendment to the facility providing for, among other things, the (a) modification and addition of certain reporting requirements, (b) modification of the financial covenant requiring maintenance of an asset coverage ratio, (c) elimination of the financial covenant requiring maintenance of a minimum operating cash flow, (d) addition of a financial covenant requiring maintenance of a minimum level of EBITDA, and (e) elimination of a nine-month extension provision. On November 21, 2001, the Bankruptcy Court entered an order authorizing the Debtors to enter into another amendment to the facility, dated as of November 14, 2001, pursuant to which, (a) the scheduled termination date of the DIP Financing Facility was extended to June 30, 2002, (b) certain covenants were modified based on the Debtors' three-year strategic plan, (c) a new covenant was added limiting the incurrence of costs for relocation of equipment and costs associated with facility closures, (d) the commitment under the DIP Financing Facility was reduced from $125 million to $100 million, and (e) certain events of default were added relating to the Debtors' progress toward emergence from bankruptcy, which required the Debtors to file on or prior to December 31, 2001 a feasible plan of reorganization and disclosure statement and to obtain the Bankruptcy Court's approval of a disclosure statement on or prior to March 1, 2002, and further requires the Debtors to (i) obtain confirmation of a plan of reorganization on or prior to May 15, 2002 and (ii) cause a plan of reorganization to become effective on or prior to June 30, 2002. The Debtors and the lenders under the DIP Financing Facility entered into another amendment to the facility, dated as of February 8, 2002, providing for, among other things, the (a) further modification of the financial covenant relating to the asset coverage ratio, (b) modification of the covenant limiting the incurrence of costs for relocation of equipment and costs associated with facility closures, and (c) modification of the covenant relating to the level of capital expenditures. This amendment was obtained to allow the Company to proceed with certain aspects of the Company's business plan. The DIP Financing Facility will expire on the earliest to occur of (a) June 30, 2002, (b) the date on which the Plan or another 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. 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 4.00% or Bank of America's Base Rate (which is the higher of the Federal Funds Rate or Prime Rate plus, in either case, 0.50%) plus 1.50%. In addition to a facility fee and an underwriting fee of 0.50% each, there is an unused commitment fee of 0.75%, a letter of credit fee of 4.00%, 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, a junior lien on certain plant and equipment that secure three of the industrial revenue bond facilities described below, and a first priority lien on all post-petition real and personal assets of the Company. The documentation evidencing the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum level of EBITDA, as well as other covenants that limit, among other things, the incurrence of costs for relocation of equipment and costs associated with facility closures, indebtedness, liens, sales of assets, capital expenditures and investments, and prohibit dividend payments. The net proceeds of certain asset sales outside the ordinary course of business will reduce prepetition indebtedness under the senior secured credit facilities; otherwise, the net proceeds of asset sales outside the ordinary course of business will be applied as a reduction of the DIP Financing Facility. No cash borrowings were outstanding on the DIP Financing Facility at December 29, 2001. Availability under the DIP Financing Facility is based upon the balances of eligible assets, reduced by outstanding debt and letters of credit. Availability under the DIP Financing Facility as of December 29, 2001 was approximately $25.0 million. As of December 29, 2001, the Company had $40.4 million in cash and cash equivalents, including $3.9 million in 24 cash which was being held by the lenders under the DIP Financing Facility as collateral for outstanding letter of credit. As of December 29, 2001, the Company had $16.3 million in letters of credit outstanding under the DIP Financing Facility. 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 or, assuming consummation of the Plan in accordance with its terms, the Exit Financing Revolver Facility. Assuming consummation of the Plan in accordance with its terms, holders of claims in respect of the DIP Financing Facility other than those relating to Designated Post-Petition Loans will be paid cash in an amount equal to such claim and holders of claims relating to Designated Post-Petition Loans will receive a note under the Exit Term Loan in an amount equal to the amount of such holder's Designated Post-Petition Loans. In addition, letters of credit issued under the DIP Financing Facility will be replaced with letters of credit issued under the Exit Financing Revolver 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. As of December 29, 2001, (a) outstanding prepetition borrowings under the revolving credit facility were $233.0 million, (b) outstanding prepetition borrowings under the term loan facility were $242.0 million in the aggregate, and (c) outstanding letters of credit under the revolving credit facility were the $11.1 million in the aggregate. Pursuant to the DIP Financing Order, $150 million of prepetition borrowings under the senior debt facilities had become subject to treatment as postpetition debt. As prepetition letters of credit expire, to the extent they are renewed, they will be reissued under the DIP Financing Facility or, assuming consummation of the Plan in accordance with its terms, the Exit Financing Revolver 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 prepetition senior credit facilities for the twelve months ended December 29, 2001 was 7.82%. The prepetition senior debt facilities expired 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. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the prepetition senior debt facilities. Even though these payments are being made, the Company remains in default under the prepetition senior debt facilities. Assuming consummation of the Plan in accordance with its terms, the indebtedness under the senior debt facilities will be cancelled and, in exchange therefor, holders of claims in respect of the senior debt facilities will become entitled to receive New Common Stock. Overline Facility In May 1999, the Company entered into a $20.0 million senior unsecured revolving credit facility (the "Overline Facility") to obtain additional working capital availability. On July 27, 1999, the Overline Facility was amended to increase the amount of funds available to $35.0 million and to secure it with the same assets securing the senior debt facilities described above. As of December 29, 2001, outstanding borrowings under the Overline Facility were $34.7 million. 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 matured on January 31, 2002. 25 Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the Overline Facility. Even though these payments are being made, the Company remains in default under the Overline Facility. Assuming consummation of the Plan in accordance with its term, the indebtedness under the Overline Facility will be cancelled and, in exchange therefor, holders of claims in respect of the Overline Facility will become entitled to receive New Common Stock and New Warrants. Senior Subordinated Debt In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million aggregate principal amount of 9% Senior Subordinated Notes due 2005 (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. As of December 29, 2001, all of the 9% Notes remained outstanding. On November 12, 1996, the Company issued $125.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes"), with interest payable semiannually commencing May 15, 1997. The 10% Notes 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. As of December 29, 2001, all of the 10% Notes remained outstanding. 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. The Company is in default under the indentures governing both the 9% Notes and the 10% Notes. No principal or interest payment has been or will be made on the 9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases. Assuming consummation of the Plan in accordance with its terms, the indebtedness under the 9% Notes and the 10% Notes will be cancelled and, in exchange therefor, holders of claims in respect of 9% Notes or 10% Notes will become entitled to receive New Common Stock and New Warrants. 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 Common Stock. As of December 29, 2001, approximately $85.2 million aggregate principal amount of the 6% Convertible Debentures remain outstanding. If all such outstanding 6% Convertible Debentures were converted at such date, the resulting cash component of the conversion consideration would have been approximately $57.2 million. Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest bearing subordinated promissory notes (the "Cash Claimant Notes") in respect of the unpaid cash portion of the conversion consideration owing to certain holders of the 6% Convertible Debentures who had surrendered their debentures for conversion, but had not been paid the cash portion of the conversion consideration. As of December 29, 2001, the aggregate amount of the outstanding Cash Claimant Notes was $5.2 million. The 6% Convertible Debentures and Cash Claimant Notes are general unsecured obligations of Fieldcrest Cannon. Fieldcrest Cannon is in default under the indenture governing the 6% Convertible Debentures and the Cash Claimant Notes. No principal or interest payment has been or will be made on the 6% Convertible Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases. Assuming consummation of the Plan in accordance with its terms, the indebtedness under the 6% Convertible Debentures and the Cash Claimant Notes will be cancelled and, in exchange therefor, holders of claims in respect of 6% Convertible Debentures or Cash Claimant Notes will become entitled to receive New Common Stock and New Warrants. 26 Industrial Revenue Bonds The Company presently has obligations in respect of two industrial revenue bond facilities (the "IRB Facilities"). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of December 29, 2001, $13.2 million of bonds in the aggregate were outstanding under the IRB Facilities. On February 6, 2001, the Bankruptcy Court authorized the Company to make scheduled principal and interest payments on the IRB Facilities. Even though these payments are being made, the Company remains in default of its obligations under each of the IRB Facilities. Assuming consummation of the Plan in accordance with its terms, the IRB Facilities will be reinstated and the letters of credit issued in respect thereof will be replaced, substituted, or otherwise satisfied with equivalent letters of credit to be issued under the Exit Financing Revolver Facility. 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, Pillowtex has incurred, and will continue to incur, significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. However, based on current and anticipated levels of operations and continued efforts to reduce inventories, and assuming consummation of the Plan prior to June 30, 2002, 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. The DIP Financing Facility is currently scheduled to terminate on June 30, 2002, and accordingly, if the Plan is not consummated in accordance with its terms prior to such date, Pillowtex would be required to obtain a further extension of the DIP Financing Facility or alternative financing. Pillowtex can provide no assurance that such an extension would be granted or that alternative financing would be available on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to alternative financing in such a scenario would be very limited. Furthermore, in the event that cash flows, together with available borrowings under the DIP Financing Facility or alternative financing arrangements, are not sufficient to meet the Company's cash requirements, Pillowtex may be required to reduce planned capital expenditures; however, Pillowtex can provide no assurance that such reductions would be sufficient to cover any cash shortfalls. Management of the Debtors believes that, assuming consummation of the Plan in accordance with its terms and achievement of the Debtors' business plan and strategy, reorganized Pillowtex will have sufficient liquidity for the reasonably foreseeable future to service post-reorganization indebtedness and conduct its business as contemplated by the Debtors' business plan and strategy. 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 the Plan or another plan of reorganization. Adjustments necessitated by the confirmation of the Plan or another plan of reorganization could materially change the amounts reported in the consolidated financial statements. Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors of approximately $485.0 million as of December 29, 2001, 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 and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine what the ultimate liability will be for all contracts and leases approved by the Bankruptcy Court for rejection, but the estimated prepetition liability for those the Bankruptcy Court has already approved is approximately $15.8 million. The Company expects to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. 27 New Accounting Standards In 2000, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) issued EITF No. 00-14, "Accounting for Certain Sales Incentives", which the Company was required to adopt at the beginning of fiscal 2001. The Company was already in compliance with the accounting guidance prescribed in EITF No. 00-14, and as a result, the adoption of EITF No. 00-14 had no impact on the Company's financial position or results of operations. The EITF also issued EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products and Services to be Delivered in the Future", and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" (collectively, the "EITFs"), which address various aspects of accounting for consideration given by a vendor to a customer or a reseller of products. The Company is required to adopt the provisions of the EITFs as of the beginning of fiscal 2002, which commenced December 30, 2001. The EITFs will require the Company to classify all consideration paid to customers as a reduction to revenue. Prior to December 30, 2001, the Company classified amounts paid to customers for co-operative advertising and marketing in selling, general, and administrative expenses. If the Company had adopted these EITFs in 2001, approximately $19.0 million of selling, general, and administrative expense would have been reclassified as a reduction of net sales. In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, and specifies criteria for the recognition and reporting of intangible assets apart from goodwill. Under SFAS No. 142, beginning in fiscal 2002, the Company will no longer amortize goodwill and intangible assets with indefinite lives, but instead will test those assets for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. The Company is required to adopt SFAS No. 142 on December 30, 2001. If the Company had adopted SFAS No. 142 in 2001, selling, general, and administrative expenses would have decreased by $6.3 million, representing the amortization expense recognized on the Company's goodwill and intangible assets with indefinite lives. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment of a business (as previously defined in Opinion 30). SFAS No. 144 also retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The Company is required to adopt SFAS No. 144 as of December 30, 2001. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, the Company cannot presently determine the effects that adoption of SFAS No. 144 will have on the Company's financial statements. 28 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. The annual impact on the Company's results of operations of a 100 basis point interest rate change on the December 29, 2001 outstanding balance of the variable rate debt would be approximately $6.6 million. This same calculation for 2000 was $6.8 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 29, 2001 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. 29 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, 2002.
Name and Position Age Experience - ----------------- --- ---------- Ralph W. LaRovere 66 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 69 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 63 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 a member of the Board of Mercantile Bank and Trust. A. Allen Oakley 48 A. Allen Oakley has served as Executive Vice President - Manufacturing and a director of the Company since May 2000. Prior to that time and since 1976, Mr. Oakley served in various managerial capacities for the Company and Fieldcrest Cannon. Mark A. Petricoff 63 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 48 Scott E. Shimizu has served as Executive Vice President - Sales & Marketing of the Company since 1992 and a director since February 1996. Mr. Shimizu was Executive Vice President of the Company from 1988 to 1992. He was also a director of the Company from May 1994 to May 1995. Mary R. Silverthorne 66 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.
30 Anthony T. Williams 55 Anthony T. Williams has served as President and Chief Operating Officer of the Company since November 2000 and a director since August 2000. Mr. Williams was Executive Vice President and Chief Financial Officer of the Company from May 2000 to October 2000. Prior to joining the Company, from January 1999 to April 2000, Mr. Williams was a consultant. 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 for 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, 2002.
Name and Position (1) Age Experience - ------------------ --- ---------- Ralph W. LaRovere, 66 See "Item 10. Directors and Executive Officers of the Registrant - Chairman of the Board Directors of the Registrant" above. Anthony T. Williams, 55 See "Item 10. Directors and Executive Officers of the Registrant - President and Chief Operating Directors of the Registrant" above. Officer Scott E. Shimizu, 48 See "Item 10. Directors and Executive Officers of the Registrant - Executive Vice President - Directors of the Registrant" above. Sales & Marketing Michael R. Harmon, 54 Michael R. Harmon has served as Executive Vice President and Chief Executive Vice President and Chief Financial Officer of the Company since March 2001. Prior to joining the Financial Officer Company, Mr. Harmon spent 13 years at Galey & Lord, Inc., a $1 billion manufacturer of textiles, where he last served as Executive Vice President and Chief Financial Officer. Galey & Lord, Inc. filed for bankruptcy protection under chapter 11 of the Bankruptcy Code on February 19, 2002. A. Allen Oakley, 48 See "Item 10. Directors and Executive Officers of the Registrant - Executive Vice President - Directors of the Registrant" above. Manufacturing Richard A. Grissinger, 58 Richard A. Grissinger has served as Senior Vice President - Marketing of Senior Vice President - the Company since March 2000. From September 1998 to February 2000, he Marketing was Senior Vice President - Marketing - Bath of the Company and from December 1997 to September 1998, Mr. Grissinger was Vice President - Marketing for the Department Store Specialty Business of the Company. Mr. Grissinger was Business Manager of the Bath Division of Fieldcrest Cannon from 1995 to December 1997. Richard L. Dennard, 53 Richard L. Dennard has served as Senior Vice President - Purchasing and Senior Vice President - Logistics of the Company since August 1999. From December 1997 to July Purchasing and Logistics 1999, Mr. Dennard was Vice President of the Company in charge of purchasing. From January 1997 to December 1997, Mr. Dennard served as Vice President for Blankets and Utility Bedding for the Company and from January 1996 to December 1996, he served as Vice President of Purchasing for Utility Bedding.
31 Deborah G. Poole, 47 Deborah G. Poole has served as Vice President and Chief Information Vice President and Chief Officer of the Company since February 1999. Prior to joining the Company, Information Officer from 1991 to February 1999, Ms. Poole was Corporate Vice President, Information Services of Guilford Mills, Inc., a textile manufacturer. Guilford Mills, Inc. filed for bankruptcy protection under chapter 11 of the Bankruptcy Code on March 13, 2002. Donald Mallo, 52 Donald Mallo has served as Vice President - Human Resources of the Company Vice President - since September 2000. Prior to joining the Company, Mr. Mallo practiced Human Resources labor and employment law in New York. From 1998 through 1999, Mr. Mallo was Senior Vice President - Human Resources of Grove Worldwide LLC, a leading manufacturer of construction cranes and aerial work platforms. From 1993 to 1998, Mr. Mallo was Executive Vice 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, 38 John F. Sterling has served as Vice President and General Counsel of the Vice President and Company since November 1999 and as Corporate Secretary since July 2001. General Counsel and From May 1997 to November 1999, Mr. Sterling was Associate General Counsel Corporate Secretary of the Company. Prior to joining the Company, Mr. Sterling was an attorney with the law firm of Thompson & Knight, P.C. Henry T. Pollock, 61 Henry T. Pollock has served as Vice President and Treasurer of the Company Vice President and Treasurer since March 2001. From June 2000 to November 2000, Mr. Pollock was a consultant to the Company in the areas of finance and treasury and joined the Company full-time in November 2000. Prior to joining the Company, Mr. Pollock was assistant treasurer of Varity Corporation, a $2.5 billion worldwide manufacturer of brake systems and diesel engines. Thomas D. D'Orazio, 43 Thomas D. D'Orazio has served as Vice President and Corporate Controller Vice President and of the Company since October 2001. Prior to joining the Company, from Corporate Controller December 1998 to September 2001, Mr. D'Orazio was Corporate Controller of Glatfelter, a $0.7 billion global manufacturer of specialty paper and engineered products. From March 1994 to December 1998, Mr. D'Orazio was Assistant Corporate Controller of Mohawk Industries, Inc., a multi-billion producer of woven and tufted broadloom carpet and rugs for residential and commercial applications. John Wahoski, 49 John Wahoski has served as Vice President - Financial and Operational Vice President - Financial and Analysis since July 2000. Prior to joining the Company, Mr. Wahoski spent Operational Analysis 12 years at TRW Automotive Systems, a $6 billion automotive supplier, and its predecessors where he last served as Director - Financial and Operational Analysis.
(1) All executive officers serve at the pleasure of the Board of Directors. - --------------------------- SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires directors and officers of the Company, and persons who own more than 10 percent of the Common Stock, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of such stock. Directors, officers and beneficial owners of more than 10 percent of the Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. 32 Based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all Section 16(a) filing requirements applicable to its directors, officers and beneficial owners of more than 10 percent of its Common Stock were met during the year ended December 29, 2001, except that a timely Form 4 was not filed for Paul G. Gillease, a director of the Company, for the sale of 700 shares of Common Stock in September 2001. ITEM 11. EXECUTIVE COMPENSATION ---------------------- Summary Compensation Table The following table sets forth the compensation paid or accrued by the Company to the five most highly compensated executive officers (the "Named Executive Officers") for their services in 2001, 2000 and 1999.
---------------------------------- ------------------------ Long Term Annual Compensation Compensation - ------------------------------------------------------------------------------------------------------------------- Restricted Securities Name and Other Annual Stock Underlying All Other Principal Position Year Salary Bonus Compensation Awards Options Compensation (1) ($) ($) ($)(2) ($)(3) (#) ($)(4) - ------------------------------------------------------------------------------------------------------------------- Anthony T. Williams 2001 400,000 -- 135,998 -- -- 249,237 - ------------------------------------------------------------------------------------------------------------------- President and Chief 2000 147,917 -- 19,312 -- 40,000 6,020 - ------------------------------------------------------------------------------------------------------------------- Operating Officer 1999 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Michael R. Harmon 2001 277,083 -- 128,825 -- -- 56,661 - ------------------------------------------------------------------------------------------------------------------- Executive Vice President 2000 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- and CFO 1999 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Scott E. Shimizu 2001 375,000 -- -- -- -- 220,485 - ------------------------------------------------------------------------------------------------------------------- Executive Vice President - 2000 375,000 -- -- -- -- 6,271 - ------------------------------------------------------------------------------------------------------------------- Sales & Marketing 1999 375,000 -- -- 63,426 50,000 3,041 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- A. Allen Oakley 2001 300,000 -- -- -- -- 105,721 - ------------------------------------------------------------------------------------------------------------------- Executive Vice President - 2000 300,000 -- -- -- -- 8,004 - ------------------------------------------------------------------------------------------------------------------- Manufacturing 1999 300,000 12,000 -- 52,844 62,000 844 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Richard A. Grissinger 2001 284,167 -- -- -- -- 73,902 - ------------------------------------------------------------------------------------------------------------------- Senior Vice President - 2000 275,000 -- -- -- 7,500 5,627 - ------------------------------------------------------------------------------------------------------------------- Marketing 1999 275,000 -- -- 26,422 -- 2,678 - -------------------------------------------------------------------------------------------------------------------
FOOTNOTES: (1) The Company's former Chief Executive Officer resigned from the Company effective October 26, 2000. Since his 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, Mark A. Petricoff, Anthony T. Williams and Scott E. Shimizu to fulfill 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. The amount paid to Mr. Williams in 2001 includes $116,705 for reimbursement of moving expenses. The amount paid to Mr. Harmon in 2001 includes $111,790 for reimbursement of moving expenses. 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) 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. (4) For 2001, the amount for Mr. Williams includes $120,000 paid under the Retention Plan (as such term is hereinafter defined), $50,000 paid as a bonus to Mr. Williams as a result of his promotion to President, $65,000 paid as a bonus to Mr. Williams pursuant to the terms of his Employment Agreement, $6,517 for medical insurance and $3,870 for group term life insurance; the amount for Mr. Harmon includes $52,500 paid under the Retention Plan and $1,150 for group term life insurance; the amount for Mr. Shimizu includes $112,500 paid under the Retention Plan, $100,000 paid as a special retention bonus 33 approved by the Bankruptcy Court, $2,785 for medical insurance and $1,350 for group term life insurance; the amount for Mr. Oakley includes $90,000 paid under the Retention Plan, $10,521 for medical insurance and $1,350 for group term life insurance; and the amount for Mr. Grissinger includes $68,750 paid under the Retention Plan and $1,290 for group term life insurance. The amounts for 2001 also include company contributions to the Pillowtex Corporation 401(k) Plan, a qualified ERISA plan ($3,850 for Mr. Williams; $3,011 for Mr. Harmon; $3,850 for Mr. Shimizu; $3,850 for Mr. Oakley; and $3,862 for Mr. Grissinger). Option Grants in Last Fiscal Year None. Aggregated Option Exercises in Fiscal 2001 and Option Values at December 29, 2001
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at Options at December 29, 2001 December 29, 2001 (#) ($) ---------------------------------- --------------------------------- Shares Acquired on Value Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable (#) ($) - -------------------------------------------------------------------------------------------------------------------------- Anthony T. Williams -- -- 10,000 30,000 -- -- Michael R. Harmon -- -- - - -- -- Scott E. Shimizu -- -- 78,500 30,500 -- -- A. Allen Oakley -- -- 48,250 36,750 -- -- Richard A. Grissinger -- -- 16,875 10,625 -- --
Assuming consummation of the Plan in accordance with its terms, all outstanding stock options will be cancelled without consideration. Pension Plan The Company maintains defined benefit pension plans covering substantially all of its employees, other than employees of the Company's Canadian subsidiary, Pillowtex Canada Inc., and other employees subject to collective bargaining agreements. The Company funds the pension plans through annual contributions in an amount between the minimum required and the maximum amount that can be deducted for federal income taxes. Prior to January 1, 2000, the Company maintained a pension plan for qualified employees in its Pillow and Pad Division, as well as separate pension plans for qualified employees of two of its subsidiaries, Fieldcrest Cannon and Leshner. On January 1, 2000, the Company merged the pension plans into two new plans covering all of the qualified salaried and hourly employees of the Company. Certain of the Named Executive Officers have always been subject to the surviving plan; however, prior to January 1, 2000, Scott E. Shimizu was subject to one of the plans that was merged out of existence (the "Prior Pillowtex Plan"). Pursuant to the terms of the new consolidated plan, such participant's benefits for his years of service prior to January 1, 2000 will continue to be determined using the benefit provisions of the Prior Pillowtex Plan. Accordingly, a separate table is presented to determine the annual benefits available to Mr. Shimizu for his years of service prior to January 1, 2000. 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 $5,320 $10,639 $15,959 $21,279 $26,599 $31,918 $37,238 $42,558 $150,000 $6,570 $13,139 $19,709 $26,279 $32,849 $39,418 $45,988 $52,558 $175,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558 $200,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558 $250,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558 $275,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558 $300,000 $7,570 $15,139 $22,709 $30,279 $37,849 $45,418 $52,988 $60,558
- --------------------------- *"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 - --------------------------------- Anthony T. Williams 0 2 Michael R. Harmon 0 1 Scott E. Shimizu 18 2 A. Allen Oakley 0 26 Richard A. Grissinger 0 8
(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 2001 plan year is $170,000. Therefore, fiscal 2001 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. Supplemental Executive Retirement Plan The Supplemental Executive Retirement Plan (the "SERP") provides supplemental retirement income to executive employees of the Company who are selected by the Compensation Committee of the Board of Directors. 35 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 (a) the Company is no longer an independent publicly owned corporation or sells or disposes of all or substantially all of its assets; (b) a person becomes the beneficial owner of 35% or more of the Company's voting stock; (c) the Company does not survive a merger or consolidation; or (d) 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. 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. Pursuant to the Plan, the Common Stock will be cancelled without consideration. Accordingly, under the current circumstances, the SERP benefit has no value to the participants. 36 Employment Agreements Pillowtex has entered into employment agreements with each of the Named Executive Officers. The employment agreement of each Named Executive Officer states that the Named Executive Officer is an at-will employee and that the relationship between the Named Executive Officer and Pillowtex may be terminated by either party, subject to satisfaction of any applicable severance pay obligations. The employment agreements provide for initial annual base salaries for the Named Executive Officers as follows:
Initial Amount Named Executive Officer Base Salary - ----------------------- -------------- Anthony T. Williams................. $400,000 Michael R. Harmon................... 350,000 Scott E. Shimizu.................... 375,000 A. Allen Oakley..................... 300,000 Richard A. Grissinger............... 286,000
In each case, the Named Executive Officer's base salary is subject to increase in accordance with company policy. Mr. Harmon's employment agreement also provides for a $50,000 bonus which was paid on March 19, 2002. The employment agreements for all the Named Executive Officers also provide (a) that the Named Executive Officers will be eligible to participate in the Retention Incentive Plan and the Severance Plan (as such terms are defined below) and in any stock option plan made available generally to the Company's senior executives and (b) for other customary benefits. The employment agreements supersede the prior employment agreements that the Company had with Messrs. Williams, Shimizu, Oakley and Grissinger. Under Mr. William's employment agreement, if his employment is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any company-sponsored pension plan in which he participates or cause, or if following a change in control he terminates employment for good reason no later than six months after the occurrence of an event constituting good reason, Pillowtex will pay to Mr. Williams in a single lump sum no later than five days after such termination of employment a severance benefit equal to his base salary then in effect for a period of 24 months, less the amount of any severance benefit paid to him under the Retention Plan. Under Mr. Harmon's employment agreement, if his employment is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any company-sponsored pension plan in which he participates or cause, or if following a change in control he terminates employment for good reason no later than six months after the occurrence of an event constituting good reason under the agreement, Pillowtex will pay to Mr. Harmon in a single lump sum no later than five days after such termination of employment a severance benefit in an amount equal to his annual base salary then in effect, reduced by the amount of any severance benefit paid to him under the Retention Plan. If, however, within one year after the commencement of employment of an individual who is not an officer of Pillowtex on the Effective Date to serve as chief executive officer, Mr. Harmon's employment is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any company-sponsored pension plan in which he participates or cause, then, notwithstanding any provision in the Retention Plan to the contrary, the amount of such severance benefit will be equal to two times Mr. Harmon's annual base salary then in effect, reduced by the amount of any severance benefit paid to him under the Retention Plan. Under the employment agreements with each of Messrs. Shimizu, Oakley and Grissinger, if employment of the applicable Named Executive Officer is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any company-sponsored pension plan in which he participates or cause, or if following a change in control he terminates employment for good reason no later than six months after the occurrence of an event constituting good reason under the employment agreement, Pillowtex will pay to him a severance benefit equal to his base salary then in effect for a period of 24 months, less any amount received by him under the Retention Plan. The severance benefit shall be paid to the applicable Named Executive Officer as follows: (a) the portion of the severance benefit equal to his annual base salary then in effect, shall be paid in a single lump sum no later than five days after the termination of his employment; and (b) the remainder of the severance benefit shall be paid in equal monthly installments beginning on the first anniversary date of the termination of his employment; provided, however, that he will not be entitled to the remaining amount if he obtains other full-time employment prior to such anniversary and the obligation to pay the remaining amount shall immediately cease if he obtains other full-time employment after such anniversary. Pillowtex has entered into similar employment agreements with certain other key employees. 37 Key Employee Retention Program To stabilize employee relations, the Company developed a key employee retention plan (the "Retention Plan"), which the Bankruptcy Court approved on March 6, 2001. The Retention Plan is designed to, among other things, ensure that the employees most critical to the Company's reorganization efforts are provided with sufficient economic incentives and protections to remain with the Company and fulfill their responsibilities through the successful conclusion of the Chapter 11 Cases. The Retention Plan consists of three separate components: (a) a retention incentive plan (the "Retention Incentive Plan"), (b) an emergence performance bonus plan, (the "Emergence Performance Bonus Plan"), and (c) an employee severance plan (the "Severance Plan"). Under the Retention Incentive Plan, each eligible employee earns a specified retention incentive payment (the "Retention Incentive Payment"), based upon a percentage of his or her salary as determined by the Company's management, if the employee remains actively employed by the Company on the specified dates. Under the Retention Incentive Plan: (a) 25% of the total Retention Incentive Payment (approximately $1.5 million) was paid on April 9, 2001, (b) 25% of the total Retention Incentive Payment (approximately $1.5 million) was paid on November 14, 2001, (c) 25% of the total Retention Incentive Payment is to be paid on the earlier of (i) six months after the second payment is made or (ii) confirmation of a plan of reorganization, and (d) 25% of the total Retention Incentive Payment is to be paid 30 days following confirmation of a plan of reorganization. The Company currently estimates the total cost of the Retention Incentive Plan to be approximately $6.1 million. In addition, a discretionary retention pool of $500,000 is available for non-union employees not included in the Retention Incentive Plan. Each of the Named Executive Officers participates in the Retention Incentive Plan and is eligible for a Retention Incentive Payment equal to a percentage of their base pay equal to 60% in the case of Messrs. Williams, Harmon, Shimizu, and Oakley, and 50% in the case of Mr. Grissinger. The Emergence Performance Bonus Plan provided an additional incentive payment to certain management employees considered essential to the implementation of the Company's restructuring to encourage them to remain with the Company through the plan of reorganization negotiation and confirmation process. Payments under the Emergence Performance Bonus Plan were tied directly to the amount of the distribution made under a confirmed plan of reorganization to unsecured creditors and length of the Reorganization Cases. Each of the Named Executive Officers participated in the Emergence Performance Bonus Plan. Under the current circumstances, the Company does not anticipate making any payments of emergence bonuses under the Retention Plan. The purpose of the Severance Plan is to consolidate all severance agreements existing prior to the Petition Date into one severance plan, which supersedes all prior severance plans and the severance provisions of executives' employment arrangements. The Severance Plan covers all full-time employees of the Company, the majority of whom are not eligible to participate in any other components of the Retention Plan. With certain exceptions, under the Severance Plan, employees who are terminated for reasons other than death, disability, retirement or cause, are eligible to receive severance benefits equal to one week's salary for each completed year of service, with a minimum benefit of two weeks' salary and a maximum of 26 weeks' salary. In addition, eligible employees are entitled to receive medical insurance, life insurance and certain other benefits. Restricted Stock Awards 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 SERP), 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." Messrs. Shimizu, Oakley and Grissinger 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. 38 Compensation Committee Interlocks and Insider Participation The Compensation Committee consists entirely of non-employee directors. Mr. Madden, Mr. Petricoff, Mrs. Silverthorne and Mr. Gillease served on the Compensation Committee during 2001. 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, 2001, 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. 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. Assuming consummation of the Plan in accordance with its terms, all outstanding stock options will be cancelled without consideration. Following the resignation of the Company's then Chairman 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, 2001, Mr. LaRovere had been granted a total of 13,572 shares at prices ranging from $5.0625 to $33.50. 39 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, 2002, 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 - ------------------------------------------- ----------------------- -------------------- John H. Silverthorne Marital Trust B(1) 2,268,893 15.9% Mary R. Silverthorne (1) 634,241 4.4% Paul G. Gillease (2) 13,947 * Ralph W. LaRovere (2) 10,447 * William B. Madden (2) 18,447 * Mark A. Petricoff (2) 4,415 * Anthony T. Williams (2) 20,000 * Michael R. Harmon (2) 0 * Scott E. Shimizu (2) 86,883 * A. Allen Oakley (2) 56,201 * Richard A. Grissinger (2) 21,875 * Jeffrey M. Hollander (3) 3,393,375 19.2% All executive officers and directors as a group (17 persons) (4) 3,214,626 22.1%
- ---------- *Less than 1%. FOOTNOTES: (1) 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. (2) Includes options which are currently exercisable or become exercisable within 60 days after March 20, 2002 to purchase the number of shares of Common Stock indicated for the following persons: Mr. Gillease (13,947); Mr. Madden (13,947); Mr. LaRovere (10,447); Mr. Petricoff (4,375); Mr. Williams (20,000); Mr. Shimizu (84,000); Mr. Oakley (55,000); and Mr. Grissinger (21,875). (3) 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, 2002, 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. The amount shown does not reflect dividends in kind that have continued to accrue since the Petition Date but for which shares of additional Preferred Stock have not been issued by the Company. (4) Includes options which are currently exercisable or become exercisable within 60 days after March 20, 2002 to purchase a total of 302,841 shares of Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- None. 40 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 29, 2001 and December 30, 2000 F-3 Consolidated Statements of Operations for the years ended December 29, 2001, December 30, 2000 and January 1, 2000 F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 29, 2001, December 30, 2000 and January 1, 2000 F-5 Consolidated Statements of Cash Flows for the years ended December 29, 2001, December 30, 2000 and January 1, 2000 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 29, 2001, December 30, 2000 and January 1, 2000 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Pillowtex: Schedule II - Valuation and Qualifying Accounts S-1
3. Index to Exhibits -----------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 2.1 Agreement and Plan of Merger, dated as of September 10, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of 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)) 2.3 Asset Purchase Agreement, dated as of July 27, 2001 between Beacon Manufacturing Co. and Beacon Acquisition Co. (incorporated by reference to Exhibit 2.1 to Pillowtex Corporation's Current Report on Form 8-K dated August 23, 2001) 2.4 First Amendment to Asset Purchase Agreement, dated September 6, 2001 between Beacon Manufacturing Co. and Beacon Acquisition Co. (incorporated by reference to Exhibit 2.2 to Pillowtex Corporation's Current Report on Form 8-K dated September 6, 2001) 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)
41 3.2 Amended and Restated Bylaws of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 2000) 3.3 Amendments to Amended and Restated Bylaws of Pillowtex Corporation 4.1 Specimen of Certificate evidencing Common Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 1996) 4.2 Specimen of Certificate evidencing Series A Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended January 3, 1998) 4.3 Indenture, dated November 12, 1996, 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) 4.11 Resignation, Appointment and Acceptance, dated March 23, 2001, by and among Pillowtex Corporation, as Issuer, U.S. Bank National Association, as Resigning Trustee, and HSBC Bank USA, as Successor Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the Quarterly period ended March 31, 2001)
42 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 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)
43 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 Term 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) 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)
44 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 (incorporated by reference to Exhibit 10.25 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 2000) 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 (incorporated by reference to Exhibit 10.26 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 2000) 10.27 Second Amendment to Post-Petition Credit Agreement dated as of January 30, 2001, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, NA, 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 March 31, 2001) 10.28 Third Amendment to Post-Petition Credit Agreement dated as of August 13, 2001, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, NA, 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 September 29, 2001) 10.29 Fourth Amendment to Post-Petition Credit Agreement dated as of November 14, 2001, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, N.A., as Administrative Agent 10.30 Fifth Amendment to Post-Petition Credit Agreement dated as of February 8, 2002, among Pillowtex Corporation and certain of its Subsidiaries, certain Lenders named therein, and Bank of America, N.A., as Administrative Agent 10.31 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)) 10.32 Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of November 21, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated November 21, 1997) 10.33 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)) 10.34 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))
45 10.35 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)) 10.36 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)) 10.37 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)) 10.38 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) 10.39 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)) 10.40 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) 10.41* 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)) 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* Employment Agreement entered into between Pillowtex Corporation and Anthony T. Williams, dated April 1, 2001 10.45* Employment Agreement entered into between Pillowtex Corporation and Michael R. Harmon, dated as of March 19, 2001 (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001) 10.46* Employment Agreement entered into between Pillowtex Corporation and Scott E. Shimizu, dated as of April 1, 2001 10.47* Employment Agreement entered into between Pillowtex Corporation and A. Allen Oakley, dated as of April 1, 2001 10.48* Employment Agreement entered into between Pillowtex Corporation and Richard A. Grissinger, dated as of April 1, 2001 10.49* 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)
46 10.50* 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) 10.51* 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) 10.52* 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) 10.53* Separation Agreement dated as of October 26, 2000 by and between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.52 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 2000) 10.54 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)) 21.1 List of Pillowtex Corporation's Principal Operating Subsidiaries 23.1 Consent of KPMG LLP 99.1 Second Amended Joint Plan of Reorganization of Pillowtex Corporation and Its Debtor Subsidiaries (incorporated by reference to Exhibit 99.2 to Pillowtex Corporation's Current Report on Form 8-K dated March 11, 2002) 99.2 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code for the Second Amended Joint Plan of Reorganization of Pillowtex Corporation and Its Debtor Subsidiaries (incorporated by reference to Exhibit 99.3 to Pillowtex Corporation's Current Report on Form 8-K dated March 11, 2002)
47 b) Reports On Form 8-K. ------------------- During the quarter ended December 29, 2001, Pillowtex filed the following Current Report on Form 8-K: Current Report on Form 8-K, dated December 28, 2001 and filed December 28, 2001, reporting information under "Item 3. Bankruptcy or Receivership" regarding the filing of the Company's plan of reorganization. - --------------- * 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 28, 2002. 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 28, 2002.
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 Officer) Anthony T. Williams /s/ Michael R. Harmon Executive Vice President and Chief Financial Officer - ------------------------------ (Principal Financial Officer) Michael R. Harmon /s/ Paul G. Gillease Director - ------------------------------ Paul G. Gillease /s/ William B. Madden Director - ------------------------------ William B. Madden /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/ Thomas D. D'Orazio Vice President and Corporate Controller - ------------------------------ (Principal Accounting Officer) Thomas D. D'Orazio
49 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Independent Auditors' Report .................................................. F-2 Consolidated Financial Statements: - --------------------------------- Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000 F-3 Consolidated Statements of Operations for years ended December 29, 2001, December 30, 2000 and January 1, 2000 .............. F-4 Consolidated Statements of Shareholders' Equity (Deficit) for years ended December 29, 2001, December 30, 2000 and January 1, 2000 .. F-5 Consolidated Statements of Cash Flows for years ended December 29, 2001, December 30, 2000 and January 1, 2000 .............. F-6 Notes to Consolidated Financial Statements .............................. F-7 Financial Statement Schedule for years ended December 29, 2001, December 30, 2000 and January 1, 2000 Schedule II - Valuation and Qualifying Accounts ......................... S-1
F-1 Independent Auditors' Report The Board of Directors and Shareholders Pillowtex Corporation: We have audited the consolidated financial statements of Pillowtex Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pillowtex Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for the each of the years in the three-year period ended December 29, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 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 classifications of liabilities that might result from the outcome of these uncertainties. (signed) KPMG LLP Charlotte, North Carolina February 14, 2002 F-2 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Balance Sheets December 29, 2001 and December 30, 2000 (in thousands of dollars, except for par value)
December 29, December 30, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents (including restricted cash of $3,861 as of December 29, 2001) $ 40,388 32,182 Receivables: Trade, less allowances of $9,276 as of December 29, 2001 and $40,897 as of December 30, 2000 144,727 189,064 Other 4,478 6,192 Inventories 200,578 262,145 Assets held for sale 6,075 5,281 Prepaid expenses 3,604 5,260 Net assets of discontinued operations 1,358 46,784 ----------- ---------- Total current assets 401,208 546,908 Property, plant and equipment, net 453,440 525,990 Intangible assets, at cost less accumulated amortization of $40,899 as of December 29, 2001 and $27,802 as of December 30, 2000 221,729 233,480 Other assets 11,250 29,391 ----------- ---------- Total assets $ 1,087,627 1,335,769 =========== ========== LIABILITIES AND SHAREHOLDERS' DEFICIT Liabilities not subject to compromise: Current liabilities: Accounts payable $ 35,119 33,083 Accrued expenses 59,837 57,182 Current portion of long-term debt 356 -- Current portion of long-term debt in default 660,893 33,229 Long-term debt in default 10,920 660,790 ----------- ---------- Total current liabilities 767,125 784,284 Long-term debt, less current portion 645 -- Noncurrent liabilities 48,950 40,016 ----------- ---------- Total liabilities not subject to compromise 816,720 824,300 Liabilities subject to compromise 500,840 492,093 ----------- ---------- Total liabilities 1,317,560 1,316,393 Series A redeemable convertible preferred stock, $.01 par value; 81,411 shares issued and outstanding for December 29, 2001 and December 30, 2000 99,185 82,827 Shareholders' deficit: Preferred stock, $.01 par value; authorized 20,000,000 shares; only Series A issued -- -- Common stock, $.01 par value; authorized 55,000,000 shares; 14,250,892 as of December 29, 2001 and 14,252,069 as of December 30, 2000 shares issued and outstanding 143 143 Additional paid-in capital 160,120 160,120 Accumulated deficit (461,186) (222,067) Accumulated other comprehensive loss (28,195) (1,647) ----------- ---------- Total shareholders' deficit (329,118) (63,451) Commitments and contingencies ----------- ---------- Total liabilities and shareholders' deficit $ 1,087,627 1,335,769 =========== ==========
See accompanying notes to consolidated financial statements. F-3 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Operations Years ended December 29, 2001, December 30, 2000 and January 1, 2000 (in thousands of dollars, except for per share data)
2001 2000 1999 ----------- ---------- ---------- Net sales $ 1,031,055 1,259,004 1,432,434 Cost of goods sold 992,540 1,222,572 1,241,903 ----------- ---------- ---------- Gross profit 38,515 36,432 190,531 Selling, general, and administrative expenses 92,275 126,353 114,020 Impairment of long-lived assets 40,961 24,400 2,000 Restructuring charges 10,759 -- -- ----------- ---------- ---------- Earnings (loss) from operations (105,480) (114,321) 74,511 Interest and other expense (contractual interest of $98,929 in 2001 and $111,061 in 2000) 64,666 107,062 87,279 ----------- ---------- ---------- Loss from continuing operations before reorganization items and income taxes (170,146) (221,383) (12,768) Reorganization items 31,401 19,368 -- ----------- ---------- ---------- Loss from continuing operations before income taxes (201,547) (240,751) (12,768) Income tax benefit -- (93,361) (2,740) ----------- ---------- ---------- Net loss from continuing operations (201,547) (147,390) (10,028) Discontinued operations: Loss from operations, net of income tax benefit of $11,399 in 2000 and $5,161 in 1999 (18,258) (115,018) (9,504) Loss on disposal (2,956) -- -- ----------- ---------- ---------- Loss from discontinued operations (21,214) (115,018) (9,504) ----------- ---------- ---------- Net loss (222,761) (262,408) (19,532) Preferred dividends and accretion 16,358 8,928 12,294 ----------- ---------- ---------- Loss applicable to common shareholders $ (239,119) (271,336) (31,826) =========== ========== ========== Basic and diluted loss per common share - Loss from continuing operations applicable to common shareholders $ (15.29) (10.97) (1.58) =========== ========== ========== Loss applicable to common shareholders $ (16.78) (19.04) (2.25) =========== ========== ========== Weighted average common shares outstanding - Basic and diluted 14,251 14,252 14,154 =========== ========== ==========
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 29, 2001, December 30, 2000 and January 1, 2000 (in thousands of dollars, except for per share data)
Common Stock Retained Accumulated Total ------------------------ Additional earnings other shareholders' Number Par paid-in (accumulated comprehensive equity of shares value capital deficit) loss (deficit) ----------- -------- ----------- ----------- ----------- ----------- 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 of $6 3,375 -- 49 -- -- 49 Issuance of restricted stock 46,398 -- 1,190 -- (807) 383 Issuance of common stock - convertible debentures 85,518 2 3,465 -- -- 3,467 Accretion of Series A Preferred Stock -- -- -- (216) -- (216) Preferred stock dividends -- -- -- (12,078) -- (12,078) Common stock dividends declared ($.18 per share) -- -- -- (2,555) -- (2,555) ----------- -------- ----------- ----------- ----------- ----------- Balance at January 1, 2000 14,261,886 143 160,515 49,269 (2,538) 207,389 Comprehensive loss: Net loss -- -- (262,408) -- (262,408) Currency translation adjustments -- -- -- 84 84 ----------- Total comprehensive loss (262,324) ----------- Restricted stock - amortization and forfeitures (15,469) -- (586) -- 807 221 Issuance of common stock - convertible debentures 5,652 -- 191 -- -- 191 Accretion of Series A Preferred Stock -- -- -- (216) -- (216) Preferred stock dividends -- -- -- (8,712) -- (8,712) ----------- -------- ----------- ----------- ----------- ----------- Balance at December 30, 2000 14,252,069 143 160,120 (222,067) (1,647) (63,451) Comprehensive loss: Net loss -- -- -- (222,761) -- (222,761) Currency translation adjustments -- -- -- -- (143) (143) Excess of additional pension liability over unrecognized prior service cost -- -- -- -- (26,405) (26,405) ----------- Total comprehensive loss (249,309) ----------- Cancellation of restricted stock (1,177) -- -- -- -- -- Accretion of Series A Preferred Stock -- -- -- (216) -- (216) Preferred stock dividends -- -- -- (16,142) -- (16,142) ----------- -------- ----------- ----------- ----------- ----------- Balance at December 29, 2001 14,250,892 $ 143 $ 160,120 $ (461,186) $ (28,195) $ (329,118) =========== ======== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Cash Flows Years ended December 29, 2001, December 30, 2000 and January 1, 2000 (in thousands of dollars)
2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net loss $(222,761) $(262,408) $ (19,532) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Loss from discontinued operations 21,214 115,018 9,504 Depreciation and amortization 53,785 57,517 51,941 Long-lived asset impairment 40,961 24,400 2,000 Write-down of inventory -- 49,538 -- Reorganization items (118) 17,528 -- Deferred income taxes -- (93,361) (3,194) Changes in assets and liabilities, net of effects of divestiture of Blanket Division: Trade receivables 44,337 47,371 (28,349) Inventories 60,720 51,305 (256) Accounts payable and accrued expenses 23,388 (3,126) (14,852) Other assets and liabilities 13,325 22,132 407 --------- --------- --------- Net cash provided by (used in) continuing operations 34,851 25,914 (2,331) --------- --------- --------- Net cash provided by discontinued operations 3,365 9,072 11,869 Cash flows from investing activities: Proceeds from sale of assets held for sale and property, plant and equipment 4,589 4,925 6,151 Proceeds from sale of Blanket Division 11,153 -- -- Purchases of property, plant and equipment (12,832) (33,197) (89,737) --------- --------- --------- Net cash provided by (used in) investing activities 2,910 (28,272) (83,586) --------- --------- --------- Cash flows from financing activities: Decrease in checks not yet presented for payment (11,785) (8,427) (18,592) Borrowings on revolving credit loans -- 849,413 383,028 Repayments of revolving credit loans -- (736,078) (271,028) Retirement of long-term debt (19,882) (82,198) (16,095) Payments of debt and equity issuance costs (1,253) (2,100) -- Dividends paid -- -- (4,011) Proceeds from exercise of stock options -- -- 43 --------- --------- --------- Net cash provided by (used in) financing activities (32,920) 20,610 73,345 --------- --------- --------- Net change in cash and cash equivalents 8,206 27,324 (703) Cash and cash equivalents at beginning of year 32,182 4,858 5,561 --------- --------- --------- Cash and cash equivalents at end of year $ 40,388 $ 32,182 $ 4,858 ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) (1) General Founded in 1954, Pillowtex Corporation ("Pillowtex" or the "Company") is one of the largest North American designers, manufacturers, and marketers of home textile products. Pillowtex's extensive product offerings include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products. As a leading supplier across all distribution channels, Pillowtex sells its products to mass merchants, department stores, and specialty retailers. The Company also markets its products to wholesale clubs, catalog merchants, institutional distributors, and international customers and on the Internet. Pillowtex is organized into two major operating divisions: Bed and Bath Division and Pillow and Pad Division. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, towels, bath rugs, and kitchen textile products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. See note 18 below for financial information regarding segments. On November 14, 2000 (the "Petition Date"), Pillowtex 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. 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 and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. During 2001, the Company accrued $15.8 million for the estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection. Approximately $10.3 million of the prepetition liability relating to the rejected contracts and leases have been reflected as reorganization items, and the remaining $5.5 million has been included in the loss from discontinued operations in the accompanying consolidated statement of operations for 2001. The Company expects to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. 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. On December 28, 2001, the Debtors filed with the Bankruptcy Court a Joint Plan of Reorganization and related Disclosure Statement. On February 26, 2002, the Debtors filed with the Bankruptcy Court a First Amended Joint Plan of Reorganization and related Disclosure Statement. On March 1, 2002, the Debtors filed with the Bankruptcy Court a Second Amended Joint Plan of Reorganization and related Disclosure Statement. On March 11, 2002, the Debtors filed with the Bankruptcy Court a revised version of the Second Amended Joint Plan of Reorganization (as so revised, the "Plan") and related Disclosure Statement (as so revised, the "Disclosure Statement") incorporating certain nonmaterial clarifications and modifications to reflect, among other things, events subsequent to March 1, 2002. F-7 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) The primary objectives of the Plan are to: (a) alter the Debtors' debt and equity structures to permit the Debtors to emerge from the Chapter 11 Cases with viable capital structures; (b) maximize the value of the ultimate recoveries to all creditor groups on a fair and equitable basis; and (c) settle, compromise, or otherwise dispose of certain claims and interests on terms that the Debtors believe to be fair and reasonable and in the best interests of their respective estates, creditors, and equity holders. The Plan provides for, among other things: . the cancellation of certain indebtedness in exchange for cash, common stock in reorganized Pillowtex (the "New Common Stock"), and/or warrants to purchase shares of New Common Stock ("New Warrants"); . the cancellation of "Designated Post-Petition Loans" (as such term is defined in the Plan) having an aggregate principal amount of $150 million in exchange for the issuance by reorganized Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the "Exit Term Loan"); . the cancellation without consideration of Pillowtex's common stock and preferred stock that was issued and outstanding immediately prior to the Petition Date; . the assumption, assumption and assignment, or rejection of executory contracts or unexpired leases to which any Debtor is a party; . the reinstatement of approximately $11.4 million principal amount of industrial revenue bonds; . the selection of boards of directors of the reorganized Debtors; . the merger of Pillowtex with and into a new Delaware corporation, with the new Delaware corporation as the surviving corporation; and . the corporate restructuring of certain of Pillowtex's subsidiaries to simplify the Company's corporate structure. Under the terms of the Plan, there are significant conditions precedent to both the confirmation of the Plan by the Bankruptcy Court and the subsequent effectiveness of the Plan. Conditions to the confirmation of the Plan include, among others, the receipt by the Debtors of a commitment for a revolving credit facility (the "Exit Financing Revolver Facility") on terms and conditions satisfactory to the Debtors and the unanimous consent of the holders of Designated Post-Petition Loans to the treatment thereof under the Plan as described in the immediately preceding paragraph. Conditions to the effectiveness of the Plan include, among others, the execution and delivery of the documentation effectuating the Exit Financing Revolver Facility and the execution and deliver of the documentation effectuating the Exit Term Loan. There can be no assurance that these conditions will be satisfied. It is presently anticipated that (a) the Exit Financing Revolver Facility will be a senior asset-based revolving credit facility in the amount of $200 million, including a $60 million letter of credit sub-facility, secured by a first priority lien on the accounts receivable, inventory, and trademarks of the reorganized Debtors and a second priority lien on the primary collateral that secures the Exit Term Loan and (b) the Exit Term Loan will be a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures that Exit Financing Revolver Facility. The principal amount of the Exit Term Loan may be immediately reduced utilizing borrowings under the Exit Financing Revolver Facility depending on borrowing base availability thereunder. The Bankruptcy Court has entered an order approving the Disclosure Statement as containing "adequate information" for creditors of the Debtors in accordance with section 1125 of the Bankruptcy Code. The Boards of Directors of Pillowtex and each of the other Debtors, as well as the Official Committee of Unsecured Creditors, believe that the Plan is in the best interests of the Company's creditors. F-8 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) On or about March 11, 2002, the Debtors commenced delivery of copies of the Plan and Disclosure Statement to parties in interest as required pursuant to the Bankruptcy Code. The Debtors have until 4:00 p.m., Eastern Time, on April 19, 2002 (the "Voting Deadline") to solicit acceptance of the Plan. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the Plan. The Bankruptcy Court has scheduled a confirmation hearing for the Plan on May 1, 2002 at 4:30 p.m., Eastern Time. There can be no assurance that the Plan will receive the requisite acceptance by creditors or that the Bankruptcy Court will confirm the Plan. To confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (a) 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, (b) each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence), and (c) 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 will receive no value for their interests under the Plan. The Bankruptcy Code provides that the Debtors have exclusive periods during which only they may file and solicit acceptances of a plan of reorganization. These "exclusive periods" may be extended for "cause." As a result of several extensions, the Debtors have the exclusive right until May 15, 2002 to solicit acceptance of the Plan. Unless such period is again extended by the Bankruptcy Court, if the Debtors fail to obtain acceptance of the Plan from the requisite impaired classes of creditors by May 15, 2002, 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. Since the Petition Date, the Debtors have conducted business in the ordinary course. 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 continuing to review their operations and to identify assets for disposition. On September 6, 2001, the Company sold the majority of the inventory and fixed assets associated with its Blanket Division (see note 5). 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 obtain confirmation of the Plan or another plan of reorganization, its ability to comply with the DIP Financing Facility (see note 11) and its ability to generate sufficient cash from operations and 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 assets amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. 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 sheets could materially change because of changes in business strategies and the effects of the Plan or another plan of reorganization. F-9 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) In the Chapter 11 Cases, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under the Plan or another plan of reorganization which must be confirmed by the Bankruptcy Court as described above. 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 sheets. Generally, all actions to enforce or otherwise effect repayment of pre-petition 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 the terms of the Plan or another plan of reorganization, as confirmed by the Bankruptcy Court, 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 Pillowtex 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 1999 ended January 1, 2000, fiscal year 2000 ended December 30, 2000, and fiscal year 2001 ended December 29, 2001. 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. At December 29, 2001, approximately $3.9 million in cash was being held by the lenders under the Company's DIP Financing Facility (see note 11) as collateral for outstanding letters of credit. Supplemental disclosures of cash flow information for years 2001, 2000, and 1999 follow: 2001 2000 1999 -------- ------- ------ Interest paid $ 74,313 87,535 87,906 ======== ======= ====== Income taxes paid (refunded) $ (759) (2,706) 769 ======== ======= ====== During the year ended December 29, 2001, the Company entered into a capital lease obligation of $1.1 million. (d) Inventories Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) and last-in, first-out (LIFO) methods (see note 6). (e) Derivative Financial Instruments 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 F-10 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Nos. 137 and 138, are effective for fiscal years beginning after June 15, 2000. The Company adopted the provisions of SFAS No. 133 as of December 31, 2000. The adoption of SFAS No. 133, as amended, did not have any impact on its financial position or results of operations. The Company enters into fixed-price contracts for purchases of raw material cotton and natural gas from its suppliers. SFAS No. 133, as amended, requires the Company to evaluate its commodity contracts to determine whether the contracts are "normal purchases or normal sales." The Company has concluded and documented that these contracts meet the definition of "normal purchases or normal sales," and therefore are not considered derivative instruments subject to the provisions of SFAS No. 133, as amended. (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 ($193.6 million and $199.1 million, net of accumulated amortization of $22.2 million and $16.8 million as of December 29, 2001 and December 30, 2000, respectively) recorded in connection with acquisitions. 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 and classified as assets held for sale. (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. F-11 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) (j) Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Stock Option Plan In accordance with 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) Sales Incentive and Other Advertising Expense The Company employs a number of sales incentive programs to promote and maintain its product lines. The major programs are rebates, discounts, co-operative advertising, and market development funds. The Company expenses the costs of such programs as incurred. Sales incentive expense was approximately $50.9 million, $56.1 million, and $71.0 million during 2001, 2000, and 1999, respectively. Sales incentive expense is classified in part in net sales and in selling, general, and administrative expenses. In 2001, 2000 and 1999, sales incentive expense included in net sales and selling, general, and administrative expenses was $31.9 million and $19.0 million, $31.9 million and $24.2 million, and $51.2 million and $19.8 million, respectively. Other advertising expense included in selling, general, and administrative expenses during 2001, 2000, and 1999 was $1.5 million, $0.7 million, and $5.1 million, respectively. Such cost is expensed as incurred. (n) Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing earnings available for common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing (i) earnings (loss) 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 F-12 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) 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. (q) Comprehensive Income (Loss) Comprehensive income (loss) consists of net earnings (loss), foreign currency translation adjustments, and pension equity adjustments and is presented in the consolidated statements of shareholders' equity (deficit). (r) Reclassifications The 2000 and 1999 consolidated financial statements have been restated to present the Blanket Division as a discontinued operation (see note 5). Approximately $12.8 million of information technology expenses associated with the Company's manufacturing systems have been reclassified in 1999 from selling, general, and administrative expenses to cost of goods sold to conform with the presentation used in 2000 and 2001. (3) Restructuring Charges and Impairment of Long-Lived Assets Restructuring Charges. During 2001, the Company announced the closure of the following locations: a towel manufacturing facility in Hawkinsville, Georgia; a cut-and-sew bedding facility in Rocky Mount, North Carolina; a sheet manufacturing facility in Kannapolis, North Carolina; a towel yarn manufacturing operation and cotton warehouse in Columbus, Georgia, a towel warehouse and distribution center in Phenix City, Alabama; a towel yarn manufacturing operation in Tarboro, North Carolina and a pillow manufacturing location in Toronto, Canada. The Company also scaled back towel production at another facility in Kannapolis, North Carolina. Only the Toronto location and the warehouse and distribution operations at Rocky Mount remained open at December 29, 2001, utilizing approximately 150 employees. In total, the facility closures impacted approximately 1,300 employees. The Rocky Mount facility manufactured decorative bedding exclusively under a license agreement, which expired on June 30, 2001. The production and functions performed at the other locations were relocated to existing facilities. The total charge recognized during 2001 for severance and related benefits was $6.5 million. In addition to the facility closures, during 2001, the Company implemented an enhanced early retirement plan under which salaried employees age 59 or older having at least five years of service were eligible to participate in the plan. Of the 135 employees eligible, 76 accepted. The Company also continued to implement a reduction in force among its salaried employees, terminating approximately 22 employees. The total charge relating to the early retirement plan and reduction in force recognized in 2001 was approximately $4.3 million. Activity in the reserve established for the restructuring charges is presented below: Restructuring charges $ 10,759 Payments (5,552) Reclassification of early retirement program liability to pension liability (4,144) -------- Ending balance $ 1,063 ======== Included in the loss from discontinued operations for the year ended December 29, 2001 is a $0.4 million restructuring charge consisting of severance and benefits associated with employees at a blanket yarn manufacturing plant in Newton, North Carolina. The facility was closed in connection with sale of the Company's Blanket Division (see note 5). Impairment of Long-Lived Assets. During 2001, the Company recognized charges for impairment of long-lived assets of $41.0 million. Approximately $36.5 million relates to the real property and equipment at the facilities discussed above. The Company also evaluated the carrying values of certain machinery and equipment classified as assets held for sale and recorded a write-down of $4.5 million. F-13 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) During 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 recorded a charge of $24.4 million to reduce these assets to their estimated fair values. During 2000, 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 $88.3 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 $50.0 million for the impairment of property, plant, and equipment. This charge has been included in the loss from discontinued operations in the 2000 income statement. The Blanket Division was sold in September 2001 (see note 5). The impairment charges 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 the accompanying balance sheet as of December 29, 2001 at a carrying value of $6.1 million. Management expects to sell these assets within the next twelve months. During 1999, a $2.0 million impairment charge was recorded to reduce the carrying value of the Opelika, Alabama facility, which was closed in the first quarter of 1999, to its estimated fair value. (4) Earnings (Loss) Per Share There were no reconciling items between basic loss per share and diluted loss per share in 2001, 2000, and 1999, because the effects of the conversion of convertible preferred stock and convertible debentures would have been anti-dilutive for all periods presented. No options were assumed to be exercised during 2001, 2000, and 1999 as the exercise price exceeded the average market price. The convertible preferred stock was convertible into approximately 4.1 million shares, 3.1 million shares, and 2.7 shares in 2001, 2000, and 1999, respectively. The convertible debentures were convertible into 0.5 million shares, 0.5 million shares, and 0.5 million shares in 2001, 2000 and 1999, respectively. Options to purchase approximately 1.0 million shares, 1.1 million shares, and 1.0 million shares were outstanding in 2001, 2000, and 1999, respectively. (5) Sale of Blanket Division On September 6, 2001, the Company sold the majority of the inventory and fixed assets associated with its Blanket Division to Beacon Acquisition Corporation for approximately $13.4 million. The purchase price consisted of approximately $12.1 million in cash ($0.6 million of which was placed in escrow to secure post-closing obligations) and a three-year promissory note in a principal amount of approximately $1.3 million. The promissory note is secured by a pledge of 100% of the stock of the purchaser, a second lien on the majority of the assets being sold (excluding the Blanket Division's real property located in Swannanoa, North Carolina and Westminister, South Carolina), and a third lien on the Blanket Division's real property located in Swannanoa, North Carolina. The net cash proceeds of $11.2 million from the sale were applied to pay down the Company's senior debt facilities. The loss on the sale recognized during 2001 was $3.0 million. The results of operations and net assets of the Blanket Division have been accounted for as a discontinued operation. As a result, the 2000 and 1999 consolidated financial statements have been restated to reflect the Blanket Division as a discontinued operation. The net assets of the Blanket Division remaining at December 29, 2001 primarily include accounts receivable, accounts payable and accrued expenses. The losses from discontinued operations during 2001, 2000, and 1999 were $18.3 million, $115.0 million, and $9.5 million, respectively. F-14 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) (6) Inventories Inventories consist of the following at December 29, 2001 and December 30, 2000: 2001 2000 -------- ------- Finished goods $104,532 116,212 Work-in-process 40,832 75,465 Raw materials and supplies 46,828 53,258 In-transit and off-site 8,386 17,210 -------- ------- $200,578 262,145 ======== ======= At December 29, 2001 and December 30, 2000, 70% and 71%, respectively, of inventories were valued at LIFO. During 2000, the Company recorded a $49.5 million write-down of excess, obsolete, and distressed inventory. This charge was reflected in cost of goods sold and resulted from a slow down in the retail environment and the impact of the filing of the Chapter 11 Cases on November 14, 2000. The Chapter 11 Cases 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 estimated it would receive lower prices when selling such inventory. The loss from discontinued operations for 2000 includes a $19.2 million write-down to reflect the Blanket Division's inventory at its estimated net realizable value based upon the Company's review of strategic alternatives with regard to the division. As discussed in note 5, the Blanket Division was sold in 2001. During 1999, the Company recorded a $4.9 million write-down to reduce certain inventory at the Blanket Division to its net realizable value. The write-down has been included in the loss from discontinued operations for 1999. (7) Property, Plant, and Equipment Property, plant, and equipment are stated at cost or fair value and consist of the following at December 29, 2001 and December 30, 2000: 2001 2000 --------- -------- Land $ 24,529 27,671 Buildings and improvements 157,655 161,249 Machinery and equipment 329,590 372,968 Data processing equipment and software 100,727 100,782 Furniture and fixtures 4,579 5,991 Leasehold improvements 2,666 2,567 Projects in progress 6,632 8,341 --------- -------- 626,378 679,569 Less accumulated depreciation and amortization (172,938) (153,579) --------- -------- $ 453,440 525,990 ========= ======== Interest costs of $0.9 million and $5.6 million incurred during 2000 and 1999, respectively, for the purchase and construction of qualifying fixed assets, were capitalized and are being amortized over the related assets' estimated useful lives. No interest costs were capitalized during 2001. (8) Accounts Payable and Accrued Expenses Accounts payable includes $0.3 million and $12.1 million at December 29, 2001 and December 30, 2000, respectively, of checks not yet presented for payment on zero balance disbursement accounts, less amounts on deposit at the banking institutions where the zero balance disbursement accounts are maintained. F-15 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Accrued expenses consist of the following at December 29, 2001 and December 30, 2000: 2001 2000 ------- ------ Employee-related compensation and benefits $10,012 10,507 Insurance and workers' compensation 9,929 11,655 Customer rebates 14,455 8,529 Interest and commitment fees 2,064 3,731 Advertising 5,763 7,699 Other accrued expenses 17,614 15,061 ------- ------ $59,837 57,182 ======= ====== At December 29, 2001 and 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: 2001 2000 --------- -------- Change in benefit obligation: Benefit obligation at beginning of year $ 310,499 296,889 Service cost 6,143 6,667 Interest cost 23,194 22,740 Actuarial loss 17,109 4,973 Benefits paid (23,935) (20,770) Curtailments (1,350) -- Special termination benefits 4,144 -- --------- -------- $ 335,804 310,499 ========= ======== Change in plan assets: Fair value of plan assets at beginning of year $ 365,353 370,840 Actual return on plan assets (21,436) 15,283 Benefits paid (23,935) (20,770) --------- -------- Fair value of plan assets at end of year $ 319,982 365,353 ========= ======== Funded status: Benefit obligation $(335,804) (310,499) Fair value of plan assets 319,982 365,353 Unrecognized transition asset (18) (26) Unrecognized prior service cost 702 805 Unrecognized net actuarial (gain) loss 33,036 (37,285) Intangible asset (702) -- Amount included in comprehensive income (26,405) -- --------- -------- Prepaid (accrued) benefit cost $ (9,209) 18,348 ========= ======== F-16 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) At December 29, 2001, the Company recognized an additional minimum pension liability of $27.1 million for the additional pension liability in excess of the accumulated benefit obligation. The additional minimum liability results from the value of the accumulated benefit obligation being greater than the fair value of the plan assets at December 29, 2001. The offsets to the additional minimum liability are a charge to shareholders' deficit of $26.4 million, representing the excess of additional pension liability over unrecognized prior service cost, and an intangible asset of $0.7 million.
2001 2000 1999 -------- ------- ----------- Weighted average assumptions as of December 29, 2001, December 30, 2000 and January 1, 2000: Discount rate 7.25% 7.75% 8.00% Expected return 9.00% 9.00-9.50% 9.00-10.50% Compensation increase rate 3.50% 3.50% 4.00% Components of net periodic pension cost (income): Service cost $ 6,143 6,667 7,615 Interest cost 23,194 22,740 21,892 Expected return on plan assets (31,305) (34,272) (34,379) Recognized net actuarial gain (471) (2,798) (2) Amortization of transition asset (8) (8) (8) Amortization of prior service cost 103 104 35 Special termination benefits 4,144 -- -- Curtailment gain (1,350) -- -- -------- ------- ----------- Net periodic pension cost (income) $ 450 (7,567) (4,847) ======== ======= ==========
The $4.1 million charge for special termination benefits relates to the Company's enhanced early retirement program (see note 3) and has been included in restructuring charges in 2001. The curtailment gain relates to the sale of the Blanket Division (see note 5) and has been included in the loss on the sale of the Blanket Division in 2001. 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 2001, 2000, and 1999, the Company incurred costs of $2.6 million, $2.7 million, and $3.2 million, respectively, to provide matching contributions for those plans with matching provisions. (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. F-17 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data)
2001 2000 -------- ------- Change in benefit obligation: Benefit obligation at beginning of year $ 31,647 34,418 Service cost 535 497 Interest cost 2,350 2,311 Actuarial (gain) loss 785 (3,361) Benefits paid (2,307) (2,218) -------- ------- Benefit obligation at end of year $ 33,010 31,647 ======== ======= Change in plan assets: Fair value of plan assets at beginning of year $ -- -- Employer contributions 2,307 2,218 Benefits paid (2,307) (2,218) -------- ------- Fair value of plan assets at end of year $ -- -- ======== ======= Funded status: Benefit obligation $(33,010) (31,647) Unrecognized net actuarial gain (5,925) (7,294) -------- ------- Accrued postretirement benefit cost included in accrued expenses and noncurrent liabilities $(38,935) (38,941) ======== ======= 2001 2000 1999 ----------------------------------- Weighted average assumptions as of December 29, 2001, December 30, 2000 and January 1, 2000: Discount rate 7.25% 7.75% 8.00% Compensation increase rate 3.50% 3.50% 4.00% Components of net periodic postretirement cost: Service cost $ 535 497 582 Interest cost 2,350 2,311 2,430 Amortization of actuarial gain (584) (342) (28) ----------------------------------- Net periodic postretirement benefit cost $ 2,301 2,466 2,984 ===================================
F-18 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 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 29, 2001 and December 30, 2000:
2001 2000 ----------- ---------- Revolver, less portion to be treated as post-petition debt $ 233,051 255,956 Overline Credit Facility 34,738 34,738 Term loans, less portion to be treated as post-petition debt 242,004 268,090 Portion of revolver and term loans to be treated as post-petition debt 150,000 117,179 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 13,185 14,925 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, inclusive of Cash Claimant Notes in the principal amount of $5.2 million 90,417 90,417 Other debt 2,106 3,131 ----------- ---------- Total debt 1,075,501 1,094,436 Less: Current portion of long-term debt (356) -- Current portion of long-term debt in default (660,893) (33,229) Long-term debt in default (10,920) (660,790) Liabilities subject to compromise (see note 12) (402,687) (400,417) ----------- ---------- Total long-term debt $ 645 -- =========== ==========
DIP Financing Facility On December 12, 2000, the Bankruptcy Court entered an order (the "DIP Financing Order") authorizing the Debtors to enter into a $150.0 million debtor-in-possession financing facility, including a $60.0 million letter of credit sub-facility, (the "DIP Financing Facility") with Bank of America, N.A. as agent for a syndicate of financing 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. Under the DIP Financing Order, the Debtors were required to remit (or were deemed to have remitted) to the prepetition lenders as payment in respect of the prepetition senior debt facilities described below all cash collateral constituting proceeds of the prepetition collateral up to $150 million. All such cash collateral so remitted (or deemed remitted) was required to be re-advanced (or was deemed re-advanced) to the Debtors on a postpetition basis as the Designated Post-Petition Loans. On March 6, 2001, the DIP Financing Facility was amended to, among other things, reduce the size of the facility to $125.0 million, including the $60.0 million letter of credit sub-facility. The Company obtained the reduction in the size of the DIP Financing 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. On August 13, 2001, the Debtors and the lenders under the DIP Financing Facility entered into an amendment to the facility providing for, among other things, the (a) modification and addition of certain reporting requirements, (b) modification of the financial covenant requiring maintenance of an asset coverage ratio, (c) elimination of the financial covenant requiring maintenance of a minimum operating cash flow, (d) addition of a financial covenant requiring maintenance of a minimum level of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and (e) elimination of a nine-month extension provision. F-19 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) On November 21, 2001, the Bankruptcy Court entered an order authorizing the Debtors to enter into another amendment to the facility, dated as of November 14, 2001, pursuant to which, (a) the scheduled termination date of the DIP Financing Facility was extended to June 30, 2002, (b) certain covenants were modified based on the Debtors' three-year strategic plan, (c) a new covenant was added limiting the incurrence of costs for relocation of equipment and costs associated with facility closures, (d) the commitment under the DIP Financing Facility was reduced from $125 million to $100 million, and (e) certain events of default were added relating to the Debtors' progress toward emergence from bankruptcy, which required the Debtors to file on or prior to December 31, 2001 a feasible plan of reorganization and disclosure statement and to obtain the Bankruptcy Court's approval of a disclosure statement on or prior to March 1, 2002, and further requires the Debtors to (i) obtain confirmation of a plan of reorganization on or prior to May 15, 2002 and (ii) cause a plan of reorganization to become effective on or prior to June 30, 2002. The Debtors and the lenders under the DIP Financing Facility entered into another amendment to the facility, dated as of February 8, 2002, providing for, among other things, the (a) further modification of the financial covenant relating to the asset coverage ratio, (b) modification of the covenant limiting the incurrence of costs for relocation of equipment and costs associated with facility closures, and (c) modification of the covenant relating to the level of capital expenditures. This amendment was obtained to allow the Company to proceed with certain aspects of the Company's business plan. The DIP Financing Facility will expire on the earliest to occur of (a) June 30, 2002, (b) the date on which the Plan or another 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. 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 4.00% or Bank of America's Base Rate (which is the higher of the Federal Funds Rate or Prime Rate plus, in either case, 0.50%) plus 1.50%. In addition to a facility fee and an underwriting fee of 0.50% each, there is an unused commitment fee of 0.75%, a letter of credit fee of 4.00%, 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, a junior lien on certain plant and equipment that secure three of the industrial revenue bond facilities described below, and a first priority lien on all post-petition real and personal assets of the Company. The documentation evidencing the DIP Financing Facility contains financial covenants requiring maintenance of an asset coverage ratio and a minimum level of EBITDA, as well as other covenants that limit, among other things, the incurrence of costs for relocation of equipment and costs associated with facility closures, indebtedness, liens, sales of assets, capital expenditures and investments, and prohibit dividend payments. The net proceeds of certain asset sales outside the ordinary course of business will reduce prepetition indebtedness under the senior secured credit facilities; otherwise, the net proceeds of asset sales outside the ordinary course of business will be applied as a reduction of the DIP Financing Facility. No cash borrowings were outstanding on the DIP Financing Facility at December 29, 2001. Availability under the DIP Financing Facility is based upon the balances of eligible assets, reduced by outstanding debt and letters of credit. Availability under the DIP Financing Facility as of December 29, 2001 was approximately $25.0 million. As of December 29, 2001, the Company had $40.4 million in cash and cash equivalents, including $3.9 million in cash which was being held by the lenders under the DIP Financing Facility as collateral for outstanding letter of credit. As of December 29, 2001, the Company had $16.3 million in letters of credit outstanding under the DIP Financing Facility. 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 or, assuming consummation of the Plan in accordance with its terms, the Exit Financing Revolver Facility. Assuming consummation of the Plan in accordance with its terms, holders of claims in respect of the DIP Financing Facility other than those relating to Designated Post-Petition Loans will be paid cash in an amount equal to such claim and holders of claims relating to Designated Post-Petition Loans will receive a note under the Exit Term Loan in an amount equal to the amount of such holder's Designated Post-Petition F-20 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Loans. In addition, letters of credit issued under the DIP Financing Facility will be replaced with letters of credit issued under the Exit Financing Revolver 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 The Leshner Corporation ("Leshner"), allowing the Company to fund the transaction and reduce borrowings under the revolving credit facility. As of December 29, 2001, (a) outstanding prepetition borrowings under the revolving credit facility were $233.0 million, (b) outstanding prepetition borrowings under the term loan facility were $242.0 million in the aggregate, and (c) outstanding letters of credit under the revolving credit facility were the $11.1 million in the aggregate. Pursuant to the DIP Financing Order, $150 million of prepetition borrowings under the senior debt facilities had become subject to treatment as postpetition debt. As prepetition letters of credit expire, to the extent they are renewed, they will be reissued under the DIP Financing Facility or, assuming consummation of the Plan in accordance with its terms, the Exit Financing Revolver 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 prepetition senior credit facilities for the year ended December 29, 2001 was 7.82%. The prepetition senior debt facilities expired 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. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the prepetition senior debt facilities. Even though these payments are being made, the Company remains in default under the prepetition senior debt facilities. Assuming consummation of the Plan in accordance with its terms, the indebtedness under the senior debt facilities will be cancelled and, in exchange therefore, holders of claims in respect of the senior debt facilities will become entitled to receive New Common Stock. Overline Facility In May 1999, the Company entered into a $20.0 million senior unsecured revolving credit facility (the "Overline Facility") to obtain additional working capital availability. On July 27, 1999, the Overline Facility was amended to increase the amount of funds available to $35.0 million and to secure it with the same assets securing the senior debt facilities described above. As of December 29, 2001, outstanding borrowings under the Overline Facility were $34.7 million. 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 matured on January 31, 2002. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Company to make scheduled interest payments on the Overline Facility. Even though these payments are being made, the Company remains in default under the Overline Facility. F-21 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Assuming consummation of the Plan in accordance with its term, the indebtedness under the Overline Facility will be cancelled and, in exchange therefor, holders of claims in respect of the Overline Facility will become entitled to receive New Common Stock and New Warrants. Senior Subordinated Debt In connection with the Fieldcrest Cannon acquisition, the Company issued $185.0 million of 9% Senior Subordinated Notes due 2005 (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. As of December 29, 2001, all of the 9% Notes remained outstanding. On November 12, 1996, the Company issued $125.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes"), with interest payable semiannually commencing May 15, 1997. The 10% Notes 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. As of December 29, 2001, all of the 10% Notes remained outstanding. 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. The Company is in default under the indentures governing both the 9% Notes and the 10% Notes. No principal or interest payment has been or will be made on the 9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases. Assuming consummation of the Plan in accordance with its terms, the indebtedness under the 9% Notes and the 10% Notes will be cancelled and, in exchange therefor, holders of claims in respect of 9% Notes or 10% Notes will become entitled to receive New Common Stock and New Warrants. Fieldcrest Cannon 6% Convertible Debentures As a result of the Company's acquisition of Fieldcrest Cannon, the outstanding Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6% Convertible Debentures") are convertible, at the option of the holders, into a combination of cash and Common Stock. As of December 29, 2001, approximately $85.2 million aggregate principal amount of the 6% Convertible Debentures remain outstanding. If all such outstanding 6% Convertible Debentures were converted at such date, the resulting cash component of the conversion consideration would have been approximately $57.2 million. Prior to the Petition Date, Fieldcrest Cannon issued certain non-interest bearing subordinated promissory notes (the "Cash Claimant Notes") in respect of the unpaid cash portion of the conversion consideration owing to certain holders of the 6% Convertible Debentures who had surrendered their debentures for conversion, but had not been paid the cash portion of the conversion consideration. As of December 29, 2001, the aggregate amount of the outstanding Cash Claimant Notes was $5.2 million. The 6% Convertible Debentures and Cash Claimant Notes are general unsecured obligations of Fieldcrest Cannon. Fieldcrest Cannon is in default under the indenture governing the 6% Convertible Debentures and the Cash Claimant Notes. No principal or interest payment has been or will be made on the 6% Convertible Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases. Assuming consummation of the Plan in accordance with its terms, the indebtedness under the 6% Convertible Debentures and the Cash Claimant Notes will be cancelled and, in exchange therefor, holders of claims in respect of the 6% Convertible Debentures and the Cash Claimant Notes will become entitled to receive New Common Stock and New Warrants. F-22 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Industrial Revenue Bonds The Company presently has obligations in respect of two industrial revenue bond facilities (the "IRB Facilities"). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of December 29, 2001, $13.2 million of bonds in the aggregate were outstanding under the IRB Facilities. On February 6, 2001, the Bankruptcy Court authorized the Company to make scheduled principal and interest payments on the IRB Facilities. Even though these payments are being made, the Company remains in default of its obligations under each of the IRB Facilities. Assuming consummation of the Plan in accordance with its terms, the IRB Facilities will be reinstated and the letters of credit issued in respect thereof under the senior debt facilities described above will be replaced, substituted, or otherwise satisfied with equivalent letters of credit to be issued under the Exit Financing Revolver Facility. 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, Pillowtex has incurred, and will continue to incur, significant professional fees and other restructuring costs in connection with the Chapter 11 Cases and the restructuring of its business operations. However, based on current and anticipated levels of operations and continued efforts to reduce inventories, and assuming consummation of the Plan prior to June 30, 2002, 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. The DIP Financing Facility is currently scheduled to terminate on June 30, 2002, and accordingly, if the Plan is not consummated in accordance with its terms prior to such date, Pillowtex would be required to obtain a further extension of the DIP Financing Facility or alternative financing. Pillowtex can provide no assurance that such an extension would be granted or that alternative financing would be available on acceptable terms. As a result of the Chapter 11 Cases and the circumstances leading to the filing thereof, Pillowtex's access to alternative financing in such a scenario would be very limited. Furthermore, in the event that cash flows, together with available borrowings under the DIP Financing Facility or alternative financing arrangements, are not sufficient to meet the Company's cash requirements, Pillowtex may be required to reduce planned capital expenditures; however, Pillowtex can provide no assurance that such reductions would be sufficient to cover any cash shortfalls. Management of the Debtors believes that, assuming consummation of the Plan in accordance with its terms and achievement of the Debtors' business plan and strategy, reorganized Pillowtex will have sufficient liquidity for the reasonably foreseeable future to service post-reorganization indebtedness and conduct its business as contemplated by the Debtors' business plan and strategy. F-23 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Fair Value The carrying and fair values of these financial instruments as of December 29, 2001 and December 30, 2000 are presented below. The fair values at December 29, 2001 were determined using the estimated recovery percentages included in the Disclosure Statement approved by the Bankruptcy Court on February 28, 2002 (see note 1). The recovery percentages are based on the estimated market prices of the New Common Stock and/or New Warrants and are subject to change. The fair values at December 30, 2000 were estimated by discounting the future cash flows using rates available at December 30, 2000 or obtaining market prices as of December 30, 2000.
2001 2000 ----------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ------- --------- ------- Revolver, less portion to be treated as post-petition debt $ 233,051 95,085 255,956 159,973 Overline Credit Facility 34,738 903 34,738 21,486 Term loans, less portion to be treated as post-petition debt 242,004 99,222 268,090 167,556 Portion of revolver and term loans to be treated as post- petition debt 150,000 150,000 117,179 117,179 Industrial revenue bonds and other debt 15,291 12,456 18,056 11,510 9% Senior Subordinated Notes due 2007 185,000 4,810 185,000 9,250 10% Senior Subordinated Notes due 2006 125,000 3,250 125,000 6,625 6% convertible subordinated sinking fund debentures due 2012 90,417 2,350 90,417 3,617 ---------- ------- --------- ------- Total $1,075,501 368,076 1,094,436 497,196 ========== ======= ========= =======
Scheduled Maturities Aggregate maturities of long-term debt for each of the five years following December 29, 2001 and thereafter, assuming the unpaid principal balance at December 29, 2001 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: Amount Year -------- 2002 $669,081 2003 7,781 2004 6,932 2005 6,273 2006 131,268 Thereafter 254,166 F-24 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) (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. 2001 2000 -------- ------- 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 2012 90,417 90,417 Other unsecured debt 2,270 -- -------- ------- Total long-term debt 402,687 400,417 -------- ------- Interest accrued on above notes and debentures 14,018 14,448 Accounts payable 51,266 55,322 Nonqualified pension plan liability 11,673 11,673 Liability for rejected contracts and leases 15,841 -- Other accrued expenses 5,355 10,233 -------- ------- $500,840 492,093 ======== ======= 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 the Plan or another plan of reorganization providing for the repayment terms has been confirmed by the Bankruptcy Court and becomes effective. Therefore, interest of $38.2 million on prepetition unsecured obligations has not been accrued after the Petition Date. (13) Income Taxes The components of income tax benefit are as follows: 2001 2000 1999 -------- ------- ------ U.S. federal - deferred $ -- (84,926) (2,355) State and foreign taxes - deferred -- (8,435) (385) -------- ------- ------ $ -- (93,361) (2,740) ======== ======= ====== F-25 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) A reconciliation of income tax benefit computed using the U.S. federal statutory income tax rate of 35% of loss from continuing operations before income taxes to the actual income tax benefit is as follows:
2001 2000 1999 -------- -------- -------- Expected tax benefit at U.S. statutory rate $(70,541) (84,263) (4,468) Amortization of goodwill 1,898 1,956 2,036 State and foreign taxes, net of federal effect (6,906) (11,598) (385) Change in valuation allowance 75,832 -- -- Other (283) 544 77 -------- -------- -------- $ -- (93,361) (2,740) ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of December 29, 2001 and December 30, 2000 are presented below: Deductible temporary differences & carryforwards: 2001 2000 --------- --------- Package design costs $ 258 72 Accrued employee benefits 12,565 11,865 State deferred income taxes -- 18,613 Accruals and allowances 17,250 19,363 Operating losses and credit carryforwards 220,316 98,774 Other 3,936 5,236 --------- --------- Total gross deferred tax assets 254,325 153,923 Less valuation allowance (115,925) (32,666) --------- --------- Net deferred tax assets 138,400 121,257 --------- --------- Taxable temporary differences: Inventory costs and reserves (38,696) (25,561) Depreciable assets (80,133) (72,338) State deferred income taxes (9,883) (13,613) Trademarks (9,688) (9,745) --------- --------- Total gross deferred tax liabilities (138,400) (121,257) --------- --------- Net deferred tax liabilities $ -- -- ========= ========= The table above includes net deferred tax assets of discontinued operations of $7.4 million and $32.7 million at December 29, 2001 and December 30, 2000, respectively, which have been completely offset by valuation allowances. At December 29, 2001, the Company has $536.0 million of federal and state operating loss carryforwards expiring 2006 through 2021, $2.0 million general business tax credit carryforward expiring 2005 through 2021 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 29, 2001 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. The net change in the valuation allowance for the year ended December 29, 2001 was an $83.3 million increase. F-26 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) (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 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 29, 2001. 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. Assuming consummation of the Plan in accordance with its terms, the Series A Preferred Stock will be cancelled without consideration. (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 29, 2001, there were 684,000 shares available for grant under the stock option plan. No stock options were granted during 2001. The per share weighted-average fair value of stock options granted in 2000 and 1999 was $2.52 and $6.46 respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2000 1999 ------- ------- Expected dividend yield 0.0% 0.0% Stock price volatility 60.51 46.53 Risk-free interest rate 6.33 5.35 Expected option term 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: F-27 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data)
2001 2000 1999 ---------------------------------------------- Loss available for common shareholders: As reported $ (239,119) (271,336) (31,826) Pro forma (240,434) (272,951) (33,410) Loss per share: As reported - basic and diluted $ (16.78) (19.04) (2.25) Pro forma - basic and diluted (16.87) (19.15) (2.36)
All options are granted at an exercise price not less than the fair market value of the common stock at the date of grant. The option period may not be more than ten years from the date the option is granted, and options generally vest over a four-year period. A summary of option activity during 1999, 2000, and 2001 follows (shares in thousands): Weighted average Shares exercise price ------ ---------------- 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 (296 shares exercisable) 1,042 20.80 Granted 506 4.38 Canceled (408) 5.44 ------ Outstanding at December 30, 2000 (387 shares exercisable) 1,140 15.03 Canceled (143) 16.90 ------ Outstanding at December 29, 2001 (564 shares exercisable) 997 $14.77 ====== The table below provides weighted average exercise prices and weighted average remaining contractual life of options outstanding at December 29, 2001, segregated based upon ranges of exercise prices. Options are presented in thousands.
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 - $4.32 340 110 $ 4.16 $ 4.20 8.34 $4.56 - $15.63 220 129 8.13 10.12 6.22 $15.88 - $31.81 265 196 21.16 20.58 6.19 $33.50 - $44.38 172 129 34.29 34.29 6.13
Assuming consummation of the Plan in accordance with its terms, all outstanding stock options will be cancelled without consideration. (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 $28.2 million, $33.3 million, and $27.6 million during 2001, 2000, and 1999, respectively. F-28 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) 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 - ---- ------- 2002 $20,046 2003 19,113 2004 18,321 2005 16,015 2006 13,122 Thereafter 6,386 At December 29, 2001, the Company had $43.1 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 consolidated 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 largest individual customer, including its affiliated entities, accounted for approximately 31.2%, 20.1%, and 16.8% in 2001, 2000, and 1999, respectively. No other customer accounted for 10% or more of the Company's sales. 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 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 two major divisions that it considers operating segments: (1) Bed and Bath and (2) Pillow and Pad. The Bed and Bath Division manufactures and sells sheets and other fashion bedding textiles, as well as towels, bath rugs, and kitchen textile products. The Pillow and Pad Division manufactures and sells bed pillows, down comforters, and mattress pads. On September 6, 2001, the Company sold the majority of the inventory and fixed assets associated with its Blanket Division, which F-29 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) manufactured and sold blanket products (see note 5). Other includes the Company's retail stores, corporate activities, and the remaining assets associated with the Blanket Division. 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. Information about the Company's divisions is presented below:
Year ended December 29, 2001 ------------------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ------------------------------------------------------- Net sales $ 756,234 252,919 21,902 1,031,055 Gross profit (loss) 39,672 34,630 (35,787) 38,515 Depreciation & amortization 38,437 3,370 11,978 53,785 Total assets 820,871 133,803 132,953 (2) 1,087,627 Capital expenditures 5,967 841 6,024 12,832 Year ended December 30, 2000 ------------------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ------------------------------------------------------- Net sales $ 942,604 286,666 29,734 1,259,004 Gross profit (loss) (3) 61,825 28,452 (53,845) 36,432 Depreciation & amortization 42,031 2,886 12,800 57,717 Total assets 983,983 117,371 234,415 (2) 1,335,769 Capital expenditures 22,884 899 9,414 (4) 33,197 Year ended January 1, 2000 ------------------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ------------------------------------------------------- Net sales $1,095,344 303,969 33,121 1,432,434 Gross profit (loss) 165,608 59,694 (34,771) 190,531 Depreciation & amortization 40,801 3,093 8,047 51,941 Total assets 1,147,531 139,250 384,995 (2) 1,671,776 Capital expenditures 46,815 1,544 41,378 (4) 89,737
(1) Includes retail stores and miscellaneous Corporate activities, including the Company's central information technology, manufacturing, human resource, and purchasing departments. (2) Corporate amounts include primarily data processing equipment and software and other enterprise wide assets not allocated to the segments. Also includes net assets of discontinued operations of $1.4 million, $46.8 million, and $182.6 million in 2001, 2000, and 1999, respectively. (3) Includes inventory write-downs of $39.8 million in the Bed and Bath Division, $8.2 million in the Pillow and Pad Division, and $1.5 million in Other. (4) Includes capital expenditures for discontinued operations of $0.7 million and $6.2 million in 2000 and 1999, respectively. F-30 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) The Company's principal geographic market is North America, primarily the United States. Pillowtex's current international business is concentrated in Canada, but the Company also sells its products in other foreign markets, including Asia, Australia, Europe, Mexico, and South America. Sales outside the United States accounted for approximately 2% of total sales in 2001, 5% in 2000 and 6% in 1999. (19) Selected Quarterly Financial Data (Unaudited) The following tables present unaudited financial data of the Company for each quarter of 2001 and 2000.
2001 quarter ended -------------------------------------------------------- March 31 June 30 September 29 December 29 --------- ------- ------------ ----------- Net sales $ 278,925 237,135 271,395 243,600 Gross profit (loss) 7,492 (1,503) 12,433 20,093 Net loss (48,227) (80,676) (43,689) (50,169) Loss per common share - basic and diluted (3.64) (9.56) (3.39) (3.83) 2000 quarter ended -------------------------------------------------------- April 1 July 1 September 30 December 30 --------- ------- ------------ ----------- Net sales $ 324,419 323,868 330,391 280,326 Gross profit (loss) 41,430 40,815 30,382 (76,195) Net loss (9,727) (6,118) (16,268) (230,295) Loss per common share - basic and diluted (0.82) (0.57) (1.29) (16.36)
(20) Reorganization Items The Company recognized the following items as reorganization items in the statement of operations: 2001 2000 -------- ------ Professional fees and other costs associated with the Chapter 11 Cases $ 17,169 1,840 Retention incentive plan 5,393 -- Rejected contracts and lease agreements 10,360 -- Deferred financing fees associated with unsecured debt -- 17,528 Gain on renegotiated lease (118) -- Interest income on investments (1,403) -- -------- ------ $ 31,401 19,368 ======== ====== Professional Fees. During 2001, the Company paid approximately $14.4 million in professional fees associated with the Chapter 11 Cases. Key Employee Retention Program. To stabilize employee relations, the Company developed a key employee retention plan (the "Retention Plan"), which the Bankruptcy Court approved on March 6, 2001. The F-31 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Retention Plan is designed to, among other things, ensure that the employees most critical to the Company's reorganization efforts are provided with sufficient economic incentives and protections to remain with the Company and fulfill their responsibilities through the successful conclusion of the Chapter 11 Cases. The Retention Plan consists of three separate components: (a) a retention incentive plan (the "Retention Incentive Plan"), (b) an emergence performance bonus plan, (the "Emergence Performance Bonus Plan"), and (c) an employee severance plan (the "Severance Plan"). Under the Retention Incentive Plan, each eligible employee earns a specified retention incentive payment (the "Retention Incentive Payment"), based upon a percentage of his or her salary as determined by the Company's management, if the employee remains actively employed by the Company on the specified dates. Under the Retention Incentive Plan: (a) 25% of the total Retention Incentive Payment (approximately $1.5 million) was paid on April 9, 2001, (b) 25% of the total Retention Incentive Payment (approximately $1.5 million) was paid on November 14, 2001, (c) 25% of the total Retention Incentive Payment is to be paid on the earlier of (i) six months after the second payment is made or (ii) confirmation of a plan of reorganization, and (d) 25% of the total Retention Incentive Payment is to be paid 30 days following confirmation of a plan of reorganization. The Company currently estimates the total cost of the Retention Incentive Plan to be approximately $6.1 million. In addition, a discretionary retention pool of $500,000 is available for non-union employees not included in the Retention Incentive Plan. The Emergence Performance Bonus Plan provided an additional incentive payment to certain management employees considered essential to the implementation of the Company's restructuring to encourage them to remain with the Company through the plan of reorganization negotiation and confirmation process. Payments under the Emergence Performance Bonus Plan were tied directly to the amount of the distribution made under a confirmed plan of reorganization to unsecured creditors and length of the Reorganization Cases. Under the current circumstances, the Company does not anticipate making any payments of emergence bonuses under the Retention Plan. The purpose of the Severance Plan is to consolidate all severance agreements existing prior to the Petition Date into one severance plan, which supersedes all prior severance plans and the severance provisions of executives' employment arrangements. The Severance Plan covers all full-time employees of the Company, the majority of whom are not eligible to participate in any other components of the Retention Plan. With certain exceptions, under the Severance Plan, employees who are terminated for reasons other than death, disability, retirement or cause, are eligible to receive severance benefits equal to one week's salary for each completed year of service, with a minimum benefit of two weeks' salary and a maximum of 26 weeks' salary. In addition, eligible employees are entitled to receive medical insurance, life insurance and certain other benefits. Rejected Contracts and Leases. The Debtors are in the process of reviewing their executory contracts and unexpired leases and have received approval from the Bankruptcy Court to reject certain contracts and leases. The Debtors cannot presently determine the ultimate liability for all contracts and leases that will be approved by the Bankruptcy Court for rejection. During 2001, the Company accrued $15.8 million for the estimated prepetition liability for those contracts and leases the Bankruptcy Court has already approved for rejection. Approximately $10.3 million of the prepetition liability relating to the rejected contracts and leases have been reflected as reorganization items, and the remaining $5.5 million has been included in the loss from discontinued operations in the accompanying statement of operations for 2001. The Company expects to accrue additional liabilities as more contracts and leases are approved for rejection by the Bankruptcy Court. (21) Recently Issued Accounting Standards In 2000, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) issued EITF No. 00-14, "Accounting for Certain Sales Incentives", which the Company was required to adopt at the beginning of fiscal 2001. The Company was already in compliance with the accounting guidance prescribed in EITF No. 00-14, and as a result, the adoption of EITF No. 00-14 had no impact on the Company's financial position or results of operations. The EITF also issued EITF No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products and Services to be Delivered in the Future", and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" (collectively, the "EITFs"), which address various aspects of accounting for consideration given by a vendor to a customer or a reseller of products. The F-32 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) Company is required to adopt the provisions of the EITFs as of the beginning of fiscal 2002, which commenced December 30, 2001. The EITFs will require the Company to classify all consideration paid to customers as a reduction to revenue. Prior to December 30, 2001, the Company classified amounts paid to customers for co-operative advertising and marketing in selling, general, and administrative expenses. If the Company had adopted these EITFs in 2001, approximately $19.0 million of selling, general, and administrative expense would have been reclassified as a reduction of net sales. In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, and specifies criteria for the recognition and reporting of intangible assets apart from goodwill. Under SFAS No. 142, beginning in fiscal 2002, which commences December 30, 2001, the Company will no longer amortize goodwill and intangible assets with indefinite lives, but instead will test those assets for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. The Company is required to adopt SFAS No. 142 as of December 30, 2001. If the Company had adopted SFAS No. 142 in 2001, selling, general, and administrative expenses would have decreased by $6.3 million, representing the amortization expense recognized on the Company's goodwill and trademarks. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment of a business (as previously defined in Opinion 30). SFAS No. 144 also retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The Company is required to adopt SFAS No. 144 as of December 30, 2001. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, the Company cannot presently determine the effects that adoption of SFAS No. 144 will have on the Company's financial statements. (22) Subsequent Events (Unaudited) On February 28, 2002, the Company announced the closure of the towel finishing operations in Phenix City, Alabama and Columbus, Georgia. The facilities are estimated be closed by June 1, 2002 and will impact approximately 980 employees. The majority of the goods produced at the plants will be produced at an existing facility in Kannapolis, North Carolina and the remaining items will be purchased from other suppliers. The Company currently expects to recognize a restructuring charge between $3.0 million and $3.5 million in the first quarter of 2002 for severance and related benefits associated with the terminated employees. In addition, the Company believes it will incur a charge for impairment of long-lived assets for the real property and machinery and equipment associated with the facilities. Appraisals of the assets are currently in process, and the resulting write-downs of these long-lived assets are not presently known. F-33 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data) (23) Supplemental Condensed Consolidating Financial Information (Unaudited) The following is summarized condensed consolidating financial information for Pillowtex, segregating Pillowtex (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 29, 2001 ----------------------------------------------------------------------------- Guarantor Non-Guarantor Financial Position Parent Subsidiaries Subsidiaries Elimination Consolidated -------------------------- ----------------------------------------------------------------------------- Assets: Trade receivables $ -- 140,489 4,238 -- 144,727 Receivables from affiliates 773,297 -- -- (773,297) -- Inventories -- 197,167 3,411 -- 200,578 Other current assets -- 55,427 476 -- 55,903 --------- --------- ------ -------- ---------- Total current assets 773,297 393,083 8,125 (773,297) 401,208 Property, plant and equipment, net 38 452,714 688 -- 453,440 Intangibles 1,131 218,460 2,138 -- 221,729 Other assets 29,691 4,305 -- (22,746) 11,250 --------- --------- ------ -------- ---------- Total assets 804,157 1,068,562 10,951 (796,043) 1,087,627 ========= ========= ====== ======== ========== Liabilities and shareholders' deficit: Liabilities not subject to compromise: Accounts payable and accrued liabilities 41,859 52,775 322 -- 94,956 Payables to affiliates -- 765,228 8,069 (773,297) -- Other current liabilities -- 356 -- -- 356 Long-term debt in default 659,793 12,020 -- -- 671,813 --------- --------- ------ -------- ---------- Total current liabilities 701,652 830,379 8,391 (773,297) 767,125 Noncurrent liabilities -- 49,595 -- -- 49,595 --------- --------- ------ -------- ---------- Total liabilities not subject to compromise 701,652 879,974 8,391 (773,297) 816,720 Liabilities subject to compromise 332,438 168,402 -- -- 500,840 Redeemable convertible preferred stock 99,185 -- -- -- 99,185 Shareholders' equity (deficit) (329,118) 20,186 2,560 (22,746) (329,118) --------- --------- ------ -------- ---------- Total liabilities and shareholders' equity (deficit) $ 804,157 1,068,562 10,951 (796,043) 1,087,627 ========= ========= ====== ======== ========== December 30, 2000 ---------------------------------------------------------------------------------- Guarantor Non-Guarantor Financial Position Parent Subsidiaries Subsidiaries Elimination Consolidated -------------------------- ---------------------------------------------------------------------------------- Assets: Trade receivables -- 181,173 7,891 -- 189,064 Receivables from affiliates 787,590 -- -- (787,590) -- Inventories -- 255,257 6,888 -- 262,145 Other current assets -- 94,890 809 -- 95,699 ---------- --------- ------- ---------- ---------- Total current assets 787,590 531,320 15,588 (787,590) 546,908 Property, plant and equipment, net 320 524,686 984 -- 525,990 Intangibles 6,622 224,652 2,206 -- 233,480 Other assets 214,090 53,914 -- (238,613) 29,391 ---------- --------- ------- ---------- ---------- Total assets 1,008,622 1,334,572 18,778 (1,026,203) 1,335,769 ========== ========= ======= ========== ========== Liabilities and shareholders' deficit: Liabilities not subject to compromise: Accounts payable and accrued liabilities 4,151 83,233 2,881 -- 90,265 Payables to affiliates -- 779,207 8,383 (787,590) -- Other current liabilities 984 32,369 (124) -- 33,229 Long-term debt in default 660,790 -- -- -- 660,790 ---------- --------- ------- ---------- ---------- Total current liabilities 665,925 894,809 11,140 (787,590) 784,284 Noncurrent liabilities -- 39,910 106 -- 40,016 ---------- --------- ------- ---------- ---------- Total liabilities not subject to compromise 665,925 934,719 11,246 (787,590) 824,300 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 1,334,572 18,778 (1,026,203) 1,335,769 ========== ========= ======= ========== ==========
F-34 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data)
Years ended --------------------------------------------------------------------------------- December 29, 2001 --------------------------------------------------------------------------------- Guarantor Non-Guarantor Results of Operations Parent Subsidiaries Subsidiariez Eliminations Consolidated - ------------------------------------- --------------------------------------------------------------------------------- Net sales $ -- 1,040,305 15,872 (25,122) 1,031,055 Cost of goods sold -- 998,427 19,235 (25,122) 992,540 --------------------------------------------------------------------------------- Gross profit (loss) -- 41,878 (3,363) -- 38,515 Selling, general, and administrative expenses (6,804) 97,970 1,109 -- 92,275 Impairment of long-lived assets -- 40,961 -- -- 40,961 Restructuring charges -- 10,594 165 -- 10,759 --------------------------------------------------------------------------------- Earnings (loss) from operations 6,804 (107,647) (4,637) -- (105,480) Equity in earnings (loss) of subsidiaries (215,867) -- -- 215,867 -- Interest expense (income) (17,238) 80,229 335 -- 63,326 --------------------------------------------------------------------------------- Earnings (loss) from continuing operations before reorganization items and income taxes (191,825) (187,876) (4,972) 215,867 (168,806) Reorganization items 30,936 465 -- -- 31,401 --------------------------------------------------------------------------------- Earnings (loss) from continuing operations before income tax (222,761) (188,341) (4,972) 215,867 (200,207) Income taxes -- -- -- -- -- --------------------------------------------------------------------------------- Net earnings (loss) from continuing operations (222,761) (188,341) (4,972) 215,867 (200,207) Loss from discontinued operations -- (22,554) -- -- (22,554) --------------------------------------------------------------------------------- Net loss (222,761) (210,895) (4,972) 215,867 (222,761) Preferred dividends and accretion 16,358 -- -- -- 16,358 --------------------------------------------------------------------------------- Earnings (loss) available for common shareholders $(239,119) (210,895) (4,972) 215,867 (239,119) ================================================================================= Years ended --------------------------------------------------------------------------------- December 30, 2000 --------------------------------------------------------------------------------- Guarantor Non-Guarantor Results of Operations Parent Subsidiaries Subsidiariez Eliminations Consolidated - ------------------------------------- --------------------------------------------------------------------------------- Net sales -- 1,271,160 26,236 (38,392) 1,259,004 Cost of goods sold -- 1,231,600 29,364 (38,392) 1,222,572 --------------------------------------------------------------------------------- Gross profit (loss) -- 39,560 (3,128) -- 36,432 Selling, general, and administrative expenses (2,306) 127,727 932 -- 126,353 Impairment of long-lived assets -- 24,400 -- -- 24,400 Restructuring charges -- -- -- -- -- --------------------------------------------------------------------------------- Earnings (loss) from operations 2,306 (112,567) (4,060) -- (114,321) Equity in earnings (loss) of subsidiaries (245,609) -- -- 245,609 -- Interest expense (income) 15,259 90,751 1,052 -- 107,062 --------------------------------------------------------------------------------- Earnings (loss) from continuing operations before reorganization items and income taxes (258,562) (203,318) (5,112) 245,609 (221,383) Reorganization items 8,380 10,988 -- -- 19,368 --------------------------------------------------------------------------------- Earnings (loss) from continuing operations before income tax (266,942) (214,306) (5,112) 245,609 (240,751) Income taxes (4,534) (88,827) -- -- (93,361) --------------------------------------------------------------------------------- Net earnings (loss) from continuing operations (262,408) (125,479) (5,112) 245,609 (147,390) Loss from discontinued operations -- (115,018) -- -- (115,018) --------------------------------------------------------------------------------- Net 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) ================================================================================= Year Ended January 1, 2000 --------------------------------------------------------------------------------- Guarantor Non-Guarantor Results of Operations Parent Subsidiaries Subsidiariez Eliminations Consolidated - ------------------------------------- --------------------------------------------------------------------------------- Net sales -- 1,414,638 25,902 (8,106) 1,432,434 Cost of goods sold -- 1,225,100 24,909 (8,106) 1,241,903 -------------------------------------------------------------------------------- Gross profit -- 189,538 993 -- 190,531 Selling, general, and administrative expenses (5,477) 118,641 856 -- 114,020 Impairment of long-lived assets -- 2,000 -- -- 2,000 Restructuring charges -- -- -- -- -- -------------------------------------------------------------------------------- Earnings (loss) from operations 5,477 68,897 137 -- 74,511 Equity in earnings (loss) of subsidiaries (21,793) -- -- 21,793 -- Interest expense (income) 1,998 85,301 (20) -- 87,279 -------------------------------------------------------------------------------- Earnings (loss) from continuing operations before reorganization items and income taxes (18,314) (16,404) 157 21,793 (12,768) Reorganization items -- -- -- -- -- -------------------------------------------------------------------------------- Earnings (loss) from continuing operations before income tax (18,314) (16,404) 157 21,793 (12,768) Income taxes 1,218 (3,881) (77) -- (2,740) -------------------------------------------------------------------------------- Net earnings (loss) from continuing operations (19,532) (12,523) 234 21,793 (10,028) Loss from discontinued operations -- (9,504) -- -- (9,504) -------------------------------------------------------------------------------- Net 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) ===============================================================================
F-35 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements December 29, 2001 and December 30, 2000 (Tables in thousands of dollars, except for per share data)
Years Ended ------------------------------------------------------------------------ December 29, 2001 ------------------------------------------------------------------------ Guarantor Non-Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------ Net cash provided by (used in) operating activities $ 4,117 30,010 724 -- 34,851 Net cash provided by discontinued operations -- 3,365 -- -- 3,365 Net cash provided by (used in) investing activities (4,117) 7,185 (158) -- 2,910 Net cash provided by (used in) financing activities -- (32,354) (566) -- (32,920) --------------------------------------------------------------------- Net change in cash and cash equivalents -- 8,206 -- -- 8,206 Cash and cash equivalents at beginning of year -- 32,182 -- -- 32,182 --------------------------------------------------------------------- Cash and cash equivalents end of year $ -- 40,388 -- -- 40,388 ===================================================================== Years Ended ---------------------------------------------------------------------- December 30, 2000 ---------------------------------------------------------------------- Guarantor Non-Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------------------------------------------------------------------- Net cash provided by (used in) operating activities (15,259) 40,942 231 -- 25,914 Net cash provided by discontinued operations -- 9,072 -- -- 9,072 Net cash provided by (used in) investing activities -- (28,045) (227) -- (28,272) Net cash provided by (used in) financing activities 15,259 5,355 (4) -- 20,610 ------------------------------------------------------------------ Net change in cash and cash equivalents -- 27,324 -- -- 27,324 Cash and cash equivalents at beginning of year -- 4,858 -- -- 4,858 ------------------------------------------------------------------ Cash and cash equivalents end of year -- 32,182 -- -- 32,182 ================================================================== Years ended ------------------------------------------------------------------------- January 1, 2000 ------------------------------------------------------------------------- Guarantor Non-Guarantor Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------------------------------------------- Net cash provided by (used in) operating activities (32,752) 38,307 (7,886) -- (2,331) Net cash provided by discontinued operations -- 11,869 -- -- 11,869 Net cash provided by (used in) investing activities 98 (83,569) (115) -- (83,586) Net cash provided by (used in) financing activities 32,654 32,697 7,994 -- 73,345 ---------------------------------------------------------------------- Net change in cash and cash equivalents -- (696) (7) -- (703) Cash and cash equivalents at beginning of year -- 5,554 7 -- 5,561 ---------------------------------------------------------------------- Cash and cash equivalents end of year -- 4,858 -- -- 4,858 ======================================================================
F-36 PILLOWTEX CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Schedule II - Valuation and Qualifying Accounts Years ended December 29, 2001, December 30, 2000 and January 1, 2000 (dollars in thousands)
Additions Deductions ------------------------------ ------------ Balance at Balance at beginning of Charged to Charged to Write-offs/ end period Expense Other Accounts Recoveries of period ------------ ------------ ------------ ------------ ------------ Allowance for: Returns & Allowances and Doubtful Accounts Year ended 2001 $ 40,897 $ 19,404 -- $ 51,025 (1) $ 9,276 ============ ============ ============ ============ ============ Year ended 2000 $ 31,897 $ 51,138 -- $ 42,138 (1) $ 40,897 ============ ============ ============ ============ ============ Year ended 1999 $ 19,891 $ 44,169 -- $ 32,163 (1) $ 31,897 ============ ============ ============ ============ ============ Inventory reserves: Year ended 2001 $ 46,699 $ 33,826 -- $ 69,008 $ 11,517 ============ ============ ============ ============ ============ Year ended 2000 $ 12,641 $ 53,947 -- $ 19,889 $ 46,699 ============ ============ ============ ============ ============ Year ended 1999 $ 13,478 $ 9,562 -- $ 10,399 $ 12,641 ============ ============ ============ ============ ============
(1) Accounts written off, less recoveries S-1 EX-3.3 3 dex33.txt AMENDMENTS TO THE PILLOWTEX CORP. BYLAWS Exhibit 3.3 AMENDMENTS TO THE PILLOWTEX CORPORATION BYLAWS * * * The following amendments to the Amended and Restated Bylaws of Pillowtex Corporation (the "Bylaws") were approved by the Board of Directors of Pillowtex Corporation on November 5, 2001: 1. The first sentence of Article III, Section 6 of the Bylaws was amended to read in its entirety as follows: "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." 2. The first sentence of Article III, Section 11 of the Bylaws was amended to read in its entirety as follows: "At all meetings of the Board of Directors, the presence of one-third 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." -1- EX-10.29 4 dex1029.txt FOURTH AMENDMENT TO POST-PETITION CR. AGRMT EXHIBIT 10.29 FOURTH AMENDMENT TO POST-PETITION CREDIT AGREEMENT THIS FOURTH AMENDMENT TO POST-PETITION CREDIT AGREEMENT (this "Amendment"), --------- dated to be effective as of November 14, 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 entirely amending the definitions of ----------- "Applicable Margin", "EBITDA", "Scheduled Termination Date" and "Total Credit Commitment" and adding a new definition of "Operational Restructuring Costs" as follows: "Applicable Margin": a per annum percentage equal to (a) 4.00% ----------------- with respect to Eurodollar Loans and (b) 1.50% for Base Rate Loans. "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 or accruals for Operational Restructuring Costs, to the extent not captured in (d), (e), or (f) above. "Operational Restructuring Costs" for any period, on a ------------------------------- consolidated basis for the Borrowers and their Subsidiaries the costs related to the permanent closure of a facility or facilities and the relocation of the production to an alternative facility or facilities to the extent included in determining Earnings from Operations consisting of the sum of (a) payment or accruals for severance and benefit continuation, plus (b) payment or accruals for employee retention bonuses, plus (c) expenses incurred to relocate equipment from a closed facility or facilities to an alternative manufacturing location or locations, plus (d) payments or accruals to resolve any environmental issues related to a closed facility or facilities, plus (e) employee training costs for the relocated equipment, plus (f) increased quality costs due to the start-up of production at the new facility or facilities and the phase-down of production at the closed facility or facilities, plus (g) increased labor and workers compensation costs during the phase-down of production at the closed facility or facilities, plus (h) payments or accruals for a general reduction in force. "Scheduled Termination Date": June 30, 2002. -------------------------- "Total Credit Commitment": $100,000,000 (which amount includes ----------------------- the Letter of Credit Commitment), as such sum may be reduced from time to time. -2- (b) Section 2.5(b) is entirely amended, as follows: -------------- (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) 0.75%, 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) Section 2.5(c) is amended by entirely amending and -------------- restating clause (i) thereof, 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 4.0% per annum on the aggregate undrawn and available amount under all outstanding Letters of Credit; and (d) Section 8.15 is entirely amended, as follows: ------------ Section 8.15 Capital Expenditures. Make Capital -------------------- Expenditures in excess of (a) $17,000,000 in the aggregate from November 14, 2001 through the Scheduled Termination Date, and (b) $9,000,000 in the aggregate during any fiscal quarter. (e) 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, plus (v) asset write-downs during the fourth fiscal quarter of 2001 attributable to the permanent closure of certain facilities, which do not exceed $14,000,000 in the aggregate, to (b) the outstanding principal amount of all Pre-Petition Indebtedness and the Obligations, to be less than the ratios set forth below during the periods set forth below, measured twice monthly pursuant to the reporting requirements set forth in Section 7.1: -3-
Period Minimum Ratio ------ ------------- September 30, 2001 through October 31, 2001 1.21 to 1.00 November 1, 2001 through December 31, 2001 1.20 to 1.00 January 1, 2002 through March 31, 2002 1.17 to 1.00 April 1, 2002 through June 30, 2002 1.15 to 1.00
(f) Section 8.17 is entirely amended, as follows: ------------ 8.17 EBITDA. Allow EBITDA for the periods set forth ------ below to be less than the amount set forth opposite each such period: Period Amount ------ ------ 1 fiscal month ended 11/3/01 $ 1,065,000 2 fiscal months ended 12/1/01 $ 1,256,000 3 fiscal months ended 12/29/01 $ 3,286,000 4 fiscal months ended 2/2/02 $ 4,164,000 5 fiscal months ended 3/2/02 $ 6,636,000 6 fiscal months ended 3/30/02 $10,566,000 7 fiscal months ended 5/4/02 $12,244,000 8 fiscal months ended 6/1/02 $14,299,000 9 fiscal months ended 6/29/02 $19,831,000 (g) A new Section 8.18 is added immediately following ------------ Section 8.17, as follows: ------------ Section 8.18 Restructuring Costs. Permit Operational ------------------- Restructuring Costs incurred and/or paid for the periods set forth below to be greater than the amount set forth opposite each such period: Period Amount ------ ------ 3 fiscal months ended 12/29/01 $7,000,000 6 fiscal months ended 3/30/02 $8,000,000 9 fiscal months ended 6/29/02 $9,000,000 (h) Section 10.3 is amended by inserting the text, ------------ "financial advisors," immediately following the text, "agents," found in such Section 10.3. ------------ (i) Section 11.1 is amended by deleting the word, "and", ------------ immediately following the semi-colon in clause (b) thereof, deleting ---------- the period (".") at the end of clause (c) thereof and replacing it with ---------- the text, "; and", and adding a new clause (d) to such Section 11.1 ---------- ------------ immediately following clause (c) thereof, as follows: ---------- -4- (d) no such waiver and no such amendment, supplement or modification shall amend, modify or waive any provision of Section 8.16 without the written consent of Lenders on the date of such waiver, amendment, supplement or modification having Credit Exposures aggregating in excess of 66 2/3% of the aggregate Credit Exposures of all Lenders on such date. 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, November 14, 2001, an amendment fee in an amount equal to the product of (a) 0.50% 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 ------- 6 of this Amendment have been satisfied 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 6 of this Amendment have --------- been satisfied. The Borrowers agree 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. ADDITIONAL EVENTS OF DEFAULT. Notwithstanding anything in the ---------------------------- DIP Financing Documents to the contrary, it will constitute an immediate Event of Default (with no grace or cure period) if the Parent Corporation shall fail to (a) file, on or prior to December 31, 2001, a feasible plan of reorganization and disclosure statement, substantially complete in form and substance, that complies with all applicable provisions of Chapter 11 of the Bankruptcy Code, including Section 1129(a)(9), and provides for the cash payment, in full, of all outstanding DIP Loans, the replacement or liquidation of all Letters of Credit, and the cash payment of all administrative expenses, (b) obtain, on or prior to March 1, 2002, the Bankruptcy Court's approval of a disclosure statement, (c) obtain confirmation from the Bankruptcy Court of a plan on or prior to May 15, 2002, or (d) cause a plan to become effective on or prior to June 30, 2002 (each, a "Plan Default"). ------------ 4. WAIVER FEE REGARDING PLAN DEFAULTS. Notwithstanding anything ---------------------------------- in the DIP Financing Documents to the contrary, waiver of any Plan Default will require approval of the Required Lenders and the Borrowers' payment of a fee, for the pro rata benefit of the Lenders that timely execute and deliver the waivers to the Administrative Agent (or its counsel), equal to 0.50% of an amount equal to each such Lender's portion of the Total Credit Commitment at the time of such waiver. 5. REPRESENTATIONS AND WARRANTIES. By its execution and delivery ------------------------------ hereof, the Borrowers represent and warrant to the Lenders that, as of the date hereof: (a) 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; -5- (b) no event has occured 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. 6. CONDITIONS OF EFFECTIVENESS. This Amendment shall be effective only --------------------------- after each of the following conditions precedent shall have been satisfied; provided that the Lenders hereby waive satisfaction of the conditions set forth - -------- ---- in clauses (b) and (c) below until such time as the Bankruptcy Court shall have ---------- --- the opportunity to consider this Amendment, and if the Bankruptcy Court does not approve this Amendment after such consideration, then this Amendment shall be null and void and of no further force or effect, and provided further that the -------- ------- ---- Lenders shall have no commitment to fund DIP Loans, and Issuing Bank shall not issue Letters of Credit, during the period commencing on the date hereof and continuing through and including the date the Bankruptcy Court considers this Amendment: (a) the Administrative Agent shall receive counterparts of this Amendment executed by the Lenders and the Borrowers; (b) Borrowers shall pay the Amendment Fee; (c) the Bankruptcy Court shall enter an order approving this Amendment, which order must also contain a clarification that proceeds from the liquidation of accounts receivable and inventory of Borrowers' blankets division shall be applied to payment of the Pre-Petition Indebtedness; (d) the representations and warranties set forth in Section 5 of this --------- Amendment shall be true and correct; and -6- (e) 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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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 ================================================================================ -7- 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: _________________________ Name:____________________ Title:___________________ Fourth Amendment to Post Petition Credit Agreement Signature Page ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent, Issuing Bank and a Lender By: ________________________________ William E. Livingstone, IV Managing Director Fourth Amendment to Post Petition Credit Agreement Signature Page LENDERS: THE BANK OF NOVA SCOTIA GOLDMAN SACHS CREDIT PARTNERS L.P. By: ___________________________________ By: ______________________________ Name:__________________________________ Name:_____________________________ Title:_________________________________ Title:____________________________ CREDIT LYONNAIS - NEW YORK BRANCH LEHMAN COMMERCIAL PAPER, INC. By: ___________________________________ By: ______________________________ Name:__________________________________ Name:_____________________________ Title:_________________________________ Title:____________________________ PB CAPITAL CORPORATION FLEET NATIONAL BANK, (formerly known as Fleet Bank, N.A.) By: ______________________________ By: ___________________________________ Name:_____________________________ Name:__________________________________ Title:____________________________ Title:_________________________________ FRANKLIN FLOATING RATE TRUST By: ______________________________ Name:_____________________________ By: ___________________________________ Title:____________________________ Name:__________________________________ Title:_________________________________ GENERAL ELECTRIC CAPITAL CORPORATION By: Fourth Amendment to Post Petition Credit Agreement Signature Page Name:__________________________________________ Title:_________________________________________ OCM ADMINISTRATIVE SERVICES II, L.L.C. By Oaktree Capital Management, LLC, Its Manager By: ___________________________________________ Name:__________________________________________ Title:_________________________________________ By: ___________________________________________ Name:__________________________________________ Title:_________________________________________ FOOTHILL INCOME TRUST II, L.P. By: ___________________________________________ Name:__________________________________________ Title:_________________________________________ Fourth Amendment to Post Petition Credit Agreement Signature Page EX-10.30 5 dex1030.txt FIFTH AMENDMENT TO POST-PETITION CR. AGRMT EXHIBIT 10.30 FIFTH AMENDMENT TO POST-PETITION CREDIT AGREEMENT THIS FIFTH AMENDMENT TO POST-PETITION CREDIT AGREEMENT (this "Amendment"), --------- dated to be effective as of February 8, 2002, 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 7.1 is amended by deleting the word, "and", immediately ----------- following the semi-colon in clause (n) thereof, deleting the period (".") ---------- at the end of clause (o) thereof and replacing it with the text, "; and", ---------- and adding a new clause (p) to such Section 7.1 immediately following ---------- ----------- clause (o) thereof, as follows: --------- (p) as soon as practical, but in any event no later than 20 Business Days after the end of each fiscal month, a progress report in respect of the Borrowers' restructuring of their bath division, in form and detail satisfactory to the Administrative Agent, including without limitation details regarding major tasks accomplished, amount of cash used in connection therewith, and estimated time until completion of such restructure. (b) Section 8.15 is entirely amended, as follows: ------------ Section 8.15 Capital Expenditures. Make Capital Expenditures in -------------------- excess of (a) $17,000,000 in the aggregate from November 14, 2001 through the Scheduled Termination Date, and (b) $10,000,000 in the aggregate during any fiscal quarter. (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, plus (v) asset write-downs during the fourth fiscal quarter of 2001 attributable to the permanent closure of certain facilities, which do not exceed $14,000,000 in the aggregate, plus (vi) asset write-downs during the first and second quarters of 2002 attributable to the restructuring of the Borrowers' bath division, which do not exceed $44,000,000, to (b) the outstanding principal amount of all Pre-Petition Indebtedness and the Obligations, to be less than the ratios set forth below during the periods set forth below, measured twice monthly pursuant to the reporting requirements set forth in Section 7.1: Period Minimum Ratio ------ ------------- September 30, 2001 through October 31, 2001 1.21 to 1.00 November 1, 2001 through December 31, 2001 1.20 to 1.00 January 1, 2002 through March 31, 2002 1.17 to 1.00 April 1, 2002 through June 30, 2002 1.14 to 1.00 (d) Section 8.18 is entirely amended, as follows: ------------ Section 8.18 Restructuring Costs. Permit Operational Restructuring ------------------- Costs incurred and/or paid for the periods set forth below to be greater than the amount set forth opposite each such period: Period Amount ------ ------ -2- 3 fiscal months ended 12/29/01 $ 7,000,000 6 fiscal months ended 3/30/02 $ 8,000,000 9 fiscal months ended 6/29/02 $11,500,000 2. REPRESENTATIONS AND WARRANTIES. By its execution and delivery hereof, ------------------------------ the Borrowers represent and warrant to the Lenders that, as of the date hereof: (a) 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) 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. 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall be effective only --------------------------- after each of the following conditions precedent shall have been satisfied: (a) the Administrative Agent shall receive counterparts of this Amendment executed by the Lenders and the Borrowers; (b) the representations and warranties set forth in Section 2 of --------- this Amendment shall be true and correct; and (c) 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. -3- 4. 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. 5. 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. 6. 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. 7. 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. 8. 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. 9. 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: _______________________________________ Name:__________________________________ Title:_________________________________ ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent, Issuing Bank and a Lender By: ________________________________ William E. Livingstone, IV Managing Director LENDERS: THE BANK OF NOVA SCOTIA GOLDMAN SACHS CREDIT PARTNERS L.P. By: ____________________________________ By: ________________________________ Name:___________________________________ Name:_______________________________ Title:__________________________________ Title:______________________________ CREDIT LYONNAIS - NEW YORK BRANCH LEHMAN COMMERCIAL PAPER, INC. By: ____________________________________ By: ________________________________ Name:___________________________________ Name:_______________________________ Title:__________________________________ Title:______________________________ FLEET NATIONAL BANK, (formerly known as PB CAPITAL CORPORATION Fleet Bank, N.A.) By: ____________________________________ By: ________________________________ Name:___________________________________ Name:_______________________________ Title:__________________________________ Title:______________________________ By: ________________________________ Name:_______________________________ Title:______________________________ FRANKLIN FLOATING RATE TRUST By: ____________________________________ Name:___________________________________ Title:__________________________________ GENERAL ELECTRIC CAPITAL CORPORATION By: ___________________________ Name:______________________ Title:_____________________ OCM ADMINISTRATIVE SERVICES II, L.L.C. By: Oaktree Capital Management, LLC, Its Manager By: ___________________________ Name:______________________ Title:_____________________ By: ___________________________ Name:______________________ Title:_____________________ FOOTHILL INCOME TRUST II, L.P. By: ___________________________ Name:______________________ Title:_____________________ -7- EX-10.44 6 dex1044.txt EMPLOYMENT AGREEMENT - ANTHONY WILLIAMS Exhibit 10.44 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 1st day of April, 2001, is entered into by and between Pillowtex Corporation, a Texas corporation (the "Company"), and Anthony T. Williams ("Employee"). WHEREAS, the Company wishes to employ Employee, and Employee wishes to accept employment with the Company, on the terms and conditions set forth below; and WHEREAS, the Company is a debtor in a bankruptcy case under Chapter 11 of the United States Bankruptcy Code, Case Number 00-4211(SLR), pending in the United States Bankruptcy Court for the District of Delaware (the "Court"); and WHEREAS, the Company will implement the KERP (as defined below) pursuant to an Order Authorizing Debtors and Debtors in Possession to Implement Key Employee Retention Program and Severance Plan issued by the Court on March 6, 2001 (the "Order"). NOW THEREFORE, in consideration of the mutual covenants contained herein and for good and valuable consideration, including participation in the KERP, the receipt of which is hereby acknowledged, it is agreed as follows: ARTICLE 1 DEFINITIONS ----------- The following terms will have the respective meanings set forth below, unless the context clearly otherwise requires: 1.1 "Affiliate" means, with respect to the Company, any person or entity --------- that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. 1.2 "Cause" means the occurrence of any of the following: (a) Employee's ----- engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee's engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; and (c) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement. For purposes of this Section 1.2, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, the Company will provide Employee a written notice referencing this Section 1.2, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (c) of the first sentence of this Section 1.2, cure or cease and desist such conduct. 1.3 "Change in Control" means the occurrence of any of the following ----------------- events: (a) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (b) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of the Company; (d) during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this paragraph (d) each director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the directors of the Company (or a committee thereof) then still in office who were directors of the Company at the beginning of any such period will be deemed to have been a director of the Company at the beginning of such period; or (e) the Company's Chapter 11 case is converted into a case under Chapter 7 of the Bankruptcy Code. For purposes of this Section 1.3, the term "Excluded Person" means the Company; any entity in which the Company directly or indirectly owns 50% or more of the outstanding Voting Stock (a "Subsidiary"); or any employee benefit plan sponsored by the Company or any Subsidiary. Notwithstanding the foregoing provisions of this Section 1.3, (i) a Change in Control described in Section 1.3(c) will not occur solely by reason of the confirmation by the Bankruptcy Court of a plan of reorganization with respect to the Company pursuant to which the Company emerges from bankruptcy; and (ii) a merger, consolidation or reorganization of the Company effected in connection with the confirmation of such plan of reorganization will not be a Change 2 in Control described in Section 1.3(b) or Section 1.3(b) if such merger, consolidation or reorganization does not involve a sale of all or substantially all of the assets of the Company to an unrelated third party, including, for example, and not by way of limitation, a reincorporation of the Company in another jurisdiction. 1.4 "Effective Date" means the date of this Agreement. -------------- 1.5 "Good Reason" means the termination of Employee's employment by ----------- Employee after a Change in Control upon the occurrence of any of the following: (a) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with the Company as existing immediately prior to a Change in Control; a substantial alteration in the nature or status of Employee's position or responsibilities from those in effect immediately prior to a Change in Control; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control, or any removal of Employee from or failure to re-elect Employee to any such positions; (b) a reduction by the Company in Employee's base salary in effect immediately prior to a Change in Control; (c) the requirement by the Company that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; or (d) the taking of any action by the Company which would (i) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control or (ii) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control. 1.6 "KERP" means the Key Employee Retention Program and Severance Plan, as ---- approved by the Order, which consists of (i) a retention incentive plan, (ii) an emergence bonus plan and (iii) a severance plan. 1.7 "Trade Secrets" means proprietary and confidential information of the ------------- Company or any Affiliate consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information used in the operation of their businesses. 3 ARTICLE 2 EMPLOYMENT, COMPENSATION AND DUTIES ----------------------------------- 2.1 Employment. Subject to the terms of this Agreement, the Company agrees ---------- to employ Employee as its President and Chief Operating Officer. Employee will report to the Chief Executive Officer of the Company or, in the absence of a Chief Executive Officer, to the Chairman of the Board. Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina, subject to such travel as is consistent with the office of President and Chief Operating Officer. Employee and the Company agree that Employee is an at-will employee, and nothing contained in this Agreement will prevent Employee from terminating employment with the Company for any reason or for no reason or will prevent the Company from terminating Employee's employment with the Company for any reason or for no reason, subject to satisfaction of any applicable severance pay obligations under Section 3.1. 2.2 Compensation. Employee's annual base salary will be $400,000, payable ------------ in accordance with the Company's customary payroll practices and subject to increases in accordance with Company policy. 2.3 Duties. Employee will perform the customary duties of his position as ------ President and Chief Operating Officer plus such other duties as may reasonably be assigned to him from time to time by the Chief Executive Officer of the Company or, in the absence of a Chief Executive Officer, the Chairman of the Board. ARTICLE 3 BENEFITS -------- 3.1 KERP Benefits. Employee will be eligible to participate in the KERP, in ------------- accordance with its terms. In addition, in the event Employee's employment by the Company is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any Company-sponsored pension plan in which Employee participates or Cause, or in the event Employee terminates employment for Good Reason no later than six months after the occurrence of an event constituting Good Reason, the Company will pay to Employee a severance benefit calculated and payable as described below. Employee's severance benefit will be an amount (the "Severance Amount") equal to Employee's base salary then in effect for a period of 24 months, less the amount of any severance benefit payable to Employee under the KERP. The Severance Amount shall be paid to Employee in a single lump sum no later than five days after the termination of Employee's employment. In the event of any inconsistency between the provisions of this Section 3.1 and the KERP, the provisions of this Section 3.1 will control. 3.2 Other Employee Benefits. Employee and Employee's eligible dependents, ----------------------- as applicable, will be eligible for participation in and will receive all benefits to which they are entitled under the terms of the Company's other employee benefit plans, as in effect from time to time. 3.3 Stock Options. Employee will be eligible to participate in any stock ------------- option plan adopted by the Company and made available generally to its senior executives. 4 3.4 Vacation. Employee will be entitled to paid vacation in accordance -------- with Company policy in effect from time to time, or if greater, three weeks' vacation. 3.5 Term Life Insurance. The Company will provide Employee with a $500,000 ------------------- term life insurance policy. 3.6 Club Membership. The Company will reimburse Employee for the --------------- initiation fee of one country club membership within 50 miles of his home or Company office, as mutually agreed, in an amount not to exceed $25,000, and for club dues and other charges incidental to membership. All country club expenses incurred by Employee that are related to Company business will be reimbursed in accordance with the Company's customary expense reimbursement policy. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership to the Company; provided, however, that if Employee is terminated for any reason other than Cause, Employee shall be entitled to acquire the membership from the Company for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. 3.7 Automobile Allowance. The Company will provide Employee with an -------------------- automobile allowance of $1,000.00 per month. The Company will also reimburse Employee for mileage in accordance with Company policy. 3.8 Certain Tax Payments. The Company will make tax gross-up payments to -------------------- Employee in an amount that will be sufficient to cover the federal and state income taxes incurred by Employee as a result of the payments made under Section 3.6 and Section 3.7 (including federal and state income taxes incurred as a result of such gross-up payments). 3.9 Legal Fees. The Company will reimburse Employee for all legal fees and ---------- expenses he incurs in seeking to enforce or in defending his rights under this Agreement, including, but not limited to, fees and expenses identified in Section 5.3, without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no colorable claim of success. 3.10 Insurance. If Employee's employment is terminated so that Employee is --------- entitled to the severance benefit provided for in Section 3.1, Employee shall be entitled to participate, during the period in which severance is being paid to Employee pursuant to Section 3.1, in all employee benefit plans providing health, dental, life and disability benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law and provided further that Employee continues to make contributions, if any, in the same amounts as required immediately prior to the termination of Employee's employment. If Employee's participation in any such plan is not permitted for any reason, the Company shall arrange to provide Employee, at the Company's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. Employee's COBRA rights shall not begin to run until after the end of the severance period. 5 Furthermore, at the end of the severance period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. ARTICLE 4 CERTAIN OBLIGATIONS OF EMPLOYEE ------------------------------- 4.1 Trade Secrets. During the term of Employee's employment, the Company ------------- will provide Employee access to, and Employee will have access to and become familiar with, various Trade Secrets. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in the Company's industry; (b) are entrusted to Employee after being informed of their confidential and secret status by the Company or its Affiliates and because of the fiduciary position occupied by Employee with the Company; (c) have been developed by the Company and its Affiliates for and on behalf of the Company and its Affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give the Company and its Affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of the Company and its Affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company and its Affiliates. Employee will not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the term of Employee's employment or at any time thereafter, except as required in the course of Employee's employment. All files, records, documents, information, data and similar items relating to the business of the Company and its Affiliates, whether prepared by Employee or otherwise coming into Employee's possession, will remain the exclusive property of the Company and its Affiliates and will not be removed from the premises of the Company and its Affiliates under any circumstances without the prior written consent of the President of the Company (except in the ordinary course of business during Employee's period of employment), and in any event will be promptly delivered to the Company upon termination of Employee's employment with the Company and its Affiliates. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee will timely notify and promptly hand deliver a copy of the subpoena, process or other request to the President of the Company. 4.2 Return of Property. Employee agrees that, upon termination of ------------------ Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition, all property of the Company, including without limitation, the originals and all copies of all management, training, marketing and selling manuals; promotional materials; other training and instructional materials; financial information; vendor, owner, manager and product information; customer lists; other customer information; and all other selling, service and trade information and equipment. If such items are not returned, the Company will have the right to charge Employee for all reasonable damages, costs, attorneys' fees and other expenses incurred in searching for, taking, removing and/or recovering such property. 4.3 Noncompetition. Employee acknowledges and agrees that the training -------------- Employee will receive, the experience Employee will gain and the information Employee will acquire 6 regarding Trade Secrets while employed hereunder will enable Employee to injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company and its Affiliates. For these reasons, Employee hereby agrees that Employee will not, during the period of employment with the Company, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a competitor of the Company or any of its Affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by the Company or its Affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by the Company or its Affiliates within the United States, Canada and Mexico. 4.4 Nonsolicitation. During the period of employment with the Company and --------------- for a period of 12 months thereafter, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of the Company or its Affiliates to leave the employment of the Company or its Affiliates, nor will Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the employees of the Company or its Affiliates 4.5 Damages. Notwithstanding anything in this Agreement to the contrary, if ------- Employee breaches the covenants contained in this ARTICLE 4, the Company will have no further obligations to Employee pursuant to this Agreement and may recover from Employee all such damages to which it may be entitled at law or in equity. In addition, Employee acknowledges that any such breach may result in immediate and irreparable harm to the Company for which money damages are likely to be inadequate. Accordingly, the Company may seek whatever relief it determines to be appropriate to protect the Company's rights under this Agreement, including, without limitation, an injunction to prevent Employee from disclosing any trade secrets or confidential information concerning the Company to any person or entity, to prevent any person or entity from receiving from Employee or using any such trade secrets or confidential information and/or to prevent any person or entity from retaining or seeking to retain any other employees of the Company. Employee acknowledges good and sufficient consideration for the noncompetition and nonsolicitation covenants of this Section 4.5. 7 ARTICLE 5 MISCELLANEOUS ------------- 5.1 Assignment. This Agreement is personal in nature and neither of the ---------- parties hereto will, without the written consent of the other, assign, transfer or delegate this Agreement or any rights or obligations contained in this Agreement except as expressly provided in Secction 5.2. Without limiting the generality or effect of the foregoing, Employee's right to receive payments provided for in this Agreement will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution, and if Employee attempts any assignment or transfer contrary to this Section 5.1, the Company will have no liability to pay to any purported assignee any amount Employee attempts to assign, transfer or delegate. 5.2 Successors and Binding Agreement. -------------------------------- (a) The Company will require any successor to all or substantially all of the businesses or assets of the Company (whether direct or indirect, by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise) expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the businesses or assets of the Company whether by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise (and such successor will thereafter be deemed "the Company" for the purposes of this Agreement). (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. 5.3 Governing Law; Arbitration. This Agreement and all questions arising -------------------------- in connection with it will be governed by and construed in accordance with the laws of the State of North Carolina. Subject to the following sentence, all disputes arising out of, or in connection with this Agreement, which are not promptly settled by mutual agreement of the parties hereto, will be finally settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association, the cost of which will be borne by the party against whom an arbitration award is entered, specifically subject, however, to the provisions of Section 3.9. Notwithstanding anything herein to the contrary, the Company may, at its option, seek injunctive relief as contemplated in ARTICLE 4 either in lieu of or in addition to the arbitration remedies provided for in this Section 5.3. 5.4 Severability. If any portion of this Agreement is held to be invalid ------------ or unenforceable, such holding will not affect any other portion of this Agreement. 5.5 Entire Agreement. This Agreement comprises the entire agreement ---------------- between the parties hereto and, as of the Effective Date, supersedes any prior written or oral agreements between the parties, including, without limitation, the Employment Agreement in effect between 8 Employee and Pillowtex Management Services Company dated as of May 9, 2000. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 5.6 Notices. Any notice or consent required or permitted to be given ------- under this Agreement will be in writing and will be effective (a) when given by personal delivery, (b) one business day after being sent by overnight delivery service or (c) five business days after being sent by certified or registered mail, return receipt requested, to the Secretary of the Company at the Company's principal place of business or to Employee at the last known address of Employee as shown on the records of the Company. 5.7 Withholding Taxes. The Company may withhold from any amounts ----------------- payable under this Agreement all federal, state, provincial, city or other taxes or other amounts as will be required pursuant to any law or governmental regulation or ruling. 5.8 Court Approval. On March 6, 2001, the Bankruptcy Court entered an -------------- order authorizing the Company to implement the KERP (the "KERP Order"). The Company warrants that its execution of and performance under this Agreement does not violate or contradict the KERP Order, any provision of Title 11 of the United States Bankruptcy Code, any other applicable statutes, or any orders previously entered by the Bankruptcy Court in the Company's bankruptcy case. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. PILLOWTEX CORPORATION By:__________________________________________ Name: Don Mallo Title: Vice President - Human Resources EMPLOYEE ______________________________________________ Anthony T. Williams 10 EX-10.46 7 dex1046.txt EMPLOYMENT AGREEMENT - SCOTT SHIMIZU Exhibit 10.46 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 1st day of April, 2001, is entered into by and between Pillowtex Corporation, a Texas corporation (the "Company"), and Scott E. Shimizu ("Employee"). WHEREAS, the Company wishes to employ Employee, and Employee wishes to accept employment with the Company, on the terms and conditions set forth below; and WHEREAS, the Company is a debtor in a bankruptcy case under Chapter 11 of the United States Bankruptcy Code, Case Number 00-4211(SLR), pending in the United States Bankruptcy Court for the District of Delaware (the "Court"); and WHEREAS, the Company will implement the KERP (as defined below) pursuant to an Order Authorizing Debtors and Debtors in Possession to Implement Key Employee Retention Program and Severance Plan issued by the Court on March 6, 2001 (the "Order"). NOW THEREFORE, in consideration of the mutual covenants contained herein and for good and valuable consideration, including participation in the KERP, the receipt of which is hereby acknowledged, it is agreed as follows: ARTICLE 1 DEFINITIONS ----------- The following terms will have the respective meanings set forth below, unless the context clearly otherwise requires: 1.1 "Affiliate" means, with respect to the Company, any person or entity --------- that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. 1.2 "Cause" means the occurrence of any of the following: (a) Employee's ----- engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee's engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; and (c) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement. For purposes of this Section Error! Reference source not found., no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, the Company will provide Employee a written notice referencing this Section Error! Reference source not found., setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (c) of the first sentence of this Section Error! Reference source not found., providing Employee with a reasonable opportunity of not less than 15 days to cure or cease and desist such conduct. 1.3 "Change in Control" means the occurrence of any of the following ----------------- events: (a) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (b) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of the Company; (d) during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this paragraph (d) each director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the directors of the Company (or a committee thereof) then still in office who were directors of the Company at the beginning of any such period will be deemed to have been a director of the Company at the beginning of such period; or (e) the Company's Chapter 11 case is converted into a case under Chapter 7 of the Bankruptcy Code. For purposes of this Section 1.3, the term "Excluded Person" means the Company; any entity in which the Company directly or indirectly owns 50% or more of the outstanding Voting Stock (a "Subsidiary"); or any employee benefit plan sponsored by the Company or any Subsidiary. Notwithstanding the foregoing provisions of this Section 1.3, (i) a Change in Control described in Section 1.3(c)will not occur solely by reason of the confirmation by the Bankruptcy Court of a plan of reorganization with respect to the Company pursuant to which the Company emerges from bankruptcy; and (ii) a merger, consolidation or reorganization of the Company effected in connection with the confirmation of such plan of reorganization will not be a Change 2 in Control described in Section 1.3(a) or Section 1.3(b) if such merger, consolidation or reorganization does not involve a sale of all or substantially all of the assets of the Company to an unrelated third party, including, for example, and not by way of limitation, a reincorporation of the Company in another jurisdiction. 1.4 "Effective Date" means the date of this Agreement. -------------- 1.5 "Good Reason" means the termination of Employee's employment by ----------- Employee after a Change in Control upon the occurrence of any of the following: (a) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with the Company as existing immediately prior to a Change in Control; a substantial alteration in the nature or status of Employee's position or responsibilities from those in effect immediately prior to a Change in Control; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control, or any removal of Employee from or failure to re-elect Employee to any such positions; (b) a reduction by the Company in Employee's base salary in effect immediately prior to a Change in Control; (c) the requirement by the Company that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; or (d) the taking of any action by the Company which would (i) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control or (ii) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control. 1.6 "KERP" means the Key Employee Retention Program and Severance Plan, as ---- approved by the Order, which consists of (i) a retention incentive plan, (ii) an emergence bonus plan and (iii) a severance plan. 1.7 "Trade Secrets" means proprietary and confidential information of the ------------- Company or any Affiliate consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information used in the operation of their businesses. 3 ARTICLE 2 EMPLOYMENT, COMPENSATION AND DUTIES ----------------------------------- 2.1 Employment. Subject to the terms of this Agreement, the Company agrees ---------- to employ Employee as its Executive Vice President - Sales & Marketing. Employee will report to the President and Chief Operating Officer of the Company. Employee's principal place of work will be at the Company's offices in Dallas, Texas, subject to such travel as is consistent with the office of Executive Vice President - Sales & Marketing. Employee and the Company agree that Employee is an at-will employee, and nothing contained in this Agreement will prevent Employee from terminating employment with the Company for any reason or for no reason or will prevent the Company from terminating Employee's employment with the Company for any reason or for no reason, subject to satisfaction of any applicable severance pay obligations under Section 3.1. 2.2 Compensation. Employee's annual base salary will be $375,000, payable ------------ in accordance with the Company's customary payroll practices and subject to increases in accordance with Company policy. 2.3 Duties. Employee will perform the customary duties of his position as ------ Executive Vice President - Sales & Marketing plus such other duties as may reasonably be assigned to him from time to time by the President and Chief Operating Officer of the Company. ARTICLE 3 BENEFITS -------- 3.1 KERP Benefits. Employee will be eligible to participate in the KERP, in ------------- accordance with its terms. In addition, in the event Employee's employment by the Company is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any Company-sponsored pension plan in which Employee participates or Cause, or in the event Employee terminates employment for Good Reason no later than six months after the occurrence of an event constituting Good Reason, the Company will pay to Employee a severance benefit calculated and payable as described below. Employee's severance benefit will be an amount (the "Severance Amount") equal to Employee's base salary then in effect for a period of 24 months, less (i) any amount received by Employee under the retention plan provided for in the KERP and (ii) the amount of any severance benefit payable to Employee under the KERP. The Severance Amount shall be paid to Employee as follows: (i) the portion of the Severance Amount equal to Employee's annual base salary then in effect, shall be paid in a single lump sum no later than five days after the termination of Employee's employment; and (ii) the remainder of the Severance Amount (the "Remaining Amount") shall be paid in equal monthly installments beginning on the anniversary date of the termination of Employee's employment (the "Termination Anniversary"); provided, however, that (A) the Employee will not be entitled to the Remaining Amount if Employee obtains other full-time employment (including reemployment by the Company) prior to the Termination Anniversary and (B) the Company's obligation to pay the Remaining Amount shall immediately cease if Employee obtains other full-time employment (including reemployment by the Company) during the period the Remaining Amount is being paid. If the Company's obligation to pay the Remaining Amount is terminated other than at the end of the month, payment of the Remaining Amount for 4 that month shall be prorated to include the portion of the month in which Employee remained unemployed. In the event of any inconsistency between the provisions of this Section 3.1 and the KERP, the provisions of this Section 3.1 will control. 3.2 Other Employee Benefits. Employee and Employee's eligible dependents, ----------------------- as applicable, will be eligible for participation in and will receive all benefits to which they are entitled under the terms of the Company's other employee benefit plans, as in effect from time to time. 3.3 Stock Options. Employee will be eligible to participate in any stock ------------- option plan adopted by the Company and made available generally to its senior executives. 3.4 Vacation. Employee will be entitled to paid vacation in accordance -------- with Company policy in effect from time to time, or if greater, three weeks' vacation. 3.5 Term Life Insurance. The Company will provide Employee with a $500,000 ------------------- term life insurance policy. 3.6 Club Membership. The Company will reimburse Employee for the --------------- initiation fee of one country club membership within 50 miles of his home or Company office, as mutually agreed, in an amount not to exceed $25,000, and for club dues and other charges incidental to membership. All country club expenses incurred by Employee that are related to Company business will be reimbursed in accordance with the Company's customary expense reimbursement policy. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership to the Company; provided, however, that if Employee is terminated for any reason other than Cause, Employee shall be entitled to acquire the membership from the Company for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. 3.7 Automobile Allowance. The Company will provide Employee with an -------------------- automobile allowance of $1,000.00 per month. The Company will also reimburse Employee for mileage in accordance with Company policy. 3.8 Certain Tax Payments. The Company will make tax gross-up payments to -------------------- Employee in an amount that will be sufficient to cover the federal and state income taxes incurred by Employee as a result of the payments made under Section Error! Reference source not found. and Section Error! Reference source not found. (including federal and state income taxes incurred as a result of such gross-up payments). 3.9 Legal Fees. The Company will reimburse Employee for all legal fees and ---------- expenses he incurs in seeking to enforce or in defending his rights under this Agreement, including, but not limited to, fees and expenses identified in Section Error! Reference source not found., without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no colorable claim of success. 3.10 Insurance. If Employee's employment is terminated so that Employee is --------- entitled to the severance benefit provided for in Section 3.1, Employee shall be entitled to participate, 5 during the period in which severance is being paid to Employee pursuant to Section 3.1, in all employee benefit plans providing health, dental, life and disability benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law and provided further that Employee continues to make contributions, if any, in the same amounts as required immediately prior to the termination of Employee's employment. If Employee's participation in any such plan is not permitted for any reason, the Company shall arrange to provide Employee, at the Company's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. Employee's COBRA rights shall not begin to run until after the end of the severance period. Furthermore, at the end of the severance period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. ARTICLE 4 CERTAIN OBLIGATIONS OF EMPLOYEE ------------------------------- 4.1 Trade Secrets. During the term of Employee's employment, the ------------- Company will provide Employee access to, and Employee will have access to and become familiar with, various Trade Secrets. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in the Company's industry; (b) are entrusted to Employee after being informed of their confidential and secret status by the Company or its Affiliates and because of the fiduciary position occupied by Employee with the Company; (c) have been developed by the Company and its Affiliates for and on behalf of the Company and its Affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give the Company and its Affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of the Company and its Affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company and its Affiliates. Employee will not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the term of Employee's employment or at any time thereafter, except as required in the course of Employee's employment. All files, records, documents, information, data and similar items relating to the business of the Company and its Affiliates, whether prepared by Employee or otherwise coming into Employee's possession, will remain the exclusive property of the Company and its Affiliates and will not be removed from the premises of the Company and its Affiliates under any circumstances without the prior written consent of the President of the Company (except in the ordinary course of business during Employee's period of employment), and in any event will be promptly delivered to the Company upon termination of Employee's employment with the Company and its Affiliates. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee will timely notify and promptly hand deliver a copy of the subpoena, process or other request to the President of the Company. 4.2 Return of Property. Employee agrees that, upon termination of ------------------ Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition, all property of the Company, including without limitation, the 6 originals and all copies of all management, training, marketing and selling manuals; promotional materials; other training and instructional materials; financial information; vendor, owner, manager and product information; customer lists; other customer information; and all other selling, service and trade information and equipment. If such items are not returned, the Company will have the right to charge Employee for all reasonable damages, costs, attorneys' fees and other expenses incurred in searching for, taking, removing and/or recovering such property. 4.3 Noncompetition. Employee acknowledges and agrees that the -------------- training Employee will receive, the experience Employee will gain and the information Employee will acquire regarding Trade Secrets while employed hereunder will enable Employee to injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company and its Affiliates. For these reasons, Employee hereby agrees that Employee will not, during the period of employment with the Company, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a competitor of the Company or any of its Affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by the Company or its Affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by the Company or its Affiliates within the United States, Canada and Mexico. 4.4 Nonsolicitation. During the period of employment with the --------------- Company and for a period of 12 months thereafter, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of the Company or its Affiliates to leave the employment of the Company or its Affiliates, nor will Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the employees of the Company or its Affiliates 4.5 Damages. Notwithstanding anything in this Agreement to the -------- contrary, if Employee breaches the covenants contained in this ARTICLE 4, the Company will have no further obligations to Employee pursuant to this Agreement and may recover from Employee all such damages to which it may be entitled at law or in equity. In addition, Employee acknowledges that any such breach may result in immediate and irreparable harm to the Company for which money damages are likely to be inadequate. Accordingly, the Company may seek whatever relief it determines to be appropriate to protect the Company's rights under this Agreement, including, without limitation, an injunction to prevent Employee from disclosing 7 any trade secrets or confidential information concerning the Company to any person or entity, to prevent any person or entity from receiving from Employee or using any such trade secrets or confidential information and/or to prevent any person or entity from retaining or seeking to retain any other employees of the Company. Employee acknowledges good and sufficient consideration for the noncompetition and nonsolicitation covenants of this Section 4.5. ARTICLE 5 MISCELLANEOUS ------------- 5.1 Assignment. This Agreement is personal in nature and neither ---------- of the parties hereto will, without the written consent of the other, assign, transfer or delegate this Agreement or any rights or obligations contained in this Agreement except as expressly provided in Section 5.2. Without limiting the generality or effect of the foregoing, Employee's right to receive payments provided for in this Agreement will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution, and if Employee attempts any assignment or transfer contrary to this Section 5.1, the Company will have no liability to pay to any purported assignee any amount Employee attempts to assign, transfer or delegate. 5.2 Successors and Binding Agreement. -------------------------------- (a) The Company will require any successor to all or substantially all of the businesses or assets of the Company (whether direct or indirect, by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise) expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the businesses or assets of the Company whether by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise (and such successor will thereafter be deemed "the Company" for the purposes of this Agreement). (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. 5.3 Governing Law; Arbitration. This Agreement and all questions --------------------------- arising in connection with it will be governed by and construed in accordance with the laws of the State of North Carolina. Subject to the following sentence, all disputes arising out of, or in connection with this Agreement, which are not promptly settled by mutual agreement of the parties hereto, will be finally settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association, the cost of which will be borne by the party against whom an arbitration award is entered, specifically subject, however, to the provisions of Section 3.9. Notwithstanding anything herein to the contrary, the Company may, at its option, seek injunctive relief as contemplated in ARTICLE 4 either in lieu of or in addition to the arbitration remedies provided for in this Section 5.3. 8 5.4 Severability. If any portion of this Agreement is held to be ------------ invalid or unenforceable, such holding will not affect any other portion of this Agreement. 5.5 Entire Agreement. This Agreement comprises the entire agreement ---------------- between the parties hereto and, as of the Effective Date, supersedes any prior written or oral agreements between the parties, including, without limitation, the Employment Agreement in effect between Employee and Pillowtex Management Services Company dated as of January 1, 1998. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 5.6 Notices. Any notice or consent required or permitted to be ------- given under this Agreement will be in writing and will be effective (a) when given by personal delivery, (b) one business day after being sent by overnight delivery service or (c) five business days after being sent by certified or registered mail, return receipt requested, to the Secretary of the Company at the Company's principal place of business or to Employee at the last known address of Employee as shown on the records of the Company. 5.7 Withholding Taxes. The Company may withhold from any amounts ----------------- payable under this Agreement all federal, state, provincial, city or other taxes or other amounts as will be required pursuant to any law or governmental regulation or ruling. 5.8 Court Approval. On March 6, 2001, the Bankruptcy Court -------------- entered an order authorizing the Company to implement the KERP (the "KERP Order"). The Company warrants that its execution of and performance under this Agreement does not violate or contradict the KERP Order, any provision of Title 11 of the United States Bankruptcy Code, any other applicable statutes, or any orders previously entered by the Bankruptcy Court in the Company's bankruptcy case. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. PILLOWTEX CORPORATION By:_____________________________ Name: Anthony T. Williams Title: President and Chief Operating Officer EMPLOYEE ________________________________ Scott E. Shimizu 9 EX-10.47 8 dex1047.txt EMPLOYMENT AGREEMENT - A ALLEN OAKLEY Ehibit 10.47 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 1st day of April, 2001, is entered into by and between Pillowtex Corporation, a Texas corporation (the "Company"), and A. Allen Oakley ("Employee"). WHEREAS, the Company wishes to employ Employee, and Employee wishes to accept employment with the Company, on the terms and conditions set forth below; and WHEREAS, the Company is a debtor in a bankruptcy case under Chapter 11 of the United States Bankruptcy Code, Case Number 00-4211(SLR), pending in the United States Bankruptcy Court for the District of Delaware (the "Court"); and WHEREAS, the Company will implement the KERP (as defined below) pursuant to an Order Authorizing Debtors and Debtors in Possession to Implement Key Employee Retention Program and Severance Plan issued by the Court on March 6, 2001 (the "Order"). NOW THEREFORE, in consideration of the mutual covenants contained herein and for good and valuable consideration, including participation in the KERP, the receipt of which is hereby acknowledged, it is agreed as follows: ARTICLE 1 DEFINITIONS ----------- The following terms will have the respective meanings set forth below, unless the context clearly otherwise requires: 1.1 "Affiliate" means, with respect to the Company, any person or entity --------- that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. 1.2 "Cause" means the occurrence of any of the following: (a) Employee's ----- engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee's engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; and (c) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement. For purposes of this Section 1.2, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, the Company will provide Employee a written notice referencing this Section 1.2, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (c) of the first sentence of this Section 1.2, providing Employee with a reasonable opportunity of not less than 15 days to cure or cease and desist such conduct. 1.3 "Change in Control" means the occurrence of any of the following ----------------- events: (a) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (b) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of the Company; (d) during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this paragraph (d) each director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the directors of the Company (or a committee thereof) then still in office who were directors of the Company at the beginning of any such period will be deemed to have been a director of the Company at the beginning of such period; or (e) the Company's Chapter 11 case is converted into a case under Chapter 7 of the Bankruptcy Code. For purposes of this Section 1.3, the term "Excluded Person" means the Company; any entity in which the Company directly or indirectly owns 50% or more of the outstanding Voting Stock (a "Subsidiary"); or any employee benefit plan sponsored by the Company or any Subsidiary. Notwithstanding the foregoing provisions of this Section 1.3, (i) a Change in Control described in Section 1.3(c) will not occur solely by reason of the confirmation by the Bankruptcy Court of a plan of reorganization with respect to the Company pursuant to which the Company emerges from bankruptcy; and (ii) a merger, consolidation or reorganization of the Company effected in connection with the confirmation of such plan of reorganization will not be a Change 2 in Control described in Section 1.3(a) or Section 1.3(b) if such merger, consolidation or reorganization does not involve a sale of all or substantially all of the assets of the Company to an unrelated third party, including, for example, and not by way of limitation, a reincorporation of the Company in another jurisdiction. 1.4 "Effective Date" means the date of this Agreement. -------------- 1.5 "Good Reason" means the termination of Employee's employment by ----------- Employee after a Change in Control upon the occurrence of any of the following: (a) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with the Company as existing immediately prior to a Change in Control; a substantial alteration in the nature or status of Employee's position or responsibilities from those in effect immediately prior to a Change in Control; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control, or any removal of Employee from or failure to re-elect Employee to any such positions; (b) a reduction by the Company in Employee's base salary in effect immediately prior to a Change in Control; (c) the requirement by the Company that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; or (d) the taking of any action by the Company which would (i) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control or (ii) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control. 1.6 "KERP" means the Key Employee Retention Program and Severance Plan, as ---- approved by the Order, which consists of (i) a retention incentive plan, (ii) an emergence bonus plan and (iii) a severance plan. 1.7 "Trade Secrets" means proprietary and confidential information of the ------------- Company or any Affiliate consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information used in the operation of their businesses. 3 ARTICLE 2 EMPLOYMENT, COMPENSATION AND DUTIES ----------------------------------- 2.1 Employment. Subject to the terms of this Agreement, the Company agrees ---------- to employ Employee as its Executive Vice President - Manufacturing. Employee will report to the President and Chief Operating Officer of the Company. Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina, subject to such travel as is consistent with the office of Executive Vice President - Manufacturing. Employee and the Company agree that Employee is an at-will employee, and nothing contained in this Agreement will prevent Employee from terminating employment with the Company for any reason or for no reason or will prevent the Company from terminating Employee's employment with the Company for any reason or for no reason, subject to satisfaction of any applicable severance pay obligations under Section 3.1. 2.2 Compensation. Employee's annual base salary will be $300,000, payable ------------ in accordance with the Company's customary payroll practices and subject to increases in accordance with Company policy. 2.3 Duties. Employee will perform the customary duties of his position as ------ Executive Vice President - Manufacturing plus such other duties as may reasonably be assigned to him from time to time by the President and Chief Operating Officer of the Company. ARTICLE 3 BENEFITS -------- 3.1 KERP Benefits. Employee will be eligible to participate in the KERP, ------------- in accordance with its terms. In addition, in the event Employee's employment by the Company is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any Company-sponsored pension plan in which Employee participates or Cause, or in the event Employee terminates employment for Good Reason no later than six months after the occurrence of an event constituting Good Reason, the Company will pay to Employee a severance benefit calculated and payable as described below. Employee's severance benefit will be an amount (the "Severance Amount") equal to Employee's base salary then in effect for a period of 24 months, less (i) any amount received by Employee under the retention plan provided for in the KERP and (ii) the amount of any severance benefit payable to Employee under the KERP. The Severance Amount shall be paid to Employee as follows: (i) the portion of the Severance Amount equal to Employee's annual base salary then in effect, shall be paid in a single lump sum no later than five days after the termination of Employee's employment; and (ii) the remainder of the Severance Amount (the "Remaining Amount") shall be paid in equal monthly installments beginning on the anniversary date of the termination of Employee's employment (the "Termination Anniversary"); provided, however, that (A) the Employee will not be entitled to the Remaining Amount if Employee obtains other full-time employment (including reemployment by the Company) prior to the Termination Anniversary and (B) the Company's obligation to pay the Remaining Amount shall immediately cease if Employee obtains other full-time employment (including reemployment by the Company) during the period the Remaining Amount is being paid. If the Company's obligation to pay the Remaining Amount is terminated other than at the end of the month, payment of the Remaining Amount for 4 that month shall be prorated to include the portion of the month in which Employee remained unemployed. In the event of any inconsistency between the provisions of this Section 3.1 and the KERP, the provisions of this Section 3.1 will control. 3.2 Other Employee Benefits. Employee and Employee's eligible dependents, ----------------------- as applicable, will be eligible for participation in and will receive all benefits to which they are entitled under the terms of the Company's other employee benefit plans, as in effect from time to time. 3.3 Stock Options. Employee will be eligible to participate in any stock ------------- option plan adopted by the Company and made available generally to its senior executives. 3.4 Vacation. Employee will be entitled to paid vacation in accordance -------- with Company policy in effect from time to time, or if greater, three weeks' vacation. 3.5 Term Life Insurance. The Company will provide Employee with a $500,000 ------------------- term life insurance policy. 3.6 Club Membership. The Company will reimburse Employee for the --------------- initiation fee of one country club membership within 50 miles of his home or Company office, as mutually agreed, in an amount not to exceed $25,000, and for club dues and other charges incidental to membership. All country club expenses incurred by Employee that are related to Company business will be reimbursed in accordance with the Company's customary expense reimbursement policy. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership to the Company; provided, however, that if Employee is terminated for any reason other than Cause, Employee shall be entitled to acquire the membership from the Company for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. 3.7 Automobile Allowance. The Company will provide Employee with an -------------------- automobile allowance of $1,000.00 per month. The Company will also reimburse Employee for mileage in accordance with Company policy. 3.8 Certain Tax Payments. The Company will make tax gross-up payments to -------------------- Employee in an amount that will be sufficient to cover the federal and state income taxes incurred by Employee as a result of the payments made under Section 3.6 and Section 3.7 (including federal and state income taxes incurred as a result of such gross-up payments). 3.9 Legal Fees. The Company will reimburse Employee for all legal fees and ---------- expenses he incurs in seeking to enforce or in defending his rights under this Agreement, including, but not limited to, fees and expenses identified in Section 5.3 without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no colorable claim of success. 3.10 Insurance. If Employee's employment is terminated so that Employee is --------- entitled to the severance benefit provided for in Section 3.1, Employee shall be entitled to participate, 5 during the period in which severance is being paid to Employee pursuant to Section 3.1, in all employee benefit plans providing health, dental, life and disability benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law and provided further that Employee continues to make contributions, if any, in the same amounts as required immediately prior to the termination of Employee's employment. If Employee's participation in any such plan is not permitted for any reason, the Company shall arrange to provide Employee, at the Company's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. Employee's COBRA rights shall not begin to run until after the end of the severance period. Furthermore, at the end of the severance period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. ARTICLE 4 CERTAIN OBLIGATIONS OF EMPLOYEE ------------------------------- 4.1 Trade Secrets. During the term of Employee's employment, the Company ------------- will provide Employee access to, and Employee will have access to and become familiar with, various Trade Secrets. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in the Company's industry; (b) are entrusted to Employee after being informed of their confidential and secret status by the Company or its Affiliates and because of the fiduciary position occupied by Employee with the Company; (c) have been developed by the Company and its Affiliates for and on behalf of the Company and its Affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give the Company and its Affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of the Company and its Affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company and its Affiliates. Employee will not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the term of Employee's employment or at any time thereafter, except as required in the course of Employee's employment. All files, records, documents, information, data and similar items relating to the business of the Company and its Affiliates, whether prepared by Employee or otherwise coming into Employee's possession, will remain the exclusive property of the Company and its Affiliates and will not be removed from the premises of the Company and its Affiliates under any circumstances without the prior written consent of the President of the Company (except in the ordinary course of business during Employee's period of employment), and in any event will be promptly delivered to the Company upon termination of Employee's employment with the Company and its Affiliates. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee will timely notify and promptly hand deliver a copy of the subpoena, process or other request to the President of the Company. 4.2 Return of Property. Employee agrees that, upon termination of ------------------ Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition, all property of the Company, including without limitation, the 6 originals and all copies of all management, training, marketing and selling manuals; promotional materials; other training and instructional materials; financial information; vendor, owner, manager and product information; customer lists; other customer information; and all other selling, service and trade information and equipment. If such items are not returned, the Company will have the right to charge Employee for all reasonable damages, costs, attorneys' fees and other expenses incurred in searching for, taking, removing and/or recovering such property. 4.3 Noncompetition. Employee acknowledges and agrees that the training -------------- Employee will receive, the experience Employee will gain and the information Employee will acquire regarding Trade Secrets while employed hereunder will enable Employee to injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company and its Affiliates. For these reasons, Employee hereby agrees that Employee will not, during the period of employment with the Company, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a competitor of the Company or any of its Affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by the Company or its Affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by the Company or its Affiliates within the United States, Canada and Mexico. 4.4 Nonsolicitation. During the period of employment with the Company and --------------- for a period of 12 months thereafter, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of the Company or its Affiliates to leave the employment of the Company or its Affiliates, nor will Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the employees of the Company or its Affiliates 4.5 Damages. Notwithstanding anything in this Agreement to the contrary, ------- if Employee breaches the covenants contained in this Error! Reference source not found., the Company will have no further obligations to Employee pursuant to this Agreement and may recover from Employee all such damages to which it may be entitled at law or in equity. In addition, Employee acknowledges that any such breach may result in immediate and irreparable harm to the Company for which money damages are likely to be inadequate. Accordingly, the Company may seek whatever relief it determines to be appropriate to protect the Company's rights under this Agreement, including, without limitation, an injunction to prevent Employee from disclosing 7 any trade secrets or confidential information concerning the Company to any person or entity, to prevent any person or entity from receiving from Employee or using any such trade secrets or confidential information and/or to prevent any person or entity from retaining or seeking to retain any other employees of the Company. Employee acknowledges good and sufficient consideration for the noncompetition and nonsolicitation covenants of this Section Error! Reference source not found.. ARTICLE 5 MISCELLANEOUS ------------- 5.1 Assignment. This Agreement is personal in nature and neither of the ---------- parties hereto will, without the written consent of the other, assign, transfer or delegate this Agreement or any rights or obligations contained in this Agreement except as expressly provided in Section 5.2. Without limiting the generality or effect of the foregoing, Employee's right to receive payments provided for in this Agreement will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution, and if Employee attempts any assignment or transfer contrary to this Section 5.1, the Company will have no liability to pay to any purported assignee any amount Employee attempts to assign, transfer or delegate. 5.2 Successors and Binding Agreement. -------------------------------- (a) The Company will require any successor to all or substantially all of the businesses or assets of the Company (whether direct or indirect, by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise) expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the businesses or assets of the Company whether by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise (and such successor will thereafter be deemed "the Company" for the purposes of this Agreement). (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. 5.3 Governing Law; Arbitration. This Agreement and all questions arising -------------------------- in connection with it will be governed by and construed in accordance with the laws of the State of North Carolina. Subject to the following sentence, all disputes arising out of, or in connection with this Agreement, which are not promptly settled by mutual agreement of the parties hereto, will be finally settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association, the cost of which will be borne by the party against whom an arbitration award is entered, specifically subject, however, to the provisions of Section 3.9. Notwithstanding anything herein to the contrary, the Company may, at its option, seek injunctive relief as contemplated in ARTICLE 4 either in lieu of or in addition to the arbitration remedies provided for in this Section 5.3. 8 5.4 Severability. If any portion of this Agreement is held to be invalid ------------ or unenforceable, such holding will not affect any other portion of this Agreement. 5.5 Entire Agreement. This Agreement comprises the entire agreement ---------------- between the parties hereto and, as of the Effective Date, supersedes any prior written or oral agreements between the parties, including, without limitation, the Employment Agreement in effect between Employee and Pillowtex Management Services Company dated as of October 9, 1998. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 5.6 Notices. Any notice or consent required or permitted to be given under ------- this Agreement will be in writing and will be effective (a) when given by personal delivery, (b) one business day after being sent by overnight delivery service or (c) five business days after being sent by certified or registered mail, return receipt requested, to the Secretary of the Company at the Company's principal place of business or to Employee at the last known address of Employee as shown on the records of the Company. 5.7 Withholding Taxes. The Company may withhold from any amounts payable ----------------- under this Agreement all federal, state, provincial, city or other taxes or other amounts as will be required pursuant to any law or governmental regulation or ruling. 5.8 Court Approval. On March 6, 2001, the Bankruptcy Court entered an -------------- order authorizing the Company to implement the KERP (the "KERP Order"). The Company warrants that its execution of and performance under this Agreement does not violate or contradict the KERP Order, any provision of Title 11 of the United States Bankruptcy Code, any other applicable statutes, or any orders previously entered by the Bankruptcy Court in the Company's bankruptcy case. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. PILLOWTEX CORPORATION By: _____________________________________________ Name: Anthony T. Williams Title: President and Chief Operating Officer EMPLOYEE _________________________________________________ A. Allen Oakley 10 EX-10.48 9 dex1048.txt EMPLOYMENT AGREEMENT - RICHARD A. GRISSINGER Exhibit 10.48 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 1st day of April, 2001, is entered into by and between Pillowtex Corporation, a Texas corporation (the "Company"), and Richard A. Grissinger ("Employee"). WHEREAS, the Company wishes to employ Employee, and Employee wishes to accept employment with the Company, on the terms and conditions set forth below; and WHEREAS, the Company is a debtor in a bankruptcy case under Chapter 11 of the United States Bankruptcy Code, Case Number 00-4211(SLR), pending in the United States Bankruptcy Court for the District of Delaware (the "Court"); and WHEREAS, the Company will implement the KERP (as defined below) pursuant to an Order Authorizing Debtors and Debtors in Possession to Implement Key Employee Retention Program and Severance Plan issued by the Court on March 6, 2001 (the "Order"). NOW THEREFORE, in consideration of the mutual covenants contained herein and for good and valuable consideration, including participation in the KERP, the receipt of which is hereby acknowledged, it is agreed as follows: ARTICLE 1 DEFINITIONS ----------- The following terms will have the respective meanings set forth below, unless the context clearly otherwise requires: 1.1 "Affiliate" means, with respect to the Company, any person or entity --------- that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. 1.2 "Cause" means the occurrence of any of the following: (a) Employee's ----- engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee's engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; and (c) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement. For purposes of this Section 1.2, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of the Company. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, the Company will provide Employee a written notice referencing this Section Error! Reference source not found., setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (c) of the first sentence of this Section Error! Reference source not found., providing Employee with a reasonable opportunity of not less than 15 days to cure or cease and desist such conduct. 1.3 "Change in Control" means the occurrence of any of the following ----------------- events: (a) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (b) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of the Company; (d) during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this paragraph (d) each director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the directors of the Company (or a committee thereof) then still in office who were directors of the Company at the beginning of any such period will be deemed to have been a director of the Company at the beginning of such period; or (e) the Company's Chapter 11 case is converted into a case under Chapter 7 of the Bankruptcy Code. For purposes of this Section 1.3, the term "Excluded Person" means the Company; any entity in which the Company directly or indirectly owns 50% or more of the outstanding Voting Stock (a "Subsidiary"); or any employee benefit plan sponsored by the Company or any Subsidiary. Notwithstanding the foregoing provisions of this Section 1.3, (i) a change in Control described in Section 1.3(c) will not occur solely by reason of the confirmation by the Bankruptcy Court of a plan of reorganization with respect to the Company pursuant to which the Company emerges from bankruptcy; and (ii) a merger, consolidation or reorganization of the Company effected in connection with the confirmation of such plan of reorganization will not be a Change 2 in Control described in Section 1.3(a) or Section 1.3(b) if such merger, consolidation or reorganization does not involve a sale of all or substantially all of the assets of the Company to an unrelated third party, including, for example, and not by way of limitation, a reincorporation of the Company in another jurisdiction. 1.4 "Effective Date" means the date of this Agreement. -------------- 1.5 "Good Reason" means the termination of Employee's employment by ----------- Employee after a Change in Control upon the occurrence of any of the following: (a) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with the Company as existing immediately prior to a Change in Control; a substantial alteration in the nature or status of Employee's position or responsibilities from those in effect immediately prior to a Change in Control; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control, or any removal of Employee from or failure to re-elect Employee to any such positions; (b) a reduction by the Company in Employee's base salary in effect immediately prior to a Change in Control; (c) the requirement by the Company that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; or (d) the taking of any action by the Company which would (i) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control or (ii) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control. 1.6 "KERP" means the Key Employee Retention Program and Severance Plan, as ---- approved by the Order, which consists of (i) a retention incentive plan, (ii) an emergence bonus plan and (iii) a severance plan. 1.7 "Trade Secrets" means proprietary and confidential information of the ------------- Company or any Affiliate consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information used in the operation of their businesses. 3 ARTICLE 2 EMPLOYMENT, COMPENSATION AND DUTIES ----------------------------------- 2.1 Employment. Subject to the terms of this Agreement, the Company ---------- agrees to employ Employee as its Senior Vice President - Bed and Bath Marketing. Employee will report to the Executive Vice President - Sales & Marketing of the Company. Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina, subject to such travel as is consistent with the office of Senior Vice President - Bed and Bath Marketing. Employee and the Company agree that Employee is an at-will employee, and nothing contained in this Agreement will prevent Employee from terminating employment with the Company for any reason or for no reason or will prevent the Company from terminating Employee's employment with the Company for any reason or for no reason, subject to satisfaction of any applicable severance pay obligations under Section 3.1. 2.2 Compensation. Employee's annual base salary will be $286,000, ------------ payable in accordance with the Company's customary payroll practices and subject to increases in accordance with Company policy. 2.3 Duties. Employee will perform the customary duties of his position ------ as Senior Vice President - Bed and Bath Marketing plus such other duties as may reasonably be assigned to him from time to time by the Executive Vice President - - Sales & Marketing of the Company. ARTICLE 3 BENEFITS -------- 3.1 KERP Benefits. Employee will be eligible to participate in the KERP, ------------- in accordance with its terms, with respect to the retention incentive plan and severance plan. In addition, in the event Employee's employment by the Company is involuntarily terminated for reasons other than death, disability, retirement at or after the earliest retirement age under any Company-sponsored pension plan in which Employee participates or Cause, or in the event Employee terminates employment for Good Reason no later than six months after the occurrence of an event constituting Good Reason, the Company will pay to Employee a severance benefit calculated and payable as described below. Employee's severance benefit will be an amount (the "Severance Amount") equal to Employee's base salary then in effect for a period of 24 months, less (i) any amount received by Employee under the retention plan provided for in the KERP and (ii) the amount of any severance benefit payable to Employee under the KERP. The Severance Amount shall be paid to Employee as follows: (i) the portion of the Severance Amount equal to Employee's annual base salary then in effect, shall be paid in a single lump sum no later than five days after the termination of Employee's employment; and (ii) the remainder of the Severance Amount (the "Remaining Amount") shall be paid in equal monthly installments beginning on the anniversary date of the termination of Employee's employment (the "Termination Anniversary"); provided, however, that (A) the Employee will not be entitled to the Remaining Amount if Employee obtains other full-time employment (including reemployment by the Company) prior to the Termination Anniversary and (B) the Company's obligation to pay the Remaining Amount shall immediately cease if Employee obtains other full-time employment (including reemployment by the Company) during the period the Remaining Amount is being paid. If the Company's obligation to pay the Remaining Amount is terminated 4 other than at the end of the month, payment of the Remaining Amount for that month shall be prorated to include the portion of the month in which Employee remained unemployed. In the event of any inconsistency between the provisions of this Section 3.1 and the KERP, the provisions of this Section 3.1 will control. 3.2 Other Employee Benefits. Employee and Employee's eligible dependents, ----------------------- as applicable, will be eligible for participation in and will receive all benefits to which they are entitled under the terms of the Company's other employee benefit plans, as in effect from time to time. 3.3 Stock Options. Employee will be eligible to participate in any stock ------------- option plan adopted by the Company and made available generally to its senior executives. 3.4 Vacation. Employee will be entitled to paid vacation in accordance --------- with Company policy in effect from time to time. 3.5 Automobile Allowance. The Company will provide Employee with an -------------------- automobile allowance of $750.00 per month. The Company will also reimburse Employee for mileage in accordance with Company policy. 3.6 Certain Tax Payments. The Company will make tax gross-up payments to -------------------- Employee in an amount that will be sufficient to cover the federal and state income taxes incurred by Employee as a result of the payments made under Section 3.5 (including federal and state income taxes incurred as a result of such gross-up payments). 3.7 Legal Fees. The Company will reimburse Employee for all legal fees ---------- and expenses he incurs in seeking to enforce or in defending his rights under this Agreement, including, but not limited to, fees and expenses identified in Section 5.3, without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no colorable claim of success. 3.8 Insurance. If Employee's employment is terminated so that Employee is --------- entitled to the severance benefit provided for in Section 3.1, Employee shall be entitled to participate, during the period in which severance is being paid to Employee pursuant to Section 3.1, in all employee benefit plans providing health, dental, life and disability benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law and provided further that Employee continues to make contributions, if any, in the same amounts as required immediately prior to the termination of Employee's employment. If Employee's participation in any such plan is not permitted for any reason, the Company shall arrange to provide Employee, at the Company's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. Employee's COBRA rights shall not begin to run until after the end of the severance period. Furthermore, at the end of the severance period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. 5 ARTICLE 4 CERTAIN OBLIGATIONS OF EMPLOYEE ------------------------------- 4.1 Trade Secrets. During the term of Employee's employment, the Company ------------- will provide Employee access to, and Employee will have access to and become familiar with, various Trade Secrets. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in the Company's industry; (b) are entrusted to Employee after being informed of their confidential and secret status by the Company or its Affiliates and because of the fiduciary position occupied by Employee with the Company; (c) have been developed by the Company and its Affiliates for and on behalf of the Company and its Affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give the Company and its Affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of the Company and its Affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company and its Affiliates. Employee will not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the term of Employee's employment or at any time thereafter, except as required in the course of Employee's employment. All files, records, documents, information, data and similar items relating to the business of the Company and its Affiliates, whether prepared by Employee or otherwise coming into Employee's possession, will remain the exclusive property of the Company and its Affiliates and will not be removed from the premises of the Company and its Affiliates under any circumstances without the prior written consent of the President of the Company (except in the ordinary course of business during Employee's period of employment), and in any event will be promptly delivered to the Company upon termination of Employee's employment with the Company and its Affiliates. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee will timely notify and promptly hand deliver a copy of the subpoena, process or other request to the President of the Company. 4.2 Return of Property. Employee agrees that, upon termination of ------------------ Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition, all property of the Company, including without limitation, the originals and all copies of all management, training, marketing and selling manuals; promotional materials; other training and instructional materials; financial information; vendor, owner, manager and product information; customer lists; other customer information; and all other selling, service and trade information and equipment. If such items are not returned, the Company will have the right to charge Employee for all reasonable damages, costs, attorneys' fees and other expenses incurred in searching for, taking, removing and/or recovering such property. 4.3 Noncompetition. Employee acknowledges and agrees that the training -------------- Employee will receive, the experience Employee will gain and the information Employee will acquire regarding Trade Secrets while employed hereunder will enable Employee to injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company and its Affiliates. 6 For these reasons, Employee hereby agrees that Employee will not, during the period of employment with the Company, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a competitor of the Company or any of its Affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by the Company or its Affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by the Company or its Affiliates within the United States, Canada and Mexico. 4.4 Nonsolicitation. During the period of employment with the Company and --------------- for a period of 12 months thereafter, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of the Company or its Affiliates to leave the employment of the Company or its Affiliates, nor will Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the employees of the Company or its Affiliates 4.5 Damages. Notwithstanding anything in this Agreement to the contrary, ------- if Employee breaches the covenants contained in this ARTICLE 4, the Company will have no further obligations to Employee pursuant to this Agreement and may recover from Employee all such damages to which it may be entitled at law or in equity. In addition, Employee acknowledges that any such breach may result in immediate and irreparable harm to the Company for which money damages are likely to be inadequate. Accordingly, the Company may seek whatever relief it determines to be appropriate to protect the Company's rights under this Agreement, including, without limitation, an injunction to prevent Employee from disclosing any trade secrets or confidential information concerning the Company to any person or entity, to prevent any person or entity from receiving from Employee or using any such trade secrets or confidential information and/or to prevent any person or entity from retaining or seeking to retain any other employees of the Company. Employee acknowledges good and sufficient consideration for the noncompetition and nonsolicitation covenants of this Section 4.5. ARTICLE 5 MISCELLANEOUS ------------- 5.1 Assignment. This Agreement is personal in nature and neither of the ---------- parties hereto will, without the written consent of the other, assign, transfer or delegate this Agreement or any rights or obligations contained in this Agreement except as expressly provided in Section 5.2. Without limiting the generality or effect of the foregoing, Employee's right to 7 receive payments provided for in this Agreement will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution, and if Employee attempts any assignment or transfer contrary to this Section 5.1 the Company will have no liability to pay to any purported assignee any amount Employee attempts to assign, transfer or delegate. 5.2 Successors and Binding Agreement. -------------------------------- (a) The Company will require any successor to all or substantially all of the businesses or assets of the Company (whether direct or indirect, by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise) expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the businesses or assets of the Company whether by purchase, merger, consolidation, reorganization, confirmed reorganization plan or otherwise (and such successor will thereafter be deemed "the Company" for the purposes of this Agreement). (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. 5.3 Governing Law; Arbitration. This Agreement and all questions arising -------------------------- in connection with it will be governed by and construed in accordance with the laws of the State of North Carolina. Subject to the following sentence, all disputes arising out of, or in connection with this Agreement, which are not promptly settled by mutual agreement of the parties hereto, will be finally settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association, the cost of which will be borne by the party against whom an arbitration award is entered, specifically subject, however, to the provisions of Section 3.7. Notwithstanding anything herein to the contrary, the Company may, at its option, seek injunctive relief as contemplated in Error! Reference source not found. either in lieu of or in addition to the arbitration remedies provided for in this Section Error! Reference source not found.. 5.4 Severability. If any portion of this Agreement is held to be invalid ------------ or unenforceable, such holding will not affect any other portion of this Agreement. 5.5 Entire Agreement. This Agreement comprises the entire agreement ---------------- between the parties hereto and, as of the Effective Date, supersedes any prior written or oral agreements between the parties, including, without limitation, the Employment Agreement in effect between Employee and Fieldcrest Cannon, Inc. dated as of December 15, 1999. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 5.6 Notices. Any notice or consent required or permitted to be given under ------- this Agreement will be in writing and will be effective (a) when given by personal delivery, (b) one business day after being sent by overnight delivery service or (c) five business days after being 8 sent by certified or registered mail, return receipt requested, to the Secretary of the Company at the Company's principal place of business or to Employee at the last known address of Employee as shown on the records of the Company. 5.7 Withholding Taxes. The Company may withhold from any amounts payable ----------------- under this Agreement all federal, state, provincial, city or other taxes or other amounts as will be required pursuant to any law or governmental regulation or ruling. 5.8 Court Approval. On March 6, 2001, the Bankruptcy Court entered an -------------- order authorizing the Company to implement the KERP (the "KERP Order"). The Company warrants that its execution of and performance under this Agreement does not violate or contradict the KERP Order, any provision of Title 11 of the United States Bankruptcy Code, any other applicable statutes, or any orders previously entered by the Bankruptcy Court in the Company's bankruptcy case. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. PILLOWTEX CORPORATION By:______________________________________________ Name: Anthony T. Williams Title: President and Chief Operating Officer EMPLOYEE _________________________________________________ Richard A. Grissinger 9 EX-21.1 10 dex211.txt OPERATING SUBSIDIARIES EXHIBIT 21.1 PRINCIPAL OPERATING SUBSIDIARIES State of Incorporation/Organization ----------------------------------- Fieldcrest Cannon, Inc. Delaware FCI Corporate LLC Delaware FCI Operations LLC Delaware Encee, Inc. Delaware The Leshner Corporation Ohio Opelika Industries, Inc. Alabama Pillowtex Canada Inc. Ontario, Canada Pillowtex, Inc. Delaware Pillowtex Management Services Company Delaware EX-23.1 11 dex231.txt CONSENT OF KPMG 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 14, 2002, with respect to the consolidated balance sheets of Pillowtex Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 29, 2001, and the related financial statement schedule, which report appears in the December 29, 2001 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 Charlotte, North Carolina March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----