-----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, G2X2B0OLkbUBB50GBWPMBHzzkc3LGjB0BHwk9K510ZTa5GQ1FwVF6T9MBdToTbcS rSfENCd35COF4C9I4Eur7g== 0001047469-98-013743.txt : 19980406 0001047469-98-013743.hdr.sgml : 19980406 ACCESSION NUMBER: 0001047469-98-013743 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980403 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-84624 FILM NUMBER: 98587429 BUSINESS ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 BUSINESS PHONE: 2143333225 MAIL ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 FORMER COMPANY: FORMER CONFORMED NAME: PILLOWTEX CORP DATE OF NAME CHANGE: 19930125 10-K 1 FORM 10-K - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ______ COMMISSION FILE NUMBER 1-11756 PILLOWTEX CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-2147728 (State of Incorporation) (I.R.S. Employer Identification No.) 4111 MINT WAY, DALLAS, TEXAS 75237 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 333-3225 __________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ----------------------------- ----------------------- Common Stock, $0.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None __________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 20, 1998 was $389,930,943. As of March 20, 1998, Registrant had 14,016,422 shares of Common Stock outstanding. __________________ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1997 Annual Report to Shareholders and the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders are incorporated by reference in Parts II, III, and IV hereof. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" INCLUDE PILLOWTEX CORPORATION AND ITS SUBSIDIARIES. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report and other reports and statements, including those incorporated by reference herein, filed by the Company from time to time with the Securities and Exchange Commission (collectively, "Company SEC Filings") contain or may contain certain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. Any statements preceded by, followed by, or that include the words "anticipates," "believes"' "expects," "estimates," "intends," or similar expressions contained in Company SEC Filings, as well as any other statements contained in Company SEC Filings regarding matters that are not historical facts, are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because such forward-looking statements are subject to various risks and uncertainties, results and values may differ materially from those expressed in or implied by such statements. Many of the factors that will determine these results and values are beyond the Company's ability to control or predict. The Company's shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date of the document in which they are contained. The Company's shareholders should understand that the following important factors, in addition to those discussed elsewhere in Company SEC Filings, could affect the Company's future results and could cause results and values to differ materially from those expressed in or implied by such forward-looking statements: (i) the Company's significant leverage and debt service obligations; (ii) the restrictive covenants contained in the instruments governing the Company's indebtedness; (iii) the Company's ability to achieve certain cost savings; (iv) the Company's ability to integrate acquired operations successfully with existing operations; (v) the price and availability of raw materials used by the Company; (vi) general retail industry conditions; (vii) the Company's ability to renew key trademark licenses; (viii) the goodwill associated with the brand names owned by the Company and the Company's ability to protect its proprietary rights in such brand names; (ix) the Company's ability to retain key customers; (x) the Company's relationships with both union and nonunion employees; (xi) the influence of significant shareholders of the Company; (xii) the Company's dependence on key management personnel; and (xiii) the seasonality of the Company's business. The foregoing factors are discussed in greater detail under the caption "Risk Factors" in each of the Joint Proxy Statement/Prospectus forming a part of the Company's Registration Statement on Form S-4 (No. 333-36663) and the Prospectus forming a part of the Company's Registration Statement on Form S-4 (No. 333-46209). PART I ITEM 1. BUSINESS RECENT DEVELOPMENTS On December 19, 1997, a wholly owned subsidiary of the Company was merged with and into Fieldcrest Cannon, Inc. ("Fieldcrest"), whereupon Fieldcrest became a wholly owned subsidiary of the Company. Since the consummation of such merger (the "Fieldcrest Merger"), the Company has disposed of certain non-core business assets of Fieldcrest for approximately $38.7 million in cash. The Company plans to continue to evaluate certain Fieldcrest properties and lines of business unrelated to its core home textile business of towels, bath rugs, sheets and fashion bedding and expects to enter into additional agreements for the disposal of such properties and businesses. See "- Products - Traditional Fieldcrest Product Lines - Disposition of Certain Non-Core Business Assets." On January 20, 1998, the Company announced that it was consolidating its four blanket production locations into two facilities in Swannanoa, North Carolina and Westminster, South Carolina. In connection with such -2- consolidation, the Company intends to close certain facilities operated by its subsidiaries, Manetta Home Fashions, Inc. and Tennessee Woolen Mills, Inc. GENERAL The Company, founded in 1954, is a leading North American designer, manufacturer, and marketer of home textile products, offering a full line of bed pillows, sheets, blankets, mattress pads, down comforters, towels, bath rugs, and other home textile products. The Company markets to major mass merchants, department stores, and specialty retail stores, providing its customers a centralized "one-stop" source for their home textile merchandise. The Company also markets products to wholesale clubs, catalog merchants, and institutional distributors. COMPETITIVE STRENGTHS The Company's management team believes the following competitive strengths enhance the Company's position in the marketplace: - INDUSTRY LEADING BRANDS: As a result of the Fieldcrest Merger, the Company owns some of the most recognizable brand names in the industry, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Caldwell-Registered Trademark-, Charisma-Registered Trademark-, St. Mary's-Registered Trademark-, and Touch of Class-Registered Trademark-. Furthermore, through licensing agreements, the Company currently has rights to manufacture and, in some instances, market certain bedding products under such well-known brands as Ralph Lauren, Disney's Mickey UNLIMITED-Registered Trademark-, Mickey's Stuff for Kids-Registered Trademark-, and Mickey & Co.-Registered Trademark-, Comforel-Registered Trademark-, Adrienne Vittadini-Registered Trademark-, Ellen Tracy-Registered Trademark-, and Waverly-Registered Trademark-. This diverse portfolio of premier brand names allows the Company to differentiate its products from those of its competitors and provides distinct brand names for different channels of retail distribution and for different price points. These brand names also enable the Company to assist its customers in coordinating their product offerings and differentiating such offerings from those of their competitors. - STRONG CUSTOMER RELATIONSHIPS: The Company has established relationships with the top home textile retailers in North America. The Fieldcrest Merger has enhanced these relationships, providing the Company's customers the benefits of a true "one-stop" source for bed and bath products. These strong relationships create a stable base from which the Company can pursue future business and new product introductions. - CREATIVE MERCHANDISING STRATEGIES: Historically, both the Company and its recently acquired Fieldcrest subsidiary have maintained creative partnerships with their customers, including extensive merchandising programs, that have resulted in the creation of successful new products, product mix strategies, point-of-sale concepts, and advertising campaigns. Retail customers are increasingly demanding exclusive or specially designed product lines to differentiate their product offerings from those of other retailers and to implement price tiering in order to achieve higher margins. The Company will continue this collaboration with its retail customers to design products and marketing programs responsive to individual customer's needs. - LOW COST OPERATING CAPABILITIES: As a result of its continued emphasis on cost-containment and capital expenditures to obtain greater plant efficiencies, the Company is a low cost producer of bed pillows, blankets, down comforters, and mattress pads in the home textile industry. The Fieldcrest Merger provides the Company with efficient, low cost towel and bath rug production capabilities, including a new, state-of-the-art towel production facility. In addition, the Company has emphasized a low cost of operations, creating a competitive advantage by operating with one of the lowest SG&A expenses, as a percentage of sales, in the industry. The Company believes that significant opportunities exist to improve this competitive position by lowering Fieldcrest's SG&A costs as a percentage of sales to the Company's historic levels. BUSINESS STRATEGY The Company's strategic objectives are to capitalize on its industry leading position by leveraging the strength of its brand names, customer relationships, and operational capabilities across its comprehensive array of product offerings. The Company's strategic focus will be as follows: -3- - CAPITALIZE ON INDUSTRY LEADING POSITION: The Company will focus on leveraging its market leadership by implementing sales and marketing programs designed to facilitate a customer-driven "pull" strategy. By cross-marketing its various products using the Company's strong brand names, the Company will create enhanced product value and facilitate greater differentiation of its products from those of its competitors. - DEVELOP THE PREMIER "ONE-STOP SHOP" FOR HOME TEXTILES: The breadth of the Company's product lines provides it with a significant competitive advantage as it can offer its retailer customers a centralized "one-stop" purchasing source for their home textile merchandise. The Company's extensive assortment of home textile products includes fashion and utility bedding, as well as a full line of bath products. The Company will exploit its position as a "one-stop" purchasing source by continuing its practice of offering broad product assortments across diverse product lines, thereby offering retailers a central source from which to efficiently and effectively purchase their home textile items. - FURTHER STRENGTHEN CUSTOMER RELATIONSHIPS: The Company has a long history of strong customer relationships with the top retailers in the United States and Canada. The Company has developed these relationships by providing value-added services, such as innovative marketing and cross- merchandising capabilities. The Company believes that the value of such services to retailers will be increased significantly by combining the Company's traditional product lines with the traditional product lines of Fieldcrest in a centralized purchasing source and utilizing the Fieldcrest portfolio of brand names across all such product lines. The Company will also increase the use of marketing and cross-merchandising services in connection with the traditional Fieldcrest products, creating opportunities for added sales and providing retailers with more opportunities to differentiate their product offerings from those of their competitors. - ENHANCE OPERATIONAL EFFICIENCIES: The Company will continue to focus on reducing its manufacturing cost structure by rationalizing its current operations and investing in automation, equipment modernization, process improvements, and system controls throughout all aspects of its business. The Company's management believes that significant opportunities exist to improve production efficiency through capital investment, improved operational logistics, selective outsourcing, and increased utilization of information systems. The Company intends to make capital expenditures in excess of $240.0 million over the next several years, principally to modernize the acquired Fieldcrest sheet and certain towel manufacturing facilities through the addition of new machinery and equipment. The Company anticipates that approximately $100.0 million in capital expenditures will be made in fiscal 1998. - REALIZE SIGNIFICANT COST SAVINGS: The Company estimates that it will realize approximately $21.6 million of annual cost savings as a result of the Fieldcrest Merger. These cost savings are comprised of approximately $20.3 million of savings from the elimination of duplicate staff salaries and approximately $1.3 million of savings from the elimination of duplicative corporate expenses. In addition, the Company expects to realize significant ongoing cost savings, including at least $8.4 million to be realized during fiscal 1998, as follows: (i) $0.9 million by eliminating other redundant cost functions; (ii) $2.0 million by improving procurement efficiencies by exploiting the combined company's purchasing power; (iii) $3.0 million by reducing trade advertising; (iv) $1.0 million by rationalizing and streamlining operations; and (v) $1.5 million by reducing the use of outside consultants. PRODUCTS TRADITIONAL PILLOWTEX PRODUCT LINES GENERAL. The Company originally expanded its historic pillow operations to include blankets through the acquisition of Manetta Mills, Inc. in August 1993 and Tennessee Woolen Mills, Inc. in September 1993. In addition, in December 1994, the Company acquired substantially all of the assets of Beacon Manufacturing Company ("Beacon"), a manufacturer of cotton and synthetic blankets and throws. The Company expanded its manufacturing operations into Canada through the acquisition of Torfeaco Industries, Ltd. ("Torfeaco"), a manufacturer of fashion and synthetic bedding products, in December 1993, and Imperial Feather Company ("Imperial"), a manufacturer of bedding products, including natural fill and synthetic bed pillows, down comforters, and comforter covers, in August 1994. In 1996, the -4- Company acquired certain assets from Fieldcrest's blanket operations, including a large number of newer, more efficient looms that have been installed at the Company's other blanket facilities. For a brief description of the Company's recently announced consolidation of its blanket operations, see "- Recent Developments." The combination of its historic pillow operations with the acquired top-of-the-bed product lines enabled the Company to build its traditional business around four utility bedding product lines that have a low risk of obsolescence. These include bed pillows (including natural fill, synthetic fiber fill, and latex), blankets (including cotton, wool blends, acrylic and polyester blankets, and throws), down comforters, and mattress pads (including thread quilt, sonic quilt and convoluted foam). The Company's traditional product lines also include other bedroom textile furnishings, such as comforter covers, featherbeds, pillow protectors, decorative pillows, bedspreads, synthetic comforters, pillow shams, dust ruffles, and window treatments. BED PILLOWS. The Company believes that it is a leading manufacturer and marketer of bed pillows in North America. Pillowtex produces and markets a broad line of traditional bed pillows, as well as specially designed bed pillows such as the BedMate-Registered Trademark- body pillow and Great Shapes-Registered Trademark- pillows, including Euro Square, U-Neck and Neck Roll. The Company offers products at various levels of quality and price, from synthetic pillows sold at retail prices as low as $4 to fine white goose down pillows sold at a retail price of up to approximately $185. The Company believes that it is a leading feather and down pillow manufacturer in North America, offering products filled with quality goose and duck down, or blends of feather and down, in a range of grades. These materials, known as "natural fill," are noted for their loft and resiliency. The Company also manufactures and markets a full line of bed pillows featuring staple (cut and crimped), tow (continuous filament), and cluster (individual ball) synthetic fiber fills. The Company believes that it is a leading supplier of premium synthetic and latex bed pillows in North America. BLANKETS. The Company believes that it is a leading producer of blankets in North America, manufacturing woven and nonwoven conventional and thermal weave blankets and throws in a wide assortment of fibers, including cotton, wool blend, acrylic, and polyester. The Company is the exclusive supplier in North America of blankets for Ralph Lauren. The Company has a strong presence in the infant blanket market with products ranging from nonwoven receiving blankets, to jacquard throws, to the finest Supima-Registered Trademark- cotton crib blanket. The Company also designs and manufactures a full line of decorative cotton and acrylic jacquard throws. DOWN COMFORTERS. The Company was a pioneer in marketing down comforters in the United States, and the Company believes that it is a leading manufacturer and marketer of down comforters in North America. Down comforters have become increasingly popular for both their insulation and fashion qualities, selling well in both warm and cool climates. They sell at department stores at prices ranging from $70 to approximately $400. Increasingly popular higher end comforters typically offer more down fill, sport higher thread count shells, and feature more appealing "surface interest," such as damask dots, stripes, and checks. MATTRESS PADS. The Company believes that it is a leading manufacturer and marketer of mattress pads in North America, producing and marketing a complete line of mattress pads, including sizes for adults and children, natural and synthetic filled, flat, and fitted as well as its skirted Adjust-A-Fit- Registered Trademark- mattress pad, an adjustable fit mattress pad made with Lycra-Registered Trademark-, a multidirectional stretch material produced by E.I. DuPont de Nemours & Co. ("DuPont"). The Adjust-A-Fit-Registered Trademark- mattress pad correctly fits a broad range of mattress thicknesses, including pillow top mattresses. OTHER BEDROOM TEXTILES. The Company offers a variety of other complementary bedroom textile products, including comforter covers, featherbeds, pillow protectors, synthetic fill comforters, decorative pillows, pillow shams, dust ruffles, and window treatments. These products represent a source of additional profitability as "add-on" sales for retailers. TRADITIONAL FIELDCREST PRODUCT LINES GENERAL. With its recent acquisition of Fieldcrest, the Company expanded its operations to include the traditional Fieldcrest product lines. These product lines include towels, bath rugs, sheets and fashion bedding. -5- Fieldcrest's products are sold under such brand names as Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Charisma-Registered Trademark-, and St. Mary's-Registered Trademark-. TOWELS. Fieldcrest's bathroom textile products include bath, hand, and fingertip towels, washcloths, and bath mats. Royal Velvet-Registered Trademark-, Fieldcrest-Registered Trademark-, Cannon-Registered Trademark-, Charisma-Registered Trademark-, and St. Mary's-Registered Trademark- are well-known, high quality towel brand names, providing Fieldcrest with a strong market position in key sectors of the North American market. Fieldcrest is also recognized as the color leader in the towel industry as it markets 40 colors in its Royal Velvet-Registered Trademark- franchise. In the marketplace, Fieldcrest differentiates its towels by using fine ring spun cotton yarns to produce Royal Velvet-Registered Trademark- towels and pima cotton yarns for Charisma-Registered Trademark- towels. The towel line includes solid color cam and dobby towels, woven stripes, and fancy jacquards, as well as printed towels. Retail prices of Fieldcrest's towels range from $1.84 for a 25-inch by 42-inch solid color towel to approximately $25.00 for a 30-inch by 52-inch Charisma-Registered Trademark- towel made of Supima-Registered Trademark-cotton. BATH RUGS. Fieldcrest markets a variety of bath and accent rugs in conjunction with its towel offering. Sizes range from 18-inches by 30-inches to 50-inches by 30-inches. These products are marketed under the Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, and Charisma-Registered Trademark- brands, as well as private labels. Retail prices for bath rugs range from $4.99 to approximately $35.00. SHEETS AND FASHION BEDDING. Fieldcrest produces a wide variety of sheets, ranging from a 128-thread count sheet of blended cotton and polyester to top-of-the-line 310-thread count 100% pima cotton sheets. Its principal brand names for this product line include Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, and Charisma-Registered Trademark-. Among Fieldcrest's sheeting strengths are solid color sheets with coordinating decorative bedding accessories. In addition to sheets, Fieldcrest's fashion bedding products consist of matching comforters, duvet covers, and pillow shams along with coordinated ruffled or pleated bed skirts. Retail prices of Fieldcrest's sheets start at approximately $6.99 for a twin size, 128-thread count sheet set and extend to approximately $150.00 for a king size, 310-thread count Charisma-Registered Trademark- sheet. Comforters are sold at retail prices as low as $19.99 for a solid color twin size to approximately $450.00 for a king size Charisma-Registered Trademark- comforter. DISPOSITION OF CERTAIN NON-CORE BUSINESS ASSETS. Prior to January 1998, Fieldcrest marketed shower curtains and ceramic bath accessories as complementary bath products for its towel and bath rug product lines. In January 1998, the Company entered into a license agreement with Ex-Cell Home Fashions, Inc. ("Ex-Cell"), pursuant to which the Company granted Ex-Cell an exclusive, world-wide license to manufacture, sell, and distribute shower curtains and bath accessories under the Fieldcrest family of brands, including Royal Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Charisma-Registered Trademark-, and Touch of Class-Registered Trademark-. The license agreement requires royalty payments to the Company based upon product sales, including payments of minimum annual royalties, and is for an initial term of five years with up to two optional renewal terms of five years each. Prior to March 1998, Fieldcrest also manufactured and marketed a full line of ready-made furniture coverings through its SureFit-Registered Trademark- operations. In March 1998, the Company sold Fieldcrest's SureFit-Registered Trademark- operations. For additional information regarding the Company's disposition of certain non-core business assets of Fieldcrest, see "- Recent Developments." MARKETING, SALES, AND DISTRIBUTION The Company markets its products to major mass merchants, department stores, and specialty retail stores, as well as to wholesale clubs, catalog merchants, and institutional distributors. The Company's top ten customers accounted for approximately 66% of its total sales in fiscal 1997. The top ten customers of Fieldcrest, which was acquired by the Company in December 1997, accounted for approximately 55% of Fieldcrest's total sales for its 1997 fiscal year. Wal-Mart Stores, Inc. (including Wal-Mart and Sam's Club stores) ("Wal-Mart") and Dayton Hudson Corporation (including Mervyn's, Marshall Field's, and Target Stores) accounted for 14% and 13%, respectively, of the Company's total sales in fiscal 1997; no other customer accounted for more than 10% of the Company's total sales in fiscal 1997. Wal-Mart was Fieldcrest's largest customer in 1997, representing approximately 25% of Fieldcrest's total sales for its 1997 fiscal year; no other customer accounted for more than 10% -6- of Fieldcrest's total sales in 1997. Consistent with industry practice, the Company (including its Fieldcrest subsidiary) generally does not operate under long-term written supply contracts with its customers. As a supplement to its primary distribution channels, the Company's Fieldcrest subsidiary operates retail outlet stores which sell Fieldcrest's products directly to customers. These stores sell both first quality merchandise and seconds or "off-goods" at competitive retail prices and are typically located in regions which are not served by Fieldcrest's primary customers. The Company believes that Fieldcrest's retail outlet stores provide an effective channel for the distribution of second quality merchandise and enhances its distribution of first quality products in regions where consumers would not otherwise have access to Fieldcrest's products. Total sales at Fieldcrest's retail outlet stores were $42.0 million or 4% of Fieldcrest's total sales for its 1997 fiscal year. The use of the Fieldcrest brand names is segmented by distribution channel in order to solidify the perceived value of such brands and maintain their integrity. Royal Velvet-Registered Trademark-, Fieldcrest-Registered Trademark-, and Royal Family-Registered Trademark- brand name bed and bath products are distributed primarily to leading department stores, specialty home furnishing stores, and catalog merchants. St. Mary's-Registered Trademark- and Cannon-Registered Trademark- brand name bed and bath products are distributed through mass merchants. The Fieldcrest brand names are supported with national consumer advertising. Fieldcrest also utilizes private brands through large chain stores and also sells a smaller amount of unbranded products to institutional and government customers. Approximately 95% of Fieldcrest's total sales for its 1997 fiscal year were derived from products carrying Fieldcrest brand names. The Company's current international business is concentrated in Canada, although it also sells in Mexico, Latin America, and overseas. The Company's acquisition of Torfeaco in 1993 and of Imperial and Beacon in 1994, greatly enhanced the Company's market position in Canada and its relationships with important Canadian retailers. The Company's relationship with the Polo Ralph Lauren Corporation began in 1987 and the Ralph Lauren brand name is among the Company's most important licensed trademarks. The Company holds an exclusive license for pillows, blankets, down comforters, and mattress pads in North America, and a non-exclusive license to manufacture, and in certain cases to sell, a variety of fashion bedding products in such territory. Ralph Lauren products are sold worldwide to fine department and specialty stores. In order to maximize product exposure and increase sales, the Company works closely with its major customers to assist them in merchandising and promoting the Company's products to the consumer. In addition to frequent personal consultation with the employees of such customers, the Company meets periodically with the senior management of such customers to develop jointly merchandising programs, new products, product mix strategies, point-of-sale concepts, and advertising campaigns specifically tailored to that customer's needs. The Company also provides its customers merchandising assistance with store layouts, fixture designs, point-of-sale displays, and advertising materials. The Company's electronic data interchange system allows customers to place, and allows the Company to fill, track and bill, orders by computer. This system enables the Company to ship products on a "quick response" basis. The Company generally employs salespeople who have many years of industry experience. Most sales people are compensated with a combination of salary and discretionary or performance-oriented bonus. Certain Ralph Lauren products are sold by the Ralph Lauren sales force. TRADEMARKS AND LICENSE AGREEMENTS The Company markets its products under its own proprietary trademarks, trade names, and customer-owned private labels, as well as certain licensed trademarks and trade names. The Company uses trademarks, trade names, and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors. The Company owns various trademarks and trade names, such as Beacon-Registered Trademark-, Nettle Creek-Registered Trademark-, Softie-Registered Trademark-, Globe-Registered Trademark-, and BedMate-Registered Trademark-, as well as the recently acquired Fieldcrest portfolio of names. The Fieldcrest names include Royal -7- Velvet-Registered Trademark-, Cannon-Registered Trademark-, Fieldcrest-Registered Trademark-, Royal Family-Registered Trademark-, Caldwell-Registered Trademark-, Charisma-Registered Trademark-, St. Mary's-Registered Trademark-, and Touch of Class-Registered Trademark-. The Company regards its trademarks and trade names as valuable assets and vigorously protects them against infringement. The Company holds the exclusive license for the highly regarded Ralph Lauren trademark for pillows, blankets, down comforters, and mattress pads in the United States and Canada. In addition, the Company holds a non-exclusive license to manufacture, and in certain cases sell, a variety of fashion bedding products under the Ralph Lauren trademark in the United States, Canada, and Mexico. The Company's licenses with Polo Ralph Lauren Corporation expire on June 30, 1998. The Company has a long-standing relationship with Polo Ralph Lauren Corporation and has no reason to believe that such licenses will not be renewed. However, there can be no assurance that, upon their expiration, the Company will be able to renew such licenses on acceptable terms. The Company also manufactures and sells various goods, including pillows, blankets, and throws under non-exclusive license agreements with The Walt Disney Company for the standard Disney characters, including Mickey Mouse, Minnie Mouse, and Donald Duck, as well as other characters and film properties such as Winnie the Pooh and the Lion King. In addition, the Company's Fieldcrest subsidiary utilizes license agreements with Waverly-Registered Trademark-, Adrienne Vittadini-Registered Trademark-, Court of Versailles-Registered Trademark-, Ellen Tracy-Registered Trademark-, and others. PRODUCT DEVELOPMENT The Company's product development staff creates and develops products with new or superior performance characteristics in cooperation with various outside sources, including its suppliers and customers. The Company believes that this ability is an important competitive advantage. As a result, the Company commits time and resources to identifying new materials, designs, and products from a variety of domestic and international vendors. In addition to internal product development, the Company's acquisitions, such as the acquisition of Fieldcrest, have expanded its product lines and enhanced its manufacturing and other resources available for developing existing and new product lines. MANUFACTURING, RAW MATERIALS, AND IMPORTS TRADITIONAL PILLOWTEX PRODUCT LINES MANUFACTURING AND DISTRIBUTION GENERAL. The Company operates an extensive network of facilities in Texas, California, Illinois, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, and Toronto, Canada in connection with the manufacture and distribution of the Company's traditional bed pillow, blanket, down comforter, and mattress pad product lines. This nationwide manufacturing and distribution network enables the Company to ship bed pillows, blankets, comforters, and mattress pads cost effectively to all major cities in North America. BED PILLOWS. The hub of the network for bed pillows (as well as comforters) is located in Dallas, Texas, where the Company operates what it believes to be the largest feather and down processing facility in North America, producing significant economies of scale. Feather and down are processed by state-of-the-art computerized washing and sorting equipment and are sorted into a variety of mixtures and grades used in manufacturing natural fill pillows and comforters. The raw materials are shipped, along with imported products, to the Company's regional facilities for final assembly and distribution to customers. The Company also operates an automated sewing facility in Dallas, Texas, where high speed, computerized machines cut and sew fabric into pillow shells. Many of the Company's regional manufacturing facilities produce natural fill and synthetic fill pillows. Natural fill pillows are assembled by blowing processed feather and down into the pillow shell and sewing the open seam closed. Synthetic fill pillows are produced on machines known as garnets that pull, comb, and expand compressed polyester fibers. Once expanded, the fibers are inserted into a pillow shell and the open seam is sewn shut. -8- BLANKETS. The Company produces blankets and spins yarn at manufacturing facilities in North Carolina, South Carolina, and Tennessee. These plants provide full vertical production capability, including spinning, weaving, dyeing, and finishing. For a brief description of the Company's recently announced consolidation of its blanket operations, see "- Recent Developments." DOWN COMFORTERS. The Company's line of natural fill comforters are manufactured by the Company at its California, Illinois, Mississippi, Pennsylvania, and Toronto, Canada locations using processed down from the Dallas facility. MATTRESS PADS. Mattress pads are manufactured at the California, Mississippi, Pennsylvania, and Toronto, Canada facilities by two automated methods. The traditional quilt sewing method uses high speed equipment that sews the top, bottom and fill material together. The sonic method fuses the top, bottom, and fill material together. RAW MATERIALS AND IMPORTS The principal raw materials that the Company uses in manufacturing its traditional bed pillow, blanket, down comforter, and mattress pad product lines are: feather and down; synthetic (polyester and acrylic), cotton and wool fibers; and cotton and polyester-cotton blend fabrics. The Company imports feather and down from several sources outside the United States. A majority of such purchases are from the People's Republic of China ("China"), where feather and down are by-products of ducks and geese raised for food. The Company is generally able to purchase feather and down from its suppliers in China on open credit terms without letters of credit. The Company purchases its Adjust-A-Fit-Registered Trademark- mattress pad Lycra-Registered Trademark- skirting from DuPont. Because of DuPont's patent on Lycra-Registered Trademark-, it is the exclusive supplier for this material. The Company believes that the risk that DuPont will cease to manufacture and sell Lycra-Registered Trademark- to the Company is minimal. The Company purchases synthetic fiber from, among others, DuPont, Wellman, Inc., Monsanto Company, Cytec Industries Inc., Hoechst Celanese Textile Fibers, and Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations, the Company makes commitments from time to time for future purchases of synthetic and natural fibers. The Company uses fabric purchased from third parties in the production of pillow shells, comforter covers, and various other products. Although the Company believes that fabric is a commodity-type product that is available from numerous sources, the Company currently purchases large quantities of pillow ticking fabric from a single supplier, Santee Print Works, to control costs and quality. Consistent with industry practice, the Company and Santee Print Works have not entered into a long-term supply contract. However, to reduce the effect of potential price fluctuations the Company makes commitments from time to time for future purchases from Santee Print Works. The Company imports the majority of its comforter shells from China, Hong Kong, and India. As of July 1, 1996, quota restrictions on comforter shells from China were eliminated, allowing the Company to import shells on an unlimited and as-needed basis. TRADITIONAL FIELDCREST PRODUCT LINES MANUFACTURING AND DISTRIBUTION GENERAL. The Company's recently acquired Fieldcrest subsidiary operates 14 principal facilities in the United States: nine in North Carolina, two in Alabama, one in Georgia, one in New York, and one in Virginia. Generally, each of these facilities produces finished products and ships them directly to the customer. TOWELS. Fieldcrest produces bath towels at its facilities in Alabama, Georgia, North Carolina, and Virginia. Cotton and synthetic fibers are spun into yarn utilizing Fieldcrest's spinning capacity and, then, woven into fabric or greige cloth. The greige cloth is finished, dyed, cut, and sewn into finished towel products. Fieldcrest's Fieldale, Virginia facility generally produces the higher quality, department and specialty stores' products. The Columbus, Georgia and Phenix City, Alabama facilities generally support Fieldcrest's mass merchant business segment. The -9- Kannapolis, North Carolina facility is capable of producing both types of products and, as a result, is used to support both segments. BATH RUGS. Bath rugs are produced in Fieldcrest's Scottsboro, Alabama facility. Tufted yarn is punched into fabric and cut into a uniform height. A latex coating is applied to the underside of the fabric to hold the fibers. The product is dyed, cut, and finished. SHEETS AND FASHION BEDDING. Bed sheet products are produced in Fieldcrest's facilities in the Kannapolis, North Carolina area. As with Fieldcrest's towel operations, these facilities provide the full range of Fieldcrest's sheet products for substantially all channels of distribution. Cotton and synthetic fibers are spun into yarn and woven into greige cloth for finishing, dyeing, cutting, and sewing. In late 1995, however, Fieldcrest outsourced certain yarn production and closed two operations to take advantage of certain cost savings made available by a supplier of yarn. In an effort to maximize cost savings, the Company intends to review Fieldcrest's trend toward outsourcing certain manufacturing and corporate functions on a case by case basis. The Company presently intends to continue Fieldcrest's outsourcing practices in areas that appear to result in reduced operating costs, such as in sheeting yarn spinning, and may increase or curtail the use of outsourcing in spinning and other areas based on future cost and other considerations, although the potential impact of any future outsourcing decisions on the Company's operating results cannot be determined at this time. Fieldcrest produces comforters and other decorative bedding products such as pillow shams and decorative pillows at its Eden and Laurel Hill, North Carolina facilities. Finished cloth generally is supplied by Fieldcrest's bed sheet operations. The cloth is cut, polyester fiber-fill is inserted, and the product is sewn and packaged for shipment to retail customers. RAW MATERIALS AND IMPORTS The basic raw materials used in manufacturing the traditional Fieldcrest product lines are cotton and synthetic fibers. These materials are generally available from a wide variety of sources, and no significant shortage of such materials is currently anticipated. Domestic cotton merchants are Fieldcrest's primary source of cotton, and domestic fiber producers are Fieldcrest's primary source of synthetic fibers. Fieldcrest uses significant quantities of cotton which is subject to ongoing price fluctuations. Fieldcrest in the ordinary course of business may arrange for purchase commitments with vendors for future cotton requirements. MISCELLANEOUS The Company (including Fieldcrest) has established quality control programs that are designed to assure that its products meet predetermined quality standards established both internally and by its customers. The Company devotes significant resources to support its quality improvement efforts. Each manufacturing facility is staffed with a quality control team that identifies and resolves quality issues. The Company attempts to maintain close contact with customer quality control or other appropriate personnel to assure that the Company understands the customer's requirements. The Company also has programs with its major suppliers to assure the consistency of purchased raw materials by imposing strict standards and materials inspection, and requiring rapid response to the Company's complaints. Management of the Company believes that its relationships with its suppliers are generally good. SEASONALITY The Company's business is subject to a pattern of seasonal fluctuation. Historically, the Company's sales and earnings from operations are greater during the second half of the year and the Company's needs for working capital increase in the second half of the year, causing the Company's total debt levels to peak in the third and fourth quarters and fall off again in the first quarter of the following year. The amount of the Company's sales generated during the second half of the year generally has depended upon a number of factors, including the level of retail sales for home textile furnishings during the fall and winter, weather conditions affecting the level of sales of down comforters and -10- blankets (which are sold in greater quantities in cold weather), general economic conditions, and other factors beyond the Company's control. Similarly, the Company's recently acquired Fieldcrest subsidiary historically has had greater sales volume in the last three quarters of the calendar year than in the first calendar quarter and, accordingly, its operating performance in the first quarter has been less favorable than operating performance in the last three quarters. COMPETITION The Company participates in a highly competitive industry. The Company competes with a number of established manufacturers, importers, and distributors of home textile furnishings, some of which have greater financial, distribution, and marketing resources. The Company competes on the basis of price, quality, brand names, and service. See "-Competitive Strengths" and "-Business Strategy." GOVERNMENT REGULATION The Company is subject to various federal, state, and local environmental laws and regulations governing the discharge, storage, handling, and disposal of various substances, including provisions of the California Health and Safety Code pertaining to air quality management. The Company is also subject to federal and state laws and regulations that requires certain of its products to bear product content labels containing specified information, including their place of origin and fiber content. In addition, the Company's operations are governed by a variety of federal, state, local, and foreign laws and regulations relating to worker safety and health, advertising, importing and exporting, and other matters applicable to businesses in general. All laws and regulations are subject to change, and the Company cannot predict what effect, if any, changes in laws and regulations might have on its business. BACKLOG The amount of the Company's backlog orders at any particular time is affected by a number of factors, including seasonality and scheduling of the manufacturing and shipment of products. In general, the Company's electronic data interchange and "quick response" capabilities have resulted in shortened lead times between submission of purchase orders and delivery and lowered the level of backlog orders. Consequently, the Company believes that the amount of its backlog is not an appropriate indicator of levels of future production. EMPLOYEES As of February 28, 1998, the Company had approximately 14,150 employees, including approximately 10,400 employees of Fieldcrest. The Company is currently subject to the following collective bargaining agreements:
Number of Number of Eligible Covered Union Location Covered Expiration Employees Employees - ---------------------------------------------- ------------------------ -------------- ------------- ------------- Union of Needletrades, Industrial and Textile Columbus, Georgia 01/06/00 1,214 707 Workers Union of Needletrades, Industrial and Textile Eden, North Carolina 01/06/00 484 241 Workers Union of Needletrades, Industrial and Textile Fieldale, Virginia 01/06/00 968 375 Workers Union of Needletrades, Industrial and Textile Toronto, Ontario, Canada 02/28/00 227 187 Workers United Auto Workers Tunica, Mississippi 08/01/99 301 113
-11- Warehouse, Mail Order, Office, Technical Chicago, Illinois 02/01/00 156 127 and Professional Employees (Teamsters)
Since 1991, the Union of Needletrades, Industrial and Textile Workers ("UNITE") has campaigned to organize approximately 5,500 additional hourly workers at five Fieldcrest plants, including Fieldcrest's main manufacturing facility in Kannapolis, North Carolina. Fieldcrest has opposed UNITE's organizing efforts. Although a majority of employees at these plants has previously voted not to select UNITE as a bargaining representative, the results are subject to legal challenge. There can be no assurances as to whether or when the results of such election will be certified or a new election will be scheduled. It is impossible to predict the effect, if any, a lengthy continuation of another organizing campaign will have on the productivity of the Fieldcrest workforce. The Company believes that its relationships with both its union and non-union employees are generally good. YEAR 2000 COMPLIANCE Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the Year 2000. This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. The Company is reliant on computer-based technology and utilizes a variety of proprietary and third party applications in connection with its electronic data interchange system as well as for various administrative functions. Beginning in April, 1995, the Company undertook an assessment of the effect of the Year 2000 issue on the Company's operations. Shortly thereafter, a team consisting of personnel from various departments within the Company (the "Year 2000 Compliance Team") was established and charged with identifying and evaluating Year 2000-related compliance issues, proposing solutions, estimating the cost of the implementation thereof, and communicating its determinations to the Company's senior management and Board of Directors. The Year 2000 Compliance Team has developed a compliance program. The Year 2000 Compliance Team is responsible for overseeing the implementation of such compliance program, including ensuring the compliance of software and other date sensitive products purchased for use by the Company. Pursuant to the Company's Year 2000 compliance program, the Company has examined or will examine its proprietary software applications. All such applications that relate to a critical function and are not Year 2000 compliant are expected to be converted or replaced. In addition, a strategy has been instituted to identify and address Year 2000 issues affecting third-party software applications. That process includes contacting all third-party providers to secure appropriate representations to the effect that Year 2000 issues associated with the software provided by them to the Company have been or will be timely addressed. The Company continues to develop contingency plans as to material third-party software applications used by the Company in respect of which the Company does not receive adequate compliance assurances within a reasonable time period prior to December 31, 1999. Barring unforeseen events, the Company anticipates completing corrective measures as to most of its proprietary software applications and completing a comprehensive, integrated test of a substantial amount of its main-frame and mid-range computer systems (hardware, software, network components, interfaces, and third-party software applications) no later than mid-1999. The Company anticipates that a subsequent test would be instituted to deal with third-party software applications, if any, that are expected to first achieve compliance after such time. To date, the Company's Year 2000 compliance program is on schedule and on budget. The Company does not believe that Year 2000 issues (including costs of the Company's compliance program) will have a material adverse effect on the Company's financial position or results of operations, though no assurance can be given in this regard. Notwithstanding that the Company has been proceeding diligently with the implementation of its own compliance program, including aspects thereof directed to ascertaining Year 2000 compliance by third parties, with which the Company has commercial relationships (including software, data processing, and other vendors), there can be no assurance that the Company's operations will not experience disruptions due to the failure of such third parties to become fully Year 2000 compliant in a timely manner. -12- ITEM 2. PROPERTIES The following table summarizes certain information concerning certain of the facilities used by the Company in connection with the manufacture and distribution of the traditional Pillowtex product lines:
Approx. Owned/ Location Principal Use Square Feet Leased -------------------------- -------------------------------------------------------- ----------- ------ Dallas, Texas Headquarters and feather and down processing 104,000 Owned Dallas, Texas General administration, manufacturing, and distribution 150,000 Owned Los Angeles, California Manufacturing and distribution 320,000 Leased Chicago, Illinois Manufacturing and distribution 121,000 Owned Tunica, Mississippi Manufacturing and distribution 288,000 Owned New York, New York Principal sales office and showroom 12,500 Leased Asheville, North Carolina Warehouse 117,000 Leased Asheville, North Carolina Warehouse 254,000 Leased Monroe, North Carolina* Manufacturing and distribution 288,000 Leased Newton, North Carolina Manufacturing and distribution 297,000 Leased Rocky Mount, North Carolina Manufacturing and distribution 139,000 Owned Rocky Mount, North Carolina Manufacturing and distribution 78,000 Leased Swannanoa, North Carolina Manufacturing, distribution, warehouse and office 1,425,000 Owned Swannanoa, North Carolina Outlet Store 5,000 Owned Hanover, Pennsylvania Manufacturing and distribution 291,000 Owned Mauldin, South Carolina Warehouse and distribution 746,600 Owned Westminster, South Carolina Manufacturing, distribution, warehouse and office 652,000 Owned Westminster, South Carolina Warehouse 29,000 Leased Goodlettsville, Tennessee* Warehouse and distribution 158,000 Leased Lebanon, Tennessee* Warehouse and distribution 53,000 Leased Lebanon, Tennessee* Manufacturing 175,000 Owned Toronto, Ontario, Canada Manufacturing and distribution 99,000 Leased Toronto, Ontario, Canada Manufacturing and distribution 60,000 Leased
___________________ * To be closed in connection with the Company's recently announced consolidation of its blanket operations. See "Item 1. Business --Recent Developments." The Company also maintains small sales offices for its sales staff in Arkansas, California, Massachusetts, Minnesota, North Carolina, and Washington. The following table summarizes certain information concerning certain of the facilities used by the Company's recently acquired Fieldcrest subsidiary in connection with the manufacture and distribution of the traditional Fieldcrest product lines:
Approx. Owned/ Location Principal Use Square Feet Leased -------------------------- ------------------------------------- ----------- ------ Kannapolis, North Carolina Offices, manufacturing, and warehouse 5,863,041 Owned Phenix City, Alabama Manufacturing and warehouse 678,681 Owned Scottsboro, Alabama Manufacturing and warehouse 272,800 Owned Columbus, Georgia Manufacturing and warehouse 727,246 Owned New York, New York Sales office and showroom 64,490 Leased Concord, North Carolina Manufacturing 696,963 Owned Eden, North Carolina Manufacturing and warehouse 529,273 Owned Eden, North Carolina Warehouse 185,214 Owned Kannapolis, North Carolina Manufacturing 760,939 Owned Laurel Hill, North Carolina Manufacturing and warehouse 238,072 Owned Rockwell, North Carolina Manufacturing 98,240 Owned Salisbury, North Carolina Manufacturing 229,361 Owned Salisbury, North Carolina Manufacturing and warehouse 567,000 Owned Fieldale, Virginia Manufacturing and warehouse 973,253 Owned
In addition to the foregoing, Fieldcrest maintains certain warehousing and distribution centers in the states where its manufacturing facilities are located and maintains small sales and marketing offices in seven additional states. Fieldcrest also owns various other properties, both developed and undeveloped, which are unrelated to its manufacturing -13- operations. Certain of these properties were acquired throughout the years for investment or ancillary to specific acquisitions. Some of such properties are currently held for investment by Fieldcrest, some are listed for sale, and some are leased by Fieldcrest to third parties. The Company believes that its facilities, including those of Fieldcrest, are generally well maintained, in good operating condition, and adequate for its current needs. The Company will continue to emphasize improvements at these plants, upgrading the physical plant and purchasing additional and newer machinery and equipment. ITEM 3. LEGAL PROCEEDINGS MATTRESS PAD LITIGATION Louisville Bedding Company ("Louisville") filed a complaint for patent infringement against the Company in the United States District Court for the Western District of Kentucky, Louisville Division, in 1994. Louisville's complaint alleges that certain of the Company's Adjust-A-Fit-Registered Trademark- mattress pad product lines infringe on certain of Louisville's patents. Louisville's allegations relate both to the Company's current mattress pad product line and to certain discontinued product lines sold from 1991 through 1995. Louisville's complaint seeks an injunction against the Company's sale of its current stretch-to-fit mattress pad line, as well as an accounting of profits and unspecified damages relating to both the Company's current and discontinued product lines. In addition, Louisville's complaint seeks trebled damages, interest, costs, and attorneys' fees. During April 1997, Louisville voluntarily dismissed its infringement claims against the Company's current opening price point mattress pad line and, during October 1997, the district court granted summary judgment for the Company on the issue of infringement with respect to the Company's current premium product. On January 30, 1998, the district court entered an additional order confirming that the Company's current premium price point product did not infringe Louisville's patents as alleged. Notwithstanding the foregoing, Louisville continued to pursue various infringement claims against the Company. On March 4, 1998, representatives of the Company met with representatives of Louisville to discuss the possible settlement of such claims and, subsequent thereto, all such claims were resolved. OTHER The Company is involved in various other claims and lawsuits incidental to its business; however, the outcome of such suits is not expected to have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 19, 1997, the Company held a special meeting of its shareholders to consider and vote upon a proposal to approve the issuance (the "Share Issuance") of up to 5,600,000 shares of Common Stock, par value $0.01 per share, of the Company ("Common Stock") and of 65,000 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share, of the Company ("Series A Preferred Stock") in connection with the Fieldcrest Merger and related financing transactions. The number of votes cast for and against, and the number of abstentions and broker non-votes as to, the approval of the Share Issuance were as follows:
Votes Cast Vote Cast Broker For Against Abstentions Non-Votes ---------- --------- ----------- --------- 8,645,837 387,448 3,355 0
PART II -14- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock, par value $0.01 per share ("Common Stock") is traded on the New York Stock Exchange under the symbol "PTX." The information required by this Item 5 with respect to the high and low sales prices for the Common Stock for each full quarterly period within the Company's two most recent fiscal years is set forth in the table appearing in the forepart of the Company's 1997 Annual Report to Shareholders (the "1997 Annual Report") and incorporated herein by reference. At March 6, 1998, the Company had approximately 324 holders of record of Common Stock. The Company paid for quarterly dividends of $0.05 per share in 1996 and four quarterly dividends in 1997, consisting of four dividends of $0.05 per share and four dividends of $0.06 per share. The Company currently intends to continue to pay quarterly dividends of $0.06 per share on the Common Stock. Certain instruments governing the indebtedness of the Company and the terms of the Series A Preferred Stock restrict the Company's ability to pay dividends or make other distributions to holders of Common Stock. Accordingly, there can be no assurance that the Company will pay any such dividends in the future or, if such dividends are paid, as to the amount thereof. As part of the Company's financing for the Fieldcrest Merger, on December 19, 1997 the Company issued and sold to Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. an aggregate of 65,000 shares of Series A Preferred Stock for $65.0 million, resulting in net proceeds to the Company of approximately $62.9 million. The Series A Preferred Stock was issued and sold by the Company without registration under the Securities Act of 1933, as amended, in reliance on the exemption from registration provided by Section 4(2) of such Act. At the option of the holder thereof, at any time and from time to time each share of Series A Preferred Stock may be converted into a number of shares of Common Stock determined by dividing (i) the sum of (a) $1,000 and (b) any unpaid dividends on such share by (ii) $24.00 (subject to adjustment in certain circumstances to prevent dilution). ITEM 6. SELECTED FINANCIAL DATA The information required by this Item 6 is set forth at page 2 of the 1997 Annual Report under the caption "Selected Financial Data" and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item 7 is set forth at pages 3 through 7 of the 1997 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is set forth in the Company's consolidated financial statements and supplementary data contained in the 1997 Annual Report and incorporated herein by reference. Specific financial statements and supplementary data can be found in the 1997 Annual Report at the pages listed in the following index:
Index Page ----- Number ------ Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 8 Consolidated Financial Statements:
-15-
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 . . . . . . . . . . . . . . . . . . . . . . . . 9 Consolidated Statements of Earnings for the years ended December 30, 1995, December 28, 1996, and January 3, 1998 . . . 10 Consolidated Statements of Shareholders' Equity for the years ended December 30, 1995, December 28, 1996, and January 3, 1998 . . . . . . . . . . . . . . . . . . . . . . . . 11 Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996, and January 3, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Notes to Consolidated Financial Statements. . . . . . . . . . . . 13
The information set forth in Exhibit 99.1 hereto is also incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this Item 10 is set forth at pages 4 through 7 of the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders (the "1998 Proxy Statement") under the captions "Election of Directors," "Information Concerning the Board of Directors --Section 16(a) Beneficial Ownership Reporting Compliance" and "Executive Officers," and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth at page 6 and pages 8 through 19 of the 1998 Proxy Statement under the captions "Information Concerning the Board of Directors --Compensation of Directors" and "Executive Compensation" (excluding the information set forth at pages 8 through 11 and page 19 under the captions "Executive Compensation --Report of the Compensation Committee on Executive Compensation" and "--Stock Price Performance Graph") and incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth at pages 2 through 4 of the 1998 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is set forth at pages 17 through 18 of the 1998 Proxy Statement under the captions "Executive Compensation - --Employment Agreements" and "-Certain Transactions" and incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: -16- 1. FINANCIAL STATEMENTS. The list of financial statements required by this Item 14 is set forth in "Item 8. Consolidated Financial Statements and Supplementary Data" and incorporated herein by reference. The list of financial statements set forth in Exhibit 99.1 hereto under the caption "Index to Consolidated Financial Statements" is also incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule of the Company for the fiscal years ended December 30, 1995, December 28, 1996, and January 3, 1998 is included herein at page S-1 and should be read in conjunction with the consolidated financial statements of the Company incorporated by reference in "Item 8. Consolidated Financial Statements and Supplementary Data": Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are inapplicable, not required, or the information is included in the consolidated financial statements of the Company or the notes thereto incorporated herein by reference. 3. EXHIBITS. The exhibits filed herewith or incorporated by reference are listed in the Index to Exhibits accompanying this report. (b) REPORTS ON FORM 8-K. During the quarter ended January 3, 1998, the Company filed a Current Report on Form 8-K, dated November 21, 1997 and filed on November 26, 1997, reporting information under "Item 5. Other Events" regarding certain modifications to the agreement providing for the issuance of the Series A Preferred Stock in connection with the Fieldcrest Merger. -17- SCHEDULE II PILLOWTEX CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 30, 1995, December 28, 1996 and January 3, 1998 (Dollars in thousands) Additions Deductions ----------------------- ---------- Balance at Charged to Charged to Balance beginning costs and other Write-offs/ at end of Description of period expenses accounts (recoveries) period ----------- ---------- --------- --------- ----------- ---------- Receivable Reserves: Year ended December 30, 1995 $3,341 8,170 176 (3) 8,919 (1) 2,768 ====== ====== ====== ====== ====== Year ended December 28, 1996 $2,768 11,092 (89) 11,296 (1) 2,475 ====== ====== ====== ====== ====== Year ended January 3, 1998 $2,475 13,789 11,268 (2) 12,762 (1) 14,770 ====== ====== ====== ====== ====== Inventory reserves: Year ended December 30, 1995 $5,922 1,416 (3,186) 1,627 2,525 ====== ====== ====== ====== ====== Year ended December 28, 1996 $2,525 2,130 - 1,370 3,285 ====== ====== ====== ====== ====== Year ended January 3, 1998 $3,285 4,337 3,168 (2) 1,378 9,412 ====== ====== ====== ====== ======
(1) Accounts written off, less recoveries. (2) Includes reserves for acquired companies as of the date of acquisition. (3) Adjustments to the reserves for acquired companies after the date of acquisition. S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 3, 1998. PILLOWTEX CORPORATION By /s/ Charles M. Hansen, Jr. --------------------------------- Charles M. Hansen, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on April 3, 1998.
Signatures Title ---------- ----- /s/ Charles M. Hansen, Jr. Chairman of the Board and Chief Executive - ----------------------------- Officer; Director Charles M. Hansen, Jr. (Principal Executive Officer) /s/ Jeffrey D. Cordes President and Chief Operating Officer; Director - ----------------------------- (Principal Financial and Accounting Officer) Jeffrey D. Cordes /s/ Christopher N. Baker - ----------------------------- Director Christopher N. Baker /s/ Kevin M. Finlay - ----------------------------- Director Kevin M. Finlay /s/ Scott E. Shimizu - ----------------------------- Director Scott E. Shimizu /s/ Mary R. Silverthorne - ----------------------------- Director Mary R. Silverthorne /s/ William B. Madden - ----------------------------- Director William B. Madden /s/ M. Joseph McHugh - ----------------------------- Director M. Joseph McHugh /s/ Paul G. Gillease - ----------------------------- Director Paul G. Gillease /s/ Ralph W. La Rovere - ----------------------------- Director Ralph W. La Rovere
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 -- Agreement and Plan of Merger, dated as of September 10, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-36663)) 2.2 -- Amendment to Agreement and Plan of Merger, dated as of September 23, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus forming a part of Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-36663)) 3.1 -- Restated Articles of Incorporation of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1) dated December 19, 1997) 3.2 -- Amended and Restated Bylaws of Pillowtex Corporation, as amended (incorporated by reference to Exhibit 3.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 1994) 4.1 -- Specimen of Certificate evidencing Common Stock (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 4.2* -- Specimen of Certificate evidencing Series A Redeemable Convertible Preferred Stock 4.3 -- Indenture, dated November 12, 1996 (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 4.4 -- Indenture, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1) dated December 19, 1997) 4.5 -- Supplemental Indenture, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997, as amended by a Form 8-K/A (Amendment No. 1) dated December 19, 1997) 10.1 -- Amended and Restated Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997) 10.2 -- Term Credit Agreement, dated as of December 19, 1997, among Pillowtex Corporation, certain Lenders named herein, and NationsBank of Texas, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997)
10.3 -- Preferred Stock Purchase Agreement, dated as of September 10, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Current Report on Form 8-K dated September 10, 1997, as amended by a Form 8-K/A (Amendment No. 1) dated September 10, 1997) 10.4 -- Amendment No. 1 to the Preferred Stock Purchase Agreement, dated as of November 21, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Current Report on Form 8-K dated November 21, 1997) 10.5 -- Purchase Agreement, dated December 15, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.5 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997) 10.6 -- Purchase Agreement Supplement, dated December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.6 to Pillowtex Corporation's Current Report on Form 8-K dated December 19, 1997) 10.7 -- Registration Rights Agreement, dated as of December 18, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBanc Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.7 to Pillowtex Corporation's Current Report on Form 8-K dated December 18, 1997, as amended by a Form 8-K/A (Amendment No. 1) dated December 19, 1997) 10.8 -- Registration Rights Agreement Supplement, dated as of December 19, 1997, among Pillowtex Corporation, the guarantors listed on the signature page thereto, and NationsBank Montgomery Securities, Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 10.8 to Pillowtex Corporation's Current Report on Form 8-K dated December 18, 1997, as amended by a Form 8-K/A (Amendment No. 1) dated December 19, 1997) 10.9 -- Registration Rights Agreement, dated as of November 12, 1996, by and among Pillowtex Corporation, each domestic subsidiary of Pillowtex Corporation, and NationsBanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by reference to Exhibit 10.59 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 333-17731)) 10.10 -- Sublicense Agreement, dated as of July 1, 1995, between Pillowtex Corporation and the Ralph Lauren Home Collection (incorporated by reference to Exhibit 10 to Pillowtex Corporation's Quarterly on Form 10-Q for the quarter ended July 1, 1995) 10.11* -- Amendment to Sublicense Agreement, dated as of October 31, 1997, between Pillowtex Corporation and the Ralph Lauren Home Collection 10.12 -- Lease Agreement, dated as of September 18, 1995, between Pillowtex Corporation and Sanwa Business Credit Corp. (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Quarterly Report on Form 10-Q, as amended, for the quarter ended September 30, 1995) 10.13 -- Agreement of Lease, dated May 23, 1995, between Ten Seventy One Joint Venture and Pillowtex Corporation (incorporated by reference to Exhibit 10.66 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 1995) 10.14* -- Lease, dated as of November 26, 1996, by and among Torfeaco Industries Limited and Standa Investment Limited
10.15* -- Indemnity Agreement, dated as of November 26, 1996, between Torfeaco Industries Limited and Standa Investment Limited 10.16 -- Industrial Lease, dated as of November 23, 1992, between Angel and Jean Echevarria and Pillowtex Corporation (incorporated by reference to Exhibit 10.21 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.17* -- Second Amendment to Lease entered into in September 1997 between Angel and Jean Echevarria and Pillowtex Corporation 10.18 -- Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith, Jr. and Pillowtex Corporation (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.19* -- Agreement for Modification and Extension of Lease between Jimmie D. Smith, Jr. and Pillowtex Corporation 10.20 -- Form of Equipment Leasing Agreement between BTM Financial & Leasing Corporation B-4 and Beacon Manufacturing Company, Manetta Home Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as of June 14, 1996 (incorporated by reference to Exhibit 10 to Pillowtex Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 10.21 -- Employment Agreement dated as of January 1, 1993, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.22 -- Amendment to Employment Agreement, dated as of July 26, 1993, between Pillowtex Corporation and Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.26 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.23* -- Amendment to Employment Agreement, dated as of January 20, 1998, between Pillowtex Corporation and Charles M. Hansen, Jr. 10.24 -- Form of Confidentiality and Noncompetition Agreement (incorporated by reference to Exhibit 10.27 to Pillowtex Corporation's Registration Statement on Form-S-1 (No. 33-57314)) 10.25 -- Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.36 to Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314)) 10.26 -- Split Dollar Life Insurance Agreement between Pillowtex Corporation and Charles M. Hansen, Jr. dated July 26, 1993 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10.27 -- Pillowtex Corporation 1993 Stock Option Plan (incorporated by reference to Appendix A to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.28* -- Form of Employment Agreement entered into between Pillowtex Management Services Company and each of Christopher N. Baker, Jeffrey D. Cordes, and Scott E. Shimizu 10.29* -- Form of Employment Agreement dated as of January 1, 1998, between Pillowtex Management Services Company and Kevin M. Finlay
10.30 -- Pillowtex Corporation Supplemental Executive Retirement Plan, effective as of January 1, 1997 (incorporated by reference to Exhibit 10.1.44 to Pillowtex Corporation's Registration Statement on Form S-4 (No. 33-36663) filed on September 29, 1997) 10.31 -- Pillowtex Corporation Management Incentive Plan (incorporated by reference to Appendix B to Pillowtex Corporation's Proxy Statement for its Annual Meeting of Shareholders held on May 8, 1997) 10.32* -- Pillowtex Corporation Deferred Compensation Plan, effective as of February 9, 1998 10.33 -- Indenture, dated as of March 15, 1987, relating to the 6% Convertible Subordinated Debentures Due 2012 (incorporated by reference to Exhibit 4.9 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-12436)) 10.34 -- Yarn Purchase Agreement between Parkdale Mills, Incorporated and Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 13.1* -- Portions of Pillowtex Corporation's 1997 Annual Report to Shareholders that are incorporated herein by reference 21.1* -- List of Pillowtex Corporation's Principal Operating Subsidiaries 23.1* -- Consent of KPMG Peat Marwick LLP 23.2* -- Consent of KPMG Peat Marwick LLP 23.3* -- Consent of Ernst & Young LLP 27* -- Financial Data Schedule 99.1* -- Consolidated Financial Statements of Fieldcrest Cannon, Inc. as of and for the fiscal years ended January 3, 1998, December 31, 1996, and December 31, 1995
_______________ * Filed herewith EX-4.2 2 EXHIBIT 4.2 INCORPORATED UNDER LAWS OF TEXAS NUMBER SHARES ------ ------ PILLOWTEX CORPORATION Series A Redeemable Convertible Preferred Stock AUTHORIZED SHARES 200,000 -- PAR VALUE $0.01 PER SHARE This Certifies that SPECIMEN is the ---------------------------------------------------- registered holder of Shares --------------------------------------------------- transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS HEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this _____________ day of __________________ A.D. 19__ - ------------------------------ [SEAL] ------------------------------ Secretary President [Reverse Side] CERTIFICATE FOR ----------- SHARES OF PILLOWTEX CORPORATION Series A Redeemable Convertible Preferred Stock ISSUED TO -------------------------------- DATED -------------------------------- For Value Received, ___________________________ hereby sell, assign and transfer unto ___________________________________________________________________________ _________________________________________________________________________ Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint ___________________________________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________ 19___ In presence of - ------------------------------ ------------------------------ EX-10.11 3 EXHIBIT 10.11 [LETTERHEAD] October 31, 1997 Victor Cohen, Esq. Senior Vice President and General Counsel POLO RALPH LAUREN CORPORATION 650 Madison Avenue New York, New York 10022 RE: AMENDMENT TO SUBLICENSE AGREEMENT Dear Mr. Cohen: Reference is hereby made to the Sublicense Agreement dated as of July 1, 1995 between Ralph Lauren Home Collection, Inc. ("RLHC"), successor to The Ralph Lauren Home Collection, and Pillowtex Corporation ("Pillowtex") (the "Agreement"). As you are aware, Pillowtex has entered into a merger agreement pursuant to which it will acquire ownership of Fieldcrest Cannon, Inc. ("Fieldcrest") through a merger (the "Merger") of a wholly owned subsidiary of Pillowtex with and into Fieldcrest. It is now our mutual desire to amend the Agreement in certain respects effective as of the effective time of the Merger. This letter will, therefore, serve to express, and, once signed by RLHC and Pillowtex, will constitute, the following amendment to the Agreement: 1. Paragraph 13.1(xii) of the Agreement is hereby amended to change both references to 40% in clause (a) of such paragraph to 25%. 2. In all respects, and as so amended, the Agreement shall remain in full force and effect according to its terms and conditions and is hereby confirmed and ratified. Pillowtex acknowledges that the provisions of paragraph 2.11 of the Agreement shall apply to Fieldcrest upon consummation of the Merger; provided, however, that the parties expressly agree that Fieldcrest may continue to deal with those names for which Fieldcrest manufactures and/or distributes products as of the date hereof, provided that Fieldcrest shall not expand its product offering with respect to any fashion apparel designer name pursuant to the foregoing without RLHC's prior written consent. Victor Cohen, Esq. October 31, 1997 Page 2 It is the parties' understanding that the foregoing amendment is conditioned upon the consummation of the Merger. If the foregoing is acceptable to you, please indicate your acceptance and approval by signing in the space provided below, and return one copy of this letter to John Sterling, Legal Department, so executed. Sincerely, /s/ John H. Karnes John H. Karnes Vice President and General Counsel JFS:dgf ACCEPTED AND AGREED: RALPH LAUREN HOME COLLECTION, INC. By: /s/ (Signature Illegible) ----------------------------------- Title: President -------------------------------- EX-10.14 4 EXHIBIT 10.14 LEASE, DATED 11-26-96 26/11/96 THIS LEASE dated as of the 26th day of November, 1996 B E T W E E N: STANDA INVESTMENTS INC. A corporation incorporated under the laws of the Province of Ontario (hereinafter called "Landlord") OF THE FIRST PART; - and - TORFEACO INDUSTRIES LIMITED A corporation incorporated under the laws of the Province of Ontario (hereinafter called "Tenant") OF THE SECOND PART; 1.00 - LEASE SUMMARY 1.01 Lease Summary The following is a summary of some of the basic terms of this Lease. For details of the terms referred to below, recourse should be bad to the balance of this Lease. This Section 1.01 is for convenience and if a conflict occurs between the provisions of this Section 1.01 and any other provisions of this Lease, the other provisions of this Lease shall govern. (a) Premises A free standing building and adjacent lands described as the Lands and Building and municipally known as 545 Trethewey Drive, Toronto, Ontario (b) Term 3 years (c) Commencement Date the earlier of March 1, 1997 or the date upon which the Tenant first uses any part of the Premises. (d) Expiry Date: February 29, 2000 (e) Basic Rent (f) Option to Renew Nil (g) Use of Premises: Light manufacturing and office and/or warehousing and/or storage, sale or 1 distribution of merchandise handled by the Lessee (h) Security Deposit: Nil (i) Prepaid Rent Nil ARTICLE II 2.00 - DEFINITIONS 2.01 Definitions Where used in this Lease, the following words or phrases shall have the meanings set forth in the balance of this Article. 2.02 "Actual Floor Area" shall mean the actual floor area of the Premises as same shall be determined by the Landlord's architect, engineer or surveyor as soon as the demising walls separating the Premises from other areas of the Building are completed. 2.03 "Additional Rent" shall have the meaning ascribed to it in Section 5.03. 2.04 "Building" means the building located on the Lands and forming part of the Premises. 2.05 "Commencement Date" shall have the meaning ascribed to it in Section 1.01(c). 2.06 "Lands" means the lands more particularly described in Schedule "A"hereto. 2.07 "Laws" means all statutes, regulations, bylaws, orders, rules, requirements and directions of all federal,provincial, municipal and other governmental authorities having jurisdiction. 2.08 "Lease" means this Lease including all of the schedules attached hereto. 2.09 "Operating Costs" means the costs referred to in 5.03(a), (b) and (c). 2.10 "Premises" means the Building and adjacent land thereto and includes without limitation all structures and improvements and the roof, walls and foundation and footings thereof, and all fixtures, plants, apparatus, appliances, furnaces, boilers, machinery, engines, motors, compressors, dynamos, elevators, escalators,fittings, piping, connections, conduits, ducts, equipment, partitions, furnishings and personal property of the Tenant of every kind and description affixed or attached to any such building and improvements without in any way limiting the generality of the foregoing, it is understood and agreed 2 that the Premises includes and contains lighting fixtures and all wiring, conduits and apparatus for electrical power all of which remain the property of the Landlord. 2.11 "Realty Taxes" means all taxes, rates, duties, levies, fees, charges, local improvement rates, imposed charges, levies and assessments whatever (including school taxes, water and sewer taxes, extraordinary and special assessments and all rates, charges, excises or levies whether or not of the foregoing nature), and whether municipal, provincial, federal or otherwise, which may be levied, confirmed, imposed, assessed, charged or rated against the Lands and Buildings or any part thereof, or with respect to the capital invested by the Landlord in respect thereof, and any fixtures, equipment or improvements therein, or against Landlord in respect of any of the same or in respect of any rental or other compensation receivable by Landlord in respect of the same, including any commercial concentration levy or any tax or duty imposed upon Landlord which is measured by or based in whole or in part directly upon the Rent payable under this Lease whether existing at the date hereof or hereafter imposed by any governmental authority including, without limitation, value added tax, goods and services tax, business transfer tax, retail sales tax, federal sales tax, excise taxes or duties or any tax similar to the foregoing, but not including taxes which are based on the Landlord's profits which are of the nature of a personal income tax liability imposed on the Landlord. 2.12 "Rent" shall have the meaning ascribed to it in Section 5.01 hereof. 2.13 "Rental Year" means a period of twelve (12) consecutive calendar months. 2.14 "Term" shall have the meaning ascribed to it in Section 4.02. ARTICLE III 3.00 - INTENT OF LEASE 3.01 Net Lease It is the intent of the parties hereto that this Lease be a lease that is absolutely net to Landlord, and that, except as expressly herein set out, Landlord shall not be responsible for any expenses or obligations of any kind whatsoever in respect of or attributable to the Premises. ARTICLE IV 4.00 - LEASE OF PREMISES 4.01 Premises Landlord hereby leases to Tenant and Tenant hereby leases from Landlord 3 the Premises. 4.02 Term The Term of the Lease shall be for the period described as the Term in Section 1.01(1)) hereof, commencing on the Commencement Date and to be fully completed and ended on the date described as the Expiry Date in Section 1.01(d) hereof. 4.03 Quiet Enjoyment Subject to all of the terms of this Lease and subject to Tenant's paying all Rent and performing all obligations whatsoever as and when the same are due to be paid and performed by Tenant, Tenant may peaceably possess and enjoy the Premises for the Term without interruption by Landlord or any person claiming by, from or under Landlord. ARTICLE V 5.00 - RENT 5.01 Tenant to Pay Tenant shall pay in lawful money of Canada at par at such address as shall be designated from time to time by Landlord, Basic Rent and Additional Rent (all of which are collectively herein sometimes referred to as "Rent") as herein provided without any deduction, set-off or abatement whatsoever, Tenant hereby agreeing to waive any rights it may have pursuant to the provisions of Section 35 of the Landlord and Tenant Act R.S.O. 1980 or any other statutory provision to the same or similar effect and any other rights it may have at law to set-off. On the Commencement Date and the first day of each Rental Year thereafter and at any time during any Rental Year when required by Landlord, Tenant shall deliver to Landlord as requested by Landlord either postdated cheques or a requisition for a pre-authorized debit from Tenant's bank account in such form as reasonably required by Landlord, for all payments of Basic Rent and estimates by Landlord of Additional Rent or any portions thereof payable during the balance of such Rental Year. 5.02 Basic Rent Commencing on the Commencement Date, Tenant shall pay to Landlord a fixed minimum annual rent ("Basic Rent") in the amount described as Basic Rent in Section 1.01(e) hereof, to be paid in equal monthly installments in advance on the first day of each month during the Term. In the event that the Actual Floor Area is different from the Floor Area set out in 1.01(a) and the Basic Rent is determined at a rate per square foot of Actual Floor Area, the Basic Rent shall be adjusted accordingly, based on the rental rate per square foot set out in 4 1.01(e). If the first day upon which Rent is payable is other than the first day of a calendar month, the Tenant shall pay upon such date Rent from such date to the end of such month calculated at a daily rate of 1/365th of the annual Rent. 5.03 Additional Rent In addition to Basic Rent, Tenant shall pay to Landlord (i) all Additional Rent and other amounts as and when the same shall be due and payable pursuant to the provisions of this Lease all of which shall be deemed to accrue on a per diem basis; and (ii) all other amounts as and when the same shall be due and payable pursuant to any agreement or other obligation, whether or not related to the Premises, between Landlord and Tenant; all of such amounts whether originally payable pursuant to this Lease or otherwise, being herein sometimes referred to as "Additional Rent". 5.04 Deemed Rent and Allocation If Tenant defaults in payment of any Rent (whether to Landlord or otherwise) as and when the same is due and payable hereunder, Landlord shall have the same rights and remedies against Tenant (including rights of distress) upon such default as if such sum or sums were rent in arrears under this Lease. All Rent shall, as between the parties hereto, be deemed to be rent due on the date upon which such sum or sums were originally payable pursuant to this Lease and shall be paid in accordance with this Lease without any deduction, abatement or set-off whatsoever. Landlord may, at its option, from time to time, apply or allocate or re-apply or re-allocate any sums received from or payable by Tenant to Landlord on account of any amounts payable by Tenant hereunder in such manner as Landlord determines in its sole and absolute discretion, without regard to and notwithstanding any instructions given by or allocations in respect of such amounts made by Tenant. No payment by Tenant or acceptance of payment by Landlord of any amount less than the full amount payable to Landlord, and no endorsement, direction or note on any cheque or other written instruction or statement respecting any payment by Tenant shall be deemed to constitute payment in full or an accord and satisfaction of any obligation of Tenant and Landlord may receive any such lesser amount and any such endorsement, direction, note, instruction or statement without prejudice to any of Landlord's other rights under this Lease or at law, whether or not Landlord notifies Tenant of any disagreement with or nonacceptance of any amount paid or any endorsement, direction, note, instruction or statement received. 5.05 Monthly Payments of Additional Rent Landlord may from time to time estimate any amount(s) payable by Tenant 5 pursuant to any provisions of this Lease for the then current or the next following Rental Year or, if applicable, any broken portion thereof and may notify Tenant in writing of the estimated amounts thus payable by Tenant. The amounts so estimated shall be payable by Tenant in advance in equal monthly installments over the Rental Year or broken portion thereof, such monthly installments being payable on the same day as the monthly payments of Basic Rent. Landlord may, from time to time, designate or alter the Rental Year for which accounts shall be prepared covering the Building Operating Costs. As soon as practicable after the expiration of each fiscal period, Landlord shall furnish to Tenant a statement of me actual expenses it has incurred which are the Tenant's responsibility for such Rental Year and shall make a final determination of the amounts payable by Tenant. If the amount determined to be payable by Tenant as aforesaid shall be greater or less than the payments on account thereof made by Tenant prior to the date of such determination, then the appropriate adjustments will be made and Tenant shall pay any deficiency to Landlord within thirty (30) days after delivery of such statement and final determination and if Tenant is not in default under the terms of the Lease, the amount of any Overpayment shall be paid to or credited to the account of Tenant within thirty (30) days after the delivery of such statement. Landlord shall, at Tenant's request, provide Tenant with copies of the invoices covering the expenses included in the statement of Building Operating Costs to be furnished annually to the Tenant. ARTICLE VI 6.00 - REALTY TAXES 6.01 Realty Tax Payable by Tenant Landlord shall have the right to require Tenant to pay Realty Taxes and any other taxes which are Tenant's responsibility as set out herein to the relevant taxing authority or Landlord shall have the right to pay any such Realty Taxes or other taxes directly to such taxing authority without thereby affecting Tenant's obligation to pay such Realty Taxes or other taxes. To the extent of Realty Taxes received by Landlord from Tenant, Landlord shall pay same to the relevant taxing authority. Commencing on the Commencement Date and thereafter at all times throughout the Term, Tenant shall pay to Landlord in monthly installments based on Landlord's estimate of the Realty Taxes for the relevant Lease Year, or to the relevant taxing authority, if so requested by Landlord, not later than the time when they fall due the Realty Taxes, and other taxes, if any, levied, confirmed, imposed, assessed or charged (herein collectively or individually referred to as "charged") against or in respect of the Premises and all, furnishings, fixtures, equipment, improvements and alterations in or forming part of the Premises. 6.02 Determination of Tenant's Realty Tax 6 Tenant's obligation to pay Realty Taxes and other taxes, if any, charged against the Premises shall be determined on the basis of separate tax bills or assessment notices respecting the Premises, where available. If the relevant taxing authority does not issue a separate tax bill respecting the Premises, then Tenant's obligation in respect of Realty Taxes shall be computed by applying the relevant tax rate to the applicable assessment of the Premises if the Premises have been separately assessed by the relevant assessing authority. If there is neither a separate realty tax bill for the Premises, nor a separate assessment of the Premises for any period of time, then for such period of time, the Realty Taxes shall be determined by the Landlord acting reasonably, on an equitable and consistent basis for all occupants of the Lands. Tenant shall also pay any increase in Realty Taxes assessed against tile Building which may be levied as a result of any improvements made by Tenant to the Premises. 6.03 Business Taxes Tenant shall pay as and when the same are due and payable all business taxes including all taxes charged in respect of any business conducted on the Premises or in respect of any use or occupancy of the Premises, whether or not charged against Landlord or the Premises. In the event that the Tenant is not assessed for business taxes as a result of its being business tax exempt but the Landlord is assessed for business taxes for the business carried on by the Tenant in the Premises, the Tenant shall pay to the Landlord forthwith upon demand all such business taxes assessed against the Landlord in respect of the Tenant's use of the Premises. 6.04 Tax Bills and Assessment Notices Tenant shall promptly deliver to Landlord forthwith upon Tenant's receiving the same: (a) copies of all assessment notices, tax bills and any other documents received by Tenant related to Realty Taxes. (b) receipts for payment of Realty Taxes and business taxes payable by Tenant pursuant hereto. On or before the expiry of each calendar year, in the event that the Landlord has requested that Tenant pay its share of Realty Taxes directly to the relevant taxing authority, Tenant shall provide to Landlord evidence satisfactory to Landlord that all Realty Taxes and business taxes payable by Tenant pursuant to the terms hereof up to the expiry of such calendar year, including all penalties and interest resulting from any delay in the payment of Realty Taxes and business taxes, have been duly paid. 6.05 Contest of Realty Taxes 7 Realty Taxes, or the assessments in respect of Realty Taxes which are the subject of any contest by Landlord or Tenant shall nonetheless be paid in accordance with the foregoing provisions hereof, provided, however, that in the event Tenant shall have paid any amount in respect of Realty Taxes in excess of the amount ultimately found payable as a result of the disposition of any such contest, and Landlord receives a refund in respect of the Tenant's share thereof, if Tenant is not in default hereunder the appropriate amount of such refund shall be refunded to or, at the option of Landlord, credited to the account of Tenant. Landlord may contest any Realty Taxes and appeal any assessments related thereto and may withdraw any such contest or appeal or may agree with the relevant authorities on any settlement, compromise or conclusion in respect thereof and Tenant consents to Landlord's so doing. Tenant shall co-operate with Landlord in respect of any such contest and appeal and shall make available to Landlord such information in respect thereof as Landlord requests, Tenant will execute forthwith on request all consents, authorizations or other documents as Landlord requests to give full effect to the foregoing. Tenant shall not contest any Realty Taxes or appeal any assessments related thereto without first notifying Landlord in writing. Tenant shall pay to Landlord forthwith upon demand all costs and expenses of any kind incurred by Landlord bona fide and acting reasonably in obtaining or attempting to obtain information in respect of or a reduction in respect of Realty Taxes and any assessments related thereto including, without limitation, legal, appraisal, administration and overhead costs. 6.06 Adjustments Any amounts payable by Tenant on account of Realty Taxes shall be adjusted on a per diem basis in respect of any period not falling wholly within the Term, for which Realty Taxes are payable. ARTICLE VII 7.00 - OPERATION OF PREMISES 7.01 Operation of Premises by Tenant The Tenant at its own expense shall maintain, manage and operate the Premises in the same manner as a reasonable and prudent owner of same would do in a fast class and reputable manner befitting the Premises and in conformity with all Laws and present and fixture requirements of every governmental or other authority having jurisdiction and shall act diligently and use all proper and reasonable efforts consistent with good business practice. 7.02 Landlord May Perform or Pay 8 In the event that Tenant fails to pay any cost or expense associated with or arising in connection with its use and operation, maintenance and repair of the Premises and including any and every obligation contained in this Lease or in the event Tenant fails to perform or fulfill any of its obligations hereunder, Landlord may pay or perform tile same and shall be entitled to charge all of its costs and expenses together with an administrative charge of twenty (20%) percent in Connection therewith to the Tenant as Additional Rent who shall pay them forthwith on demand, Landlord without prejudice and in addition to any other rights shall have the same remedies and may take the same steps for the recovery of all such sums as Landlord may take for the recovery of rent in arrears hereunder. ARTICLE VIII 8.00 - USE OF PREMISES 8.01 Use of Premises Tenant covenants that it shall not use and shall not cause, suffer or permit the Premises to be used for any purpose other than as described as Use of Premises in Section 1.01(g) hereof without Landlord's prior written consent which may be withheld in Landlord's sole and absolute discretion. 8.02 Conduct of Business At all times throughout the Term, Tenant shall continuously, actively and diligently conduct its business in the whole of the Premises in an up-to-date first class and reputable manner. 8.03 Tenant's Fixtures Tenant shall install and maintain at all times during the Term in the Premises first-class trade fixtures including furnishings and equipment adequate and appropriate for the business to be conducted on the Premises and of no less a quality or quantity than whatever is usual for such type of business, all of which shall be kept in good order and condition. Tenant may not remove any trade fixtures or other contents of the Premises therefrom other than in the ordinary course of business except that, with the prior written consent of Landlord, Tenant may remove such trade fixtures provided that Tenant provides evidence satisfactory to Landlord that it is substituting therefor trade fixtures at least equal in value and function to those being removed. 8.04 Signs The Tenant shall have the right to erect signs on or about the Premises (except on or from the root) advertising its business, provided that 9 such signs are first approved in writing by the Landlord and such signs shall: (a) comply with all applicable bylaws and regulations; (b) be maintained in good repair by the Tenant and (c) not be erected if to do the same would weaken or impair the structural strength of the Building; (d) at Landlord's request be removed on termination of the Lease. The Tenant shall upon removal of such signs repair any damage caused by their installation or removal. 8.05 Waste Removal Tenant shall not allow any refuse, garbage or any loose or objectionable material to accumulate in or about the Premises and will at all times keep the Premises in a clean and neat condition. Tenant shall comply with Landlord's regulations respecting the removal of waste and Tenant shall at its own expense remove all waste from the Premises, Until removed from the Premises, all waste from the Premises shall be kept in appropriate containers. 8.06 Pest Control Tenant shall be responsible for pest extermination in respect of the Premises and shall engage, for such purpose, such contractors and at such intervals as Landlord shall require. 8.07 Waste and Nuisance (a) Tenant shall not cause, suffer or permit any waste or damage to the Premises or leasehold improvements, fixtures or equipment therein nor permit any overloading of the floors thereof and shall not use or permit to be used any part of the Premises for any dangerous, noxious or offensive activity or goods and shall not do anything or permit anything to be done upon or about the Premises nor anything to be brought thereon which Landlord may reasonably deem to be hazardous or a nuisance or annoyance. Tenant shall take every reasonable precaution to protect the Premises from risk of damage by fire, water or the elements or any other cause. (b) Tenant shall not use any advertising transmitting or other media or transmissions of any kind, or other devices in a manner which can be heard, seen, or received outside the Premises, or which would in any way interfere with any communications or other Systems outside of the Premises. 8.08 Compliance with Law (a) Tenant shall be solely responsible for obtaining from all 10 authorities having jurisdiction all necessary permits, licenses and approvals as may be necessary to permit Tenant to hold this Lease and to occupy the Premises and conduct its business thereon, as required by all applicable Laws, including, without limiting the generality of the foregoing, any necessary extra provincial license, any necessary license and any necessary approvals under the Foreign Investment Review Act (Canada). Tenant shall be responsible for and shall comply at its own expense with all applicable Laws respecting the use, condition and occupation of the Premises, and all leasehold improvements, trade fixtures, furniture, fixtures, equipment and contents thereof (collectively called "Contents") and Tenant shall promptly perform all necessary repairs, alterations, changes and improvements to the Premises and Tenant's business, use, or occupancy thereof and the Contents in order to comply with all of such Laws. (b) Tenant shall provide Landlord on request with evidence satisfactory to Landlord acting reasonably that Tenant has obtained and is complying with the terms of all applicable Laws, licenses, approvals and permits from time to time. 8.09 Prohibited Uses If, in the opinion of Landlord, Tenant is in breach of any of the provisions of this Article, Tenant shall immediately discontinue such breach upon Landlord's written request. ARTICLE IX 9.OO - SERVICES AND UTILITIES 901 Utilities (a) Tenant shall be solely responsible for supplying all utilities, beating and air-conditioning equipment in such manner as a reasonable, prudent owner of the Premises would do. Tenant shall promptly pay for, as and when they fall due, all costs of supplying hot and cold water, electricity, file!, gas, steam, sewer charges and other utilities, forms of energy, or other services to or used in respect of the Premises and the Tenant's operation therein. (b) Should individual meters or apparatus for the measurement of the Consumption of any or all utilities supplied to the premises not be available, Landlord, acting reasonably, shall on an equitable and consistent basis for all Occupants of the Premises allocate the cost of such utilities including heat and air conditioning among the various users thereof and such allocation by Landlord shall be final and binding upon Tenant. If required by Landlord, Tenant shall install at its expense, a separate meter or meters to measure the Consumption of any or all utilities in the Premises, the type of meter and location to be as determined by Landlord. 11 (c) If the heating or cooling equipment shall require maintenance, repair or replacement, Tenant shall promptly arrange for the necessary work to be done at its expense by contractors approved by the Landlord, or Landlord may at its option, attend to the same at Tenant's expense with reasonable promptness having regard to the then existing climatic conditions but in any event Landlord, having so attended, shall not be liable for any losses or damages arising from the resulting lack of heating or cooling and, in any event, Landlord shall not be liable for any indirect or consequential losses or damages or any damages for personal discomfort arising from any lack of heating or cooling, whether caused by landlord's negligence or otherwise. (d) Tenant shall promptly pay as and when the same shall be payable all costs for all fittings, machine apparatus, connections, including, but not limited to telephone installation, and meters and all work, services and rental charges, charged or performed in connection with any services or utilities provided to or in respect of the Premises including the costs of maintaining and repairing all such items. Tenant shall pay the total cost of and carry out any replacement of electric light bulbs, tubes, starters and ballasts in the Premises. (e) Tenant's use of any such utilities shall not exceed the available capacity of the existing systems from time to time. If Tenant desires at any time to obtain any such utilities in excess of such available capacity, Tenant may supply and install at its expense any special wires, conducts or other equipment necessary' to provide such additional capacity' subject to the prior written consent of Landlord. (f) Landlord shall not be responsible for the inadequacy of any heating or cooling of the Premises if (i) the use or occupancy of the Premises, or (ii) the electrical or other power consumed on the Premises, or (iii) the configuration of partitions or other items on the Premises, or (iv) the failure of Tenant to keep the equipment in good maintenance or repair or (v) the failure of Tenant to adequately shade exterior windows, interferes with or impairs the functioning of equipment for heating or cooling of the Premises. 9.02 Non-Liability of Landlord Landlord shall not be liable for any damages, direct or indirect, resulting from or contributed to by any interruption or cessation of or failure in supply of any utilities, or any heating or air-conditioning equipment or any other systems or equipment on the Premises. Without limiting the generality of the foregoing, Landlord shall not be liable for and Tenant shall indemnify Landlord and save Landlord harmless from and against any and all indirect or consequential damages or damages for personal discomfort or illness of Tenant or any persons permitted by it to be on the Premises by reason of the suspension, non-operation, or failure for any period of time of any utilities, heating or air-conditioning equipment or any other systems or equipment on the Premises. 12 9.03 Landlord's Suspension of Utilities. etc. Should Landlord at any time wish to effect or make any inspection or any maintenance, repairs, replacements, alterations or improvements to any utilities, heating or air-conditioning equipment or systems (notwithstanding that Landlord has no obligation to do so), Landlord shall have the right, on at least 4 day's written notice to the Tenant, or with no prior notice in the event of an emergency, without any liability and without thereby constituting an interference with Tenant's rights under this Lease or a breach by Landlord of this Lease, and without thereby entitling Tenant to any rights in respect thereof, to discontinue, suspend or modify any utilities, heating, air-conditioning and other systems at such time or times and from time to time in order to allow the Landlord to do so. The costs incurred by the Landlord in connection with any of the above shall be payable by the Tenant forthwith on demand, and shall be recoverable by the Landlord as additional rent. ARTICLE X 10.00 MAINTENANCE, REPAIRS AND ALTERATIONS 10.01 Maintenance and Repairs of Premises (a) At all times throughout the Term the Tenant at its sole expense shall perform or cause to be performed maintenance, decoration, repairs and replacements to keep the Premises and all the contents thereof and all services, equipment and systems located in or serving the Premises, at all times in first-class appearance and condition, and in accordance with all Laws. (b) At all times throughout the Term the Tenant at its sole expense shall maintain the outside of the Premises including driveways, trucking and parking areas, lawn and shrubbery maintenance and snow removal. (c) The Landlord shall be responsible for the cost of all structural repairs or replacements to the extent that the cost of any such repair or replacements shall exceed the sum of $50,000.00 unless caused by the negligence or omission of the Tenant. The Tenant shall be responsible for the first $50,000.00 of cost of such repair or replacements during the Term or as otherwise set out herein. 10.02 Approval of Repairs and Alterations (a) Tenant shall not make any repairs, replacements, changes, additions, improvements or alterations (hereinafter in this Article X referred to as "Alterations") to the Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld unless such proposed Alterations might; (i) in any way affect the structure of the Premises, any demising walls or entrances, or the 13 coverage of the Lands for zoning purposes; or (ii) in the reasonable opinion of Landlord, detrimentally affect the appearance or quality of the Premises, or impair the value or usefulness of the Premises, in either of which events such consent may be withheld in Landlord's sole discretion. (b) With its request for Landlord's consent, Tenant shall submit to Landlord details of the proposed Alterations including plans and specifications in respect thereof prepared by qualified architects or engineers, and which Alterations shall be completed in accordance with the plans and specifications approved in writing by Landlord. (c) Unless expressly authorized in writing by Landlord to the contrary, all Alterations which might cost in excess of Ten thousand ($10,000.00) dollars to complete or which might affect the structure or mechanical or electrical systems of the Premises, shall be conducted under the supervision of a qualified architect or engineer approved by Landlord, such approval not to be unreasonably withheld. (d) All Alterations shall be planned and completed in compliance with all Laws and Tenant shall, prior to commencing any Alterations, obtain, at its expense, all necessary permits and licenses and provide evidence thereof satisfactory to Landlord. (e) Tenant shall, prior to the commencement of any such Alterations furnish to Landlord at Tenant's expense such evidence as reasonably required by Landlord of the projected cost of Alterations together with such indemnification against costs, liens and damages as Landlord shall reasonably require including, if required by Landlord, a performance bond in such terms and issued by such company as shall be acceptable to Landlord in its sole discretion in an amount at least equal to the estimated cost of such Alterations, guaranteeing completion within a reasonable time of such Alterations free and clear of any liens or encumbrances. (f) All Alterations shall be performed without any disruption to other tenants of the Building and promptly and in a good and workmanlike manner and in compliance with Landlord's rules and regulations by competent contractors or workmen who shall be designated or approved by Landlord. (g) If Tenant performs any such Alterations without compliance with all of the foregoing provisions of this Article X, Landlord, without prejudice to and without limiting Landlord's other rights pursuant to this Lease and at law, shall have the right to require Tenant to cease and/or remove such Alterations forthwith. 10.03 Repair According to Landlord's Notice Landlord or any persons designated by it shall have the right to enter the Premises at any time to view the state of repair, condition and use thereof and Tenant shall promptly perform any maintenance, decoration, repairs, replacements or Alterations according to written notice from 14 Landlord. In the event that the Tenant shall refuse or neglect to make forthwith the repairs referred to in any such notice, the Lessor may make the same and the costs thereof, together with reasonable compensation to the Landlord for administration and/or supervision of the work required, shall be paid forthwith by the Tenant as additional rent. 10.04 Notice by Tenant Tenant shall give immediate written notice to Landlord of any accident, defect, damage or deficiency in any part of the Premises, which comes to the attention of Tenant or any of its employees or contractors notwithstanding the fact that Landlord has no obligation in respect of the same. The provisions of this Section 10.04 shall not be interpreted so as to imply or impose any obligation whatsoever upon Landlord. Tenant shall exercise all due diligence to become aware of any such situation. 10.05 Ownership of Leasehold Improvements All leasehold improvements installed in the Premises shall forthwith upon the installation thereof become the absolute property of Landlord without compensation therefor but without Landlord's having or thereby accepting any responsibility in respect of the maintenance, repair or replacement thereof. all of which shall be Tenant's responsibility. The expression "Leasehold Improvements" where used in this Lease includes, without limitation, all fixtures, improvements, installations, alterations and additions from time to time made, erected or installed in or about the Premises, and includes all the following, whether or not easily disconnected and moveable: doors partitions and hardware, mechanical, electrical and utility installations, carpeting, drapes, other floor and window coverings, and drapery hardware, and decorations of any kind, heating, ventilating, air-conditioning and humidity control equipment, lighting fixtures, built-in furniture and furnishings, all counters in any way connected to the Premises or to any utility services located therein. The only exclusions from "Leasehold Improvements" are free-standing furniture, trade fixtures and equipment not in any way connected to the Premises or to any utility systems located therein. 10.06 Construction Liens Tenant shall make all payments and take all steps necessary to ensure that no lien or other charge is registered against the Lands or any portion thereof or against either Landlord's or Tenant's interest therein as a result of any work done or material supplied to Tenant or the Premises. Tenant shall cause any such registrations to be discharged or vacated immediately after notice from Landlord, or within ten (10) days after registration, whichever is earlier. 15 Tenant shall indemnify and save harmless Landlord from and against any liabilities, claims, damages, costs or expenses, including legal expenses, arising in connection with any work done or materials supplied in respect of the Premises. If Tenant permits there to be registered or fails to cause any such registration to be discharged or vacated as aforesaid, then, in addition to any other rights of Landlord, Landlord may, but shall not be obliged to. discharge or vacate the same by paying the amount claimed to be due together with any other amounts into court or otherwise as Landlord determines, including legal fees and disbursements, in thus arranging for the discharging or vacating of any such liens or certificates of action and all amounts so paid by Landlord shall be paid by Tenant to Landlord forthwith upon demand together with reasonable compensation to Landlord for administration in respect thereof. ARTICLE XI 11.00 - END OF TERM 11.01 Vacating of Possession Forthwith upon the expiry or earlier termination of the Term, Tenant shall peaceably deliver to Landlord vacant possession of the Premises in such condition in which Tenant is required to maintain and keep the Premises during the Term pursuant hereto and shall leave the Premises in a neat, clean and broom-swept condition and Tenant shall deliver all keys for the Premises and all keys or combinations to locks on doors, safes or vaults within the Premises. 11.02 Removal of Trade Fixtures Provided that Tenant has paid all Rent to the date of expiry or earlier termination of the Term and any and all damages and other amounts payable by Tenant to Landlord for any reason whatever and provided Tenant is not otherwise in default hereunder, or if otherwise authorized or requested by the Landlord, Tenant shall at the expiry or earlier termination of the Term remove its trade fixtures and shall repair all damage or injury caused to the Premises resulting from the installation or removal of such trade fixtures. Other than as provided above, Tenant shall not remove trade fixtures from the Premises. If at the expiry or earlier termination of the Term, Tenant does not remove its trade fixtures or any of its other property on the Premises, Landlord shall have no obligation in respect of any such trade fixtures or property and may sell or destroy the same or have them removed or stored at the expense of Tenant or dispose of them in any other manner whatsoever as may be determined by Landlord in its sole discretion; at the option of Landlord, such trade fixtures or property not removed at 16 the expiry or earlier termination of the Term shall become the absolute property of Landlord without payment of any compensation therefor to Tenant and may be dealt with by Landlord in such manner as it determines. 11.03 Removal of Leasehold Improvements Notwithstanding that the Leasehold Improvements become the absolute property of Landlord upon installation, at the expiry or earlier termination of the Term, Tenant shall remove any or all of such Leasehold Improvements as required by Landlord and in so doing, shall repair any damage caused as a result of the installation or removal of the same. 11.04 Overholding by Tenant If Tenant remains in possession of all or any part of the Premises after the expiry of the Term with the consent of Landlord and without any further written agreement, this Lease shall not be deemed thereby to have been renewed and Tenant shall be deemed conclusively to be occupying the Premises as a monthly tenant on the same terms as set forth in this Lease so far as they are applicable to a monthly tenancy except the monthly Rent shall be 200% of an amount determined by taking 1/12 of the Rent payable for the period of the last twelve months of the Term. ARTICLE XII 12.00 DAMAGE AND DESTRUCTION 12.01 Termination of Lease If any part of the Premises is damaged or destroyed and either (a) in the opinion of Landlord acting reasonably, the damage or destruction cannot be rebuilt within one hundred and eighty (180) days after the damage or destruction; (b) such damage or destruction is caused by an occurrence against which Landlord is not insured or required to insure or the cost of repairs of which would be in excess of the amount which Landlord is required to insure pursuant hereto or is otherwise insured; or (c) such damage or destruction occurs within two (2) years prior to the expiry of the Term and either there are no remaining rights in Landlord or Tenant to extend or renew this Lease or Landlord or Tenant, having the right to renew or extend this Lease, fails to do so within fifteen (15) days after such occurrence: Landlord may, at its option to be exercised by written notice given to Tenant within sixty (60) days after such occurrence, terminate this Lease whereupon Tenant will immediately surrender the Premises and all 17 its interest therein to Landlord, and Basic Rent and all other payments for which Tenant is liable pursuant to this Lease shall be apportioned to the effective date of termination. Tenant will remain liable to Landlord for all sums accrued due under this Lease to the date of termination, and Landlord may re-enter and repossess the Premises. 12.02 Repair and Rebuilding If this Lease is not terminated pursuant to this Article XII: (a) Landlord, to the extent of insurance proceeds which Landlord receives, and to the extent that any mortgagee entitled to be paid such insurance proceeds consents to the use of same for repair of such damage or destruction, shall diligently proceed to perform such repairs to the Premises to the extent of insurance proceeds being available. Within thirty (30) days after Landlord has completed its repairs, Tenant shall complete any necessary repairs to the Premises to render the Premises usable for Tenant's purposes and shall fully fixture, stock and staff the Premises and recommence the operation of Tenant's business. (b) Except to the extent of insurance proceeds received by the Landlord for the repair of the Premises, Tenant acknowledges that its obligations to repair the Premises after damage or destruction as aforesaid or otherwise shall be performed at Tenant's sole cost whether or not the damage or destruction was caused by Landlords fault or negligence and whether or not Landlord had at any time made any contribution to the cost of supply, installation or construction of any Leasehold Improvements in the Premises. (c) Landlord, in performing its repairs to the Premises or the Common Facilities as required hereby shall not be obliged to repair or rebuild in accordance with plans or specifications for the Premises as they existed prior to such damage or destruction, but Landlord may repair or rebuild the same in accordance with any plans and specifications chosen by Landlord in its sole and absolute discretion provided that Tenant's use and occupancy of and access to the Premises and the general overall usability of the Premises are not materially detrimentally affected by any difference in plans, specifications, or form of the Premises or from such plans, specifications and form as the same existed immediately prior to the occurrence of such damage or destruction. 12.03 Abatement (a) If the damage or destruction is such as to render the whole or any part of the Premises unusable for the purpose of Tenant's use as permitted hereby, then Basic Rent shall only abate from the date of the damage or destruction until the Premises are again usable by Tenant for the purpose intended. Basic Rent shall abate to the extent that Tenant's use and occupancy of the Premises is in fact diminished, which determination shall be made by Landlord in its sole discretion acting reasonably. The abatement will diminish proportionately as repairs are 18 made and more of the Premises is returned to a usable state. (b) Notwithstanding any other provision of this Section 12.03: (i) if the necessary repairs have been made within fifteen (15) days after the date of the damage or destruction, there will be no abatement of Basic Rent; (ii) to the extent that any part of the Premises remains unusable because Tenant's repairs have not been completed, no abatement of Basic Rent will extend beyond the date by which, in the opinion of Landlord arrived at on a reasonable basis, Tenant's repairs would have been completed had Tenant exercised reasonable diligence. (iii) Basic Rent shall abate only to the extent that such rent is recovered by Landlord under any policies of insurance against rental loss which Landlord may have obtained. 12.04 Determination of Matters For the purposes of this Article XII, all matters requiring determination such as, without limitation, the extent to which any area(s) of the Premises are damaged, or are not capable of being used, or the times within which repairs may be made, shall. be determined by Landlord acting reasonably, such determination to be final and binding on the parties. ARTICLE XIII 13.00 - INSURANCE AND INDEMNITY 13.01 Tenant's Insurance (a) Tenant shall obtain in full force and effect during the Term with respect to the Premises insurance against such occurrences and in such amounts and on such terms and conditions and with such deductible(s) as Landlord may determine from time to time. Unless and until otherwise determined by Landlord, such insurance shall include, without limitation: (i) insurance on the building and improvements and equipment contained therein owned or leased by Landlord or which Landlord desires to insure, for full replacement cost, against damage by fire, lightning, explosion, sprinkler leakage and other risks contained in fire insurance policies with endorsements generally known as extended coverage and riot vandalism and malicious acts, endorsements or, at Landlord's option, all risks insurance; (ii) boiler and machinery insurance on such insurable objects as Landlord may elect to insure; (iii) rental income insurance covering such occurrences, in 19 such form, and with such period of indemnity as Landlord may determine; and (iv) public liability insurance. (b) Tenant shall maintain during the Term (i) all risks insurance upon property owned by the Tenant or for which it is liable (including glass) and which is located on the Premises including, without limitation, furniture, fittings, installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by or on behalf of the Tenant in an amount equal to the full replacement cost thereof; (ii) comprehensive general liability insurance against claims for death, personal injury and property damage in or about the Premises in amounts satisfactory from time to time to the Landlord acting reasonably but in any event in an amount not less than $5,000,000.00 per occurrence for personal injury and property damage; (iii) tenant's legal liability insurance for limits satisfactory from time to time to the Landlord acting reasonably; (iv) Business interruption insurance; (v) such other insurance as the Landlord may from time to time reasonably require; and The insurance described in parts (a), E)(i) and (b)(ii) shall name the Landlord and anyone designated in writing by the Landlord as Mortgagee as additional insureds as their interests may appear. All property damage and public liability insurance shall contain a provision for cross-liability or severability of interest as between the Landlord and the Tenant, The Tenant hereby releases the Landlord from any liability for loss to the extent of all insurance proceeds paid under policies of insurance carried by the Tenant or which would have been paid if the Tenant had maintained the insurance it is required to maintain under this Lease Such policies shall contain an endorsement requiring the insurers under such policies to notify the Landlord in writing at least thirty (30) days prior to any material change or cancellation thereof. The Tenant shall furnish to the Landlord certificates of insurance as aforesaid and shall provide written evidence of the continuation of such policies not less than ten days prior to their respective expiry dates. The cost or premium for each and every such policy shall be paid by the Tenant. If the Tenant fails to maintain such insurance, the Landlord shall have the right, but not the obligation or any liability to do so, to pay the cost or premium therefor, and in such event the Tenant shall repay to the Landlord, as Additional Rent, forthwith on demand the amount so paid. 20 (c) such other insurance in such amounts and on such terms as Landlord, in its discretion, may determine. 13.O2 Cancellation of Insurance (a) In the event of an actual or threatened cancellation of or adverse change in any policy of insurance of Tenant on or related to the Premises or any pan of contents thereof by reason of: (i) the use of occupancy of the Premises by tenant or any other person permitted by Tenant on the Premises; or (ii) anything placed on or permitted by Tenant or any person m the Premises and if Tenant fails to remedy the situation, condition, use, occupancy or other factor giving rise to such actual or threatened cancellation or change within twenty-four (24) hours after notice thereof by Landlord, Landlord may, at its option, either: (i) terminate this Lease forthwith by written notice; or (ii) remedy the situation, condition, use, occupancy or other factor giving rise to such actual or threatened cancellation or change, all at the cost of Tenant to be paid to Landlord forthwith upon demand; for any or all of such purposes as set forth in this subsection (ii) Landlord shall have the right to enter upon the Premises without further notice. 13.03 Landlord's Non-Liability Tenant agrees that Landlord shall not be liable or responsible in any way for any injury or death to any person or for any loss or damage to any property at any time, in, on or about the Premises, no matter how the same shall be caused and unless any such death, injury, loss or damage is caused or attributed to the gross negligence of the Landlord, its servants, agents, employees, contractors or persons for whom Landlord is in law responsible in performing any of its obligations hereunder or otherwise. Without limiting the generality of the foregoing, Landlord shall not be liable or responsible for any injury, death) loss or damage to any persons or property caused or contributed to by any of the following: fire, explosion, steam, water, rain, snow, electricity, gas, or falling plaster; or by dampness or leaks from any pipes, appliances, plumbing works, roof, exterior walls or any other source whatsoever. All property kept or stored in or about the Premises shall be at the sole risk of Tenant and Tenant shall indemnify Landlord and save it harmless in respect of the same. Without in any way limiting or affecting the generality or interpretation of the foregoing provisions of this Section 13.03, it is agreed that Landlord shall in no event be liable for any indirect or consequential damages suffered by Tenant or any person arising therefrom except if arising from the Landlord's gross negligence in performing any of its obligations hereunder or otherwise. 21 13.04 Indemnity of Landlord Tenant shall indemnify Landlord and all of its servants, agents, employees, contractors and persons for whom Landlord is in law responsible and shall hold them and each of them harmless from and against any and all liabilities, claims, damages, losses and expenses, including all legal fees and disbursements, due to, arising from or to the extent contributed to by: (a) any breach by Tenant of any of the provisions of this Lease; (b) any act or omission of any person on the Premises or any use of occupancy of or any articles in the Premises; (c) any act or omission of Tenant or any of its servants, agents, employees, invitees, licensees, sub-tenants, concessionaires, contractors or persons for whom Tenant is in law responsible on the Premises; (d) any injury, death or damage to persons or property of Tenant of its servants, agents, employees, customers, contractors or any other persons on the Premises by or with the invitation, license or consent of Tenant; (e) any damage, destruction or need of repair to any part of the Premises caused by any act or omission of Tenant or its servants, agents, employees, customers, contractors, or persons for whom Tenant is in law responsible, notwithstanding any other provisions of this Lease including Landlord's repair obligations under Section 10.07 above. 13.05 Landlord's Employees It is agreed that every indemnity, exclusion or release of liability and waiver of subrogation herein contained for the benefit of Landlord shall extend to and benefit all of Landlord's servants, agents, employees, and those for whom Landlord is in law responsible (collectively referred to in this Section 13.05 as "Employees"); solely for such purpose, and to the extent that Landlord expressly choose; to enforce the benefits of the Section 13.05 for its Employees, it is agreed that Landlord is the agent or trustee for its Employees. ARTICLE XIV 1400 - ASSIGNMENT SUBLETTING AND CHANGE OF CONTROL 14.01 Consent Required This Lease is personal to Tenant only and therefore Tenant shall not assign this Lease in whole or in part and shall not sublet or part with or share possession of all or any part of the Premises, nor shall it 22 grant any concessions, franchises, licenses or other rights to others to use any portion of the Premises (all of the foregoing being hereinafter individually or collectively referred to as a "Transfer") without the written consent of the Landlord, which written consent is to be obtained in advance from the Landlord such consent not to be unreasonably withheld. If the Tenant has entered into a bona fide arm's length agreement to sell the business conducted at the Premises, Tenant may Transfer this Lease to the purchaser thereunder but only with the prior written consent of Landlord in each instance, which consent may not be unreasonably withheld. Notwithstanding and without in any way affecting or limiting the interpretation of the foregoing, it is agreed that it shall be reasonable for Landlord to withhold its consent to a Transfer unless it is shown to the Landlord's satisfaction that: (i) the proposed Transferee has a good business and personal reputation; (ii) the proposed Transferee has not been bankrupt or the holder of twenty (20%) percent or more of the issued shares of any class of shares of a corporation or of an interest in a partnership, either of which has been bankrupt in the ten (10) years preceding the date of the proposed Transfer; No Transfer may be made other than pursuant to an agreement in writing of which a copy is given to Landlord together with the request for consent. The provisions of this Article XIV shall apply to any transfer which might occur by inheritance or operation of law. 14.02 Obtaining Consent All requests to Landlord for consent to any Transfer shall be made to Landlord in writing together with a copy of the agreement pursuant to which the proposed Transfer will be made and, where applicable, a copy of the agreement of purchase and sale in respect of the Tenant's business. All costs incurred by Landlord, in respect of any such request for consent, including legal costs and Landlord's administrative fee, shall be the responsibility of and shall be paid by Tenant forthwith upon demand, whether or not Landlord grants its consent to any proposed Transfer. All such requests to Landlord for consent to any Transfer shall also be accompanied by such information in writing as a landlord might reasonably require respecting a proposed Transferee and which might be required to provide Landlord with all the information necessary to determine whether the aforementioned factors are satisfied, and which information shall include, without limitation, the name, business and home addresses and telephone numbers, business experience, credit information and rating, financial position and banking and personal references of such proposed Transferee. 14.03 Terms of Consent 23 If Landlord consents to a Transfer, or a consent to such Transfer is obtained by the order of a court of competent jurisdiction, or if a Transfer occurs as a result of operation of law not requiring Landlord's consent (notwithstanding the express agreement between the parties hereto that any Transfer by operation of law shall in any event be subject to the consent of Landlord and all of the other provisions as contained in this Article XIV), Landlord shall have the following rights, in default of any of which no such Transfer shall occur or be effective: (a) to collect a deposit or further deposit to be held as a security deposit for the prompt performance by the Transferee of all of the terms, covenants, conditions and provisions of this Lease such that a security deposit held by Landlord shall be equivalent to at least the last one (1) months' Rent payable in respect of the remaining term for the Transferred Premises; (b) to require Tenant and the Transferee and any indemnifier in respect of Tenant's or Transferee's obligations hereunder to enter into an agreement in writing and under seal to implement any amendments to this Lease to give effect to Landlord's exercise of any of its rights hereunder; (c) to require the Transferee to enter into an agreement with Landlord in writing and under seal to be bound by all of Tenant's obligations under this Lease amended as herein provided; (d) to require the Transferee to waive any rights pursuant to subsection 39(2) of the Landlord and Tenant Act (Ontario) and any amendments thereto and any other statutory provisions of the same or similar effect, to pay any Rent less than the amount payable hereunder; (e) to require, if the Transfer is a sublease or other transaction not including an assignment, that all amounts payable by the Transferee to the Tenant be paid directly to Landlord who shall apply the same on account of Tenant's obligations under this Lease; and (f) to require, if the Transfer provides for a rental, a bonus, key money, a lump sum payment or any consideration incidental thereto which is in excess of the Rent or that portion of Rent attributable to the portion of the Premises transferred, then the excess shall be paid by Tenant to Landlord as Additional Rent, it being acknowledged by Tenant that it is not permitted to profit in any way from Transferring this Lease or parting with any portion of the Premises and that all additional payments in excess of the Rent and Additional Rent provided herein shall also be paid to Landlord as Additional Rent. 14.04 Effect of Transfer (a) No consent of Landlord to a Transfer shall be effective unless given in writing and executed by Landlord under seal and no such consent shall be deemed or presumed by any act or omission of Landlord 24 or by Landlord's failure to respond to any request for consent or by Landlord's accepting any payment of any amount payable hereunder from any patty other than Tenant. Without limiting the generality of the foregoing, Landlord may collect rent and any other amounts from any Transferee and apply the net amount collected to any Rent and the collection or acceptance of any Rent shall not be deemed to be a waiver of Landlord's rights under this section nor an acceptance of or consent to any such Transfer or a release of any of Tenant's obligations under this Lease. No Transfer and no consent by Landlord to any Transfer shall constitute a waiver of the necessity to obtain Landlord's consent to any subsequent or other Transfer. (b) In the event of any Transfer or any consent by Landlord to any Transfer, Tenant shall not thereby be released from any of its obligations hereunder but shall remain bound by all such obligations pursuant to this Lease for the balance of the Term. Tenant hereby consents to any amendments of this Lease which may be made between the Transferee and Landlord without the further consent or agreement of Tenant ("Amendments") and Tenant also consents to all Alterations as referred to in Section 10.02 above) after any such Transfer. Tenant shall continue to be bound by all of its obligations pursuant hereto notwithstanding any such Amendments or Alterations, to the extent of what would have been Tenant's obligations pursuant hereto had such Amendments or Alterations not been made. (c) Every Transferee shall be obliged to comply with all of the obligations of Tenant under this Lease. Tenant shall enforce all of such obligations against each Transferee. Any default of any Transferee shall also constitute a default of Tenant hereunder. (d) Tenant agrees that if this Lease is ever disclaimed or terminated by a trustee in bankruptcy of a Transferee or, if Landlord terminates this Lease as a result of the bankruptcy, insolvency or any act or default of any Transferee, Tenant shall, upon Landlord's request, enter into a new lease of the Premises on the identical terms hereof subject to such amendments hereto which had been agreed upon prior to such disclaimer or termination, with the exception that the length of the term of such new lease shall commence on tile date upon which Landlord exercises its right to require Tenant to enter into such new lease and shall expire on the date upon which tile Term would have expired but for such disclaimer or termination by such trustee in bankruptcy or such termination by Landlord, and with the exception that Tenant will accept the Premises on an "as is" condition, as of such date upon which Landlord exercises its right to require Tenant to enter into such new lease. 14.05 No Advertising of Premises Tenant shall not advertise this Lease or all or any part of the Premises or the business or fixtures or contents therein for sale without Landlord's prior written consent, which consent Landlord shall not unreasonably withhold subject to the other provisions hereof. 25 14.06 Mortgage of Lease The restrictions on Transfer as aforesaid shall apply, mutatis mutandis, to any assigning, subletting, mortgaging, charging or otherwise transferring of the Premises or this Lease for the purpose of securing any loan or the repayment thereof by Tenant. 14.07 Corporate Tenant If Tenant or any occupant of the Premises at any time is a corporation, it is acknowledged and agreed that the transfer of the majority of the issued shares in the capital stock or any transfer, issuance or division of any shares of the corporation or of any affiliated corporation of the corporation sufficient to transfer control to others than the then present shareholders of the corporation shall be deemed for all purposes of this Article XIV to be a Transfer and, accordingly, shall be subject to the requirements of this Article XIV, and it is agreed that the parties hereto shall have all of the same rights and obligations in respect thereof as are applicable to a Transfer. This Section 14.07 shall not apply to Tenant if and as long as Tenant is in occupancy of the Premises and is a corporation whose shares are listed and traded on any recognized public stock exchange in Canada or the United States. 14.08 Assignment by Landlord Landlord shall have the right to sell, lease, convey or otherwise dispose of the Lands or any portion thereof, and to assign this Lease and any interest of Landlord pursuant to this Lease without restriction. If Landlord shall sell, lease, convey or otherwise dispose of the Lands or any portion thereof, or shall assign this Lease or any interest of Landlord pursuant to this Lease, then, to the extent that the purchaser or assignee agrees with Landlord to assume the covenants and obligations of Landlord hereunder. Landlord shall thereupon and without further agreement be released of all liability under this Lease. ARTICLE XV 15.00 - STATUS AND SUBORDINATION OF LEASE 15.01 Status Statement Tenant shall, within ten (10) days' after written request from Landlord, execute and deliver to Landlord, or to any actual or proposed lender, purchaser or assignee of Landlord, a statement or certificate in such form as requested by Landlord stating with reasonable particularity (if such is the case or stating with reasonable particularity the manner in which such may not be the case): 26 (a) that this Lease is unmodified and in full force and effect, or particulars of any such modifications or stating that this Lease is not in it'll force and effect if such is the case; (b) the date of commencement and expiry of the Term and the dates to which Basic Rent and any other Rent, including any prepaid rent have been paid; (c) whether or not there is any existing default by either patty under this Lease and. if so, specifying, such default; (d) that there is no reason why the obligations of Tenant under this Lease may not be folly enforced in accordance with their terms and that there are no defenses, counterclaims or rights of set-off in respect of any of the same; and (e) full details of the financial and credit standing and details of the corporate organization of Tenant and the Indemnifier, if any, it being intended that any such statement delivered pursuant hereto may be relied upon by an actual or prospective lender, purchaser and assignee of any interest of Landlord under this Lease or in the Premises. 15.02 Subordination This Lease and the rights of Tenant hereunder are and shall be subject and subordinate to any and all mortgages, trust deeds, and charges (any of which are herein called "Mortgage" or "Mortgages") now or which in the future may be registered against the Lands or any portion thereof, and including all renewals, extensions, modifications and replacements of any Mortgages from time to time. Tenant shall at any time on notice from Landlord or a holder of any Mortgage attorn to and become a tenant of the holder of any of such Mortgages upon the same terms and conditions as set forth herein and shall execute promptly on request by Landlord any certificates, agreements, instruments of postponement or attornment or other such instruments or agreements as requested from time to time to postpone or subordinate this Lease and all of Tenant's rights hereunder to any of such Mortgages or to otherwise give full effect to any of the provisions of this Article XV. Tenant agrees to attorn to and become the tenant of any party whose tide to the Premises is superior to that of Landlord or to any assignee from Landlord of Landlord's interest under this Lease upon the same terms and conditions as are set forth in this Lease and shall execute promptly on request any agreements or instruments of attornment to give effect to such attornment as shall be requested by Landlord at any time and from time to time. Provided Tenant is not in default hereunder, Landlord shall use reasonable efforts to obtain from the holder of any Mortgage, in respect of which Tenant has executed and delivered an instrument of postponement, subordination or attornment as required hereby, its agreement to permit Tenant to continue in occupation of the Premises in accordance with and subject to the terms of this Lease so long as 27 Tenant is in foil and prompt compliance with all of its terms. 15.03 Tenant's Failure to Comply If Tenant fails to execute any certificate, agreement, instrument, or other document as required by the foregoing provisions of this Article XV within ten (10) days after request by Landlord, then Landlord shall have the right to. (a) execute any such certificate, agreement, instrument or document for and on behalf of Tenant and in Tenant's name, Tenant hereby agreeing to be bound by the same, and for such purpose Tenant hereby irrevocably appoints Landlord as Tenant's attorney for and on behalf of Tenant pursuant to the Powers of Attorney Act (Ontario) and which appointment shall survive the death or incapacity of Tenant; (b) to terminate this Lease; and (c) in any event, and without being affected by either of the foregoing rights, to exercise all rights against Tenant in respect of Tenant's default as aforesaid as Landlord might otherwise have pursuant to this Lease or at law. 15.04 Registration Tenant shall not register this Lease or any short form or notice hereof except in Landlord's form prepared by Landlord on Tenant's request or in such form as has been approved by Landlord in writing. The cost of preparation, approval, execution and registration of any notice or short form of this Lease or other document to be registered by Tenant shall be borne by Tenant and shall be paid by Tenant forthwith upon demand. If Tenant, with Landlord's prior consent, registers or causes or permits there to be registered against the title to the Lands any short form or notice of this Lease or other document, Tenant shall forthwith provide to the Landlord details of such registration and a duplicate registered copy of the registered document. Any lease or notice or short form of this Lease registered by or at the request of Tenant shall contain an irrevocable power of attorney by Tenant in favour of Landlord, which power of attorney is also hereby irrevocably granted by Tenant to Landlord under the Powers of Attorney Act (Ontario) and which power of attorney shall survive the death or incapacity of Tenant, authorizing Landlord to execute on behalf of and in the name of Tenant such notices, agreements and documents as shall be required or desired by Landlord to expunge or discharge from the register of the title of the Lands any interest of Tenant therein after the expiry or earlier termination of this Lease, or to give full effect to Landlord's rights under this Article XV. ARTICLE XVI 16.00 - DEFAULT AND REMEDIES 28 16.01 Default and Remedies If any of the following shall occur: (a) Tenant shall fail, for any reason, to make any payment of Rent as be paid hereunder arid such default shall continue for five (5) days whether or not notice is given to Tenant; (b) Tenant shall fail, for any reason, to perform any other covenant, condition, agreement or other obligation on the part of Tenant to be observed or performed pursuant to this Lease (other than the payment of any Rent) and such default shall continue for fifteen (15) days after written notice thereof or such shorter period as expressly provided herein; (c) any of the policies of Landlord's insurance on the Premises or any part or contents thereof shall be actually or threatened to be cancelled or adversely changed as a result of any use or occupancy of or contents in the Premises; (d) Tenant shall purport to make a Transfer affecting the Premises, or the Premises shall be used by any person or for any purpose, other than in compliance with and as expressly authorized by this Lease; (e) Tenant or any other person occupying any portion of the Premises shall make an assignment for the benefit of creditors or become bankrupt or insolvent or take the benefit of any statute for bankrupt or insolvent debtors or make any proposal, assignment, arrangement or compromise with its creditors or, if any steps are taken or action or proceedings commenced by any person for the dissolution, winding-up or other termination of Tenant's existence or liquidation of its assets; (f) a trustee, receiver, receiver-manager, agent or other like person shall be appointed in respect of the assets or business of Tenant or any other occupant of the Premises; (g) Tenant attempts to or does abandon the Premises or remove or dispose of any goods and chattels from the Premises so that there would not, in the event of such removal or disposition, be sufficient goods of Tenant on the Premises subject to distress to satisfy all arrears of Rent payable under this Lease and all Rent payable hereunder for a further period of at least twelve (12) months, or if the Premises shall be vacant or unoccupied for a period of five (5) consecutive days or more without the prior written consent of Landlord; (h) Tenant makes any sale in bulk affecting any property on the Premises (other than in Conjunction with a Transfer approved in writing by Landlord and made pursuant to all applicable legislation); (i) this Lease or any goods or other property of Tenant shall at 29 any time be seized or taken in execution or attachment which remains unsatisfied for a period of five (5) days or more; and (j) termination or reentry by Landlord is permitted under any provision of this Lease or at law; then, without prejudice to and in addition to any other rights and remedies to which Landlord is entitled pursuant hereto or at law, the then current and the next three (3) months' Rent shall be forthwith due and payable arid Landlord shall have the following rights and remedies, all of which are cumulative and not alternative, to: (a) terminate this Lease in respect of the whole or any part of the Premises by written notice to Tenant; if this Lease is terminated in respect of pan of the Premises, this Lease shall be deemed to be amended by the appropriate amendments, and proportionate adjustments in respect of Rent and any other appropriate adjustments shall be made in such manner as shall be determined by Landlord; (b) enter the Premises as agent of Tenant and as such agent to relet them for whatever term (which may be for a term extending beyond the Term) and on whatever terms and conditions as Landlord in its sole discretion may determine and to receive the rent therefor and, as the agent of Tenant, to take possession of any furniture, fixtures, equipment, stock or other property thereon and, upon giving written notice to Tenant, to store the same at the expense and risk of Tenant or to sell or otherwise dispose of the same at public or private sale without flintier notice, and to make such alterations to the Premises in order to facilitate their reletting as Landlord shall determine, and to apply the net proceeds of the sale of any furniture, fixtures, equipment, stock or other property or from the reletting of the Premises; less all expenses incurred by Landlord in making the Premises ready for reletting and in reletting the Premises, on account of the Rent due and to become due under this Lease and Tenant shall be liable to Landlord for any deficiency arid for all such expenses incurred by Landlord as aforesaid; no such entry or taking possession of or performing alterations to or reletting of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention or termination is given by Landlord to Tenant; (c) remedy or attempt to remedy any default of Tenant in performing any repairs, work or other covenants of Tenant hereunder and, in so doing, to make any payments due or claimed to be due by Tenant to third parties and to enter upon the Premises, without any liability to Tenant therefor or for any damages resulting thereby, and without constituting a reentry of the Premises or termination of this Lease, and without being in breach of any of Landlord's covenants hereunder and without thereby being deemed to infringe upon any of Tenant's fights pursuant hereto, and, in such case, Tenant shall pay to Landlord forthwith upon demand all amounts paid by Landlord to third parties in respect of such default and all reasonable costs of Landlord in remedying or attempting to remedy any such default plus ten (10%) 30 percent of the amount of such costs for Landlord's inspection and supervision, plus a further ten (10%) percent for Landlord's overhead and profit; (d) obtain damages from Tenant including, without limitation, if this Lease is terminated by Landlord, all deficiencies between all amounts which would have been payable by Tenant for what would have been the balance of the Term, but for such termination, arid all net amounts actually received by Landlord for such period of time. 16.02 Interest All amounts of Rent shall bear interest from their respective due dates until the actual dates of payment at a rate which shall be the greater of (1) 2 per cent per month (twenty-four (24%) per annum) calculated and compounded monthly; (ii) six (6%) per cent per annum in excess of the prime commercial rate of interest charged by Landlord's bank in Ontario for loans to its most favoured commercial customers from time to time; and (iii) the rate expressly agreed by Tenant in writing to be paid in respect of any amount(s) from time to time. 16.03 Costs Tenant shall be responsible for and pay to Landlord forthwith upon demand all costs incurred by Landlord, including, without limitation, reasonable compensation for all time expended by Landlord's own personnel, legal costs on a solicitor and his own client basis, and all other costs of any kind whatsoever, arising from or incurred as a result of any default of Tenant or any enforcement by Landlord of any of Tenant's obligations under this Lease or any other agreement or obligation of Tenant to Landlord, whether or not related to the Premises. 16.04 Allocation of Payments Tenant agrees that Landlord may, at its option to be exercised by written notice to Tenant at any time, apply all gums received by Landlord from Tenant or any other persons in respect of any Rent to any amounts whatsoever payable by Tenant and it is further agreed that any allocation made by Landlord, on its books and records or by written notice to Tenant or otherwise, may subsequently be re-allocated by Landlord as it may determine in its sole discretion, and any such allocation and re-allocation from time to time shall be final and binding on Tenant unless and to the extent subsequently re-allocated by Landlord. 16.05 Security Deposit (a) Tenant has deposited or agreed that it is obliged to deposit upon execution of this Lease with Landlord the sum described as Security Deposit in Section 1.01 hereof ("Security Deposit"). The Security Deposit together with a security interest in all of the Assets and Undertakings of the Tenant which the Tenant hereby grants to Landlord shall be security for the prompt performance by Tenant of all 31 of the terms, covenants, conditions and provisions of this Lease by Tenant. (b) If at any time any Rent shall be overdue Landlord may, at its option, appropriate and apply all or any portion of the Security Deposit to the payment of the said Rent. Further, if Tenant defaults in the performance of any of the terms, covenants, conditions and provisions of this Lease as and when the same are due to be performed by Tenant then Landlord, at its option, may appropriate and apply all or any part of the Security Deposit on account of any losses or damages sustained by Landlord as a result of such default. (c) If all or any part of the Security Deposit is appropriated and applied by Landlord on account of the payment of Rent or on account of losses or damages sustained by Landlord, then Tenant shall, within three (3) days after demand from Landlord, remit to Landlord a sufficient amount by certified cheque to restore the Security Deposit to the original sum deposited or required to be deposited as herein set forth. (d) If Tenant complies with all of the terms, covenants, conditions and provisions under this Lease and promptly pays all Rent herein provided as and when the same shall be due and payable, the Security Deposit shall be returned in full to Tenant within sixty (60) days after the later of (i) the end of the term or (ii) Tenant's vacating the Premises. (e) Landlord may deliver the Security Deposit, or such portion thereof remaining on hand to the credit of Tenant, to any purchaser, mortgagee or assignee of Landlord's interest in the Premises or the Building or this Lease and thereupon Landlord shall be arid is hereby discharged from any further liability with respect to the Security Deposit. 16.06 Remedies to Subsist (a) No waiver of any of Tenant's obligations under this Lease and no waiver of any of Landlord's rights hereunder in respect of any default by Tenant hereunder shall be deemed to have occurred or be given as a result of any condoning, excusing, overlooking or delay in acting upon by Landlord in respect of any default by Tenant or by any other act or omission of Landlord including, without limitation, the acceptance of any Rent less than the bill amount thereof, the acceptance of any Rent after the occurrence of any default by Tenant, or any verbal or written statements or agreements made by any employee of Landlord other than an agreement in writing duly executed on behalf of Landlord by one of its personnel with ostensible authority to do so. No waiver of any of Tenant's obligations or any of Landlord's rights hereunder shall be effective except and only to the extent of any express waiver in writing duly executed on behalf of Landlord by one of its personnel with ostensible authority to do so. The waiver by Landlord of any default of Tenant or of any rights of Landlord shall not be deemed to be a waiver of any term, covenant or condition in 32 respect of which such default or right has been waived and shall not be deemed to be a waiver of any subsequent default of Tenant or right of Landlord. (b) All rights and remedies of Landlord under this Lease and at law, shall be cumulative and not alternative, and the exercise by Landlord of any of its rights pursuant to this Lease or at law shall at all times be without prejudice to any other rights of Landlord, whether or not they are expressly reserved. (c) If Landlord assigns this Lease to a mortgagee or holder of other security on the Premises or any part thereof or to any other person whatsoever. Landlord shall nonetheless be entitled to exercise all rights and remedies available to it pursuant to this Lease and at law without providing evidence of the approval or consent of such mortgagee, holder of other security or other person whatsoever. (d) All Rent shall be paid by Tenant to Landlord without deduction, abatement or set-off whatsoever, except as and to the extent expressly permitted pursuant to the terms of this Lease, and Tenant hereby waives any rights of deduction, abatement or set-off available to it now or at any time in the future, including any right to deduction, abatement or set-off contained in any statute. 16.07 Impossibility of Performance If and to the extent that either Landlord or Tenant shall be unable to fulfill or shall be delayed or restricted in the fulfillment of any obligation under this Lease, other than the payment by Tenant of any Rent, by reason of unavailability of material, equipment, utilities, services or labor required to enable it to fulfill such obligation or by reason of any laws, or by reason of its not being able to obtain any permission or authority required pursuant to any applicable laws or by reason of any other such cause beyond its control and not the fault of the party being delayed and not avoidable by the exercise of reasonable foresight (excluding the inability to pay for the performance of such obligation), then the party being delayed shall be entitled to extend the time for fulfillment of such obligation by a time equal to the duration of such delay or restriction, and the other party shall not be entitled to any compensation for any loss, inconvenience, nuisance or discomfort occasioned thereby. The party delayed will, however, use its best efforts to fulfill the obligation in question as soon as is reasonably practicable by arranging an alternate method of providing the work, services or materials being delayed subject, in the case of performance by Tenant, to the approval of Landlord in its sole and absolute discretion. In any event, the provisions of this Section 16.07 shall not apply to permit any delay in any payment by Tenant of any Rent. ARTICLE XVII 17.00 - CONTROL OF PREMISES 33 17.01 Rules and Regulations Landlord may, from time to time, make and amend such rules and regulations for the management and operation of the Lands, Building and Premises as Landlord shall determine arid Tenant and all persons under its control shall be bound by and shall comply with all of such rules and regulations of which notice is given to Tenant from time to time, and all of such rules and regulations shall be deemed to be incorporated into and form a part of this Lease. Without limiting the generality of the foregoing, Tenant shall comply with all rules and regulations made by Landlord respecting security and respecting shipping, receiving, loading and unloading of merchandise, supplies, materials, garbage and all other things whatsoever, all of which shall be made only at such times and from, over or by means of such access routes, driveways, doors, loading areas, stairs and other areas or passages whatsoever as Landlord shall determine in writing from time to time. Landlord shall not make any rules or regulations which conflict with any express provisions of this Lease unless and only to the extent required by any applicable laws or unless Tenant consents thereto. Landlord shall act reasonably in enforcing such rules and regulations, but the imposition of any rules and regulations shall not create or imply any obligation of Landlord to enforce them or create any liability of Landlord for their non-enforcement or otherwise. 17.02 ACCESS TO PREMISES (a) Landlord (including its agents, employees, contractors or representatives), without limiting any other rights Landlord may have pursuant hereto or at law, shall have the right, but not the obligation, to enter the Premises at any time and for any of the following purposes: (i) to examine the Premises and to perform any maintenance, repairs and alterations to the same or any part thereof as may be required or permitted by this Lease and to perform any maintenance, repairs and alterations to any mechanical, electrical, heating, ventilating, air-conditioning and humidity control equipment and services located therein serving the Premises or any part thereof, and for all of such purposes, Landlord may take such material and equipment into the Premises as Landlord may require; (ii) to protect the Premises in respect of any construction or other work being performed in premises adjoining or in the vicinity of the Premises; (iii) for any purposes as determined by Landlord in cases of emergency; (iv) to read any utility or other similar meters located in the Premises; (v) during the last twelve (12) months of the Term to show the Premises to prospective tenants, and to permit prospective tenants to 34 make inspections, measurements and plans; (vi) at any time during the Term, to show the Premises to prospective purchasers, mortgagees or lenders; and (vii) to exercise any of the rights available to Landlord pursuant to this Lease. (b) Landlord shall have the right to run through the Premises conduits, wires, pipes, ducts and other elements of any systems for utilities, heating, ventilating, air-conditioning and humidity control, telephone and other communications systems and any other such systems to serve the Premises or any parts thereof, and Landlord shall have access for itself and those designated by it to the Premises for the purpose of inspecting, maintaining, repairing, replacing and altering any services in respect of any of the same. Notwithstanding the foregoing, the Rent shall not be reduced or otherwise affected as a result of any of such systems being located on or running through the Premises. (c) Landlord shall exercise its rights pursuant to this Section 17.02 in such manner and at such times as Landlord, acting reasonably but in its sole discretion, shall determine; at any time that entry by Landlord is desired in case of emergency, and if no personnel of Tenant are known by Landlord to be present on the Premises or if such personnel fail for any reason to provide Landlord immediate access at the time such entry is desired, Landlord may forcibly enter the Premises without liability for damage caused thereby. ARTICLE XVIII 18.00 - EXPROPRIATION 1801 Expropriation If the whole or any part of the Premises shall be expropriated (which term shall for the purposes of this Article XVII include expropriation, condemnation or sale by Landlord to an authority with the power to expropriate, condemn or take) by any competent authority then: (a) Landlord and Tenant shall co-operate with each other in respect of such expropriation so that Tenant may receive the appropriate award to which it is entitled in law for relocation costs and business interruption and so that Landlord may receive the maximum award to which it may he entitled in law for all other compensation arising from such expropriation, including, without limitation, all compensation for the value of Tenant's leasehold interest in the Premises, all of which shall be the property of Landlord and all of such Tenant's rights in respect of such expropriation, excluding only rights in respect of relocating costs and business interruption, shall he and are hereby assigned to Landlord, To give effect to such assignment to Landlord, Tenant shall execute such further documents as 35 Me necessary, in Landlord's opinion, to effect such assignment, and in default of Tenant's completing such documents within ten (10) days after demand, Landlord shall be and is hereby appointed the attorney for Tenant to execute such documents for and on behalf of Tenant and in its name, such appointment being hereby made pursuant to the Power of Attorney Act (Ontario) and shall survive the death or incapacity of Tenant; (b) Landlord shall have the option, to be exercised by written notice to Tenant, to terminate this Lease, such termination to be effective on the date the expropriating authority takes possession of the whole or any portion of the Premises; and (c) this Lease shall continue in full force and effect in accordance with its terms until the date on which this Lease is terminated in accordance with the provisions of this Article XVIII, if terminated in accordance with the express provisions hereof and, if terminated, Rent and all other obligations under this Lease shall be accrued to and he adjusted as of the date of such termination. ARTICLE XIX 19.01 ENVIRONMENTAL MATTERS 19.01 Definitions In this Lease: "Environmental Audit" shall mean a complete review of the Premises and the environmental practices of the Tenant thereon by the Landlord, its employees or agents and shall include such visual inspections, interviews with the Tenant, its employees, servants, or agents, and such soil, air, or other tests as the Landlord shall in its sole discretion deem to be necessary. "Hazardous Substance" means any contaminant, pollutant or hazardous substance that is likely to cause immediately or at some future time, harm or degradation to the environment or risk to human health or safety, and without restricting the generality of the foregoing, includes without limitation any pollutant, contaminant, waste, hazardous waste, toxic substance or dangerous good which is defined or identified in any municipal, provincial or federal environmental legislation. 19.02 Tenant's Obligations (a) The Tenant shall at all times use the Premises so as to comply with all municipal, provincial and federal environmental legislation in keeping with first class environmental protection practices and so as not to allow Hazardous Substance to be on the Premises. 36 (b) The Landlord shall have the right to conduct an Environmental Audit of the Premises at any time and from time to time throughout the term and any renewal thereof. (c) In the event that the Environmental Audit reveals that the Tenant is storing, handling, transporting, manufacturing, processing or otherwise dealing with any Hazardous Substances in the Premises, Building or Centre, the Landlord shall give the Tenant ninety (90) days within which to amend its manner of storing, handling, transporting, manufacturing, processing or otherwise dealing with such Hazardous Substances to comply with first class environmental practices and the manner in which the Landlord indicates such Hazardous Substances be stored, handled, transported, manufactures, processed or otherwise dealt with. The shall further forthwith carry out such procedures as are, in the sole opinion of the Landlord, necessary to correct any damage which may have been done to the Premises, Building or Centre and to forestall any damage to the Premises, Building or Centre which in the opinion of the landlord may be created by the unsatisfactory storing, handling, transporting, manufacturing, processing or otherwise dealing with any Hazardous Substances. (d) In the event that the Tenant shall be in default of the provisions hereof and shall fail to amend its practices or take such corrective measures as are required pursuant to subparagraph (d) hereof within the aforesaid ninety (90) day period the Landlord shall have the right to enter upon the Premises and carry out such procedures as are, in the sole opinion of the Landlord, necessary to correct any damage which may have been done to the Premises, Building or Centre, or to forestall any damage to the Premises, Building or Centre which in the opinion of the Landlord may be created by the unsatisfactory storing, handling, transporting, manufacturing, processing or otherwise dealing with such Hazardous Substances and the Tenant shall pay to the Landlord on demand, as Additional Rent, all costs and expenses of carrying out such procedures. Further, and in addition, to any other remedies available to the Landlord, the Landlord may, on seven (7) days' notice, terminate the Lease. (e) Any entry on the Premises of the Tenant by the Landlord pursuant to the terms of the Lease shall not constitute a breach of the Landlord's covenant of Quiet Enjoyment. ARTICLE XX 20.00 - MISCELLANEOUS 20.01 Notices All notices, requests, demands, acceptances, consents, communications or other writings required or permitted to be given hereunder or for the purposes hereof ("Notice" in this Section) will be in writing and be sufficiently given if personally delivered, sent by prepaid registered mail or transmitted by telex, telecopier or other form of 37 recorded communication tested prior to transmission, addressed to the party to whom it is given, as follows: To the Tenant: 545 Trethewey Drive, Toronto, ON with a copy to Pillowtex Corporation, Attention: T.R. Tunnell, Vice-President, General Counsel, 4111 Mint Way, Dallas, Texas 75237-1605 To the Landlord: 2 Lynwood Avenue, suite 403, Toronto, ON M4V 1K2 with a copy to Torkin, Manes, Cohen & Arbus, Attention: Barry S. Arbus, QC, 151 Yonge Street, Suite 1500, Toronto, ON M5C 2W7. or such other address of which Notice has been given. Any Notice mailed as aforesaid will be deemed to have been given and received on the third Business Day following the date of its mailing. Any Notice personally delivered will be deemed to have been given and received on the day it is personally delivered, provided that if such day is not a Business Day, the Notice will be deemed to have been given and received on the Business Day next following such day. Any Notice transmitted by telex, telecopier or other form of recorded communication will be deemed given and received on the first Business Day after its transmission. If a Notice is mailed and regular mail service is interrupted by strike or other irregularity on or before the fourth Business Day after the mailing thereof, such Notice will be deemed to have not been received unless personally delivered or transmitted by telex, telecopier or other form of recorded communication. 20.02 Planning Act This Lease is entered into subject to the provisions of and compliance with the provisions of all applicable legislation dealing with planning restrictions including the Planning Act S.O. 1983 and amendments. 20.03 Complete Agreement It is understood and agreed that other than and to the extent that any other written agreement between Landlord and Tenant respecting the Premises remains in force, this Lease constitutes the complete agreement between the parties and that there are no covenants, representations, agreements, warranties or conditions in any way relating to the subject matter of this Lease or the tenancy created hereby, expressed or implied, collateral or otherwise, except as expressly set forth herein, Tenant acknowledges that no representatives of Landlord are authorized to make on Landlord's behalf any covenants, representations, agreements, warranties or conditions of any kind or in any manner whatsoever other than as expressly set forth in writing in this Lease in the form in which it is executed by Landlord under seal. No amendment to this Lease shall be binding upon Landlord unless the same is in writing and executed by Landlord under seal. 20.04 Use Prior to Commencement Date 38 If Tenant uses or occupies the whole or any part of the Premises in any way prior to the Commencement Date without entering into a lease with Landlord in respect of such use or occupancy, then during the period of such use or occupancy, Tenant shall be a tenant of Landlord subject to all the terms and conditions as contained in this Lease which shall apply to such tenancy mutatis mutandis; the inclusion of this paragraph shall not be deemed to authorize or permit Tenant to use or occupy the whole or any portion of the Premises in any way prior to the Commencement Date. 20.05 Acceptance of Premises The Landlord agrees to complete the work as set out in Schedule "D", and provided that all such work is completed in a good and workmanlike manner, subject to any items of outstanding work set out in a deficiency list which may be delivered by Tenant to the Landlord within 30 days of taking possession, the Tenant's entering into possession of the Premises shall be conclusive evidence of the acceptance by Tenant of the condition of the Premises. 20.06 Time of the Essence Time is of the essence of this Lease and all parts hereof. 20.07 Applicable Law This Lease shall be governed by and interpreted in accordance with the laws of the Province of Ontario. The panics agree that the Courts of Ontario. shall have jurisdiction to determine any matters arising hereunder, except to the extent, if any, expressly provided to the contrary herein, and the panics hereby attorn to the jurisdiction of the Courts of Ontario. 20.08 Severability If any provision of this Lease or any portion thereof or the application of any of the same is illegal, unenforceable or invalid, it shall be considered separate and severable from this Lease and all of the remaining provisions hereof shall remain in full force and effect as though any such provision of this Lease or any portion thereof had not been included in this Lease but such provision of this Lease or portion hereof shall nonetheless continue to be enforceable to the full extent permitted by law. Neither parry is obliged to enforce this Lease to the extent that by so doing they would be contravening any applicable laws. 20.09 Section Numbers and Headings The table of contents of this Lease and all section numbers and all headings are inserted as a matter of convenience only and shall in no way limit or affect the interpretation of this Lease. 39 20.10 Interpretation Whenever a word importing singular or plural is used in this Lease such word shall include the plural and singular respectively. Where any patty is comprised of more than one entity, the obligations of each of such entities shall be joint and several. Words importing either gender or firms or corporations shall include persons of the other gender and firms or corporations as applicable. Subject to the express provisions contained in this Lease, words such as "hereof", "herein", "hereby", hereinafter", and "hereunder" and all similar words or expressions shall refer to this Lease as a whole and not to any particular section, or portion thereof being less than the whole, unless the context otherwise requires. 20.11 Successors This Lease and all portions hereof shall inure to the benefit of and be binding upon the parties hereto and theft respective heirs, executors, administrators, successors, assigns and other legal representatives excepting only that this Lease shall not inure to the benefit of any of such parties unless and only to the extent expressly permitted pursuant to the provisions of this Lease. IN WITNESS WHEREOF this Lease has been executed by the parties hereto under their respective corporate seals and under the hands of their duly authorized officers in that behalf, as of the day and year first written above. SIGNED, SEALED AND DELIVERED in the presence of: STANDA INVESTMENTS INC. TORFEACO INDUSTRIES /s/ (Signature Illegible) ------------------------------- 40 SCHEDULE A ALL AND SINGULAR that certain parcel or tract of land and premises situate, lying and being in the Borough of North York, in The Municipality of Metropolitan Toronto, in province of Ontario, composed of part of Lot 3 in the 4th Concession, west of Yonge Street, in the said Borough and designated as parts 1 and 2, on a Reference plan deposited in the Registry office for the Registry Division of Toronto Boroughs and York South (No 64) as Plan No. 64R2734. The description of the south-west side of Tretheway Drive in Plan No. 64R2734 conforms with the description in Plan BA-474. 41 EX-10.15 5 EXHIBIT 10.15 INDEMNITY AGREEMENT INDEMNITY AGREEMENT THIS AGREEMENT is dated the 26th day of November, 1996. B E T W E E N: STANDA INVESTMENTS INC a corporation incorporated under the laws of the Province of Ontario (the "Landlord") OF THE FIRST PART - and - PILLOWTEX CORPORATION (the "Indemnifier") OF THE SECOND PART In order to induce the Landlord to enter into the lease (the "Lease") dated the 26th day of November, 1996, and made between the Landlord and Torfeaco Industries Limited, as Tenant, and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the Indemnifier hereby makes the following indemnity and agreement (the ("Indemnity") with and in favor of the Landlord: 1. The Indemnifier hereby agrees with the Landlord that at all times during the Term of the Lease and any extension or renewal of the Lease it will (a) make the due and punctual payment of all Rent, monies, charges and other amounts of any kind whatsoever payable under the Lease by the Tenant whether to the Landlord or otherwise and whether the Lease has been disaffirmed or disclaimed; (6) effect prompt and complete performance of all and singular the terms, covenants and conditions contained in the Lease on the part of the Tenant to be kept, observed and performed; and (c) indemnify and save the Landlord harmless from any loss, costs or damages arising out of any failure by the Tenant to pay the aforesaid Rent, monies, charges or other amounts due under the Lease or resulting from any failure by the Tenant to perform any of the terms, covenants and conditions contained in the Lease. 2. This Indemnity is absolute and unconditional and the obligations of the Indemnifier shall not be released, discharged, mitigated, impaired or affected by (a) any extension of time, indulgences or modifications which the Landlord extends to or makes with the Tenant in respect of the performances of any of the obligations of the Tenant under the Lease; (b) any waiver by or failure of the Landlord to enforce any of the terms, covenants and conditions contained in the Lease; (c) any assignment of the Lease by the Tenant or by any trustee, receiver or liquidator; (d) any consent which the Landlord gives to any such assignment or subletting; (e) any amendment to the Lease or any waiver by the Tenant of any of its rights under the Lease; (f) the expiration of the Term. 3. The Indemnifier hereby expressly waives notice of the acceptance of this Agreement and all notice of non-performance, non-payment or non-observance on the part of the Tenant of the terms, covenants and conditions contained in the Lease. Without limiting the generality of the foregoing, any notice which the Landlord desires to give to the Indemnifier shall be sufficiently given if delivered in person to the Indemnifier or if mailed by prepaid registered or certified post addressed to the Indemnifier at the Leased Premises, and every such notice is deemed to have been given upon the day it was so delivered in person, or if mailed, forty-eight (48) hours after it was mailed. The Indemnifier may designate by notice in writing a substitute address for that set forth above and thereafter notices shall be directed to such substituted address. If two or more persons are named as Indemnifier, any notice given hereunder or under the Lease shall be sufficiently given if delivered or mailed in the foregoing manner to any one of such persons. 4. In the event of default under the Lease or under this Indemnity, the Indemnifier waives any right to require the Landlord to (a) proceed against the Tenant or pursue any rights or remedies against the Tenant with respect to the Lease; (b) proceed against or exhaust any security of the Tenant held by the Landlord; or (c) pursue any other remedy whatsoever in the Landlord's power. The Landlord has the right to enforce this Indemnity regardless of the acceptance of additional security from the Tenant and regardless of any release or discharge of the Tenant by the Landlord or by others or by operation of any law. 5. Without limiting the generality of the foregoing, the liability of the Indemnifier under this Indemnity is not and is not deemed to have been waived, released, discharged, impaired or affected by reason of the release or discharge of the Tenant in any receivership, bankruptcy, winding-up or other creditors proceedings or the rejection, disaffirmance or disclaimer of the Lease in any proceeding and shall continue with respect to the periods prior thereto and thereafter, for and with respect to the Term as if the Lease had not been disaffirmed or disclaimed, and in furtherance hereof, the Indemnifier agrees, upon any such disaffirmance or disclaimer, that the Indemnifier shall, at the option of the Landlord, become the Tenant of the Landlord upon the same terms and conditions as are contained in the Lease, applied MUTATIS MUTANDIS. The liability of the Indemnifier shall not be affected by any repossession of the Leased Premises by the Landlord, provided, however, that the net payments received by the Landlord after deducting all costs and expenses of repossessing and reletting the Leased Premises shall be credited from time to time by the Landlord against the indebtedness of the Indemnifier hereunder and the Indemnifier shall pay any balance owing to the Landlord from time to time immediately upon demand. 6. No action or proceedings brought or instituted under this Indemnity and no recovery in pursuance thereof shall be a bar or defence to any further action or proceeding which may be brought under this Indemnity by reason of any further default hereunder or in the performance and observance of the terms, covenants and conditions contained in the Lease. 7. No modification of this Indemnity shall be effective unless the same is in writing and is executed by both the Indemnifier and the Landlord. 8. The Indemnifier shall, without limiting the generality of the foregoing, be bound by this Indemnity in the same manner as though the Indemnifier were the Tenant named in the Lease. 9. If two or more individuals, corporations, partnerships or other business associations (or any combination of two or more thereof) execute this Indemnity as Indemnifier, the liability of each such individual, corporation, partnership or other business association hereunder is joint and several. In like manner, if the Indemnifier named in the Indemnity is a partnership or other business association, the members of which are by virtue of statutory or general law subject to personal liability, the liability of each such member is joint and several. 10. All of the terms, covenants and conditions of this Indemnity extend to and are binding upon the Indemnifier, his or its heirs, executors; administrators, successors and assigns, as the case may be, and enure to the benefit of and may be enforced by the Landlord, its successors and assigns, as the case may be, and any mortgagee, chargee, trustee under a deed of trust or other encumbrancer of all or any part of the Centre referred to in the Lease. 11. The expressions "Landlord", "Tenant", "Rent", "Term" and "Premises" and other terms or expressions where used in this Indemnity, respectively, have the same meaning as in the Lease. 12. This Agreement shall be construed in accordance with the laws of the Province of Ontario. 13. Wherever in this Indemnity reference is made to either the Landlord or the Tenant, the reference is deemed to apply also to the respective heirs, executors, administrators, successors and assigns and permitted assigns, respectively, of the Landlord and the Tenant, as the case may be, named in the Lease Any assignment by the Landlord of any of its interest in the Lease operates automatically as an assignment of such assignee of the benefit of this Indemnity. IN WITNESS WHEREOF the Landlord and the Indemnifier have signed and sealed this Indemnity. INDEMNIFIER PILLOWTEX CORPORATION Per: /s/ (Signature Illegible) ------------------------------- Authorized Signing Authority LANDLORD:. STANDA INVESTMENTS INC. Per: /s/ (Signature Illegible) ------------------------------- Authorized Signing Authority EX-10.17 6 EXHIBIT 10.17 SECOND AMENDMENT TO LEASE SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (this "Second Amendment") is made as of this ____ day of September 1997 by and between ANGEL AND JEAN ECHEVARRIA (together, "Landlord"), and PILLOWTEX CORPORATION, a Texas corporation ("Tenant"). RECITALS A. Landlord and Tenant entered into that certain Industrial Lease dated November 23, 1992 (the "Original Lease"), pursuant to which Landlord leased to Tenant, and Tenant leased from Landlord, certain premises commonly known as 3820 Union Pacific Avenue, Los Angeles, California, consisting of certain real property, an approximately 320,000 square foot building and other improvements located on the real property and certain parking areas, as more particularly described in the Original Lease (the "Premises"). B. Landlord and Tenant amended the Original Lease pursuant to that certain Broker's Ammendment [sic] executed as of November 11, 1992 (the "First Amendment"). True and correct copies of the Original Lease and the First Amendment are attached hereto as EXHIBIT A and incorporated by this reference. The Original Lease, as amended by the First Amendment, shall be referred to herein as the "Lease." C. Landlord and Tenant desire to enter into this Second Amendment to modify the rent payable by Tenant pursuant to the Lease, to extend the term of the Lease, and to make certain other changes to the Lease, all in accordance with the terms and conditions set forth below. AGREEMENT TERMS AND CONDITIONS NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. CONDITION PRECEDENT. On October 29, 1997, Landlord commenced a bankruptcy case by filing a voluntary chapter 11 petition under the United States Bankruptcy Code, 11 U.S.C. Section 101 et seq., Case No. LA 96-45771-TD with the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). This Second Amendment shall not be effective unless and until the Bankruptcy Court has entered an order approving this Second Amendment upon the terms set forth herein (the "Order"). Immediately upon full execution of this Second Amendment by Landlord and Tenant, Landlord shall seek the Order from the Bankruptcy Court. Upon entry of the Order, this Second Amendment shall immediately become effective, without further action on the part of either Landlord or Tenant. 2. TERM. Notwithstanding anything to the contrary set forth in the Lease, including without limitation Section 3.1 thereof, the term of the Lease is hereby extended through and including December 31, 2004. 3. RENT. The first two (2) sentences of Article 4 of the Lease, entitled "Rent," are hereby deleted in their entirety and replaced with the following: "Tenant shall pay Landlord rent for the Premises ("Rent") in accordance with the following schedule: a. From October 1, 1997 through December 31, 1998, Tenant shall pay to Landlord Rent at the annual rate of Six Hundred Eighteen Thousand Two Hundred Forty and 00/100 Dollars ($618,240.00), provided, however, the rent payable for the period from October 1, 1997 through and including December 31, 1997 shall be that portion of the aforesaid annual Rent equal to the product of (i) such annual Rent multiplied by (ii) one-fourth (1/4); b. From January 1, 1999 through December 31, 2000, Tenant shall pay to Landlord Rent at the annual rate of Six Hundred Thirty-Six Thousand Seven Hundred Eighty-Seven and 00/100 Dollars ($636,787.00); c. From January 1, 2001 through December 31, 2001, Tenant shall pay to Landlord Rent at the annual rate of Six Hundred Forty-Two Thousand Nine Hundred Sixty-Nine and 00/100 ($642,969.00); and d. From January 1, 2002 through December 31, 2002, Tenant shall pay to Landlord Rent at the annual rate of Six Hundred Forty-Nine Thousand One Hundred Fifty-Two and 00/100 ($649,152.00); and e. From January 1, 2003 through December 31, 2004, Tenant shall pay to Landlord Rent at the annual rate of Six Hundred Sixty-One Thousand Five Hundred Seventeen and 00/100 ($661,517.00); and Rent shall be due and payable by Tenant in advance in consecutive equal monthly installments on or before the first day of each month." 4. NO OPTION FOR EXTENSION OF TERM, OPTION ON ADDITIONAL SPACE OR RIGHT OF FIRST REFUSAL. Upon the execution hereof, the options and rights granted to Tenant under Section 39 of the Lease shall be of no further force and effect. 5. NO OTHER CHANGES. Except as set forth in this Second Amendment, all other provisions of the Lease shall remain in full force and effect and are hereby ratified. In the event of a conflict between the terms of the Lease and this Second Amendment, this -2- Second Amendment shall prevail. All references in the Lease and in this Second Amendment to the "Lease" shall be deemed to be the Lease, as amended by this Second Amendment. 6. NO BROKER. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this Second Amendment and that no broker, agent or other person brought about this transaction. Tenant hereby agrees to indemnify, defend, protect and hold Landlord harmless from and against any claims, losses, liabilities, demands, costs, expenses or causes of action by any broker, agent or other person (including, without limitation, Cushman & Wakefield) claiming any commission or other form of compensation arising directly or indirectly with regard to this Second Amendment. 7. BINDING EFFECT. This Second Amendment shall be binding upon and inure to the benefit of Landlord, its successors and assigns and Tenant and its permitted successors and permitted assigns. 8. ATTORNEYS' FEES. Should any party initiate a legal proceeding against any other party, including an arbitration, then the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs incurred in connection with such legal proceeding. 9. AUTHORITY. Tenant has full power and authority to enter into this Second Amendment, and the person signing on behalf of Tenant has been fully authorized to do so by all necessary corporate action, or any other action, on the part of Tenant. 10. CAPTIONS. The captions contained in this Second Amendment are for convenience only are not intended to limit or define the scope or effect of any provision of this Second Amendment. 11. CAPITALIZED TERMS. All terms capitalized but not defined in this Second Amendment shall have the meanings given them in the Lease. 12. SEVERABILITY. The invalidity, illegality or unenforceability of any provision of this Second Amendment shall not affect the enforceability of any other provision of this Second Amendment, all of which shall remain in full force and effect. 13. FACSIMILE. The parties hereto and their respective successors and assigns are hereby authorized to rely upon the signatures of each person and entity on this Second Amendment which are delivered by facsimile as constituting a duly authorized, irrevocable, actual, current delivery of this Second Amendment with original ink signatures of each person and entity. 14. ESTOPPEL. Tenant certifies to Landlord that, to Tenant's knowledge, as of the date of this Second Amendment, except as described in paragraph 16 below, (a) Landlord is not in default under the Lease and (b) Tenant does not have any defenses or offsets -3- to payment of rent and performance of its obligations under the Lease as and when the same becomes due. 15. COUNTERPARTS. This Second Amendment may be executed in any number of counterparts and each such counterpart shall be deemed to be an original, but all of which, when taken together, shall constitute one Second Amendment. 16. NO WAIVER OF ALLOWED CLAIM. Tenant has filed a timely proof of claim, in the amount of Fifty Thousand Dollars ($50,000), in Landlord's pending chapter 11 bankruptcy proceeding (In re Angel M. Echevarria, Case No. LA 96-45771-TD) currently pending before the United States Bankruptcy Court for the Central District of California. Tenant's proof of claim in Landlord's bankruptcy case shall be allowed for the entire amount filed and nothing herein shall be deemed to affect the payment on account of such claim through appropriate means, including Landlord's plan of reorganization or directly from the Landlord if the bankruptcy proceeding is dismissed. IN WITNESS WHEREOF, the parties have executed this Second Amendment as of the date first written above. LANDLORD: /s/ ANGEL ECHEVARRIA --------------------------------- ANGEL ECHEVARRIA /s/ JEAN ECHEVARRIA --------------------------------- JEAN ECHEVARRIA TENANT: PILLOWTEX CORPORATION, a Texas corporation By: /s/ John H. Karnes -------------------------------- Name: John H. Karnes --------------------------- Title: Vice President -------------------------- -4- EX-10.19 7 EXHIBIT 10.19 AGREEMENT FOR MODIFICATION AGREEMENT FOR MODIFICATION AND EXTENSION OF LEASE AGREEMENT between Jimmie D. Smith, Jr. Post office Box 7623, Rocky Mount, NC 27804 hereinafter "Landlord" and Pillowtex Corporation, a corporation existing under the laws of the State of Texas, with an office at 4111 Mint Way, Dallas, Texas 75237, hereinafter "Tenant" modifying and extending the lease dated October 12, 1988 between the above fore-mentioned as it relates to a certain tract or parcel of land located in the Southwest quadrant of Craig and South Davis Street, Rocky Mount, Nash County, North Carolina. WITNESSETH: That for one dollar ($1.00) and other valuable consideration by each of the parties hereto mentioned to the other in hand paid, receipt whereof is hereby reciprocally acknowledged, said lease is hereby modified and extended to October 31, 1998, at a rental of one hundred six thousand and two hundred dollars ($106,200.00) per annum for said term commencing November 1, 1994 and terminating October 31, 1998, which rent shall be paid in equal monthly installments of eighty eight hundred and fifty dollars ($8,850.00). It is further expressly and agreed that in all other respects said lease shall be unmodified and in full force. IN WITNESS WHEREOF the Landlord has caused these present to be signed and witnessed and the Tenant has hereunto caused these present to be signed by the Secretary and another duly authorized officer. /s/ (Signature Illegible) /s/ (Signature Illegible) ------------------------- ------------------------- WITNESS LANDLORD /s/ (Signature Illegible) /s/ (Signature Illegible) ------------------------- ------------------------- SECRETARY TENANT EX-10.23 8 EXHIBIT 10.23 AMENDMENT TO EMPLOYMENT - HANSEN [LOGO] PILLOWTEX CORPORATION 4111 Mint Way Dallas, Texas 75237 214/333-3225, FAX: 214/330-6016 Mr. Charles M. Hansen, Jr. 3820 Gillon Dallas, TX 75205 Re: AMENDMENT TO EMPLOYMENT AGREEMENT Dear Chuck: On January 1, 1993, Pillowtex Corporation ("Pillowtex") and you entered into an Employment Agreement (the "Agreement") including an amendment dated as of July 26, 1993, pursuant to which you were employed as Chairman of the Board, Chief Executive Officer and President of Pillowtex. Set forth below are amendments to the Agreement to which Pillowtex and you have agreed: 1. Section 4 of the Agreement shall be amended extending the term of employment as follows: "4. TERM. The employment of Employee hereunder shall begin on the date hereof and shall continue until the earliest of (a) the death of the Employee, (b) the Disability (as defined herein) of Employee, (c) the date the Employee voluntarily terminates his employment hereunder, (d) the date the Employer terminates Employee's employment hereunder for Just Cause (as defined herein) or (e) June 20, 2005 (the "Expiration Date"). . . ." 2. Pursuant to Section 6(d) of your Employment Agreement, dated January 1, 1993, Pillowtex Corporation (the "Company") agreed to provide you with a term life insurance policy for the benefit of your designated beneficiaries. In an amendment to the Employment Agreement, dated as of July 26, 1993, the term life insurance policy was substituted for a $3 million split dollar life insurance policy and the Company agreed to maintain the premium payments that would have been payable by the Company had the term life insurance remained in effect, and to loan to you the balance of the premiums as they become due. Amounts loaned to you in connection with these premium payments are evidenced by a promissory note given by you to the Company, and bear interest quarterly at the rate stated therein. The Company has now agreed to assume the obligation of payment of all of the premiums due and payable on the policy including any and all interest accrued on the promissory note and will reimburse you for the income tax consequences attributable to you for such accrued interest. Accordingly, effective as of January 20, 1998, additional principal will cease to accrue on the promissory note. All of Mr. Charles M. Hansen, Jr. January 20, 1998 Page 2 the terms of the promissory note, including provisions regarding the repayment thereof, shall remain the same. If the foregoing reflects the agreement between Pillowtex and you, please execute this letter where indicated below. Very truly yours, PILLOWTEX CORPORATION By: /s/ Jeffrey D. Cordes ------------------------------------- Jeffrey D. Cordes President and Chief Operating Officer AGREED AND ACCEPTED As of January 20, 1998 /s/ Charles M. Hansen, Jr. - ------------------------------ Charles M. Hansen, Jr. EX-10.28 9 EXHIBIT 10.28 FORM OF EMPLOYMENT AGREEMENT 1-1-98 FORM OF EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of January 1, 1998, is by and between Pillowtex Management Services Company, a Delaware business trust ("EMPLOYER"), and _______ ("EMPLOYEE"). WITNESSETH: WHEREAS, Employee desires to enter into the employment of Employer and Employer desires to employ Employee in the capacity and on the terms set forth below. NOW, THEREFORE, in consideration of the foregoing recital and of the mutual agreements contained herein, and for other valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT AND SCOPE. (a) Commencing as of January 1, 1998 (the "COMMENCEMENT DATE") and continuing throughout the Term of this Agreement, Employer agrees to employ Employee and Employee agrees to serve as the employee of Employer with the title and capacity of Executive Vice President of Sales. As such, Employee's duties shall include responsibility for sales functions of Employer and its affiliates, as well as such other responsibilities as are consistent with the office of Executive Vice President of Sales and such other responsibilities as may be assigned from time to time by the President of Employer's Sales and Marketing Division. Employee shall report to the President of Employer's Sales and Marketing Division. (b) Employee's performance of services under this Agreement shall occur primarily at Employer's principle executive offices at 4111 Mint Way, Dallas, Texas, subject to such travel as is consistent with the office of Executive Vice President of Sales. 1 (c) During the Term of Employee's employment, Employee shall devote Employee's full business time (at least 40 hours per week) exclusively to the performance of Employee's duties as stated in this Agreement and to the furtherance of Employer's business. 2. TERM. (a) The term of this Agreement (the "TERM") shall begin on the Commencement Date and shall continue through the third anniversary thereof, subject to automatic extension as provided below and unless terminated earlier in accordance with Section 4. (b) Beginning with the second anniversary date of the Commencement Date and continuing with each anniversary date thereafter, the Term of this Agreement shall automatically be extended in additional, successive one-year increments, with the result that the Term will have a remaining duration of two years upon each and every anniversary. Notwithstanding the foregoing sentence, the Term shall not be extended if either party has previously given the other party written notice of its intent not to extend the Agreement at least 15 months prior to the anniversary upon which the extension would otherwise occur. 3. COMPENSATION. During the Term of this Agreement, Employer shall compensate Employee as set forth below: (a) Employer shall pay to Employee a base salary of $______, payable in accordance with Employer's payroll policies in effect from time to time for executive officers generally, subject to all appropriate withholdings. (b) Employee shall be eligible to participate in Employer's incentive bonus plans as they may be amended from time to time to the same extent as executive officers generally. 2 (c) Employee shall be entitled to the greater of three-weeks of paid vacation annually and that amount of vacation to which Employee would be entitled under Employer's vacation policy as it may be amended from time to time. (d) Employee shall be entitled to participate in Employer's health, benefit and welfare plans offered by Employer as they may be amended from time to time to the same extent as executive officers of Employer generally. (e) Employer shall provide Employee with a $500,000 term life insurance policy. (f) Employee shall be eligible to participate in any supplemental executive retirement plan that Employer may adopt. (g) Employer will acquire a club membership at a country club of Employee's choice for the exclusive use of Employee during the Term at an initiation fee of up to $25,000. The membership shall remain the property of Employer subject to Employee's right to acquire it upon termination of Employee's employment as set forth below. Employer will pay Employee's membership dues and will reimburse Employee for all expenses and charges incurred at the club for business purposes. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership to Employer, PROVIDED, HOWEVER, that if Employee is terminated for any reason other than for Cause (as defined in Section 4(g)(i)), Employee shall be entitled to acquire the membership from Employer for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. 3 (h) Employer will pay Employee a car allowance of $1,000 per month plus an additional amount equal to all federal and state income taxes arising with respect to any portion of the allowance taxable as income to Employee. 4. TERMINATION DURING TERM. Notwithstanding anything to the contrary in Section 2 of this Agreement, Employee's employment under this Agreement may be terminated during the Term as set forth below: (a) Employer may terminate Employee's employment for Cause, in which case the parties' rights and obligations shall be as set forth in Section 5(a) below. (b) Employer may terminate Employee's employment in the absence of Cause and other than upon Employee's Retirement or Permanent Disability, in which case the parties' rights and obligations shall be as set forth in either Section 5(b) or (e) below, as applicable. (c) Employee's employment shall be terminated upon Employee's Permanent Disability, in which case the parties' rights and obligations shall be as set forth in Section 5(c) below. (d) Employee's employment shall be terminated upon Employee's Retirement, in which case the parties' rights and obligations shall be as set forth in Section 5(d) below. (e) In the event of a Change in Control of Employer, Employee may terminate Employee's employment (i) for any reason, for up to six months after the Change in Control of Employer, or (ii) for Good Reason, in which case the parties' rights and obligations shall be as set forth in Section 5(e) below. (f) Employee may terminate Employee's employment at any time for any reason not heretofore enumerated, in which case the parties' rights and obligations shall be as set forth in Section 5(f) below. 4 (g) The following definitions shall apply for purposes of the early termination of the Term of this Agreement: (i) "CAUSE" shall mean the occurrence of any of the following: (A) Employee's engagement in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of Employer or its affiliates; (B) Employee's engagement in any act involving willful dishonesty, disloyalty, or infidelity against Employer or its affiliates; (C) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; and (D) Employee's willful and continued breach of or failure substantially to perform under any material policy established by the Company with respect to the operation of the Company's business and affairs, or the conduct of the Company's employees. For purposes of this Section 4(g)(i), no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of Employer. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, Employer shall provide Employee a written notice referencing this Section 4(g)(i), setting out with specificity the conduct asserted to constitute Cause. Any disputes arising as to whether Cause existed for Employee's termination shall be resolved through binding arbitration in accordance with Section 9 of this Agreement. (ii) "CHANGE IN CONTROL OF EMPLOYER" means the occurrence during the Term of any of the following events: (A) Pillowtex Corporation, a Texas corporation ("PILLOWTEX"), is merged, consolidated or reorganized into or with another corporation or other legal person, and as a 5 result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("VOTING STOCK") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such transaction; (B) Pillowtex sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such sale or transfer; (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of Pillowtex; or (D) If, during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the Directors of Pillowtex cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (D) each Director who is first elected, or first nominated for election by Pillowtex's stockholders, by a vote of at least two-thirds of the Directors of Pillowtex (or a committee thereof) then still in office who were 6 Directors of Pillowtex at the beginning of any such period will be deemed to have been a Director of Pillowtex at the beginning of such period. (iii) "EXCLUDED PERSON" shall mean any of (A) Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate or any person for which any of Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate are deemed to hold beneficial ownership of securities of Pillowtex registered in the name of such person; (B) Pillowtex; (C) any entity in which Pillowtex directly or indirectly owns 50% or more of the outstanding Voting Stock (a "SUBSIDIARY"); or (D) any employee benefit sponsored by Pillowtex or any Subsidiary. (iv) "GOOD REASON" shall mean termination of Employee's employment by Employee after a Change in Control of Pillowtex upon the occurrence of any of the following: (A) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with Employer as existing immediately prior to a Change in Control of Employer; a substantial alteration in the nature or status of Employee's responsibilities from those in effect immediately prior to a Change in Control of Employer; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control of Employer, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control of Employer, or any removal of Employee from or failure to re-elect Employee to any such positions; (B) a reduction by Employer in Employee's base salary in effect immediately prior to a Change in Control of Employer; (C) the requirement by Employer that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control of Employer, except for required travel on Employee's business to an extent 7 substantially consistent with Employee's business travel obligations immediately prior to a Change in Control of Employer; or (D) the taking of any action by Employer which would (1) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control of Employer, or (2) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control of Employer (v) "PERMANENT DISABILITY" shall mean any physical or mental impairment rendering Employee unable to perform the essential functions of Employee's job (as determined by Employer), with or without reasonable accommodation that does not constitute undue hardship to Employer, and such impairment is permanent or is likely to continue for a period exceeding six consecutive months. If Employee fails to notify Employer of Employee's need for accommodation, Employer is not required to accommodate Employee and may hold Employee to the same standards as persons without a disability. The determination of whether Employee has a Permanent Disability shall be made as set forth below. During any period in which the existence of a Permanent Disability is being determined, Employee shall continue to receive Employee's full base salary at the rate then in effect and all compensation and benefits paid during such period until a Permanent Disability is conclusively determined and this Agreement is terminated in accordance with Section 8 hereof, provided Employee (and Employee's personal and legal representatives) act in good faith and with reasonable diligence in pursuing a determination. This definition is not intended to either expand or limit any rights and protections granted to Employee by law. Employer may require Employee to be examined by a physician, at Employee's own expense, in order to determine whether 8 Employee has a Permanent Disability. If Employer disagrees with the written opinion of this physician ("FIRST PHYSICIAN"), it may engage, at its own expense, another physician ("SECOND PHYSICIAN") to examine Employee. If the First and Second Physicians agree in writing that Employee has not suffered a Permanent Disability, their written opinion shall, except as otherwise set forth in this Section 4(g)(v), be conclusive on the issue of Permanent Disability. If the First and Second Physicians disagree on whether Employee has suffered a Permanent Disability, they shall choose a third consulting physician (whose expense shall be shared equally by Employer and Employee) and the written opinion of a majority of these three physicians shall be conclusive as to the issue of Permanent Disability. In connection with a Permanent Disability determination, Employee hereby consents to any required medical examination and agrees to furnish any medical information requested by any examining physician and to waive any applicable physician-patient privilege that may arise because of such examination. All physicians must be board-certified in the specialty most closely related to the nature of the Permanent Disability alleged to exist. (vi) "RETIREMENT" shall mean termination by Employer or Employee in accordance with Employer's retirement policy (including early retirement, if included in such policy and elected by Employee in writing) generally applicable to its senior executive employees, or in accordance with any other retirement agreement entered into by and between Employee and Employer. 5. COMPENSATION UPON TERMINATION. If Employee's employment is terminated during the Term of this Agreement, Employee shall be entitled to compensation as set forth below: (a) If Employer terminates Employee's employment for Cause, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then 9 in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. (b) If Employer terminates Employee's employment without Cause, then Employer shall pay Employee, not later than the fifth day following the date of termination, a lump sum severance payment equal to the sum of (i) Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (ii) Employee's undiscounted base salary through the remaining duration of the Term or, if greater, for a period of 24 months, at the highest rate in effect during the 12 months immediately preceding the date of Employee's termination; and (iii) the product obtained by multiplying the greater of (A) (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target award level under any successor plan or program) as of the date of Employee's termination by (B) a proration factor (the "BONUS PRORATION FACTOR") equal to the quotient obtained by dividing the number of months (but in no event less than 24 months) in the period from the beginning of the most recent plan year for which a bonus has not been paid (but is anticipated to be paid as of the date of the Employee's termination) to the expiration of the Term, by 12. Notwithstanding the foregoing, the provisions of this Section 5(b) shall not apply if Employer terminates Employee's employment without Cause subsequent to a Change in Control of Employer. (c) If Employee's employment is terminated upon Employee's Permanent Disability, Employer shall pay Employee's undiscounted base salary through the date of Employee's 10 termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits, if any, shall be determined in accordance with Employer's employee benefit plans or other insurance programs then in effect. (d) If Employee's employment is terminated upon Employee's Retirement, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits shall be determined in accordance with Employer's retirement policy applicable to its senior executive employees or in accordance with any other retirement agreement entered into by and between Employee and Employer. (e) If, after a Change in Control of Employer, Employee's employment (x) is terminated by Employee for any reason during a period of six months beginning on the date of the Change in Control of Employer, or if less, during the remaining duration of the Term; (y) is terminated by Employee for Good Reason; or (z) is terminated by Employer without Cause (and not by reason of Employee's Permanent Disability Retirement, or death), Employee shall be entitled to the compensation and benefits provided below: (i) Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect; (ii) Employer shall pay all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (iii) Employer shall pay as severance pay to Employee, not later than the fifth day following Employee's termination, a lump sum severance payment (together with the 11 payments described in Sections 5(e)(iv) and (v), the "SEVERANCE PAYMENTS") equal to the sum of (A) the product obtained by multiplying Employee's undiscounted annual base salary at the highest rate in effect during the 12 months immediately preceding Employee's termination by the number of years or fractions thereof (but in no event less than two years) remaining in the Term and (B) the product obtained by multiplying the greater of (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target aware level under any successor plan or program) based upon Employee's annual salary at the highest rate in effect during the 12 months immediately preceding Employee's termination, by the Bonus Proration Factor (as defined in Section 5(b) above); (iv) in lieu of shares of common stock, $0.01 par value, of Pillowtex (the "SHARES") issuable upon the exercise of options ("OPTIONS"), if any, granted to Employee under any stock option plan of Pillowtex (which Options shall be canceled upon the making of the payment referred to below), Employer shall pay Employee in one sum in cash, not later than the fifth day following the date of Employee's termination, an aggregate amount equal to the product of (A) the difference (to the extent that such differences are a positive number) obtained by subtracting the per Share exercise price of each Option held by Employee, whether or not then fully exercisable, from the higher of (1) the closing price of the Shares, as reported on the New York Stock Exchange on the Date of Termination (or the last trading date prior thereto) or (2) the highest price per Share actually paid in connection with any Change in Control of Employer, and (B) the number of shares covered by each such Option; 12 (v) Employer shall pay Employee the retirement benefits to which Employee is entitled under Employee's retirement policy or other retirement agreement; (vi) Employer shall reimburse Employee for all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in successfully contesting or disputing any such termination or seeking to obtain or enforce any right or benefit provided by this Agreement); and (vii) if Severance Payments become subject to the excise tax (the "EXCISE TAX") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), Employer shall pay to Employee an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by Employee, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for in this Section 5(e)(vii)), shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Employee in connection with a Change in Control of Employer and Employee's subsequent termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions resulted in the Change in Control of Employer or any person affiliated with Employer or such person) shall be treated as a "parachute payment" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Employer's independent auditors and reasonably acceptable to Employee such other payments or benefits (in whole or in part) do not constitute parachute payments, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the 13 lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of section 280(G)(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by Employer's independent auditors in accordance with the principles of sections 280(G)(d)(3) and (4) of the Code and the applicable Treasury Regulations. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of Employee's termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Employee's termination of employment, Employee shall repay to Employer, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined. Employee and Employer shall each reasonably 14 cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (f) If Employee terminates Employee's employment under circumstances in which Section 5(e) does not apply, or if Employee's employment is terminated by reason of his death, Employer shall pay Employee's full base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. 6. INSURANCE. If Employee's employment is terminated under the provisions of Section 4(e) of this Agreement, Employee shall participate, for a period of two years from the date of Employee's termination, in all employee benefit plans providing health and dental benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law. If Employee's participation in any such plan is not permitted for any reason, Employer shall arrange to provide Employee, at Employer's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. At the end of such two-year period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. 7. FUTURE EMPLOYMENT. Employee shall not be required to mitigate the amount of any payment provided for in Section 5 hereof by seeking other employment or otherwise, nor shall the amount of any payment provided for in Section 5 hereof be reduced by any compensation earned by Employee as a result of employment by another employer after the date of Employee's termination, or otherwise. 8. NOTICE OF TERMINATION. 15 (a) Any purported termination by Employer or by Employee shall be communicated by a written "Notice of Termination" to the other party. A Notice of Termination shall mean a notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated. (b) The "date of Employee's termination" shall be: (i) if Employee's employment is terminated by reason of Employee's Permanent Disability, the date that is 30 days after the determination of Permanent Disability pursuant to Section 4(g)(v) of this Agreement, (ii) if Employee's employment is terminated for Cause, the date specified in the Notice of Termination, or (iii) if Employee's employment is terminated for any other reason, the date specified in the Notice of Termination, provided such date is not more than 60 days from the date such Notice of Termination is given. 9. ARBITRATION. All disputes or claims arising under this Agreement or in connection with Employee's employment with Employer (including any claims under any federal, state, or local law or ordinance), except for any dispute or claim arising under Sections 10, 11, 12, 13, and 16 of this Agreement, shall be subject to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association, the cost of which shall be borne by the party against whom an arbitration award is entered. 10. NONDISCLOSURE AGREEMENT. Employer, during the term of Employee's employment under this Agreement, shall provide Employee access to, and Employee shall have access to and become familiar with, various trade secrets and proprietary and confidential information consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, 16 methods of doing business and other confidential information (collectively referred to herein as the "TRADE SECRETS"), which are owned by Employer and its affiliates and are regularly used in the operation of their businesses, but in connection with which Employer and its affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in Employer's industry; (b) are entrusted to Employee after being informed of their confidential and secret status by Employer or its affiliates and because of the fiduciary position occupied by Employee with Employer; (c) have been developed by Employer and its affiliates for and on behalf of Employer and its affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give Employer and its affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of Employer and its affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to Employer and its affiliates. Employee shall not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the Term of this Agreement or at any time thereafter, except as required in the course of Employee's employment under this Agreement. All files, records, documents, information, data and similar items relating to the business of Employer and its affiliates, whether prepared by Employee or otherwise coming into Employee's possession, shall remain the exclusive property of Employer and its affiliates and shall not be removed from the premises of Employer and its affiliates under any circumstances without the prior written consent of the Board of Directors of Employer (except in the ordinary course of business during Employee's period of active employment under this Agreement), and in any event shall be promptly delivered to Employer upon termination of this Agreement. Employee agrees that upon 17 Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Chief Executive Officer of Pillowtex. For this purpose, Employee irrevocably nominates and appoints Employer (including any attorney retained by Employer), as Employee's true and lawful attorney-in-fact, to act in Employee's name, place and stead to perform any act that Employee might perform to defend and protect against any disclosure of any Trade Secrets. As used in this Agreement, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, Employer. 11. NON-COMPETITION AGREEMENT. Employee acknowledges and agrees that the training Employee will receive, the experience Employee will gain and the information Employee will acquire regarding the Trade Secrets while employed hereunder will enable Employee to injure Employer if Employee should compete with Employer in a business that is competitive with the business conducted or to be conducted by Employer and its affiliates. For these reasons, Employee hereby agrees that, without the prior written consent of Employer, Employee shall not, during the period of employment with Employer, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (a) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of Employer or its affiliates, (b) accept employment with or render services to a competitor of Employer or any of its affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by 18 Employer or its affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of Employer or its affiliates or any person or entity whose business Employer or its affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by Employer or its affiliates within the United States, Canada and Mexico. 12. NONEMPLOYMENT AGREEMENT. During the period of employment with Employer and for a period of 24 months thereafter, Employee shall not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of Employer or its affiliates to leave the employment of Employer or its affiliates, nor shall Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of Employer concerning the names and addresses of the employees of Employer or its affiliates. 13. NONDISPARAGEMENT AGREEMENT. Employee shall not, either during the Term of this Agreement or at any time thereafter, make statements, whether orally or in writing, concerning Employer, any of its directors, officers, employees or affiliates or any of its business strategies, policies or practices, that shall be in any way disparaging, derogatory or critical, or in any way harmful to the reputation of Employer, any such persons or entities or business strategies, policies or practices. 14. SUCCESSORS; BINDING AGREEMENT. (a) Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of 19 Employer, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle Employee to compensation from Employer in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of Employee's termination. As used in this Agreement, "Employer" shall mean Employer as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 14 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of Employee's death, any amounts owed to Employer under this Agreement shall be paid to Employee's surviving spouse, if any, and if none, to Employee's estate. 15. SEVERABILITY. The parties hereto intend all provisions of Sections 10, 11, 12, 13 and 16 hereof to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of Sections 10, 11, 12, 13 and 16 hereof is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Employee agrees that the provisions of each of the foregoing sections constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other 20 provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants and agreements of Employee contained in the non-competition, nondisclosure, nonemployment or nondisparagement agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 16. INVENTIONS. Employee shall promptly disclose, grant and assign to Employer for its sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to the products of Employer or any of its affiliates or capable of beneficial use by Employer or any of its affiliates, which Employee has in the past conceived, developed or acquired, or may conceive, develop or acquire during the term hereof (whether or not during usual working hours), together with all patent applications, letters patent, copyrights and reissues thereof that may at any time be granted upon any such invention, improvement or technical information. In connection therewith, Employee shall promptly at all times during and after the term hereof: (a) execute and deliver such applications, assignments, descriptions and other instruments as may be necessary or proper in the opinion of Employer to vest title to such inventions, 21 improvements, technical information, patent applications and patents or reissues thereof in Employer and to enable it to obtain and maintain the entire right and title thereto throughout the world; and (b) render to Employer, at its expense, all such assistance as it may require in the prosecution of applications for said patents or reissues thereof, in the prosecution or defense of interferences which may be declared involving any said application or patents and in any litigation in which Employer or its affiliates may be involved relating to any such patents, inventions, improvements or technical information. 17. AFFILIATES. Employee will use Employee's best efforts to ensure that no relative of his or corporation of which Employee is an officer, director or shareholder, or other affiliate of his, shall take any action that Employee could not take without violating any provision of this Agreement. 18. REMEDIES. Employee recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of this Agreement would be difficult, and Employee agrees that Employer, in addition to all other remedies it may have, shall have the right to injunctive relief if there is such a breach. 19. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Employer: Pillowtex Management Services Company 4111 Mint Way Dallas, Texas 75237 Attention: Chief Executive Officer Facsimile No. (214) 333-2244 If to Employee: ______________________ 22 _______________________ Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. 20. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof, including without limitation the Employment Agreement in effect between Employee and Employer on December 31, 1997, and contains all of the covenants and agreements between the parties with respect thereto. 21. MODIFICATION. No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the parties hereto. 22. GOVERNING LAW AND VENUE. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE OBLIGATIONS AND UNDERTAKINGS OF THE PARTIES HEREUNDER WILL BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IF ANY ACTION IS BROUGHT TO ENFORCE OR INTERPRET THIS AGREEMENT, VENUE FOR SUCH ACTION SHALL BE IN DALLAS COUNTY, TEXAS. EACH OF THE PARTIES HERETO HEREBY AGREES IRREVOCABLY AND UNCONDITIONALLY TO CONSENT TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS, TEXAS FOR ANY ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND FURTHER AGREES THAT SERVICE OF PROCESS, SUMMONS OR NOTICE BY U.S. REGISTERED MAIL TO THE APPLICABLE 23 ADDRESSES SET FORTH IN SECTION 19 HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS OF ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST SUCH PARTY IN ANY SUCH COURT. 23. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document. 24. COSTS. If any action or law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which Employee or it may be entitled. 25. ASSIGNMENT. Employer shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of Employer's assets or all of its stock, or with which Employer merges or consolidates. The rights, duties and benefits to Employee hereunder are personal to Employee, and no such right or benefit may be assigned by Employee. 26. BINDING EFFECT. This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns. 27. NO WAIVER. The failure by Employer to enforce at any time any of the provisions of this Agreement or to require at any time performance by Employee of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect the validity of this Agreement, or any part hereof, or the right of Employer thereafter to enforce each and every such provision in accordance with the terms of this Agreement. * * * 24 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PILLOWTEX MANAGEMENT SERVICES COMPANY By: ____________________________________ EMPLOYEE ________________________________________ GUARANTEE Pillowtex Corporation unconditionally guarantees all obligations of Pillowtex Management Services Company to Employee as set forth in the foregoing Employment Agreement. PILLOWTEX CORPORATION By: ____________________________________ 25 EX-10.29 10 EXHIBIT 10.29 EMPLOYMENT AGREEMENT - FINLAY EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of January 1, 1998, is by and between Pillowtex Management Services Company, a Delaware business trust ("EMPLOYER"), and Kevin M. Finlay ("EMPLOYEE"). WITNESSETH: WHEREAS, Employee desires to enter into the employment of Employer and Employer desires to employ Employee in the capacity and on the terms set forth below. NOW, THEREFORE, in consideration of the foregoing recital and of the mutual agreements contained herein, and for other valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT AND SCOPE. (a) Commencing as of January 1, 1998 (the "COMMENCEMENT DATE") and continuing throughout the Term of this Agreement, Employer agrees to employ Employee and Employee agrees to serve as the employee of Employer with the title and capacity of President of Employer's Sales and Marketing Division. As such, Employee's duties shall include responsibility for all sales and marketing functions of Employer and its affiliates, as well as such other responsibilities as are consistent with the office of President of Employer's Sales and Marketing Division and such other responsibilities as may be assigned from time to time by the Chief Executive Officer of Pillowtex Corporation, a Texas corporation ("PILLOWTEX"). Employee shall report to the Chief Executive Officer of Pillowtex. (b) Employee's performance of services under this Agreement shall occur primarily at Employer's principle executive offices at 4111 Mint Way, Dallas, Texas, subject to such travel as is consistent with the office of President of Employer's Sales and Marketing Division. (c) During the Term of Employee's employment, Employee shall devote Employee's full business time (at least 40 hours per week) exclusively to the performance of Employee's duties as stated in this Agreement and to the furtherance of Employer's business. 2. TERM. (a) The term of this Agreement (the "TERM") shall begin on the Commencement Date and shall continue through the third anniversary thereof, subject to automatic extension as provided below and unless terminated earlier in accordance with Section 4. (b) Beginning with the second anniversary date of the Commencement Date and continuing with each anniversary date thereafter, the Term of this Agreement shall automatically be extended in additional, successive one-year increments, with the result that the Term will have a remaining duration of two years upon each and every anniversary. Notwithstanding the foregoing sentence, the Term shall not be extended if either party has previously given the other party written notice of its intent not to extend the Agreement at least 15 months prior to the anniversary upon which the extension would otherwise occur. 3. COMPENSATION. During the Term of this Agreement, Employer shall compensate Employee as set forth below: (a) Employer has previously paid to Employee a signing bonus in the amount of $300,000. If, prior to April 11, 1998, Employee terminates Employee's employment voluntarily (I.E., for reasons other than Permanent Disability Retirement or Good Reason) or is terminated by Employer for Cause (as defined in Section 4(g)(i) below), Employee shall pay Employer a pro-rata portion of this signing bonus equal to the number of weeks remaining in the period between the date of Employee's termination and April 11, 1998, divided by fifty-two, and multiplied by $300,000. 2 (b) Employer shall pay to Employee a base salary of $400,000 per year, payable in accordance with Employer's payroll policies in effect from time to time for executive officers generally, subject to all appropriate withholdings. (c) Employee shall be eligible to participate in Employer's incentive bonus plans as they may be amended from time to time to the same extent as executive officers generally. During the period from April 11, 1997 through April 10, 1999, Employer shall pay Employee bonuses under Employer's bonus plans aggregating at least $150,000 per year, excluding the signing bonus described in Section 3(a) above. (d) Employee shall be entitled to the greater of three-weeks of paid vacation annually and that amount of vacation to which Employee would be entitled under Employer's vacation policy as it may be amended from time to time. (e) Employee shall be entitled to participate in Employer's health, benefit and welfare plans offered by Employer as they may be amended from time to time to the same extent as executive officers of Employer generally. (f) Employer shall provide Employee with a $500,000 term life insurance policy. (g) Employer will provide Employee with a supplemental retirement benefit equal to the difference between (i) the monthly normal retirement benefit that would be paid to Employee at age 65 under the Pillowtex Corporation Pension Plan (the "PENSION PLAN") if there were added to Employee's years of benefit accrual service under the Pension Plan ten additional years of such service, and (ii) the monthly normal retirement benefit that is payable to Employee under the Pension Plan at age 65. The supplemental retirement benefit will be paid to Employee in the same form, and at the same time, as Employee's retirement benefit is paid under the Pension Plan, subject to the same 3 reductions and other adjustments for optional forms and early commencement of benefits that are made to Employee's Pension Plan benefit. (h) Employee shall also be eligible to participate in any supplemental executive retirement plan that Employer may adopt, and will be given credit for ten years of service for vesting purposes under any such supplemental executive retirement plan that Employer may adopt. (i) Employer has extended Employee an unsecured loan of $61,000 to cover certain relocation expenses incurred by Employee. The loan will bear interest at Employer's incremental cost of funds and will be due and payable in full upon the earlier of the termination of Employee's employment or four years from the initial date of Employee's employment with Employer. Mandatory prepayments of the loan equal to 25% of the original principal amount of the loan will be due to the extent of bonuses otherwise payable to Employee under Employer's bonus incentive plans under Section 3(c). Interest will be payable under the loan annually to the extent of bonuses otherwise payable to Employee under Employee's bonus incentive plans under Section 3(c), less mandatory prepayments for the period. Upon the termination of Employee's employment, the outstanding principal amount of and interest on the loan will be offset against all amounts otherwise payable to Employee. (j) Employer will acquire a club membership at a country club of Employee's choice for the exclusive use of Employee during the Term at an initiation fee of up to $25,000. The membership shall remain the property of Employer subject to Employee's right to acquire it upon termination of Employee's employment as set forth below. Employer will pay Employee's membership dues and will reimburse Employee for all expenses and charges incurred at the club for business purposes. Upon termination of Employee's employment, Employee's privileges with respect to the membership shall cease and Employee shall transfer and assign all rights in the membership 4 to Employer, PROVIDED, HOWEVER, that if Employee is terminated for any reason other than for Cause (as defined in Section 4(g)(i)), Employee shall be entitled to acquire the membership from Employer for an amount equal to the lesser of the original initiation fee or the then-prevailing market price of a comparable membership and Employee's assumption of all future monthly dues and other costs and expenses related to the membership. (k) Employer will pay Employee a car allowance of $1,000 per month plus an additional amount equal to all federal and state income taxes arising with respect to any portion of the allowance taxable as income to Employee. 4. TERMINATION DURING TERM. Notwithstanding anything to the contrary in Section 2 of this Agreement, Employee's employment under this Agreement may be terminated during the Term as set forth below: (a) Employer may terminate Employee's employment for Cause, in which case the parties' rights and obligations shall be as set forth in Section 5(a) below. (b) Employer may terminate Employee's employment in the absence of Cause and other than upon Employee's Retirement or Permanent Disability, in which case the parties' rights and obligations shall be as set forth in either Section 5(b) or (e) below, as applicable. (c) Employee's employment shall be terminated upon Employee's Permanent Disability, in which case the parties' rights and obligations shall be as set forth in Section 5(c) below. (d) Employee's employment shall be terminated upon Employee's Retirement, in which case the parties' rights and obligations shall be as set forth in Section 5(d) below. (e) In the event of a Change in Control of Employer, Employee may terminate Employee's employment (i) for any reason, for up to six months after the Change in Control of 5 Employer, or (ii) for Good Reason, in which case the parties' rights and obligations shall be as set forth in Section 5(e) below. (f) Employee may terminate Employee's employment at any time for any reason not heretofore enumerated, in which case the parties' rights and obligations shall be as set forth in Section 5(f) below. (g) The following definitions shall apply for purposes of the early termination of the Term of this Agreement: (i) "CAUSE" shall mean the occurrence of any of the following: (A) Employee's engagement in any personal misconduct involving willful dishonesty, illegality, or moral turpitude that is demonstrably and materially detrimental or injurious to the business interests, reputation or goodwill of Employer or its affiliates; (B) Employee's engagement in any act involving willful dishonesty, disloyalty, or infidelity against Employer or its affiliates; (C) Employee's willful and continued breach of or failure substantially to perform under any of the material terms and covenants of this Agreement; and (D) Employee's willful and continued breach of or failure substantially to perform under any material policy established by the Company with respect to the operation of the Company's business and affairs, or the conduct of the Company's employees. For purposes of this Section 4(g)(i), no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interest of Employer. Prior to asserting any action or failure to act as Cause for Employee's termination as set forth above, Employer shall provide Employee a written notice referencing this Section 4(g)(i), setting out with specificity the conduct asserted to constitute Cause. Any disputes arising as to whether Cause existed for Employee's 6 termination shall be resolved through binding arbitration in accordance with Section 9 of this Agreement. (ii) "CHANGE IN CONTROL OF EMPLOYER" means the occurrence during the Term of any of the following events: (A) Pillowtex is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("VOTING STOCK") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such transaction; (B) Pillowtex sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of Pillowtex immediately prior to such sale or transfer; (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an "Excluded Person" as defined below has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 35% or more of the combined voting power of the then-outstanding Voting Stock of Pillowtex; or 7 (D) If, during any period of 24 consecutive months, individuals who at the beginning of any such period constitute the Directors of Pillowtex cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (D) each Director who is first elected, or first nominated for election by Pillowtex's stockholders, by a vote of at least two-thirds of the Directors of Pillowtex (or a committee thereof) then still in office who were Directors of Pillowtex at the beginning of any such period will be deemed to have been a Director of Pillowtex at the beginning of such period. (iii) "EXCLUDED PERSON" shall mean any of (A) Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate or any person for which any of Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate are deemed to hold beneficial ownership of securities of Pillowtex registered in the name of such person; (B) Pillowtex; (C) any entity in which Pillowtex directly or indirectly owns 50% or more of the outstanding Voting Stock (a "SUBSIDIARY"); or (D) any employee benefit sponsored by Pillowtex or any Subsidiary. (iv) "GOOD REASON" shall mean termination of Employee's employment by Employee after a Change in Control of Pillowtex upon the occurrence of any of the following: (A) the assignment to Employee of any duties inconsistent with Employee's position, duties and status with Employer as existing immediately prior to a Change in Control of Employer; a substantial alteration in the nature or status of Employee's responsibilities from those in effect immediately prior to a Change in Control of Employer; the failure to provide Employee with substantially the same perquisites which Employee had immediately prior to a Change in Control of Employer, including but not limited to an office and appropriate support services; or a change in Employee's titles or offices as in effect immediately prior to a Change in Control of Employer, or any removal of Employee from or failure to re-elect Employee to any such positions; 8 (B) a reduction by Employer in Employee's base salary in effect immediately prior to a Change in Control of Employer; (C) the requirement by Employer that Employee be based anywhere other than the metropolitan area in which Employee's office is located immediately prior to a Change in Control of Employer, except for required travel on Employee's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control of Employer; or (D) the taking of any action by Employer which would (1) materially and adversely affect Employee's participation in or materially reduce Employee's benefits under any employee benefit or compensation plan in which Employee participates immediately prior to a Change in Control of Employer, or (2) deprive Employee of any material fringe benefit enjoyed by Employee, or to which Employee is entitled, as existing immediately prior to a Change in Control of Employer (v) "PERMANENT DISABILITY" shall mean any physical or mental impairment rendering Employee unable to perform the essential functions of Employee's job (as determined by Employer), with or without reasonable accommodation that does not constitute undue hardship to Employer, and such impairment is permanent or is likely to continue for a period exceeding six consecutive months. If Employee fails to notify Employer of Employee's need for accommodation, Employer is not required to accommodate Employee and may hold Employee to the same standards as persons without a disability. The determination of whether Employee has a Permanent Disability shall be made as set forth below. During any period in which the existence of a Permanent Disability is being determined, Employee shall continue to receive Employee's full base salary at the rate then in effect and all compensation and benefits paid during such period until a 9 Permanent Disability is conclusively determined and this Agreement is terminated in accordance with Section 8 hereof, provided Employee (and Employee's personal and legal representatives) act in good faith and with reasonable diligence in pursuing a determination. This definition is not intended to either expand or limit any rights and protections granted to Employee by law. Employer may require Employee to be examined by a physician, at Employee's own expense, in order to determine whether Employee has a Permanent Disability. If Employer disagrees with the written opinion of this physician ("FIRST PHYSICIAN"), it may engage, at its own expense, another physician ("SECOND PHYSICIAN") to examine Employee. If the First and Second Physicians agree in writing that Employee has not suffered a Permanent Disability, their written opinion shall, except as otherwise set forth in this Section 4(g)(v), be conclusive on the issue of Permanent Disability. If the First and Second Physicians disagree on whether Employee has suffered a Permanent Disability, they shall choose a third consulting physician (whose expense shall be shared equally by Employer and Employee) and the written opinion of a majority of these three physicians shall be conclusive as to the issue of Permanent Disability. In connection with a Permanent Disability determination, Employee hereby consents to any required medical examination and agrees to furnish any medical information requested by any examining physician and to waive any applicable physician-patient privilege that may arise because of such examination. All physicians must be board-certified in the specialty most closely related to the nature of the Permanent Disability alleged to exist. (vi) "RETIREMENT" shall mean termination by Employer or Employee in accordance with Employer's retirement policy (including early retirement, if included in such policy and elected by Employee in writing) generally applicable to its senior executive employees, or in accordance with any other retirement agreement entered into by and between Employee and Employer. 10 5. COMPENSATION UPON TERMINATION. If Employee's employment is terminated during the Term of this Agreement, Employee shall be entitled to compensation as set forth below: (a) If Employer terminates Employee's employment for Cause, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. (b) If Employer terminates Employee's employment without Cause, then Employer shall pay Employee, not later than the fifth day following the date of termination, a lump sum severance payment equal to the sum of (i) Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (ii) Employee's undiscounted base salary through the remaining duration of the Term or, if greater, for a period of 24 months, at the highest rate in effect during the 12 months immediately preceding the date of Employee's termination; and (iii) the product obtained by multiplying the greater of (A) (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target award level under any successor plan or program) as of the date of Employee's termination by (B) a proration factor (the "BONUS PRORATION FACTOR") equal to the quotient obtained by dividing the number of months (but in no event less than 24 months) in the period from the beginning of the most recent plan year for which a bonus has not been paid (but is anticipated to be paid as of the date of the Employee's termination) to the expiration of the Term, by 12. Notwithstanding the foregoing, the provisions of 11 this Section 5(b) shall not apply if Employer terminates Employee's employment without Cause subsequent to a Change in Control of Employer. (c) If Employee's employment is terminated upon Employee's Permanent Disability, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits, if any, shall be determined in accordance with Employer's employee benefit plans or other insurance programs then in effect. (d) If Employee's employment is terminated upon Employee's Retirement, Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. Employee's additional compensation and benefits shall be determined in accordance with Employer's retirement policy applicable to its senior executive employees or in accordance with any other retirement agreement entered into by and between Employee and Employer. (e) If, after a Change in Control of Employer, Employee's employment (x) is terminated by Employee for any reason during a period of six months beginning on the date of the Change in Control of Employer, or if less, during the remaining duration of the Term; (y) is terminated by Employee for Good Reason; or (z) is terminated by Employer without Cause (and not by reason of Employee's Permanent Disability Retirement, or death), Employee shall be entitled to the compensation and benefits provided below: (i) Employer shall pay Employee's undiscounted base salary through the date of Employee's termination at the rate then in effect; 12 (ii) Employer shall pay all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans; (iii) Employer shall pay as severance pay to Employee, not later than the fifth day following Employee's termination, a lump sum severance payment (together with the payments described in Sections 5(e)(iv) and (v), the "SEVERANCE PAYMENTS") equal to the sum of (A) the product obtained by multiplying Employee's undiscounted annual base salary at the highest rate in effect during the 12 months immediately preceding Employee's termination by the number of years or fractions thereof (but in no event less than two years) remaining in the Term and (B) the product obtained by multiplying the greater of (1) the highest annual amount paid to Employee (or awarded to Employee, if such amount has not yet been paid) as bonus compensation during or in respect of any of the three calendar years preceding the year in which the termination occurs and (2) Employee's Bonus Opportunity Level under the Pillowtex Corporation Management Incentive Plan (or functionally similar target aware level under any successor plan or program) based upon Employee's annual salary at the highest rate in effect during the 12 months immediately preceding Employee's termination, by the Bonus Proration Factor (as defined in Section 5(b) above); (iv) in lieu of shares of common stock, $0.01 par value, of Pillowtex (the "SHARES") issuable upon the exercise of options ("OPTIONS"), if any, granted to Employee under any stock option plan of Pillowtex (which Options shall be canceled upon the making of the payment referred to below), Employer shall pay Employee in one sum in cash, not later than the fifth day following the date of Employee's termination, an aggregate amount equal to the product of (A) the difference (to the extent that such differences are a positive number) obtained by subtracting the per Share exercise price of each Option held by Employee, whether or not then fully exercisable, from the higher of (1) the closing price of the Shares, as reported on the New York Stock Exchange on the 13 Date of Termination (or the last trading date prior thereto) or (2) the highest price per Share actually paid in connection with any Change in Control of Employer, and (B) the number of shares covered by each such Option; (v) Employer shall pay Employee the retirement benefits to which Employee is entitled under Employee's retirement policy or other retirement agreement; (vi) Employer shall reimburse Employee for all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in successfully contesting or disputing any such termination or seeking to obtain or enforce any right or benefit provided by this Agreement); and (vii) if Severance Payments become subject to the excise tax (the "EXCISE TAX") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), Employer shall pay to Employee an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by Employee, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for in this Section 5(e)(vii)), shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Employee in connection with a Change in Control of Employer and Employee's subsequent termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions resulted in the Change in Control of Employer or any person affiliated with Employer or such person) shall be treated as a "parachute payment" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax 14 counsel selected by Employer's independent auditors and reasonably acceptable to Employee such other payments or benefits (in whole or in part) do not constitute parachute payments, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of section 280(G)(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by Employer's independent auditors in accordance with the principles of sections 280(G)(d)(3) and (4) of the Code and the applicable Treasury Regulations. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of Employee's termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Employee's termination of employment, Employee shall repay to Employer, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up 15 Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Employee with respect to such excess) at the time that the amount of such excess is finally determined. Employee and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (f) If Employee terminates Employee's employment under circumstances in which Section 5(e) does not apply, or if Employee's employment is terminated by reason of his death, Employer shall pay Employee's full base salary through the date of Employee's termination at the rate then in effect and all amounts to which Employee is entitled upon termination of employment under Employer's employee benefit plans. 6. INSURANCE. If Employee's employment is terminated under the provisions of Section 4(e) of this Agreement, Employee shall participate, for a period of two years from the date of Employee's termination, in all employee benefit plans providing health and dental benefits in which Employee participated or was entitled to participate immediately prior to Employee's termination, provided that such participation is permitted under the general terms and provisions of such plans and under applicable law. If Employee's participation in any such plan is not permitted for any reason, Employer shall arrange to provide Employee, at Employer's sole cost and expense, with benefits substantially similar to those which Employee is entitled to receive under such plans. At the end of such two-year period, Employee will be entitled to take advantage of any conversion privileges applicable to the benefits available under any such plans. 7. FUTURE EMPLOYMENT. Employee shall not be required to mitigate the amount of any payment provided for in Section 5 hereof by seeking other employment or otherwise, nor shall the amount of any payment provided for in Section 5 hereof be reduced by any compensation earned by 16 Employee as a result of employment by another employer after the date of Employee's termination, or otherwise. 8. NOTICE OF TERMINATION. (a) Any purported termination by Employer or by Employee shall be communicated by a written "Notice of Termination" to the other party. A Notice of Termination shall mean a notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated. (b) The "date of Employee's termination" shall be: (i) if Employee's employment is terminated by reason of Employee's Permanent Disability, the date that is 30 days after the determination of Permanent Disability pursuant to Section 4(g)(v) of this Agreement, (ii) if Employee's employment is terminated for Cause, the date specified in the Notice of Termination, or (iii) if Employee's employment is terminated for any other reason, the date specified in the Notice of Termination, provided such date is not more than 60 days from the date such Notice of Termination is given. 9. ARBITRATION. All disputes or claims arising under this Agreement or in connection with Employee's employment with Employer (including any claims under any federal, state, or local law or ordinance), except for any dispute or claim arising under Sections 10, 11, 12, 13, and 16 of this Agreement, shall be subject to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association, the cost of which shall be borne by the party against whom an arbitration award is entered. 17 10. NONDISCLOSURE AGREEMENT. Employer, during the term of Employee's employment under this Agreement, shall provide Employee access to, and Employee shall have access to and become familiar with, various trade secrets and proprietary and confidential information consisting of, but not limited to, financial statements, processes, computer programs, compilations of information, records, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business and other confidential information (collectively referred to herein as the "TRADE SECRETS"), which are owned by Employer and its affiliates and are regularly used in the operation of their businesses, but in connection with which Employer and its affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. Employee acknowledges and agrees that the Trade Secrets (a) are secret and not known in Employer's industry; (b) are entrusted to Employee after being informed of their confidential and secret status by Employer or its affiliates and because of the fiduciary position occupied by Employee with Employer; (c) have been developed by Employer and its affiliates for and on behalf of Employer and its affiliates through substantial expenditures of time, effort and money and are used in their businesses; (d) give Employer and its affiliates an advantage over competitors who do not know or use the Trade Secrets; (e) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (f) are valuable, special and unique assets of Employer and its affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to Employer and its affiliates. Employee shall not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the Term of this Agreement or at any time thereafter, except as required in the course of Employee's employment under this Agreement. All files, records, documents, information, data and similar items relating to the business of Employer and its affiliates, whether prepared by Employee or otherwise coming into Employee's 18 possession, shall remain the exclusive property of Employer and its affiliates and shall not be removed from the premises of Employer and its affiliates under any circumstances without the prior written consent of the Board of Directors of Employer (except in the ordinary course of business during Employee's period of active employment under this Agreement), and in any event shall be promptly delivered to Employer upon termination of this Agreement. Employee agrees that upon Employee's receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Employee shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Chief Executive Officer of Pillowtex. For this purpose, Employee irrevocably nominates and appoints Employer (including any attorney retained by Employer), as Employee's true and lawful attorney-in-fact, to act in Employee's name, place and stead to perform any act that Employee might perform to defend and protect against any disclosure of any Trade Secrets. As used in this Agreement, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, Employer. 11. NON-COMPETITION AGREEMENT. Employee acknowledges and agrees that the training Employee will receive, the experience Employee will gain and the information Employee will acquire regarding the Trade Secrets while employed hereunder will enable Employee to injure Employer if Employee should compete with Employer in a business that is competitive with the business conducted or to be conducted by Employer and its affiliates. For these reasons, Employee hereby agrees that, without the prior written consent of Employer, Employee shall not, during the period of employment with Employer, 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 19 which constitute not more than 1% of the voting securities of any such company) in any business that is competitive with that of Employer or its affiliates, (b) accept employment with or render services to a competitor of Employer or any of its affiliates as a director, officer, manager or executive, (c) engage, for Employee's self or any other person or entity in the sales, marketing, design or manufacture of products competitive with any product sold, marketed, designed or manufactured by Employer or its affiliates, (d) contact, solicit or attempt to solicit or accept business from any customers of Employer or its affiliates or any person or entity whose business Employer or its affiliates is soliciting, or (e) take any action inconsistent with the fiduciary relationship of an employee to Employee's employer. For purposes of this Agreement, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations, or other entities that market products and/or perform services in direct or indirect competition with those marketed and/or performed by Employer or its affiliates within the United States, Canada and Mexico. 12. NONEMPLOYMENT AGREEMENT. During the period of employment with Employer and for a period of 24 months thereafter, Employee shall not, on Employee's own behalf or on behalf of any other person, partnership, association, corporation or other entity, hire or solicit or in any manner attempt to influence or induce any employee of Employer or its affiliates to leave the employment of Employer or its affiliates, nor shall Employee use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of Employer concerning the names and addresses of the employees of Employer or its affiliates. 13. NONDISPARAGEMENT AGREEMENT. Employee shall not, either during the Term of this Agreement or at any time thereafter, make statements, whether orally or in writing, concerning Employer, any of its directors, officers, employees or affiliates or any of its business strategies, policies or practices, that shall be in any way disparaging, derogatory or critical, or in any way 20 harmful to the reputation of Employer, any such persons or entities or business strategies, policies or practices. 14. SUCCESSORS; BINDING AGREEMENT. (a) Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle Employee to compensation from Employer in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of Employee's termination. As used in this Agreement, "Employer" shall mean Employer as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 14 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of Employee's death, any amounts owed to Employer under this Agreement shall be paid to Employee's surviving spouse, if any, and if none, to Employee's estate. 15. SEVERABILITY. The parties hereto intend all provisions of Sections 10, 11, 12, 13 and 16 hereof to be enforced to the fullest extent permitted by law. Accordingly, should a court of 21 competent jurisdiction determine that the scope of any provision of Sections 10, 11, 12, 13 and 16 hereof is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Employee agrees that the provisions of each of the foregoing sections constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants and agreements of Employee contained in the non-competition, nondisclosure, nonemployment or nondisparagement agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 16. INVENTIONS. Employee shall promptly disclose, grant and assign to Employer for its sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to the products of Employer or any of its affiliates or capable of beneficial use by Employer or any of its affiliates, which Employee has in the past conceived, developed or acquired, or may conceive, develop or acquire during the term hereof (whether or not during usual working hours), together with all patent applications, letters patent, copyrights and reissues thereof 22 that may at any time be granted upon any such invention, improvement or technical information. In connection therewith, Employee shall promptly at all times during and after the term hereof: (a) execute and deliver such applications, assignments, descriptions and other instruments as may be necessary or proper in the opinion of Employer to vest title to such inventions, improvements, technical information, patent applications and patents or reissues thereof in Employer and to enable it to obtain and maintain the entire right and title thereto throughout the world; and (b) render to Employer, at its expense, all such assistance as it may require in the prosecution of applications for said patents or reissues thereof, in the prosecution or defense of interferences which may be declared involving any said application or patents and in any litigation in which Employer or its affiliates may be involved relating to any such patents, inventions, improvements or technical information. 17. AFFILIATES. Employee will use Employee's best efforts to ensure that no relative of his or corporation of which Employee is an officer, director or shareholder, or other affiliate of his, shall take any action that Employee could not take without violating any provision of this Agreement. 18. REMEDIES. Employee recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of this Agreement would be difficult, and Employee agrees that Employer, in addition to all other remedies it may have, shall have the right to injunctive relief if there is such a breach. 19. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. 23 If to Employer: Pillowtex Management Services Company 4111 Mint Way Dallas, Texas 75237 Attention: Chief Executive Officer Facsimile No. (214) 333-2244 If to Employee: Kevin M. Finlay 908 Turnberry Lane Southlake, Texas 76092 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. 20. ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof, including without limitation the Employment Agreement in effect between Employee and Employer on December 31, 1997, and contains all of the covenants and agreements between the parties with respect thereto. 21. MODIFICATION. No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the parties hereto. 22. GOVERNING LAW AND VENUE. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE OBLIGATIONS AND UNDERTAKINGS OF THE PARTIES HEREUNDER WILL BE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IF ANY ACTION IS BROUGHT TO ENFORCE OR INTERPRET THIS AGREEMENT, VENUE FOR SUCH ACTION SHALL BE IN DALLAS COUNTY, TEXAS. EACH OF THE PARTIES HERETO HEREBY AGREES IRREVOCABLY AND UNCONDITIONALLY TO CONSENT TO SUBMIT TO THE EXCLUSIVE JURISDICTION 24 OF THE COURTS OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA LOCATED IN DALLAS, TEXAS FOR ANY ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND FURTHER AGREES THAT SERVICE OF PROCESS, SUMMONS OR NOTICE BY U.S. REGISTERED MAIL TO THE APPLICABLE ADDRESSES SET FORTH IN SECTION 19 HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS OF ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST SUCH PARTY IN ANY SUCH COURT. 23. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document. 24. COSTS. If any action or law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which Employee or it may be entitled. 25. ASSIGNMENT. Employer shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of Employer's assets or all of its stock, or with which Employer merges or consolidates. The rights, duties and benefits to Employee hereunder are personal to Employee, and no such right or benefit may be assigned by Employee. 26. BINDING EFFECT. This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns. 27. NO WAIVER. The failure by Employer to enforce at any time any of the provisions of this Agreement or to require at any time performance by Employee of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect the validity of this 25 Agreement, or any part hereof, or the right of Employer thereafter to enforce each and every such provision in accordance with the terms of this Agreement. * * * 26 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PILLOWTEX MANAGEMENT SERVICES COMPANY By: /s/ Charles M. Hansen, Jr. ------------------------------------ Charles M. Hansen, Jr. Chairman of the Board and Chief Executive Officer EMPLOYEE /s/ Kevin M. Finlay ------------------------------------ Kevin M. Finlay GUARANTEE Pillowtex Corporation unconditionally guarantees all obligations of Pillowtex Management Services Company to Employee as set forth in the foregoing Employment Agreement. PILLOWTEX CORPORATION By: /s/ Charles M. Hansen, Jr. ------------------------------------ Charles M. Hansen, Jr. Chairman of the Board and Chief Executive Officer 27 EX-10.32 11 EXHIBIT 10.32 EXECUTIVE DEFERRED COMPENSATION [LOGO] PILLOWTEX CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN (Effective February 9, 1998) PILLOWTEX CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN * * * * 1. PURPOSE. The purpose of the Executive Deferred Compensation Plan is to provide key executives of the Company and non-employee members of the Board of Directors with the opportunity to defer base salary, incentive compensation payments or other payments in accordance with the provisions of this Plan. 2. DEFINITIONS. The following definitions are used throughout the Plan. (a) "ACCOUNT" means the account described in Section 5. (b) "BOARD OF DIRECTORS" means the Board of Directors of the Company. (c) "CHANGE IN CONTROL" means the occurrence of one or more of the following events, unless the Board has adopted a resolution prior to or promptly following the occurrence of any such event stipulating, conditionally, temporarily or otherwise, that any such event will not result in a change in control of the Company: (i) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of the surviving corporation or person immediately after such transaction is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (ii) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding Voting Stock of the acquiring corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (iii) any person (as the term "person" is used in Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934), other than an Excluded Person (as hereafter defined), is or becomes the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then-outstanding securities; 1 (iv) during any period of 24 consecutive months, at least a majority of the Board ceases to consist of individuals who have served continuously on the Board since the beginning of such 24-month period, unless the election of directors during such period, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then still in office who will at that time have served continuously on the Board since the beginning of such 24-month period; or (v) the Company has entered into one or more definitive agreements pursuant to which a transaction described in paragraph (i) or paragraph (ii) above may occur and the Board determines that all conditions required to consummate such a transaction have been fulfilled. Notwithstanding the foregoing provisions, a "Change in Control" will not be deemed to have occurred for purposes of this Agreement solely because the Company, a Subsidiary or any employee benefit plan of the Company either files or becomes obligated to file a report or proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Securities Exchange Act of 1934, disclosing beneficial ownership by it of shares of voting securities of the Company, whether in excess of 25% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. For purposes of this definition, the term "Excluded Person" means any of Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate or any person for which any of Charles M. Hansen, Jr., Mary R. Silverthorne or the John H. Silverthorne Estate are deemed to hold beneficial ownership of securities of the Company registered in the name of such person. (d) "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time. (e) "COMMITTEE" means the Compensation Committee of the Board of Directors or any successor committee appointed by the Board of Directors to administer the Plan. (f) "COMPANY" means Pillowtex Corporation, a Texas corporation. (g) "COMPENSATION" means (i) the annual fixed or base compensation, payable monthly or otherwise to a Participant, (ii) cash incentive compensation earned by a Participant pursuant to an incentive compensation plan now in effect or hereafter established by the Company, including, without limitation, the Pillowtex Corporation Management Incentive Plan, (iii) cash compensation earned by a Participant for service on the Board of Directors, (iv) cash compensation earned by a Participant who is a non-employee member of the Board of Directors for services rendered as a consultant to the Company and (v) any other cash bonus or cash incentive compensation earned by a Participant pursuant to a Company policy, program or practice. 2 (h) "EFFECTIVE DATE" means February 9, 1998. (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (j) "FINANCIAL HARDSHIP" means an unforeseeable financial emergency of the Participant, determined by the Committee as provided in Section 7(b) on the basis of information supplied by the Participant, arising from an illness, disability, casualty loss, sudden financial reversal or other such unforeseeable occurrence, but not including foreseeable events such as the purchase of a house or education expenses for children. (k) "PARTICIPANT" means an employee of the Company or non-employee member of the Board of Directors who is eligible to receive benefits under the Plan. The term "Participant" will include the beneficiary of a deceased Participant, unless the context clearly requires a different interpretation. (l) "PLAN" means the Pillowtex Corporation Executive Deferred Compensation Plan as set forth herein and as amended from time to time. (m) "SUBSIDIARY" means any corporation, partnership, joint venture or other entity in which the Company owns or controls, directly or indirectly, 50% or more of the total combined voting power or equity interest represented by all classes of stock or equity issued by such corporation, partnership, joint venture or other entity. 3. ELIGIBILITY. Each key executive of the Company or any Subsidiary, or non-employee member of the Board of Directors, who is designated by the Committee as eligible to participate in the Plan will be a Participant. 4. DEFERRAL OF COMPENSATION. (a) A Participant may elect to defer receipt of all or a portion of his or her Compensation for any calendar year. Subject to procedures established by the Committee, a Participant's election may specify a dollar amount or percentage of Compensation for deferral, and may specify that different percentages or dollar amounts will apply to different sources of Compensation. A Participant's entitlement to defer will cease with respect to the calendar year following the calendar year in which he or she ceases to be a Participant. (b) A Participant's Compensation in excess of amounts deductible by the Company with respect to any year under Section 162(m) of the Code will automatically be deferred under the Plan in accordance with procedures established by the Committee. (c) Deferral elections will be made in accordance with procedures established by the Committee from time to time. Except as provided in this Section, a deferral election must be made before the first day of the calendar year in which the Participant would earn the Compensation covered by such election by the performance of services. (d) Notwithstanding Section 4(b), a Participant who first becomes eligible to participate in the Plan during a calendar year may, no later than 30 days after becoming a 3 Participant, elect to participate in the Plan for such year and any calendar year thereafter by filing an election agreement with the Committee, and such Participant's deferral election will be effective with respect to Compensation payable after the date of the Participant's election. In addition, no later than 30 days after the Effective Date of the Plan, a Participant may elect to participate in the Plan for such year and any calendar year thereafter by filing an election agreement with the Committee, and such Participant's deferral agreement will be effective with respect to Compensation payable after the date of the Participant's election. 5. ACCOUNTS/INTEREST CREDIT. Compensation that a Participant elects to defer will be treated as if it were set aside in an Account on the date the Compensation would otherwise have been paid to the Participant. Such Account will be credited with interest at such rate and in such manner as determined from time to time by the Committee. Unless otherwise determined by the Committee, interest hereunder will be credited at the prime rate in effect according to the Wall Street Journal plus one percent, adjusted as of the first day of each calendar quarter. 6. VESTING. Except as provided in Section 7(c) and Section 10, a Participant's Account will be fully vested and nonforfeitable at all times. 7. DISTRIBUTION OF BENEFITS. (a) Except as otherwise provided in this Section, payment of a Participant's Account balance will be made or begin on the earlier to occur of the first day of the month following the month in which the Participant retires or otherwise terminates employment (or in the case of a non-employee member of the Board of Directors, terminates service on the Board of Directors), or the date specified by the Participant in the election agreement. (b) Upon a finding by the Committee that a Participant has suffered a Financial Hardship, the Committee may, in its sole discretion, distribute to the Participant an amount which does not exceed the amount required to meet the immediate financial needs created by the Financial Hardship and not reasonably available to the Participant from other sources. (c) Notwithstanding any other provision of this Section 7, a Participant may elect to receive a distribution of all or part of his or her Account if (and only if) the amount distributed with respect to such election is reduced by 10%. The remaining 10% of the portion of the Participant's Account subject to such election will be forfeited. Any distribution made pursuant to such an election will be made as soon as practicable following the date such election is submitted to the Committee. 8. FORM OF PAYMENT. A Participant's Account balance will be paid in a single lump sum cash payment, unless the Participant elects, at least six months prior to the date his Account is scheduled to be paid, in accordance with procedures established by the Committee, to receive his Account balance in annual, quarterly or monthly cash installments over a period not greater than fifteen years (or in a combination of a lump sum and such installments). The amount of each installment payment will be equal to the quotient obtained by dividing the Participant's Account balance as of the date of such installment payment by the number of installment payments remaining to be made to or on behalf of such Participant at the time of calculation. If a 4 Participant has elected an installment form of payment, the unpaid portion of the Participant's Account will continue to earn interest in accordance with Section 4. 9. DEATH BENEFITS. (a) If a Participant who has an Account balance under the Plan dies before payment of such balance begins, the Account balance will be paid as a death benefit to the beneficiary designated by the Participant (who may or may not be the Participant's spouse) in accordance with procedures established by the Committee or, in the event the Participant has not designated any beneficiary, to the Participant's surviving spouse, if any, and if none, to the Participant's estate. The death benefit payable pursuant to this subsection (b) will be paid on the first day of the month following the month in which the Participant dies. The death benefit will be paid to the beneficiary in a single lump sum payment unless the beneficiary elects, at least six months prior to the date the benefit is scheduled to be paid, to receive the death benefit in any other form permitted under Section 8. (b) Upon the death of a Participant who is receiving installment payments of his or her Account balance, the Participant's Account balance will continue to be paid in accordance with the form of payment elected by the Participant under Section 8. 10. BENEFITS ARE UNFUNDED. (a) The Plan will be unfunded. All benefits payable to a Participant under the Plan will be paid from the general assets of the Company or any Subsidiary that employed the Participant, and nothing contained in the Plan will require the Company or any Subsidiary to set aside or hold in trust any funds for the benefit of a Participant, who will have the status of a general unsecured creditor with respect to the obligation of the Company to make payments under the Plan. Any funds of the Company or any Subsidiary available to pay benefits under the Plan will be subject to the claims of general creditors of the Company or such Subsidiary and may be used for any purpose by the Company or such Subsidiary. (b) If the benefit payable to a Participant under the Plan is attributable to periods of employment with the Company and/or one or more Subsidiaries, the Committee may allocate liability for the payment of the benefit among the Company and one or more Subsidiaries in any manner the Committee, in its sole discretion, determines to be appropriate. (c) Notwithstanding the provisions of Section 10(a), the Company may, at the direction, and in the absolute discretion, of the Committee, transfer to the trustee of one or more trusts established for the benefit of one or more Participants assets from which all or a portion of the benefits provided under the Plan will be satisfied, provided that such assets held in trust will at all times be subject to the claims of general unsecured creditors of the Company and the subsidiaries of the Company, and no Participant will at any time have a prior claim to such assets. To the extent that supplemental retirement benefits under the Plan are paid from any such trust, the Company and each subsidiary of the Company will be relieved of all liability for such benefits. 11. ADMINISTRATION OF THE PLAN. (a) The Committee will administer the Plan and will have the full authority and discretion to accomplish that purpose, including without limitation, the authority and discretion to (i) interpret the Plan and correct any defect, supply any omission or reconcile any inconsistency or ambiguity in the Plan in the manner and to the extent that the Committee deems desirable to carry out the purpose of the Plan, (ii) resolve all questions relating 5 to the eligibility of individuals to become Participants, (iii) determine the amount of benefits payable to Participants and authorize and direct the Company with respect to the payment of benefits under the Plan, (iv) make all other determinations and resolve all questions of fact necessary or advisable for the administration of the Plan, and (v) make, amend and rescind such rules as it deems necessary for the proper administration of the Plan. The Committee will keep a written record of its action and proceedings regarding the Plan and all dates, records and documents relating to its administration of the Plan. (b) Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control the Committee may not adopt or revise any earnings factor, election procedure or other administrative rule that would adversely affect the existing or future benefit of any Participant without such Participant's written consent. (c) Any action taken or determination made by the Committee will, except as otherwise provided in Section 12 below, be conclusive on all parties. No member of the Committee will vote on any matter relating specifically to such member. In the event that a majority of the members of the Committee will be specifically affected by any action proposed to be taken (as opposed to being affected in the same manner as each other Participant in the Plan), such action will be taken by the Board of Directors. 12. CLAIMS PROCEDURE. (a) If a Participant does not receive the benefits which the Participant believes he or she is entitled to receive under the Plan, the Participant may file a claim for benefits with the Committee. All claims will be made in writing and will be signed by the claimant. If the claimant does not furnish sufficient information to determine the validity of the claim, the Committee will indicate to the claimant any additional information which is required. (b) Each claim will be approved or disapproved by the Committee within 90 days following the receipt of the information necessary to process the claim. In the event the Committee denies a claim for benefits in whole or in part, the Committee will notify the claimant in writing of the denial of the claim. Such notice by the Committee will also set forth, in a manner calculated to be understood by the claimant, the specific reason for such denial, the specific Plan provisions on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information is necessary, and an explanation of the Plan's claim review procedure as set forth below. If no action is taken by the Committee on a claim within 90 days, the claim will be deemed to be denied for purposes of the review procedure. (c) A claimant may appeal a denial of his claim by requesting a review of the decision by the Committee or a person designated by the Committee, which person will be a named fiduciary under Section 402(a)(2) of ERISA for purposes of this Section. An appeal must be submitted in writing within six months after the denial and must (i) request a review of the claim for benefits under the Plan, (ii) set forth all of the grounds upon which the claimant's request for review is based and any facts in support thereof, and (iii) set forth any issues or comments which the claimant deems pertinent to the appeal. The Committee or the named fiduciary designated by the Committee will make a full and fair review of each appeal and any written materials submitted in connection with the appeal. The Committee or the named 6 fiduciary designated by the Committee will act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision will be rendered as soon as possible but not later than 120 days after the appeal is received. The claimant will be given the opportunity to review pertinent documents or materials upon submission of a written request to the Committee or named fiduciary, provided the Committee or named fiduciary finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Committee or named fiduciary will make an independent determination of the claimant's eligibility for benefits under the Plan. The decision of the Committee or named fiduciary on any claim for benefits will be final and conclusive upon all parties thereto. In the event the Committee or named fiduciary denies an appeal in whole or in part, it will give written notice of the decision to the claimant, which notice will set forth in a manner calculated to be understood by the claimant the specific reasons for such denial and which will make specific reference to the pertinent Plan provisions on which the decision was based. 13. AMENDMENT OR TERMINATION. (a) Except as provided in paragraph (b) of this Section, the Plan may be amended at any time by the Committee. The Plan may also be amended or terminated by the Board of Directors at any time. Any amendment adopted by the Committee or the Board may reduce prospectively the earnings factor to be applied to a Participant's account established under the Plan. However, no action taken by the Committee or by the Board of Directors to amend or terminate the Plan will have the effect of decreasing a Participant's account balance as of the date of such action. (b) Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control the Plan may not be amended with respect to any Participant in any manner that would adversely affect such Participant's existing or future benefit under the Plan without such Participant's written consent. 14. MISCELLANEOUS. (a) Nothing in the Plan will confer upon a Participant the right to continue in the employ of the Company or any Subsidiary or will limit or restrict the right of the Company or any Subsidiary to terminate the employment or other service of a Participant at any time with or without cause. (b) Except as otherwise provided in the Plan, no right or benefit under the Plan will be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge such right or benefit will be void. No such right or benefit will in any manner be liable for or subject to the debts, liabilities or torts of a Participant. (c) The Plan is intended to provide benefits for "management or highly compensated" employees within the meaning of Sections 201, 301 and 401 of ERISA, and therefore to be exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan will terminate and no further benefits will accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA, which is not so exempt. In addition, in the absolute discretion of the Committee, the benefit of each Participant 7 accrued under such balance of the Plan on the date of termination will be paid immediately to such Participant in a single lump sum cash payment. (d) The Company may withhold or cause to be withheld from any amounts payable under the Plan all federal, state, local and other taxes as required by law. Any withholding of taxes or other amounts with respect to Compensation deferred under the Plan which is required prior to distribution from the Plan will be withheld from the Participant's non-deferred Compensation, or will be satisfied by such other arrangement with the Participant as may be approved by the Committee. (e) If any provision in the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions will nevertheless continue in full force and effect without being impaired or invalidated in any way. (f) THE PLAN WILL BE CONSTRUED AND GOVERNED IN ALL RESPECTS IN ACCORDANCE WITH APPLICABLE FEDERAL LAW AND, TO THE EXTENT NOT PREEMPTED BY SUCH FEDERAL LAW, IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. Executed this 26th day of February, 1998, effective as of February 9, 1998. PILLOWTEX CORPORATION By: /s/ Jeffrey D. Cordes ------------------------------------ 8 PILLOWTEX CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN 1998 DEFERRAL AGREEMENT This Deferral Agreement (the "Agreement") has been made as of the date indicated below between __________________________________ (the "Participant") and Pillowtex Corporation, a Texas corporation (the "Company"). I hereby elect to participate in the Pillowtex Corporation Executive Deferred Compensation Plan (the "Plan"), and elect to defer receipt of the portion of my Compensation specified below. Capitalized terms not defined in this Agreement have the meanings set forth in the Plan. 1. BASE SALARY. Please defer payment of my base salary as follows: / / $____________ or _____% of my base salary. 2. OTHER CASH COMPENSATION. Please defer payment of my other cash compensation as follows: / / $____________ or _____% of any cash incentive compensation under the Pillowtex Corporation Management Incentive Plan. / / $____________ or _____% of any other cash bonus or cash incentive compensation earned under a Company policy, program or practice. / / $____________ or _____% of any cash compensation earned for service on the Board of Directors. (NONEMPLOYEE DIRECTORS ONLY) / / $____________ or _____% of any other cash compensation earned for services rendered as a consultant to the Company. (NONEMPLOYEE DIRECTORS ONLY) 3. TIMING OF DISTRIBUTION. Please defer payment or make payment of the first installment as follows (check one and complete blank if necessary): / / Upon retirement or other termination of service. / / On _____________________________ (specify date that is at least 3 years after the beginning of the calendar year in which the Compensation is earned - e.g. for Compensation earned in 1998, date must be January 1, 2001 or later). 9 4. FORM OF PAYMENT. Please make payment of the above specified Compensation together with all accrued interest reflected in my Account as follows (check one and complete blank if necessary): / / Pay in a lump sum. / / Pay $_________________ or _____% of such amount in a lump sum and the remainder of such amount in ____ annual installments (not to exceed 15 installments). / / Pay $_________________ or _____% of such amount in a lump sum and the remainder of such amount in ____ quarterly installments (not to exceed 60 installments). / / Pay $_________________ or _____% of such amount in a lump sum and the remainder of such amount in ____ monthly installments (not to exceed 180 installments). I understand that in order to modify or revoke this Agreement with respect to Compensation otherwise payable in a particular year, the modification of revocation must be delivered to the Company before the first day of the calendar year in which I would earn the Compensation by the performance of services. I acknowledge that I have reviewed the Plan and understand that my participation will be subject to the terms and conditions contained in the Plan. I acknowledge that I have been advised to consult with my own financial, tax, estate planning and legal advisors before making this election to defer in order to determine the tax effects and other implications of my participation in the Plan. I understand that by electing to participate in the Plan, I will automatically defer amounts of my Compensation in excess of amounts deductible by the Company with respect to Section 162(m) of the Code in accordance with procedures established by the Committee. Dated this _____ day of _________________, 1998. _____________________________ _____________________________ (Signature) (Print or type name) 10 PILLOWTEX CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN BENEFICIARY DESIGNATIONS In accordance with the terms and conditions of the Pillowtex Corporation Executive Deferred Compensation Plan (the "Plan"), I hereby designate the person(s) indicated below as my beneficiary(ies) to receive the amounts payable under said Plan. Name____________________________ Name____________________________ Address_________________________ Address_________________________ ________________________________ ________________________________ ________________________________ ________________________________ Social Sec. No. of Social Sec. No. of Beneficiary____________________ Beneficiary____________________ Relationship____________________ Relationship____________________ Date of Birth___________________ Date of Birth___________________ In the event that the above-named beneficiary(ies) predecease(s) me, I hereby designate the following person as beneficiary(ies); Name____________________________ Name____________________________ Address_________________________ Address_________________________ ________________________________ ________________________________ ________________________________ ________________________________ Social Sec. No. of Social Sec. No. of Beneficiary____________________ Beneficiary____________________ Relationship____________________ Relationship____________________ Date of Birth___________________ Date of Birth___________________ I hereby expressly revoke all prior designations of beneficiary(ies), reserve the right to change the beneficiary(ies) herein designated and agree that the rights of said beneficiary(ies) shall be subject to the terms of the Plan. In the event that there is no beneficiary living at the time of my death, I understand that the amounts payable under the Plan will be paid to my estate. Date (Signature) (Print or type name) 11 EX-13.1 12 EXHIBIT 13.1 [PORTIONS OF PILLOWTEX CORPORATION'S 1997 ANNUAL REPORT] * * * COMMON STOCK CLOSING PRICE RANGE CASH DIVIDENDS HIGH LOW PER SHARE -------------------------------- --------- 1997 Fourth Quarter $34-7/8 $26-1/2 $.06 Third Quarter 28-7/16 21 .06 Second Quarter 23 16-5/8 .06 First Quarter 18-3/8 15-7/8 .06 1996 Fourth Quarter $18-1/4 $12-7/8 $.05 Third Quarter 14-3/8 10-5/8 .05 Second Quarter 13-3/4 12 .05 First Quarter 12-1/2 10-1/2 .05
* * * SELECTED FINANCIAL DATA (In thousands, except per share data) The selected financial data presented below are derived from the Company's consolidated financial statements for the five years ended January 3, 1998. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Annual Report. YEAR ENDED 12/31/93(1) 12/31/94(2) 12/30/95 12/28/96 01/03/98(3) ----------------------------------------------------------------------- STATEMENTS OF EARNINGS DATA: Net sales $ 291,624 $ 349,520 $ 474,899 $ 490,655 $ 579,999 Cost of goods sold 238,155 294,714 395,922 411,048 485,679 ---------- ---------- ---------- ---------- ---------- Gross profit 53,469 54,806 78,977 79,607 94,320 Selling, general and administrative expenses 29,227 36,399 42,508 41,445 52,090 Restructuring charge - - - - 5,986 ---------- ---------- ---------- ---------- ---------- Earnings from operations 24,242 18,407 36,469 38,162 36,244 Interest expense 3,042 6,361 17,491 13,971 22,470 Other income - (379) - - - ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and extraordinary items 21,200 12,425 18,978 24,191 13,774 Income taxes 8,420 4,736 7,509 9,459 5,538 ---------- ---------- ---------- ---------- ---------- Earnings before extraordinary items 12,780 7,689 11,469 14,732 8,236 Extraordinary items, net - - - (609) (919) ---------- ---------- ---------- ---------- ---------- Net earnings (4) 12,780 7,689 11,469 14,123 7,317 Preferred dividends - - - - 85 ---------- ---------- ---------- ---------- ---------- Net earnings available for common shareholders (4) $ 12,780 $ 7,689 $ 11,469 $ 14,123 $ 7,232 ========== ========== ========== ========== ========== BASIC EARNINGS PER COMMON SHARE: Before extraordinary items $ 1.32 $ .73 $ 1.08 $ 1.39 $ .75 Extraordinary items - - - (.06) (.08) ---------- ---------- ---------- ---------- ---------- Basic earnings per common share $ 1.32 $ .73 $ 1.08 $ 1.33 $ .67 ========== ========== ========== ========== ========== Weighted average common shares outstanding - basic 9,751 10,604 10,618 10,618 10,837 ========== ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE: Before extraordinary items $ 1.32 $ .72 $ 1.08 $ 1.39 $ .74 Extraordinary items - - - (.06) (.08) ---------- ---------- ---------- ---------- ---------- Diluted earnings per common share $ 1.32 $ .72 $ 1.08 $ 1.33 $ .66 ========== ========== ========== ========== ========== Weighted average common shares outstanding - diluted 9,769 10,640 10,620 10,634 11,086 ========== ========== ========== ========== ========== OPERATING DATA: Depreciation and amortization $ 3,868 $ 6,365 $ 11,994 $ 12,775 $ 16,064 Capital expenditures 7,135 10,538 12,448 21,040 20,567 Cash dividends 2,506 244 531 2,124 2,569 BALANCE SHEET DATA: Working capital $ 78,141 $ 122,738 $ 110,128 $ 150,506 $ 394,496 Property, plant and equipment, net 39,110 81,187 84,567 94,267 488,841 Total assets 180,967 319,544 324,710 375,714 1,410,186 Long-term debt, net of current portion 63,735 177,149 153,472 194,851 785,383 Redeemable convertible preferred stock -- -- -- -- 62,882 Shareholders' equity 69,329 76,478 87,990 100,004 196,707
(1) Amounts set forth in 1993 reflect the inclusion of Manetta Home Fashions, Inc. from August 30, 1993, Tennessee Woolen Mills, Inc. from September 7, 1993 and Torfeaco Industries Limited from December 1, 1993. (2) Amounts set forth in 1994 reflect the inclusion of Imperial Feather Company from August 19, 1994 and Beacon Manufacturing Company from December 1, 1994. (3) Amounts set forth in fiscal 1997 reflect the results of operations for a 53-week period and the inclusion of Fieldcrest Cannon, Inc. from December 19, 1997. (4) On a pro forma basis, giving effect to the termination of Pillowtex's status as an S corporation under subchapter S of the Internal Revenue Code (which termination resulted from the initial public offering of Pillowtex Common Stock), as if such termination had occurred on January 1, 1992, net earnings and earnings available for common shareholders would have been $12,877 and $12,877, respectively, for 1993. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Pillowtex Corporation (the "Company"), with annualized sales in excess of $1.6 billion, markets and manufactures home textile furnishings for the bedroom and bathroom. The Company operates a network of manufacturing, purchasing and distribution facilities in the U.S. and Canada with approximately 14,800 employees. MERGER On December 19, 1997 (the "Merger Date"), the Company acquired Fieldcrest Cannon, Inc. ("Fieldcrest Cannon") for a combination of cash and stock valued at approximately $409.0 million ("the Merger"). Additionally, the Company retired approximately $199.0 million of existing Fieldcrest Cannon long-term debt. The Merger was accounted for under the purchase accounting method. Accordingly, the operating results of Fieldcrest Cannon for the period from the Merger Date through January 3, 1998 have been included in fiscal 1997 results. RESULTS OF OPERATIONS The following table presents certain statements of historical operations data as a percentage of sales for the periods indicated. YEAR ENDED ------------------------------------------ DECEMBER 30, DECEMBER 28, JANUARY 3, 1995 1996 1998 ---- ---- ---- Net sales................... 100.0% 100.0% 100.0% Cost of goods sold.......... 83.4 83.8 83.7 ----- ----- ----- Gross profit................ 16.6 16.2 16.3 Selling, general and administrative expenses... 9.0 8.4 9.0 Restructuring charge........ - - 1.0 ----- ----- ----- Earnings from operations.... 7.6 7.8 6.3 Interest expense............ 3.7 2.8 3.9 ----- ----- ----- Earnings before income taxes and extraordinary items... 3.9% 5.0% 2.4% ===== ===== =====
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 NET SALES. Net sales were $580.0 million in fiscal 1997, representing an increase of $89.3 million, or 18.2%, as compared to $490.7 million in 1996. Excluding $40.0 million of Fieldcrest Cannon sales since the Merger Date, the $49.3 million increase in net sales is due to increases in blanket sales of $30.8 million, as well as higher sales in bed pillows, mattress pads and fashion bedding of $18.5 million. The increases are due in part to the acquisition of the blanket operations of Fieldcrest Cannon in November 1996 and the offering of new branded products introduced in early 1997. GROSS PROFIT. Gross profit margins remained virtually flat at 16.3% in fiscal 1997, compared to 16.2% in 1996. Increases in product margins resulted primarily from lower raw material prices, which were offset by costs associated with reconfiguring the Company's South Carolina distribution facility, increases in obsolescence reserves, higher sales-related deductions, and losses on sales of certain inventories to accommodate the consolidation of the blanket facilities. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased $10.7 million to $52.1 million in fiscal 1997, compared to $41.4 million in 1996, and as a percentage of net sales, increased to 9.0% in fiscal 1997 from 8.4% in 1996. Excluding $3.5 million of Fieldcrest Cannon expenses since the Merger Date, the $7.2 million increase resulted primarily from higher personnel costs due in part to filling several management positions which were vacant in 1996 and the payment of severance, increased travel expenses primarily related to the Merger, and higher professional fees. RESTRUCTURING CHARGE. The $6.0 million restructuring charge was related to costs associated with the consolidation of blanket production into facilities in Swannanoa, North Carolina and Westminster, South Carolina. The charge represents costs associated with the write-down of certain assets and other expenses. INTEREST EXPENSE. Interest expense increased by $8.5 million to $22.5 million in fiscal 1997, compared to $14.0 million in 1996. The increase was primarily due to $3.5 million of interest on the additional debt incurred as a result of the Merger, with the remaining increase due primarily to interest on the $125.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes") issued by the Company in November 1996. TAXES. The effective tax rate for 1997 increased to 40.2% compared to 39.1% in 1996, primarily due to nondeductible goodwill amortization connected with the Merger. EXTRAORDINARY ITEM. An extraordinary loss of $0.9 million was recorded in 1997 related to the write-off of deferred debt issuance costs associated with the Company's previous senior credit facility, which was refinanced in connection with the Merger. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 NET SALES. Net sales were $490.7 million in 1996, representing an increase of $15.8 million or 3.3%, as compared to $474.9 million in 1995. This increase reflected strong sales in bed pillows, mattress pads and fashion bedding. These increases were partially offset by lower sales in other product areas, the largest of which was blankets, due to a weak retail climate. GROSS PROFIT. Gross profit margins decreased to 16.2% in 1996 from 16.6% in 1995, due primarily to a highly competitive pricing environment in blankets, lower blanket sales, and start-up operational issues at the Newton cotton yarn spinning facility, which negatively impacted margins throughout the first half of 1996. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses decreased $1.1 million to $41.4 million in 1996 from $42.5 million in 1995, and as a percentage of sales, decreased to 8.4% from 9.0% in the respective periods. These decreases reflected the Company's success at reducing these costs. INTEREST EXPENSE. Interest expense decreased to $14.0 million in 1996 from $17.5 million in 1995. Interest expense fell due to lower borrowings and decreased average interest rates. INCOME TAXES. The effective tax rate for 1996 decreased to 39.1%, compared to 39.6% for 1995, primarily due to lower state taxes. EXTRAORDINARY LOSS. An extraordinary loss of $0.6 million recorded in 1996 related to the write-off of deferred debt issuance costs associated with the Company's term loan, which was retired with a portion of the proceeds from the Company's private offering of the 10% Notes in November 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's financing structure has changed as a result of the Merger. New senior revolving credit and term loan facilities (the "Facilities") were established with a group of financial and institutional investors led by NationsBank of Texas, N.A. ("NationsBank"). The Facilities consist of a $350.0 million revolving credit facility (the "Revolver") and a $250.0 million term loan facility (the "Term Loan"). The Term Loan consists of a $125.0 tranche A term loan (the "Tranche A Term Loan") and a $125.0 million tranche B term loan (the "Tranche B Term Loan"). The Revolver and the Tranche A Term Loan expire December 31, 2003 and the Tranche B Term Loan expires December 31, 2004. The Revolver includes $55.0 million of availability for letters of credit. At January 3, 1998, $37.8 million of letters of credit were outstanding. Unused availability under the Revolver was $197.2 million at January 3, 1998. Amounts outstanding under the Revolver and the Tranche A Term Loan presently bear interest at a rate based upon the London Interbank Offered Rate plus 2.00%. The Tranche B Term Loan bears interest on a basis similar to the Tranche A Term Loan, plus an additional margin of .50%. These rates are subject to decrease based upon the Company's achievement of certain ratios of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities during 1997 was 6.77%, and the effective rate at January 3, 1998 was 7.79%. The Revolver and the Term Loan are guaranteed by each of the domestic subsidiaries of the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The Term Loan is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of the Company (except as specifically provided), 50% of the net cash proceeds of equity issuances by the Company or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the remaining installments of principal. The Facilities contain a number of financial, affirmative and negative covenants which, among other things, require maintenance of certain ratios of funded debt to EBITDA and certain cash flow coverage ratios, and require the Company to maintain a minimum tangible net worth. Other covenants restrict, among other things, the Company's ability to incur additional debt, grant liens, engage in transactions with affiliates, make loans, advances and investments, pay dividends and other distributions to shareholders, dispose of assets, effect mergers, consolidations and dissolutions, and make certain changes in its business. At January 3, 1998, the Company was in compliance with all covenants under the Facilities. In connection with the Merger, the Company completed a private offering of $185.0 million aggregate principal amount of 9% Senior Subordinated Notes due 2007 (the "9% Notes"). The 9% Notes are due December 15, 2007, with interest payable semiannually commencing June 15, 1998. The 9% Notes are not subject to mandatory redemption (except upon a "change of control"); however, the Company may at its option redeem the 9% Notes in whole or in part on or after December 15, 2002 at a redemption price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%. The 9% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Revolver, and rank pari passu with the Company's 10% Notes described below. The Company is currently engaged in an offer to exchange the unregistered 9% Notes previously sold in the private offering for an equal aggregate principal amount of registered 9% Notes. On November 12, 1996, the Company completed a private offering of $125.0 million aggregate principal amount of 10% Notes. The 10% Notes are due November 15, 2006, with interest payable semiannually commencing May 15, 1997. The Company used the proceeds from such offering to retire the outstanding indebtedness under the Company's previously existing term loan, to finance the acquisition of certain assets of Fieldcrest Cannon's blanket operations, to temporarily reduce indebtedness under the previous revolving credit facility, and to acquire a warehouse facility. The 10% Notes are not subject to mandatory redemption (except upon a "change of control"); however, the Company may at its option redeem the 10% Notes in whole or in part on or after November 15, 2001 at a redemption price of 105%, which declines 1.667% annually through November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Revolver. In March 1997, the Company completed an offer to exchange the unregistered 10% Notes previously sold in the private offering for an equal aggregate principal amount of registered 10% Notes. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the Facilities described above. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. The 9% Notes and the 10% Notes are subject to certain covenants which restrict, among other things, the Company's ability to incur additional indebtedness and issue preferred stock, grant liens to secure subordinated indebtedness, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, engage in certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 9% Notes and the 10% Notes, merge or consolidate with any other person, sell stock of subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. At January 3, 1998, the Company was in compliance with all covenants under the 9% Notes and the 10% Notes. As a result of the Merger, the outstanding $112.5 million aggregate principal amount of 6% Convertible Subordinated Debentures due 2012 of Fieldcrest Cannon (the "Fieldcrest Debentures") are convertible, at the option of the holder, into a combination of cash and the Company's common stock. At January 3, 1998, if all outstanding Fieldcrest Debentures were converted, the resulting cash component to be paid to the debtholders would be approximately $68.3 million. The Company expects to utilize funds available under the Revolver to pay any cash payable upon conversion of the Fieldcrest Debentures. The Company enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the financial statements. As of December 28, 1996 and January 3, 1998, the Company had approximately $215.0 million and $125.0 million, respectively, of notional amounts covered under fixed for floating swap agreements at average interest rates of 6.24% and 9.54%, respectively. Subsequent to January 3, 1998, the Company terminated the swap agreement covering approximately $125.0 million of indebtedness for a gain of approximately $1.0 million. The gain has been deferred and will be amortized as an adjustment to interest expense over the remaining three-year term of the terminated swap agreement. On January 9, 1998, the Company entered into an interest rate swap agreement covering $250.0 million of indebtedness expiring February 19, 1999, exchanging variable rates for a fixed rate of 5.56%. The Company anticipates that its principal use of cash will be working capital requirements, debt service requirements, payment of dividends (if permitted), and capital expenditures, as well as expenditures relating to acquisitions and integrating acquired businesses. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the Revolver, will be adequate to meet its anticipated cash requirements for fiscal year 1998. There can be no assurance, however, that the Company's business will continue to generate sufficient cash flow from operations in the future to service its debt, and the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. These increased borrowings may result in higher interest payments. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on the Company. The Company spent $20.6 million for capital expenditures in 1997, including $13.7 million in the blanket facilities, principally to complete the installation of equipment purchased from Fieldcrest Cannon in November 1996. For 1996, the Company's capital expenditures were $21.0 million, most of which were used to upgrade the physical plants and purchase machinery and equipment for the blanket facilities, including $6.3 million for equipment purchased from Fieldcrest Cannon. In addition, the Company purchased a warehouse in Mauldin, South Carolina for approximately $8.4 million, to replace certain warehouse facilities previously leased. The Company intends to make capital expenditures in excess of $240.0 million over the next three years, principally to modernize the acquired Fieldcrest Cannon sheet and certain of the towel manufacturing facilities through the addition of new machinery and equipment. The Company anticipates that approximately $80.0 million of such capital expenditures will be made in fiscal 1998. The Company currently anticipates that it will continue to pay a quarterly dividend of $.06 per share on its common stock. Through December 31, 1999, the Company anticipates that it will pay dividends on its preferred stock at a rate per annum equal to 3%, or approximately $2.0 million per year. Thereafter, the rate at which dividends will accrue on the preferred stock may increase to 7% or 10% depending on the Company's earnings per share for the 1999 fiscal year. The Company's ability to pay dividends on the common stock and preferred stock is restricted under the terms of the Facilities and the 9% Notes and the 10% Notes, and, in the case of common stock dividends, under the terms of the preferred stock. Accordingly, there can be no assurance that the Company will pay any dividends in the future or, if dividends are paid, as to the amount thereof. NEW ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, effective for periods beginning after December 15, 1997. The purpose of this standard is to disclose disaggregated information which provides information about the operating segments an enterprise engages in, consistent with the way management reviews financial information to make decisions about the enterprise's operating matters. The Company will comply with the requirements of this standard for fiscal year 1998. YEAR 2000 CONSIDERATIONS Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the Year 2000. This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. The Company has undertaken an assessment of the effect of the Year 2000 issue on the Company's operations. In connection therewith, the Company has sought, and continues to seek, identify and evaluate Year 2000-related compliance issues, develop proposed solutions, and estimate the costs of the implementation of such solutions. The Company does not believe that the Year 2000 issues (including the costs of the Company's compliance program) will have a material adverse effect on the Company's financial position or results of operations, though no assurance can be given in this regard. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report and other reports and statements of the Company (collectively, "Company Reports"), including those filed from time to time with the Securities and Exchange Commission, contain or may contain certain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the Company's management. Any statements preceded by, followed by, or that include the words "anticipates", "believes", "expects", "estimates", "intends", or similar expressions contained in Company Reports, as well as any other statements contained in Company Reports regarding matters that are not historical facts, are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because such forward-looking statements are subject to various risks and uncertainties, results and values may differ materially from those expressed in or implied by such statements. Many of the factors that will determine these results and values are beyond the Company's ability to control or predict. The Company's shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date of the document in which they are contained. The Company's shareholders should understand that the following important factors, in addition to those discussed elsewhere in Company Reports, could affect the Company's future results and could cause results and values to differ materially from those expressed in or implied by such forward-looking statements: (i) the Company's significant leverage and debt service obligations; (ii) the restrictive covenants contained in the instruments governing the Company's indebtedness; (iii) the Company's ability to achieve certain cost savings; (iv) the Company's ability to integrate acquired operations successfully with existing operations; (v) the price and availability of raw materials used by the Company; (vi) general retail industry conditions; (vii) the Company's ability to renew key trademark licenses; (viii) the goodwill associated with the brand names owned by the Company and the Company's ability to protect its proprietary rights in such brand names; (ix) the Company's ability to retain key customers; (x) the Company's relationships with both union and nonunion employees; (xi) the influence of significant shareholders of the Company; (xii) the Company's dependence on key management personnel; and (xiii) the seasonality of the Company's business. The foregoing factors are discussed in greater detail under the caption "Risk Factors" in each of the Joint Proxy Statement/Prospectus forming a part of the Company's Registration Statement on Form S-4 (No. 333-36663) and the Prospectus forming a part of the Company's Registration Statement on Form S-4 (No. 333-46209). INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Pillowtex Corporation: We have audited the consolidated financial statements of Pillowtex Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pillowtex Corporation and subsidiaries as of December 28, 1996 and January 3, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended January 3, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP Dallas, Texas February 5, 1998 PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 28, 1996 and January 3, 1998 (Dollars in thousands, except for par value) ASSETS 1996 1997 ---- ---- Current assets: Cash and cash equivalents $ 20 $ 4,604 Receivables (note 11): Trade, less allowances of $2,475 in 1996 and $14,770 in 1997 78,482 221,185 Other 4,480 16,468 Inventories (notes 6 and 11) 133,495 359,751 Assets held for sale - 32,614 Prepaid expenses 2,613 6,335 Deferred income taxes (note 12) 2,567 - -------- ---------- Total current assets 221,657 640,957 Property, plant and equipment, net (notes 7 and 11) 94,267 488,841 Intangible assets, at cost less accumulated amortization of $3,843 in 1996 and $5,111 in 1997 57,113 258,867 Other assets 2,677 21,521 -------- ---------- $375,714 $1,410,186 ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable (note 8) $ 45,481 111,202 Accrued expenses (note 8) 22,156 113,575 Deferred income taxes (note 12) - 16,068 Current portion of long-term debt (note 11) 1,868 5,616 Income taxes payable 1,646 - -------- --------- Total current liabilities 71,151 246,461 Long-term debt, net of current portion (note 11) 194,851 785,383 Deferred income taxes (note 12) 9,708 66,340 Noncurrent liabilities (note 10) - 52,413 -------- --------- Total liabilities 275,710 1,150,597 Series A redeemable convertible preferred stock, $.01 par value; 65,000 shares issued and outstanding (note 13) - 62,882 Shareholders' equity (notes 11 and 14): Preferred stock, $.01 par value; authorized 20,000,000 shares; only Series A issued - - Common stock, $.01 par value; authorized 30,000,000 shares; 10,617,722 and 13,967,715 shares issued and outstanding in 1996 and 1997, respectively 106 140 Additional paid-in capital 58,427 151,095 Retained earnings 41,665 46,328 Currency translation adjustment (194) (856) -------- --------- Total shareholders' equity 100,004 196,707 Commitments and contingencies (notes 9, 10 and 15) -------- --------- $375,714 $1,410,186 ======== ==========
See accompanying notes to consolidated financial statements. PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 30, 1995, December 28, 1996 and January 3, 1998 (Amounts in thousands, except for per share data) 1995 1996 1997 ---- ---- ---- Net sales $474,899 $490,655 $579,999 Cost of goods sold 395,922 411,048 485,679 -------- -------- -------- Gross profit 78,977 79,607 94,320 Selling, general and administrative expenses 42,508 41,445 52,090 Restructuring charge (note 3) - - 5,986 -------- -------- -------- Earnings from operations 36,469 38,162 36,244 Interest expense 17,491 13,971 22,470 -------- -------- -------- Earnings before income taxes and extraordinary items 18,978 24,191 13,774 Income taxes (note 12) 7,509 9,459 5,538 -------- -------- -------- Earnings before extraordinary items 11,469 14,732 8,236 Extraordinary items, net of income tax benefit of $391 in 1996 and $613 in 1997 (note 11) - (609) (919) -------- -------- -------- Net earnings 11,469 14,123 7,317 Preferred dividends (note 13) - - 85 -------- -------- -------- Earnings available for common shareholders $ 11,469 $14,123 $ 7,232 ======== ======== ======== Basic earnings per common share: Before extraordinary items $ 1.08 $ 1.39 $ .75 Extraordinary items - (.06) (.08) -------- -------- -------- Basic earnings per common share $ 1.08 $ 1.33 $ .67 ======== ======== ======== Weighted average common shares outstanding - basic (note 4) 10,618 10,618 10,837 ======== ======== ======== Diluted earnings per common share: Before extraordinary items $ 1.08 $ 1.39 $ .74 Extraordinary items - (.06) (.08) -------- -------- -------- Diluted earnings per common share $ 1.08 $ 1.33 $ .66 ======== ======== ======== Weighted average common shares outstanding - diluted (note 4) 10,620 10,634 11,086 ======== ======== ========
See accompanying notes to consolidated financial statements. PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 30, 1995, December 28, 1996 and January 3, 1998 (Dollars in thousands, except for per share data) Common Stock ------------------ Additional Currency Total Number Par paid-in Retained translation shareholders' of shares value capital earnings adjustment equity --------- ----- ------- -------- ---------- ------ Balances at December 31, 1994 10,617,722 $106 $ 58,396 $18,728 $(752) $ 76,478 Other - - 31 - - 31 Common stock dividends declared ($.05 per share) - - - (531) - (531) Currency translation adjustment - - - - 543 543 Net earnings - - - 11,469 - 11,469 ---------- ---- -------- ------- ---- --------- Balances at December 30, 1995 10,617,722 106 58,427 29,666 (209) 87,990 Common stock dividends declared ($.20 per share) - - - (2,124) - (2,124) Currency translation adjustment - - - - 15 15 Net earnings - - - 14,123 - 14,123 ---------- ---- -------- ------- ----- -------- Balances at December 28, 1996 10,617,722 106 58,427 41,665 (194) 100,004 Exercise of stock options, including tax benefit of $517 (note 14) 174,812 2 2,992 - - 2,994 Issuance of common stock - acquisitions (note 5) 3,175,181 32 89,676 - - 89,708 Preferred stock dividends (note 13) - - - (85) - (85) Common stock dividends declared ($.24 per share) - - - (2,569) - (2,569) Currency translation adjustment - - - - (662) (662) Net earnings - - - 7,317 - 7,317 ---------- ---- -------- ------- ----- -------- Balances at January 3, 1998 13,967,715 $140 $151,095 $46,328 $(856) $196,707 ========== ==== ======== ======= ===== ========
See accompanying notes to consolidated financial statements. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 30, 1995, December 28, 1996 and January 3, 1998 (Dollars in thousands) 1995 1996 1997 ---- ---- ---- Cash flows from operating activities: Net earnings $ 11,469 $ 14,123 $ 7,317 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 11,994 12,775 16,064 Extraordinary items - 609 919 Restructuring charge - - 5,986 Deferred income taxes 3,635 2,030 (2,320) Loss (gain) on disposal of property, plant and equipment 74 40 (1,052) Changes in operating assets and liabilities, excluding effects of businesses acquired: Trade receivables 714 (7,040) (8,173) Inventories (172) (26,107) (3,900) Accounts payable (3,698) 6,267 (6,236) Other assets and liabilities 1,875 (1,983) 8,781 -------- -------- --------- Net cash provided by operating activities 25,891 714 17,386 -------- -------- --------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 119 19 4,926 Purchases of property, plant and equipment (12,448) (21,040) (20,567) Payments for businesses purchased, net of cash acquired (2,235) (4,112) (535,222) -------- -------- --------- Net cash used in investing activities (14,564) (25,133) (550,863) -------- -------- --------- Cash flows from financing activities: Increase (decrease) in checks not yet presented for payment 8,155 (2,526) 6,583 Borrowings on revolving credit loans 47,150 62,000 200,600 Repayments of revolving credit loans (61,500) (66,600) (146,600) Proceeds from the issuance of long-term debt 645 125,635 435,000 Retirement of long-term debt (5,056) (89,357) (2,727) Payment of debt and equity issuance costs (350) (3,000) (19,703) Proceeds from issuance of redeemable convertible preferred stock - - 65,000 Dividends paid (531) (2,124) (2,569) Proceeds from exercise of stock options - - 2,477 -------- -------- --------- Net cash provided by (used in) financing activities (11,487) 24,028 538,061 -------- -------- --------- Net change in cash and cash equivalents (160) (391) 4,584 Cash and cash equivalents at beginning of year 571 411 20 -------- -------- --------- Cash and cash equivalents at end of year $ 411 $ 20 $ 4,604 ======== ======== =========
See accompanying notes to consolidated financial statements. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (1) GENERAL Pillowtex Corporation ("Pillowtex") and subsidiaries (collectively "the Company"), which operates in a single industry segment, is a North American designer, manufacturer and marketer of home textile products, offering a full line of bed pillows, blankets, sheets, mattress pads, down comforters, towels, bath rugs and other home textile products. As a leading supplier across all distribution channels, the Company sells its products to most major mass merchants, wholesale clubs, department stores, specialty retailers, catalogs and institutions. On December 19, 1997, the Company and Fieldcrest Cannon, Inc. ("Fieldcrest Cannon"), a textile manufacturer primarily involved in the production of home furnishing products, principally towels and sheets, entered into a merger agreement whereby a wholly owned subsidiary of the Company was merged with and into Fieldcrest Cannon (the "Merger"). Following consummation of the Merger, Fieldcrest Cannon became a wholly owned subsidiary of the Company (see notes 5 and 11). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Pillowtex Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) FISCAL YEAR The Company's fiscal year ends on the Saturday closest to December 31. Fiscal year 1995 ended December 30, 1995, fiscal 1996 ended December 28, 1996 and fiscal 1997 ended January 3, 1998 and such years include the results of operations for 52, 52 and 53-week periods, respectively. (c) STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, the Company considers all short-term investments with original maturities of three months or less to be cash equivalents. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Supplemental disclosures of cash flow information for the years ended December 30, 1995, December 28, 1996 and January 3, 1998 follow: 1995 1996 1997 ---- ---- ---- Interest paid $ 15,632 $15,234 $19,207 ======== ======= ======= Income taxes paid $ 3,793 $ 6,483 $ 7,533 ======== ======= =======
(d) INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) and last-in, first-out (LIFO) methods (see note 6). (e) DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into interest rate swap agreements to modify the interest characteristics of portions of its outstanding debt. The agreements entitle the Company to receive or pay to the counterparty (a major bank), on a quarterly basis, the amounts, if any, by which the Company's interest payments covered by swap agreements differ from those of the counterparty. These amounts are recorded as adjustments to interest expense. The fair value of the swap agreements and changes in fair value as a result of changes in market interest rates are not recognized in the consolidated financial statements. (f) PROPERTY, PLANT AND EQUIPMENT Depreciation is provided generally using the straight-line method in amounts sufficient to amortize the cost of the assets over their estimated useful lives as follows: Buildings and improvements 10-33 years Machinery and equipment 5-15 years Data processing equipment 5 years Furniture and fixtures 5-8 years Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the remaining term of the lease using the straight-line method. Interest costs of $0.3 million and $0.6 million, incurred during the years ended December 28, 1996 and January 3, 1998, respectively, for the purchase and construction of qualifying fixed assets, were capitalized and are being amortized over the related assets' estimated useful lives. Renewals and betterments are capitalized and depreciated over the remaining life of the specific property unit. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (g) INTANGIBLES Intangible assets consist primarily of goodwill ($46.7 million and $238.2 million as of December 28, 1996 and January 3, 1998, respectively) recorded in connection with the Company's acquisitions (see note 5). Goodwill represents the excess of purchase price over the fair value of net identifiable tangible and intangible assets acquired. Amortization is provided using the straight-line method, the majority of which is over the estimated useful life of 40 years. Other intangible assets consist principally of deferred debt issuance costs amortized over the terms of the related debt (ranging from 2 to 10 years) using the interest method. The Company assesses the recoverability of goodwill by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. At this time, the Company believes that no significant impairment of goodwill has occurred and that no reduction of the estimated useful lives is warranted. (h) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on December 31, 1995, the first day of fiscal year 1996. This statement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's consolidated financial statements. (i) FAIR VALUE The carrying amount of cash and cash equivalents, receivables and accounts payable approximates fair value because of the short maturity of these instruments (see note 11). (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (j) INCOME TAXES Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) STOCK OPTION PLAN Prior to fiscal year 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. Accordingly, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. At the beginning of fiscal year 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (l) REVENUE RECOGNITION Revenue is recognized upon shipment of products. Reserves for sales returns and allowances are recorded in the same accounting period as the related revenues. (m) ADVERTISING EXPENSES The Company expenses advertising costs as incurred. Advertising expense was approximately $3.0 million, $3.2 million and $3.8 million during the years ended December 30, 1995, December 28, 1996 and January 3, 1998, respectively. (n) EARNINGS PER SHARE In fiscal year 1997, the Company adopted the provisions of SFAS No. 128, EARNINGS PER SHARE, which requires the calculation of basic and diluted earnings per share. Basic earnings per share is computed by dividing earnings available for common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) share is computed by dividing earnings available for common shareholders by the weighted average number of shares outstanding plus the number of additional shares that would have been outstanding if potentially dilutive securities had been issued. In addition, in computing the dilutive effect of such securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. All prior period earnings per share amounts have been restated to reflect the requirements of this statement. (o) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Company's foreign subsidiaries use the local currency as the functional currency. The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded in a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in the consolidated statements of earnings and were not material in any of the years presented. (p) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) RESTRUCTURING CHARGE During the fourth quarter of 1997, the Company committed to a plan to consolidate its blanket production into its facilities in Swannanoa, North Carolina and Westminster, South Carolina. The aggregate cost of this restructuring is estimated to be approximately $7.5 million, of which approximately $6.0 million (associated with the write-down of certain assets and other expenses) was accrued (and remains unpaid) in the year ended January 3, 1998, and the remaining $1.5 million (associated with employee severance) will be expensed in the first quarter of fiscal year 1998. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (4) EARNINGS PER SHARE The following table reconciles the numerators and denominators of basic and diluted earnings per share for the year ended January 3, 1998. There were no material reconciling items for the years ended December 30, 1995 and December 28, 1996. Earnings Shares -------- ------ Basic - earnings available for common shareholders $8,151 10,837 Effect of dilutive securities: Stock options - 132 Convertible preferred stock 85 117 ------ ------ Diluted - earnings available for common shareholders plus assumed conversions $8,236 11,086 ====== ======
(5) ACQUISITIONS BUSINESS ACQUIRED On December 19, 1997, the Company acquired all of the outstanding common and preferred stock of Fieldcrest Cannon in exchange for cash of $335.9 million (including acquisition costs) and 3.2 million shares of common stock of the Company. In connection with the acquisition, the Company retired $199.0 million of outstanding Fieldcrest Cannon debt. The acquisition has been accounted for under the purchase method of accounting and, accordingly, results of operations of Fieldcrest Cannon have been included in the consolidated statement of earnings since the acquisition date. As of January 3, 1998, the fair values assigned to certain assets acquired and liabilities assumed (primarily fixed assets and intangibles) are based upon preliminary estimates, which are subject to change upon completion of an independent valuation. Management does not expect the estimated values to change materially upon completion of the valuation. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) A summary of the assets acquired and liabilities assumed in connection with the Fieldcrest Cannon acquisition for the year ended January 3, 1998 follows: Current assets, net of cash acquired $ 399,073 Property, plant and equipment 388,675 Intangible assets 193,811 Other assets 19,150 Current liabilities (161,645) Noncurrent liabilities (214,134) --------- Total 624,930 Issuance of 3.2 million shares of Pillowtex common stock (89,708) --------- Cash paid, net of cash acquired $ 535,222 =========
Unaudited consolidated condensed pro forma results of operations for the fiscal years ended December 28, 1996 and January 3, 1998, as if the acquisition had occurred on the first day of fiscal year 1996 follow: 1996 1997 ---- ---- Net sales $1,583,000 $1,630,000 Earnings before extraordinary items available for common shareholders 6,052 12,748 Basic earnings per share before extraordinary items .44 .92 Diluted earnings per share before extraordinary items .44 .89
The pro forma results of operations are presented pursuant to applicable accounting rules relating to business combinations and are not necessarily indicative of the actual results that would have been achieved had this transaction occurred as of the beginning of fiscal year 1996, nor are they indicative of future results of operations. ASSETS ACQUIRED On November 18, 1996, the Company purchased certain assets of Fieldcrest Cannon's blanket operations for a purchase price of $28.3 million in cash. The acquisition included selected equipment ($6.3 million), inventory ($18.0 million) and an exclusive long-term license for the use of certain trademarks and tradenames ($4.0 million). The funds for the acquisition were provided by the Company's private offering of the 10% Senior Subordinated Notes (see note 11). (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (6) INVENTORIES Inventories consist of the following at December 28, 1996 and January 3, 1998: 1996 1997 ---- ---- Finished goods $ 56,085 $163,905 Work-in-process 33,436 120,063 Raw materials 41,955 54,790 Supplies 2,019 20,993 --------- -------- $ 133,495 $359,751 ========= ========
At January 3, 1998, 40% of inventories were valued at LIFO. The remaining inventories are valued at FIFO. Inventories are net of related reserves of approximately $3.3 million and $9.4 million at December 28, 1996 and January 3, 1998, respectively. (7) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and consist of the following at December 28, 1996 and January 3, 1998: 1996 1997 ---- ---- Land $ 2,847 $ 10,050 Buildings and improvements 44,713 171,857 Machinery and equipment 74,580 288,069 Data processing equipment 6,714 11,994 Furniture and fixtures 2,070 4,393 Leasehold improvements 1,403 2,434 Projects in progress 5,660 55,915 -------- -------- 137,987 544,712 Less accumulated depreciation and amortization (43,720) (55,871) -------- -------- $ 94,267 $488,841 ======== ========
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable includes $9.2 million and $39.3 million at December 28, 1996, and January 3, 1998, respectively, of checks not yet presented for payment on zero balance disbursement accounts. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Accrued expenses consist of the following at December 28, 1996 and January 3, 1998: 1996 1997 ---- ---- Employee-related compensation and benefits $ 4,159 $ 39,790 Accrued insurance and worker's compensation reserves 2,117 17,214 Accrued customer rebates 5,220 13,534 Accrued interest and commitment fees 1,831 9,336 Accrued restructuring - 5,484 Accrued royalties and commissions 4,831 4,951 Accrued advertising 927 4,061 Other accrued expenses 3,071 19,205 ------- -------- $22,156 $113,575 ======= ========
(9) PENSION PLANS Pillowtex has a defined benefit pension plan covering substantially all of its non-union employees. Fieldcrest Cannon has pension plans covering essentially all employees. The plans provide pension benefits based on the employees' compensation and service. The Company's funding policy provides for annual contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. Pension plan assets consist of investments in publicly traded corporate common stocks and bonds, as well as U.S. government obligations. Net pension expense includes the following components for the years ended December 30, 1995, December 28, 1996 and January 3, 1998: 1995 1996 1997 ---- ---- ---- Service cost $ 585 $ 766 $ 1,058 Interest cost on projected benefit obligation 402 523 1,414 Actual return on plan assets (1,041) (564) (2,199) Net amortization and deferral 684 133 604 ------- ----- ------- Net pension expense $ 630 $ 858 $ 877 ======= ===== =======
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) A reconciliation of the funded status of the Pillowtex pension plan at December 28, 1996 and January 3, 1998 follows: 1996 1997 ---- ---- Actuarial present value of accumulated benefit obligations: Vested benefit obligation $ 5,492 $ 6,843 Nonvested benefit obligation 421 580 ------- ------- Accumulated benefit obligation $ 5,913 $ 7,423 ======= ======= Projected benefit obligation for services rendered to date $(7,286) $(9,204) Pension plan assets at fair value 6,275 7,378 ------- ------- Pension plan assets less than projected benefit obligation (1,011) (1,826) Unrecognized net asset at March 1, 1987 being recognized over 17 years (60) (51) Unrecognized prior service costs 243 207 Amortization and deferral of net (gains) and losses (88) 729 ------- ------- Net pension liability included in accrued expenses $ (916) $ (941) ======= =======
A reconciliation of the funded status of Fieldcrest Cannon's pension plans at January 3, 1998 follows: Actuarial present value of accumulated benefit obligations: Vested benefit obligation $ 284,152 Nonvested benefit obligation 6,853 --------- Accumulated benefit obligation $ 291,005 ========= Projected benefit obligation for services rendered to date $(297,746) Pension plan assets at fair value 299,480 --------- Net pension asset included in other assets $ 1,734 =========
The following assumptions were used in determining the actuarial present value of the projected benefit obligation and net pension expense: 1995 1996 1997 ---- ---- ---- Discount rate 7.25% 7.75% 7.00% Rate of increase in future compensation 4.0 4.0 4.0-4.5 Expected long-term rate of return on assets 8.5 8.5 9.0-9.5
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) The Company also sponsors employee savings plans which cover substantially all employees. The Company's matching provisions under these plans vary, with some matches being discretionary. The matching formulas of certain plans can be changed annually. (10) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Fieldcrest Cannon provides medical insurance premium assistance and life insurance benefits to retired employees. The medical premium assistance payments are at a fixed dollar amount based on the retiree's years of service. Employees become eligible for these benefits when they reach retirement age while working for the company. The plans are funded as benefits are paid. Net periodic postretirement benefit cost charged to earnings since the date of acquisition for the year ended January 3, 1998 included the following components: Service cost $ 35 Interest cost on projected benefit obligation 114 ---- Net periodic postretirement benefit expense $149 ==== The table below sets forth the plans' combined status at January 3, 1998: Accumulated postretirement benefit obligation: Retirees $26,724 Fully eligible active participants 7,688 Other active participants 4,936 ------- Accrued postretirement liability included in noncurrent liabilities $39,348 =======
The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% as of January 3, 1998. Medical premium assistance payments are at a fixed dollar amount based on the retiree's years of service; therefore, the plans are not affected by a health care cost trend rate assumption. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (11) LONG-TERM DEBT Long-term debt consists of the following at December 28, 1996 and January 3, 1998: 1996 1997 ---- ---- Revolver $ 61,000 $115,000 Term loans - 250,000 Industrial revenue bonds with interest rates from 2.75% to 7.85% and maturities from February 1, 1998 through July 1, 2021; generally collateralized by land and buildings 6,915 18,050 9% Senior Subordinated Notes due 2007 - 185,000 10% Senior Subordinated Notes due 2006 125,000 125,000 6% convertible subordinated sinking fund debentures due to 2012 (effective rate of 8.72%, net of $17,400 in unamortized discount) - 95,126 Other debt 3,804 2,823 -------- -------- 196,719 790,999 Less current portion (1,868) (5,616) -------- -------- $194,851 $785,383 ======== ========
In connection with the acquisition of Fieldcrest Cannon (see note 5), the Company entered into new senior revolving credit and term loan facilities (the "Facilities") with a group of financial and institutional investors for which NationsBank of Texas, N.A. ("NationsBank") acts as the agent. The Facilities consist of a $350.0 million revolving credit facility (the "Revolver") and a $250.0 million term loan facility (the "Term Loan"). The Term Loan consists of a $125.0 million tranche A term loan (the "Tranche A Term Loan") and a $125.0 million tranche B term loan (the "Tranche B Term Loan"). The Revolver and the Tranche A Term Loan expire December 31, 2003, and the Tranche B Term Loan expires December 31, 2004. The Revolver includes $55.0 million of availability for letters of credit. At January 3, 1998, $37.8 million of letters of credit were outstanding. Unused availability under the Revolver was $197.2 million at January 3, 1998. Amounts outstanding under the Revolver and Tranche A Term Loan bear interest at a rate based, at the Company's option, upon either (i) the London Interbank Offered Rate plus a margin of up to 2.25% or (ii) NationsBank's Base Rate (as defined) plus a margin of up to .75%. The Tranche B Term Loan bears interest on a basis similar to the Tranche A Term Loan, plus an additional margin of .50%. These rates are subject to decrease based upon the Company's achievement of certain ratios of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The weighted average annual interest rate on outstanding borrowings under the various senior credit facilities during 1997 was 6.77%, and the effective rate at January 3, 1998 was 7.79%. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) The Facilities are guaranteed by each of the domestic subsidiaries of the Company and are secured by first priority liens on all of the capital stock of each domestic subsidiary of the Company and by 65% of the capital stock of the Company's foreign subsidiaries. The Company has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties, and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The Term Loan is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of the Company (except as specifically provided), 50% of the net cash proceeds of equity issuances by the Company or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). All mandatory prepayments will be applied pro rata between the Tranche A Term Loan and the Tranche B Term Loan to reduce the remaining installments of principal. The Facilities contain a number of financial, affirmative and negative covenants which, among other things, require maintenance of certain ratios of funded debt to EBITDA, and certain cash flow coverage ratios, and require the Company to maintain a minimum tangible net worth. Other covenants restrict, among other things, the Company's ability to incur additional debt, grant liens, engage in transactions with affiliates, make loans, advances and investments, pay dividends and other distributions to shareholders, dispose of assets, effect mergers, consolidations and dissolutions, and make certain changes in its business. At January 3, 1998, the Company was in compliance with all covenants under the Facilities. In connection with the new Facilities, the Company's previous senior credit facility was extinguished and the associated unamortized deferred debt issuance costs of $.9 million, net of related income tax benefit of $.6 million, were charged to expense resulting in an extraordinary loss on debt extinguishment. In connection with the acquisition, the Company issued $185.0 million of 9% Senior Subordinated Notes due 2007 (the "9% Notes") in a private offering. The 9% Notes are due December 15, 2007, with interest payable semiannually commencing June 15, 1998. The Company may at its option redeem the 9% Notes, in whole or in part, on or after December 15, 2002 at a redemption price of 104.5%, which declines 1.5% annually through December 15, 2005 to 100%. The 9% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Revolver and rank pari passu to the 10% Senior Subordinated Notes described below. On November 12, 1996, the Company issued $125.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2006 (the "10% Notes"). The 10% notes are due November 15, 2006, with interest payable semiannually commencing May 15, 1997. The Company used the proceeds from such offering to retire the outstanding indebtedness under the Company's previously existing term loan, to finance the acquisition of certain assets of Fieldcrest Cannon's blanket operations (see note 5), to temporarily reduce indebtedness under the previous revolving credit facility, and to acquire a warehouse facility. In connection with the retirement of the term loan, the Company charged the related unamortized deferred debt issuance costs to expense (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) resulting in an extraordinary loss on debt extinguishment of $0.6 million, net of related income taxes of $0.4 million. The Company may at its option redeem the 10% Notes, in whole or in part, on or after November 15, 2001 at a redemption price of 105.0%, which declines 1.667% annually through November 15, 2004 to 100%. The 10% Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness, including borrowings under the Revolver. The 9% Notes and the 10% Notes are unconditionally guaranteed on a senior subordinated basis by each of the existing and future domestic subsidiaries of the Company and each other subsidiary of the Company that guarantees the Company's obligations under the Facilities described above (see note 18). The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the relevant guarantor. Upon a change in control, the Company will be required to make an offer to repurchase all outstanding 9% Notes and 10% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. The 9% Notes and the 10% Notes are subject to certain covenants which restrict, among other things, the Company's ability to incur additional indebtedness and issue preferred stock, grant liens to secure subordinated indebtedness, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, engage in certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 9% Notes and the 10% Notes, merge or consolidate with any other person, sell stock of subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. At January 3, 1998, the Company was in compliance with all covenants under the 9% Notes and the 10% Notes. As of December 28, 1996 and January 3, 1998, the Company had approximately $215.0 and $125.0 million, respectively, of notional amounts covered under fixed for floating swap agreements at an average interest rate of 6.24% and 9.54%, respectively. Subsequent to January 3, 1998, the Company terminated the swap agreement in place covering approximately $125.0 million of indebtedness for a gain of approximately $1.0 million. The gain has been deferred and will be amortized as an adjustment to interest expense over the remaining three-year term of the terminated swap agreement. On January 9, 1998, the Company entered into an interest rate swap agreement covering $250.0 million of indebtedness expiring February 19, 1999 exchanging variable rates for a fixed rate of 5.56%. The interest rates on certain notes, industrial revenue bonds and 10% senior subordinated debentures (aggregating $135.7 million and $145.9 million at December 28, 1996 and January 3, 1998, respectively) differ from current market rates. The fair value of these financial instruments, estimated by discounting the future cash flows using rates currently available, is approximately (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) $134.5 million and $141.1 million at December 28, 1996 and January 3, 1998, respectively. Other debt is at current market rates; therefore, its fair value approximates carrying value. Aggregate maturities of long-term debt for each of the five years following January 3, 1998 and thereafter, assuming the unpaid principal balance at January 3, 1998 under the Revolver remains unchanged, are as follows: Fiscal Year Amount ----------- ------ 1998 $ 5,616 1999 13,957 2000 23,880 2001 33,950 2002 43,800 Thereafter 687,196
(12) INCOME TAXES The components of income tax expense, excluding the income tax benefit related to extraordinary items, are as follows: 1995 1996 1997 ---- ---- ---- U.S. federal - current $2,632 $6,604 $ 6,385 U.S. federal - deferred 3,412 1,793 (1,478) State and foreign taxes - current 1,242 825 1,473 State and foreign taxes - deferred 223 237 (842) ------ ------ ------- $7,509 $9,459 $ 5,538 ====== ====== =======
A reconciliation of income tax expense computed using the U.S. federal statutory income tax rate of 35% of earnings before income taxes and extraordinary loss to the actual provision for income taxes follows: 1995 1996 1997 ---- ---- ---- Expected tax at U.S. statutory rate $6,642 $8,467 $4,821 State and foreign taxes, net of federal benefit 652 555 477 Nondeductible meals and entertainment expenses 162 166 158 Other 53 271 82 ------ ------ ------ $7,509 $9,459 $5,538 ====== ====== ======
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 28, 1996 and January 3, 1998 are presented below: 1996 1997 ---- ---- Net current deferred tax assets (liabilities): Inventory costs and reserves $ 1,113 $(42,716) Accrued employee benefits 422 685 State deferred taxes 488 957 Nondeductible accruals and allowances 544 17,665 Other - 7,341 ------- -------- Current deferred tax assets (liabilities) 2,567 (16,068) ------- -------- Net noncurrent deferred tax liabilities: Package design costs 336 351 Depreciable assets (9,057) (79,962) State deferred income taxes (562) (6,673) Goodwill (565) (830) Nondeductible accruals and allowances - 6,872 Other 140 13,902 ------- -------- Noncurrent deferred tax liabilities (9,708) (66,340) ------- -------- Net deferred tax liabilities $(7,141) $(82,408) ======= ========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets at January 3, 1998 to be realized as a result of the reversal of existing taxable temporary differences giving rise to deferred tax liabilities and the generation of taxable income. (13) REDEEMABLE CONVERTIBLE PREFERRED STOCK On December 19, 1997, the Company issued 65,000 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") for $65.0 million less $2.1 million of issue costs. Dividends will accrue from the issue date through December 31, 1999 at a 3% annual rate. Beginning January 1, 2000, the rate at which dividends will accrue may increase to 7% or 10% depending on the Company's earnings per share for the 1999 fiscal year. The Company may also be required to pay a one-time cumulative dividend in cash or Series A Preferred Stock, from the issue date through December 31, 1999, equal to the difference between the dividends calculated at the 3% rate and dividends calculated at either the 7% or 10% rate, if the fiscal year 1999 earnings per share are less than the predetermined targets. The Series A Preferred Stock is convertible, at any time at the option of the holder, into common stock at a rate calculated by dividing $1,000 plus unpaid dividends per share by $24.00 per share. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Each share of Series A Preferred Stock is subject to mandatory redemption in ten and one-half years after the issue date at a redemption price of $1,000 plus accrued and unpaid dividends. The Company has the right after the fourth anniversary of the issue date to call all or a portion of the Series A Preferred Stock at $1,000 per share plus accrued and unpaid dividends times a premium equal to the dividend rate after the fourth anniversary date and declining ratably to the mandatory redemption date. Holders of the Series A Preferred Stock are entitled to limited voting rights only under certain conditions. (14) STOCK OPTIONS In 1993, the Company established a stock option plan under which options may be granted to eligible employees and nonemployee directors of the Company. Under the stock option plan, the Board of Directors may grant either nonqualified stock options or incentive stock options. Additionally, the plan provides for the reservation and issuance of up to 1.5 million shares of the Company's common stock. At January 3, 1998, there were .8 million shares available for grant under the stock option plan. The per share weighted average fair value of stock options granted during fiscal years 1995, 1996 and 1997 was $2.75, $4.65 and $7.86, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: 1995 1996 1997 ---- ---- ---- Expected dividend yield 1.14% 1.14% 1.41% Stock price volatility 38.82 38.82 38.94 Risk-free interest rate 6.66 5.99 6.15 Expected option term 5 years 5 years 5 years
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1995 1996 1997 ---- ---- ---- Earnings available for common shareholders: As reported $11,469 $14,123 $7,232 Pro forma 11,443 13,986 6,720
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) 1995 1996 1997 ---- ---- ---- Earnings per share: As reported - basic $ 1.08 $1.33 $.67 As reported - diluted 1.08 1.33 .66 Pro forma - basic 1.08 1.32 .62 Pro forma - diluted 1.08 1.32 .61
Pro forma net earnings reflects only options granted in fiscal years 1995, 1996 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. All options are granted at an exercise price not less than the fair market value of the common stock at the date of grant. The option period may not be more than ten years from the date the option is granted, and generally the options may be exercised ratably over a four-year period or as otherwise specified by the Board of Directors. A summary of option activity during fiscal years 1995, 1996 and 1997 follows: Weighted Average Shares Exercise Price ------ -------------- Outstanding at December 31, 1994 (69 shares exercisable) 364 $ 14.91 Granted 187 13.34 Canceled (114) 13.91 --- Outstanding at December 30, 1995 (131 shares exercisable) 437 14.50 Granted 226 12.59 Canceled (152) 14.33 --- Outstanding at December 28, 1996 (176 shares exercisable) 511 13.71 Granted 537 16.98 Exercised (175) 14.17 Canceled (131) 14.85 --- Outstanding at January 3, 1998 (289 shares exercisable) 742 15.76 ===
At January 3, 1998, the weighted average remaining contractual life of outstanding options is 8.67 years. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (15) COMMITMENTS AND CONTINGENT LIABILITIES Manufacturing facilities at certain locations, showrooms, sales offices and warehouse space are leased under noncancelable operating lease agreements. These leases generally require the Company to pay all executory costs such as maintenance and taxes. Rental expense for operating leases was approximately $3.1 million, $5.3 million and $7.6 million during fiscal years 1995, 1996 and 1997, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year), which expire at various dates through 2009, are as follows: Fiscal Year Amount ----------- ------ 1998 $19,181 1999 16,816 2000 15,083 2001 17,639 2002 8,953 Thereafter 27,247
Louisville Bedding Company ("Louisville") filed a complaint for patent infringement against the Company in 1994. Louisville's complaint alleges that certain of the Company's mattress pad product lines infringe on certain of Louisville's patents. The allegations relate both to the Company's current mattress pad product line as well as to certain discontinued product lines sold from 1991 through 1995. The complaint seeks an injunction against the Company's sale of its current stretch-to-fit mattress pad line, as well as an accounting of profits and unspecified damages relating to both the Company's current and discontinued product lines. In addition, the complaint seeks trebled damages, interest, costs, and attorneys' fees. During April of 1997, Louisville voluntarily dismissed its infringement claims against the Company's current opening price point mattress pad line and, during October of 1997, the Company was granted summary judgment on the issue of infringement with respect to the Company's current premium product. On January 30, 1998, the district court entered an additional order confirming that the Company's current premium price point product did not infringe Louisville's patents as alleged. The Company does not expect the Louisville suit to have any effect on the Company's continued right to market its current line of stretch-to-fit mattress pads. Notwithstanding the foregoing, Louisville has continued to pursue various infringement claims against the Company. On March 4, 1998, representatives of the Company met with representatives of Louisville to discuss the possible settlement of such claims. In furtherance of such discussions, the Company is currently attempting to reach agreement with Louisville regarding the specific terms of a comprehensive settlement, though no assurance can be given with respect thereto. (Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) From time to time, the Company is a party to various other legal proceedings arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of all matters currently pending will not have a materially adverse effect on the Company's financial position, results of operations or liquidity. (16) CONCENTRATION OF CREDIT RISK The Company's customers are primarily retailers located throughout the United States and Canada. Although the Company closely monitors the creditworthiness of its customers, adjusting credit policies and limits as needed, a customers' ability to pay is largely dependent upon the retail industry's economic environment. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The Company has trade receivables which are due from certain customers who are experiencing financial difficulties. However, in the opinion of management of the Company, the allowance for doubtful accounts is adequate, and trade receivables are presented at net realizable value. Sales to the Company's two individual major customers, including their affiliated entities, accounted for approximately 14% and 13% each of net sales in fiscal years 1995, 1996 and 1997. (17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables present unaudited financial data of the Company for each quarter of fiscal years 1996 and 1997. The quarter ended January 3, 1998 was a 14 week period compared to a 13 week period for the quarter ended December 28, 1996. 1996 Quarter Ended ------------------------------------------------- March 30 June 29 September 28 December 28 -------- ------- ------------ ----------- Net sales $100,794 $91,185 $143,791 $154,885 Gross profit 15,568 15,615 24,315 24,109 Earnings before extraordinary item 941 1,491 6,122 6,178 Net earnings 941 1,491 6,122 5,569 Earnings per common share - basic .09 .14 .58 .52 Earnings per common share - diluted .09 .14 .58 .52
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) 1997 Quarter Ended ------------------------------------------------- March 29 June 28 September 27 January 3 -------- ------- ------------ --------- Net sales $113,763 $104,894 $151,977 $209,365 Gross profit 18,706 19,701 26,552 29,361 Earnings (loss) before extraordinary item 1,651 1,871 7,050 (2,336) Net earnings (loss) 1,651 1,871 7,050 (3,255) Earnings (loss) per common share - basic .16 .18 .66 (.30) Earnings (loss) per common share - diluted .15 .17 .65 (.30)
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) (18) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following is summarized condensed consolidating financial information for the Company, segregating the Parent and guarantor subsidiaries from nonguarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the Company and guarantees are full, unconditional and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that these financial statements would not provide relevant material additional information to users of the financial statements.
December 28, 1996 January 3, 1998 ------------------------------------------------- -------------------------------------------------- Non- Non- Guarantor Guarantor Guarantor Guarantor Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli- Financial Position Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated - ------------------ ------ --------- --------- ------- -------- ------ --------- --------- ------- -------- ASSETS: Trade receivables $ - 73,438 5,044 - 78,482 - 216,869 4,316 - 221,185 Receivable from affiliates 197,236 - - (197,236) - 668,588 - - (668,588) - Inventories - 125,803 7,692 - 133,495 - 351,720 8,031 - 359,751 Other current assets - 8,911 769 - 9,680 - 58,650 1,371 - 60,021 -------- ------- ------ -------- ------- ------- --------- ------ -------- --------- Total current assets 197,236 208,152 13,505 (197,236) 221,657 668,588 627,239 13,718 (668,588) 640,957 Property, plant and equipment, net 714 90,664 2,889 - 94,267 657 485,975 2,209 - 488,841 Intangibles, net 10,103 44,331 2,679 - 57,113 24,256 232,112 2,499 - 258,867 Other assets 71,362 901 - (69,586) 2,677 229,039 19,564 - (227,082) 21,521 -------- ------- ------ -------- ------- ------- --------- ------ -------- --------- Total assets $279,415 344,048 19,073 (266,822) 375,714 922,540 1,364,890 18,426 (895,670) 1,410,186 ======== ======= ====== ======== ======= ======= ========= ====== ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts payable and accrued liabilities $ - 64,501 3,136 - 67,637 - 218,874 5,818 - 224,692 Payable to affiliates - 193,000 4,236 (197,236) - - 668,000 588 (668,588) - Other current liabilities 306 3,041 167 - 3,514 85 21,591 93 - 21,769 -------- ------- ------ -------- ------- ------- --------- ------ -------- --------- Total current liabilities 306 260,542 7,539 (197,236) 71,151 85 908,465 6,499 (668,588) 246,461 Noncurrent liabilities 185,950 17,978 631 - 204,559 675,000 228,550 586 - 904,136 -------- ------- ------ -------- ------- ------- --------- ------ -------- --------- Total liabilities 186,256 278,520 8,170 (197,236) 275,710 675,085 1,137,015 7,085 (668,588) 1,150,597 Redeemable convertible preferred stock - - - - - 62,882 - - - 62,882 Shareholders' equity 93,159 65,528 10,903 (69,586) 100,004 184,573 227,875 11,341 (227,082) 196,707 -------- ------- ------ -------- ------- ------- --------- ------ -------- --------- Total liabilities and shareholders' equity $279,415 344,048 19,073 (266,822) 375,714 922,540 1,364,890 18,426 (895,670) 1,410,186 ======== ======= ====== ======== ======= ======= ========= ====== ======== =========
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Years Ended ----------------------------------------------------------------------------------------------------- December 30, 1995 December 28, 1996 ------------------------------------------------- -------------------------------------------------- Non- Non- Guarantor Guarantor Guarantor Guarantor Results of Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli- Operations Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated - -------------- ------ --------- --------- ------- -------- ------ --------- --------- ------- -------- Net sales $278,052 178,823 37,241 (19,217) 474,899 78,959 403,386 31,480 (23,170) 490,655 Cost of goods sold 226,842 154,124 34,173 (19,217) 395,922 60,215 345,269 28,734 (23,170) 411,048 -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Gross profit 51,210 24,699 3,068 - 78,977 18,744 58,117 2,746 - 79,607 Selling, general and administra- tive expenses 25,211 15,586 1,711 - 42,508 8,831 30,938 1,676 - 41,445 Restructuring charges - - - - - - - - - - -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Earnings from operations 25,999 9,113 1,357 - 36,469 9,913 27,179 1,070 - 38,162 Interest expense (income) 4,161 13,321 9 - 17,491 5,017 8,973 (19) - 13,971 -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Earnings (loss) before income taxes and extra- ordinary items 21,838 (4,208) 1,348 - 18,978 4,896 18,206 1,089 - 24,191 Income taxes 8,399 (1,298) 408 - 7,509 1,921 7,329 209 - 9,459 -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Earnings (loss) before extra- ordinary items 13,439 (2,910) 940 - 11,469 2,975 10,877 880 - 14,732 Extraordinary items - - - - - (609) - - - (609) -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Net earnings (loss) 13,439 (2,910) 940 - 11,469 2,366 10,877 880 - 14,123 -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Preferred dividends - - - - - - - - - - -------- ------- ------ ------- ------- ------ ------- ------ -------- -------- Earnings (loss) available for common share- holders $ 13,439 (2,910) 940 - 11,469 2,366 10,877 880 - 14,123 ======== ======= ====== ======= ======= ====== ======= ====== ======== ========
Years Ended - ------------------------------------------------------------------- January 3, 1998 -------------------------------------------------- Non- Guarantor Guarantor Results of Sub- Sub- Elimi- Consoli- Operations Parent sidiaries sidiaries nations dated - ---------- ------ --------- --------- ------- -------- Net sales 18,759 537,536 29,268 (5,564) 579,999 Cost of goods sold 11,523 453,149 26,571 (5,564) 485,679 ------- ------- ------ ------- ------- Gross profit 7,236 84,387 2,697 - 94,320 Selling, general and administra- tive expenses 3,990 46,624 1,476 - 52,090 Restructuring charges - 5,986 - - 5,986 ------- ------- ------ ------- ------- Earnings from operations 3,246 31,777 1,221 - 36,244 Interest expense (income) (764) 23,239 (5) - 22,470 ------- ------- ------ ------- ------- Earnings (loss) before income taxes and extra- ordinary items 4,010 8,538 1,226 - 13,774 Income taxes 1,725 3,687 126 - 5,538 ------- ------- ------ ------- ------- Earnings (loss) before extra- ordinary items 2,285 4,851 1,100 - 8,236 Extraordinary loss (919) - - - (919) ------- ------- ------ ------- ------- Net earnings (loss) 1,366 4,851 1,100 - 7,317 Preferred dividends 85 - - - 85 ------- ------- ------ ------- ------- Earnings (loss) available for common share- holders 1,281 4,851 1,100 - 7,232 ======= ======= ====== ======= =======
(Continued) PILLOWTEX CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands, except for per share data) Years Ended ----------------------------------------------------------------------------------------------------- December 30, 1995 December 28, 1996 ------------------------------------------------- -------------------------------------------------- Non- Non- Guarantor Guarantor Guarantor Guarantor Sub- Sub- Elimi- Consoli- Sub- Sub- Elimi- Consoli- Cash Flows Parent sidiaries sidiaries nations dated Parent sidiaries sidiaries nations dated - ---------- ------ --------- --------- ------- -------- ------ --------- --------- ------- -------- Net cash provided by (used in) operating activities $ 31,617 (7,765) 2,039 - 25,891 (548) (4,977) 6,239 - 714 Net cash used in investing activities (167) (13,716) (681) - (14,564) (16,140) (8,421) (572) - (25,133) Net cash provided by (used in) financing activities (31,600) 21,468 (1,355) - (11,487) 16,286 13,406 (5,664) - 24,028 -------- ------- ------ ------- ------- ------- ------ ------ ------ ------- Net change in cash and cash equivalents (150) (13) 3 - (160) (402) 8 3 - (391) Cash and cash equivalents at beginning of period 552 17 2 - 571 402 4 5 - 411 -------- ------- ------ ------- ------- ------- ------ ------ ------ ------- Cash and cash equivalents at end of period $ 402 4 5 - 411 - 12 8 - 20 ======== ======= ====== ======= ======= ======= ====== ====== ====== =======
Years Ended - ------------------------------------------------------------------------------- January 3, 1998 -------------------------------------------------- Non- Guarantor Guarantor Sub- Sub- Elimi- Consoli- Cash Flows Parent sidiaries sidiaries nations dated - ---------- ------ --------- --------- ------- -------- Net cash provided by (used in) operating activities 1,383 12,330 3,673 - 17,386 Net cash used in investing activities (157,858) (392,940) (65) - (550,863) Net cash provided by (used in) financing activities 156,475 385,188 (3,602) - 538,061 -------- -------- ------ ------- -------- Net change in cash and cash equivalents - 4,578 6 - 4,584 Cash and cash equivalents at beginning of period - 12 8 - 20 -------- -------- ------ ------- -------- Cash and cash equivalents at end of period - 4,590 14 - 4,604 ======== ======== ====== ======= ========
EX-21.1 13 EXHIBIT 21.1 LIST OF SUBSIDIARIES PRINCIPAL OPERATING SUBSIDIARIES State of Incorporation ---------------------- Beacon Manufacturing Company................. North Carolina Tennessee Woolen Mills, Inc.................. Tennessee Manetta Home Fashions, Inc. ................. North Carolina Torfeaco Industries, Inc. ................... Ontario, Canada Fieldcrest Cannon, Inc. ..................... Delaware Encee, Inc. ................................. Delaware EX-23.1 14 EXHIBIT 23.1 CONSENT AND REPORT ON FINCANCIAL STMT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Pillowtex Corporation: We consent to the inclusion and incorporation by reference in the registration statement Nos. 33-65408, 33-84624, 33-81478 and 333-39191 on Form S-8 of Pillowtex Corporation and subsidiaries of our report dated February 5, 1998, relating to the consolidated balance sheets of Pillowtex Corporation and subsidiaries as of December 28, 1996 and January 3, 1998, and the related consolidated statements of earnings, shareholders' equity, and cash flows and related schedule for each of the years in the three-year period ended January 3, 1998, which reports are included and incorporated by reference in the January 3, 1998 annual report on Form 10-K of Pillowtex Corporation and subsidiaries. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Dallas, Texas April 3, 1998 EX-23.2 15 EXHIBIT 23.2 CONSENT OF KPMG EXHIBIT 23.2 The Board of Directors Pillowtex Corporation: We consent to incorporation by reference in the registration statements (Nos. 33-65408, 33-84624, 33-81478 and 333-39191) on Form S-8 of Pillowtex Corporation and subsidiaries of our report dated February 5, 1998, relating to the consolidated balance sheet of Fieldcrest Cannon, Inc. and subsidiaries (a wholly-owned subsidiary of Pillowtex Corporation) as of January 3, 1998, and the related consolidated statements of operations and retained earnings, and cash flows for the period from December 19, 1997 to January 3, 1998 and the period from January 1, 1997 to December 18, 1997, which report appears in the January 3, 1998 annual report on Form 10-K of Pillowtex Corporation and subsidiaries as an exhibit. KPMG Peat Marwick LLP Greensboro, North Carolina April 2, 1998 EX-23.3 16 EXHIBIT 23.3 CONSENT OF ERNST & YOUNG EXHIBIT 23.3 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements of Pillowtex Corporation (Form S-8 Nos. 33-65408, 33-84624, 33-81478 and 333-39191) of our report dated January 31, 1997, with respect to the consolidated financial statements of Fieldcrest Cannon, Inc. for the year ended December 31, 1996 included in the Annual Report (Form 10-K) for Pillowtex Corporation for the year ended January 3, 1998. /s/ ERNST & YOUNG LLP Ernst & Young LLP Greensboro, North Carolina April 2, 1998 EX-27 17 EXHIBIT 27
5 1,000 12-MOS JAN-03-1998 DEC-29-1996 JAN-03-1998 4,604 0 235,955 14,770 359,751 640,957 544,712 55,871 1,410,186 246,461 790,999 62,882 0 140 196,567 1,410,186 579,999 579,999 485,679 485,679 58,076 775 22,470 13,774 5,538 8,236 0 (919) 0 7,317 .67 .66
EX-99.1 18 EXHIBIT 99.1 FINANCIAL STATEMENTS OF FIELDCREST FIELDCREST CANNON, INC. AND SUBSIDIARIES Consolidated Financial Statements As of December 31, 1996 and January 3, 1998 and for years ended December 31, 1995 and 1996, and periods ended December 18, 1997 and January 3, 1998 (With Independent Auditors' Reports Thereon) FIELDCREST CANNON, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Independent Auditors' Reports..........................................1 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1996 and January 3, 1998................................................3 Consolidated Statements of Operations and Retained Earnings for the years ended December 31, 1995 and 1996, and periods ended December 18, 1997 and January 3, 1998..............................4 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996, and periods ended December 18, 1997 and January 3, 1998........................5 Notes to Consolidated Financial Statements...........................6
- -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Shareowner Fieldcrest Cannon, Inc.: We have audited the accompanying consolidated balance sheet of Fieldcrest Cannon, Inc. and subsidiaries (a wholly-owned subsidiary of Pillowtex Corporation) (Successor Company) as of January 3, 1998, and the related consolidated statements of operations and retained earnings, and cash flows for the period from December 19, 1997 to January 3, 1998. We have also audited the accompanying consolidated statements of operations and retained earnings, and cash flows for the period from January 1, 1997 to December 18, 1997 of Fieldcrest Cannon, Inc. and subsidiaries (Predecessor Company). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Successor Company at January 3, 1998, and the results of their operations and their cash flows for the period from December 19, 1997 to January 3, 1998, and the results of their operations and their cash flows of the Predecessor Company for the period from January 1, 1997 to December 18, 1997, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, Fieldcrest Cannon, Inc. and subsidiaries was acquired by Pillowtex Corporation as of December 19, 1997 in a business combination accounted for as a purchase. As a result of the application of purchase accounting, the consolidated financial statements of Fieldcrest Cannon, Inc. and subsidiaries as of January 3, 1998 and for the period from December 19, 1997 to January 3, 1998 are presented on a different basis than those for the period from January 1, 1997 to December 18, 1997 and, therefore, are not directly comparable. /s/ KPMG Peat Marwick LLP Greensboro, North Carolina February 5, 1998 The Shareowner and Board of Directors of Fieldcrest Cannon, Inc. We have audited the accompanying consolidated balance sheet of Fieldcrest Cannon, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of operations and retained earnings, and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fieldcrest Cannon, Inc. and subsidiaries at December 31, 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young, L.L.P. Greensboro, North Carolina January 31, 1997 FIELDCREST CANNON, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and January 3, 1998 (Dollars in thousands, except for par value data)
Predecessor Successor ----------------- --------------- December 31, 1996 January 3, 1998 ----------------- --------------- ASSETS Current assets: Cash $ 4,647 4,581 Accounts receivable, less allowances of $7,693 in 1996 and $9,847 in 1997, principally trade 154,511 154,350 Inventories 216,165 222,291 Assets held for sale - 32,614 Other prepaid expenses and current assets 2,489 3,498 --------- --------- Total current assets 377,812 417,334 --------- --------- Plant and equipment, net 323,838 389,572 Intangible assets, net 10,881 193,853 Deferred charges and other assets 55,962 18,908 --------- --------- Total assets $ 768,493 1,019,667 ========= ========= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Accounts and drafts payable $ 63,910 65,448 Deferred income taxes 18,212 22,129 Accrued liabilities 61,172 79,787 Current portion of long-term debt 5,508 720 --------- --------- Total current liabilities 148,802 168,084 --------- --------- Senior long-term debt 107,746 11,320 Subordinated long-term debt 203,750 95,126 --------- --------- Total long-term debt 311,496 106,446 Due to Pillowtex - 459,173 Deferred income taxes 38,291 56,522 Other non-current liabilities 54,149 54,143 --------- --------- Total non-current liabilities 403,936 676,284 --------- --------- Total liabilities 552,738 844,368 --------- --------- Commitments (notes 7 and 8) Shareowners' equity: Preferred stock, $.01 par value. Authorized 10,000,000 shares; issued and outstanding 1,500,00 shares in 1996. 15 - Common stock, $1 par value in 1996 and $.01 par value in 1997. Authorized 25,000,000 shares in 1996 and 100 shares in 1997; issued 12,738,894 shares in 1996 and issued and outstanding 100 shares in 1997. 12,739 - Additional paid in capital 224,611 174,905 Retained earnings 95,615 394 Treasury stock, 3,606,400 common shares at cost (117,225) - --------- --------- Total shareowners' equity 215,755 175,299 --------- --------- Total liabilities and shareowners' equity $ 768,493 1,019,667 ========= =========
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 FIELDCREST CANNON, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Retained Earnings Years ended December 31, 1995 and 1996, and periods ended December 18, 1997 and January 3, 1998 (Amounts in thousands, except for per share data)
Predecessor Successor ------------------------------------------ ------------- Year ended December 31, Jan. 1, 1997 Dec. 19, 1997 ------------------------ through through 1995 1996 Dec. 18, 1997 Jan. 3, 1998 ---------- --------- ------------- ------------- Net sales $1,095,193 1,092,496 1,050,121 40,048 Cost of sales 966,642 956,522 900,475 33,422 Selling, general and administrative 108,194 105,405 121,820 3,542 Restructuring charges 20,469 8,130 - - ---------- --------- --------- ------ Total operating costs and expenses 1,095,305 1,070,057 1,022,295 36,964 ---------- --------- --------- ------ Operating income (loss) (112) 22,439 27,826 3,084 ---------- --------- --------- ------ Other deductions (income): Interest expense 27,630 26,869 23,519 2,327 Other, net 67 (5,604) (6,027) - ---------- --------- --------- ------ Total other deductions 27,697 21,265 17,492 2,327 ---------- --------- --------- ------ Income (loss) before income taxes (27,809) 1,174 10,334 757 Federal and state income taxes (benefits) (12,084) 114 3,844 363 ---------- --------- --------- ------ Net income (loss) (15,725) 1,060 6,490 394 Preferred stock dividends (4,500) (4,500) (4,125) - ---------- --------- --------- ------ Earnings (loss) on common $ (20,225) (3,440) 2,365 394 ========== ========= ========= ====== Amount added to (subtracted from) retained earnings (20,225) (3,440) 2,365 394 Retained earnings, beginning 119,280 99,055 95,615 - ---------- --------- --------- ------ Retained earnings, ending $ 99,055 95,615 97,980 394 ========== ========= ========= ====== Basic earnings (loss) per common share $ (2.28) (.38) .26 Diluted earnings (loss) per common share $ (2.28) (.38) .26 Average basic common shares outstanding 8,860 9,018 9,200 ========== ========= ========= Average diluted common shares outstanding 8,860 9,018 9,261 ========== ========= =========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 FIELDCREST CANNON, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1995 and 1996, and periods ended December 18, 1997 and January 3, 1998 (Dollars in thousands)
Predecessor Successor --------------------------------------------- -------------- Year ended December 31, Jan. 1, 1997 Dec. 19, 1997 -------------------------- through through 1995 1996 Dec. 18, 1997 Jan. 3, 1998 ----------- ----------- ------------- -------------- Cash flows from operating activities: Net income (loss) $ (15,725) 1,060 6,490 394 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 31,746 36,678 33,602 1,681 Deferred income taxes (6,779) (1,565) 14,952 1,036 Other 1,597 (3,409) (1,818) - Changes in operating assets and liabilities, excluding effects of acquisition of Sure Fit and sale of Blanket Division inventories: Accounts receivable 10,579 13,601 8,322 (2,330) Inventories 3,125 (10,004) 9,811 389 Other prepaid expenses and current assets 582 957 (569) - Accounts payable and accrued liabilities 4,990 3,083 5,499 (4,009) Federal and state income taxes (2,268) - (11,629) (673) ---------- ---------- --------- --------- Net cash provided by (used in) operating activities 27,847 40,401 64,660 (3,512) ---------- ---------- --------- --------- Cash flows from investing activities: Additions to plant and equipment (64,153) (33,386) (68,954) (2,314) Proceeds from disposal of plant and equipment 1,218 15,483 3,442 - Proceeds from sale of Blanket Division inventories and equipment - 26,189 - - Proceeds from sale of net assets held for sale 23,241 - - 1,700 Purchase of Sure Fit, net of cash acquired (27,300) - - - ---------- ---------- --------- --------- Net cash provided by (used in) investing activities (66,994) 8,286 (65,512) (614) ---------- ---------- --------- --------- Cash flows from financing activities: Increase (decrease) in revolving debt 48,298 (46,816) 18,379 - Proceeds from issuance of other long-term debt - 3,610 - - Payments on long-term debt (1,469) (5,499) (10,917) (841) Borrowings from parent company - - - 4,967 Payment of deferred loan costs - - (2,176) - Proceeds from issuance of common stock 57 41 - - Dividends paid on preferred stock (4,500) (4,500) (4,500) - ---------- ---------- --------- --------- Net cash provided by (used in) financing activities 42,386 (53,164) 786 4,126 ---------- ---------- --------- --------- Net increase (decrease) in cash 3,239 (4,477) (66) - Cash at beginning of period 5,885 9,124 4,647 4,581 --------- ---------- --------- --------- Cash at end of period $ 9,124 4,647 4,581 4,581 ========= ========== ========= ========= Supplemental disclosures of cash flow information is as follows: Interest paid $ 25,471 $ 26,150 $ 24,113 $ 3,121 ========= ========== ========= ========= Income taxes paid (refunded) $ 2,848 $ (5,958) $ 515 $ - ========= ========== ========= =========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 5 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except per share data) (1) GENERAL Fieldcrest Cannon, Inc. and subsidiaries ("the Company") is a North American designer, manufacturer and marketer of home textile products, offering a full line of sheets, towels, bath rugs and other home textile products. Sales are primarily to domestic department stores, mass retailers, specialty stores and large chain stores. Sales to one customer (Wal-Mart and its affiliates) represented 16.6% of net sales in 1995, 21.2% of net sales in 1996, 25.1% of net sales for the period January 1, 1997 through December 18, 1997 and 31.9% of net sales for the period December 19, 1997 through January 3, 1998. On December 19, 1997, the Company and Pillowtex Corporation and subsidiaries ("Pillowtex") entered into a merger agreement. Under the merger agreement, Pillowtex acquired the net assets of the Company for $318,822,000 in cash and issuance of 3,175,181 shares of Pillowtex common stock valued at $89,708,000. Pillowtex assumed Company liabilities of $375,779,000. Following consummation of the merger, the Company became a wholly-owned subsidiary of Pillowtex. At January 3, 1998, the $459,173,000 due to Pillowtex primarily represents the push-down of Pillowtex's incremental borrowings incurred as a result of the acquisition of the Company on December 19, 1997. The amount due to Pillowtex is due on January 3, 2000 and bears interest, payable quarterly, at either the lower of the bank's prime rate plus 1% or the maximum rate of nonusurious interest permitted from day-to-day by applicable law (9% at January 3, 1998). Interest expense in the accompanying consolidated statement of operations for the period from December 19, 1997 to January 3, 1998 includes $1,770,000 on the amount due to Pillowtex. For financial reporting purposes, the years ended December 31, 1995 and 1996, and the period January 1, 1997 to December 18, 1997 are presented on a historical cost basis and are referred to herein as the "Predecessor". The period December 19, 1997 to January 3, 1998 is presented on a purchase accounting basis and is referred to as the "Successor". The acquisition has been accounted for as a purchase transaction in accordance with Accounting Principles Board Opinion No. 16 which requires that the aggregate purchase price (which includes early call premiums on the 11.25% Senior Subordinated Debentures, cost of financial advisor, legal, accounting and other 6 (Continued) FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except per share data) professional fees and qualifying accruals for severance and related costs) be allocated to the assets acquired and liabilities assumed of the Predecessor based upon their respective fair values at the date of acquisition and are reflected in the consolidated financial statements of the Successor under the push-down method of accounting. As a result, the consolidated financial information as of January 3, 1998 and the period from the acquisition date of December 19, 1997 through January 3, 1998 included in the consolidated financial statements and notes thereto, is presented on a different cost basis from that included in Predecessor financial statements and notes thereto and therefore is not comparable. As of January 3, 1998, the estimated fair values assigned to certain assets acquired and liabilities assumed (primarily fixed assets and intangibles) are based upon preliminary estimates, which are subject to change upon completion of an independent valuation. Management does not expect the estimated values to change materially upon completion of the valuation. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Fieldcrest Cannon, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) INVENTORIES For financial reporting, inventories are valued at the lower of cost, determined principally on a last-in, first-out basis ("LIFO"), or market. (c) PROPERTY, PLANT AND EQUIPMENT Depreciation for financial reporting purposes is provided generally using the straight-line method in amounts sufficient to amortize the cost of the assets over their estimated useful lives as follows:
Estimated Useful Life ----------- Buildings and improvements 15-33 years Machinery and equipment 12-15 years Data processing equipment 5 years Furniture and fixtures 5- 8 years
7 (Continued) FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except per share data) (d) INTANGIBLE ASSETS At January 3, 1998, intangible assets consist primarily of goodwill recorded in connection with the Company's acquisition by Pillowtex. Amortization is provided using the straight-line method, all of which is over the estimated useful life of 40 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. (e) DEFERRED CHARGES AND OTHER ASSETS Predecessor deferred charges and other assets consist principally of prepaid pension asset, miscellaneous notes receivable and deferred loan costs. Successor deferred charges and other assets consist principally of miscellaneous notes receivable. For Predecessor financial reporting, deferred loan costs were amortized over the term of the related loans on the effective interest method. (f) INCOME TAXES Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Beginning on December 19, 1997, the Company is included in the consolidated federal tax returns filed by Pillowtex. Current federal income taxes are calculated on a separate return basis and remitted to or from Pillowtex. (g) STOCK OPTION PLANS Prior to fiscal year 1996, the Predecessor accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. Accordingly, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. At the beginning of fiscal year 1996, the Predecessor adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits 8 (Continued) FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except per share data) entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Predecessor has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. All outstanding options were retired as part of the merger with Pillowtex and the Successor has no option plans in existence. (h) REVENUE RECOGNITION Revenue from product sales is recognized at the time ownership of the goods transfers to the customer. Reserves for sales returns and allowances are recorded in the same accounting period as the related revenues. (i) EARNINGS (LOSS) PER SHARE The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, effective January 3, 1998. This statement requires the calculation of basic and diluted earnings per share. Basic earnings per share is computed by dividing the income available for common stockholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share is also computed by dividing income available for common stockholders by the weighted-average number of shares outstanding plus the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. All prior period earnings (loss) per share amounts have been restated to reflect the requirements of this statement. Earnings (loss) per share information for the Successor is not meaningful and therefore is not presented. (j) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make 9 (Continued) FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except per share data) estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, effective for periods beginning after December 15, 1997. The purpose of this standard is to disclose disaggregated information which provides information about the operating segments an enterprises engages is consistent with the way management reviews financial information to make decisions about the enterprise's operating matters. The Company will comply with the requirements of this standard for fiscal year 1998. (l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (m) RECLASSIFICATIONS Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the 1997 presentation. 10 (Continued) FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (3) RESTRUCTURING CHARGES During 1995, the Predecessor relocated its New York sales, marketing and design personnel to Kannapolis, North Carolina, announced the closing of the two yarn mills and sold a warehouse. As a result of these actions, the Predecessor incurred restructuring charges of $20.5 million. The restructuring charges include approximately $15.6 million for severance and termination benefits, voluntary early retirement benefits and lease termination costs; $4.4 million for the write-down of yarn equipment; and $.5 million for termination benefits associated with closing the yarn mills. Substantially all charges were subsequently incurred. In 1996, the Predecessor announced the closing of a towel weaving facility and yarn manufacturing facility and sold certain Blanket Division inventories and equipment which resulted in closing the Blanket facilities in Eden, North Carolina. As a result of these actions, the Predecessor incurred restructuring charges of $8.1 million which included $3.6 million for employee termination benefits, substantially all of which was paid as of December 31, 1996, and the write-down of weaving and yarn equipment associated with closing the towel facilities and $4.5 million for Blanket Division employee termination benefits and the write-down of certain Blanket Division real estate which the Predecessor disposed of during 1997. (4) INVENTORIES Inventories consisted of the following:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Finished goods $ 104,092 113,491 Work-in-progress 68,668 81,752 Raw materials and supplies 43,405 27,048 ---------- ------- Total $ 216,165 222,291 ========== =======
Approximately 69% of Predecessor's inventories were valued on the LIFO method. If the FIFO method of accounting had been used, inventories would have been greater by approximately $45,000,000 at December 31, 1996. In 1996, reduction in LIFO inventory quantities had the effect of increasing net income by approximately $600,000. At January 3, 1998, approximately 65% of inventories were valued on the LIFO method. Successor's inventory values were adjusted to fair market value as of (Continued) 11 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) December 19, 1997. Accordingly, LIFO inventory values as of January 3, 1998 approximate FIFO inventory values. (5) PLANT AND EQUIPMENT Plant and equipment is stated at cost and consisted of the following:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Land $ 2,794 7,113 Buildings 207,909 120,542 Equipment 383,118 215,156 Plant additions in progress 16,467 48,178 ---------- ------- Total 610,288 390,989 Accumulated depreciation (286,450) (1,417) ---------- ------- Net plant and equipment $ 323,838 389,572 ========== =======
Successor costs have been established based upon internal estimates and will be finalized as independent valuations are obtained. (6) ACCRUED LIABILITIES Accrued liabilities consisted of the following:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Salaries and other compensation $ 10,630 29,545 Pension, medical and other employee benefit plans 15,672 10,454 Advertising expense 3,579 3,700 Interest expense 3,629 2,026 Other 27,662 34,062 --------- ------- Total $ 61,172 79,787 ========= =======
(Continued) 12 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (7) DEBT Long-term debt consisted of the following:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Senior long-term debt: Revolving long-term debt $ 95,706 - Industrial development bonds, due 2021 10,000 10,000 Industrial revenue bonds, due in installments through 2002 2,740 2,040 --------- ------- Total senior long-term debt 108,446 12,040 Less current portion 700 720 --------- ------- Net senior long-term debt 107,746 11,320 --------- ------- Subordinated long-term debt: 6% convertible subordinated sinking fund debentures due 1999 to 2012 123,558 95,126 11.25% senior subordinated debentures due 2002 to 2004 85,000 - --------- ------- Total subordinated long-term debt 208,558 95,126 Less current portion 4,808 - --------- ------- Net subordinated long-term debt 203,750 95,126 --------- ------- Total long-term debt $ 311,496 106,446 ========= =======
The $10 million Industrial Development Bonds are collateralized by a standby letter of credit issued by Pillowtex and bear interest at a variable rate which approximates the LIBOR interbank rate (5.95% at January 3, 1998). The 6% Convertible Subordinated Sinking Fund Debentures were convertible into shares of the Predecessor Company Common Stock at a conversion price of $44.25 per share. Effective December 19, 1997, the Company's Convertible Subordinated Debentures became convertible into $610.20 of cash and 6.08 shares of Pillowtex Corporation Common Stock for each $1,000 of aggregate principal amount. The carrying value of the 6% Convertible Subordinated Sinking Fund Debentures was adjusted to fair market value as of December 19, 1997, and a $17.4 million discount is being amortized by the Successor to interest expense over the remaining life of the debentures on the effective interest method. (Continued) 13 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) At January 3, 1998, the carrying value of the Company's debt approximated its fair market value. The fair value of the Convertible Subordinated Debentures was based on quoted market prices. Pillowtex's senior revolving credit and term loan facilities are guaranteed by each of the domestic subsidiaries of Pillowtex including the Company, and are secured by first priority liens on all of the capital stock of each domestic subsidiary of Pillowtex and by 65% of the capital stock of Pillowtex's foreign subsidiaries. Pillowtex has also granted a first priority security interest in all of its presently unencumbered and future domestic assets and properties and all presently unencumbered and future domestic assets and properties of each of its subsidiaries. The term loan facility is subject to mandatory prepayment from all net cash proceeds of asset sales and debt issuances of Pillowtex (except as specifically provided), 50% of the net cash proceeds of equity issuances by Pillowtex or any of its subsidiaries, and 75% of Excess Cash Flow (as defined). The aggregate principal and sinking fund payments required to be made on long-term debt during each of the five years subsequent to January 3, 1998 and thereafter are:
Year Ending Amount ----------- ------ 1998 $ 720 1999 5,090 2000 5,090 2001 5,165 2002 5,000 Thereafter 86,101
In connection with the acquisition of the Successor by Pillowtex as discussed in Note 1, the revolving credit facility and the 11.25% Senior Subordinated Debentures were repaid. (Continued) 14 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (8) LEASE OBLIGATIONS The Company leases certain real estate and equipment under various operating leases. Listed below are the future minimum rental payments required under these operating leases with noncancelable terms in excess of one year at January 3, 1998.
Real Estate Equipment Total ------ --------- ----- 1998 $ 3,752 8,662 12,414 1999 3,017 8,313 11,330 2000 2,240 7,833 10,073 2001 2,140 6,300 8,440 2002 1,881 4,520 6,401 Subsequent years 7,994 9,946 17,940 --------- ------ ------ Net minimum lease payments $ 21,024 45,574 66,598 ========= ====== ======
Total rental expense for all operating leases was $22,000,000 for 1995, $20,600,000 for 1996, $15,600,000 for the period January 1, 1997 through December 18, 1997, and $700,000 for the period December 19, 1997 through January 3, 1998. (9) SHAREOWNERS' EQUITY In connection with the acquisition of the Predecessor by Pillowtex, 1,500,000 shares of $3.00 Series A Convertible Preferred Stock with annual dividends of $3.00 and 12,850,520 shares of $1 par value common stock were purchased and retired. In addition, the Successor's capital of 100 shares of common stock with a $.01 par value are wholly-owned by Pillowtex. The Successor's additional paid-in capital of $174,905,000 represents Pillowtex's capitalization of the Company on the date of acquisition. The Predecessor had an Employee Stock Option Plan under which incentive or nonqualified stock options were granted at not less than the fair market value of the Common Stock at the time of grant. Options generally were exercisable in four equal annual installments commencing one year from the date of grant and expired ten years from such date. For the years ended December 31, 1995 and 1996 and the period from January 1, 1997 to December 18, 1997, respectively, options to purchase 400,400, 37,500 and 17,600 shares of Common Stock were awarded at a weighted-average exercise price of $22.17, $18.75 and $16.25, respectively. All outstanding options were retired as part of the Merger with Pillowtex and the successor has no option plans in existence. (Continued) 15 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The Predecessor had a Director Stock Option Plan under which an annual grant of an option to purchase 2,000 shares of Common Stock was awarded to each non-employee Director on the fifth business day after the annual meeting of the shareowners at the fair market value of the Company's Common Stock on the grant date. Options vested when awarded and expired seven years from the grant date, but no option could be exercised during the six month period following its grant except in the case of death or disability. For the years ended December 31, 1995 and 1996 and the period from January 1, 1997 to December 18, 1997, respectively, options to purchase 16,000, 14,000 and 14,000 shares of Common Stock were awarded at a weighted-average exercise price of $22.125, $20.625 and $17.25, respectively. The Predecessor accounted for these plans in accordance with APB Opinion 25. Because the exercise price of the stock options is not less than the market price of the underlying stock on the date of grant, no compensation expense was recognized. Had compensation costs for the Predecessor's two Plans been determined based on the fair value at the grant dates for awards under those Plans consistent with the method of FASB Statement 123, the Predecessor's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
Jan. 1, 1997 to 1995 1996 Dec. 18, 1997 ---- ---- ------------- Net income (loss): As reported $ (15,725) 1,060 6,490 Pro forma (16,553) 6 5,513 Basic and diluted earnings (loss) per share: As reported (2.28) (.38) .26 Pro forma (2.37) (.50) .15
Pro forma net income (loss) and basic and diluted earnings (loss) per share reflect only options granted since December 31, 1994. Therefore, the full impact of calculating the Employee Stock Option Plan's compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) and basic and diluted earnings (loss) per share amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. (Continued) 16 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The following schedule summarizes the Predecessor's stock option plan activity through December 18, 1997:
Number of Weighted Average Shares Exercise Price --------- ---------------- Outstanding January 1, 1995 30,000 $ 18.70 Awarded 416,400 22.17 Exercised (4,000) 14.16 Canceled (9,800) 22.67 -------- Outstanding January 1, 1996 432,600 22.16 Awarded 51,500 19.26 Exercised (2,000) 20.63 Canceled (36,175) 22.36 -------- Outstanding December 31, 1996 445,925 21.74 Awarded 31,600 16.69 Canceled (62,225) 22.38 -------- Outstanding December 18, 1997 415,300 21.17 ========
Options exercisable were 149,750 at December 31, 1996 and 219,975 at December 18, 1997 and the weighted average exercise price of those options was $21.57 and $21.25, respectively. The per share weighted-average fair value of stock options granted during 1995 was $12.43, during 1996 was $9.12 and during the period January 1, 1997 to December 18, 1997 was $8.12. The Black-Scholes option pricing method was used to calculate the fair value of each option based on the following assumptions for 1995, 1996 and the period from January 1, 1997 to December 18, 1997, respectively; risk-free interest rates 6.8%, 6.0% and 6.0%; no dividend yield for any period; expected lives for all periods of 6 years; and volatility of 48%, 40% and 40%. As of December 18, 1997, the 415,300 options outstanding under the Plans had exercise prices between $13.00 and $25.63 and a weighted-average remaining contractual life of 6.8 years. On September 11, 1991, the Board of Directors approved the grant of a nonqualified stock option to purchase 20,000 shares of Common Stock to the Company's chief executive officer. The per share exercise price is $14.875, the quoted market value on that date. This option became exercisable on January 1, 1992, and expires on September 10, 1998. (Continued) 17 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The Predecessor had a Long-Term Incentive Plan ("the Plan") under which senior executives may be awarded shares of Common Stock without cost to the employee. The quoted market value of the shares at the date of award is accounted for as deferred compensation and is amortized over the restricted period. Awards under the Plan are vested after the employee completes four years of continuous employment beginning with the year for which the award is made or upon a change of control of the Company. The following is an analysis of shares of restricted stock under the Long- Term Incentive Plan:
Jan. 1, 1997 to 1995 1996 Dec. 18, 1997 ---- ---- ------------- Number of shares: Outstanding at beginning of period 151,111 141,146 84,875 Awarded 70,000 - 15,000 Canceled (5,460) (4,241) (3,434) Issued (74,505) (52,030) (41,693) ------- ------- ------- Outstanding at end of period 141,146 84,875 54,748 ------- ------- ------- Available for grant at end of period 190,008 194,249 182,683 ======= ======= ======= Quoted market value on date of grant for shares granted during the period $ 22.00 - 16.25 ======= ======= =======
(Continued) 18 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) Transactions with respect to Common Stock and additional paid in capital of the Predecessor during the years ended December 31, 1995 and 1996 and the period January 1, 1997 to December 18, 1997 were as follows:
Additional Common Stock Paid-in Shares Amount Capital Amount ------ ------ -------------- Balance December 31, 1994 12,360,252 $ 12,360 216,772 Shares issued to employee savings plans 132,034 132 2,563 Restricted shares awarded 70,000 70 (70) Restricted shares canceled (5,460) (5) 5 Earned compensation, restricted stock - - 1,684 Director stock options exercised 4,000 4 71 ---------- --------- ------- Balance December 31, 1995 12,560,826 12,561 221,025 Shares issued to employee savings plans 180,309 180 2,959 Restricted shares canceled (4,241) (4) (104) Earned compensation, restricted stock - - 692 Director stock options exercised 2,000 2 39 ---------- --------- ------- Balance December 31, 1996 12,738,894 12,739 224,611 Shares issued to employee savings plans 99,542 100 1,946 Restricted shares awarded 15,000 15 229 Restricted shares canceled (3,434) (4) (72) Earned compensation, restricted stock - - 243 Shares issued upon conversion of debentures 518 1 23 ---------- --------- ------- Balance December 18, 1997 12,850,520 $ 12,851 226,980 ========== ========= =======
Total shares of Common Stock outstanding as of December 18, 1997 are reduced to 9,244,120 shares by 3,606,400 shares of treasury stock acquired with the acquisition of Amoskeag. The $117,225,000 cost of the treasury stock reduces total shareowners' equity. (Continued) 19 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) There were no Common Stock transactions during the period December 19, 1997 to January 3, 1998. (10) EMPLOYEE PENSION AND SAVINGS PLAN The Company has trusteed pension plans covering substantially all employees. The plans provide pension benefits that are based on the employees' compensation and service. The Company's policy is to fund amounts required by applicable regulations. Pension expense amounted to $8,193,000 in 1995, $5,565,000 in 1996, $2,353,000 for the period January 1, 1997 to December 18, 1997, and $103,000 for the period December 19, 1997 to January 3, 1998. Net pension expense consisted of the following components:
Predecessor Successor ------------------------------------ ------------- Year Ended December 31, Jan. 1, 1997 Dec. 19, 1997 --------------------- through through 1995 1996 Dec. 18, 1997 Jan. 3, 1998 ---- ---- ------------- ------------- Service cost (benefits earned during the period) $ 6,530 8,103 6,626 288 Interest cost on projected benefit obligation 17,572 19,034 19,064 829 Actual return on assets (52,465) (33,209) (36,811) (1,600) Net amortization and deferral 34,197 11,637 13,474 586 Special termination benefits 2,359 - - - -------- ------- ------- ------ Net pension cost $ 8,193 5,565 2,353 103 ======== ======= ======= ======
The Predecessor recognized special termination benefits from a voluntary early retirement program in 1995. (Continued) 20 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The table below sets forth the plans' funded status:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Projected benefit obligation: Vested benefits $ 250,242 284,152 Non-vested benefits 7,075 6,853 ---------- ------- Accumulated benefit obligation 257,317 291,005 Additional amounts related to projected compensation levels 7,507 6,741 ---------- ------- Total projected benefit obligation 264,824 297,746 Plan assets at fair value, primarily publicly traded stocks and bonds 278,376 299,480 ---------- ------- Plan assets over projected benefit obligation 13,552 1,734 Unrecognized net loss 15,442 - Unrecognized net transition assets (534) - Unrecognized prior service cost 2,141 - ---------- ------- Net pension asset recognized in the Consolidated Balance Sheets $ 30,601 1,734 ========== =======
Assumptions used in determining the funded status of the pension plans were as follows:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Discount rate 7.75% 7.0% Increase in compensation levels 4.5 % 4.5% Expected long-term rate of return on assets 9.0 % 9.0%
The Company also sponsors employee savings plans which cover substantially all employees. The Company provides a match of 70% of employee contributions up to 2% of compensation and a match of 20% of employee contributions for the next 2% of compensation. The matching formula may be changed yearly at the discretion of the Company. Prior to October 1, 1997, the match was contributed quarterly in Common Stock of the Company. The match from October 1, 1997 to January 3, 1998 was paid in cash. Expense of the Company match was $2,700,000 in 1995, $3,100,000 in 1996, $2,700,000 for the period January 1, 1997 to (Continued) 21 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) December 18, 1997 and $100,000 for the period December 19, 1997 to January 3, 1998. (11) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides medical insurance premium assistance and life insurance benefits to retired employees. The medical premium assistance payments are at a fixed dollar amount based on the retiree's years of service. Essentially all of the Company's employees become eligible for these benefits when they reach retirement age while working for the Company. The Company's policy is to fund the plans as benefits are paid. The table below sets forth the plans' combined status:
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Accumulated postretirement benefit obligation: Retirees $ 26,089 26,724 Fully eligible active participants 7,441 7,688 Other active participants 4,802 4,936 --------- ------ Total 38,332 39,348 Unrecognized net gain 225 - --------- ------ Accrued postretirement benefit cost recognized in the Consolidated Balance Sheets $ 38,557 39,348 ========= ======
The discount rate used in determining the accumulated postretirement benefit obligation was 7.75% as of December 31, 1996 and 7.0% as of January 3, 1998. Medical premium assistance payments are at a fixed dollar amount based on the retiree's years of service and, therefore, the plan is not affected by a health care cost trend rate assumption. (Continued) 22 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) Net periodic postretirement benefit cost included the following components:
Predecessor Successor ------------------------------------ ------------- Year Ended December 31, Jan. 1, 1997 Dec. 19, 1997 --------------------- through through 1995 1996 Dec. 18, 1997 Jan. 3, 1998 ---- ---- ------------- ------------- Service cost (benefits earned during the period) $ 818 903 793 35 Interest cost on projected benefit obligation 2,945 2,748 2,628 114 Net amortization and deferral (171) 109 - - ------ ----- ----- --- Net periodic postretirement benefit cost $3,592 3,760 3,421 149 ====== ===== ===== ===
(12) INCOME TAXES The components of income tax expense (benefit) are as follows:
Predecessor Successor ------------------------------------ ------------- Year Ended December 31, Jan. 1, 1997 Dec. 19, 1997 --------------------- through through 1995 1996 Dec. 18, 1997 Jan. 3, 1998 ---- ---- ------------- ------------- U.S. Federal - current $ (5,611) (1,582) (11,327) (591) U.S. Federal - deferred (3,977) 2,055 14,870 910 State and foreign taxes - current 306 131 219 (82) State and foreign taxes - deferred (2,802) (490) 82 126 -------- ----- ------ ---- $(12,084) 114 3,844 363 ======== ====== ====== ====
(Continued) 23 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) A reconciliation of income tax expense (benefit) computed using the U.S. Federal statutory income tax rate of 35% of earnings (loss) before income taxes to the actual provision (benefit) for income taxes follows:
Predecessor Successor ------------------------------------ ------------- Year Ended December 31, Jan. 1, 1997 Dec. 19, 1997 --------------------- through through 1995 1996 Dec. 18, 1997 Jan. 3, 1998 ---- ---- ------------- ------------- Expected tax at U.S. statutory rate $ (9,733) 411 3,617 265 State and foreign taxes, net of federal benefit (1,623) (233) 196 28 Foreign sales corporation benefit - - (159) (7) Equity in earnings in foreign subsidiary - - 78 - Nondeductible goodwill - - - 70 Nondeductible meals and entertainment expenses - - 151 7 Tax credits (543) (36) (46) - Other (185) (28) 7 - -------- ---- ----- --- $(12,084) 114 3,844 363 ======== ==== ===== ===
(Continued) 24 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities.
Predecessor Successor Dec. 31, 1996 Jan. 3, 1998 ------------- ------------ Net deferred tax assets: Accruals and allowances $ 16,264 16,392 Operating loss and credit carryforwards 4,973 6,657 Other - 80 --------- ------ Current deferred tax asset 21,237 23,129 --------- ------ Accrued employee benefits 5,400 1,347 Accruals and allowances 1,123 6,005 Other 7,760 6,295 --------- ------ Noncurrent deferred tax asset 14,283 13,647 --------- ------ Net deferred tax liabilities: Depreciable assets (576) (313) Inventory costs and reserves (36,882) (44,734) Other (1,991) (211) --------- ------ Current deferred tax liabilities (39,449) (45,258) --------- ------ Noncurrent deferred tax liability - depreciable assets (52,574) (70,169) --------- ------ Net deferred tax liability $ (56,503) (78,651) ========= =======
(Continued) 25 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data) (13) EARNINGS (LOSS) PER SHARE The following table reconciles the numerators and denominators of the basic and diluted per share computations for the years ended December 31, 1995 and 1996 and the period ended December 18, 1997:
Loss Shares Per-share Year ended December 31, 1995: (numerator) (denominator) amount ----------------------------- ----------- ------------- --------- Loss before preferred dividends $ (15,725) Less: preferred dividends (4,500) ---------- Basic EPS: Loss available for common shareholders (20,225) 8,860 $ (2.28) ======= Effect of dilutive securities - - ---------- ----- Diluted EPS: Loss available for common shareholders plus assumed conversions $ (20,225) 8,860 $ (2.28) ========== ===== =======
Income (loss) Shares Per-share Year ended December 31, 1996: (numerator) (denominator) amount ----------------------------- ------------- ------------- --------- Income before preferred dividends $ 1,060 Less: preferred dividends (4,500) -------- Basic EPS: Loss available for common shareholders (3,440) 9,018 $ (0.38) ======= Effect of dilutive securities - - -------- ---- Diluted EPS: Loss available for common shareholders plus assumed conversions $ (3,440) 9,018 $ (0.38) ======== ===== =======
(Continued) 26 FIELDCREST CANNON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tables in thousands of dollars, except for per share data)
Income Shares Per-share Year ended December 31, 1997: (numerator) (denominator) amount ----------------------------- ----------- ------------- --------- Income before preferred dividends $ 6,490 Less: preferred dividends (4,125) -------- Basic EPS: Income available for common shareholders 2,365 9,200 $ 0.26 ====== Effect of dilutive securities: Stock options - 61 -------- ----- Diluted EPS: Income available for common shareholders plus assumed conversions $ 2,365 9,261 $ 0.26 ======== ===== ======
(14) QUARTERLY DATA (UNAUDITED) The table below sets forth the Company's quarterly information for 1996, the period from January 1, 1997 to December 18, 1997 and the period from December 19, 1997 to January 3, 1998:
Predecessor Successor ---------------------------------------------- ------------- 1996 quarter end March 31 June 30 Sept. 30 Dec. 31 ---------------- ---------- ------- -------- ------- Net sales $ 250,000 277,800 285,200 279,500 Gross profit 34,900 36,000 35,700 29,400 Operating income 6,100 11,000 2,900 2,400 Net income (loss) (700) 2,100 (2,700) 2,400 Basic earnings (loss) per share (.20) .11 (.43) .13 Diluted earnings (loss) per share (.20) .11 (.43) .13
Oct. 1 to Dec. 19 to 1997 Periods March 31 June 30 Sept. 30 Dec. 18 Jan. 3 ------------ ---------- ------- -------- --------- ---------- Net sales $ 262,900 270,800 287,000 229,500 40,000 Gross profit 35,800 45,400 43,900 24,600 6,600 Operating income (loss) 9,200 15,700 14,500 (11,600) 3,100 Net income (loss) 2,000 6,800 5,800 (8,100) 400 Basic earnings (loss) per share .10 .62 .51 (.97) Diluted earnings (loss) per share .10 .55 .47 (.97)
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