-----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, FlnWyluonlIRPIPIu5V4u15Soj/rKDLVXaSqTpjgT7kaattZqgVAKYeC2qGnwu91 qzEKMAQMlO+59lzlFingUQ== 0001021408-02-010574.txt : 20020813 0001021408-02-010574.hdr.sgml : 20020813 20020813112807 ACCESSION NUMBER: 0001021408-02-010574 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020629 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-49835 FILM NUMBER: 02728385 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-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 2002 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: 000-49835 PILLOWTEX CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 75-2147728 (State of Incorporation) (IRS Employer Identification No.) One Lake Circle Drive Kannapolis, North Carolina 28081 (Address of Principal Executive Offices) (Zip Code) (704) 939-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 1, 2002 Common Stock, $0.01 par value 18,994,000 PILLOWTEX CORPORATION AND SUBSIDIARIES INDEX
Part I - Financial Information Page No. Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets as of June 29, 2002, June 30, 2001 and December 29, 2001 2 Consolidated Statements of Operations for the one month ended June 29, 2002, the two months ended June 1, 2002 and 3 three months ended June 30, 2001 Consolidated Statements of Operations for the five months ended June 1, 2002 and six months ended June 30, 2001 4 Consolidated Statements of Stockholders' Equity (Deficit) for the five months ended June 1, 2002 and the one month 5 ended June 29, 2002 Consolidated Statements of Cash Flows for the one month ended June 29, 2002, the five months ended June 1, 2002 6 and six months ended June 30, 2001 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Part II - Other Information Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 35 Signature 36
1 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for par value)
Successor Predecessor ---------------- ------------------------------- ASSETS June 29, June 30, December 29, 2002 2001 2001 ---------------- -------------- --------------- Current assets: Cash and cash equivalents (including restricted cash of $8,056 as of June 29, 2002 and $3,861 as of December 29, 2001) $ 15,004 24,355 40,388 Receivables: Trade, less allowances of $9,303 as of June 29, 2002, $21,986 as of June 30, 2001 and $9,276 as of December 29, 2001 134,181 153,040 144,727 Other 2,594 7,383 4,478 Inventories 193,673 225,715 200,578 Assets held for sale 18,696 7,074 6,075 Prepaid expenses 5,574 3,491 3,604 Net assets of discontinued operations - 37,657 1,358 ---------------- -------------- --------------- Total current assets 369,722 458,715 401,208 Property, plant and equipment, less accumulated depreciation of $857 as of June 29, 2002, $160,612 as of June 30, 2001 and $172,938 as of December 29, 2001 169,359 485,046 453,440 Intangible assets, at cost less accumulated amortization of $88 as of June 29, 2002, $34,181 as of June 30, 2001 and $40,899 as of December 29, 2001 50,136 227,219 221,729 Other assets 2,766 29,465 11,250 ---------------- -------------- --------------- Total assets $ 591,983 1,200,445 1,087,627 ================ ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities not subject to compromise: Current liabilities: Checks not yet presented for payment $ 14,971 9,726 285 Accounts payable 39,648 26,710 34,834 Accrued expenses 64,536 51,396 59,837 Current portion of long-term debt 6,653 - 356 Current portion of long-term debt in default - 678,923 660,893 Long-term debt in default - 12,673 10,920 ---------------- -------------- --------------- Total current liabilities 125,808 779,428 767,125 Long-term debt, less current portion 201,656 - 645 Noncurrent liabilities 73,858 38,833 48,950 ---------------- -------------- --------------- Total liabilities not subject to compromise 401,322 818,261 816,720 Liabilities subject to compromise - 491,898 500,840 ---------------- -------------- --------------- Total liabilities 401,322 1,310,159 1,317,560 Predecessor Series A redeemable convertible preferred stock, $0.01 par value; 81,411 shares issued and outstanding for June 30, 2001 and December 29, 2001 - 90,225 99,185 Stockholders' equity (deficit): Successor preferred stock, $0.01 par value; authorized 10,000,000 shares - - - Predecessor preferred stock, $0.01 par value; authorized 20,000,000 shares; only Series A issued - - - Successor common stock, $0.01 par value; authorized 50,000,000 shares; 18,600,000 shares issued and outstanding 186 - - Predecessor common stock, $0.01 par value; authorized 55,000,000 shares; 14,250,892 shares issued and outstanding as of June 30, 2001 and December 29, 2001 - 143 143 Additional paid-in capital 191,438 160,120 160,120 Accumulated deficit (1,009) (358,366) (461,186) Accumulated other comprehensive income (loss) 46 (1,836) (28,195) ---------------- -------------- --------------- Total stockholders' equity (deficit) 190,661 (199,939) (329,118) Commitments and contingencies ---------------- -------------- --------------- Total liabilities and stockholders' equity (deficit) $ 591,983 1,200,445 1,087,627 ================ ============== ===============
See accompanying notes to consolidated financial statements. 2 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS One Month Ended June 29, 2002, Two Months Ended June 1, 2002 and Three Months Ended June 30, 2001 (Dollars in thousands, except for per share data)
Successor Predecessor ------------- ----------------------------- One Month Two Months Three Months Ended Ended Ended June 29, June 1, June 30, 2002 2002 2001 ----------- ---------- ---------- Net sales $ 71,291 139,125 232,383 Cost of goods sold 65,291 140,377 238,637 ----------- ---------- ---------- Gross profit (loss) 6,000 (1,252) (6,254) Selling, general, and administrative expenses 5,572 9,010 15,632 Impairment of long-lived assets - 192 20,085 Restructuring charges - 1,200 4,488 ----------- ---------- ---------- Income (loss) from operations 428 (11,654) (46,459) Interest expense (contractual interest of $11,614 in two months ended June 1, 2002 and $25,020 in 2001) 1,437 6,531 16,455 ----------- ---------- ---------- Loss from continuing operations before reorganization items and income taxes (1,009) (18,185) (62,914) Reorganization items: Gain on cancellation of pre-petition liabilities - (856,375) - Fresh start adjustments - 391,091 - Other - 61,330 13,540 ----------- ---------- ---------- Total reorganization items - (403,954) 13,540 ----------- ---------- ---------- Income (loss) from continuing operations before income taxes (1,009) 385,769 (76,454) Income tax expense - - - ----------- ---------- ---------- Net income (loss) from continuing operations (1,009) 385,769 (76,454) Loss from discontinued operations - - 4,222 ----------- ---------- ---------- Net income (loss) (1,009) 385,769 (80,676) Preferred dividends and accretion - 2,892 3,697 =========== ========== ========== Income (loss) applicable to common stockholders $ (1,009) 382,877 (84,373) =========== ========== ========== Basic and diluted loss per common share - Loss applicable to common stockholders $ (0.05) =========== Weighted average common shares outstanding - Basic and diluted 18,600 ===========
See accompanying notes to consolidated financial statements. 3 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Five Months Ended June 1, 2002 and Six Months Ended June 30, 2001 (Dollars in thousands)
Predecessor ----------------------------------- Five Months Six Months Ended Ended June 1, June 30, 2002 2001 ---------------- ------------- Net sales $ 380,050 506,225 Cost of goods sold 371,941 510,071 ---------------- ------------- Gross profit (loss) 8,109 (3,846) Selling, general, and administrative expenses 25,127 34,707 Impairment of long-lived assets 31,111 20,085 Restructuring charges 4,233 6,465 ---------------- ------------- Loss from operations (52,362) (65,103) Interest expense (contractual interest of $30,481 in 2002 and $52,508 in 2001) 16,832 35,376 ---------------- ------------- Loss from continuing operations before reorganization items and income taxes (69,194) (100,479) Reorganization items: Gain on cancellation of pre-petition liabilities (856,375) - Fresh start adjustments 391,091 - Other 66,633 21,165 ---------------- ------------- Total reorganization items (398,651) 21,165 ---------------- ------------- Income (loss) from continuing operations before income taxes 329,457 (121,644) Income tax benefit (7,157) - ---------------- ------------- Net income (loss) from continuing operations 336,614 (121,644) Loss from discontinued operations - 7,259 ---------------- ------------- Net income (loss) 336,614 (128,903) Preferred dividends and accretion 7,467 7,396 ---------------- ------------- Income (loss) applicable to common stockholders $ 329,147 (136,299) ================ =============
See accompanying notes to consolidated financial statements. 4 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Five Months Ended June 1, 2002 and One Month Ended June 29, 2002 (Dollars in thousands)
Common Stock Retained Accumulated Total --------------------------- Additional earnings other stockholders' Number Par paid-in (accumulated comprehensive equity of shares value capital deficit) income (loss) (deficit) ------------ ------------ ------------ ------------ ------------- ------------ Predecessor: Balance at December 29, 2001 14,250,892 $ 143 $ 160,120 $ (461,186) $ (28,195) $ (329,118) Comprehensive loss: Net loss excluding plan of reorganization and fresh start adjustments - - - (128,670) - (128,670) Currency translation adjustments - - - - (30) (30) ---------- Total comprehensive loss (128,700) ---------- Accretion of Series A Preferred Stock - - - (90) - (90) Preferred dividends declared - - - (7,377) - (7,377) Effect of plan of reorganization and fresh start adjustments: Cancellation of old common stock (14,250,892) (143) (160,120) - - (160,263) Issuance of new common stock and warrants 18,600,000 186 191,438 - - 191,624 Other fresh start adjustments - - - 597,323 28,225 625,548 ----------- ------------ ----------- ----------- ----------- ---------- Successor: Balance at June 1, 2002 18,600,000 186 191,438 - - 191,624 Comprehensive loss: Net loss - - - (1,009) - (1,009) Currency translation adjustment - - - - 46 46 ---------- Total comprehensive loss (963) ---------- ----------- ------------ ----------- ----------- ----------- ---------- Balance at June 29, 2002 18,600,000 $ 186 $ 191,438 $ (1,009) $ 46 $ 190,661 =========== ============ =========== =========== =========== ==========
See accompanying notes to consolidated financial statements. 5 PILLOWTEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS One Month Ended June 29, 2002, Five Months Ended June 1, 2002 and Six Months Ended June 30, 2001 (Dollars in thousands)
Successor Predecessor ------------------- ----------------------------- Five Months Six Months One Month Ended Ended Ended June 29, June 1, June 30, 2002 2002 2001 ------------------- ------------- ------------- Cash flows from operating activities: Net income (loss) $ (1,009) 336,614 (128,903) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on cancellation of pre-petition liabilities - (856,375) - Fresh start adjustments - 391,091 - Loss from discontinued operations - - 7,259 Depreciation and amortization 857 18,880 27,659 Impairment of long-lived assets - 31,111 20,085 Changes in assets and liabilities, net of effects of fresh start adjustments and the divestiture of the Blanket Division: Trade receivables (9,881) 20,807 36,024 Inventories (6,950) (3,085) 36,430 Accounts payable and accrued expenses (4,535) (994) (322) Other assets and liabilities 7,196 42,845 3,074 --------- --------- --------- Net cash provided by (used in) operating activities (14,322) (19,106) 1,306 Net cash provided by discontinued operations - 894 726 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 1,864 1,058 1,251 Purchases of property, plant and equipment (1,949) (28,491) (6,380) --------- --------- --------- Net cash used in investing activities (85) (27,433) (5,129) Cash flows from financing activities: Increase (decrease) in checks not yet presented for payment 9,735 4,951 (2,344) Borrowings on revolving credit loans 77,806 70,956 - Repayments on revolving credit loans (74,933) (11,933) - Retirement of long-term debt (696) (41,218) (2,386) --------- --------- --------- Net cash provided by (used in) financing activities 11,912 22,756 (4,730) Net change in cash and cash equivalents (2,495) (22,889) (7,827) Cash and cash equivalents at beginning of period 17,499 40,388 32,182 --------- --------- --------- Cash and cash equivalents at end of period $ 15,004 17,499 24,355 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest $ 323 17,758 37,229 ========= ========= ========= Income taxes $ (6,606) 10 121 ========= ========= =========
Supplemental disclosure of noncash financing information: During the five months ended June 1, 2002, the Company converted several operating leases into capital lease obligations of $24,386. See accompanying notes to consolidated financial statements. 6 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (1) General Pillowtex Corporation, a Delaware corporation ("Pillowtex" or "Parent", and together with its subsidiaries, the "Company"), is one of the largest North American designers, manufacturers, and marketers of home textile products. The Company's extensive product offerings include a full line of utility and fashion bedding and complementary bedroom textile products, as well as a full line of bathroom and kitchen textile products. As a leading supplier across all distribution channels, the Company sells it 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. Chapter 11 Proceedings and Reorganization On November 14, 2000 (the "Petition Date"), Pillowtex Corporation, a Texas corporation ("Old Pillowtex"), and substantially all of its domestic subsidiaries (collectively with Old Pillowtex, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for 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 for the Debtors (the "Chapter 11 Cases") were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 2, 2002, Old Pillowtex announced that the Bankruptcy Court had confirmed the Debtors' Second Amended Joint Plan of Reorganization, with certain modifications (as so modified, the "Plan"). On May 24, 2002 (the "Effective Date"), the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. Pursuant to the Plan, the following transactions were completed on or about the Effective Date: .. all of Old Pillowtex's issued and outstanding common stock and preferred stock were cancelled without consideration; .. Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation (the "Merger"); .. certain indebtedness of the Debtors was cancelled in exchange for cash, common stock, par value $0.01 per share, of Pillowtex ("Common Stock"), and/or warrants to purchase shares of Common Stock ("Warrants"); .. designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the issuance by Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the "Exit Term Loan") (the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million (see note 4)); .. executory contracts or unexpired leases to which any Debtor was a party were assumed, assumed and assigned, or rejected; .. industrial revenue bonds in the aggregate principal amount of $11.4 million were reinstated; .. members of the boards of directors and officers of Pillowtex and the reorganized Debtor subsidiaries were elected and began serving their respective terms; and .. the overall corporate structure was simplified through the restructuring and dissolution of certain of Old Pillowtex's subsidiaries. On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, 7 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Pillowtex Corporation 2002 Equity Incentive Plan (the "Equity Incentive Plan"), which was implemented in accordance with the Plan. In addition, on the Effective Date, Pillowtex entered into a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility (the "Exit Revolver Facility") with Congress Financial Corporation as agent for a syndicate of lenders. See note 4 for a more detailed description of the Exit Revolver Facility. Fresh Start Adjustments The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24, 2002. However, for financial reporting purposes, the Company deemed the effective date of the Plan to have occurred on June 1, 2002. References to "Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002, and references to "Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. In accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting because holders of existing voting shares of Old Pillowtex immediately before filing and confirmation of the Plan received less than 50% of the Common Stock distributed under the Plan and the Company's reorganization value was less than the Debtors' post-petition liabilities and allowed claims in the aggregate on a consolidated basis. Fresh start reporting requires that the reorganization value of the Company be allocated to its assets in conformity with Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value of the specific tangible or identifiable intangible net assets over reorganization value, or negative goodwill, is to be allocated to noncurrent non-monetary assets on a pro rata basis. Based on the consideration of many factors and various valuation methods, including a discounted cash flow, a comparable public company analysis, a comparable acquisitions analysis, and other applicable analyses believed by the Company's management to be appropriate for the Company's business and industry, the Company and its financial advisors determined the reorganization value of the Company to be approximately $400 million, which served as the basis for the Plan approved by the Bankruptcy Court. Approximately $208.4 million of the reorganization value related to debt and other obligations outstanding as of the Effective Date, and the remaining reorganization value of approximately $191.6 million was assigned as the initial equity of the Company. The $208.4 million of the reorganization value related to debt and other obligations is comprised of $206.3 million of long-term debt and $19.6 million of deferred creditor claim payments and bankruptcy-related professional fees included in accrued expenses, offset by $17.5 million of cash included in current assets in the Successor column in the table below. The fair value of the net assets exceeded the reorganization value by $131.2 million, resulting in negative goodwill. The negative goodwill has been allocated on a proportional basis to property, plant and equipment and certain intangible assets. 8 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) The following table reflects the reorganization adjustments to Old Pillowtex's consolidated balance sheet as of June 1, 2002:
Fresh Plan of Start Predecessor Reorganization Adjustments Successor ------------- ----------------- ------------- ----------- Assets: - ------- Current assets $ 364,936 - (953) (e) 363,983 Property, plant and equipment, net 456,739 - (288,321) (f) 168,418 Intangibles, net 229,440 - (179,309) (g) 50,131 Other assets 5,946 - (3,087) (e) 2,859 ----------- ----------- --------- --------- Total assets $ 1,057,061 - (471,670) 585,391 =========== =========== ========= ========= Liabilities and stockholders' equity (deficit): - ----------------------------------------------- Liabilities not subject to compromise: Checks not yet presented for payment, accounts payable and accrued expenses $ 101,873 7,393 (a) 4,689 (e) 113,955 Long-term debt 194,901 11,380 (b) - 206,281 Long-term debt in default 520,104 (520,104) (c) - - Noncurrent liabilities 52,147 - 21,384 (e) 73,531 ----------- ----------- --------- --------- Total liabilities not subject to compromise 869,025 (501,331) 26,073 393,767 Liabilities subject to compromise 546,668 (546,668) (c) - - ----------- ----------- --------- --------- Total liabilities 1,415,693 (1,047,999) 26,073 393,767 Redeemable convertible preferred stock 106,652 - (106,652) (h) - Stockholders' equity (deficit) (465,284) 1,047,999 (d) (391,091) (h) 191,624 ----------- ----------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 1,057,061 - (471,670) 585,391 =========== =========== ========= =========
(a) To record certain pre-petition accounts payable and property taxes to be settled in cash. (b) To reinstate industrial revenue bonds. (c) To record elimination of pre-petition liabilities that were cancelled. (d) To record issuance of securities of Pillowtex ($191.6 million) and gain on cancellation of pre-petition liabilities ($856.4 million). (e) To reflect assets and liabilities at fair value. Such revaluations include: -- The reduction of inventory to eliminate the existing LIFO reserves and adjust the carrying value to the estimated market value; -- The addition of warehousing costs to the carrying value of inventory; -- The increase in accrued expenses for certain unfavorable contract commitments; -- The increase in accrued pension and postretirement benefit obligations primarily due to the reduction in the value of the pension plan assets; and -- The reduction in carrying values of certain other assets to reflect fair values. (f) To record at fair value, less allocated portion of negative goodwill. (g) To write off goodwill and adjust trademarks and certain licenses to fair value, less allocated portion of negative goodwill. (h) To write off Old Pillowtex's securities, accumulated deficit and accumulated other comprehensive loss. 9 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) The fresh start adjustments were based upon the work of outside appraisers, actuaries, and financial consultants, as well as internal valuation estimates using discounted cash flow analyses, to determine the relative fair values of the assets and liabilities of the Company and its subsidiaries. Basis of Presentation References in these consolidated financial statements to "Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002. References to "Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. The accompanying consolidated financial statements for the five months ended June 1, 2002 (Predecessor), the six months ended June 30, 2001 (Predecessor) and as of December 29, 2001 (Predecessor) have been presented in accordance with SOP 90-7 and assumed that the Debtors would continue as a going concern. In the Chapter 11 Cases, substantially all unsecured liabilities and under-secured liabilities as of the Petition Date were subject to compromise or other treatment under the Plan. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction were 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 as of June 30, 2001 and December 29, 2001. Pursuant to SOP 90-7, professional fees and other costs associated with the Chapter 11 Cases were expensed as incurred and reported as reorganization items. Interest expense was reported only to the extent that it was to be paid during the Chapter 11 Cases. The accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal, recurring adjustments and accruals, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Old Pillowtex's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 29, 2001 (Commission File No. 1-11756). The June 30, 2001 consolidated financial statements have been restated to present the Blanket Division as a discontinued operation (see note 12). The provisions of EITF No. 00-25 (as defined in note 11) were adopted on December 30, 2001. As a result, $4.8 million and $9.8 million of selling, general, and administrative expenses have been reclassified as a reduction to net sales in the three months and six months ended June 30, 2001, respectively. (2) Inventories Inventories consist of the following:
Successor Predecessor -------------------- ------------------------------------------- June 29, June 30, December 29, 2002 2001 2001 -------------------- ------------------- -------------------- Finished goods $ 99,343 113,756 104,532 Work-in-process 44,522 46,614 40,832 Raw materials and supplies 36,799 58,477 46,828 In-transit and off-site 13,009 6,868 8,386 -------------------- ------------------- -------------------- $ 193,673 225,715 200,578 ==================== =================== ====================
10 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) (3) Loss Per Share There were no reconciling items between basic loss per share and diluted loss per share because the effects of the conversion of the Warrants would have been anti-dilutive for the one month ended June 29, 2002. Warrants exercisable to purchase up to 3,529,412 shares of Common Stock were outstanding as of June 29, 2002. (4) Long-Term Debt and Liquidity Long-term debt consists of the following:
Sucessor Predecessor ----------------- ----------------------------------- June 29, June 30, December 29, 2002 2001 2001 ----------------- ---------------- ---------------- Exit Revolver Facility $ 61,895 - - Exit Term Loan 111,359 - - Revolver less portion to be treated as post-petition debt - 241,021 233,051 Term loans less portion to be treated as post-petition debt - 250,204 242,004 Portion of revolver and term loans to be treated as post-petition debt - 150,000 150,000 Overline Credit Facility - 34,738 34,738 DIP Financing Facility - - - Industrial revenue bonds with interest rates from 1.35% to 2.19% and maturities through July 1, 2021; generally collateralized by land, buildings and letters of credit 11,380 13,860 13,185 9% Senior Subordinated Notes due 2007 - 185,000 185,000 10% Senior Subordinated Notes due 2006 - 125,000 125,000 6% Convertible Subordinated Debentures due 2012 inclusive of Cash Claimant Notes in the principal amount of $5.2 million - 90,417 90,417 Capital lease obligations 23,675 - - Other debt - 1,811 2,106 ----------------- ---------------- ---------------- Total debt 208,309 1,092,051 1,075,501 Less: Current portion of long-term debt (6,653) - (356) Current portion of long-term debt in default - (678,923) (660,893) Long-term debt in default - (12,673) (10,920) Liabilities subject to compromise - (400,455) (402,687) ----------------- ---------------- ---------------- Total long-term debt $ 201,656 - 645 ================= ================ ================
Exit Revolver Facility As discussed in note 1, the Company entered into the Exit Revolver Facility on the Effective Date. The Exit Revolver Facility is a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility. Parent and certain of its domestic subsidiaries are borrowers under the Exit Revolver Facility, and Parent's other domestic and Canadian subsidiaries are guarantors thereunder. The availability of borrowings under the Exit Revolver Facility generally is based on a percentage of eligible accounts receivable and eligible inventory, subject to certain reserves that can be established by the lender. In addition, the borrowers may, at their option, borrow up to a maximum principal amount of $10 million as part of the $200 million facility based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. Any such loan would be partially amortized over the remaining term of the Exit 11 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Revolver Facility. The Exit Revolver Facility is secured by a pledge of the stock of the subsidiaries, a first priority lien on the accounts receivable, inventory, and trademarks, as well as certain real property and equipment, of the borrowers and guarantors, and a second priority lien on the primary collateral that secures the Exit Term Loan. All borrowings under the Exit Revolver Facility bear interest at an annual rate equal to, at Parent's option, the lender's prime rate or the prevailing adjusted Eurodollar rate, in either case plus a specified margin determined based on the amount of excess availability and the Company's leverage ratio. The average interest rate on the Exit Revolver Facility was 5.0% for the month ended June 29, 2002. The Exit Revolver Facility includes an unused commitment fee of either 3/8% or 1/2% per annum (depending on excess availability and the leverage ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2% per annum on the daily outstanding balance of letters of credit issued under the Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of the amount of the maximum credit if the Exit Revolver Facility is terminated in whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of the reduction of the maximum credit if the Company reduces the maximum credit in part at the time of any such reduction. The Exit Revolver Facility contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of Pillowtex or any of its subsidiaries, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, effect mergers, consolidations, and dissolutions, prepay and refinance debt, and make certain changes in its business. The Exit Revolver Facility also establishes a minimum earnings threshold as defined herein that applies at any time excess availability is less than $35 million. As of June 29, 2002, $61.9 million was outstanding under the Exit Revolver Facility and outstanding letters of credit under the Exit Revolver Facility aggregated $23.7 million. Availability as of June 29, 2002 was $111.2 million. Exit Term Loan On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures the Exit Revolver Facility. The Exit Term Loan was entered into by Pillowtex in exchange for cancellation of designated post-petition loans having an aggregate principal amount of $150 million which were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds from the Exit Term Loan. Pillowtex is the borrower under the Exit Term Loan and substantially all of its subsidiaries are guarantors thereunder. The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on the last day of March, June, September, and December, commencing on September 30, 2002. In addition to scheduled payments of principal on the last day of June and December, commencing December 31, 2002, Pillowtex is required to prepay the Exit Term Loan (i) with the net cash proceeds from the sale of certain assets, and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to the minimum excess availability requirements contained in the Exit Revolver Facility), with 50% of the excess cash flow, if any, for the preceding fiscal year. The Exit Term Loan also contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions, prepay debt, and make certain changes in its business, to adopt newly-issued generally accepted accounting standards as appropriate and new tax requirements as they are enacted. The Exit Term Loan requires compliance with a maximum leverage ratio and a minimum interest coverage ratio. Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million utilizing borrowings under the Exit Revolver Facility. Under the Exit Term Loan, Pillowtex has paid or will pay an annual administrative fee of $150,000 on the Effective Date and each anniversary thereof. As of June 29, 2002, $111.4 million was outstanding under the Exit Term Loan. 12 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) 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 million debtor-in-possession financing facility, including a $60 million letter of credit sub-facility (the "DIP Financing Facility") with Bank of America, N.A. as administrative agent for a syndicate of financing institutions comprised of certain of Old Pillowtex's pre-petition senior secured lenders. The size of the DIP Financing Facility was subsequently reduced to $100 million, including the $60 million letter of credit sub-facility. The DIP Financing Facility expired by its terms on the Effective Date. No loan amounts were outstanding under the DIP Financing Facility on the Effective Date. Letters of credit outstanding under the DIP Financing Facility as of the Effective Date are being replaced with letters of credit issued under the Exit Revolver Facility. As of June 29, 2002, outstanding letters of credit of $2.5 million remained outstanding under the DIP Financing Facility. The lenders under the DIP Financing Facility were holding approximately $8.1 million as collateral for outstanding letters of credit issued under the facility. As these letters of credit are replaced with letters of credit issued under the Exit Revolver Facility, the funds will be returned to the Company. Senior Debt Facilities In December 1997, in connection with its acquisition of Fieldcrest Cannon, Old Pillowtex 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 million revolving credit facility and a $250 million term loan facility. The term loan facility consisted of a $125 million Tranche A Term Loan and a $125 million Tranche B Term Loan. Effective July 28, 1998, Old Pillowtex amended these facilities by increasing the Tranche B Term Loan to $225 million. The increase occurred in conjunction with the acquisition of The Leshner Corporation, allowing Old Pillowtex to fund the transaction and reduce borrowings under the revolving credit facility. As amended, amounts outstanding under the revolving credit facility and the Tranche A Term Loan bore interest at a rate based upon LIBOR plus 3.5%. The Tranche B Term Loan bore interest on a similar basis to the Tranche A Term Loan, plus an additional margin of 0.5%. The weighted average annual interest rate on outstanding borrowings under the various pre-petition senior credit facilities for the five months ended June 1, 2002 was 5.7%. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized the Debtors to make scheduled interest payments on the pre-petition senior debt facilities during the pendency of the Chapter 11 Cases. As of the Effective Date, the outstanding indebtedness under the revolving credit facility and the term loan facility was $232.6 million and $241.4 million, respectively, after designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the Exit Term Loan. On the Effective Date, pursuant to the Plan the amounts outstanding were cancelled, and in exchange therefor, holders of claims in respect of the senior debt facilities became entitled to receive Common Stock. Overline Facility In May 1999, Old Pillowtex entered into a $20 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 funds available to $35 million and to secure it with the same assets securing the senior debt facilities described above. Amounts borrowed under the Overline Facility bore interest at a rate based upon LIBOR plus 4.5% or the base rate plus 3%, at Old Pillowtex's option. Pursuant to the DIP Financing Order, the Bankruptcy Court authorized Old Pillowtex to make scheduled interest payments on the Overline Facility during the pendency of the Chapter 11 Cases. 13 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) On the Effective Date and pursuant to the Plan, the outstanding indebtedness on the Overline Facility of $34.8 million was cancelled, and in exchange therefor, holders of claims in respect of the Overline Facility became entitled to receive Common Stock and Warrants. Senior Subordinated Debt In connection with its acquisition of Fieldcrest Cannon, Old Pillowtex issued $185 million of 9% Senior Subordinated Notes due 2005 (the "9% Notes"), with interest payable semiannually commencing June 15, 1998. The 9% Notes were general unsecured obligations of Old Pillowtex, were subordinated in right of payment to all existing and future senior indebtedness, and ranked pari passu with the 10% Notes described below. On November 12, 1996, Old Pillowtex issued $125 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 were general unsecured obligations of the Company, were subordinated in right of payment to all existing and future senior indebtedness, and ranked pari passu with the 9% Notes. No principal or interest payments were made on the 9% Notes or the 10% Notes during the pendency of the Chapter 11 Cases. On the Effective Date, pursuant to the Plan indebtedness under the 9% Notes and 10% Notes of $185 million and $125 million, respectively, was cancelled, and in exchange therefore, holders of claims in respect of 9% Notes or 10% Notes became entitled to receive Common Stock and Warrants. Fieldcrest Cannon 6% Convertible Debentures As a result of Old Pillowtex's acquisition of Fieldcrest Cannon, the outstanding Fieldcrest Cannon 6% Convertible Subordinated Debentures due 2012 (the "6% Convertible Debentures") were convertible, at the option of the holders, into a combination of cash and common stock of Old Pillowtex. As of the Effective Date, approximately $85.2 million aggregate principal amount of the 6% Convertible Debentures remained outstanding. 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 the Effective Date, the aggregate amount of the outstanding Cash Claimant Notes was $5.2 million. No principal or interest payments were made on the 6% Convertible Debentures or Cash Claimant Notes during the pendency of the Chapter 11 Cases. On the Effective Date, pursuant to the Plan the indebtedness under the 6% Convertible Debentures was cancelled, and in exchange therefor, holders of claims in respect of the 6% Convertible Debentures became entitled to receive Warrants, and the indebtedness under the Cash Claimant Notes was cancelled, and in exchange therefor, holders of claims in respect of the Cash Claimant Notes became entitled to receive Common Stock and Warrants. Industrial Revenue Bonds The Company presently has obligations in respect of two industrial revenue bond facilities that were reinstated on the Effective Date (the "IRB Facilities"). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of June 29, 2002, approximately $11.4 million of bonds in the aggregate were outstanding under the IRB Facilities. On February 6, 2001, the Bankruptcy Court authorized the Debtors to make scheduled principal and interest payments on the IRB Facilities. Even though these payments were being made, the Debtors remained in default of 14 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) its obligations under each of the IRB Facilities. On the Effective Date, pursuant to the Plan the IRB Facilities were reinstated and the letters of credit issued in respect thereof under the senior debt facilities described above were replaced with equivalent letters of credit issued under the Exit Revolver Facility. During the pendency of the Chapter 11 Cases, two industrial revenue bond facilities matured pursuant to their terms and were paid off by the Debtors pursuant to an order of the Bankruptcy Court. The plant facility associated with another industrial revenue bond financing was closed, and the Debtors agreed to have the Bankruptcy Court lift the automatic stay to enable the lender to foreclose on the equipment collateral to satisfy partially the obligations of the Debtor thereunder. Capital Lease Obligations Certain existing operating leases were renegotiated as part of the reorganization process. The renegotiated leases have been classified as capital lease obligations. These leases have interest rates between 7.5% and 9%, and have terms between 48 and 60 months. The total amount of operating leases converted to capital lease obligations during the five months ended June 1, 2002 was approximately $24.4 million. As of June 29, 2002, $23.7 million was outstanding under capital lease obligations. Adequacy of Capital Resources The Company's principal sources of liquidity will be cash flows from operations and borrowings under the Exit Revolver Facility. Based on current and anticipated levels of operations, the Company's management believes that cash flows from operations, together with amounts available under the Exit Revolver Facility, will be adequate to meet the Company's anticipated cash requirements, including debt service requirements and planned capital expenditures. In the event that the Company's borrowing base, comprised of a percentage of eligible accounts receivable and eligible inventory after reserves, becomes insufficient to support additional borrowing under the Exit Revolver Facility, the borrowers thereunder have the option of borrowing up to a maximum principal amount of $10 million (as part of the overall $200 million commitment) based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. However, since the amount of any such loan is dependent on the appraised value of such real property and equipment at the time the option is exercised by the borrowers, no assurance can be given as to the amount of additional borrowing that would actually be available to the borrowers in such circumstances. In the event that cash flows, together with available borrowings under the Exit Revolver Facility, were not sufficient to meet the Company's cash requirements, the Company would be required to obtain alternative financing or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that, except for miscellaneous real property and equipment, substantially all of the Company's existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, industrial revenue bonds and capital lease obligations, or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. 15 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Scheduled Maturities As of June 29, 2002, the scheduled maturities of long-term debt are as follows: Year Amount ---- ------ Remainder of 2002 $ 3,527 2003 8,587 2004 15,214 2005 78,745 2006 14,491 2007 77,745 Thereafter 10,000 The scheduled maturities reflect the expiration of the Exit Revolver Facility in 2005, and the final payment on the Exit Term Loan in 2007. (5) Stockholders' Equity Pillowtex's authorized capital stock consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"). On June 29, 2002, there were 18,600,000 shares of Common Stock issued and outstanding and no shares of Preferred Stock issued and outstanding. On the Effective Date, pursuant to the Plan, 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants and 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Equity Incentive Plan. Common Stock The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by Pillowtex's Board of Directors (the "Board") from funds legally available for payment of dividends. However, Pillowtex does not presently anticipate that dividends will be paid on Common Stock in the foreseeable future. Furthermore, payment of dividends is restricted by the terms of the Exit Term Loan and the Exit Revolver Facility. In the event of a liquidation, dissolution, or winding up of Pillowtex, holders of Common Stock will be entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of outstanding Preferred Stock, if any. Holders of Common Stock have no preemptive, subscription, redemption, or conversion rights. All of the outstanding shares of Common Stock are validly issued, fully paid, and nonassessable. Warrants On the Effective Date, pursuant to the Plan, Warrants initially exercisable to purchase up to 3,529,412 shares of Common Stock were issued. The Warrants were issued under the Warrant Agreement entered into between Pillowtex and Mellon Investor Services L.L.C. Approximately $9.9 million was assigned to the value of the Warrants on the Effective Date and has been included in additional paid-in capital. Each Warrant initially entitles the owner thereof to acquire one share of Common Stock at a cash exercise price of $28.99. Warrants may also be exercised on a cashless basis, subject to the terms and conditions set forth in the Warrant Agreement. The Warrants expire on November 24, 2009, i.e., the date that is seven and one-half years after the Effective Date. The exercise price and the number and kind of shares purchasable upon exercise of a Warrant will be subject to adjustment upon events specified in the Warrant Agreement. Preferred Stock Pillowtex is authorized to issue 10,000,000 shares of Preferred Stock. The Board has the authority to issue Preferred Stock from time to time in one or more classes or series and to fix the price, rights, preferences, privileges, and 16 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) restrictions thereof, including dividend rights, dividend rates, conversion rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting a series or the designation of such series, without any further vote or action by Pillowtex's stockholders. The Preferred Stock may be issued in distinctly designated series, may be convertible into Common Stock, and may rank prior to the Common Stock as to dividend rights, liquidation preferences, or both. The express terms of shares of a different series of any particular class of Preferred Stock will be identical except for such variations as may be permitted by law. Pillowtex's Certificate of Incorporation provides that the Board may not, without the approval of the holders of a majority of the capital stock of Pillowtex or any class or series entitled to vote generally in the election of directors, authorize any series of Preferred Stock or issue any shares of Preferred Stock, or rights to acquire shares of Preferred Stock, in connection with a stockholders' rights plan or any similar plan or arrangement. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss), pension equity adjustments, and foreign currency translation adjustments. For the one month ended June 30, 2002, comprehensive loss was $1.0 million. For the two months and five months ended June 1, 2002, comprehensive loss before the gain on cancellation of pre-petition liabilities and fresh start adjustments was $79.5 million and $128.7 million, respectively. For the three month and six months ended June 30, 2001, comprehensive loss was $80.7 million and $129.1 million, respectively. (6) Redeemable Convertible Preferred Stock On December 19, 1997, Old Pillowtex issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65 million less $2.1 million of issue costs. Accretion was 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 Old Pillowtex's earnings per share for 1999 falling below predetermined targets. During the third and fourth quarters of 1999, Old Pillowtex 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 were payable in cash or additional shares of Series A Preferred Stock until December 2002, at which time they would have become payable solely in cash. Under the DIP Financing Facility, Old Pillowtex was 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 the Effective Date. The commencement of the Chapter 11 Cases constituted an "Event of Noncompliance" under the terms of the Series A Preferred Stock. The terms of the Series A Preferred Stock provided that upon the occurrence of an Event of Noncompliance, the dividend rate on such stock would 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. On the Effective Date, pursuant to the Plan the Series A Preferred Stock was cancelled without consideration. (7) 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. Other includes the Company's retail stores, corporate activities, and the remaining assets associated with the Blanket Division (see note 12). 17 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) The accounting policies of the divisions are the same as those described in the "Summary of Significant Accounting Policies" in Old Pillowtex's Annual Report on Form 10-K for the year ended December 29, 2001. The Company evaluates division performance based on gross profit. Interdivisional sales are not material. Information about the divisions is presented below:
Successor ------------------------------------------------------------------ One Month Ended June 29, 2002 ------------------------------------------------------------------ Bed Pillow and and Bath Pad Other (1) Total ------------------------------------------------------------------ Net sales $ 52,414 17,451 1,426 71,291 Gross profit (loss) 5,992 2,597 (2,589) 6,000 Depreciation and amortization 561 64 232 857 Capital expenditures 1,303 90 556 1,949 Total assets 451,918 84,834 55,231 (2) 591,983 Predecessor ------------------------------------------------------------------ Two Months Ended June 1, 2002 ------------------------------------------------------------------ Bed Pillow and and Bath Pad Other (1) Total ------------------------------------------------------------------ Net sales $ 104,435 32,987 1,703 139,125 Gross profit (loss) 3,417 1,873 (6,542) (1,252) Depreciation and amortization 4,876 164 2,540 7,580 Capital expenditures 22,919 584 838 24,341 Total assets (3) 791,189 105,338 160,534 (2) 1,057,061 Predecessor ------------------------------------------------------------------ Three Months Ended June 30, 2001 ------------------------------------------------------------------ Bed Pillow and and Bath Pad Other (1) Total ------------------------------------------------------------------ Net sales $ 172,397 55,004 4,982 232,383 Gross profit (loss) 760 5,728 (12,742) (6,254) Depreciation and amortization 9,907 932 3,043 13,882 Capital expenditures 1,041 402 2,987 4,430 Total assets 802,298 133,590 264,557 (2) 1,200,445
18 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Predecessor ---------------------------------------------- Five Months Ended June 1, 2002 ---------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ---------------------------------------------- Net sales $ 285,084 88,695 6,271 380,050 Gross profit (loss) 14,190 7,810 (13,891) 8,109 Depreciation and amortization 12,323 954 5,603 18,880 Capital expenditures 25,030 938 2,523 28,491 Total assets (3) 791,189 105,338 160,534 (2) 1,057,061 Predecessor ------------------------------------------------- Six Months Ended June 30, 2001 ------------------------------------------------- Bed Pillow and and Bath Pad Other(1) Total ------------------------------------------------- Net sales $ 379,288 117,094 9,843 506,225 Gross profit (loss) 7,274 12,371 (23,491) (3,846) Depreciation and amortization 20,095 1,756 5,808 27,659 Capital expenditures 1,861 402 4,117 6,380 Total assets 802,298 133,590 264,557 (2) 1,200,445 (1) Includes retail stores and miscellaneous corporate activities, including the Company's central information technology, manufacturing, human resources, and purchasing departments. (2) Corporate amounts include primarily data processing equipment and software, other enterprise-wide assets not allocated to the segments, and the net assets associated with the Blanket Division. (3) Does not reflect adjustments for fresh start reporting (note 1). (8) Restructuring Charges and Impairment of Long-lived Assets During the first quarter of 2002, a restructuring charge of $3.0 million associated with the closure of three facilities was incurred. The towel finishing operations in Columbus, Georgia and Phenix City, Alabama closed in July 2002 and impacted approximately 980 employees. The majority of the goods finished at the plants are now being finished at an existing facility in Kannapolis, North Carolina, and the remaining items are being purchased from other suppliers. The automated sewing facility in Dallas, Texas closed in June 2002 and resulted in the termination of approximately 99 employees. The facility's operations were consolidated into other existing pillow and pad facilities. The restructuring charge consisted principally of severance and benefits, which the Company anticipates it will complete paying in the third quarter of 2002. During the two months ended June 1, 2002, a restructuring charge of $1.2 million was incurred. Approximately $0.8 million of the charge relates to a loss resulting from curtailment of defined benefit pension plans for hourly and salaried employees at the closed facilities in Columbus, Georgia and Phenix City, Alabama. A curtailment is an event that significantly reduces the expected years of future service of present employees or eliminates for a 19 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) significant number of employees the accrual of defined benefits for some or all of their future services. The remaining $0.4 million restructuring charge is primarily due to a revision in the estimated cost of benefits provided to the employees at Columbus, Georgia and Phenix City, Alabama after termination. A charge for impairment of long-lived assets of $30.9 million was incurred during the first quarter of 2002 for assets located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge consists of $9.0 million for real property and $21.9 million for machinery and equipment. The impairment charge reflects management's estimate of the fair market value based upon appraisals and the expected future cash flows to be generated by the assets, including their ultimate disposition. During the two months ended June 1, 2002, an additional charge of $0.2 million relating to machinery and equipment located at the Phenix City, Alabama location was incurred. These assets have been classified as assets held for sale as of June 29, 2002. Activity in the reserve established for the restructuring charges is presented below: Balance, December 30, 2001 $ 1,063 Restructuring charge 4,233 Reclassification of curtailment loss to pension liability (751) Payments (3,983) ---------- Balance, June 29, 2002 $ 562 ========== During the six months ended June 30, 2001, the closure of several facilities was announced. The facilities included 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 in Columbus, Georgia, and a towel warehouse and distribution center in Phenix City, Alabama. The Rocky Mount, North Carolina facility manufactured decorative bedding exclusively under a licensing agreement, which expired on June 30, 2001. The majority of the production at the other facilities was relocated to existing facilities. The closures resulted in the termination of approximately 1,130 employees. Restructuring charges of $4.5 million and $6.5 million related to these closures were incurred in the three months and six months ended June 30, 2001, respectively. An impairment charge of $20.1 million in the second quarter of 2001 primarily related to the assets in the closed facilities discussed above was also recognized. (9) Reorganization Items The following items have been recognized as reorganization items in the statements of operations:
Predecessor --------------------------------------------------------------------- Two Months Three Months Five Months Six Months Ended Ended Ended Ended June 1, June 30, June 1, June 30, 2002 2001 2002 2001 -------------- ----------------- ----------------- --------------- Gain on cancellation of pre-petition liabilities $ (856,375) - (856,375) - Fresh start adjustments 391,091 - 391,091 - Other: Professional fees and other costs associated with the Chapter 11 Cases 12,682 3,799 17,110 10,110 Retention incentive plan 365 1,206 1,156 3,108 Rejected contracts and lease agreements 48,352 8,936 48,570 8,936 Interest income on investments (69) (401) (203) (989) -------------- ----------------- ----------------- --------------- Total other 61,330 13,540 66,633 21,165 -------------- ----------------- ----------------- --------------- $ (403,954) 13,540 (398,651) 21,165 ============== ================= ================= ===============
20 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Key Employee Retention Program. To stabilize employee relations, the Debtors developed a key employee retention plan (the "Retention Plan"), which the Bankruptcy Court approved on March 6, 2001. The Retention Plan was designed to, among other things, ensure that the employees most critical to the Debtors' reorganization efforts were provided with sufficient economic incentives and protections to remain with the Debtors 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, and (c) an employee severance plan. Under the Retention Incentive Plan, each eligible employee earned a specified retention incentive payment (the "Retention Incentive Payment"), based upon a percentage of his or her salary as determined by the Company's management, if the employee remained actively employed by the Company on the specified dates. Under the Retention Incentive Plan, three installments were paid on April 9, 2001, November 14, 2001, and May 14, 2002. The final installment of the Retention Incentive Payment of $1.6 million was paid on May 31, 2002. The total amount paid under the Retention Incentive Plan was approximately $6.5 million. No amounts were paid under the emergence performance bonus plan. Rejected Contracts and Leases. During the pendency of the Chapter 11 Cases, the Debtors reviewed their executory contracts and unexpired leases and received approval from the Bankruptcy Court to reject certain contracts and leases. In this context, "rejection" means that the Debtors were relieved from their obligations to perform further under the contract or lease and were subject only to a claim for damages for the breach thereof. Any claim for damages resulting from the rejection of a contract or lease was treated as a general unsecured claim in the Chapter 11 Cases, and the allowed amount of such claim was recognized as a reorganization item. On the Effective Date, pursuant to the Plan, holders of claims in respect of damages became entitled to receive Common Stock and Warrants. (10) Income Taxes The Company's management, in assessing the realizability of deferred tax assets, must consider whether it is more likely than not that part or all of the deferred tax asset may not be realized. This assessment includes consideration for the scheduled reversal of temporary taxable differences, projected future taxable income, and tax planning strategies. Predecessor Periods No income tax benefit was recognized for the loss from continuing operations before reorganization items for the two months ending June 1, 2002. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. In addition, no income tax expense or benefit was recognized on reorganization items for the two months ending June 1, 2002. The items of income and expense included in the reorganization income are non-taxable and non-deductible, respectively. For the five months ending June 1, 2002, the increase in the valuation allowance was partially offset by a $7.2 million tax refund related to a 2001 net operating loss. The reduction of the valuation allowance for the 2001 net operating loss resulted from a provision in Congress' economic stimulus package enacted during the first quarter of 2002 that changed the period for carryback of net operating losses. This change allowed Old Pillowtex to carry back a portion of the 2001 net operating loss five years rather than two years. If all or a portion of Old Pillowtex's deferred tax asset is realized in the future, or considered "more likely than not" realizable by management, intangibles will be reduced first and any excess treated as an increase to additional paid-in capital. 21 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Successor Periods The Company did not recognize an income tax benefit for the loss incurred in the one month ended June 29, 2002. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. Bankruptcy Impact In connection with the reorganization, a gain on cancellation of indebtedness was realized. This gain will not be taxable since the gain resulted from reorganization under the Bankruptcy Code. However, the Company will be required, as of the beginning of its 2003 taxable year, to reduce certain attributes including net operating loss carryforwards ("NOLs"), certain tax credits and tax bases in assets in an amount equal to such gain on extinguishment. The reorganization of the Company on the Effective Date constituted an ownership change under Section 382 of the Internal Revenue Code. Consequently, the use of any of the NOLs and tax credits generated prior to the ownership change, that are not reduced pursuant to the provisions discussed above, will be subject to an annual limitation. (11) Recently Issued or Adopted Accounting Standards The Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or 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 provisions of the EITFs were adopted as of the beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require all consideration paid to customers to be classified as a reduction to net sales. Prior to December 30, 2001, amounts paid to customers for co-operative advertising and marketing were classified in selling, general, and administrative expenses. As a result, $4.8 million and $9.8 million of selling, general, and administrative expenses have been reclassified as a reduction to net sales for the three months and six months ended June 30, 2001, respectively. In July 2001, 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. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. SFAS No. 142 was adopted as of December 30, 2001. The Company has restated its intangible assets to their estimated fair values on June 1, 2002, in conjunction with fresh start reporting (see note 1). 22 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) Pro forma loss from continuing operations applicable to common stockholders and loss applicable to common stockholders for the three months and six months ended June 30, 2001, adjusted to eliminate historical amortization of goodwill and intangibles with indefinite lives, are as follows:
Predecessor -------------------------- Three Six Months Months Ended Ended June 30, June 30, 2001 2001 ----------- ------------ Loss from continuing operations applicable to common stockholders - as reported $ (84,373) (136,299) =========== ============ Loss from continuing operations applicable to common stockholders - pro forma $ (82,810) (133,155) =========== ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes 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 of by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The provisions of SFAS No. 144 were adopted as of December 30, 2001. The adoption of SFAS No. 144 for long-lived assets held for use did not have a material impact on the consolidated financial statements because the impairment assessment requirements under SFAS No. 144 are largely unchanged from SFAS No. 121. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145, among other things, prohibits the classification of gains and losses from extinguishment of debt as extraordinary unless they meet the criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted upon the Statement's issuance, and as such, the gain recognized by Old Pillowtex on the extinguishment of debt resulting from the emergence from the chapter 11 bankruptcy proceedings has been classified as a reorganization item. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with an exit activity (including a restructuring) or with a disposal of long-lived assets. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets. Under current accounting guidance, a liability can be recorded when management has committed to an exit plan. The requirements under SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Restatement of previously issued financial statements is not permitted. (12) Discontinued Operations On September 6, 2001, Old Pillowtex sold the majority of the inventory and fixed assets associated with its Blanket Division to Beacon Blankets, Inc. (fka Beacon Acquisition Corporation) (the "Purchaser") for approximately $13.4 23 PILLOWTEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tables in thousands) million. The results of operations and net assets of the Blanket Division have been accounted for as a discontinued operation. As a result, the June 30, 2001 consolidated financial statements have been restated to reflect the Blanket Division as a discontinued operation. The loss from discontinued operations was $4.2 million and $7.3 million for the three months and six months ended June 30, 2001, respectively. (13) Subsequent Events On July 5, 2002, the Company granted restricted stock awards totaling 394,000 shares of Common Stock and options to acquire 594,200 shares of Common Stock to certain of its key employees. The restricted stock awards and options, as provided in the Plan, were made pursuant to the terms of the Equity Incentive Plan. Restrictions on the restricted stock awards lapsed immediately upon grant with respect to one-third of the shares, while the restrictions on the remaining two-thirds of the shares lapse in equal installments on the first and second anniversary date of the grant. The cost of issuing the restricted stock will be charged to earnings over the vesting period. During the one month ended June 29, 2002 and the two months ended June 1, 2002, approximately $0.4 million and $0.8 million, respectively, was charged to earnings. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report, and with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of Pillowtex Corporation, a Texas corporation ("Old Pillowtex"), as filed with the Securities and Exchange Commission (Commission File No. 1-11756) for the fiscal year ended December 29, 2001. Pillowtex Corporation, a Delaware corporation, is referred to herein as "Pillowtex" or "Parent" and, together with its subsidiaries, as the "Company." Chapter 11 Proceedings and Reorganization On November 14, 2000 (the "Petition Date"), Old Pillowtex and substantially all of its domestic subsidiaries (collectively with Old Pillowtex, the "Debtors"), including Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), filed voluntary petitions for 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 for the Debtors (the "Chapter 11 Cases") were jointly administered for procedural purposes. From the Petition Date until May 24, 2002, the Debtors operated their businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 2, 2002, Old Pillowtex announced that the Bankruptcy Court had confirmed the Debtors' Second Amended Joint Plan of Reorganization, with certain modifications (as so modified, the "Plan"). On May 24, 2002 (the "Effective Date"), the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. Pursuant to the Plan, the following transactions were completed on or about the Effective Date: .. all of Old Pillowtex's issued and outstanding common stock and preferred stock were cancelled without consideration; .. Old Pillowtex merged with and into Pillowtex, a wholly-owned Delaware subsidiary of Old Pillowtex, with Pillowtex as the surviving corporation (the "Merger"); .. certain indebtedness of the Debtors was cancelled in exchange for cash, common stock, par value $0.01 per share, of Pillowtex ("Common Stock"), and/or warrants to purchase shares of Common Stock ("Warrants"); .. designated post-petition loans having an aggregate principal amount of $150 million were cancelled in exchange for the issuance by Pillowtex of $150 million aggregate principal amount of notes under a new secured term loan (the "Exit Term Loan") (the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million (see note 4 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report)); .. executory contracts or unexpired leases to which any Debtor was a party were assumed, assumed and assigned, or rejected; .. industrial revenue bonds in the aggregate principal amount of $11.4 million were reinstated; .. members of the boards of directors and officers of Pillowtex and the reorganized Debtor subsidiaries were elected and began serving their respective terms; and .. the overall corporate structure was simplified through the restructuring and dissolution of certain of Old Pillowtex's subsidiaries. On the Effective Date, (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Pillowtex Corporation 2002 25 Equity Incentive Plan (the "Equity Incentive Plan"), which was implemented in accordance with the terms of the Plan. In addition, on the Effective Date, Pillowtex entered into a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility (the "Exit Revolver Facility") with Congress Financial Corporation as agent for a syndicate of lenders. See "- Liquidity and Capital Resources" below and note 4 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report for a more detailed description of the Exit Revolver Facility. 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. 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 June 29, 2002, a reserve of $7.7 million was recorded and included as an allowance against trade accounts receivable. This allowance includes $2.0 million for returns and allowances not yet claimed by customers, but which management believes is necessary based on historical deduction 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. Based on experiences in the past few years with selling obsolete and slow moving inventory to various promotional and alternative markets, management does not believe the likelihood is significant that materially higher inventory write-downs due to obsolescence are required. If the assumptions made by management in estimating sales returns and allowances and inventory obsolescence 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. 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 as well as economic conditions. Given the significant number of recent plant closures in the textile industry in the geographic areas where the Company operates, the likelihood is remote that historical sales levels will be achieved, and management attempts to take this into consideration when determining fair values. Management continually reviews its fair value estimates and records further impairment charges for assets held for sale when management determines, based on new and reliable information, that such charges are appropriate. At June 29, 2002, the Company had $18.7 million in assets held for sale, of which $12.6 million relates to real property and $6.1 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 2002 and the adjustments recorded during fiscal 2001, management believes it is reasonably possible that the Company will not fully recover these balances and that additional impairment charges may be required in subsequent periods. Fresh Start Reporting and Factors Affecting Comparability of Financial Information The Debtors emerged from their chapter 11 bankruptcy proceedings on May 24, 2002. However, for financial reporting purposes, the Company deemed the Effective Date of the Plan to have occurred on June 1, 2002. Fresh start reporting has been implemented as of June 1, 2002, and accordingly, at such date all assets and liabilities were restated to reflect their respective fair values. See note 1 to the unaudited consolidated financial statements included 26 elsewhere in this Quarterly Report for a discussion of the fresh start adjustments. For financial reporting purposes, references to "Predecessor" refer to Old Pillowtex and its subsidiaries on and prior to May 24, 2002 and Pillowtex and its subsidiaries from May 24, 2002 through June 1, 2002, and references to "Successor" refer to Pillowtex and its subsidiaries on and after June 1, 2002, after giving effect to the implementation of fresh start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements. However, for purposes of discussion of results of operations, the one month ended June 29, 2002 (Successor) has been combined with the two months ended June 1, 2002 (Predecessor) and then compared to the three months ended June 30, 2001 (Predecessor). Similarly, for year-to-date discussion of results of operations, the one month ended June 29, 2002 (Successor) has been combined with the five months ended June 1, 2002 (Predecessor) and compared with the six months ended June 30, 2001 (Predecessor). Results of Operations As a result of the sale of the Blanket Division on September 6, 2001, operations of the Blanket Division have been accounted for as a discontinued operation. The results of operations for the three months and six months ended June 30, 2001 have been restated to reflect the Blanket Division as a discontinued operation. Amounts paid to customers for co-operative advertising and marketing were classified as a reduction to net sales beginning on December 30, 2001. Prior to fiscal 2002, these amounts were classified in selling, general, and administrative expenses. Approximately $4.8 million and $9.8 million have been reclassified from selling, general, and administrative expenses as a reduction to net sales in the three months and six months ended June 30, 2001, respectively, to conform to the 2002 presentation. See "- New Accounting Standards" below. The operating results of the Company's segments are disclosed in note 7 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report. The following table shows the combined 2002 periods in comparison to the corresponding 2001 periods (dollars in thousands):
Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ---------- ---------- --------- ---------- Net sales $ 210,416 232,383 451,341 506,225 Cost of goods sold 205,668 238,637 437,232 510,071 ---------- ---------- --------- ---------- Gross profit (loss) 4,748 (6,254) 14,109 (3,846) Selling, general, and administrative 14,582 15,632 30,699 34,707 expenses Impairment of long-lived assets 192 20,085 31,111 20,085 Restructuring charges 1,200 4,488 4,233 6,465 Interest expense 7,968 16,455 18,269 35,376 Reorganization items (403,954) 13,540 (398,651) 21,165 Income tax benefit - - (7,157) - ---------- ---------- --------- ---------- Income (loss) from continuing 384,760 (76,454) 335,605 (121,644) operations Loss from discontinued operations - 4,222 - 7,259 ---------- ---------- --------- ---------- Net income (loss) $ 384,760 (80,676) 335,605 (128,903) ========== ========== ========= ==========
Net Sales. Net sales were $210.4 million for the three-month period ended June 29, 2002, a decrease of $22.0 million or 9.5% from the comparable three-month period ended June 30, 2001. Net sales for the six-month period ended June 29, 2002 were $451.3 million, a decrease of $54.9 million or 10.8% from the comparable six-month period ended June 30, 2001. The non-renewal of a Ralph Lauren licensing agreement on June 30, 2001 contributed $20 million and $28 million to the sales decreases in the three-month and six-month periods ended June 29, 2002, respectively. The remaining decrease for the six-month period ended June 29, 2002 is primarily attributable to the one-time inventory liquidation in 2001. A charge had been taken in December 2000 to reduce certain inventories to net realizable value. Sales of these products were $12 million and $29 million in the three-month and six-month periods ended June 30, 2001, respectively. 27 Gross Profit. Gross profit increased $11.0 million from a loss of $6.3 million in the three-month period ended June 30, 2001 to $4.7 million in the three-month period ended June 29, 2002. For the six-month period ended June 29, 2002, gross profit was $14.1 million, an increase of $17.9 million, compared to a loss of $3.8 million in the six-month period ended June 30, 2001. These increases are attributable to lower overhead costs resulting from a manufacturing rationalization plan and reduced material costs and natural gas prices. These savings have been partially offset by operating inefficiencies experienced due to the relocation of certain manufacturing operations required by the recently announced facility closures. During 2002, the towel finishing operations in Columbus, Georgia and Phenix City, Alabama and the Pillow and Pad automated sewing line facility in Dallas, Texas were closed. The operations at these facilities were transferred to existing facilities. Selling, General, and Administrative ("SG&A") Expenses. SG&A expenses decreased $1.0 million from $15.6 million in the three-month period ended June 30, 2001 to $14.6 million in the three-month period ended June 29, 2002. SG&A expenses decreased $4.0 million from $34.7 million in the six-month period ended June 30, 2001 to $30.7 million in the six-month period ended June 29, 2002. Statement of Financial Accounting Standard ("SFAS") No. 142 was adopted on December 30, 2001 which requires that goodwill and intangible assets with indefinite lives no longer be amortized (see "- New Accounting Standards" below). As a result, no amortization on its goodwill and trademarks has been recorded during 2002, which contributed approximately $1.6 million and $3.1 million to the decreases in SG&A expenses for the three-month and six-month periods ended June 29, 2002, respectively. In addition to lower amortization expense in 2002, a $2.2 million gain was recognized on the termination of an excess benefit plan provided for certain employees and former employees. These decreases have been partially offset by higher advertising expense due to the implementation of a national advertising campaign in 2002. Restructuring Charges. During the six-month period ended June 29, 2002, a restructuring charge of $4.2 million was recorded for severance and related benefits for the approximately 1,079 employees terminated by the closures of the facilities discussed above. The facilities closed during June and July 2002. During the six months ended June 30, 2001, a restructuring charge of $6.5 million was recorded, related to the facility closures at four locations. Impairment of Long-lived Assets. A charge for impairment of long-lived assets of $31.1 million was incurred during the six months ended June 29, 2002 for assets located at the Columbus, Georgia and Phenix City, Alabama facilities. The charge consists of $9.0 million for real property and $22.1 million for machinery and equipment. During the six-month period ended June 30, 2001, a charge for impairment of long-lived assets of $20.1 million was incurred primarily relating to facilities closed in 2001. Interest Expense. Interest expense decreased $8.5 million from $16.5 million in the three-month period ended June 30, 2001 to $8.0 million in the three-month period ended June 29, 2002. Interest expense decreased $17.1 million from $35.4 million in the six-month period ended June 30, 2001 to $18.3 million in the six-month period ended June 29, 2002. The decreases are primarily due to a decrease in the average interest rate from 9.0% for the six-month period ended June 30, 2001 to 5.6% for the six-month period ended June 29, 2002. Reorganization Items. Gains of $404.0 million and $398.7 million were recognized in the three month and six months ended June 29, 2002, respectively. The gains were due to the gain recognized on the cancellation of pre-petition liabilities upon emergence, offset by fresh start accounting adjustments. Discontinued Operations. During the three-month and six-month periods ended June 30, 2001, the Blanket Division incurred a loss from discontinued operations of $4.2 million and $7.3 million, respectively. The Blanket Division was sold on September 6, 2001. 28 Liquidity and Capital Resources Exit Revolver Facility As discussed above and in note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report, the Company entered into the Exit Revolver Facility on the Effective Date. The Exit Revolver Facility is a three-year $200 million senior secured asset-based nonamortizing revolving credit facility, including a $60 million letter of credit sub-facility. Parent and certain of its domestic subsidiaries are borrowers under the Exit Revolver Facility, and Parent's other domestic and Canadian subsidiaries are guarantors thereunder. The availability of borrowings under the Exit Revolver Facility generally is based on a percentage of eligible accounts receivable and eligible inventory, subject to certain reserves that can be established by the lender. In addition, the borrowers may, at their option, borrow up to a maximum principal amount of $10 million as part of the $200 million facility based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. Any such loan would be partially amortized over the remaining term of the Exit Revolver Facility. The Exit Revolver Facility is secured by a pledge of the stock of the subsidiaries, a first priority lien on the accounts receivable, inventory, and trademarks, as well as certain real property and equipment, of the borrowers and guarantors and a second priority lien on the primary collateral that secures the Exit Term Loan. All borrowings under the Exit Revolver Facility bear interest at an annual rate equal to, at Parent's option, the lender's prime rate or the prevailing adjusted Eurodollar rate, in either case plus a specified margin determined based on the amount of excess availability and the Company's leverage ratio. The average interest rate on the Exit Revolver Facility was 5.0% for the month ended June 29, 2002. The Exit Revolver Facility includes an unused commitment fee of either 3/8% or 1/2% per annum (depending on excess availability and the leverage ratio), a servicing fee of $5,000 per month, a letter of credit fee of 2 1/2% per annum on the daily outstanding balance of letters of credit issued under the Exit Revolver Facility, an early termination fee in an amount equal to 1/2% of the amount of the maximum credit if the Exit Revolver Facility is terminated in whole prior to its maturity, and a reduction fee in an amount equal to 1/2% of the reduction of the maximum credit if the Company reduces the maximum credit in part at the time of any such reduction. The Exit Revolver Facility contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of Pillowtex or any of its subsidiaries, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, effect mergers, consolidations, and dissolutions, prepay and refinance debt, and make certain changes in its business. The Exit Revolver Facility also establishes a minimum earnings threshold as defined herein that applies at any time excess availability is less than $35 million. As of June 29, 2002, $61.9 million was outstanding under the Exit Revolver Facility and outstanding letters of credit under the Exit Revolver Facility aggregated $23.7 million. Availability as of June 29, 2002 was $111.2 million. Exit Term Loan On the Effective Date, Pillowtex also entered into the Exit Term Loan, a $150 million senior five-year term loan secured by a first priority lien on certain real estate, plant, and equipment and a second priority lien on the primary collateral that secures the Exit Revolver Facility. The Exit Term Loan was entered into by Pillowtex in exchange for cancellation of designated post-petition loans having an aggregate principal amount of $150 million which were made to Old Pillowtex, and accordingly, Pillowtex obtained no new funds from the Exit Term Loan. Pillowtex is the borrower under the Exit Term Loan and substantially all of its subsidiaries are guarantors thereunder. The Exit Term Loan bears interest at a fixed rate of 10% per annum, payable on the last day of March, June, September, and December, commencing on September 30, 2002. In addition to scheduled payments of principal on the last day of June and December, commencing December 31, 2002, Pillowtex is required to prepay the Exit Term Loan (i) with the net cash proceeds from the sale of certain assets, and (ii) commencing March 31, 2004 and on each March 31 thereafter (subject to the minimum excess availability requirements contained in the Exit Revolver Facility), with 50% of the excess cash flow, if any, for the preceding fiscal year. 29 The Exit Term Loan also contains a number of negative covenants, which restrict, among other things, Pillowtex's ability to incur additional debt, pay dividends or make other restricted payments, sell stock of subsidiaries, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions, prepay debt, and make certain changes in its business, to adopt newly-issued generally accepted accounting standards as appropriate and new tax requirements as they are enacted. The Exit Term Loan requires compliance with a maximum leverage ratio and a minimum interest coverage ratio. Upon emergence from bankruptcy, the principal amount of the Exit Term Loan was immediately reduced on the Effective Date by $38.6 million utilizing borrowings under the Exit Revolver Facility. Under the Exit Term Loan, Parent has paid or will pay an annual administrative fee of $150,000 on the Effective Date and each anniversary thereof. As of June 29, 2002, $111.4 million was outstanding under the Exit Term Loan. Industrial Revenue Bonds The Company presently has obligations in respect of two industrial revenue bond facilities that were reinstated on the Effective Date (the "IRB Facilities"). One of the IRB Facilities is secured by liens on specified plants and equipment and by a letter of credit. The other IRB Facility is secured by a letter of credit. As of June 29, 2002, approximately $11.4 million of bonds in the aggregate were outstanding under the IRB Facilities. Adequacy of Capital Resources The Company's principal sources of liquidity will be cash flows from operations and borrowings under the Exit Revolver Facility. Based on current and anticipated levels of operations, the Company's management believes that cash flows from operations, together with amounts available under the Exit Revolver Facility, will be adequate to meet the Company's anticipated cash requirements, including debt service requirements and planned capital expenditures. In the event that the Company's borrowing base, comprised of a percentage of eligible accounts receivable and inventory after reserves, becomes insufficient to support additional borrowing under the Exit Revolver Facility, the borrowers thereunder have the option of borrowing up to a maximum principal amount of $10 million (as part of the overall $200 million commitment) based on the value of certain real property and equipment held as collateral that would be added to the borrowing base. However, since the amount of any such loan is dependent on the appraised value of such real property and equipment at the time the option is exercised by the borrowers, no assurance can be given as to the amount of additional borrowing that would actually be available to the borrowers in such circumstances. In the event that cash flows, together with available borrowings under the Exit Revolver Facility were not sufficient to meet the Company's cash requirements, the Company would be required to obtain alternative financing or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that, except for miscellaneous real property and equipment, substantially all of the Company's existing assets are pledged as collateral for the Exit Term Loan, Exit Revolver Facility, industrial revenue bonds and capital lease obligations or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. 30 Contractual Obligations and Commercial Commitments The following table contains the contractual cash obligations outstanding under long-term debt, which for this table comprises the Exit Term Loan and industrial revenue bonds, capital lease obligations, and operating leases as of June 29, 2002 (dollars in thousands):
Payments Due by Period ----------------------------------------------------------------------------- During remainder 2003 - 2005 - Contractual Obligations Total of 2002 2004 2006 After 2006 ---------------------------- ----------- ------------ ------------ ----------- ------------- Long-term debt $ 122,739 557 13,073 22,272 86,838 Capital lease obligations 23,675 2,970 10,728 9,069 907 Operating lease obligations 15,502 1,995 7,024 3,880 2,603 Cotton purchase commitments 48,794 22,871 25,923 - - ----------- ------------ ------------ ----------- ------------- Total contractual cash obligations $ 210,710 28,393 56,748 35,221 90,348 =========== ============ ============ =========== =============
Other commercial commitments outstanding as of June 29, 2002 are as follows (dollars in thousands):
Amount of Commitment Expiration Per Period ---------------------------------------------------------------------------- Total During Other Commercial Amounts Remainder 2003- 2005- Commitments Committed of 2002 2004 2006 After 2006 ---------------------------- ------------- ------------ ---------- ----------- ------------- Line of credit $ 61,895 - - 61,895 - Standby letters of credit 25,489 350 1,397 23,742 - Commercial letters of credit 799 799 - - - ------------- ------------ ---------- ----------- ------------- Total commercial commitments $ 88,183 1,149 1,397 85,637 - ============= ============ ========== =========== =============
New Accounting Standards The Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board (the "FASB") issued EITF No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or 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 provisions of the EITFs were adopted as of the beginning of fiscal 2002, which commenced December 30, 2001. The EITFs require all consideration paid to customers to be classified as a reduction to net sales. Prior to December 30, 2001, amounts paid to customers for co-operative advertising and marketing were classified in selling, general, and administrative expenses. As a result, $4.8 million and $9.8 million of selling, general, and administrative expenses have been reclassified as a reduction to net sales for the three months and six months ended June 30, 2001, respectively. In July 2001, 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. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. SFAS No. 142 was adopted as of December 30, 2001. The Company has restated its intangible assets to their estimated fair values on June 1, 2002, in conjunction with fresh start reporting. See note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report. 31 Pro forma loss from continuing operations applicable to common stockholders and loss applicable to common stockholders for the three months and six months ended June 30, 2001, adjusted to eliminate historical amortization of goodwill and intangibles with indefinite lives, are as follows (dollars in thousands):
Predecessor --------------------------- Three Six Months Months Ended Ended June 30, June 30, 2001 2001 ----------- ------------ Loss from continuing operations applicable to common stockholders - as reported $ (84,373) (136,299) =========== ============ Loss from continuing operations applicable to common stockholders - pro forma $ (82,810) (133,155) =========== ============
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes 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 of by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, SFAS No. 144 is not applicable to goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The provisions of SFAS No. 144 were adopted as of December 30, 2001. The adoption of SFAS No. 144 for long-lived assets held for use did not have a material impact on the consolidated financial statements because the impairment assessment requirements under SFAS No. 144 are largely unchanged from SFAS No. 121. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145, among other things, prohibits the classification of gains and losses from extinguishment of debt as extraordinary unless they meet the criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted upon the Statement's issuance, and as such, the gain recognized by Old Pillowtex on the extinguishment of debt resulting from the emergence from the chapter 11 bankruptcy proceedings has been classified as a reorganization item. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with an exit activity (including a restructuring) or with a disposal of long-lived assets. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets. Under current accounting guidance, a liability can be recorded when management has committed to an exit plan. The requirements under SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Restatement of previously issued financial statements is not permitted. Subsequent Events On July 5, 2002, the Company granted restricted stock awards totaling 394,000 shares of Common Stock and options to acquire 594,200 shares of Common Stock to certain of its key employees. The restricted stock awards and options, as provided in the Plan, were made pursuant to the terms of the Equity Incentive Plan. Restrictions on the restricted stock awards lapsed immediately upon grant with respect to one-third of the shares, while the restrictions on the remaining two-thirds of the shares lapse in equal installments on the first and second anniversary date of the grant. 32 The cost of issuing the restricted stock will be charged to earnings over the vesting period. During the one month ended June 29, 2002 and the two months ended June 1, 2002, approximately $0.4 million and $0.8 million, respectively, was charged to earnings. Cautionary Statement Regarding Forward-Looking Statements This filing contains certain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. Because such forward-looking statements are subject to various risks and uncertainties, results may differ materially from those expressed in or implied by such statements. Many of the factors that will determine these results are beyond the Company's ability to control or predict. Factors which could affect the Company's future results and could cause results to differ materially from those expressed in or implied by such forward-looking statements include, among others: (a) the restrictions on the conduct of the Company's business as a result of the provisions contained in the Exit Revolving Facility and Exit Term Loan; (b) the Company's dependence on specific raw materials; (c) the effects of adverse retail industry conditions; (d) the Company's dependence on specific brand names; (e) the risks related to loss of material customers; (f) the risks related to organized labor; (g) the seasonality of the Company's businesses, and (h) the difficulties in attracting and retaining personnel. For further discussion of such risks, see "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in Old Pillowtex's Annual Report on Form 10-K for its fiscal year ended December 29, 2001. 33 PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Old Pillowtex's Current Reports on Form 8-K filed on February 26, 2002, March 4, 2002, March 12, 2002, May 24, 2002, and May 16, 2002, and Part I, Item 3. Legal Proceedings, of the Annual Report on Form 10-K for the fiscal year ended December 29, 2001 filed on March 28, 2002, which reported during the fiscal year some of the legal proceedings referenced below. See note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Chapter 11 Cases. Such discussion is incorporated herein by this reference. Item 2. Changes in Securities and Use of Proceeds The Plan became effective on May 24, 2002. On the Effective Date, pursuant to the Plan all of Old Pillowtex's issued and outstanding common stock and preferred stock were cancelled without consideration; Old Pillowtex, a Texas corporation, was merged with and into its wholly-owned subsidiary Pillowtex, a Delaware corporation, with Pillowtex as the surviving corporation; and the Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of Pillowtex continued as the certificate of incorporation and bylaws of the surviving corporation. Additionally, on the Effective Date, pursuant to the Plan (a) 18,600,000 shares of Common Stock and Warrants initially exercisable to purchase 3,529,412 shares of Common Stock were issued for distribution in respect of claims against the Debtors, (b) 3,529,412 shares of Common Stock were reserved for issuance upon the exercise of Warrants, and (c) 1,400,000 shares of Common Stock were reserved for issuance in satisfaction of awards under the Equity Incentive Plan. Descriptions of the Common Stock and Warrants are included in the Company's Current Report on Form 8-K dated and filed May 24, 2002. Copies of the Certificate and Bylaws are filed as Exhibits 4.2 and 4.3, respectively, to such Form 8-K. Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of securities under a plan of reorganization from registration under the Securities Act and state securities laws if three principal requirements are satisfied: (a) the securities must be offered and sold under a plan of reorganization and must be securities of the debtor, an affiliate participating in a joint plan with the debtor or a successor to the debtor under the plan; (b) the recipients of the securities must hold a pre-petition or administrative expense claim against the debtor or an interest in the debtor; and (c) the securities must be issued entirely in exchange for the recipient's claim against or interest in the debtor, or principally in such exchange and partly for cash or property. Section 1145(a)(2) of the Bankruptcy Code exempts the offer of a security through any warrant, option, right to purchase or conversion privilege that is sold in the manner specified in section 1145(a)(1) and the sale of a security upon the exercise of such a warrant, option, right or privilege. Pillowtex believes that the offer and sale of the Common Stock and the Warrants under the Plan satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code and, therefore, are exempt from registration under the Securities Act and state securities laws. Similarly, Pillowtex believes that the offer of Common Stock through the Warrants and the sale of Common Stock upon the exercise of the Warrants satisfy the requirements of section 1145(a)(2) of the Bankruptcy Code and, therefore, are exempt from registration under the Securities Act and state securities laws. Item 5. Other Information On June 12, 2002, the Company announced the hiring of David A. Perdue as the Company's new Chairman of the Board and Chief Executive Officer, effective July 1, 2002. 34 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description ----------- ----------- 10.1* Restated Employment Agreement dated August 1, 2002 and effective as of July 1, 2002, between Pillowtex Corporation and David A. Perdue 10.2* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Anthony T. Williams 10.3* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Michael R. Harmon 10.4* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and Scott E. Shimizu 10.5* Employment Agreement dated May 24, 2002, between Pillowtex Corporation and A. Allen Oakley 10.6* Form of Indemnification Agreement entered into between Pillowtex Corporation and Directors and Executive Officers 10.7 Schedule of Indemnification Agreements pursuant to Instruction 2 of Item 601 10.8 First Amendment to Term Loan Agreement dated as of June 28, 2002, among Pillowtex Corporation, Bank of America, N.A., as Administrative Agent, and the Lenders party thereto
_____________ * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. (b) Reports on Form 8-K During the quarter ended June 29, 2002, Old Pillowtex and Pillowtex filed the following Current Reports on Form 8-K: Current Report on Form 8-K, dated May 2, 2002 and filed May 16, 2002, reporting information under "Item 3. Bankruptcy or Receivership" regarding the confirmation by the Bankruptcy Court of the Plan. Current Report on Form 8-K, dated and filed May 24, 2002, reporting information under "Item 5. Other Events" regarding the effective date of the Plan (the "May 24 Form 8-K"). Current Report on Form 8-K/A, dated May 24, 2002 and filed June 10, 2002, amending the May 24 Form 8-K by adding certain exhibits thereto. 35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: August 13, 2002 PILLOWTEX CORPORATION (Registrant) By: /s/ Michael R. Harmon ---------------------------------- Michael R. Harmon Executive Vice President and Chief Financial Officer 36 EX-10.1 3 dex101.txt RESTATED EMPLOYMENT AGREEMENT - DAVID PERDUE Exhibit 10.1 RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT, originally dated as of the 28th day of June, 2002 (but effective as of the date set forth in Section 1.6), and amended and restated as of the 1st day of August, 2002, is entered into by and between PILLOWTEX CORPORATION, a Delaware corporation (the "Company"), and DAVID A. PERDUE ("Employee"). WHEREAS, the Company and Employee desire to provide for certain rights and responsibilities of each party in connection with the employment of Employee. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are 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" shall mean, 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 "Board" shall mean the Board of Directors of the Company. 1.3 "Cause" shall mean the occurrence of any of the following: (a) Employee engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; (c) an act of fraud, embezzlement or theft in connection with Employee's duties or in the course of his employment with the Company; (d) Employee's material breach of or failure to substantially perform under any of the material terms and covenants of this Agreement; or (e) the death, disability or retirement of Employee. For purposes of this Section 1.3, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee 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 1.3, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (d) of the first sentence of this Section 1.3, providing Employee with a reasonable opportunity of not less than thirty (30) days to cure or cease and desist such conduct; provided, however, Employee will not be provided any opportunity to cure such conduct more than twice while this Agreement is in effect. - -------------------------------------------------------------------------------- Page 1 1.4 "Change in Control" shall mean (a) The Company is merged, acquired, re-capitalized, consolidated or reorganized by, into or with another corporation or other legal entity by stock exchange or other similar transaction, and as a result of such merger, acquisition, re-capitalization, consolidation or reorganization less than a majority of the combined voting power of the then outstanding securities of the Company or such corporation or other legal entity immediately after such transaction are held in the aggregate by the holders of Voting Stock immediately prior to such transaction; (b) The Company sells (directly or indirectly) all or substantially all of its assets to any other corporation or other legal entity; (c) Any person (as the term "person" is used in Section 13(d) (3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") becomes (subsequent to the Effective Date) 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 fifty percent (50%) or more of then issued and outstanding Voting Stock; or (d) The Company contributes all or substantially all of the assets of the Company to a joint venture with one or more third parties and the Company and/or its Affiliates do not directly or indirectly hold at least a majority of the voting interests of the resulting joint venture. Notwithstanding the foregoing provisions of Section 1.4(c) hereof, a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, and/or (iii) any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of fifty percent (50%) or otherwise, or because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership. 1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended, including, the Rules and Regulations issued thereunder. 1.6 "Commencement Date" shall mean July 1, 2002. 1.7 "Committee" shall have the meaning set forth in the Incentive Plan. 1.8 "Company" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.9 "Confidential Information" shall mean any and all technical and non-technical information disclosed by the Company pursuant to or in contemplation of this Agreement, - -------------------------------------------------------------------------------- Page 2 including Trade Secrets and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents and formulae related to the current, future and proposed products and services of the Company and/or the Company's parents, subsidiaries, customers and/or vendors, whether delivered in written (or other tangible) form, and includes, without limitation, information concerning design details and specifications, financial data, procurement requirements, customer lists, business forecasts and purchasing, manufacturing, sales, merchandising, development, engineering and marketing plans. Without limiting the generality of the foregoing, the term "Confidential Information" will also be deemed to include all analyses, compilations, forecasts, studies or other documents prepared by Employee in connection with the performance by Employee of Employee's duties pursuant to this Agreement. 1.10 "Disability" shall mean a physical or mental disability which renders Employee substantially incapable of performing his duties under this Agreement, as determined by an independent physician selected by the Company and agreed to by Employee, and which disability has existed for (a) at least one hundred twenty consecutive days, or (b) one hundred eighty (180) days in any twelve- month period. 1.11 "Employee" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.12 "Employee Benefits" shall mean all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate generally, including, without limitation, any stock option, restricted stock, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-funded by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the termination of Employee's employment or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company. 1.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor to thereto. 1.14 "Good Reason" means the termination of Employee's employment by Employee upon the occurrence of any of the following, without Employee's prior written consent: (a) a significant reduction or diminution in the nature or scope of the authorities, reporting relationships, title, powers, functions, responsibilities or duties attached to the position(s) with the Company which Employee holds as of the Commencement Date; (b) the failure to elect or reelect Employee to the office(s) of the Company which Employee holds as of the Commencement Date; (c) any reduction by the Company in Employee's Base Salary or Annual Bonus opportunity percentage, or the termination or reduction of Employee's rights to any Employee Benefits required under this Agreement or in effect for all senior executives, as in - -------------------------------------------------------------------------------- Page 3 effect on the Commencement Date or as such may be increased from time to time (other than a termination of Employee Benefits which affects all senior executive officers of the Company in the same manner); (d) a decision, action or requirement by the Company to relocate Employee more than fifty (50) miles from the Company's offices in Kannapolis, North Carolina; (e) the stock options contemplated by Section 2.2(d) and the stock appreciation rights contemplated by Section 2.2(e) are not granted to Employee by the Company on or before December 31, 2002, upon substantially the terms described herein; or (f) any failure to pay Employee when due any material amount of his compensation or any other amount payable under any plan, agreement or arrangement of or with the Company or any other material breach of any material provision of this Agreement by the Company; provided, however, the events described in this Section 1.13(e) will only be deemed to constitute "Good Reason" if Employee has given the Company written notice of such breach (describing the breach in reasonable detail) and the Company has failed to cure such breach within ten (10) days in the case of payment defaults and thirty (30) days in the case of any other breach. 1.15 "Incentive Plan" shall have the meaning ascribed to such term in Section 2.2(d) of this Agreement. 1.16 "Market Value" will be deemed to mean, on any date, (i) the closing sale price per share (regular way) of the Pillowtex Common Stock on the principal exchange on which the Pillowtex Common Stock is then trading averaged over the thirty (30) calendar day period immediately preceding the date of determination or, if applicable, the Nasdaq Stock Market as reported in The Wall Street Journal or (ii) if clause (i) does not apply, the fair market value of the Pillowtex Common Stock as determined by the Board. 1.17 "Noncompetition Period" shall mean the period of Employee's employment with the Company and thereafter, a period equal to the greater of (i) the remaining stated term of this Agreement and (ii) two and one-half (2.5) years. 1.18 "Post-Employment Payment" shall have the meaning ascribed to such term in Section 3.1 of this Agreement. 1.19 "Protected Area" shall mean (a) the United States, (b) Canada, (c) Mexico, (d) the states of the United States adjoining or east of the Mississippi River, and (c) North Carolina. 1.20 "Trade Secrets" shall mean 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, that (a) the Company and its Affiliates have taken steps to keep secret, and (b) is not generally known to others, and (c) gives the Company or any such Affiliate a competitive business advantage. If any Trade Secret is found by an arbitrator or a court of competent jurisdiction to not be a Trade Secret for the purposes of this Agreement, such information will in any event be considered Confidential - -------------------------------------------------------------------------------- Page 4 Information for purposes of this Agreement; provided such Trade Secret otherwise is included within the scope of the definition set forth in Section 1.9. 1.21 "Termination Date" shall have the meaning ascribed to such term in Section 3.1 (a). 1.22 "Voting Stock" shall mean any outstanding securities entitled to vote generally in the election of directors of the Company. ARTICLE 2 EMPLOYMENT, COMPENSATION AND DUTIES 2.1 Employment. Subject to the terms of this Agreement, the Company agrees to employ Employee as its Chief Executive Officer and Chairman of the Board of Directors with duties as set forth in Section 2.3. The term (the "Term") of this Agreement shall be four (4) years beginning on the Commencement Date. Any decision to not renew this Agreement shall not constitute termination without Cause or termination for Good Reason. Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina. 2.2 Compensation. (a) Base Salary. Employee's annual base salary (the "Base Salary") will be: (i) Six Hundred Twenty-Five Thousand and 00/100 Dollars ($625,000) per year for period ending December 31, 2002 to be prorated based upon actual days of employment in 2002; (ii) Six Hundred Seventy-Five Thousand and 00/100 Dollars ($675,000) per year beginning January 1, 2003 through the twelve month period ending December 31, 2003; (iii) Seven Hundred Twenty-Five Thousand and 00/100 Dollars ($725,000) per year beginning January 1, 2004 and continuing through the remaining Term. The Base Salary will be payable in accordance with the Company's customary payroll practices, and subject to such increases as may be determined from time to time thereafter by the Board or the Committee thereof in its sole discretion. (b) Annual Bonus. During each year of this Agreement, Employee shall be paid an annual performance bonus ("Annual Bonus") of one hundred percent (100%) of Employee's Base Salary for such period upon achievement of annual incentive goals to be determined annually by the Board, Committee and Employee; provided, that the Annual Bonuses with respect to the period ending December 31, 2003 shall not be less than one hundred percent (100%) of Employee's Base Salary with respect to the period ending December 31, 2003. The Annual Bonus for the year 2002 shall be paid on a pro-rated basis based upon actual Base Salary for the year 2002. The Annual Bonus will be paid within ninety (90) days following the end of each calendar year. - -------------------------------------------------------------------------------- Page 5 (c) Signing Bonus. Upon the Commencement Date, as consideration for signing this Agreement, Employee will be paid a signing bonus of One Million Fifty Thousand and 00/100 Dollars ($1,050,000.00); and on or before August 8, 2002, will be issued Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00) of Pillowtex Common Stock at a price per share equal to the lesser of (i) the average of the closing sale price per share (regular way) of the Pillowtex Common Stock computed over the sixty (60) calendar day period commencing May 30, 2002 (including only days on which a closing sale price is quoted) and (ii) Seven and 50/100 Dollars ($7.50) per share. Notwithstanding any other provision of this Agreement to the contrary (including but not limited to Section 4.5), such signing bonus is not subject to any contingency or obligation of Employee to render services to the Company. (d) Stock Options. As soon as practicable following the Commencement Date, the Committee will grant to Employee non-qualified stock options to purchase Eight Hundred Thousand (800,000) shares of Pillowtex Common Stock at a purchase price equal to the Market Value of such shares of Pillowtex Common Stock at the time of grant; provided, however, such stock options are conditioned upon the disclosure to and subsequent approval by the stockholders of the Company of the material terms of such stock options in accordance with Section 162(m) of the Code. The options will be for a seven (7) year term and will vest in four equal annual installments commencing upon the first anniversary of the Commencement Date, provided Employee is employed by the Company on such anniversary dates. The vesting of the options will accelerate upon the occurrence of a Change in Control or termination of Employee's employment with the Company without "Cause" or for "Good Reason" and, in those circumstances will remain exercisable for a period of ninety (90) days following termination of employment. If and only if that certain Pillowtex Corporation 2002 Equity Incentive Plan (the "Incentive Plan") is amended by the stockholders of the Company to permit the issuance of the options contemplated by this Section 2.2(d) and, if and only if the material terms and issuance of such options have been approved by the stockholders of the Company in accordance with Section 162(m) of the Code, the options to be issued pursuant to this Section 2.2(d) will be issued pursuant to the Incentive Plan and the terms and conditions of this Section 2.2(d). (e) Stock Appreciation Rights. If the Market Value of one share of Pillowtex Common Stock exceeds Seven and 50/100 Dollars ($7.50) per share upon the date of grant of the stock appreciation rights contemplated by this Section 2.2(e), the Committee will grant to Employee stock appreciation rights with respect to Eight Hundred Thousand (800,000) shares of Pillowtex Common Stock at a Grant Price (as defined in the Incentive Plan) per share equal to Seven and 50/100 Dollars ($7.50) per share; provided, however, such stock appreciation rights are conditioned upon the disclosure to and subsequent approval by the stockholders of the Company of the material terms of such grant in accordance with Section 162(m) of the Code; and provided further, that for purposes of such stock appreciation rights, the maximum appreciation per share of Pillowtex Common Stock will be limited to the result of subtracting Seven and 50/100 Dollars ($7.50) from the Market Value of one (1) share of Pillowtex Common Stock on the date of grant of the stock appreciation rights contemplated by this Section 2.2(e). The stock appreciation rights will be for a seven (7) year term and will vest in four equal annual installments commencing upon the first anniversary of the Commencement Date, provided Employee is employed by the Company on such anniversary dates. The vesting of the stock appreciation rights will accelerate upon the occurrence of a Change in Control or termination of Employee's employment with the Company without "Cause" or for "Good Reason" and, in those circumstances will remain exercisable for a period of ninety (90) days following termination of - -------------------------------------------------------------------------------- Page 6 employment. Each stock appreciation right will be settled, at the option of the Company, in cash or in cash and shares of Pillowtex Common Stock (valued at Market Value as of the date of exercise of the applicable stock appreciation right(s)) within thirty (30) days following exercise thereof; provided, however, without the written consent of Employee, no more than sixty percent (60%) of the consideration to be delivered by the Company upon exercise of stock appreciation rights may be delivered in the form of Pillowtex Common Stock. If and only if the Incentive Plan is amended by the stockholders of the Company to permit the issuance of the stock appreciation rights contemplated by this Section 2.2(e) and, if and only if the material terms and issuance of such stock appreciation rights have been approved by the stockholders of the Company in accordance with Section 162(m) of the Code, the stock appreciation rights to be issued pursuant to this Section 2.2(e) will be issued pursuant to the Incentive Plan and the terms and conditions of this Section 2.2(e). The stock appreciation rights to be issued pursuant to this Section 2.2(e) are not being issued in tandem with any stock option. (f) Special Incentive Bonus. On the fourth anniversary of the Commencement Date (the "Special Incentive Bonus Determination Date"), if and only if Employee is then employed by the Company, a determination will be made regarding the amount realized (or then realizable) by Employee (the "Determination") with respect to (i) stock options granted to Employee by the Company, (ii) Pillowtex Common Stock owned by Employee at any time during the period between the Commencement Date and the Special Incentive Bonus Determination Date, (iii) stock appreciation rights granted to Employee by the Company or (iv) dividends or other distributions received by Employee with respect to Pillowtex Common Stock (the "Pillowtex Equity"). Such Determination will be made without consideration of taxes payable in connection with amounts realized or then realizable with respect to the Pillowtex Equity. The Determination will be made by a certified public accounting firm (the "Accounting Firm") mutually agreed upon by Employee and the Company. Such Determination will be made within thirty (30) days following the Special Incentive Bonus Determination Date. The Accounting Firm will furnish detailed supporting calculations to both Employee and the Company and, absent manifest error, the Determination will be final and binding upon Employee and the Company. All fees and expenses of the Accounting Firm related to making the Determination will be paid solely by the Company. If as of the Special Incentive Bonus Determination Date, Employee has not realized (or is not then able to realize) an aggregate of at least Three Million and 00/100 Dollars ($3,000,000.00) with respect to the Pillowtex Equity, the Company will make a lump sum payment to Employee in the amount of Two Million and 00/100 Dollars ($2,000,000.00) (the "Special Incentive Bonus"). If as of the Special Incentive Bonus Determination Date, Employee has realized (or is then able to realize) an aggregate amount in excess of Three Million and 00/100 Dollars ($3,000,000.00) but less than Nine Million and 00/100 Dollars ($9,000,000.00) with respect to the Pillowtex Equity, the Company will reduce the Special Incentive Bonus by $.33333 for every dollar realized or then realizable by Employee in excess of Three Million and 00/100 Dollars ($3,000,000.00). If Employee has realized or is then able to realize Nine Million and 00/100 Dollars ($9,000,000.00) or more with respect to the Pillowtex Equity on the Special Incentive Bonus Determination Date, the Company will not be obligated to make any Special Incentive Bonus to Employee. The Special Incentive Bonus will be paid within ten (10) days following the date on which the Company is advised in writing of the Determination. Payment of the Special Incentive Bonus will be secured by a Stand-by Letter of Credit, issued by Wachovia Bank or any other United States bank with capital of not less than Five Hundred Million and 00/100 Dollars ($500,000,000.00) selected by the Company, and will be in substantially the form attached hereto as Exhibit A. Employee agrees that he may only - -------------------------------------------------------------------------------- Page 7 draw upon the Stand-by Letter of Credit if (i) the Company fails to pay the Special Incentive Bonus when due or (ii) the bank issuing the Stand-by Letter of Credit gives notice that it does not intend to renew the Stand-by Letter of Credit, such Stand-by Letter of Credit will expire prior to the latest date on which the Company may, in accordance with the terms and conditions of this Agreement, pay the Special Incentive Bonus and the Company has not furnished Employee with a replacement letter of credit (upon substantially the same terms and conditions) prior to the date that is seven (7) business days prior to the expiration of the Stand-by Letter of Credit. Unless Employee draws upon the Stand-by Letter of Credit pursuant to clause (ii) of the immediately preceding sentence (hereinafter referred to as "Clause (ii)"), Employee further agrees that he will furnish the Company with written notice of his intent to draw upon the Stand-by Letter of Credit not less than ten (10) calendar days prior to any such draw. The parties agree and acknowledge that due to the contingent nature of the Special Incentive Bonus and its amount, it is their intention and understanding that no income tax withholding or reporting shall be made or required until and if such Special Incentive Bonus is actually made to Employee. In the event that Employee draws upon the Stand-by Letter of Credit, Employee acknowledges and agrees that he will be solely responsible for payment of all required income tax and other withholding taxes. In the event that Employee draws more funds under the Stand-by Letter of Credit than he is entitled to draw based upon the Determination (including, without limitation, any draw under the Stand-by Letter of Credit pursuant to Clause (ii) that is subsequently determined to be in excess of the amount to which Employee is entitled), Employee will (upon written request specifying the amount of such overdraw and the specific reasons upon which the Company bases its conclusion that Employee has overdrawn the Stand-by Letter of Credit) promptly (but in any event within fifteen (15) days of his receipt of such written request) remit the excess funds (less any taxes paid by Employee with respect to such draw upon the Stand-by Letter of Credit but plus any tax savings attributable to the repayment of such excess funds to the Company) to the Company. If Employee fails to remit such funds within such fifteen (15) days, the Company may offset its obligations to Employee pursuant to this Agreement against such funds; provided, however, that Company first allows Employee an opportunity to be heard by the full Board. Any remaining disagreement after such a hearing before the Board regarding whether excess funds have been drawn under the Stand-by Letter of Credit will be resolved pursuant to Section 5.3. (g) Special Change in Control Provision. If prior to the grant of the stock options contemplated by Section 2.2(d) and the stock appreciation rights contemplated by Section 2.2(e), a Change in Control occurs and such stock options and stock appreciation rights are subsequently granted to Employee, such stock options and stock appreciation rights will be fully vested and immediately exercisable upon grant, notwithstanding any contrary provision of this Agreement. (h) Timing. Except as otherwise expressly provided in this Section 2.2 all Awards (as defined in the Incentive Plan) contemplated by this Agreement will be granted simultaneously. 2.3 Duties. Employee will perform the customary duties of his position as Chief Executive Officer and those delegated to Employee by the Board consistent with his position. Employee will report directly to and be accountable to the full Board. - -------------------------------------------------------------------------------- Page 8 ARTICLE 3 BENEFITS 3.1 Severance Benefits. (a) If, during the Term, Employee is terminated by the Company for any reason other than Cause or Employee terminates his employment with the Company for Good Reason (within six (6) months following the occurrence of the event constituting Good Reason), the Company shall pay to Employee the amount specified below in Section 3.1 (a)(i) within fifteen (15) business days after the date Employee's employment is terminated (the "Termination Date"). (i) In lieu of any further payments to Employee for periods subsequent to the Termination Date, but without affecting the rights of Employee referred to in Section 3.1(b) hereof, a lump sum payment (the "Post-Employment Payment"), less any withholdings required by applicable law, in an amount equal to the greater of: (A) the sum of Employee's Base Salary payable over the remaining Term plus the result of multiplying: (I) the greater of: (a) Employee's Annual Bonus paid with respect to the immediately preceding calendar year or (b) Employee's guaranteed Annual Bonus, if any, for the year in which the termination is effective by (II) a fraction the numerator of which is the number of days remaining in the Term (without giving effect to termination) and the denominator of which is 365 or (B) an amount equal to the result of multiplying: (I) the sum of Employee's then current Base Salary plus the greater of: (a) Employee's Annual Bonus paid with respect to the immediately preceding calendar year or (b) Employee's guaranteed Annual Bonus, if any, for the year in which the termination is effective by (II) a factor of two and one-half (2.5) For the calendar year ending December 31, 2002, the Annual Bonus on which the Severance Benefit will be calculated will be Six Hundred Twenty-Five Thousand and 00/100 Dollars ($625,000.00). (ii) Upon written notice given by Employee to the Company prior to the receipt of any payment pursuant to Section 3.1(a)(i) hereof, Employee, at Employee's sole option, may elect to have all or any of the Post-Employment Payment paid to Employee on a quarterly or monthly basis during the time period specified in such written notice. - -------------------------------------------------------------------------------- Page 9 (b) In addition to all other compensation due to Employee, if, during the Term, Employee is terminated by the Company without Cause or Employee terminates his employment with the Company for Good Reason (within six (6) months following the occurrence of the event constituting Good Reason): (i) Any Company stock options or stock appreciation rights held by Employee that have not previously terminated or been exercised shall be deemed vested and exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; provided, however, if prior to the grant of the stock options contemplated by Section 2.2(d) and the stock appreciation rights contemplated by Section 2.2(e), Employee is terminated by the Company without Cause or Employee terminates his employment with the Company for Good Reason, the Company will pay to Employee, within fifteen (15) business days after the Termination Date, an amount equal to the result of multiplying (x) Eight Hundred Thousand (800,000) by (y) the positive difference, if any, resulting from subtracting (1) the lesser of (I) the average of the closing sale price per share (regular way) of the Pillowtex Common Stock computed over the sixty (60) calendar day period commencing May 30, 2002 (including only days on which a closing sale price is quoted) and (II) Seven and 50/100 Dollars ($7.50) per share from (2) the Market Value of one (1) share of Pillowtex Common Stock on the Termination Date. (ii) All restrictions on any restricted securities granted by the Company to Employee that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied. (iii) For a period of time equal to the remaining Term, following the Termination Date, the Company shall arrange to provide Employee with the car allowance as set forth in Section 3.4, club dues as set forth in Section 3.5, and Employee Benefits (other than any stock option, stock purchase, stock appreciation, savings, pension, supplemental retirement or other retirement plan of the Company, or any other equity incentive policy, plan, program or arrangement of the Company), substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that Employee is no longer an officer or employee of the Company, then the Company shall itself pay to Employee and/or Employee's dependents and beneficiaries, the full cost of such Employee Benefits). Any Employee Benefits payable to Employee pursuant to this Section 3.1(b)(iii) by reason of any "welfare benefit plan" of the Company (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are available to Employee from another employer during such time period as set forth in this Section 3.1(b)(iii). (iv) The Special Incentive Bonus Determination Date will be accelerated to coincide with the Termination Date and the Determination will be made - -------------------------------------------------------------------------------- Page 10 and the Special Incentive Bonus will be paid based upon such accelerated Special Incentive Bonus Determination Date. (c) Death or Disability. If Employee's employment is terminated by reason of his Disability, Employee shall continue to receive his then current annual Base Salary, a prorated Annual Bonus based upon the number of months of employment during the year of termination and all Employee Benefits for six (6) months after his termination for such Disability, and such payments will be in addition to any insurance payments Employee is entitled to receive. If Employee's employment is terminated by reason of Employee's death, the Company agrees to pay to the legal representative of his estate, (i) for a period of six (6) months after the date of death an amount equal to and payable at the same rate as his then current annual Base Salary, (ii) any payment Employee's beneficiaries may be entitled to receive pursuant to any Employee Benefits then maintained by the Company and (iii) a prorated Annual Bonus based upon the number of months of employment during the year of termination. In the event of death or Disability, the estate or Employee, as the case may be, will have the right to receive all earned and accrued but unpaid Base Salary, bonus and vacation payments. (d) Excise Tax. (i) In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of Employee (the "Payments"), either under this Agreement or otherwise, will be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code or any successor provision ("section 4999"), the Company will, prior to the date on which any amount of the Excise Tax must be paid or withheld, make an additional lump-sum payment (the "Gross-up Payment") to Employee. The Gross-up Payment will be sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the Gross-up Payment, to make Employee whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of section 4999. The Gross-up Payment provided for above will be paid on the thirtieth (30th) day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Payments are subject to the Excise Tax, but in no event later than sixty (60) days following termination of employment of Employee. (ii) In the event Employee would be entitled to the Payments which would be subject to the Excise Tax, Employee may, at his option, elect to reduce the Payments he would receive to such an amount as would not be subject to the Excise Tax. To exercise this option, Employee must provide written notice (the "Cap Notice") to the Company of such election within ten (10) business days of the Termination Date and such Cap Notice must specify the manner and amount in which Employee elects to reduce the Payments. Upon receipt of the Cap Notice by the Company, Employee's election will be considered irrevocable and the Company shall have no liability whatsoever for complying with Employee's instructions contained in the Cap Notice. (iii) Determinations under this Section 3.1 will be made by the Accounting Firm. The determinations of the Accounting Firm will be binding upon the Company and Employee except as the determinations are established in resolution - -------------------------------------------------------------------------------- Page 11 (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. 3.2 Stock Options and Restricted Stock. Employee will be eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. 3.3 Vacation. Employee will be entitled to paid vacation in accordance with Company policy in effect from time to time for senior executive officers of the Company, or if greater, four weeks' vacation. 3.4 Auto Expense. The Company will pay Employee Two Thousand Five Hundred Dollars ($2,500) per month as his automobile allowance, plus an additional amount equal to any taxes incurred by Employee for such automobile allowance. 3.5 Club Membership. The Company will reimburse Employee for the initiation fee of one country club membership within fifty (50) miles of his home or the Company office, as mutually agreed, in an amount not to exceed Fifty-Thousand Dollars ($50,000) (unless otherwise approved by the Board), and the Company will reimburse Employee 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. 3.6 Moving Expenses. The Company will reimburse Employee for reasonable and customary moving expenses directly related to Employee's relocation from Massachusetts to the Kannapolis, North Carolina area, including (i) fees and charges customarily paid by a seller with respect to the sale of Employee's current home in Massachusetts, including, without limitation, real estate brokerage fees, attorneys' fees, closing costs and transfer taxes and (ii) fees and charges customarily paid by a purchaser with respect to the purchase by Employee of a new home in the Kannapolis, North Carolina area, including, without limitation, attorneys' fees, closing costs and transfer taxes (it is understood and agreed that real estate brokerage fees are not customarily paid by a purchaser), and up to six (6) months temporary living expenses in the Kannapolis, North Carolina area. In addition, the Company will "gross up" the moving expense reimbursements paid by it to Employee to offset the federal income taxes of Employee with respect to such payments. Employee must submit proper documentation of moving expenses incurred in order to receive reimbursement of such expenses. 3.7 Accounting and Legal Fees. Within, ten (10) days following receipt of appropriate written documentation, the Company will reimburse Employee for up to Thirty-Five Thousand and 00/100 Dollars ($35,000.00) of reasonable and customary accounting and legal fees and expenses incurred by Employee with respect to the negotiation and execution of this Agreement. The Company will also reimburse Employee for customary and reasonable legal fees and expenses incurred, in good faith, by Employee in connection with efforts to obtain or enforce any benefit or right provided by this Agreement; provided that Employee obtains or recovers any sum from the Company, whether by settlement or award. 3.8 Business Expenses. The Company will reimburse Employee for the reasonable and necessary business expenses incurred by Employee in the performance of the duties of - -------------------------------------------------------------------------------- Page 12 Employee under this Agreement. Such reimbursement will be made in accordance with the Company's customary practices and policies applicable to senior executive officers. 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 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 with the Company. 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, prior to any such disclosure, notify and deliver a copy of the subpoena, process or other request to the Company. The obligations of non-disclosure of Trade Secrets will not apply to any Trade Secret which Employee can demonstrate any of the following: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company or an agent of the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Trade Secret; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. Disclosure of Trade Secrets in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. 4.2 No Removal of Records and Return of Property. 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 (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 termination of Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition (reasonable wear and tear excepted), 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, and Employee hereby authorizes Company to deduct any such amounts from any sum due from Company to Employee under this Agreement, consistent with applicable law. In the event of a dispute between Employee and the Company regarding the amount of any such deductions, the parties agree to submit such dispute to arbitration in accordance with Section 5.3. 4.3 Noncompetition. Employee acknowledges and agrees that by virtue of Employee's position with the Company, Employee will be exposed to the Company's valuable Trade Secrets and Confidential Information and will have access to the Company's customers - -------------------------------------------------------------------------------- Page 13 and suppliers at the highest level and that, if used in competition with the Company, such contacts and information would enable Employee to irreparably injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted by the Company and its Affiliates during the continuation of Employee's employment with the Company or which the Company proposes to conduct as of the termination of the employment of Employee (and of which Employee has knowledge). For these reasons, Employee hereby agrees that Employee will not, during the Noncompetition Period and within the Protected Area, 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 one percent (1%) of the voting securities of any such company) in any business that is directly competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a direct competitor of the Company as a director, officer, manager, consultant, executive or other employee, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design, offer or manufacture of products or services directly competitive with any product and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates, or (d) solicit or accept business with respect to products or services that are directly competitive with the products and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting or solicited during Employee's employment. For purposes of this Agreement, a "competitor" or a business that is competitive with the Company means only those persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that manufacture and/or market textile related bed, bath, pillow and pad products and/or perform services in direct competition with those marketed and/or performed by the Company or its Affiliates within the Protected Area; provided, however, the term "competitor" (i) expressly excludes any entity where the foregoing definition would apply to ten percent (10%) or less of such entity's annual sales, and (ii) expressly includes Westpoint Stevens, Inc., Springs Industries, Inc. and Dan River, Inc. Employee's obligations pursuant to this Section 4.3 are conditioned upon payment by the Company of the Special Incentive Bonus. 4.4 Nonsolicitation. During the period of employment with the Company and the Noncompetition Period, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, directly or indirectly, 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, directly or indirectly, 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 Acknowledgement. The parties acknowledge and agree that all benefits to be received, or available to be received by Employee pursuant to this Agreement are consideration for all covenants and obligations of Employee hereunder, including, without limitation, those contained in Section 4.3 and Section 4.4. The parties will use commercially reasonable efforts to agree, within ten (10) business days of the Termination Date, to the dollar value attributable to the covenants contained in Section 4.3 and the amount of any Post-Employment Payment attributable to such covenants. - -------------------------------------------------------------------------------- Page 14 4.6 Confidential Information. During the course of this Agreement, Employee may receive or have access to Confidential Information. Employee acknowledges the economic value to the Company of the Confidential Information. Employee agrees that Employee: (i) shall use the Confidential Information only in connection with Employee's performance of his obligations under this Agreement; (ii) shall not disclose such Confidential Information to any other person or entity without the prior written consent of the Company; and (iii) shall copy the Confidential Information only as necessary for the performance of Employee's obligations under this Agreement, and ensure that all confidentiality notices are reproduced in full on such copies. The obligations of confidentiality shall not apply to any Confidential Information which Employee can demonstrate: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Confidential Information; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. Disclosure of Confidential Information in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. Confidential Information, including permitted copies, shall be deemed the property of the Company. Employee shall, within thirty (30) days of a written request by the Company, return all Confidential Information (or any designated portion thereof) recorded in a tangible form, including all copies thereof, to the Company, or if so directed by the Company, destroy such Confidential Information and all other Confidential Information that is within the control of Employee. 4.7 Damages. (a) 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. Employee acknowledges any breach of this Agreement 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 - -------------------------------------------------------------------------------- Page 15 determines to be appropriate to protect the Company's rights under this Agreement, including, without limitation, an injunction (without the requirement of posting a bond or other security) 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 ARTICLE 4. (b) The parties acknowledge and agree that if Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, (i) the amount of contractual damages that would be suffered by Employee would be speculative and difficult to determine, (ii) the consideration to be provided to Employee pursuant to this Agreement as a result of such contingencies are a good faith reasonable estimate of the amount of damages which Employee will suffer, and (iii) the delivery of such consideration constitutes liquidated damages (and not a penalty). In the event Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, the consideration to be provided to Employee pursuant to this Agreement as a result of such contingencies shall be Employee's exclusive contractual remedy and the Company's sole obligation for payments under this Agreement. 4.8 Mitigation. There will be no requirement that Employee seek other employment or otherwise mitigate damages in order to recover any payments or benefits under this Agreement, and the amount of any such payment or, except as otherwise expressly provided herein, benefit will not be reduced by any compensation earned by Employee as the result of employment by another employer, by retirement benefits, or otherwise. 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 this Section 5.1. Without limiting the generality or effect of the foregoing, Employee's rights and obligations provided for in this Agreement may not be assigned, transferred or delegated, 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, such assignment or transfer will be void and the Company will have no liability to any purported assignee or delegatee. 5.2 Successors and Binding Agreement. (a) In addition to any obligations imposed by law upon any successor to the Company, 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. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession will be a breach - -------------------------------------------------------------------------------- Page 16 of this Agreement and will entitle Employee to compensation from the Company in the same amount and on the same terms as if Employee would be entitled to hereunder if Employee were to terminate his employment for Good Reason. 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, heirs, distributees and legatees. If Employee dies while any amount would still be payable to Employee hereunder (other than amounts which, by their terms, terminate upon the death of Employee) if Employee continued to live, all such amounts, unless otherwise provided herein, will be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of Employee's estate. 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. 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 with respect to the subject matter hereof and, as of the Commencement Date, supersedes any prior written or oral agreements between the parties with respect to the subject matter hereof. 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. [SIGNATURE PAGE FOLLOWS] - -------------------------------------------------------------------------------- Page 17 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date and year first above written. PILLOWTEX CORPORATION By: /s/ Anthony T. Williams ------------------------------------------------- Name: Anthony T. Williams Title: President and Chief Operating Officer EMPLOYEE /s/ David A. Perdue ---------------------------------------------------- Printed Name: David A. Perdue - -------------------------------------------------------------------------------- Page 18 EXHIBIT A STAND-BY LETTER OF CREDIT EX-10.2 4 dex102.txt EMPLOYMENT AGREEMENT - ANTHONY WILLIAMS Exhibit 10.2 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 24th day of May, 2002 (but effective as of the date set forth in Section 1.11), is entered into by and between Pillowtex Corporation, a Delaware corporation (the "Company"), and Anthony Williams ("Employee"). WHEREAS, the Company and Employee have previously entered into that certain Employment Agreement, dated as of April 1, 2001 (the "Prior Agreement"); and WHEREAS, the Company is a debtor in a bankruptcy case (the "Bankruptcy Proceedings") 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 has previously implemented 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"); and WHEREAS, the Company and Employee desire to provide for certain rights and responsibilities of each party in connection with the future employment of the Employee including certain rights of the parties in the event of a possible change in control of the Company; and, the parties desire that this Agreement will supercede the Prior Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are 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" shall mean, 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 "Bankruptcy Proceeding" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.3 "Board" shall mean the Board of Directors of the Company. 1.4 "Cause" shall mean the occurrence of any of the following: (a) Employee engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; (c) an act of fraud, embezzlement or theft in connection with the Employee's duties or in the course of his employment with the Company; (d) Employee's breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; or (e) the death, disability or retirement of Employee. For purposes of this Section 1.4, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee 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 1.4, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (d) of the first sentence of this Section 1.4, providing Employee with a reasonable opportunity of not less than ten (10) days to cure or cease and desist such conduct; provided, however, Employee will not be provided any opportunity to cure such conduct more than twice while this Agreement is in effect. 1.5 "Change in Control" shall mean (a) the acquisition by an individual, entity or person (as the term "person" is used in Section 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of beneficial ownership (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of a majority of the outstanding Voting Stock; or (b) the sale of substantially all of the Company's assets or a merger or sale of stock wherein the holders of the Company's Voting Stock immediately prior to such sale do not hold at least a majority of the outstanding Voting Stock of the Company or its successor immediately following such sale; or (c) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred. Notwithstanding the foregoing provisions of Section 1.5 hereof, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement solely because the Company, a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership or because the Company, a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company becomes (subsequent to the Effective Date) the beneficial owner, directly or indirectly, of a majority of the Voting Stock. Notwithstanding the foregoing provisions of this Section 1.5, (i) a Change in Control described in this Section 1.5 will not occur by reason of the consummation of the transactions contemplated by the confirmation by the Bankruptcy Court of a plan of reorganization with 2 respect to the Company pursuant to which the Company emerges from bankruptcy; and (ii) a merger (including, for example, and not by way of limitation, a reincorporation of the Company in another jurisdiction), consolidation or reorganization of the Company effected in connection with the confirmation of such plan of reorganization will not be a Change in Control described in Section 1.5. 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7 "Company" shall have the meaning ascribed to such term in the first paragraph of this Agreem 1.8 "Confidential Information" shall mean any and all technical and non-technical information disclosed by the Company pursuant to or in contemplation of this Agreement, including Trade Secrets and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents and formulae related to the current, future and proposed products and services of the Company and/or the Company's parents, subsidiaries, customers and/or vendors, whether delivered in written (or other tangible) form, and includes, without limitation, information concerning design details and specifications, financial data, procurement requirements, customer lists, business forecasts and purchasing, manufacturing, sales, merchandising, development, engineering and marketing plans. Without limiting the generality of the foregoing, the term "Confidential Information" will also be deemed to include all analyses, compilations, forecasts, studies or other documents prepared by Employee in connection with the performance by Employee of Employee's duties pursuant to this Agreement. 1.9 "Court" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.10 "Disability" shall mean a physical or mental disability which renders the Employee substantially incapable of performing his duties under this Agreement, as determined by an independent physician selected by the Company and agreed to by the Employee, and which disability has existed for (a) at least 13 consecutive weeks, or (b) 120 days in any twelve- month period. 1.11 "Effective Date" shall have the meaning ascribed to such term in the Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 1.12 "Employee" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.13 "Employee Benefits" shall mean all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate generally, including, without limitation, any stock option, restricted stock, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-funded by the Company), disability, salary continuation, 3 expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the termination of Employee's employment or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company. 1.14 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor to thereto. 1.15 "Good Reason" means the termination of Employee's employment by Employee upon the occurrence of any of the following, without the Employee's prior written consent: (a) a significant reduction or diminution in the nature or scope of the authorities, title, powers, functions, responsibilities or duties attached to the position(s) with the Company which the Employee holds as of the date hereof (other than in connection with a person other than Employee being elected or appointed Chief Executive Officer of the Company); (b) the failure to elect or reelect the Employee to the office(s) of the Company which the Employee holds as of the date hereof (other than in connection with a person other than Employee being elected or appointed Chief Executive Officer of the Company); (c) any reduction by the Company in Employee's Base Salary as in effect on the date hereof or as may be increased from time to time, or the termination or reduction of Employee's rights to any Employee Benefits required under this Agreement or in effect for all senior executives, as in effect on the date hereof or as such may be increased from time to time (other than a termination of Employee Benefits which affects all senior executive officers of the Company in the same manner); (d) a decision, action or requirement by the Company to relocate the Employee more than 50 miles from the Company's offices in Kannapolis, North Carolina; or (e) a person other than Employee is elected or appointed Chief Executive Officer of the Company and Employee continues his employment with the Company for a period of nine (9) months following such election or appointment; provided, however, Employee will not be required to fulfill this nine (9) month requirement if he otherwise has Good Reason to terminate employment (as set forth in 1.15(a)-(d) above) or is terminated by the Company without Cause. 1.16 "KERP" shall mean that certain Key Employee Retention Program and Severance Plan, as approved by the Order and attached hereto as Exhibit 1.16, which consists of (a) a retention incentive plan, (b) an emergence bonus plan and (c) a severance plan. 1.17 "Order" shall have the meaning ascribed to such term in the third premise of this Agreement. 1.18 "Noncompetition Period" shall mean the period of Employee's employment and a period of (a) with respect to Westpoint Stevens, Inc., Springs Industries, Inc. and/or Dan River Inc. or their respective Affiliates, two and one-half (2.5) years following termination of 4 Employee's employment with the Company or (b) with respect to all other companies, one (1) year following termination of Employee's employment with the Company. 1.19 "Post-Employment Payment" shall have the meaning ascribed to such term in Section 3.1. 1.20 "Prior Agreement" shall have the meaning ascribed to such term in the first premise of this Agreement. 1.21 "Protected Area" shall mean (a) the United States, (b) Canada, (c) Mexico, (d) the states of the United States and adjoining or east of the Mississippi River, and (c) North Carolina. 1.22 Omitted. 1.23 "Trade Secrets" shall mean 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, that (a) the Company and its Affiliates have taken steps to keep secret and (b) is not generally known to others and (c) gives the Company a competitive business advantage. If any Trade Secret is found by an arbitrator or a court of competent jurisdiction to not be a Trade Secret for the purposes of this Agreement, such information will in any event be considered Confidential Information for purposes of this Agreement. 1.24 "Termination Date" shall have the meaning ascribed to such term in Section 3.1(a). 1.25 "Voting Stock" shall mean any outstanding securities entitled to vote generally in the election of directors of the Company. 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 with duties as set forth in Section 2.3. The initial term (the "Term") of this Agreement shall be two (2) years and, unless the Company provides Employee with written notice of its intention to renew this Agreement at least 180 days prior to the expiration of the Term, this Agreement shall expire at the end of such period. If the Company provides Employee with written notice of its intention to renew this Agreement and the Employee has not furnished notice of termination to the Company at least 180 days prior to the expiration of the Term, the Term shall be extended for an additional two (2) year period on the same terms set forth herein. Any decision to not renew this Agreement shall not constitute termination without Cause or termination for Good Reason. Employee will report to the Chief Executive Officer of the Company or, in the absence or disability of the Chief Executive Officer, to the Board. Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina. 5 2.2 Compensation. Employee's annual base salary (the "Base Salary") will be $400,000 payable in accordance with the Company's customary payroll practices and subject to such increases as may be determined from time to time thereafter by the Board or the Compensation Committee thereof in its sole discretion. During each year of this Agreement, Employee shall be eligible for an annual performance bonus to be determined by the Compensation Committee of the Board. 2.3 Duties. Employee will perform the customary duties of his position as President and Chief Operating Officer, including, without limitation, the duties described in Exhibit A attached hereto and incorporated herein by reference, plus such other duties, consistent with his position, as may reasonably be assigned to him from time to time by the Board or the Chief Executive Officer. ARTICLE 3 BENEFITS 3.1 Post-Employment Benefits. (a) If, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason, other than as described in Section 1.15(e)), the Company shall pay to the Employee the amount specified below in Section 3.1(a)(i) within fifteen (15) business days after the date the Employee's employment is terminated (the "Termination Date"): (i) In lieu of any further payments to the Employee for periods subsequent to the Termination Date, but without affecting the rights of the Employee referred to in Section 3.1(b) hereof, a lump sum payment (the "Post-Employment Payment"), less any withholdings required by applicable law, in an amount equal to the sum of (i) all earned and accrued but unpaid Base Salary, bonus payments and vacation pay, and (ii) two and one-half (2.5) times the Employee's Base Salary and bonuses paid during the preceding twelve months. (ii) Upon written notice given by the Employee to the Company prior to the receipt of any payment pursuant to Section 3.1(a)(i) hereof, the Employee, at Employee's sole option, may elect to have all or any of the Post-Employment Payment paid to the Employee on a quarterly or monthly basis during the time period specified in such written notice. (b) In addition to all other compensation due to the Employee, if, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason, other than as described in Section 1.15(e)): (i) Any Company stock options held by the Employee that have not previously terminated or been exercised shall be deemed vested and exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; 6 (ii) All restrictions on any restricted securities granted by the Company to the Employee that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; (iii) For a period of two (2) years following the Termination Date, the Company shall arrange to provide the Employee with the car allowance as set forth in Section 3.4, club dues as set forth in Section 3.6, and Employee Benefits (other than any stock option, stock purchase, stock appreciation, savings, pension, supplemental retirement or other retirement plan of the Company, or any other equity incentive policy, plan, program or arrangement of the Company), substantially similar to those which the Employee was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Employee is no longer an officer or employee of the Company, then the Company shall itself pay to the Employee and/or the Employee's dependents and beneficiaries, the full cost of such Employee Benefits). Any Employee Benefits payable to the Employee pursuant to this Section 3.1(b)(iii) by reason of any "welfare benefit plan" of the Company (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are available to the Employee from another employer during such two (2) year period. (c) The Company and Employee acknowledge and agree that the termination of Employee's employment with the Company might, but for the provisions of this Section 3.1(c), be deemed to vest rights to payments and/or benefits pursuant to the terms of both this Agreement and the KERP. Employee further acknowledges and agrees that it is not the intent of the parties that termination of Employee's employment with the Company will entitle Employee to payments and/or benefits pursuant to both this Agreement and the severance provisions of the KERP (as described on pages 10-12 of the KERP, the "KERP Severance Provisions"). Accordingly, in the event Employee's employment with the Company is terminated and such termination would, but for this Section 3.1(c), entitle Employee to payments and/or benefits pursuant to both this Agreement and the KERP Severance Provisions, Employee must elect (in writing within five (5) days of the termination of Employee's employment) whether to receive payments and benefits pursuant to this Agreement or pursuant to the KERP Severance Provisions; provided, however, under no circumstances shall the termination of Employee's employment with the Company prevent Employee from receiving his retention bonuses and/or his emergence performance bonuses as such are described in the KERP and earned by the Employee. Under no circumstances will the termination of Employee's employment with the Company entitle Employee to receive post-employment payments pursuant to both this Agreement and pursuant to the KERP. In the event of any inconsistency between the provisions of this Section 3.1(c) and the KERP, the provisions of this Section 3.1(c) will control. (d) Death or Disability. If the Employee's employment is terminated by reason of his Disability, the Employee shall continue to receive his then current annual Base Salary and all Employee Benefits for six (6) months after his termination for such Disability, and 7 such payments will be in addition to any insurance payments the Employee is entitled to receive. If the Employee's employment is terminated by reason of the Employee's death, the Company agrees to pay to the legal representative of his estate, (i) for a period of six (6) months after the date of death an amount equal to and payable at the same rate as his then current annual Base Salary, and (ii) any payment the Employee's beneficiaries may be entitled to receive pursuant to any Employee Benefits then maintained by the Company. In the event of death or Disability, the estate or the Employee, as the case may be, will have the right to receive all earned and accrued but unpaid Base Salary, bonus and vacation payments. (e) Excise Tax. (i) If Employee becomes entitled to one or more payments (with a "payment" including, without limitation, the vesting of an option, removal of restrictions on restricted stock or any other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or its Affiliates (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Code (the "Excise Tax"), the Company will pay to Employee, at the time specified below, an additional amount (the "Gross-Up Payment") equal to the lesser of: (i) $300,000 or (ii) the sum of the Excise Tax attributable to the Total Payments and the Gross-Up Tax Burden. For purposes of this Agreement, "Gross-Up Tax Burden" means an amount equal to the Excise Tax attributable to the Total Payments multiplied by the sum of (w) the highest marginal rate of United States federal income taxation applicable to an individual in the calendar year in which the Gross-Up Payment is to be made, as adjusted downward to reflect the reduction in such federal income tax rate obtained from the deduction of state and local income taxes as determined in (y) below, (x) the medicare tax rate applicable to Employee in the calendar year in which the Gross-Up Payment is to be made, (y) the highest marginal rate of state and local income taxation in the state and locality of Employee's residence on the date the Excise Tax is determined, and (z) the Excise Tax rate in the calendar year in which the Gross-Up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (A) the Total Payments will be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code will be treated as subject to the Excise Tax, unless, and except to the extent that, in the written opinion of independent compensation consultant or auditors of nationally recognized standing ("Independent Advisors") selected by the Company and reasonably acceptable to Employee, the Total Payments (in whole or in part) do not constitute parachute payments, excess parachute payments or are otherwise not subject to the Excise Tax; (B) the amount of the Total Payments which will be treated as subject to the Excise Tax will be equal to the lesser of (i) the total amount of the Total Payments, or (ii) the total amount of excess parachute payments with the meaning of Section 280G(b)(1) of the Code (after applying clause (A) above); and (C) the value of any non-cash benefits or any deferred payment or benefit will be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code and the applicable Treasury Regulations. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, Employee will repay to the Company, at the time that the amount 8 of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Gross Up Tax Burden imposed on the Gross-Up Payment being repaid by Employee to the extent that such repayment results in a reduction in the Gross UpTax Burden) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company will make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined, provided, however, such additional Gross-Up Payment (plus interest, penalties or additions payable by Employee with respect to such excess) shall not exceed an amount equal to $300,000 less the amount of the original Gross-Up Payment. Employee and the Company will each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. The Gross-up Payment provided for above will be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any portion thereof ) are subject to the Excise Tax, but in no event later than 60 days following termination of employment of Employee. (ii) In the event Employee would be entitled to Total Payments which would be subject to the Excise Tax, Employee May, at his option, elect to reduce the Total Payments he would receive to such an amount as would not be subject to the Excise Tax. To exercise this option, Employee must provide written notice (the "Cap Notice") to the Company of such election within ten (10) business days of the Termination Date and such Cap Notice must specify the manner and amount in which Employee elects to reduce the Total Payments. Upon receipt of the Cap Notice by the Company, Employee's election will be considered irrevocable and the Company shall have no liability whatsoever for complying with Employee's instructions contained in the Cap Notice. 3.2 Stock Options and Restricted Stock. Employee will be eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. Employee shall receive at a minimum those shares allocated to Employee on page 56 of that certain Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 3.3 Vacation. Employee will be entitled to paid vacation in accordance with Company policy in effect from time to time for senior executive officers of the Company, or if greater, four weeks' vacation. 3.4 Auto Expense. The Company will pay the Employee $1,000 per month as his automobile allowance, plus an additional amount equal to any taxes incurred by Employee for such automobile allowance. 9 3.5 Term Life Insurance. The Company will provide Employee with a $500,000 term life insurance policy. 3.6 Club Membership. Unless such an initiation fee has previously been paid by the Company on behalf of Employee, 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 the Company will reimburse Employee 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. 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 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 with the Company. 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, prior to any such disclosure, notify and deliver a copy of the subpoena, process or other request to the Company. The obligations of non-disclosure of Trade Secrets will not apply to any Trade Secret which Employee can demonstrate any of the following: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company or an agent of the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Trade Secret; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. Disclosure of Trade Secrets in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. 4.2 No Removal of Records and Return of Property. 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 Chief Executive Officer or 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 termination of Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition (reasonable wear and tear excepted), 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 10 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, and Employee hereby authorizes Company to deduct any such amounts from any sum due from Company to Employee under this Agreement, consistent with applicable law. In the event of a dispute between Employee and the Company regarding the amount of any such deductions, the parties agree to submit such dispute to arbitration in accordance with Section 5.4. 4.3 Noncompetition. Employee acknowledges and agrees that by virtue of Employee's position with the Company, Employee will be exposed to the Company's valuable Trade Secrets and Confidential Information and will have access to the Company's customers and suppliers at the highest level and that, if used in competition with the Company, such contacts and information would enable Employee to irreparably injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted by the Company and its Affiliates during the continuation of Employee's employment with the Company or which the Company proposes to conduct as of the termination of the employment of the Employee (and of which the Employee has knowledge). For these reasons, Employee hereby agrees that Employee will not, during the Noncompetition Period and within the Protected Area, 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 directly competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a direct competitor of the Company as a director, officer, manager, consultant, executive or other employee, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design, offer or manufacture of products or services directly competitive with any product and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates, or (d) solicit or accept business with respect to products or services that are directly competitive with the products and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting or solicited during Employee's employment. For purposes of this Agreement, a "competitor" or a business that is competitive with the Company means only those persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that manufacture and/or market textile related bed, bath, pillow and pad products and/or perform services in direct competition with those marketed and/or performed by the Company or its Affiliates within the Protected Area; provided, however, the term "competitor" (i) expressly excludes any entity where the foregoing definition would apply to 10% or less of such entity's annual sales, and (ii) expressly includes Westpoint Stevens, Inc., Springs Industries, Inc. and Dan River, Inc. 4.4 Nonsolicitation. During the period of employment with the Company and the Noncompetition Period, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, directly or indirectly, 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, directly or indirectly, 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. 11 4.5 Acknowledgement. The parties acknowledge and agree that all benefits to be received, or available to be received by Employee pursuant to this Agreement are consideration for all covenants and obligations of Employee hereunder, including, without limitation, those contained in Section 4.3 and Section 4.4. The parties will use commercially reasonable efforts to agree, within ten (10) business days of the Termination Date, to the dollar value attributable to the covenants contained in Section 4.3 and the amount of any Post-Employment Payment attributable to such covenants. 4.6 Confidential Information. During the course of this Agreement, Employee may receive or have access to Confidential Information. Employee acknowledges the economic value to the Company of the Confidential Information. Employee agrees that Employee: (i) shall use the Confidential Information only in connection with Employee's performance of his obligations under this Agreement; (ii) shall not disclose such Confidential Information to any other person or entity without the prior written consent of the Company; and (iii) shall copy the Confidential Information only as necessary for the performance of Employee's obligation under this Agreement, and ensure that all confidentiality notices are reproduced in full on such copies. The obligations of confidentiality shall not apply to any Confidential Information which Employee can demonstrate: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Confidential Information; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. (vi) Disclosure of Confidential Information in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. Confidential Information, including permitted copies, shall be deemed the property of the Company. Employee shall, within thirty (30) days of a written request by the Company, return all Confidential Information (or any designated portion thereof) recorded in a tangible form, including all copies thereof, to the Company, or if so directed by the Company, destroy such 12 Confidential Information and all other Confidential Information that is within the control of Employee. 4.7 Damages. (a) 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. Employee acknowledges any breach of this Agreement 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 (without the requirement of posting a bond or other security) 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 ARTICLE 4. (b) The parties acknowledge and agree that if Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, (i) the amount of damages that would be suffered by Employee would be speculative and difficult to determine, (ii) the Post-Employment Payment is a good faith reasonable estimate of the amount of damages which Employee will suffer, and (iii) the Post-Employment Payment constitutes liquidated damages (and not a penalty). In the event Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, the post-employment benefits described in Section 3.1 shall be Employee's exclusive remedy and the Company's sole obligation. ARTICLE 5 MISCELLANEOUS 5.1 Release. Except as expressly contemplated by this Agreement and/or the KERP, Employee hereby forever releases, waives and discharges all claims, obligations, suits, judgements, damages, demands, debts, rights, causes of action and liabilities, whether liquidated or unliquidated, fixed or contingent, material or immaterial, known or unknown, foreseen or unforeseen, arising in law, equity or otherwise, that are based in whole or in part on any act, omission, transaction or other occurrence taking place on or prior to the date hereof in any way relating to the Company or its Affiliates, and their respective past and present directors, partners, officers, employees, agents, consultants, advisors, legal counsel, accountants and financial advisors acting in such capacity (individually, a "Releasee" and collectively, "Releasees"), which Employee now has or may have had against the respective Releasees. Employee hereby covenants to refrain from directly or indirectly asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby. Employee warrants that he has not assigned or 13 otherwise transferred any claim that, but for such assignment or transfer, would be released by this Agreement. 5.2 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 this Section 5.2. Without limiting the generality or effect of the foregoing, Employee's rights and obligations provided for in this Agreement may not be assigned, transferred or delegated, 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 5.2, such assignment or transfer will be void and the Company will have no liability to any purported assignee or delegatee. 5.3 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, heirs, distributees and legatees. 5.4 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. 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 5.4. 5.5 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. 5.6 Entire Agreement. This Agreement comprises the entire agreement between the parties hereto with respect to the subject matter hereof and, as of the Effective Date, supersedes any prior written or oral agreements between the parties with respect to the subject matter hereof, excluding the KERP but specifically including, without limitation, the Prior Agreement and any other severance or employment agreement. This Agreement may not be modified, renewed or 14 extended except by a written instrument referring to this Agreement and executed by the parties hereto. 5.7 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 and each notice which must be sent to the Employee shall also be copied to: Howard Jacobs, Esq., Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. 5.8 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. 5.9 Court Approval. The Company warrants that (i) on March 2, 2001, it filed a motion with the Bankruptcy Court for authority to enter into an employment agreement with Employee; (ii) the period for objecting to such motion has expired without any objections having been filed; (iii) on March 16, 2001, the Company filed with the Bankruptcy Court a certificate of no objections with respect to such motion; and (iv) the Company's execution of and performance under this Agreement does not violate or contradict the order submitted to the Bankruptcy Court in connection with such motion, 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. 5.10 Legal Fees. The Company shall promptly reimburse Employee for all legal fees and expenses he incurs in seeking to enforce or in defending his rights under this Agreement without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no reasonable claim of success. 5.11 Other Fees. The Company agrees to reimburse Employee for those fees (including legal fees) incurred by the Employee in the negotiation and execution of this Agreement; provided, however, the Company will not reimburse Employee and Mike Harmon, Scott Shimizu and A. Allen Oakley (taken together) greater than $65,000 in the aggregate for negotiation of this Agreement and the employment agreements for such other executives. 5.12 Prior Agreement. On the Effective Date, the Prior Agreement will automatically terminate without any further action required by the parties hereto and this Agreement shall become effective. 5.13 Chief Executive Officer Agreement. In the event Anthony Williams is appointed Chief Executive Officer of the Company, the parties hereto shall enter into good faith negotiations for a new employment agreement commensurate with such title and duties. [SIGNATURE PAGE FOLLOWS] 15 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date and year first above written. PILLOWTEX CORPORATION By:____________________________________________ Name:_____________________________________ Title:____________________________________ EMPLOYEE _______________________________________________ Printed Name: Anthony Williams 16 EXHIBIT A Job Description Exhibit 1.16 [attach KERP agreement] EX-10.3 5 dex103.txt EMPLOYMENT AGREEMENT - MICHAEL HARMON Exhibit 10.3 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 24/th/ day of May, 2002 (but effective as of the date set forth in Section 1.11), is entered into by and between Pillowtex Corporation, a Delaware corporation (the "Company"), and Michael R. Harmon ("Employee"). WHEREAS, the Company and Employee have previously entered into that certain Employment Agreement, dated as of March 19, 2001 (the "Prior Agreement"); and WHEREAS, the Company is a debtor in a bankruptcy case (the "Bankruptcy Proceedings") 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 has previously implemented 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"); and WHEREAS, the Company and Employee desire to provide for certain rights and responsibilities of each party in connection with the future employment of the Employee including certain rights of the parties in the event of a possible change in control of the Company; and, the parties desire that this Agreement will supercede the Prior Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are 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" shall mean, 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 "Bankruptcy Proceeding" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.3 "Board" shall mean the Board of Directors of the Company. 1.4 "Cause" shall mean the occurrence of any of the following: (a) Employee engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; (c) an act of fraud, embezzlement or theft in connection with the Employee's duties or in the course of his employment with the Company; (d) Employee's breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; or (e) the death, disability or retirement of Employee. For purposes of this Section 1.4, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee 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 1.4, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (d) of the first sentence of this Section 1.4, providing Employee with a reasonable opportunity of not less than ten (10) days to cure or cease and desist such conduct; provided, however, Employee will not be provided any opportunity to cure such conduct more than twice while this Agreement is in effect. 1.5 "Change in Control" shall mean (a) the acquisition by an individual, entity or person (as the term "person" is used in Section 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of beneficial ownership (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of a majority of the outstanding Voting Stock; or (b) the sale of substantially all of the Company's assets or a merger or sale of stock wherein the holders of the Company's Voting Stock immediately prior to such sale do not hold at least a majority of the outstanding Voting Stock of the Company or its successor immediately following such sale; or (c) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred. Notwithstanding the foregoing provisions of Section 1.5 hereof, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement solely because the Company, a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership or because the Company, a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company becomes (subsequent to the Effective Date) the beneficial owner, directly or indirectly, of a majority of the Voting Stock. Notwithstanding the foregoing provisions of this Section 1.5, (i) a Change in Control described in this Section 1.5 will not occur by reason of the consummation of the transactions contemplated by the confirmation by the Bankruptcy Court of a plan of reorganization with -2- respect to the Company pursuant to which the Company emerges from bankruptcy; and (ii) a merger (including, for example, and not by way of limitation, a reincorporation of the Company in another jurisdiction), consolidation or reorganization of the Company effected in connection with the confirmation of such plan of reorganization will not be a Change in Control described in Section 1.5. 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7 "Company" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.8 "Confidential Information" shall mean any and all technical and non-technical information disclosed by the Company pursuant to or in contemplation of this Agreement, including Trade Secrets and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents and formulae related to the current, future and proposed products and services of the Company and/or the Company's parents, subsidiaries, customers and/or vendors, whether delivered in written (or other tangible) form, and includes, without limitation, information concerning design details and specifications, financial data, procurement requirements, customer lists, business forecasts and purchasing, manufacturing, sales, merchandising, development, engineering and marketing plans. Without limiting the generality of the foregoing, the term "Confidential Information" will also be deemed to include all analyses, compilations, forecasts, studies or other documents prepared by Employee in connection with the performance by Employee of Employee's duties pursuant to this Agreement. 1.9 "Court" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.10 "Disability" shall mean a physical or mental disability which renders the Employee substantially incapable of performing his duties under this Agreement, as determined by an independent physician selected by the Company and agreed to by the Employee, and which disability has existed for (a) at least 13 consecutive weeks, or (b) 120 days in any twelve- month period. 1.11 "Effective Date" shall have the meaning ascribed to such term in the Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 1.12 "Employee" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.13 "Employee Benefits" shall mean all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate generally, including, without limitation, any stock option, restricted stock, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-funded by the Company), disability, salary continuation, -3- expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the termination of Employee's employment or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company. 1.14 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor to thereto. 1.15 "Good Reason" means the termination of Employee's employment by Employee upon the occurrence of any of the following, without the Employee's prior written consent: (a) a significant reduction or diminution in the nature or scope of the authorities, title, powers, functions, responsibilities or duties attached to the position(s) with the Company which the Employee holds as of the date hereof; (b) the failure to elect or reelect the Employee to the office(s) of the Company which the Employee holds as of the date hereof; (c) any reduction by the Company in Employee's Base Salary as in effect on the date hereof or as may be increased from time to time, or the termination or reduction of Employee's rights to any Employee Benefits required under this Agreement or in effect for all senior executives, as in effect on the date hereof or as such may be increased from time to time (other than a termination of Employee Benefits which affects all senior executive officers of the Company in the same manner); or (d) a decision, action or requirement by the Company to relocate the Employee more than 50 miles from the Company's offices in Kannapolis, North Carolina. 1.16 "KERP" shall mean that certain Key Employee Retention Program and Severance Plan, as approved by the Order and attached hereto as Exhibit 1.16, which consists of (a) a retention incentive plan, (b) an emergence bonus plan and (c) a severance plan. 1.17 "Order" shall have the meaning ascribed to such term in the third premise of this Agreement. 1.18 "Noncompetition Period" shall mean the period of Employee's employment and a period of (a) with respect to Westpoint Stevens, Inc., Springs Industries, Inc. and/or Dan River Inc. or their respective Affiliates, two and one-half (2.5) years following termination of Employee's employment with the Company or (b) with respect to all other companies, one (1) year following termination of Employee's employment with the Company. 1.19 "Post-Employment Payment" shall have the meaning ascribed to such term in Section 3.1. 1.20 "Prior Agreement" shall have the meaning ascribed to such term in the first premise of this Agreement. -4- 1.21 "Protected Area" shall mean (a) the United States, (b) Canada, (c) Mexico, (d) the states of the United States and adjoining or east of the Mississippi River, and (c) North Carolina. 1.22 Omitted. 1.23 "Trade Secrets" shall mean 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, that (a) the Company and its Affiliates have taken steps to keep secret and (b) is not generally known to others and (c) gives the Company a competitive business advantage. If any Trade Secret is found by an arbitrator or a court of competent jurisdiction to not be a Trade Secret for the purposes of this Agreement, such information will in any event be considered Confidential Information for purposes of this Agreement. 1.24 "Termination Date" shall have the meaning ascribed to such term in Section 3.1(a). 1.25 "Voting Stock" shall mean any outstanding securities entitled to vote generally in the election of directors of the Company. 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 and Chief Financial Officer with duties as set forth in Section 2.3. The initial term (the "Term") of this Agreement shall be two (2) years and, unless the Company provides Employee with written notice of its intention to renew this Agreement at least 180 days prior to the expiration of the Term, this Agreement shall expire at the end of such period. If the Company provides Employee with written notice of its intention to renew this Agreement and the Employee has not furnished notice of termination to the Company at least 180 days prior to the expiration of the Term, the Term shall be extended for an additional two (2) year period on the same terms set forth herein. Any decision to not renew this Agreement shall not constitute termination without Cause or termination for Good Reason. Employee will report to the Chief Executive Officer of the Company or, in the absence or disability of the Chief Executive Officer, to the Chief Operating Officer or to the Board. Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina. 2.2 Compensation. Employee's annual base salary (the "Base Salary") will be $350,000 payable in accordance with the Company's customary payroll practices and subject to such increases as may be determined from time to time thereafter by the Board or the Compensation Committee thereof in its sole discretion. During each year of this Agreement, Employee shall be eligible for an annual performance bonus to be determined by the Compensation Committee of the Board. -5- 2.3 Duties. Employee will perform the customary duties of his position as Executive Vice President and Chief Financial Officer, including, without limitation, the duties described in Exhibit A attached hereto and incorporated herein by reference, plus such other duties, consistent with his position, as may reasonably be assigned to him from time to time by the Board or the Chief Executive Officer. ARTICLE 3 BENEFITS 3.1 Post-Employment Benefits. (a) If, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason), the Company shall pay to the Employee the amount specified below in Section 3.1(a)(i) within fifteen (15) business days after the date the Employee's employment is terminated (the "Termination Date"): (i) In lieu of any further payments to the Employee for periods subsequent to the Termination Date, but without affecting the rights of the Employee referred to in Section 3.1(b) hereof, a lump sum payment (the "Post-Employment Payment"), less any withholdings required by applicable law, in an amount equal to the sum of (i) all earned and accrued but unpaid Base Salary, bonus payments and vacation pay, and (ii) two and one-half (2.5) times the Employee's Base Salary and bonuses paid during the preceding twelve months. (ii) Upon written notice given by the Employee to the Company prior to the receipt of any payment pursuant to Section 3.1(a)(i) hereof, the Employee, at Employee's sole option, may elect to have all or any of the Post-Employment Payment paid to the Employee on a quarterly or monthly basis during the time period specified in such written notice. (b) In addition to all other compensation due to the Employee, if, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason): (i) Any Company stock options held by the Employee that have not previously terminated or been exercised shall be deemed vested and exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; (ii) All restrictions on any restricted securities granted by the Company to the Employee that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; -6- (iii) For a period of two (2) years following the Termination Date, the Company shall arrange to provide the Employee with the car allowance as set forth in Section 3.4, club dues as set forth in Section 3.6, and Employee Benefits (other than any stock option, stock purchase, stock appreciation, savings, pension, supplemental retirement or other retirement plan of the Company, or any other equity incentive policy, plan, program or arrangement of the Company), substantially similar to those which the Employee was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Employee is no longer an officer or employee of the Company, then the Company shall itself pay to the Employee and/or the Employee's dependents and beneficiaries, the full cost of such Employee Benefits). Any Employee Benefits payable to the Employee pursuant to this Section 3.1(b)(iii) by reason of any "welfare benefit plan" of the Company (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are available to the Employee from another employer during such two (2) year period. (c) The Company and Employee acknowledge and agree that the termination of Employee's employment with the Company might, but for the provisions of this Section 3.1(c), be deemed to vest rights to payments and/or benefits pursuant to the terms of both this Agreement and the KERP. Employee further acknowledges and agrees that it is not the intent of the parties that termination of Employee's employment with the Company will entitle Employee to payments and/or benefits pursuant to both this Agreement and the severance provisions of the KERP (as described on pages 10-12 of the KERP, the "KERP Severance Provisions"). Accordingly, in the event Employee's employment with the Company is terminated and such termination would, but for this Section 3.1(c), entitle Employee to payments and/or benefits pursuant to both this Agreement and the KERP Severance Provisions, Employee must elect (in writing within five (5) days of the termination of Employee's employment) whether to receive payments and benefits pursuant to this Agreement or pursuant to the KERP Severance Provisions; provided, however, under no circumstances shall the termination of Employee's employment with the Company prevent Employee from receiving his retention bonuses and/or his emergence performance bonuses as such are described in the KERP and earned by the Employee. Under no circumstances will the termination of Employee's employment with the Company entitle Employee to receive post-employment payments pursuant to both this Agreement and pursuant to the KERP. In the event of any inconsistency between the provisions of this Section 3.1(c) and the KERP, the provisions of this Section 3.1(c) will control. (d) Death or Disability. If the Employee's employment is terminated by reason of his Disability, the Employee shall continue to receive his then current annual Base Salary and all Employee Benefits for six (6) months after his termination for such Disability, and such payments will be in addition to any insurance payments the Employee is entitled to receive. If the Employee's employment is terminated by reason of the Employee's death, the Company agrees to pay to the legal representative of his estate, (i) for a period of six (6) months after the date of death an amount equal to and payable at the same rate as his then current annual Base Salary, and (ii) any payment the Employee's beneficiaries may be entitled to receive pursuant to any Employee Benefits then maintained by the Company. In the event of death or Disability, the -7- estate or the Employee, as the case may be, will have the right to receive all earned and accrued but unpaid Base Salary, bonus and vacation payments. (e) Excise Tax. (i) If Employee becomes entitled to one or more payments (with a "payment" including, without limitation, the vesting of an option, removal of restrictions on restricted stock or any other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or its Affiliates (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Code (the "Excise Tax"), the Company will pay to Employee, at the time specified below, an additional amount (the "Gross-Up Payment") equal to the lesser of: (i) $300,000 or (ii) the sum of the Excise Tax attributable to the Total Payments and the Gross-Up Tax Burden. For purposes of this Agreement, "Gross-Up Tax Burden" means an amount equal to the Excise Tax attributable to the Total Payments multiplied by the sum of (w) the highest marginal rate of United States federal income taxation applicable to an individual in the calendar year in which the Gross-Up Payment is to be made, as adjusted downward to reflect the reduction in such federal income tax rate obtained from the deduction of state and local income taxes as determined in (y) below, (x) the medicare tax rate applicable to Employee in the calendar year in which the Gross-Up Payment is to be made, (y) the highest marginal rate of state and local income taxation in the state and locality of Employee's residence on the date the Excise Tax is determined, and (z) the Excise Tax rate in the calendar year in which the Gross-Up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (A) the Total Payments will be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code will be treated as subject to the Excise Tax, unless, and except to the extent that, in the written opinion of independent compensation consultant or auditors of nationally recognized standing ("Independent Advisors") selected by the Company and reasonably acceptable to Employee, the Total Payments (in whole or in part) do not constitute parachute payments, excess parachute payments or are otherwise not subject to the Excise Tax; (B) the amount of the Total Payments which will be treated as subject to the Excise Tax will be equal to the lesser of (i) the total amount of the Total Payments, or (ii) the total amount of excess parachute payments with the meaning of Section 280G(b)(1) of the Code (after applying clause (A) above); and (C) the value of any non-cash benefits or any deferred payment or benefit will be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code and the applicable Treasury Regulations. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, Employee will repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Gross Up Tax Burden imposed on the Gross-Up Payment being repaid by Employee to the extent that such repayment results in a reduction in the Gross UpTax Burden) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken -8- into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company will make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined, provided, however, such additional Gross-Up Payment (plus interest, penalties or additions payable by Employee with respect to such excess) shall not exceed an amount equal to $300,000 less the amount of the original Gross-Up Payment. Employee and the Company will each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. The Gross-up Payment provided for above will be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any portion thereof ) are subject to the Excise Tax, but in no event later than 60 days following termination of employment of Employee. (ii) In the event Employee would be entitled to Total Payments which would be subject to the Excise Tax, Employee May, at his option, elect to reduce the Total Payments he would receive to such an amount as would not be subject to the Excise Tax. To exercise this option, Employee must provide written notice (the "Cap Notice") to the Company of such election within ten (10) business days of the Termination Date and such Cap Notice must specify the manner and amount in which Employee elects to reduce the Total Payments. Upon receipt of the Cap Notice by the Company, Employee's election will be considered irrevocable and the Company shall have no liability whatsoever for complying with Employee's instructions contained in the Cap Notice. 3.2 Stock Options and Restricted Stock. Employee will be eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. Employee shall receive at a minimum those shares allocated to Employee on page 56 of that certain Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 3.3 Vacation. Employee will be entitled to paid vacation in accordance with Company policy in effect from time to time for senior executive officers of the Company, or if greater, four weeks' vacation. 3.4 Auto Expense. The Company will pay the Employee $1,000 per month as his automobile allowance, plus an additional amount equal to any taxes incurred by Employee for such automobile allowance. 3.5 Term Life Insurance. The Company will provide Employee with a $500,000 term life insurance policy. 3.6 Club Membership. Unless such an initiation fee has previously been paid by the Company on behalf of Employee, 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 -9- agreed, in an amount not to exceed $25,000, and the Company will reimburse Employee 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. 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 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 with the Company. 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, prior to any such disclosure, notify and deliver a copy of the subpoena, process or other request to the Company. The obligations of non-disclosure of Trade Secrets will not apply to any Trade Secret which Employee can demonstrate any of the following: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company or an agent of the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Trade Secret; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. Disclosure of Trade Secrets in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. 4.2 No Removal of Records and Return of Property. 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 Chief Executive Officer or 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 termination of Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition (reasonable wear and tear excepted), 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, and Employee hereby authorizes Company to deduct any such amounts from any sum due from Company to Employee under this Agreement, consistent with applicable law. In the event of a dispute between Employee and the Company regarding the amount of any such deductions, the parties agree to submit such dispute to arbitration in accordance with Section 5.4. -10- 4.3 Noncompetition. Employee acknowledges and agrees that by virtue of Employee's position with the Company, Employee will be exposed to the Company's valuable Trade Secrets and Confidential Information and will have access to the Company's customers and suppliers at the highest level and that, if used in competition with the Company, such contacts and information would enable Employee to irreparably injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted by the Company and its Affiliates during the continuation of Employee's employment with the Company or which the Company proposes to conduct as of the termination of the employment of the Employee (and of which the Employee has knowledge). For these reasons, Employee hereby agrees that Employee will not, during the Noncompetition Period and within the Protected Area, 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 and investments made through Equity Capital Partners, provided Employee does not own, directly or indirectly, more than 5% of the profits or capital interest of Equity Capital Partners) in any business that is directly competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a direct competitor of the Company as a director, officer, manager, consultant, executive or other employee, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design, offer or manufacture of products or services directly competitive with any product and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates, or (d) solicit or accept business with respect to products or services that are directly competitive with the products and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting or solicited during Employee's employment. For purposes of this Agreement, a "competitor" or a business that is competitive with the Company means only those persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that manufacture and/or market textile related bed, bath, pillow and pad products and/or perform services in direct competition with those marketed and/or performed by the Company or its Affiliates within the Protected Area; provided, however, the term "competitor" (i) expressly excludes any entity where the foregoing definition would apply to 10% or less of such entity's annual sales, and (ii) expressly includes Westpoint Stevens, Inc., Springs Industries, Inc. and Dan River, Inc. 4.4 Nonsolicitation. During the period of employment with the Company and the Noncompetition Period, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, directly or indirectly, 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, directly or indirectly, 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 Acknowledgement. The parties acknowledge and agree that all benefits to be received pursuant to this Agreement, or available to be received by Employee, are consideration for all covenants and obligations of Employee hereunder, including, without limitation, those contained in Section 4.3 and Section 4.4. The parties will use commercially reasonable efforts to -11- agree, within ten (10) business days of the Termination Date, to the dollar value attributable to the covenants contained in Section 4.3 and the amount of any Post-Employment Payment attributable to such covenants. 4.6 Confidential Information. During the course of this Agreement, Employee may receive or have access to Confidential Information. Employee acknowledges the economic value to the Company of the Confidential Information. Employee agrees that Employee: (i) shall use the Confidential Information only in connection with Employee's performance of his obligations under this Agreement; (ii) shall not disclose such Confidential Information to any other person or entity without the prior written consent of the Company; and (iii) shall copy the Confidential Information only as necessary for the performance of Employee's obligation under this Agreement, and ensure that all confidentiality notices are reproduced in full on such copies. The obligations of confidentiality shall not apply to any Confidential Information which Employee can demonstrate: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Confidential Information; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. (vi) Disclosure of Confidential Information in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. Confidential Information, including permitted copies, shall be deemed the property of the Company. Employee shall, within thirty (30) days of a written request by the Company, return all Confidential Information (or any designated portion thereof) recorded in a tangible form, including all copies thereof, to the Company, or if so directed by the Company, destroy such Confidential Information and all other Confidential Information that is within the control of Employee. 4.7 Damages. -12- (a) 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. Employee acknowledges any breach of this Agreement 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 (without the requirement of posting a bond or other security) 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 ARTICLE 4. (b) The parties acknowledge and agree that if Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, (i) the amount of damages that would be suffered by Employee would be speculative and difficult to determine, (ii) the Post-Employment Payment is a good faith reasonable estimate of the amount of damages which Employee will suffer, and (iii) the Post-Employment Payment constitutes liquidated damages (and not a penalty). In the event Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, the post-employment benefits described in Section 3.1 shall be Employee's exclusive remedy and the Company's sole obligation. ARTICLE 5 MISCELLANEOUS 5.1 Release. Except as expressly contemplated by this Agreement and/or the KERP, Employee hereby forever releases, waives and discharges all claims, obligations, suits, judgements, damages, demands, debts, rights, causes of action and liabilities, whether liquidated or unliquidated, fixed or contingent, material or immaterial, known or unknown, foreseen or unforeseen, arising in law, equity or otherwise, that are based in whole or in part on any act, omission, transaction or other occurrence taking place on or prior to the date hereof in any way relating to the Company or its Affiliates, and their respective past and present directors, partners, officers, employees, agents, consultants, advisors, legal counsel, accountants and financial advisors acting in such capacity (individually, a "Releasee" and collectively, "Releasees"), which Employee now has or may have had against the respective Releasees. Employee hereby covenants to refrain from directly or indirectly asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby. Employee warrants that he has not assigned or otherwise transferred any claim that, but for such assignment or transfer, would be released by this Agreement. 5.2 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 this -13- Section 5.2. Without limiting the generality or effect of the foregoing, Employee's rights and obligations provided for in this Agreement may not be assigned, transferred or delegated, 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 5.2, such assignment or transfer will be void and the Company will have no liability to any purported assignee or delegatee. 5.3 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, heirs, distributees and legatees. 5.4 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. 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 5.4. 5.5 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. 5.6 Entire Agreement. This Agreement comprises the entire agreement between the parties hereto with respect to the subject matter hereof and, as of the Effective Date, supersedes any prior written or oral agreements between the parties with respect to the subject matter hereof, excluding the KERP but specifically including, without limitation, the Prior Agreement and any other severance or employment agreement. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 5.7 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 -14- 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 and each notice which must be sent to the Employee shall also be copied to: Howard Jacobs, Esq., Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. 5.8 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. 5.9 Court Approval. The Company warrants that (i) on March 2, 2001, it filed a motion with the Bankruptcy Court for authority to enter into an employment agreement with Employee; (ii) the period for objecting to such motion has expired without any objections having been filed; (iii) on March 16, 2001, the Company filed with the Bankruptcy Court a certificate of no objections with respect to such motion; and (iv) the Company's execution of and performance under this Agreement does not violate or contradict the order submitted to the Bankruptcy Court in connection with such motion, 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. 5.10 Legal Fees. The Company shall promptly reimburse Employee for all legal fees and expenses he incurs in seeking to enforce or in defending his rights under this Agreement without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no reasonable claim of success. 5.11 Other Fees. The Company agrees to reimburse Employee for those fees (including legal fees) incurred by the Employee in the negotiation and execution of this Agreement; provided, however, the Company will not reimburse Employee and Anthony Williams, Scott Shimizu and A. Allen Oakley (taken together) greater than $65,000 in the aggregate for negotiation of this Agreement and the employment agreements for such other executives. 5.12 Prior Agreement. On the Effective Date, the Prior Agreement will automatically terminate without any further action required by the parties hereto and this Agreement shall become effective. [SIGNATURE PAGE FOLLOWS] -15- IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date and year first above written. PILLOWTEX CORPORATION By:___________________________________ Name:____________________________ Title:___________________________ EMPLOYEE ______________________________________ Printed Name: Michael R. Harmon -16- EXHIBIT A Job Description Exhibit 1.16 [attach KERP agreement] EX-10.4 6 dex104.txt EMPLOYMENT AGREEMENT - SCOTT SHIMIZU Exhibit 10.4 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 24/th/ day of May, 2002 (but effective as of the date set forth in Section 1.11), is entered into by and between Pillowtex Corporation, a Delaware corporation (the "Company"), and Scott E. Shimizu ("Employee"). WHEREAS, the Company and Employee have previously entered into that certain Employment Agreement, dated as of April 1, 2001 (the "Prior Agreement"); and WHEREAS, the Company is a debtor in a bankruptcy case (the "Bankruptcy Proceedings") 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 has previously implemented 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"); and WHEREAS, the Company and Employee desire to provide for certain rights and responsibilities of each party in connection with the future employment of the Employee including certain rights of the parties in the event of the termination of the employment of the Employee with the Company; and, the parties desire that this Agreement will supercede the Prior Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are 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" shall mean, 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 "Bankruptcy Proceeding" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.3 "Board" shall mean the Board of Directors of the Company. 1.4 "Cause" shall mean the occurrence of any of the following: (a) Employee engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; (c) an act of fraud, embezzlement or theft in connection with the Employee's duties or in the course of his employment with the Company; (d) Employee's breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; or (e) the death, disability or retirement of Employee. For purposes of this Section 1.4, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee 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 1.4, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (d) of the first sentence of this Section 1.4, providing Employee with a reasonable opportunity of not less than ten (10) days to cure or cease and desist such conduct; provided, however, Employee will not be provided any opportunity to cure such conduct more than twice while this Agreement is in effect. 1.5 Reserved 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7 "Company" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.8 "Confidential Information" shall mean any and all technical and non-technical information disclosed by the Company pursuant to or in contemplation of this Agreement, including Trade Secrets and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents and formulae related to the current, future and proposed products and services of the Company and/or the Company's parents, subsidiaries, customers and/or vendors, whether delivered in written (or other tangible) form, and includes, without limitation, information concerning design details and specifications, financial data, procurement requirements, customer lists, business forecasts and purchasing, manufacturing, sales, merchandising, development, engineering and marketing plans. Without limiting the generality of the foregoing, the term "Confidential Information" will also be deemed to include all analyses, compilations, forecasts, studies or other documents prepared by Employee in connection with the performance by Employee of Employee's duties pursuant to this Agreement. 1.9 "Court" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.10 "Disability" shall mean a physical or mental disability which renders the Employee substantially incapable of performing his duties under this Agreement, as determined by an independent physician selected by the Company and agreed to by the Employee, and which disability has existed for (a) at least 13 consecutive weeks, or (b) 120 days in any twelve-month period. 2 1.11 "Effective Date" shall have the meaning ascribed to such term in the Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 1.12 "Employee" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.13 "Employee Benefits" shall mean all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate generally, including, without limitation, any stock option, restricted stock, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-funded by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the termination of the Employee's Employment or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company. 1.14 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor to thereto. 1.15 "Good Reason" means the termination of Employee's employment by Employee upon the occurrence of any of the following, without the Employee's prior written consent: (a) a significant reduction or diminution in the nature or scope of the authorities, title, powers, functions, responsibilities or duties attached to the position(s) with the Company which the Employee holds as of the date hereof; (b) the failure to elect or reelect the Employee to the office(s) of the Company which the Employee holds as of the date hereof; (c) any reduction by the Company in Employee's Base Salary as in effect on the date hereof or as may be increased from time to time, or the termination or reduction of Employee's rights to any Employee Benefits required under this Agreement or in effect for all senior executives, as in effect on the date hereof or as such may be increased from time to time (other than a termination of Employee Benefits which affects all senior executive officers of the Company in the same manner); or (d) a decision, action or requirement by the Company to relocate the Employee more than 50 miles from the Company's offices in Dallas, Texas. 1.16 "KERP" shall mean that certain Key Employee Retention Program and Severance Plan, as approved by the Order and attached hereto as Exhibit 1.16, which consists of (a) a retention incentive plan, (b) an emergence bonus plan and (c) a severance plan. 1.17 "Order" shall have the meaning ascribed to such term in the third premise of this Agreement. 3 1.18 "Noncompetition Period" shall mean the period of Employee's employment and a period of (a) with respect to Westpoint, Stevens, Inc., Springs Industries, Inc. and/or Dan River Inc. or their respective Affiliates, one and one-half (1.5) years following termination of Employee's employment with the Company or (b) with respect to all other companies, one (1) year following termination of Employee's employment with the Company. 1.19 "Post-Employment Payment" shall have the meaning ascribed to such term in Section 3.1. 1.20 "Prior Agreement" shall have the meaning ascribed to such term in the first premise of this Agreement. 1.21 "Protected Area" shall mean (a) the United States, (b) Canada, (c) Mexico, (d) the states of the United States and adjoining or east of the Mississippi River and (e) North Carolina. 1.22 Reserved 1.23 "Trade Secrets" shall mean 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, that (a) the Company and its Affiliates have taken steps to keep secret and (b) is not generally known to others and (c) gives the Company a competitive business advantage. If any Trade Secret is found by an arbitrator or a court of competent jurisdiction to not be a Trade Secret for the purposes of this Agreement, such information will in any event be considered Confidential Information for purposes of this Agreement. 1.24 "Termination Date" shall have the meaning ascribed to such term in Section 3.1(a). 1.25 "Voting Stock" shall mean any outstanding securities entitled to vote generally in the election of directors of the Company. 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 with duties as set forth in Section 2.3. The initial term (the "Term") of this Agreement shall be two (2) years and, unless the Company provides Employee with written notice of its intention to renew this Agreement at least 180 days prior to the expiration of the Term, this Agreement shall expire at the end of such period. If the Company provides Employee with written notice of its intention to renew this Agreement and the Employee has not furnished notice of termination to the Company at least 180 days prior to the expiration of the initial Term, the Term shall be extended for an additional two (2) year period on the same terms set forth herein. Any decision to not renew this Agreement shall not constitute termination without Cause or termination for Good Reason. Employee's principal place of work will be at the Company's offices in Dallas, Texas. 4 2.2 Compensation. Employee's annual base salary (the "Base Salary") will be $375,000 payable in accordance with the Company's customary payroll practices and subject to such increases as may be determined from time to time thereafter by the Board or the Compensation Committee thereof in its sole discretion. During each year of this Agreement, Employee shall be eligible for an annual performance bonus to be determined by the Compensation Committee of the Board. 2.3 Duties. Employee will perform the customary duties of his position as Executive Vice President - Sales & Marketing, including, without limitation, the duties described in Exhibit A attached hereto and incorporated herein by reference, plus such other duties, consistent with his position, as may reasonably be assigned to him from time to time. ARTICLE 3 BENEFITS 3.1 Post-Employment Benefits. (a) If, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason), the Company shall pay to the Employee the amount specified below in Section 3.1(a)(i) within fifteen (15) business days after the date the Employee's employment is terminated (the "Termination Date"): (i) In lieu of any further payments to the Employee for periods subsequent to the Termination Date, but without affecting the rights of the Employee referred to in Section 3.1(b) hereof, a lump sum payment (the "Post-Employment Payment"), less any withholdings required by applicable law, in an amount equal to the sum of (i) all earned and accrued but unpaid Base Salary, bonus payments and vacation pay, and (ii) two (2) times the Employee's Base Salary and bonuses paid during the preceding twelve months. (ii) Upon written notice given by the Employee to the Company prior to the receipt of any payment pursuant to Section 3.1(a)(i) hereof, the Employee, at Employee's sole option, may elect to have all or any of the Post-Employment Payment paid to the Employee on a quarterly or monthly basis during the time period specified in such written notice. (b) In addition to all other compensation due to the Employee, if, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason): (i) Any Company stock options held by the Employee that have not previously terminated or been exercised shall be deemed vested and exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; 5 (ii) All restrictions on any restricted securities granted by the Company to the Employee that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; (iii) For a period of two (2) years following the Termination Date, the Company shall arrange to provide the Employee with the car allowance as set forth in Section 3.8, club dues as set forth in Section 3.10, and Employee Benefits (other than any stock option, stock purchase, stock appreciation, savings, pension, supplemental retirement or other retirement plan of the Company, or any other equity incentive policy, plan, program or arrangement of the Company), substantially similar to those which the Employee was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Employee is no longer an officer or employee of the Company, then the Company shall itself pay to the Employee and/or the Employee's dependents and beneficiaries, the full cost of such Employee Benefits). Any Employee Benefits payable to the Employee pursuant to this Section 3.1(b)(iii) by reason of any "welfare benefit plan" of the Company (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are available to the Employee from another employer during such two (2) year period. 3.2 Reserved 3.3 KERP Benefits. The Company and Employee acknowledge and agree that the termination of Employee's employment with the Company might, but for the provisions of this Section 3.3, be deemed to vest rights to payments and/or benefits pursuant to the terms of both this Agreement and the KERP. Employee further acknowledges and agrees that it is not the intent of the parties that termination of Employee's employment with the Company will entitle Employee to payments and/or benefits pursuant to both this Agreement and the severance provisions of the KERP (as described on pages 10-12 of the KERP, the "KERP Severance Provisions"). Accordingly, in the event Employee's employment with the Company is terminated and such termination would, but for this Section 3.3, entitle Employee to payments and/or benefits pursuant to both this Agreement and the KERP Severance Provisions, Employee must elect (in writing within five (5) days of the termination of Employee's employment) whether to receive payments and benefits pursuant to this Agreement or pursuant to the KERP Severance Provisions; provided, however, under no circumstances shall the termination of Employee's employment with the Company prevent Employee from receiving his retention bonuses and/or his emergence performance bonuses as such are described in the KERP and earned by the Employee. Under no circumstances will the termination of Employee's employment with the Company entitle Employee to receive post-employment payments pursuant to both this Agreement and pursuant to the KERP. In the event of any inconsistency between the provisions of this Section 3.3 and the KERP, the provisions of this Section 3.3 will control. 6 3.4 Death or Disability. If the Employee's employment is terminated by reason of his Disability, the Employee shall continue to receive his then current annual Base Salary and all Employee Benefits for six (6) months after his termination for such Disability, and such payments will be in addition to any insurance payments the Employee is entitled to receive. If the Employee's employment is terminated by reason of the Employee's death, the Company agrees to pay to the legal representative of his estate, (i) for a period of six (6) months after the date of death an amount equal to and payable at the same rate as his then current annual Base Salary, and (ii) any payment the Employee's beneficiaries may be entitled to receive pursuant to any Employee Benefits then maintained by the Company. In the event of death or Disability, the estate or the Employee, as the case may be, will have the right to receive all earned and accrued but unpaid Base Salary, bonus and vacation payments. 3.5 Excise Tax. Employee acknowledges and agrees if Employee becomes entitled to one or more payments (with a "payment" including, without limitation, the vesting of an option or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or its Affiliates (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Code (the "Excise Tax"), Employee will be solely responsible for the payment of such Excise Tax. In the event Employee would be entitled to Total Payments which would be subject to the Excise Tax, Employee may, at his option, elect to reduce the Total Payments he would receive to such an amount as would not be subject to the Excise Tax. To exercise this option, Employee must provide written notice (the "Cap Notice") to the Company of such election within ten (10) business days of the Termination Date and such Cap Notice must specify the manner and amount in which Employee elects to reduce the Total Payments. Upon receipt of the Cap Notice by the Company, Employee's election will be considered irrevocable and the Company shall have no liability whatsoever for complying with Employee's instructions contained in the Cap Notice. 3.6 Stock Options and Restricted Stock. Employee will be eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. Employee shall receive at a minimum those shares allocated to Employee on page 56 of that certain Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 3.7 Vacation. Employee will be entitled to paid vacation in accordance with Company policy in effect from time to time for senior executive officers of the Company, or if greater, four weeks' vacation. 3.8 Auto Expense. The Company will pay the Employee $1,000 per month as his automobile allowance, plus an additional amount equal to any taxes incurred by Employee for such automobile allowance. 3.9 Term Life Insurance. The Company will provide Employee with a $500,000 term life insurance policy. 3.10 Club Membership. Unless such an initiation fee has previously been paid by the Company on behalf of Employee, 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 7 agreed, in an amount not to exceed $25,000, and the Company will reimburse Employee 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. 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 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 with the Company. 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, prior to any such disclosure, notify and deliver a copy of the subpoena, process or other request to the Company. The obligations of non-disclosure of Trade Secrets will not apply to any Trade Secret which Employee can demonstrate any of the following: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company or an agent of the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Trade Secret; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. Disclosure of Trade Secrets in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. 4.2 No Removal of Records and Return of Property. 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 Chief Executive Officer or 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 termination of Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition (reasonable wear and tear excepted), 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, and Employee hereby authorizes Company to deduct any such amounts from any sum due from Company to Employee under this Agreement, consistent with applicable law. In the event of a dispute between Employee and the Company regarding the amount of any such deductions, the parties agree to submit such dispute to arbitration in accordance with Section 5.4. 8 4.3 Noncompetition. Employee acknowledges and agrees that by virtue of Employee's position with the Company, Employee will be exposed to the Company's valuable Trade Secrets and Confidential Information and will have access to the Company's customers and suppliers at the highest level and that, if used in competition with the Company, such contacts and information would enable Employee to irreparably injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted by the Company and its Affiliates during the continuation of Employee's employment with the Company or which the Company proposes to conduct as of the termination of the employment of the Employee (and of which the Employee has knowledge). For these reasons, Employee hereby agrees that Employee will not, during the Noncompetition Period and within the Protected Area, 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 directly competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a direct competitor of the Company as a director, officer, manager, consultant, executive or other employee, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design, offer or manufacture of products or services directly competitive with any product and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates, or (d) solicit or accept business with respect to products or services that are directly competitive with the products and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting or solicited during Employee's employment. For purposes of this Agreement, a "competitor" or a business that is competitive with the Company means only those persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that manufacture and/or market textile related bed, bath, pillow and pad products and/or perform services in direct competition with those marketed and/or performed by the Company or its Affiliates within the Protected Area; provided, however, the term "competitor" (i) expressly excludes any entity where the foregoing definition would apply to 10% or less of such entity's annual sales, and (ii) expressly includes Westpoint Stevens, Inc., Springs Industries, Inc. and Dan River, Inc. 4.4 Nonsolicitation. During the period of employment with the Company and the Noncompetition Period, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, directly or indirectly, 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, directly or indirectly, 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 Acknowledgement. The parties acknowledge and agree that all benefits to be received, or available to be received by Employee pursuant to this Agreement, are consideration for all covenants and obligations of Employee hereunder, including, without limitation, those contained in Section 4.3 and Section 4.4. The parties will use commercially reasonable efforts to agree, within ten (10) business days of the Termination Date, to the dollar value attributable to 9 the covenants contained in Section 4.3 and the amount of any Post-Employment Payment attributable to such covenants. 4.6 Confidential Information. During the course of this Agreement, Employee may receive or have access to Confidential Information. Employee acknowledges the economic value to the Company of the Confidential Information. Employee agrees that Employee: (i) shall use the Confidential Information only in connection with Employee's performance of his obligations under this Agreement; (ii) shall not disclose such Confidential Information to any other person or entity without the prior written consent of the Company; and (iii) shall copy the Confidential Information only as necessary for the performance of Employee's obligation under this Agreement, and ensure that all confidentiality notices are reproduced in full on such copies. The obligations of confidentiality shall not apply to any Confidential Information which Employee can demonstrate: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Confidential Information; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. (vi) Disclosure of Confidential Information in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. Confidential Information, including permitted copies, shall be deemed the property of the Company. Employee shall, within thirty (30) days of a written request by the Company, return all Confidential Information (or any designated portion thereof) recorded in a tangible form, including all copies thereof, to the Company, or if so directed by the Company, destroy such Confidential Information and all other Confidential Information that is within the control of Employee. 10 4.7 Damages. (a) 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. Employee acknowledges any breach of this Agreement 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 (without the requirement of posting a bond or other security) 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 ARTICLE 4. (b) The parties acknowledge and agree that if Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, (i) the amount of damages that would be suffered by Employee would be speculative and difficult to determine, (ii) the Post-Employment Payment is a good faith reasonable estimate of the amount of damages which Employee will suffer, and (iii) the Post-Employment Payment constitutes liquidated damages (and not a penalty). In the event Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, the post-employment benefits described in Section 3.1 or Section 3.2 shall be Employee's exclusive remedy and the Company's sole obligation. ARTICLE 5 MISCELLANEOUS 5.1 Release. Except as expressly contemplated by this Agreement and/or the KERP, Employee hereby forever releases, waives and discharges all claims, obligations, suits, judgements, damages, demands, debts, rights, causes of action and liabilities, whether liquidated or unliquidated, fixed or contingent, material or immaterial, known or unknown, foreseen or unforeseen, arising in law, equity or otherwise, that are based in whole or in part on any act, omission, transaction or other occurrence taking place on or prior to the date hereof in any way relating to the Company or its Affiliates, and their respective past and present directors, partners, officers, employees, agents, consultants, advisors, legal counsel, accountants and financial advisors acting in such capacity (individually, a "Releasee" and collectively, "Releasees"), which Employee now has or may have had against the respective Releasees. Employee hereby covenants to refrain from directly or indirectly asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby. Employee warrants that he has not assigned or otherwise transferred any claim that, but for such assignment or transfer, would be released by this Agreement. 11 5.2 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 this Section 5.2. Without limiting the generality or effect of the foregoing, Employee's rights and obligations provided for in this Agreement may not be assigned, transferred or delegated, 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 5.2, such assignment or transfer will be void and the Company will have no liability to any purported assignee or delegatee. 5.3 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, heirs, distributees and legatees. 5.4 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. 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 5.4. 5.5 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. 5.6 Entire Agreement. This Agreement comprises the entire agreement between the parties hereto with respect to the subject matter hereof and, as of the Effective Date, supersedes any prior written or oral agreements between the parties with respect to the subject matter hereof, excluding the KERP but specifically including, without limitation, the Prior Agreement and any other severance or employment agreement. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 12 5.7 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 and each notice which must be sent to the Employee shall also be copied to: Howard Jacobs, Esq., Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. 5.8 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. 5.9 Court Approval. The Company warrants that (i) on March 2, 2001, it filed a motion with the Bankruptcy Court for authority to enter into an employment agreement with Employee; (ii) the period for objecting to such motion has expired without any objections having been filed; (iii) on March 16, 2001, the Company filed with the Bankruptcy Court a certificate of no objections with respect to such motion; and (iv) the Company's execution of and performance under this Agreement does not violate or contradict the order submitted to the Bankruptcy Court in connection with such motion, 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. 5.10 Legal Fees. The Company shall promptly reimburse Employee for all legal fees and expenses he incurs in seeking to enforce or in defending his rights under this Agreement without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no reasonable claim of success. 5.11 Other Fees. The Company agrees to reimburse Employee for those fees (including legal fees) incurred by the Employee in the negotiation and execution of this Agreement; provided, however, the Company will not reimburse Employee and Anthony Williams, Mike Harmon and A. Allen Oakley (taken together) greater than $65,000 in the aggregate for negotiation of this Agreement and the employment agreements for such other executives. 5.12 Prior Agreement. On the Effective Date, the Prior Agreement will automatically terminate without any further action required by the parties hereto and this Agreement shall become effective. [SIGNATURE PAGE FOLLOWS] 13 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date and year first above written. PILLOWTEX CORPORATION By:__________________________________________ Name: Anthony T. Williams Title: President and Chief Operating Officer EMPLOYEE ______________________________________________ Printed Name: Scott E. Shimizu 14 EXHIBIT A Duties for Executive Vice President - Sales & Marketing 1. Responsible for planning and directing all aspects of the organizations sales and marketing policies, objectives, and initiatives. 2. Responsible for ensuring maximum sales and margins for the company's products. 3. Develops and applies the sales and marketing plans and strategies to achieve established goals and objectives for the organization. 4. Responsible for establishing and maintaining high quality customer service capabilities. 5. Overall responsibility for all advertising and promotional activities. 6. Directs product development activities. 7. Represents the organization to the financial community, major customers, government agencies, shareholders, and the general public. 8. Directly supervises and gives direction to executive management and senior staff within the sales and marketing areas. 9. Carries out supervisory responsibility in accordance with the organization's policies and procedures and applicable laws. 10. Responsibilities include interviewing, hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems. 11. Participates actively in Executive Committee to manage the business. 12. Assists Executive Committee in evaluating profit improvement alternatives. EXHIBIT 1.16 KERP AGREEMENT [attach KERP agreement] EX-10.5 7 dex105.txt EMPLOYMENT AGREEMENT - A. ALLEN OAKLEY Exhibit 10.5 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of the 24/th/ day of May, 2002 (but effective as of the date set forth in Section 1.11), is entered into by and between Pillowtex Corporation, a Delaware corporation (the "Company"), and A. Allen Oakley ("Employee"). WHEREAS, the Company and Employee have previously entered into that certain Employment Agreement, dated as of April 1, 2001 (the "Prior Agreement"); and WHEREAS, the Company is a debtor in a bankruptcy case (the "Bankruptcy Proceedings") 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 has previously implemented 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"); and WHEREAS, the Company and Employee desire to provide for certain rights and responsibilities of each party in connection with the future employment of the Employee including certain rights of the parties in the event of the termination of the employment of the Employee with the Company; and, the parties desire that this Agreement will supercede the Prior Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are 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" shall mean, 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 "Bankruptcy Proceeding" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.3 "Board" shall mean the Board of Directors of the Company. 1.4 "Cause" shall mean the occurrence of any of the following: (a) Employee engaging in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is detrimental or injurious to the business interests, reputation or goodwill of the Company or its Affiliates; (b) Employee engaging in any act involving willful dishonesty, disloyalty, or infidelity against the Company or its Affiliates; (c) an act of fraud, embezzlement or theft in connection with the Employee's duties or in the course of his employment with the Company; (d) Employee's breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; or (e) the death, disability or retirement of Employee. For purposes of this Section 1.4, no act, or failure to act, on Employee's part will be considered "willful" unless done, or omitted to be done, by Employee 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 1.4, setting out with specificity the conduct asserted to constitute Cause and, if the conduct asserted to constitute Cause is described in clause (d) of the first sentence of this Section 1.4, providing Employee with a reasonable opportunity of not less than ten (10) days to cure or cease and desist such conduct; provided, however, Employee will not be provided any opportunity to cure such conduct more than twice while this Agreement is in effect. 1.5 Reserved 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7 "Company" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.8 "Confidential Information" shall mean any and all technical and non-technical information disclosed by the Company pursuant to or in contemplation of this Agreement, including Trade Secrets and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents and formulae related to the current, future and proposed products and services of the Company and/or the Company's parents, subsidiaries, customers and/or vendors, whether delivered in written (or other tangible) form, and includes, without limitation, information concerning design details and specifications, financial data, procurement requirements, customer lists, business forecasts and purchasing, manufacturing, sales, merchandising, development, engineering and marketing plans. Without limiting the generality of the foregoing, the term "Confidential Information" will also be deemed to include all analyses, compilations, forecasts, studies or other documents prepared by Employee in connection with the performance by Employee of Employee's duties pursuant to this Agreement. 1.9 "Court" shall have the meaning ascribed to such term in the second premise of this Agreement. 1.10 "Disability" shall mean a physical or mental disability which renders the Employee substantially incapable of performing his duties under this Agreement, as determined by an independent physician selected by the Company and agreed to by the Employee, and which disability has existed for (a) at least 13 consecutive weeks, or (b) 120 days in any twelve-month period. 2 1.11 "Effective Date" shall have the meaning ascribed to such term in the Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 1.12 "Employee" shall have the meaning ascribed to such term in the first paragraph of this Agreement. 1.13 "Employee Benefits" shall mean all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate generally, including, without limitation, any stock option, restricted stock, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-funded by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the termination of Employee's employment or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company. 1.14 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor to thereto. 1.15 "Good Reason" means the termination of Employee's employment by Employee upon the occurrence of any of the following, without the Employee's prior written consent: (a) a significant reduction or diminution in the nature or scope of the authorities, title, powers, functions, responsibilities or duties attached to the position(s) with the Company which the Employee holds as of the date hereof; (b) the failure to elect or reelect the Employee to the office(s) of the Company which the Employee holds as of the date hereof; (c) any reduction by the Company in Employee's Base Salary as in effect on the date hereof or as may be increased from time to time, or the termination or reduction of Employee's rights to any Employee Benefits required under this Agreement or in effect for all senior executives, as in effect on the date hereof or as such may be increased from time to time (other than a termination of Employee Benefits which affects all senior executive officers of the Company in the same manner); or (d) a decision, action or requirement by the Company to relocate the Employee more than 50 miles from the Company's offices in Kannapolis, North Carolina. 1.16 "KERP" shall mean that certain Key Employee Retention Program and Severance Plan, as approved by the Order and attached hereto as Exhibit 1.16, which consists of (a) a retention incentive plan, (b) an emergence bonus plan and (c) a severance plan. 1.17 "Order" shall have the meaning ascribed to such term in the third premise of this Agreement. 3 1.18 "Noncompetition Period" shall mean the period of Employee's employment and a period of (a) with respect to Westpoint Stevens, Inc., Springs Industries, Inc. and/or Dan River Inc. or their respective Affiliates, one and one-half (1.5) years following termination of Employee's employment with the Company or (b) with respect to all other companies, one (1) year following termination of Employee's employment with the Company. 1.19 "Post-Employment Payment" shall have the meaning ascribed to such term in Section 3.1. 1.20 "Prior Agreement" shall have the meaning ascribed to such term in the first premise of this Agreement. 1.21 "Protected Area" shall mean (a) the United States, (b) Canada, (c) Mexico, (d) the states of the United States and adjoining or east of the Mississippi River and (e) North Carolina. 1.22 Reserved 1.23 "Trade Secrets" shall mean 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, that (a) the Company and its Affiliates have taken steps to keep secret and (b) is not generally known to others and (c) gives the Company a competitive business advantage. If any Trade Secret is found by an arbitrator or a court of competent jurisdiction to not be a Trade Secret for the purposes of this Agreement, such information will in any event be considered Confidential Information for purposes of this Agreement. 1.24 "Termination Date" shall have the meaning ascribed to such term in Section 3.1(a). 1.25 "Voting Stock" shall mean any outstanding securities entitled to vote generally in the election of directors of the Company. 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 with duties as set forth in Section 2.3. The initial term (the "Term") of this Agreement shall be two (2) years and, unless the Company provides Employee with written notice of its intention to renew this Agreement at least 180 days prior to the expiration of the Term, this Agreement shall expire at the end of such period. If the Company provides Employee with written notice of its intention to renew this Agreement and the Employee has not furnished notice of termination to the Company at least 180 days prior to the expiration of the initial Term, the Term shall be extended for an additional two (2) year period on the same terms set forth herein. Any decision to not renew this Agreement shall not constitute termination without Cause or termination for Good Reason. 4 Employee's principal place of work will be at the Company's offices in Kannapolis, North Carolina. 2.2 Compensation. Employee's annual base salary (the "Base Salary") will be $300,000 payable in accordance with the Company's customary payroll practices and subject to such increases as may be determined from time to time thereafter by the Board or the Compensation Committee thereof in its sole discretion. During each year of this Agreement, Employee shall be eligible for an annual performance bonus to be determined by the Compensation Committee of the Board. 2.3 Duties. Employee will perform the customary duties of his position as Executive Vice President - Manufacturing, including, without limitation, the duties described in Exhibit A attached hereto and incorporated herein by reference, plus such other duties, consistent with his position, as may reasonably be assigned to him from time to time. ARTICLE 3 BENEFITS 3.1 Post-Employment Benefits. (a) If, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason), the Company shall pay to the Employee the amount specified below in Section 3.1(a)(i) within fifteen (15) business days after the date the Employee's employment is terminated (the "Termination Date"): (i) In lieu of any further payments to the Employee for periods subsequent to the Termination Date, but without affecting the rights of the Employee referred to in Section 3.1(b) hereof, a lump sum payment (the "Post-Employment Payment"), less any withholdings required by applicable law, in an amount equal to the sum of (i) all earned and accrued but unpaid Base Salary, bonus payments and vacation pay, and (ii) two (2) times the Employee's Base Salary and bonuses paid during the preceding twelve months. (ii) Upon written notice given by the Employee to the Company prior to the receipt of any payment pursuant to Section 3.1(a)(i) hereof, the Employee, at Employee's sole option, may elect to have all or any of the Post-Employment Payment paid to the Employee on a quarterly or monthly basis during the time period specified in such written notice. (b) In addition to all other compensation due to the Employee, if, during the Term, Employee is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason (within four (4) months following the occurrence of the event constituting Good Reason): (i) Any Company stock options held by the Employee that have not previously terminated or been exercised shall be deemed vested and exercisable, 5 regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; (ii) All restrictions on any restricted securities granted by the Company to the Employee that have not previously been forfeited shall be removed and the securities shall be fully vested and freely transferable without restrictions (unless otherwise restricted pursuant to applicable securities laws), regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied; (iii) For a period of two (2) years following the Termination Date, the Company shall arrange to provide the Employee with the car allowance as set forth in Section 3.8, club dues as set forth in Section 3.10, and Employee Benefits (other than any stock option, stock purchase, stock appreciation, savings, pension, supplemental retirement or other retirement plan of the Company, or any other equity incentive policy, plan, program or arrangement of the Company), substantially similar to those which the Employee was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Employee is no longer an officer or employee of the Company, then the Company shall itself pay to the Employee and/or the Employee's dependents and beneficiaries, the full cost of such Employee Benefits). Any Employee Benefits payable to the Employee pursuant to this Section 3.1(b)(iii) by reason of any "welfare benefit plan" of the Company (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are available to the Employee from another employer during such two (2) year period. 3.2 Reserved 3.3 KERP Benefits. The Company and Employee acknowledge and agree that the termination of Employee's employment with the Company might, but for the provisions of this Section 3.3, be deemed to vest rights to payments and/or benefits pursuant to the terms of both this Agreement and the KERP. Employee further acknowledges and agrees that it is not the intent of the parties that termination of Employee's employment with the Company will entitle Employee to payments and/or benefits pursuant to both this Agreement and the severance provisions of the KERP (as described on pages 10-12 of the KERP, the "KERP Severance Provisions"). Accordingly, in the event Employee's employment with the Company is terminated and such termination would, but for this Section 3.3, entitle Employee to payments and/or benefits pursuant to both this Agreement and the KERP Severance Provisions, Employee must elect (in writing within five (5) days of the termination of Employee's employment) whether to receive payments and benefits pursuant to this Agreement or pursuant to the KERP Severance Provisions; provided, however, under no circumstances shall the termination of Employee's employment with the Company prevent Employee from receiving his retention bonuses and/or his emergence performance bonuses as such are described in the KERP and earned by the Employee. Under no circumstances will the termination of Employee's employment with the Company entitle Employee to receive post-employment payments pursuant 6 to both this Agreement and pursuant to the KERP. In the event of any inconsistency between the provisions of this Section 3.3 and the KERP, the provisions of this Section 3.3 will control. 3.4 Death or Disability. If the Employee's employment is terminated by reason of his Disability, the Employee shall continue to receive his then current annual Base Salary and all Employee Benefits for six (6) months after his termination for such Disability, and such payments will be in addition to any insurance payments the Employee is entitled to receive. If the Employee's employment is terminated by reason of the Employee's death, the Company agrees to pay to the legal representative of his estate, (i) for a period of six (6) months after the date of death an amount equal to and payable at the same rate as his then current annual Base Salary, and (ii) any payment the Employee's beneficiaries may be entitled to receive pursuant to any Employee Benefits then maintained by the Company. In the event of death or Disability, the estate or the Employee, as the case may be, will have the right to receive all earned and accrued but unpaid Base Salary, bonus and vacation payments. 3.5 Excise Tax. Employee acknowledges and agrees if Employee becomes entitled to one or more payments (with a "payment" including, without limitation, the vesting of an option or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or its Affiliates (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Code (the "Excise Tax"), Employee will be solely responsible for the payment of such Excise Tax. In the event Employee would be entitled to Total Payments which would be subject to the Excise Tax, Employee may, at his option, elect to reduce the Total Payments he would receive to such an amount as would not be subject to the Excise Tax. To exercise this option, Employee must provide written notice (the "Cap Notice") to the Company of such election within ten (10) business days of the Termination Date and such Cap Notice must specify the manner and amount in which Employee elects to reduce the Total Payments. Upon receipt of the Cap Notice by the Company, Employee's election will be considered irrevocable and the Company shall have no liability whatsoever for complying with Employee's instructions contained in the Cap Notice. 3.6 Stock Options and Restricted Stock. Employee will be eligible to participate in any stock option plan and restricted stock plan adopted by the Company and made available generally to its senior executives. Employee shall receive at a minimum those shares allocated to Employee on page 56 of that certain Second Amended Joint Plan of Reorganization of Pillowtex Corporation, a Texas corporation, and its Debtor Subsidiaries. 3.7 Vacation. Employee will be entitled to paid vacation in accordance with Company policy in effect from time to time for senior executive officers of the Company, or if greater, four weeks' vacation. 3.8 Auto Expense. The Company will pay the Employee $1,000 per month as his automobile allowance, plus an additional amount equal to any taxes incurred by Employee for such automobile allowance. 3.9 Term Life Insurance. The Company will provide Employee with a $500,000 term life insurance policy. 7 3.10 Club Membership. Unless such an initiation fee has previously been paid by the Company on behalf of Employee, 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 the Company will reimburse Employee 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. 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 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 with the Company. 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, prior to any such disclosure, notify and deliver a copy of the subpoena, process or other request to the Company. The obligations of non-disclosure of Trade Secrets will not apply to any Trade Secret which Employee can demonstrate any of the following: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company or an agent of the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Trade Secret; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. Disclosure of Trade Secrets in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. 4.2 No Removal of Records and Return of Property. 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 Chief Executive Officer or 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 termination of Employee's employment with the Company and its Affiliates for any reason, Employee will return to the Company, in good condition (reasonable wear and tear excepted), 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, and Employee hereby authorizes Company to deduct any such amounts from any 8 sum due from Company to Employee under this Agreement, consistent with applicable law. In the event of a dispute between Employee and the Company regarding the amount of any such deductions, the parties agree to submit such dispute to arbitration in accordance with Section 5.4. 4.3 Noncompetition. Employee acknowledges and agrees that by virtue of Employee's position with the Company, Employee will be exposed to the Company's valuable Trade Secrets and Confidential Information and will have access to the Company's customers and suppliers at the highest level and that, if used in competition with the Company, such contacts and information would enable Employee to irreparably injure the Company and its Affiliates if Employee should compete with the Company in a business that is competitive with the business conducted by the Company and its Affiliates during the continuation of Employee's employment with the Company or which the Company proposes to conduct as of the termination of the employment of the Employee (and of which the Employee has knowledge). For these reasons, Employee hereby agrees that Employee will not, during the Noncompetition Period and within the Protected Area, 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 directly competitive with that of the Company or its Affiliates, (b) accept employment with or render services to a direct competitor of the Company as a director, officer, manager, consultant, executive or other employee, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design, offer or manufacture of products or services directly competitive with any product and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates, or (d) solicit or accept business with respect to products or services that are directly competitive with the products and/or services sold, marketed, designed, offered or manufactured by the Company or its Affiliates from any customers of the Company or its Affiliates or any person or entity whose business the Company or its Affiliates is soliciting or solicited during Employee's employment. For purposes of this Agreement, a "competitor" or a business that is competitive with the Company means only those persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that manufacture and/or market textile related bed, bath, pillow and pad products and/or perform services in direct competition with those marketed and/or performed by the Company or its Affiliates within the Protected Area; provided, however, the term "competitor" (i) expressly excludes any entity where the foregoing definition would apply to 10% or less of such entity's annual sales, and (ii) expressly includes Westpoint Stevens, Inc., Springs Industries, Inc. and Dan River, Inc. 4.4 Nonsolicitation. During the period of employment with the Company and the Noncompetition Period, Employee will not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, directly or indirectly, 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, directly or indirectly, 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 Acknowledgement. The parties acknowledge and agree that all benefits to be received, or available to be received by Employee pursuant to this Agreement, are consideration 9 for all covenants and obligations of Employee hereunder, including, without limitation, those contained in Section 4.3 and Section 4.4. The parties will use commercially reasonable efforts to agree, within ten (10) business days of the Termination Date, to the dollar value attributable to the covenants contained in Section 4.3 and the amount of any Post-Employment Payment attributable to such covenants. 4.6 Confidential Information. During the course of this Agreement, Employee may receive or have access to Confidential Information. Employee acknowledges the economic value to the Company of the Confidential Information. Employee agrees that Employee: (i) shall use the Confidential Information only in connection with Employee's performance of his obligations under this Agreement; (ii) shall not disclose such Confidential Information to any other person or entity without the prior written consent of the Company; and (iii) shall copy the Confidential Information only as necessary for the performance of Employee's obligation under this Agreement, and ensure that all confidentiality notices are reproduced in full on such copies. The obligations of confidentiality shall not apply to any Confidential Information which Employee can demonstrate: (i) is or becomes available to the public through no breach of this Agreement; (ii) was previously learned by Employee from a source other than the Company without any obligation to hold it in confidence; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Employee without the use of or reference to the Confidential Information; or (v) is approved for release by written authorization of the Company, but only to the extent of such authorization. (vi) Disclosure of Confidential Information in response to a valid order of a court or other governmental body will not be deemed to be a breach of this Agreement. Confidential Information, including permitted copies, shall be deemed the property of the Company. Employee shall, within thirty (30) days of a written request by the Company, return all Confidential Information (or any designated portion thereof) recorded in a tangible form, including all copies thereof, to the Company, or if so directed by the Company, destroy such Confidential Information and all other Confidential Information that is within the control of Employee. 10 4.7 Damages. (a) 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. Employee acknowledges any breach of this Agreement 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 (without the requirement of posting a bond or other security) 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 ARTICLE 4. (b) The parties acknowledge and agree that if Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, (i) the amount of damages that would be suffered by Employee would be speculative and difficult to determine, (ii) the Post-Employment Payment is a good faith reasonable estimate of the amount of damages which Employee will suffer, and (iii) the Post-Employment Payment constitutes liquidated damages (and not a penalty). In the event Employee's employment is terminated by the Company without Cause or Employee terminates his employment for Good Reason, the post-employment benefits described in Section 3.1 or Section 3.2 shall be Employee's exclusive remedy and the Company's sole obligation. ARTICLE 5 MISCELLANEOUS 5.1 Release. Except as expressly contemplated by this Agreement and/or the KERP, Employee hereby forever releases, waives and discharges all claims, obligations, suits, judgements, damages, demands, debts, rights, causes of action and liabilities, whether liquidated or unliquidated, fixed or contingent, material or immaterial, known or unknown, foreseen or unforeseen, arising in law, equity or otherwise, that are based in whole or in part on any act, omission, transaction or other occurrence taking place on or prior to the date hereof in any way relating to the Company or its Affiliates, and their respective past and present directors, partners, officers, employees, agents, consultants, advisors, legal counsel, accountants and financial advisors acting in such capacity (individually, a "Releasee" and collectively, "Releasees"), which Employee now has or may have had against the respective Releasees. Employee hereby covenants to refrain from directly or indirectly asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby. Employee warrants that he has not assigned or otherwise transferred any claim that, but for such assignment or transfer, would be released by this Agreement. 11 5.2 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 this Section 5.2. Without limiting the generality or effect of the foregoing, Employee's rights and obligations provided for in this Agreement may not be assigned, transferred or delegated, 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 5.2, such assignment or transfer will be void and the Company will have no liability to any purported assignee or delegatee. 5.3 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, heirs, distributees and legatees. 5.4 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. 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 5.4. 5.5 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. 5.6 Entire Agreement. This Agreement comprises the entire agreement between the parties hereto with respect to the subject matter hereof and, as of the Effective Date, supersedes any prior written or oral agreements between the parties with respect to the subject matter hereof, excluding the KERP but specifically including, without limitation, the Prior Agreement and any other severance or employment agreement. This Agreement may not be modified, renewed or extended except by a written instrument referring to this Agreement and executed by the parties hereto. 12 5.7 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 and each notice which must be sent to the Employee shall also be copied to: Howard Jacobs, Esq., Katten Muchin Zavis Rosenman, 575 Madison Avenue, New York, New York 10022. 5.8 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. 5.9 Court Approval. The Company warrants that (i) on March 2, 2001, it filed a motion with the Bankruptcy Court for authority to enter into an employment agreement with Employee; (ii) the period for objecting to such motion has expired without any objections having been filed; (iii) on March 16, 2001, the Company filed with the Bankruptcy Court a certificate of no objections with respect to such motion; and (iv) the Company's execution of and performance under this Agreement does not violate or contradict the order submitted to the Bankruptcy Court in connection with such motion, 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. 5.10 Legal Fees. The Company shall promptly reimburse Employee for all legal fees and expenses he incurs in seeking to enforce or in defending his rights under this Agreement without regard to whether Employee prevails in whole or in part, provided that Employee has not acted in bad faith or with no reasonable claim of success. 5.11 Other Fees. The Company agrees to reimburse Employee for those fees (including legal fees) incurred by the Employee in the negotiation and execution of this Agreement; provided, however, the Company will not reimburse Employee and Anthony Williams, Mike Harmon and Scott Shimizu (taken together) greater than $65,000 in the aggregate for negotiation of this Agreement and the employment agreements for such other executives. 5.12 Prior Agreement. On the Effective Date, the Prior Agreement will automatically terminate without any further action required by the parties hereto and this Agreement shall become effective. [SIGNATURE PAGE FOLLOWS] 13 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date and year first above written. PILLOWTEX CORPORATION By: ____________________________________________ Name: Anthony T. Williams Title: President and Chief Operating Officer EMPLOYEE ________________________________________________ Printed Name: A. Allen Oakley 14 EXHIBIT A Duties for Executive Vice President - Manufacturing 1. Plans and directs programs for all manufacturing operations for the organization and its subsidiaries. 2. Effectively manages the utilization of equipment, facilities, and personnel to achieve maximum efficiency and meet established economic performance objectives. 3. Develops and implements strategic manufacturing projects necessary to improve manufacturing capabilities and efficiencies. 4. Oversees production planning function, warehousing and distribution. 5. Directly supervises Corporate Engineering Department and manages capital expenses for plant, property and equipment purchases. 6. Directly supervises Corporate Quality Assurance Department for the corporation. 7. Develops and maintains authority over scheduling of all operations. 8. Represents the organization to the financial community, major customers, government agencies, shareholders, and the general public. 9. Directly supervises and gives direction to senior staff within the manufacturing area. 10. Responsibilities include interviewing, hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems. 11. Participates actively in Executive Committee to manage the business. 12. Assists Executive Committee in evaluating profit improvement alternatives. EXHIBIT 1.16 KERP AGREEMENT [attach KERP agreement] EX-10.6 8 dex106.txt INDEMNIFICATION AGREEMENT Exhibit 10.6 INDEMNIFICATION AGREEMENT This Indemnification Agreement (this "Agreement"), dated as of May 24, 2002, is made by and between Pillowtex Corporation, a Delaware corporation (the "Company"), and ____________________ ("Indemnitee"). RECITALS A. It is essential to the Company to retain and attract as directors and officers the most capable persons available. B. Indemnitee is a director and/or officer of the Company. C. Both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of companies in today's environment. D. The Company's certificate of incorporation (the "Certificate") and bylaws (the "Bylaws") provide that the Company will indemnify its directors and officers to the fullest extent permitted by law and will advance expenses in connection therewith, and Indemnitee's willingness to serve as a director and/or officer of the Company is based in part on Indemnitee's reliance on such provisions. E. In recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner, and Indemnitee's reliance on the aforesaid provisions of the Certificate and Bylaws, and in part to provide Indemnitee with specific contractual assurance that the protection promised by such provisions will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such provisions or any change in the composition of the Company's Board of Directors or any acquisition or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancement of expenses to Indemnitee as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies. AGREEMENTS NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. (a) "Claim" means any threatened, pending or completed action, suit or proceeding, or inquiry or investigation, whether instituted, made or conducted by the Company or any other party, whether civil, criminal, administrative, investigative or other. (b) "Expenses" includes attorneys' fees, judgment, fines or penalties, amounts paid in settlement and all other costs, expenses and obligations reasonably incurred or suffered in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any Claim relating to any Indemnifiable Event. (c) "Indemnifiable Event" means any actual or asserted event or occurrence related to the fact that Indemnitee is or was a director or officer of the Company or Pillowtex Corporation, a Texas corporation ("PTX"), or anything done or not done by Indemnitee in any such capacity; provided, however, Indemnitee will not be indemnified by reason of the fact that he or she is or was a director or officer of PTX unless Indemnitee served in such capacity as of or following November 14, 2000. 2. Basic Indemnification Arrangement. In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in whole or in part out of) an Indemnifiable Event, the Company will indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than 30 calendar days after written demand is presented to the Company, against any and all Expenses (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses) of such Claims. Notwithstanding anything in this Agreement to the contrary, Indemnitee will not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim; provided, however, Company consent will not be required with respect to any claim initiated by the Indemnitee against the Company arising out of, or in connection with, the enforcement of, or the alleged breach by the Company of, this Agreement. If so requested by Indemnitee, the Company will advance (within twenty (20) calendar days of such request) any and all Expenses to Indemnitee; provided, however, if the Delaware General Corporation Law (the "DGCL") so requires, an advancement of Expenses incurred by Indemnitee will be made only upon delivery to the Company of an undertaking (an "Undertaking"), by or on behalf of Indemnitee, to repay all amounts so advanced if it is ultimately determined by final judicial decision from which there is no further right to appeal (a "Final Adjudication") that Indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise. 3. Indemnification Procedures. The procedures to be followed with respect to providing indemnification to the Indemnitee under the terms of this Agreement will be consistent with those procedures set forth in Article VI of the Bylaws of the Company. 4. No. Presumption. For purposes of this Agreement, the termination of any claim, action, suit or proceeding upon a plea of nolo contendre or its equivalent will not create a presumption that the Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 5. Non-Exclusivity, Etc. The rights of Indemnitee hereunder will be in addition to any other rights Indemnitee may have under the Certificate, the Bylaws or the DGCL or otherwise; provided, however, that to the extent that Indemnitee otherwise would have any greater right to indemnification under any provision of the Certificate or Bylaws as in effect on 2 the date hereof, Indemnitee will be deemed to have such greater right hereunder; and provided further that to the extent that any change is made to the DGCL (whether by legislative action or judicial decision), the Certificate and/or the Bylaws which permits any greater right to indemnification than that provided under this Agreement as of the date hereof, Indemnitee will be deemed to have such greater right hereunder. The Company will not adopt any amendment to the Certificate or the Bylaws the effect of which would be to deny, diminish or encumber Indemnitee's right to indemnification under the Certificate, the Bylaws or the DGCL or otherwise as applied to any act or failure to act occurring in whole or in part prior to the date upon which the amendment was approved by the Company's Board of Directors and/or its stockholders, as the case may be. 6. Liability Insurance and Funding. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee will be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. The Company may, but will not be required to, create a trust fund, grant a security interest or use other means (including without limitation a letter of credit) to ensure the payment of such amounts as may be necessary to satisfy its obligations to indemnify and advance expenses pursuant to this Agreement. 7. Subrogation. In the event of payment under this Agreement, the Company will be subrogated to the extent of such payment to all of the related rights of recovery of Indemnitee against other persons or entities. The Indemnitee will execute all papers reasonably required and will do everything that may be reasonably necessary to secure such rights and enable the Company effectively to bring suit to enforce such rights (all of Indemnitee's reasonable costs and expenses, including attorneys' fees and disbursements, to be reimbursed by or, at the option of Indemnitee, advanced by the Company). 8. No Duplication of Payments. The Company will not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, the Certificate or the Bylaws or otherwise) of the amounts otherwise indemnifiable hereunder. 9. Joint Defense. Notwithstanding anything to the contrary herein contained, if (a) Indemnitee elects to retain counsel in connection with any Claim in respect of which indemnification may be sought by Indemnitee against the Company pursuant to this Agreement and (b) any other director or officer of the Company may also be subject to liability arising out of such Claim and in connection with such Claim may seek indemnification against the Company pursuant to an agreement similar to this Agreement, Indemnitee, together with such other persons, will employ counsel to represent jointly Indemnitee and such other persons unless the employment of separate counsel shall have been authorized in writing by the Board of Directors of the Company in connection with the defense of such action or the Indemnitee shall have reasonably concluded and delivered to the Board of Directors a written request setting forth in reasonable detail the basis for the determination that such Indemnitee has available to its defenses which are inconsistent with the defenses available to any other party seeking indemnification against the Company. In the event the Board of Directors of the Company fails to act on such request within 30 calendar days after receipt thereof by the Company, Indemnitee 3 will be deemed to be entitled to be represented by separate counsel in connection with such Claim. 10. Successors and Binding Agreement. (a) The Company will require any successor (whether by purchase, merger, consolidation or reorganization), by agreement 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, (and such successor will thereafter be deemed the "Company" for purposes of this Agreement), but will not otherwise be assignable, transferable or delegatable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Indemnitee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 12(a) and 12(b). Without limiting the generality or effect of the foregoing, Indemnitee's right to receive payments hereunder will not be assignable, transferable or delegatable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Indemnitee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 12(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five calendar days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent for next-day delivery by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Indemnitee at the Indemnitee's principal residence as shown in the Company's most current records, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 12. Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 13. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstance will not be affected, and the provision so held to be invalid, unenforceable or 4 otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 14. Miscellaneous. No provision of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by Indemnitee and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PILLOWTEX CORPORATION, a Delaware corporation By: ______________________________ Name: Title: __________________________________ [name] 6 EX-10.7 9 dex107.txt SCHEDULE OF INDEMNIFICATION AGREEMENTS Exhibit 10.7 Schedule of Indemnification Agreements 1. Indemnification Agreement dated as of July 1, 2002 entered into between Pillowtex Corporation and David A. Perdue. 2. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Bradley I. Dietz. 3. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Bruce A. Karsh. 4. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Jeffrey J. Keenan. 5. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Ralph W. LaRovere. 6. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Kenneth Liang. 7. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Mariusz J. Mazurek. 8. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and James P. Seery, Jr. 9. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Michael R. Harmon. 10. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and A. Allen Oakley. 11. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Scott E. Shimizu. 12. Indemnification Agreement dated as of May 24, 2002 entered into between Pillowtex Corporation and Anthony T. Williams. EX-10.8 10 dex108.txt FIRST AMD. TO TERM LOAN AGREEMENT Exhibit 10.8 FIRST AMENDMENT TO TERM LOAN AGREEMENT THIS FIRST AMENDMENT TO TERM LOAN AGREEMENT (this "Amendment"), dated to be effective as of June 28, 2002, is entered into among PILLOWTEX CORPORATION, a Delaware corporation (the "Borrower"), the institutions listed on the signature pages hereof that are parties to the Loan 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 Borrower, the Lenders and the Administrative Agent are parties to that certain Term Loan Agreement, dated as of May 24, 2002 (as amended through the date hereof, the "Loan Agreement"). Terms defined in the Loan Agreement and not otherwise defined herein shall be used herein as defined in the Loan Agreement. B. The Borrower, the Lenders and the Administrative Agent desire to make certain amendments to the Loan Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrower, the Lenders and the Administrative Agent covenant and agree as follows: 1. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended as follows: (a) A new Section 8.1(p) is added immediately following Section 8.1(o), as follows: (p) As soon as practical, but in any event not later than 45 days after the end of each quarterly period of each fiscal year of the Borrower, a report detailing the outstanding amount of loans and advances to directors, officers and employees of the Borrower and its Subsidiaries as of the end of such fiscal quarter, including the names of each recipient of such loans or advances and the amount outstanding under each such loan or advance, the stated or implied interest rate and maturity date associated with each advance, and a description of any amendments to the terms of any previous advance or commitments to make future advances. (b) Section 9.5(e) is amended and restated in its entirety, as follows: (e) Loans or advances to directors, officers and employees of the Borrower or any of its Subsidiaries that do not exceed $1,500,000 in aggregate amount outstanding at any time; (c) Schedule 1.1 is hereby amended in the form of, and all references in the Loan Agreement to Schedule 1.1 are hereby deemed to be references to, Schedule 1.1 attached to this Amendment. 2. REPRESENTATIONS AND WARRANTIES. By its execution and delivery hereof, the Borrower represents and warrants to the Lenders that, as of the date hereof: (a) the representations and warranties contained in the Loan Agreement and the other Loan 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 Borrower has legal power and authority to execute and deliver this Amendment, and this Amendment constitutes the legal, valid and binding obligation of the Borrower, 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 violate or conflict with, or result in a breach of, or constitute a default under, or require any consent under (i) the articles of incorporation, bylaws or other organizational documents of the Borrower, (ii) any applicable law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any agreement or instrument to which the Borrower is a party or by which it or any of its property is bound or subject; 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 Borrower 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 Borrower; (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. 2 4. REFERENCE TO LOAN AGREEMENT. Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement," "hereunder," or words of like import shall mean and be a reference to the Loan 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 Borrower, 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. LOAN DOCUMENT. This Amendment is a Loan Document and is subject to all provisions of the Loan Agreement applicable to Loan 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 LOAN 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 intentionally blank. Signature pages follow. 3 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. BORROWER: PILLOWTEX CORPORATION By: _____________________________________ Name:________________________________ Title:_______________________________ ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent and a Lender By: _____________________________________ William E. Livingstone, IV Managing Director First Amendment to Term Loan Agreement Signature Page LENDERS BANC OF AMERICA STRATEGIC SOLUTIONS, INC. By:___________________________________ William E. Livingstone, IV Managing Director WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION By:___________________________________ Name:______________________________ Title:_____________________________ FLEET NATIONAL BANK By:___________________________________ Name:______________________________ Title:_____________________________ COMERICA BANK By:___________________________________ Name:______________________________ Title:_____________________________ First Amendment to Term Loan Agreement Signature Page CREDIT LYONNAIS - NEW YORK BRANCH By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ CREDIT INDUSTRIEL ET COMMERCIAL By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ BANK POLSKA KASA OPIEKI, S.A., NEW YORK BRANCH By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ GENERAL ELECTRIC CAPITAL CORPORATION By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ First Amendment to Term Loan Agreement Signature Page SOCIETE GENERALE, SOUTHWEST AGENCY By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ VAN KAMPEN CLO I, LIMITED By: VAN KAMPEN MANAGEMENT, INC., as Collateral Manager By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ VAN KAMPEN CLO II, LIMITED By: Van Kampen Management, Inc., as Collateral Manager By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ First Amendment to Term Loan Agreement Signature Page BALANCED HIGH-YIELD FUND I LTD. By: ING CAPITAL ADVISORS, LLC, as Asset Manager By: ___________________________________________________ Name:______________________________________________ Title:_____________________________________________ By: ___________________________________________________ Name:______________________________________________ Title:_____________________________________________ BALANCED HIGH-YIELD FUND II LTD. By: ING CAPITAL ADVISORS, LLC, as Asset Manager By: ___________________________________________________ Name:______________________________________________ Title:_____________________________________________ By: ___________________________________________________ Name:______________________________________________ Title:_____________________________________________ KZH CYPRESSTREE-1 LLC By: ___________________________________________________ Name:______________________________________________ Title:_____________________________________________ First Amendment to Term Loan Agreement Signature Page THE DAI-ICHI KANGYO BANK LIMITED, NEW YORK BRANCH By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ MARINER LDC By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ LEHMAN COMMERCIAL PAPER, INC. By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ PRESIDENT & FELLOWS OF HARVARD COLLEGE By: Regiment Capital Management, LLC, as its Investment Advisor By: Regiment Capital Advisors, LLC, its Manager and pursuant to delegated authority By:_____________________________________ Name:___________________________________ Title:__________________________________ First Amendment to Term Loan Agreement Signature Page ARK CLO 2000-1, LIMITED By: Patriarch Partners, LLC Collateral Manager to ARK CLO 2000-1, Limited By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ FRANKLIN FLOATING RATE TRUST By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ UBS AG, STAMFORD BRANCH, successor to Union Bank of Switzerland, New York Branch By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ WILLIAM E. SIMONS & SONS SPECIAL SITUATION PARTNERS, L.P. By: __________________________________________________ Name:_____________________________________________ Title:____________________________________________ First Amendment to Term Loan Agreement Signature Page OCM ADMINISTRATIVE SERVICES II, L.L.C. By: Oaktree Capital Management, LLC, Its Manager By: ______________________________________ Name:_________________________________ Title:________________________________ By: ______________________________________ Name:_________________________________ Title:________________________________ PW WILLOW LLC, by Bond Street Capital, LLC, as agent By: ______________________________________ Name:_________________________________ Title:________________________________ BANKERS TRUST COMPANY By: ______________________________________ Name:_________________________________ Title:________________________________ B III CAPITAL PARTNERS, LP By: ______________________________________ Name:_________________________________ Title:________________________________ First Amendment to Term Loan Agreement Signature Page B III-A CAPITAL PARTNERS, L.P. By: ____________________________________ Name:_______________________________ Title:______________________________ CONTINENTAL CASUALTY COMPANY By ____________________________________ Name:_______________________________ Title:______________________________ CREDIT SUISSE FIRST BOSTON By: ____________________________________ Name:_______________________________ Title:______________________________ FIDELITY ADVISOR SERIES II: FIDELITY ADVISOR HIGH YIELD FUND By: ____________________________________ Name:_______________________________ Title:______________________________ First Amendment to Term Loan Agreement Signature Page FIDELITY ADVISOR SERIES II: Fidelity Advisor Floating Rate High Income Fund By: __________________________________________ Name:_____________________________________ Title:____________________________________ FIDELITY FIXED INCOME TRUST By: __________________________________________ Name:_____________________________________ Title:____________________________________ SATELLITE SENIOR INCOME FUND, LLC By: __________________________________________ Name:_____________________________________ Title:____________________________________ T. ROWE PRICE RECOVERY FUND II, L.P. By: __________________________________________ Name:_____________________________________ Title:____________________________________ First Amendment to Term Loan Agreement Signature Page CANPARTNERS INVESTMENTS IV LLC By: Canpartners Incorporate, Inc., a California corporation, its Managing Member By:__________________________________________ Name:____________________________________ Title:___________________________________ QDRP MASTER LTD By:__________________________________________ Name:____________________________________ Title:___________________________________ CONTRARIAN FUNDS, LLC By: Contrarian Capital Management, LLC as Manager By:__________________________________________ Name:________________________________________ Title:_______________________________________ REGIMENT CAPITAL LTD. By: Regiment Capital Management, LLC, as its Investment Advisor By: Regiment Capital Advisors, LLC, its Manager and pursuant to delegated authority By:___________________________________ Timothy Peterson President First Amendment to Term Loan Agreement Signature Page Each of the undersigned hereby (a) consents and agrees to this Amendment's execution and delivery, (b) ratifies and confirms its obligations under its guaranty, (c) acknowledges and agrees that its obligations under its guaranty are not released, diminished, impaired, reduced, or otherwise adversely affected by this Amendment, and (d) acknowledges and agrees that it has no claims or offsets against, or defenses or counterclaims to, its guaranty GUARANTORS: PTEX, INC. PILLOWTEX MANAGEMENT SERVICES COMPANY BEACON MANUFACTURING COMPANY FC ONLINE, INC. TENNESSEE WOOLEN MILLS, INC. FIELDCREST CANNON, INC. ENCEE, INC. FCC CANADA, INC. FIELDCREST CANNON LICENSING, INC. FCI CORPORATE LLC FIELDCREST CANNON TRANSPORTATION, INC. FCI OPERATIONS LLC THE LESHNER CORPORATION OPELIKA INDUSTRIES, INC. PILLOWTEX CANADA INC. By: _________________________________ Name: _________________________________ Title: _________________________________ PTEX HOLDING COMPANY FIELDCREST CANNON FINANCING, INC By: _________________________________ Name: _________________________________ Title: _________________________________ First Amendment to Term Loan Agreement Signature Page -----END PRIVACY-ENHANCED MESSAGE-----