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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): DECEMBER 19, 1997
FIELDCREST CANNON, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-5137 56-0586036
(State of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
ONE LAKE DRIVE, KANNAPOLIS, NORTH CAROLINA 28081
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (704) 939-2000
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ITEM 1. CHANGE IN CONTROL OF REGISTRANT
Fieldcrest Cannon, Inc. ("Fieldcrest") is the surviving corporation in the
merger described in Item 2 below. The information set forth in Item 2 below is
incorporated herein by this reference.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
GENERAL
On December 19, 1997, a wholly owned subsidiary ("Newco") of Pillowtex
Corporation ("Pillowtex") merged with and into Fieldcrest pursuant to an
Agreement and Plan of Merger, dated as of September 10, 1997 (the "Merger
Agreement"), among Pillowtex, Newco, and Fieldcrest. At the effective time (the
"Effective Time") of such merger (the "Merger"), among other things, on the
terms set forth in the Merger Agreement (i) each then-outstanding share of
Common Stock, par value $1.00 per share, of Fieldcrest ("Fieldcrest Common
Stock") was converted into the right to receive total consideration consisting
of (a) a cash payment in an amount equal to $27.00 and (b) 0.269 shares of
Common Stock, par value $0.01 per share, of Pillowtex ("Pillowtex Common
Stock"), (ii) each then-outstanding share of $3.00 Series A Convertible
Preferred Stock, par value $0.01 per share, of Fieldcrest was converted into
the right to receive total consideration consisting of (a) a cash payment in an
amount equal to $46.15 and (b) 0.4598286 shares of Pillowtex Common Stock, and
(iii) each then-outstanding share of Common Stock, par value $0.01 per share,
of Newco was converted into one share of Common Stock, par value $0.01 per
share, of Fieldcrest (as the surviving corporation in the Merger). Immediately
following the Merger, Pillowtex owned 100% of the outstanding capital stock of
Fieldcrest.
MERGER FINANCING
INTRODUCTION
Pillowtex financed the Merger and, simultaneously with the closing of the
Merger, refinanced certain indebtedness of Pillowtex and Fieldcrest through a
combination of (i) borrowings under new senior revolving credit and term loan
facilities (the "New Pillowtex Bank Facilities"), (ii) the issuance and sale of
shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per
share, of Pillowtex (the "Pillowtex Preferred Stock"), and (iii) the issuance
and sale of new senior subordinated debt securities (the "New Pillowtex Senior
Subordinated Notes").
NEW PILLOWTEX BANK FACILITIES
The New Pillowtex Bank Facilities consist of (i) a $350.0 million revolving
credit facility (including $55.0 million for standby and commercial letters of
credit and up to $25.0 million for swing line loans) (the "Revolver") and (ii) a
$250.0 million term loan facility (the "Term Loan"). The Term Loan consists of a
$125.0 million Facility A Term Loan and a $125.0 million Facility B Term Loan.
The Revolver will terminate on December 31, 2003. The Facility A Term Loan and
the Facility B Term Loan will begin scheduled amortization of principal
quarterly in arrears commencing in 1999 and 1998, respectively, with final
maturities on December 31, 2003 and December 31, 2004, respectively.
Simultaneously with the closing of the Merger, Pillowtex drew fully on the Term
Loan and drew approximately $129.9 million of the Revolver. Pillowtex will
initially pay quarterly a commitment fee of 50 basis points per annum calculated
on the unused portion of the Revolver. The commitment fee could, however, be
reduced during future periods depending upon the ratio of Pillowtex's
consolidated indebtedness to earnings before interest, taxes, depreciation, and
amortization ("EBITDA").
The Revolver and the Facility A Term Loan bear interest, at the option of
Pillowtex, at a rate per annum equal to either (i) the LIBOR interbank rate,
adjusted for reserves, plus a margin of up to 225 basis points, or (ii) the
"Base Rate" (which is the higher of (a) the prime rate then in effect and
published by NationsBank of Texas, N.A. and (b) the Federal Funds rate plus
0.5%), plus a margin of up to 75 basis points, subject to adjustments in
accordance with the terms of the New Pillowtex Bank Facilities. The specific
margin in any particular case will depend upon the ratio of Pillowtex's
consolidated indebtedness to EBITDA, as calculated based upon Pillowtex's
quarterly financial statements.
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The Facility B Term Loan bears interest on a similar basis, plus an additional
margin of 50 basis points, but will not bear interest at a rate less than the
LIBOR interbank rate plus 200 basis points or the Base Rate plus 50 basis
points. The initial interest rates will not be less than (i) the LIBOR
interbank rate plus 200 basis points or the Base Rate plus 50 basis points for
the Revolver and the Facility A Term Loan and (ii) the LIBOR interbank rate plus
250 basis points or the Base Rate plus 100 basis points for the Facility B Term
Loan, and will not be subject to any change until the receipt of Pillowtex's
March 31, 1998 financial statements.
The Revolver and the Term Loan are guaranteed by each of the domestic
subsidiaries of Pillowtex, including Fieldcrest and its domestic subsidiaries,
and is secured by first priority liens on all of the capital stock of each
domestic subsidiary of Pillowtex, including Fieldcrest and its domestic
subsidiaries, and by 65% of the capital stock of each foreign subsidiary of
Pillowtex and Fieldcrest. 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, including Fieldcrest and its
subsidiaries. The Term Loan is subject to mandatory prepayment from all net cash
proceeds of asset sales (other than sales of assets that are unnecessary to the
business operations of Pillowtex or its subsidiaries, so long as the net
proceeds therefrom are reinvested in productive tangible assets) and debt
issuances by Pillowtex or any of its subsidiaries after the Merger, 50% of the
net cash proceeds of equity issuances by Pillowtex or any of its subsidiaries
after the Merger, and 75% of excess cash flow. All mandatory prepayments will be
applied pro rata between the Facility A Term Loan and the Facility B Term Loan
(and within each facility pro rata) to reduce the remaining installments of
principal.
The documentation governing the New Pillowtex Bank Facilities includes
representations, warranties, and covenants (including financial covenants) that
are usual and customary for credit facilities such as the New Pillowtex Bank
Facilities, and the New Pillowtex Bank Facilities are subject to usual and
customary events of default, including without limitation nonpayment of
principal, interest, or fees, violation of any covenant, inaccurate
representations and warranties, bankruptcy, actual or asserted invalidity of
any loan documents or security interests, change of control, and cross-default
with other material agreements and indebtedness of Pillowtex.
PILLOWTEX PREFERRED STOCK
Introduction. Pursuant to a Preferred Stock Purchase Agreement with Apollo
Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK)
Partners III, L.P. (collectively "Apollo"), contemporaneously with the closing
of the Merger Pillowtex issued to Apollo 65,000 shares of Pillowtex Preferred
Stock having an aggregate liquidation preference of $65.0 million.
Liquidation Preference; Ranking. Each share of Pillowtex Preferred Stock
will have a liquidation preference of $1,000, plus accrued and unpaid dividends
(the "Liquidation Preference"). The Pillowtex Preferred Stock will rank senior
in right of payment to all common equity stock and all other classes of
preferred stock of Pillowtex (other than parity securities), but will rank
junior in right of payment to all indebtedness of Pillowtex. The terms of the
Pillowtex Preferred Stock will restrict, among other things, Pillowtex's
ability to pay dividends or make certain other restricted payments on the
Pillowtex Common Stock.
Dividends. Subject to the provisions described below, dividends will
accrue on the Pillowtex Preferred Stock from the issue date through and
including December 31, 1999 at a rate per annum equal to 3.0%. However,
Pillowtex may at its option pay dividends in cash during each quarterly period
during calendar years 1998 and 1999 at a rate in excess of 3.0%. Beginning
January 1, 2000, dividends will accrue on the Pillowtex Preferred Stock at the
Applicable Dividend Rate, which is defined as 3.0%, 7.0% or 10.0% depending
upon Pillowtex's 1999 Pro Forma EPS as set forth in the following table:
<TABLE>
<CAPTION>
APPLICABLE DIVIDEND
RATE AT
1999 PRO FORMA EPS JANUARY 1, 2000
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<S> <C>
$2.70 or greater 3.0% per annum
$2.35 to $2.69 7.0% per annum
$2.34 or less 10.0% per annum
</TABLE>
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The term "1999 Pro Forma EPS" is defined as Pillowtex's diluted earnings
per share as included in its audited financial statements for the fiscal year
ending January 1, 2000, as adjusted to exclude the after-tax effect of (i) any
change in generally accepted accounting principles from September 5, 1997,
other than the effects of Financial Accounting Standards Board Statement No.
128, (ii) extraordinary gains or losses, and (iii) gain on sale of assets
having a fair market value in excess of $1.0 million ("1999 EPS"), calculated
on a pro forma basis assuming (a) the dividend rate on the Pillowtex Preferred
Stock for calendar 1997 and calendar 1998 was (1) 3.0% per annum if 1999 EPS is
equal to or greater than $2.35 or (2) 10.0% per annum if 1999 EPS is less than
$2.35; (b) the dividend rate on the Pillowtex Preferred Stock for calendar 1999
was (1) 3.0% per annum if 1999 EPS is greater than or equal to $2.70, (2) 7.0%
per annum if 1999 EPS is greater than or equal to $2.35 but less than $2.70,
and (3) 10.0% per annum if 1999 EPS is less than $2.35; and (c) any incremental
dividends included pursuant to clauses (a) and (b) which were not paid when due
(either in cash or in shares of Pillowtex Preferred Stock) were paid in
additional shares of Pillowtex Preferred Stock (including the effect of all
dividends earned on unpaid dividends).
In addition to paying dividends from and after January 1, 2000 at the
Applicable Dividend Rate, Pillowtex is required to pay a one-time dividend (a
"Catch Up Dividend") in shares of Pillowtex Preferred Stock in 1999 equal to
the difference between the aggregate amount of dividends paid (whether in cash
or additional shares of Pillowtex Preferred Stock) (the "Aggregate Dividends
Paid") and the aggregate amount of dividends that would have been paid on the
Pillowtex Preferred Stock from the issue date through and including the last
Dividend Payment Date prior to the date on which Pillowtex finally determines
the amount of 1999 Pro Forma EPS ("Aggregate Dividends Owed") assuming (i) the
dividend rate for calendar 1997 and calendar 1998 was (a) 3.0% per annum if
1999 Pro Forma EPS is equal to or greater than $2.35 or (b) 10.0% per annum if
1999 Pro Forma EPS is less than $2.35, (ii) the dividend rate for calendar 1999
was the Applicable Dividend Rate, and (iii) any incremental dividends included
in calculating dividends described in clauses (i) and (ii) which were not paid
when due (either in cash or in shares of Pillowtex Preferred Stock) were paid
in additional shares of Pillowtex Preferred Stock (including the effect of all
dividends earned on unpaid dividends). If the Aggregate Dividends Paid is more
than the Aggregate Dividends Owed, then no Catch Up Dividend will be payable
and an amount equal to the difference between Aggregate Dividends Paid and
Aggregate Dividends Owed will be offset against dividends payable on the next
succeeding Dividend Payment Date or Dividend Payment Dates, as the case may be.
All dividends will be cumulative, whether or not declared, on a daily
basis from the date of issuance and will be payable quarterly, in arrears, on
March 31, June 30, September 30, and December 31 (each a "Dividend Payment
Date"). Dividends (in the form of additional dividends due) will compound
quarterly on all unpaid dividends from the Dividend Payment Date with respect
thereto until the date of payment. At the option of Pillowtex, dividends other
than the Catch Up Dividend will be payable either in cash or in kind (through
the issuance of additional shares of Pillowtex Preferred Stock) for the first
five years after issuance and will be payable only in cash thereafter.
In the event that after the fifth anniversary of the initial issuance of
the Pillowtex Preferred Stock, Pillowtex fails to pay dividends in cash on the
Dividend Payment Date when due, the dividend rate applicable to any period in
which any such dividends remain unpaid will be increased by 0.5% per quarter
for each quarter in which any such dividends remain unpaid (such rate increase,
the "Dividend Increase"). The applicable dividend rate plus the Dividend
Increase applicable to any period will not exceed the lesser of (i) 18.0% per
annum and (ii) the maximum rate permitted by applicable law. After a Dividend
Increase, when Pillowtex pays all accrued and unpaid dividends, and upon the
payment of dividends on the next Dividend Payment Date at the rate in effect
prior to giving effect to any Dividend Increase, the annual dividend rate will
be decreased to the otherwise applicable dividend rate.
Conversion. At the option of the holders thereof, at any time or from time
to time each share of the Pillowtex Preferred Stock will be convertible into
the number of shares of Pillowtex Common Stock as is determined by dividing (i)
the sum of (a) $1,000 and (b) any unpaid dividends on such share by (ii) an
initial conversion price equal to $24.00 per share, subject to subsequent
adjustment in certain circumstances to prevent dilution.
Mandatory Redemption. Each share of Pillowtex Preferred Stock will be
subject to mandatory redemption on June 30, 2008 (the "Mandatory Redemption
Date") at a redemption price equal to $1,000, plus accrued and unpaid
dividends.
Optional Redemption. Pillowtex will have the right to, at any time and
from time to time after the fourth anniversary of the initial issuance of the
Pillowtex Preferred Stock, call all or any portion of the Pillowtex Preferred
Stock for redemption at a redemption price equal to (i) the Liquidation
Preference plus (ii) the product of (a) a
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premium, which declines ratably from the percentage equal to the applicable
dividend rate on such fourth anniversary to zero on the Mandatory Redemption
Date, and (b) the Liquidation Preference (minus any accrued and unpaid
dividends from the Dividend Payment Date prior to the date fixed for
redemption).
Voting Rights. Except as described below and as otherwise required by law,
holders of Pillowtex Preferred Stock are not entitled to any vote on matters
presented to shareholders of Pillowtex.
So long as any shares of the Pillowtex Preferred Stock are outstanding,
Pillowtex may not (i) amend the Pillowtex Articles of Incorporation (the
"Pillowtex Articles") so as to (a) affect adversely the specified rights,
preferences, privileges, or voting rights of holders of shares of Pillowtex
Preferred Stock or (b) authorize the issuance of additional shares of any class
of senior securities or (ii) merge, consolidate, or enter into any other
reclassification that would (a) materially affect adversely the special or
relative rights, preferences, privileges, or voting rights of the Pillowtex
Preferred Stock or (b) result in a breach of the terms of the Pillowtex
Preferred Stock without, in any such case, the affirmative vote or consent of
holders of more than 50% of the outstanding shares of the Pillowtex Preferred
Stock. In addition, any amendment to the Pillowtex Articles that would alter in
any material respect the dividend rates, liquidation preference, redemption
rights, or conversion rights of the Pillowtex Preferred Stock will require the
affirmative vote or consent of each holder of Pillowtex Preferred Stock.
In the event of Pillowtex's failure to pay dividends or the occurrence of
certain breaches that shall have continued for a period of 60 days after notice
thereof from any holder of Pillowtex Preferred Stock, within ten business days
of such events, the number of members on the Pillowtex Board of Directors would
be automatically increased by 25% and the holders of the Pillowtex Preferred
Stock would be entitled to elect directors to fill the new positions created by
such expansion, so long as such nonpayment of dividends and breaches were not
cured after notice thereof, except that if the event of default related to (i)
the failure to redeem the Pillowtex Preferred Stock, (ii) a breach of certain
restrictions on Pillowtex's activities, or (iii) a bankruptcy event with
respect to Pillowtex or any of its subsidiaries, there would be no 60-day grace
period or right to cure and the holders' right to so elect directors would
continue for as long as the Pillowtex Preferred Stock were outstanding.
NEW PILLOWTEX SENIOR SUBORDINATED NOTES
Prior to the closing of the Merger, Pillowtex issued and sold $185.0
million aggregate principal amount of its New Pillowtex Senior Subordinated
Notes. The New Pillowtex Senior Subordinated Notes bear interest at a rate of
9% per annum, payable semiannually in arrears on June 15 and December 15 of
each year. The New Pillowtex Senior Subordinated Notes are scheduled to mature
in their entirety on December 15, 2007. Pillowtex has the option to redeem the
New Pillowtex Senior Subordinated Notes, in whole or in part, at any time on or
after December 15, 2002, at redemption prices starting at 104.5% of stated
principal on December 15, 2001 and decreasing by 1.5% per year to 100% on and
after December 15, 2005, plus all accrued and unpaid interest to the redemption
date. There is no mandatory redemption of the New Pillowtex Senior Subordinated
Notes except upon a change in control. Upon the occurrence of a "change in
control," each holder of New Pillowtex Senior Subordinated Notes will have the
right to require Pillowtex to repurchase all or any part of such holder's New
Pillowtex Senior Subordinated Notes pursuant to a "change of control" offer at
a price equal to 101% of the aggregate principal amount thereof plus accrued
and unpaid interest and liquidated damages thereon to the date of purchase.
The New Pillowtex Senior Subordinated Notes are guaranteed by each of the
domestic subsidiaries of Pillowtex, including Fieldcrest and each of its
domestic subsidiaries.
The New Pillowtex Senior Subordinated Notes are subject to certain
covenants which restrict, among other things, Pillowtex's ability to incur
additional indebtedness and issue preferred stock, incur liens to secure
subordinated indebtedness, pay dividends or make certain other restricted
payments, apply net proceeds from certain asset sales, enter into 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 New
Pillowtex Senior Subordinated 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 Pillowtex.
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SOURCES AND USES
The following table sets forth the sources and uses of funds required to
effect the Merger and the related transactions:
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Assumed borrowings under the New Pillowtex Bank Facilities ......... $397,555,162(1)
Gross proceeds from the issuance and sale of New Pillowtex
Senior Subordinated Notes ....................................... 185,000,000
Gross proceeds from the issuance and sale of Pillowtex
Preferred Stock .................................................. 65,000,000
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$647,555,612
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USES OF FUNDS:
Cash assumed to be paid to holders of Fieldcrest Common Stock
(9,244,120 shares at $27.00 per share) ........................... $249,591,240
Cash assumed to be paid to holders of Fieldcrest Preferred Stock
(1,500,000 shares at $46.15 per share) ........................... 69,225,000
Repayment of Pillowtex's revolving credit facility ................. 85,964,329
Repayment of Fieldcrest's revolving credit facility ................ 114,084,593
Satisfaction and discharge of Fieldcrest's 11.25% Senior
Subordinated Debentures .......................................... 85,000,000
Severance costs assumed to be incurred in connection with the
Merger ........................................................... 15,000,000
Assumed settlement costs of Fieldcrest Options and Fieldcrest
SARs ............................................................. 6,641,000
Early call premium on Fieldcrest 11.25% Senior Subordinated
Debentures ....................................................... 4,250,000
Fees assumed to be paid to financial advisors, legal, accounting,
and other professionals .......................................... 17,799,000
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$647,555,612
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</TABLE>
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(1) At the closing of the Merger, the initial borrowings under the New
Pillowtex Bank Facilities were approximately $379.9 million. The
borrowings are expected to increase as additional expenses incurred in
connection with the Merger are paid.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Prior to the Merger, Ernst & Young LLP ("E&Y") served as the principal
accountant to audit Fieldcrest's financial statements and KPMG Peat Marwick LLP
("KPMG") served as the principal accountant to audit Pillowtex's financial
statements. Following the Merger, KPMG will serve as the principal accountant
to audit Fieldcrest's financial statements.
Pillowtex's decision to utilize KPMG as Fieldcrest's principal independent
auditor may be deemed to constitute a dismissal of E&Y within the meaning of
Item 304(a) of Regulation S-K promulgated by the Securities and Exchange
Commission (the "Commission"). The reports of E&Y on Fieldcrest's consolidated
financial statements at and for the fiscal years ended December 31, 1995 and
1996 did not contain an adverse opinion or a disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles. In connection with the audits of Fieldcrest's financial statements
for the fiscal years ended December 31, 1995 and 1996, and in the subsequent
interim period, there were no disagreements with E&Y on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of E&Y would
have caused E&Y to make reference to the matter in their report. Fieldcrest has
requested E&Y to furnish it a letter addressed to the Commission stating
whether it agrees with the above statements. A copy of that letter, dated
December 29, 1997, is filed as Exhibit 16.1 hereto.
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As of the date hereof, Fieldcrest's Board of Directors had not yet taken
any action with respect to the matter discussed above in this Item 4. However,
prior to the Effective Time, Pillowtex, upon the recommendation of the Audit
Committee of Pillotex's Board of Directors, selected KPMG to audit the books,
records, and accounts of Pillowtex and its consolidated subsidiaries (including
Fieldcrest) following the Merger.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits:
Exhibit
Number Exhibit
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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) (the
"S-4 Registration Statement"))
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 the S-4 Registration Statement)
16.1 Letter from Ernst & Young LLP
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
FIELDCREST CANNON, INC.
By: /s/ J. MARK KIRKPATRICK
-------------------------------
J. Mark Kirkpatrick
Vice President and Treasurer
Dated: December 29, 1997
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
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<S> <C>
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) (the "S-4 Registration Statement"))
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 the S-4
Registration Statement)
16.1 Letter from Ernst & Young LLP
</TABLE>
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EXHIBIT 16.1
[LETTERHEAD OF ERNST & YOUNG LLP]
December 29, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
Re: Fieldcrest Cannon, Inc.
We have read Item 4 of Form 8-K dated December 19, 1997 of Fieldcrest
Cannon Inc. and are in agreement with the statements contained in the second
paragraph therein. We have no basis to agree or disagree with other statements
of the registrant contained therein.
Very truly yours,
/s/ Ernst & Young LLP
