<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-45331
PROSPECTUS
WORLDTEX, INC.
OFFER TO EXCHANGE ITS 9 5/8% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
9 5/8% SERIES A SENIOR NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY 19,
1998, UNLESS EXTENDED.
Worldtex, Inc. ("Worldtex" or the "Company") hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus (this "Prospectus")
and the accompanying Letter of Transmittal (the "Letter of Transmittal" and,
together with this Prospectus, the "Exchange Offer"), to exchange $1,000
principal amount of its 9 5/8% Series B Senior Notes due 2007 (the "New Notes")
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act") pursuant to a registration statement (the "Registration
Statement") of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding 9 5/8% Series A Senior Notes due 2007 (the "Old Notes"), of
which $175,000,000 principal amount is outstanding as of the date hereof. See
"The Exchange Offer." The Old Notes and the New Notes are sometimes collectively
referred to herein as the "Notes."
Although the Notes are titled "Senior," the Company has not issued, and does
not have any current firm arrangements to issue, any significant additional
indebtedness to which the Notes would be senior. The Notes will be general
unsecured obligations of the Company and will rank pari passu in right of
payment to all existing and future unsubordinated indebtedness of the Company,
including indebtedness under the New Credit Facility (as defined herein). The
obligations of the Company under the New Credit Facility, however, will be
secured by the accounts receivable and inventory of the Company and its U.S.
subsidiaries, as well as by all of the outstanding capital stock of its U.S.
subsidiaries and 65% of the outstanding capital stock of each of its non-U.S.
subsidiaries. Accordingly, the Company's obligations under the New Credit
Facility will effectively rank senior in right of payment to the Notes to the
extent of the assets subject to such security interest. The Company's payment of
principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes will be fully and unconditionally guaranteed on a senior unsecured basis
(the "Subsidiary Guarantees") by all existing and future U.S. subsidiaries of
the Company (the "Guarantors"), but Subsidiary Guarantees will not be provided
by the Company's non-U.S. subsidiaries (the "Foreign Subsidiaries"). The
Subsidiary Guarantees will rank pari passu in right of payment with all existing
and future unsecured and unsubordinated indebtedness of the Guarantors but
secured indebtedness of a Guarantor (including the secured guarantees to be
granted under the New Credit Facility) will effectively rank senior in right of
payment to the Notes to the extent of the assets subject to such security
interest. The Notes will effectively rank junior to the secured and unsecured
indebtedness and trade payables of the Foreign Subsidiaries. As of December 31,
1997, the Company and the Guarantors had approximately $181.0 million of
unsecured indebtedness outstanding (including $175 million principal amount of
the Old Notes), the Company had an additional approximately $25.0 million of
secured indebtedness available to be incurred under the New Credit Facility and
the Foreign Subsidiaries had approximately $23.3 million of indebtedness and
trade payables outstanding. See "Description of Other Indebtedness." The terms
of the Indenture (as defined herein) will permit the Company and its
subsidiaries to incur additional indebtedness (including secured indebtedness),
subject to certain limitations, but the Company has no current or pending
arrangements or agreements to incur any additional significant indebtedness to
which the Notes would rank subordinate or pari passu in right of payment.
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 p.m., New York City time, on May 19, 1998, unless extended by the
Company (such date, as it may be extended, the "Expiration Date"). The
Expiration Date will not be extended beyond the 30th business day after the date
of this Prospectus. Old Notes may be tendered only in integral multiples of
$1,000. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions. In the event the Company terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the holders thereof. The Company will not receive any proceeds from the
Exchange Offer. See "The Exchange Offer."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD NOTES ON APRIL 21, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 17, 1998
<PAGE> 2
The New Notes will be obligations of the Company evidencing the same debt
as the Old Notes, and will be entitled to the benefits of the same indenture
(the "Indenture"). See "Description of Notes." The form and terms of the New
Notes are generally the same as the form and terms of the Old Notes in all
material respects except that the New Notes have been registered under the
Securities Act and hence do not include certain rights to registration
thereunder and do not contain transfer restrictions or terms with respect to
certain special payments applicable to the Old Notes. See "The Exchange Offer."
The New Notes are being offered hereunder in order to satisfy certain
obligations under the Registration Rights Agreement, dated as of December 1,
1997 (the "Registration Rights Agreement"), among the Company, the Guarantors,
and NationsBanc Montgomery Securities, Inc., BancAmerica Robertson Stephens and
Interstate/Johnson Lane Corporation (the "Initial Purchasers"), a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The Exchange Offer is intended to satisfy the Company's
obligations under the Registration Rights Agreement to register the New Notes
and exchange them for the Old Notes under the Securities Act. Once the Exchange
Offer is consummated, the Company will have no further obligations to register
any of the Old Notes tendered for exchange, except pursuant to a shelf
registration statement to be filed under certain limited circumstances specified
in "The Exchange Offer -- Purpose of the Exchange Offer." See "Risk
Factors -- Consequences to Non-Tendering Holders of Old Notes." The Company has
agreed to pay the expenses of the Exchange Offer.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters issued to
third parties including Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1989) (the "Exxon Capital Letter"), Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley
Letter") and Shearman & Sterling, SEC No-Action Letter (available July 2, 1993)
(the "Shearman & Sterling Letter") (collectively, the "Exchange Offer No-Action
Letters"), the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof who are not affiliates of Worldtex
(other than a broker-dealer who acquired such Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act; provided
that the Holder is acquiring New Notes in its ordinary course of business and
has not engaged in, and does not intend to engage in, any distribution (within
the meaning of the Securities Act) of the New Notes and has no arrangement or
understanding with any person to participate in a distribution of the New Notes.
Persons wishing to exchange Old Notes in the Exchange Offer must represent to
the Company that such conditions have been met. However, any Holder who may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company or who tenders in the Exchange Offer with the intention to participate,
or for the purpose of participating, in a distribution of the New Notes cannot
rely on the interpretation by the staff of the Commission set forth in such
no-action letters, including the Exchange Offer No-Action Letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer -- Purpose of The Exchange Offer." In addition, each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
for its own account as a result of market-making activities or other trading
activities (other than acquisitions directly from the Company) must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities (other than acquisitions
directly from the Company). The Company has agreed that, for a period of 180
days after the Exchange Offer is consummated, it will, upon reasonable request,
make this Prospectus available promptly to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution." EXCEPT AS DESCRIBED
IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER TO RESELL,
RESALE OR OTHER TRANSFER OF NEW NOTES.
2
<PAGE> 3
Old Notes were initially represented by a single Global Old Note (as
defined herein) in fully registered form, registered in the name of a nominee of
The Depository Trust Company ("DTC"), as depositary. The New Notes exchanged for
Old Notes represented by the Global Old Note will be represented by one or more
Global New Notes (as defined herein) in fully registered form, registered in the
name of the nominee of DTC. The Global New Notes will be exchangeable for New
Notes in registered form, in denominations of $1,000 and integral multiples
thereof as described herein. The New Notes in global form will trade in DTC's
Same-Day Funds Settlement System, and secondary market trading activity of such
New Notes will therefore settle in immediately available funds. See "Description
of Notes -- Book Entry, Delivery and Form."
The New Notes will bear interest at a rate equal to 9 5/8% per annum from
the last date on which interest was paid on the Old Notes surrendered in
exchange therefor, or if no interest has been paid, from the date of original
issue of such Old Notes. Interest on the Notes is payable semi-annually on June
15 and December 15 of each year, commencing June 15, 1998.
The Notes are redeemable at the option of the Company, in whole or in part,
on or after December 15, 2002, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon and liquidated damages, if any, payable
pursuant to Section 5 of the Registration Rights Agreement with respect to the
Old Notes ("Liquidated Damages") to the redemption date. Notwithstanding the
foregoing, at any time on or before December 15, 2000, the Company may redeem up
to 35% of the original aggregate principal amount of the Notes with the net
proceeds of a public offering of common stock of the Company at the redemption
prices set forth herein, plus accrued and unpaid interest thereon, if any, to
the redemption date, provided that at least $113.75 million in aggregate
principal amount of Notes remain outstanding immediately after the occurrence of
such redemption, and provided, further, that such redemption shall occur within
45 days of the date of the closing of such public offering. Upon a Change of
Control (as defined herein), the Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest thereon and Liquidated Damages, if any, to the date
of repurchase. There can be no assurance that the Company will have the
financial resources necessary or be permitted by its other debt agreements to
repurchase the Notes upon the occurrence of a Change of Control.
The Notes are general unsecured obligations of the Company and rank pari
passu in right of payment to all existing and future unsubordinated indebtedness
of the Company, including indebtedness under the New Credit Facility. The
obligations of the Company under the New Credit Facility (as defined herein),
however, are secured by the accounts receivable and inventory of the Company and
its U.S. subsidiaries, as well as by all of the outstanding capital stock of its
U.S. subsidiaries and 65% of the outstanding capital stock of each of its
non-U.S. subsidiaries. Accordingly, the Company's obligations under the New
Credit Facility is effectively rank senior in right of payment to the Notes to
the extent of the assets subject to such security interest. The Company's
payment of principal, premium, if any, interest and Liquidated Damages, if any,
on the Notes is fully and unconditionally guaranteed on a senior unsecured basis
by the Guarantors, but Subsidiary Guarantees are not provided by the Foreign
Subsidiaries. The Subsidiary Guarantees rank pari passu in right of payment with
all existing and future unsecured and unsubordinated indebtedness of the
Guarantors but secured indebtedness of a Guarantor (including the secured
guarantees granted under the New Credit Facility) effectively ranks senior in
right of payment to the Notes to the extent of the assets subject to such
security interest. The Notes effectively rank junior to the secured and
unsecured indebtedness and trade payables of the Foreign Subsidiaries. The terms
of the Indenture (as defined herein) permit the Company and its subsidiaries to
incur additional indebtedness (including secured indebtedness), subject to
certain limitations.
Prior to this offering, there has been no public market for the Notes. The
Company does not intend to list the Notes on a national securities exchange or
to seek approval for quotation through the NASDAQ National Market. As the Old
Notes were issued and the New Notes are being issued primarily to a limited
number of institutions who typically hold similar securities for investment, the
Company does not expect that an active public market for the Notes will develop.
In addition, resales by certain holders of the Notes of a substantial percentage
of the aggregate principal amount of such notes could constrain the ability of
any market maker to develop or maintain a market for the Notes. To the extent
that a market for the Notes should develop, the market value of the Notes will
depend on prevailing interest rates, the market for similar securities and other
3
<PAGE> 4
factors, including the financial condition, performance and prospects of the
Company. Such factors might cause the Notes to trade at a discount from face
value. See "Risk Factors -- Lack of a Public Market for the Notes."
THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. THE
COMPANY HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER. NO UNDERWRITER IS
BEING USED IN CONNECTION WITH THE EXCHANGE OFFER.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1997, as filed with the Commission (File No. 1-11438), is hereby incorporated by
reference in this Prospectus.
All reports and any definitive proxy or information statements filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the terminations of the
offering of the securities offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated herein by reference, or contained in this Prospectus, shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE TO
ANY PERSON TO WHOM A PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF
SUCH PERSON, FROM WORLDTEX, INC., 212 12TH AVENUE N.E., HICKORY, NORTH CAROLINA,
28601, ATTENTION: SECRETARY, TELEPHONE (704) 328-5381. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 12, 1998.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT
AS WELL AS ON ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE
COMPANY AT THE TIME SUCH STATEMENTS WERE MADE. WHEN USED IN THIS PROSPECTUS, THE
WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND" AND SIMILAR
EXPRESSIONS, AS THEY RELATE TO THE COMPANY, ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THESE STATEMENTS ARE
REASONABLE, INVESTORS SHOULD BE AWARE THAT ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT
OF THE RISK FACTORS SET FORTH BELOW UNDER THE CAPTION "RISK FACTORS" OR OTHER
FACTORS. INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS UNDER THE CAPTION "RISK
FACTORS," AS WELL AS THE OTHER INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS,
IN EVALUATING AN INVESTMENT IN THE NOTES. THE COMPANY CAUTIONS THE READER,
HOWEVER, THAT SUCH LIST OF FACTORS UNDER THE CAPTION "RISK FACTORS" MAY NOT BE
EXHAUSTIVE AND THAT THOSE OR OTHER FACTORS, MANY OF WHICH ARE OUTSIDE OF THE
COMPANY'S CONTROL, COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY AND ITS
ABILITY TO SERVICE ITS INDEBTEDNESS, INCLUDING PRINCIPAL AND INTEREST PAYMENTS
ON AND LIQUIDATED DAMAGES, IF ANY, WITH RESPECT TO THE NOTES. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS
SET FORTH UNDER THE CAPTIONS "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and historical and pro forma financial statements, including the
notes thereto, appearing elsewhere in, or incorporated by reference in, this
Prospectus. Unless the context otherwise requires, references to the "Company"
include Worldtex and its direct and indirect subsidiaries. The information set
forth below under "Risk Factors" should be considered carefully in evaluating an
investment in the Notes offered hereby.
THE COMPANY
The Company believes that it is one of the largest suppliers of covered
elastic yarn in the world (based on 1997 sales). Covered elastic yarns are used
by the Company's customers to produce stretch fabrics for apparel that provide
enhanced styling capabilities, better shape retention, and improved aesthetics,
durability and comfort. The principal products that utilize covered elastic yarn
produced by the Company are sheer and opaque pantyhose, men's, women's and
children's socks, sweaters, swimwear, active and athletic wear and men's,
women's and children's stretch apparel. During 1997, Worldtex yarns were used in
the products of some of the world's best known brands and designers, including
Giorgio Armani, Hugo Boss, Pierre Cardin, Liz Claiborne, Danskin, Dim, Christian
Dior, Fogal, Fruit of the Loom, Givenchy, Jockey, Calvin Klein, Evan Picone,
Polo, Round the Clock, Nina Ricci, Ellen Tracy and others. The Company, which
was one of the first independent producers of covered elastic yarn when it began
operations in 1934, operates 11 manufacturing and distribution facilities
located in the United States, Canada, France and South America. The Company also
has a 38% interest in a joint venture production facility in Estonia, and
currently plans joint venture production facilities in China and India. For the
year ended December 31, 1997, Worldtex had net sales of $203.3 million.
The net proceeds from the sale of the Old Notes were used to fund the
acquisition on December 1, 1997 by the Company of the Elastic Corporation of
America division ("ECA") of NFA Corp. (the "ECA Acquisition") and to reduce
outstanding indebtedness, including indebtedness incurred to finance the
acquisition on October 3, 1997, of the Narrow Fabrics division ("Elastex") of
Texfi Industries, Inc. (the "Elastex Acquisition"). As a result of the ECA
Acquisition and the Elastex Acquisition, the Company believes that it is the
largest manufacturer of woven and knitted narrow elastic fabrics in the world
(based on 1997 sales). Narrow elastic fabrics are elasticized fabric bands,
typically under six inches in width, that are used as components in the
production of a broad range of apparel products, such as waistbands for men's,
women's and children's underwear, athletic apparel and other garments, straps,
facings and edgings in women's intimate apparel and elastic bands in women's
hosiery. For the year ended December 28, 1996, ECA had net sales of $55.8
million, and for the year ended November 1, 1996, Elastex had net sales of $15.8
million. During 1996, ECA's and Elastex's narrow elastic fabrics were used in
apparel produced by Bassett Walker, Fruit of the Loom, Tommy Hilfiger, Jockey,
Michael Jordan Sports, Donna Karan, Calvin Klein, Ralph Lauren, Russell
Corporation, Sara Lee (Hanes products), Vanity Fair, Warnaco (Warner, Olga and
Speedo brands) and others. ECA and Elastex together own a total of five
manufacturing facilities, which are located in Alabama, North Carolina, South
Carolina and Virginia. On a pro forma basis assuming that the ECA Acquisition
and the Elastex Acquisition had been consummated January 1, 1997, the Company
would have had net sales of $283.7 million for the year ended December 31, 1997.
As a result of the ECA Acquisition and the sale of the Old Notes, the Company is
highly leveraged. As of December 31, 1997, the Company and the Guarantors had
approximately $181.0 million of unsecured indebtedness outstanding (including
$175 million principal amount of the Old Notes), the Company had an additional
approximately $25.0 million of secured indebtedness available to be incurred
under the New Credit Facility and the Foreign Subsidiaries had approximately
$23.3 million of indebtedness and trade payables outstanding. As of December 31,
1997, the Company's consolidated stockholders' equity totalled approximately
$77.5 million.
The Company's common stock is listed on the New York Stock Exchange (Symbol
WTX). The Company's principal offices are located at 212 12th Avenue N.E.,
Hickory, North Carolina 28601, and its telephone number is (704) 328-5381.
5
<PAGE> 6
INDUSTRY OVERVIEW
In recent years, the worldwide fabric/apparel industry has been undergoing
significant changes relating to the types of garments produced. Specifically,
two trends have significantly impacted the Company: (i) the growth of covered
elastic yarn applications in fabric/apparel production, and (ii) increased
consumer demand for more casual, comfortable and durable apparel. As a leading
supplier of covered elastic yarns and narrow elastic fabrics, the Company
believes it is well-positioned to benefit from both of these trends.
Covered elastic yarns are produced by wrapping nylon, polyester, cotton or
other fibers around spandex or latex rubber. The core of spandex or rubber
provides stretch capability and durability, while the wrapped fiber results in
more comfort to the touch and permits the covered yarn to be dyed. Advanced
manufacturing equipment permits production of ultrafine covered elastic yarns
that result in fabrics comparable in appearance to natural fibers, but with
superior flexibility, shape retention and durability. Historically, covered
elastic yarns were principally used in the manufacture of women's pantyhose and
other hosiery products. However, advances in production techniques and trends in
consumer apparel preferences have led to a substantial expansion of the end uses
for covered elastic yarn. Today, covered elastic yarn is used in a broad range
of apparel, including sweaters, swimwear, running clothes, athletic uniforms,
slacks, skirts and dresses, as well as in pantyhose and socks.
Consumer demand for increased comfort has also favorably affected the
market for narrow elastic fabrics. These fabrics are produced by weaving covered
elastic yarn or knitting spandex or latex rubber, in each case with other yarn,
such as nylon, polyester or cotton, in order to create narrow bands of
elasticized fabric. Although the market for narrow elastic fabrics has been
relatively flat over the past five years, demand has grown during such period
for intimate apparel and athletic wear that include designer or other logos in
the waistband, which are generally higher-margin products compared to unadorned
elasticized waistbands. ECA has focused on the development and production of
such specialized waistbands, through investment in advanced weaving machines,
development of specialized dyeing techniques and close working relationships
with apparel producers to determine their requirements, and ECA is currently the
leading manufacturer of such waistbands in the United States.
BUSINESS STRATEGY
The Company's strategy is to increase revenues and margins through
expansion into new markets while reducing costs. The Company's business plan
consists of the following key elements:
- MAINTAIN LEADING POSITION IN NICHE MARKETS. The Company believes that it
is one of the largest suppliers of covered elastic yarn in the world
(based on 1997 sales). The Company believes that such leadership is based
primarily on the high quality of the Company's products, the Company's
responsiveness to customer's needs and the Company's initiative and
creativity in developing new end uses for covered elastic yarns. ECA has
followed a similar strategy to become, it believes, the largest producer
of narrow elastic fabrics in the world (based on 1997 sales). As a result
of their focus on quality and service, both Worldtex and ECA have
exclusive or significant supplier relationships for certain product lines
with certain leading apparel manufacturers. The Company intends to focus
on maintaining leadership in niche markets, such as covered elastic yarn
and narrow elastic fabrics, where it can market its specialized expertise
to more broadly-based fabric and apparel producers. The Company believes
that this expertise, when applied to produce high quality products and to
develop solutions to customers' needs, should result in growth in sales
of the Company's products.
- CONTINUE TO DEVELOP NEW END USES FOR COVERED ELASTIC YARN AND NARROW
ELASTIC FABRIC. In 1992, 65.4% of the Company's sales were to pantyhose
manufacturers, as compared to 38.4% of sales in 1996. Sales of pantyhose
in the United States during this period have declined approximately 13%,
although the Company's sales (including sales outside the United States)
have grown 19% during the period. The Company has actively worked with
apparel fabric producers and others to develop new fabrics utilizing
covered elastic yarn. For example, the Company was selected by E.I.
DuPont de Nemours & Company ("DuPont") to create and manufacture yarns
for use in the production of casual shoes to be sold by Marks and Spencer
in the European market, and the Company has also developed covered
6
<PAGE> 7
elastic yarn solutions for furniture slip covers, lace lingerie and
stretch denim fabrics. Similarly, ECA has sought to be a leader in the
development of narrow elastic fabric products, including its focus on
weaving designer logos into elastic waistbands, its production of the
patented "QuikCord"(R) system that embeds a drawstring within an elastic
waistband, and its production of silicon-backed narrow elastics used in
certain specialty hosiery. In addition, the growth in consumer demand for
more casual, comfortable and durable garments has increased the interest
of apparel fabric producers in the development of new covered elastic
yarn and narrow elastic fabric applications. In light of the Company's
long history and extensive knowledge relating to the production of
covered elastic yarn and ECA's and Elastex's extensive experience and
expertise regarding narrow elastic fabrics, the Company is well
positioned to work with apparel fabric manufacturers and others in
developing new end uses for covered elastic yarns and narrow elastic
fabrics.
- EXPAND INTERNATIONAL OPERATIONS. Prior to 1995, the Company's
manufacturing facilities were based in the United States, Canada and
France. In 1995, the Company acquired Fibrexa, Ltda. ("Fibrexa"), a
covered elastic yarn manufacturer located in Colombia, and established a
manufacturing joint venture in Estonia. In 1997, the Company entered into
a letter of intent to form a joint venture for the establishment of
manufacturing facilities in China, and it is currently in negotiations
for a similar venture in India. Although the Estonian, Chinese and Indian
ventures are relatively small -- each involving an investment of less
than $1 million -- the Company believes that the potential for growth in
these markets is significant. These new operations are expected to
provide improved access to growing new markets for the Company's
products, as well as cost-efficient facilities capable of manufacturing
covered elastic yarn for export to the Company's customers worldwide. For
example, the Company has shifted manufacturing equipment to its
lower-cost South American operation, Fibrexa. In 1997, Fibrexa had net
sales of $22.2 million, including sales to other subsidiaries of the
Company of $9.5 million for resale in North America and Europe. This
compares to total net sales by Fibrexa of $17.9 million, including sales
to other subsidiaries of the Company of $6.7 million in 1996. The Company
plans to expand Fibrexa's production capacity substantially in the near
term.
- PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue
acquisitions of companies in niche segments of the textile industry. The
Company plans to seek businesses that offer the opportunity to improve
the Company's financial results through increased purchasing power with
suppliers, elimination of duplicative operations or cross-selling of
products to common customers. For example, DuPont, Globe Manufacturing
Co. ("Globe") and Bayer A.G. ("Bayer") are major suppliers of raw
materials to the Company, ECA and Elastex, and the Company expects that
its increased purchasing power following consummation of the ECA
Acquisition will result in more favorable supply agreements. In addition,
the Company expects to shift ECA's production of covered elastic yarns to
the Company's existing covering operations to allow ECA to focus on
narrow elastic fabric production, and Worldtex will replace other
suppliers as ECA's sole source for covered elastic yarns and textured
nylon. Moreover, the Company expects to distribute and market the narrow
elastic fabric products of ECA and Elastex through its existing European,
North American and South American sales operations.
THE ECA ACQUISITION
On December 1, 1997, a wholly-owned subsidiary of the Company purchased
substantially all of the assets of ECA for a cash purchase price of
approximately $76.3 million, which was funded with a portion of the net proceeds
from the sale of the Old Notes. In connection with the ECA Acquisition, such
subsidiary of the Company assumed an industrial revenue bond obligation relating
to ECA in the aggregate principal amount of $6.0 million, operating leases (as
to which the present value of remaining lease payment obligations will not
exceed $2.3 million) and certain current liabilities.
7
<PAGE> 8
RISK FACTORS
Prospective investors should consider carefully all of the information set
forth in this Prospectus and, in particular, the information set forth under
"Risk Factors" before making an investment in the Notes or making a decision to
participate in the Exchange Offer. Such risks include effective subordination of
the Notes and Subsidiary Guarantees to secured debt, the absence of guarantees
from Foreign Subsidiaries, substantial leverage of the Company, restriction on
access to cash flows of the subsidiaries due to the Company's holding company
structure, the risks of doing business in foreign jurisdictions and the cyclical
nature of the textile and retail apparel industries, among others.
THE EXCHANGE OFFER
The Exchange Offer.............. $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of
Old Notes. As of the date hereof, $175
million in aggregate principal amount of Old
Notes were outstanding. The Company will
issue the New Notes to Holders (as defined in
"Description of Notes") on or promptly after
the Expiration Date.
Based on interpretations by the staff of the
Commission set forth in several no-action
letters issued to third parties, including
the Exchange Offer No-Action Letters, the
Company believes that New Notes issued
pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale,
resold and otherwise transferred by Holders
thereof who are not affiliates of the Company
(other than a broker-dealer who acquired such
Old Notes directly from the Company for
resale pursuant to Rule 144A under the
Securities Act or any other available
exemption under the Securities Act) without
compliance with the registration and
prospectus delivery provisions of the
Securities Act; provided that the Holder is
acquiring New Notes in its ordinary course of
business and has not engaged in, and does not
intend to engage in, any distribution (within
the meaning of the Securities Act) of the New
Notes and has no arrangement or understanding
with any person to participate in a
distribution of the New Notes. Persons
wishing to exchange Old Notes in the Exchange
Offer must represent to the Company that such
conditions have been met. However, any Holder
who is an affiliate of the Company or who
tenders in the Exchange Offer with the
intention to participate, or for the purpose
of participating, in a distribution of the
New Notes cannot rely on the interpretation
by the staff of the Commission set forth in
such no-action letters, including The
Exchange Offer No-Action Letters, and must
comply with the registration and prospectus
delivery requirements of the Securities Act
in connection with any resale transaction.
See "The Exchange Offer -- Purpose of the
Exchange Offer."
Each broker-dealer that receives New Notes
for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a
prospectus in connection with any resale of
such New Notes. The Letter of Transmittal
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning
8
<PAGE> 9
of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to
time, may be used by a broker-dealer in
connection with resales of New Notes received
in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer for
its own account as a result of market-making
activities or other trading activities (other
than acquisitions directly from the Company).
The Company has agreed that, for a period of
180 days after the Exchange Offer is
consummated, it will, upon reasonable
request, make this Prospectus available
promptly to any broker-dealer for use in
connection with any such resale. See "Plan of
Distribution."
Expiration Date................. 5:00 p.m., New York City time, on May 19,
1998, unless the Exchange Offer is extended
by the Company to the extent necessary to
comply with applicable federal and state
securities laws, in which case the term
"Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
The Expiration Date will not be extended
beyond the 30th business day after the date
of this Prospectus.
Accrued Amounts on the
Notes......................... The New Notes will bear interest from the
last date on which interest was paid on the
Old Notes surrendered in exchange therefor
or, if no interest has been paid, from the
date of original issue of such Old Notes.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions. The conditions are
limited and relate in general to laws or
Commission policies that might impair the
ability of the Company to proceed with the
Exchange Offer. As of the date of this
Prospectus, none of these events had
occurred, and the Company believes their
occurrence to be unlikely. If any such
conditions do exist prior to the Expiration
Date, the Company may (i) refuse to accept
any Old Notes and return all previously
tendered Old Notes, (ii) extend the Exchange
Offer, or (iii) waive such conditions. See
"The Exchange Offer -- Conditions."
Procedures for Tendering........ Each Holder of Old Notes wishing to accept
the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Old Notes to be exchanged and any other
required documentation to IBJ Schroder Bank &
Trust Company, as Exchange Agent (the
"Exchange Agent"), at the address set forth
herein and therein or effect a tender of such
Old Notes pursuant to the procedures for
book-entry transfer as provided for herein
and therein. By executing the Letter of
Transmittal, each Holder will represent to
the Company that, among other things, the New
Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of
business of the person receiving such New
Notes, whether or not such person is the
Holder, that neither the Holder nor any such
other person has engaged in,
9
<PAGE> 10
nor intends to engage in, any distribution of
the New Notes or has an arrangement or
understanding with any person to participate
in the distribution of such New Notes and
that neither the Holder nor any such other
person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the
Company or any of its subsidiaries. Each
broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where
such Old Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
in connection with any resale of such New
Notes. This Prospectus, as it may be amended
or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired
by such broker-dealer as a result of
market-making activities or other trading
activities (other than acquisitions directly
from the Company). The Company has agreed
that, for a period of 180 days after the
Exchange Offer is consummated, it will make
this Prospectus available to any
broker-dealer for use in connection with any
such resale (other than acquisitions directly
from the Company). See "The Exchange
Offer -- Procedures for Tendering" and "Plan
of Distribution."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender such Old
Notes in the Exchange Offer should contact
such registered Holder promptly and instruct
such registered Holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such owner's own
behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make
appropriate arrangements to register
ownership of the Old Notes in such owner's
name or obtain a properly completed bond
power from the registered Holder. The
transfer of registered ownership may take
considerable time and it may not be possible
to complete a transfer initiated shortly
before the Expiration Date. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent, or cannot
complete the procedure for book-entry
transfer prior to 5:00 p.m. on the Expiration
Date, may tender their Old Notes according to
the guaranteed delivery procedures set forth
in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights............... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
10
<PAGE> 11
Acceptance of Old Notes and
Delivery of New Notes........... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
New Notes issued pursuant to the Exchange
Offer will be delivered promptly following
the Expiration Date. Any Old Notes not
accepted for exchange will be returned
without expense to the tendering Holder
thereof as promptly as practicable after the
expiration or termination of the Exchange
Offer. See "The Exchange Offer -- Terms of
the Exchange Offer."
Certain Tax Considerations...... The exchange pursuant to the Exchange Offer
will not be a taxable event for federal
income tax purposes. See "Certain United
States Federal Tax Considerations."
Exchange Agent.................. IBJ Schroder Bank & Trust Company is serving
as Exchange Agent in connection with the
Exchange Offer.
TERMS OF NEW NOTES
The Exchange Offer applies to the entire $175,000,000 aggregate principal
amount outstanding of the Old Notes. The New Notes will be obligations of the
Company evidencing the same debt as the Old Notes and will be entitled to the
benefits of the same Indenture. See "Description of Notes." The form and terms
of the New Notes are generally the same as the form and terms of the Old Notes
in all material respects except that the New Notes have been registered under
the Securities Act and hence do not include certain rights to registration
thereunder and do not contain transfer restrictions or terms with respect to
certain special payments applicable to the Old Notes. See "Description of
Notes."
The New Notes................... $175,000,000 principal amount of 9 5/8%
Series B Senior Notes due 2007.
Maturity Date................... December 15, 2007.
Interest Rate and Payment
Dates......................... The New Notes will bear interest at a rate of
9 5/8% per annum. Interest on the New Notes
will accrue from the last date on which
interest was paid on the Old Notes
surrendered in exchange therefor, or if no
interest has been paid, from the date of
original issue of such Old Notes. Interest on
the Notes is payable semi-annually in cash in
arrears on June 15 and December 15 of each
year, commencing June 15, 1998.
Optional Redemption............. On or after December 15, 2002, the Company
may redeem the Notes, in whole or in part, at
the redemption prices set forth herein, plus
accrued and unpaid interest thereon and
Liquidated Damages, if any, to the date of
redemption. Notwithstanding the foregoing, at
any time on or before, December 15, 2000, the
Company may redeem up to 35% of the original
aggregate principal amount of the Notes with
the net proceeds of a public offering of
common stock of the Company at the redemption
prices set forth herein, plus accrued and
unpaid interest thereon, if any, to the
redemption date, provided that at least
$113.75 million in aggregate principal amount
of Notes remain outstanding immediately after
the occurrence of such redemption (excluding
Notes held by the Company or any of its
Subsidiaries), and provided, further, that
such redemption shall occur within
11
<PAGE> 12
45 days of the date of the closing of such
public offering. See "Description of
Notes -- Optional Redemption."
Ranking......................... Although the Notes are titled "Senior," the
Company has not issued, and does not have any
current firm arrangements to issue, any
significant additional indebtedness to which
the Notes would be senior. The Notes are
general unsecured obligations of the Company
and rank pari passu in right of payment to
all existing and future unsubordinated
indebtedness of the Company, including
indebtedness under the Company's New Credit
Facility. The obligations of the Company
under the New Credit Facility, however, are
secured by the accounts receivable and
inventory of the Company and its U.S.
subsidiaries, as well as by all of the
outstanding capital stock of its U.S.
subsidiaries and 65% of the outstanding
capital stock of each of its Foreign
Subsidiaries. Accordingly, the New Credit
Facility effectively ranks senior in right of
payment to the Notes to the extent of the
assets subject to such security interest. In
addition, secured indebtedness of the
Guarantors effectively ranks senior in right
of payment to the Notes to the extent of the
assets subject to such security interest, and
the Notes effectively rank junior to the
secured and unsecured indebtedness and trade
payables of the Foreign Subsidiaries. The
terms of the Indenture (as defined herein)
permit the Company and its subsidiaries to
incur additional indebtedness (including
secured indebtedness), subject to certain
limitations, but the Company has no current
or pending arrangements or agreements to
incur any significant indebtedness to which
the Notes would rank subordinate or pari
passu in right of payment. See "Description
of Notes" and "Description of Other
Indebtedness -- The New Credit Facility."
Subsidiary Guarantees........... The Notes are fully and unconditionally
guaranteed by each of the existing and future
U.S. subsidiaries of the Company, but
guarantees are not to be provided by the
Foreign Subsidiaries. The Subsidiary
Guarantees rank pari passu in right of
payment with all existing and future
unsecured and unsubordinated indebtedness of
the Guarantors, including the guarantees
granted under the New Credit Facility, but
secured indebtedness of a Guarantor
effectively ranks senior in right of payment
to the Notes to the extent of the assets
subject to such security interest. The
Guarantors' obligations under the New Credit
Facility are secured by a lien on the
accounts receivable and inventory of the
Guarantors and, accordingly, such
indebtedness ranks prior to the Subsidiary
Guarantees with respect to such assets. See
"Description of Notes -- Additional
Guarantees."
Change of Control............... Upon a Change of Control (as defined herein),
the Company is required to make an offer to
repurchase all outstanding Notes at 101% of
the principal amount thereof plus accrued and
unpaid interest thereon and Liquidated
Damages, if any, to the date of repurchase.
There are significant restrictions on the
Company's ability to repurchase the Notes on
a Change of Control, and there can be no
assurance that the Company will have the
12
<PAGE> 13
financial resources necessary or be permitted
by its other debt agreements to repurchase
the Notes upon the occurrence of a Change of
Control. See "Description of
Notes -- Repurchase at the Option of
Holders -- Change of Control" and "Risk
Factors -- Change of Control."
Covenants....................... The Indenture restricts, among other things,
the ability of the Company and its
subsidiaries to incur additional indebtedness
and issue preferred stock, enter into sale
and leaseback transactions, incur liens, pay
dividends or make certain other restricted
payments, apply net proceeds from certain
asset sales, enter into certain transactions
with affiliates, merge or consolidate with
any other person, sell stock of subsidiaries,
and assign, transfer, lease, convey or
otherwise dispose of substantially all of the
assets of the Company. See "Description of
Notes -- Certain Covenants."
Exchange Rights................. Holders of New Notes are not entitled to any
exchange rights with respect to the New
Notes. Holders of Old Notes are entitled to
certain exchange rights pursuant to the
Registration Rights Agreement. Under the
Registration Rights Agreement, the Company is
required to offer to exchange the Old Notes
for new notes having substantially identical
terms which have been registered under the
Securities Act. This Exchange Offer is
intended to satisfy such obligation. Once the
Exchange Offer is consummated, the Company
will have no further obligations to register
any of the Old Notes not tendered by the
Holders for exchange, except pursuant to a
shelf registration statement to be filed
under certain limited circumstances specified
in "The Exchange Offer -- Purpose of the
Exchange Offer." See "Risk
Factors -- Consequences to Non-Tendering
Holders of Old Notes."
Use of Proceeds................. The Company will not receive any proceeds
from the Exchange Offer.
13
<PAGE> 14
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations data and other
operating data for the year ended December 31, 1997 give effect to the ECA
Acquisition, the Elastex Acquisition and the application of the net proceeds
from the sale of the Old Notes (collectively, the "Transactions") as if each had
occurred at January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $283,726
Cost of goods sold.......................................... 228,215
Gross profit................................................ 55,511
Selling, general and administrative expenses................ 26,829
--------
Operating profit............................................ 28,682
Interest expense............................................ 17,939
Other income (expense), net................................. (345)
--------
Income before income taxes.................................. 10,398
Income taxes................................................ 4,822
--------
Net income.................................................. $ 5,576
========
OTHER OPERATING DATA:
Depreciation and amortization............................... $ 10,920
Capital expenditures........................................ 10,279
Cash interest expense....................................... 17,239
Ratio of earnings to fixed charges(a)....................... 1.45x
</TABLE>
- ---------------
(a) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and that
portion of rental expense which is representative of the interest factor in
these rentals.
14
<PAGE> 15
SUMMARY HISTORICAL FINANCIAL INFORMATION
WORLDTEX
The following table sets forth selected consolidated financial information
of the Company for each of the five years in the period ended December 31, 1997.
Such information was derived from the Consolidated Financial Statements of the
Company, which in the case of the three years in the period ended December 31,
1997 have been audited by KPMG Peat Marwick LLP and are incorporated by
reference in this Prospectus. The selected consolidated financial information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto of the Company incorporated by reference
in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $ 203,256 $207,829 $187,981 $164,654 $152,709
Cost of goods sold........................... 167,272 168,754 156,519 138,666 125,739
--------- -------- -------- -------- --------
Gross profit................................. 35,984 39,075 31,462 25,988 26,970
Selling, general and administrative
expenses................................... 16,770 16,582 15,708 13,502 12,108
--------- -------- -------- -------- --------
Operating profit............................. 19,214 22,493 15,754 12,486 14,862
Interest expense............................. 7,043 5,826 5,693 3,951 3,298
Other income (expense), net.................. (302) 694 170 333 (74)
--------- -------- -------- -------- --------
Income before income taxes................... 11,869 17,361 10,231 8,868 11,490
Income tax expense........................... 5,377 6,415 4,979 3,058 4,206
--------- -------- -------- -------- --------
Net income before extraordinary item......... 6,492 10,946 5,252 5,810 7,284
Extraordinary item, net (Note 6)............. 1,344 -- -- -- --
--------- -------- -------- -------- --------
Net income................................... $ 5,148 $ 10,946 $ 5,252 $ 5,810 $ 7,284
========= ======== ======== ======== ========
OTHER OPERATING DATA:
Cash Flows provided (used):
Operating.................................. $ (1,497) $ 15,032 $ 12,046 $ 9,592 $ 11,288
Investing.................................. (101,278) (14,934) (15,434) (8,953) (6,090)
Financing.................................. 113,904 399 2,182 128 (3,318)
EBITDA(a).................................... 25,757 29,471 22,057 17,708 18,869
Depreciation and amortization................ 6,845 6,284 6,133 4,889 4,081
Capital expenditures......................... 7,706 13,785 8,356 8,077 5,803
Ratio of earnings to fixed charges(b)........ 2.49x 3.63x 2.65x 3.07x 4.14x
BALANCE SHEET DATA (AT PERIOD END):
Working capital.............................. $ 87,743 $ 47,470 $ 47,342 $ 42,953 $ 34,554
Total assets................................. 312,439 206,032 196,065 166,405 145,996
Total debt................................... 188,219 70,730 71,126 61,821 60,337
Stockholders' equity......................... 77,502 85,178 78,939 69,033 59,042
</TABLE>
(See Notes to Summary Historical Financial Information on the following page.)
15
<PAGE> 16
ECA
The following table sets forth selected financial information of ECA for
each of the three fiscal years in the period ended December 28, 1996. Such
information was derived from the stand alone Financial Statements of ECA, which
have been audited and are included elsewhere in this Prospectus. The following
table also sets forth the selected financial information of ECA as of September
28, 1996 and September 27, 1997 and for the thirty-nine week period then ended.
For convenience, the thirty-nine week period is hereinafter referred to as the
nine months then ended. Such information was derived from the unaudited stand
alone Financial Statements of ECA. Such unaudited stand alone Financial
Statements, in the opinion of ECA's management, include all adjustments
(consisting of only normal recurring accruals) necessary for a stand alone
presentation of the financial position and results of operations for such
periods in accordance with the basis of presentation described in Note 1 to the
audited ECA financial statements. The results of operations for the nine months
ended September 27, 1997 are not necessarily indicative of results that may be
expected for the full year. The selected financial information set forth below
should be read in conjunction with the Financial Statements and Notes thereto of
ECA included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
----------------------------- ------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995 1994
------------- ------------- ------------ ------------ ------------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $52,739 $41,779 $55,798 $ 58,055 $61,339
Cost of goods sold................ 38,914 31,151 41,828 45,060 45,666
------- ------- ------- -------- -------
Gross profit...................... 13,825 10,628 13,970 12,995 15,673
Selling, general and
administrative expenses......... 6,447 5,241 6,664 6,219 9,379
------- ------- ------- -------- -------
Operating income.................. 7,378 5,387 7,306 6,776 6,294
Interest expense.................. 983 615 814 1,147 1,001
Net income........................ $ 6,395 $ 4,772 $ 6,492 $ 5,629 $ 5,293
======= ======= ======= ======== =======
OTHER OPERATING DATA:
Cash Flows:
Operating....................... $ 5,323 $ 4,737 $ 3,747 $ 11,287 $ 5,785
Investing....................... (2,174) (673) (1,138) 116 (835)
Financing....................... (3,079) (4,036) (2,612) (11,446) (4,952)
EBITDA(a)......................... 8,766 7,060 9,183 8,719 8,287
Depreciation and amortization..... 1,388 1,673 1,877 1,943 1,992
Capital expenditures.............. 2,174 678 1,171 944 1,371
Ratio of earnings to fixed
charges(b)...................... 5.10x 5.00x .25x 4.42x 5.51x
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................... $20,286 $15,436 $18,356 $ 13,055 $16,757
Total assets...................... 35,168 28,738 30,189 25,955 32,468
Total debt........................ 6,000 6,000 6,000 6,000 6,700
Divisional equity................. 24,258 17,798 20,942 16,362 21,478
</TABLE>
- ---------------
(a) Management believes that EBITDA is a measure useful to investors, although
the Company's measures of EBITDA may not be comparable to other similarly
titled measures presented by other companies. EBITDA represents income
before income taxes plus interest expense, depreciation and amortization for
the applicable company. EBITDA should not be considered as an alternative
measure of net income or cash provided by operating activities (both as
determined in accordance with generally accepted accounting principles), but
is presented to provide additional information relating to the Company's
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity.
(b) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and that
portion of rental expense which is representative of the interest factor in
these rentals.
16
<PAGE> 17
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the specific
risk factors set forth below as well as the other information contained in this
Prospectus before deciding to invest in the Notes or participate in the Exchange
Offer. In particular, prospective purchasers should review "Disclosure Regarding
Forward-Looking Statements" preceding the Prospectus Summary.
EFFECTIVE SUBORDINATION OF THE NOTES AND SUBSIDIARY GUARANTEES TO SECURED DEBT
The Notes and each Subsidiary Guarantee are senior unsecured obligations of
the Company and the applicable Guarantor, respectively, and rank pari passu in
right of payment with all other existing and future unsecured and unsubordinated
indebtedness of the Company and the Guarantors. However, the Notes and the
Subsidiary Guarantees are effectively subordinated to secured indebtedness of
the Company and the Guarantors, respectively, with respect to the assets
securing such indebtedness. The indebtedness of the Company under its $25.0
million working capital facility with NationsBank, N.A. and the other lenders
named therein (the "New Credit Facility") is secured by accounts receivable and
inventory of the Company and its U.S. subsidiaries, as well as by all of the
outstanding capital stock of its U.S. subsidiaries and 65% of the outstanding
capital stock of each of its Foreign Subsidiaries. Accordingly, the New Credit
Facility effectively ranks senior in right of payment to the Notes to the extent
of the assets subject to such security interest. In addition, secured
indebtedness of the Guarantors effectively ranks senior in right of payment to
the Notes to the extent of the assets subject to such security interest,
including the secured guarantees granted under the New Credit Facility, and the
Notes effectively rank junior to the secured and unsecured indebtedness and
trade payables of the Foreign Subsidiaries. As of December 31, 1997, the Company
and the Guarantors had approximately $181.0 million of unsecured indebtedness
outstanding (including $175 million principal amount of the Old Notes), the
Company had an additional approximately $25.0 million of secured indebtedness
available to be incurred under the New Credit Facility and the Foreign
Subsidiaries had approximately $23.3 million of indebtedness and trade payables
outstanding. As of December 31, 1997, the Company's consolidated stockholders'
equity totalled approximately $77.5 million. Although the Indenture contains
limitations on the amount of additional indebtedness that the Company and its
subsidiaries (including certain of the Guarantors) can incur, under certain
circumstances the amount of such indebtedness could be substantial and may be
secured. See "Description of Notes -- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" and "-- Liens."
FOREIGN SUBSIDIARIES WILL NOT PROVIDE SUBSIDIARY GUARANTEES
The Company's current and future Foreign Subsidiaries will not provide
Subsidiary Guarantees. A substantial portion of the Company's operations and
assets are attributable to the Foreign Subsidiaries. For the years 1997 and
1996, 63.7% and 69.1%, respectively, of the Company's sales were through Foreign
Subsidiaries, and at December 31, 1997, 41% of the Company's total assets was
held by Foreign Subsidiaries.
SUBSTANTIAL LEVERAGE
As a result of the ECA Acquisition and the sale of the Old Notes, the
Company is highly leveraged. As of December 31, 1997, the Company and the
Guarantors had approximately $181.0 million of unsecured indebtedness
outstanding (including $175 million principal amount of the Old Notes), the
Company had an additional approximately $25.0 million of secured indebtedness
available to be incurred under the New Credit Facility and the Foreign
Subsidiaries had approximately $23.3 million of indebtedness and trade payables
outstanding. As of December 31, 1997, the Company's consolidated stockholders'
equity totalled approximately $77.5 million. In addition, for the year ended
December 31, 1997, on a pro forma basis assuming that the Transactions had
occurred on January 1, 1997, the Company's ratio of earnings to fixed charges
would have been 1.45x. The Company and its subsidiaries will be permitted to
incur additional indebtedness in the future. See "Descriptions of
Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital
17
<PAGE> 18
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. There can be no assurance that
the Company's business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
future borrowings will be available under the New Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. If the Company's cash flow proved
inadequate to meet its liquidity needs, the Company may need to refinance all or
a portion of the principal amount of the Notes on or prior to maturity. There
can be no assurance that the Company will be able to effect any such refinancing
on commercially reasonable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The degree to which the Company is leveraged following the sale of the Old
Notes could have important consequences to holders of the Notes, including, but
not limited to: (i) making it more difficult for the Company to satisfy its
obligations with respect to the Notes, (ii) increasing the Company's
vulnerability to general adverse economic and industry conditions, (iii)
limiting the Company's ability to obtain additional financing to fund future
working capital, capital expenditures, and other general corporate requirements,
(iv) requiring the dedication of a substantial portion of the Company's cash
flow from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other general
corporate purposes, (v) limiting the Company's flexibility in planning for, or
reacting to, changes in its business and the industry, and (vi) placing the
Company at a competitive disadvantage vis-a-vis less leveraged competitors. In
addition, the Indenture and the New Credit Facility contain financial and other
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds. Failure by the Company to comply with such
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on the Company. In addition, the degree to
which the Company is leveraged could prevent it from repurchasing all of the
Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Notes -- Repurchase at Option of Holder -- Change of Control"
and "Description of Other Indebtedness -- New Credit Facility."
HOLDING COMPANY STRUCTURE; RESTRICTION ON ACCESS TO CASH FLOWS OF SUBSIDIARIES
Worldtex is a holding company, the only assets of which are the stock of
its subsidiaries. All of the operations of Worldtex are conducted through its
direct and indirect wholly owned subsidiaries. Accordingly, Worldtex's ability
to service its indebtedness, including the Notes, is dependent upon earnings and
cash flow of its subsidiaries and the payment of funds by those subsidiaries to
Worldtex in the form of loans, dividends or otherwise. In addition, the ability
of Worldtex's subsidiaries to pay dividends, repay intercompany liabilities or
make other advances to Worldtex is subject to restrictions imposed by corporate
law and certain United States, state and foreign tax considerations. Although
the Guarantors have provided the Subsidiary Guarantees, such Subsidiary
Guarantees may not be enforceable under certain circumstances. See
"-- Fraudulent Transfer Considerations; Unenforceability of Subsidiary
Guarantees."
ACQUISITION RISKS
The Company intends to seek additional acquisition opportunities. There can
be no assurance, however, that the Company will be able to successfully identify
suitable acquisition candidates, negotiate appropriate acquisition terms, obtain
financing which may be needed to effect such acquisitions, complete
acquisitions, integrate acquired operations into its existing operations or
expand into new markets. In addition, there can be no assurance that the Company
will be able to successfully integrate ECA and Elastex with the Company.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies, services and products of the acquired companies
and the diversion of management's attention from other business concerns. Future
acquisitions by the Company could result in the incurrence of substantial
additional indebtedness, the amortization of expenses related to goodwill and
other intangible assets and other increased expenses, particularly in the fiscal
quarters immediately following the completion of such acquisitions while the
operations of the acquired business are being integrated into the Company's
operations, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Once
18
<PAGE> 19
integrated, acquired operations may not achieve levels of revenues,
profitability or productivity comparable with those achieved by the Company's
existing operations, or otherwise perform as expected. In addition, the Company
competes for acquisition and expansion opportunities with companies that have
substantially greater resources.
RISKS OF DOING BUSINESS IN FOREIGN JURISDICTIONS
In 1997, approximately 63.7% of the Company's sales (45.6% on a pro forma
basis assuming that the Transactions occurred at the beginning of such period)
and approximately 82.9% of operating profits (55.6% on such pro forma basis)
were derived from international operations and export sales, which are subject
in varying degrees to risks inherent in doing business abroad. Such risks
include the possibility of unfavorable circumstances arising from host country
laws or regulations. In addition, foreign operations include risks of partial or
total expropriation; currency exchange rate fluctuations and restrictions on
currency repatriation; significant taxation policies; the disruption of
operations from labor and political disturbances, insurrection or war; and the
requirements of partial local ownership of operations in certain countries. For
example, France recently increased the corporate income tax rate from 36.67% to
41.67%, which resulted in a charge to 1997 earnings of approximately $0.5
million and a one-time charge to increase the reserve for deferred income taxes
of approximately $1.2 million.
Any change in the value of the currencies of the foreign countries in which
the Company does business against the U.S. dollar could have a material adverse
impact on the Company's business, financial condition and results of operations.
For example, the decline in the value of the French franc and Colombian peso as
compared to the U.S. dollar during 1997 resulted in a reduction in the Company's
sales for financial reporting purposes. In addition, the economies of Colombia
and certain of the Company's target Latin American markets have experienced
significant and in some periods extremely high rates of inflation over the past
few years. Inflation and rapid fluctuation in exchange rates have had and may
continue to have negative effects on these economies and could have a material
adverse impact on the Company's business, financial condition and results of
operations.
TEXTILE INDUSTRY AND CYCLICALITY
The textile and retail apparel industries are highly cyclical and are
characterized by rapid shifts in fashion and consumer demand, as well as
competitive pressures and price and demand volatility. The demand for the
Company's products is principally dependent upon the level of United States
demand for retail apparel. The demand for retail apparel is in turn dependent on
United States consumer spending, which may be adversely affected by an economic
downturn, changing retailer and consumer demands, a decline in consumer
confidence or spending, and other factors beyond the Company's control. A
reduction in the level of demand for retail apparel could have a material
adverse effect on the Company.
The Company's success depends in part upon its ability to anticipate and
respond to changing consumer preferences and fashion trends in a timely manner.
Any sustained failure by the Company to identify and be able to respond to such
trends could have a material adverse effect on the Company.
The Company believes that recent trends in consumer preferences have put
downward pressure on demand for sheer pantyhose, and that alternative apparel,
such as trouser socks, knee highs and anklets, have gained favor. A substantial
portion of the Company's sales in 1997 and 1996 were to pantyhose manufacturers.
See "Business -- Business Strategy -- Continue to Develop New End Uses for
Covered Elastic Yarn and Narrow Elastic Fabric." The Company cannot predict the
extent to which these trends may continue or their future effect on the Company.
LIMITED RAW MATERIAL SOURCES
Spandex and nylon are the principal raw materials used in the manufacture
of covered elastic yarn by Worldtex. In 1997 Worldtex purchased over half of its
nylon and spandex from a single source, DuPont. If the supply of spandex from
DuPont should be interrupted or cease for any reason, Worldtex believes it might
be difficult to find adequate alternative suppliers of spandex.
19
<PAGE> 20
COMPETITION; RISKS ASSOCIATED WITH CHANGING INDUSTRY
The textile and apparel industries are highly competitive. The apparel
markets are served by a variety of producers, many of which are located in
rapidly growing, low-wage countries and use textiles produced in those regions.
Many of these textile producers have substantially greater financial and other
resources and lower cost of funds than the Company.
Unifi, Inc. ("Unifi"), Spanco Industries, Inc. ("Spanco") and Worldtex are
the three largest suppliers of covered elastic yarns in the United States.
Unifi, which is also a leading producer of other yarns, recently acquired
Spanco. The Company cannot predict the effect that such acquisition will have on
the Company, although Unifi has substantially greater financial resources than
the Company and is less leveraged.
Future technological advances in the textile industry may result in the
availability of new products or increase the efficiency of existing
manufacturing and distribution systems. If a new technology becomes available
that is more cost-effective or creates a competing product, the Company may be
unable to access such technology or its use may involve substantial capital
expenditure that the Company may be unable to finance. There can be no assurance
as to whether existing, proposed or yet undeveloped technologies will render the
Company's technology less profitable or less viable, or that the Company will
have available the financial and other resources to compete effectively against
companies possessing such technologies. The Company is unable to predict which
of the many possible future products and services will meet the evolving
industry standards and consumer demands. There can be no assurance that the
Company will be able to adapt to such technological changes or offer such
products on a timely basis or establish or maintain competitive positions.
DEPENDENCE ON EXISTING MANAGEMENT
The depth of experience in the business represented by the Company's
executive management team, including Barry D. Setzer, President and Chief
Executive Officer, and Richard J. Mackey, Chairman of the Board and Chief
Financial Officer, and the managers of the Company's subsidiaries, is a key
component of the Company's competitiveness. Although the Company has entered
into employment contracts with Messrs. Setzer and Mackey, the continued presence
of such persons within the Company's management structure cannot be assured. In
addition, although the Company has entered into an employment contract with
Edward Gleadall, the chief executive officer of ECA, the continued employment of
Mr. Gleadall cannot be assured. Mr. Gleadall will receive a substantial bonus
from NFA Corp. upon consummation of the ECA Acquisition. The loss of the
services of any of the foregoing persons could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company does not maintain any key person insurance.
ENVIRONMENTAL LAWS AND REGULATIONS
The Company is subject to various federal, state and local environmental
laws and regulations governing the discharge, emission, storage, handling and
disposal of a variety of substances and wastes used in or resulting from the
Company's operations. There can be no assurance that environmental regulations
(or the interpretation of existing regulations) will not become more stringent
in the future, that the Company will not incur substantial costs in the future
to comply with such requirements or that the Company will not discover currently
unknown environmental problems or conditions. Any such event could have a
material adverse effect on the Company.
LIMITS ON ABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to
repurchase all of the outstanding Notes at 101% of the principal amount hereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. There can be no assurance that the Company will have the financial
resources necessary or be permitted by its other debt agreements to repurchase
the Notes upon the occurrence of a Change of Control. The inability to
repurchase all of the tendered Notes would constitute an Event of Default (as
defined herein) under the Indenture. A Change of Control also constitutes an
event of default under the Company's New Credit Facility. See "Description of
Notes -- Repurchase at the Option of Holders -- Change of Control."
20
<PAGE> 21
LACK OF PUBLIC MARKET FOR THE NOTES
There is no existing trading market for the Notes, and there can be no
assurance regarding the future development of a market for the Notes or the
ability of holders of the Notes to sell their Notes or the price at which such
holders may be able to sell their Notes. If such a market were to develop, the
Notes could trade at prices that may be higher or lower than the initial
offering price depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. The
Initial Purchasers have advised the Company that they currently intend to make a
market in the New Notes. The Initial Purchasers are not obligated to do so,
however, and any market making with respect to the Notes may be discontinued at
any time without notice. Therefore, there can be no assurance as to the
liquidity of any trading market for the Notes or that an active trading market
for the Notes will develop. The Company does not intend to apply for listing or
quotation of the Notes on any securities exchange or stock market.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on holders of the Notes.
FRAUDULENT TRANSFER CONSIDERATIONS; UNENFORCEABILITY OF SUBSIDIARY GUARANTEES
The obligations of any Guarantor as a guarantor under the Indenture may be
subject to review under applicable fraudulent transfer or similar laws, in the
event of the bankruptcy or other financial difficulty of any such Guarantor. In
the United States, under such laws, if a court in a lawsuit by an unpaid
creditor or representative of creditors of any such Guarantor, such as a trustee
in bankruptcy or any such person as debtor in possession, were to find that at
the time such Guarantor incurred its obligations under its guarantee, it (i)
received less than fair consideration or reasonably equivalent value therefore,
and (ii) either (a) was insolvent, (b) was rendered insolvent, (c) was engaged
in a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital, or (d) intended to incur or believed
that it would incur debts beyond its ability to pay as such debts matured, such
court could void all or a portion of such obligations under its guarantee and
direct the return of any amounts paid with respect thereof. Moreover, regardless
of the factors identified in the foregoing clauses (i) and (ii), a court could
take such action if it found that the guarantee was entered into with actual
intent to hinder, delay or defraud creditors. The measure of insolvency for
purposes of the foregoing will vary depending on the law of the jurisdiction
being applied. Generally, however, an entity would be considered insolvent if
the sum of its debts (including contingent or unliquidated debts) is greater
than all of its property at a fair valuation or if the present fair salable
value of its assets is less than the amount that would be required to pay its
probable liability on its existing debts as they become absolute and matured.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Notes except pursuant to a shelf registration
statement to be filed under certain limited circumstance specified in "The
Exchange Offer -- Purpose of the Exchange Offer." Thereafter, subject to such
exception, any Holder of Old Notes who does not tender its Old Notes in the
Exchange Offer will continue to hold restricted securities which may not be
offered, sold or otherwise transferred, pledged or hypothecated except pursuant
to Rule 144 and Rule 144A under the Securities Act or pursuant to any other
exemption from registration under the Securities Act relating to the disposition
of securities, in which case, an opinion of counsel must be furnished to the
Company that such an exemption is available.
21
<PAGE> 22
THE COMPANY
Worldtex is a holding company engaged through its subsidiaries in the
manufacture and supply of covered elastic yarn and narrow elastic fabrics.
Worldtex, a Delaware corporation, was organized in July 1992 to acquire the
covered elastic yarn manufacturing operations of Rexel, Inc., formerly known as
Willcox & Gibbs, Inc., a New York corporation ("W&G"). Prior to November 12,
1992, Worldtex was a wholly owned subsidiary of W&G. On that date, W&G declared
a dividend of one share of Worldtex Common Stock for each share of W&G Common
Stock outstanding on November 23, 1992.
Worldtex's principal subsidiaries engaged in the production of covered
elastic yarn are Regal Manufacturing Company, Inc. ("Regal"), based in Hickory,
North Carolina, Rubyco (1987), Inc. ("Rubyco"), based in Montreal, Canada, Filix
Lastex, S.A. ("Filix"), based in Troyes, France, and Fibrexa, Ltda. ("Fibrexa"),
based in Bogota, Colombia. W&G acquired Regal in 1983, acquired Rubyco in 1986
and acquired Filix in 1990, and transferred them to Worldtex in August 1992.
Worldtex acquired Fibrexa in 1995.
Worldtex's principal subsidiaries engaged in the production of narrow
elastic fabrics are Elastic Corporation of America, Inc., based in Columbiana,
Alabama, which acquired ECA on December 1, 1997, and Elastex, Inc., based in
Asheboro, North Carolina, which acquired Elastex on October 3, 1997.
The following chart indicates the principal subsidiaries of Worldtex
(although certain subsidiaries are owned indirectly through other subsidiaries),
the percentage of Worldtex's 1997 net sales attributable to each principal
subsidiary, on a pro forma basis after giving effect to the Transactions, and
whether or not such subsidiary is a Guarantor.
edgar description on pcn 900
22
<PAGE> 23
USE OF PROCEEDS
THE EXCHANGE OFFER
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered in the
Exchange Offer. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the form and terms of which are the same in all material
respects as the form and terms of the New Notes except that the New Notes have
been registered under the Securities Act and hence do not include certain rights
to registration thereunder or contain transfer restrictions or terms with
respect to Liquidated Damages. The Old Notes surrendered in exchange for the New
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the New Notes will not result in any proceeds to the Company or increase in
the indebtedness of the Company.
THE SALE OF THE OLD NOTES
The net proceeds received by the Company from the sale of the Old Notes
(the "Offering"), after deducting the discount to the Initial Purchasers, the
discount to investors and related transaction fees and expenses, were
approximately $167.6 million. The Company used the net proceeds as follows: (i)
$8.3 million were used to repay borrowings under the Existing Credit Facility
(as defined below) undertaken to fund the Elastex Acquisition (which included
the purchase price of $7.7 million and a $0.6 million payment to cancel an
equipment operating lease assumed from the seller); (ii) $76.3 million were used
to fund the ECA Acquisition; (iii) $53.4 million, inclusive of accrued interest,
were used to repay the 7.50% senior notes (such notes were payable in annual
installments of $7.1 million commencing July 1, 1998, with final maturity on
July 1, 2004, and paid interest at a rate of 7.50% per annum); (iv) $17.5
million were used to repay the Company's existing Credit Facility, dated as of
November 12, 1992, as amended (the "Existing Credit Facility"), which provided
for revolving credit loans from time to time through May 31, 1999 (such loans
paid interest at rates based on LIBOR, the prime rate and certificate of deposit
rates; for the year ended December 31, 1997, the weighted average interest rate
under the Existing Credit Facility was 7.05% per annum); and (v) $12.1 million
were retained as cash proceeds to the Company. The Company expects to use the
balance of the net proceeds from the sale of the Old Notes, together with the
$25.0 million available to be borrowed under the New Credit Facility, for
general corporate purposes, including working capital and capital expenditures.
In addition, such available liquidity may be used for future acquisitions of
businesses, although the Company currently has no acquisition commitment.
Pending use of such cash, the balance of the net proceeds of the sale of the
Notes will be invested in cash equivalents.
23
<PAGE> 24
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on December 1, 1997 (the "Closing
Date") through the Initial Purchasers to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act). In connection with the sale of
the Old Notes, the Company, the Guarantors and the Initial Purchasers entered
into the Registration Rights Agreement pursuant to which the Company and the
Guarantors agreed to cause to be filed with the Commission within 60 days after
the Closing Date, and use their best efforts to cause to become effective on or
prior to 120 days after December 1, 1997, a registration statement with respect
to the Exchange Offer. However, if (i) the Company is not required to file an
Exchange Offer registration statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) if any holder of Old Notes shall notify the Company within 20
business days of the consummation of the Exchange Offer (A) that such holder is
prohibited by applicable law or Commission policy from participating in the
Exchange Offer, or (B) that such holder may not resell the New Notes acquired by
it in the Exchange Offer to the public without delivering a prospectus and that
the Prospectus contained in the Exchange Offer registration statement is not
appropriate or available for such resales by such holder, or (C) that such
holder is a broker-dealer and holds Old Notes acquired directly from the Company
or one of its affiliates, then the Company within six months of such date, the
Company and the Subsidiary Guarantors shall (A) use their best efforts to cause
to become effective a shelf registration statement (the "Shelf Registration
Statement") with respect to resales of the Old Notes, and (B) keep the Shelf
Registration Statement effective for a period of at least two years after the
Closing Date.
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Once the Exchange Offer is consummated, the Company
will have no further obligations to register any of the Old Notes not tendered
by the Holders for exchange, except pursuant to a Shelf Registration Statement
filed under the limited circumstances described in the immediately preceding
paragraph. Thereafter, any Holder of Old Notes who does not tender its Old Notes
in the Exchange Offer and which is not eligible to use such a Shelf Registration
Statement will continue to hold restricted securities which may not be offered,
sold or otherwise transferred, pledged or hypothecated except pursuant to Rule
144 and Rule 144A under the Securities Act or pursuant to any other exemption
from registration under the Securities Act relating to the disposition of
securities.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, including the Exchange Offer
No-Action Letters, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof who are not affiliates of the Company
(other than a broker-dealer who acquired such Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act; provided
that the Holder is acquiring New Notes in its ordinary course of business and
has not engaged in, and does not intend to engage in, any distribution (within
the meaning of the Securities Act) of the New Notes and has no arrangement or
understanding with any person to participate in a distribution of the New Notes.
Persons wishing to exchange Old Notes in the Exchange Offer must represent to
the Company that such conditions have been met. However, any Holder who may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company or who tenders in the Exchange Offer with the intention to participate,
or for the purpose of participating, in a distribution of the New Notes cannot
rely on the interpretation by the staff of the Commission set forth in such
no-action letters, including the Exchange Offer No-Action Letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Old Notes where such Old Notes were acquired
by such broker-dealer as a result of market-
24
<PAGE> 25
making activities or other trading activities (other than acquisitions directly
from the Company) must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received as aforesaid. The Company has agreed that for a period of 180 days
after the Exchange Offer is consummated, it will, upon reasonable request, make
this Prospectus available promptly to such broker-dealers for use in connection
with any such resale. See "Plan of Distribution."
Except as set forth above, this Prospectus may not be used for an offer to
resell, or for a resale or other transfer of New Notes.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer registration statement with the Commission on or prior to 60
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer registration statement declared effective by the Commissions
on or prior to 120 days after the Closing Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer registration statement
was declared effective by the Commission, New Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, the Company will use its best efforts to file
the Shelf Registration Statement with the Commission on or prior to 60 days
after such filing obligation arises and to cause the Shelf Registration to be
declared effective by the Commission on or prior to 90 days after such
obligation arises. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer registration statement, or (d)
the Shelf Registration Statement or the Exchange Offer registration statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Transfer Restricted Securities held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Transfer Restricted Securities with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages for all Registration Defaults of
$.30 per week per $1,000 principal amount of Transfer Restricted Securities. All
accrued Liquidated Damages will be paid by the Company on each interest payment
date to the Global Note Holder by wire transfer of immediately available funds
or by federal funds check and to Holders of certificated Notes by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. For
purposes of the foregoing, "Transfer Restricted Securities" means each Old Note
until (i) the date on which such Old Note has been exchanged by a person other
than a broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New Note,
the date on which such New Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer registration statement, (iii) the date on which
such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the date
on which such Old Note is distributed to the public pursuant to Rule 144 under
the Act.
25
<PAGE> 26
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000.
As of April 17, 1998, there was $175 million aggregate principal amount of
the Old Notes outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of April 21, 1998.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depositary. The New Notes exchanged for the Old
Notes will initially be issued and transferable in book-entry form through DTC.
See "Description of Notes -- Book-Entry Delivery and Form."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay the expenses, other than
certain applicable taxes, of the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Company has the right to extend the Exchange Offer but only to the
extent necessary to comply with applicable federal and state securities laws or
if any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer which, in the
reasonable judgment of the Company, might impair the ability of the Company to
proceed with the Exchange Offer. In order to extend the Expiration Date, the
Company will notify the Exchange Agent and the record Holders of Old Notes of
any extension by oral or written notice, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
The Expiration Date will not be extended beyond the 30th business day after the
date of this Prospectus.
The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if the applicable
condition set forth herein under "Conditions" shall have occurred and shall not
have been waived by the Company by giving oral or written notice of such delay,
extension, amendment or termination to the Exchange Agent. Any such delay in
acceptance, extension, amendment or termination will be followed as promptly as
practicable by oral or written notice thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment in a manner reasonably calculated
to inform the Holders of such amendment and the Company will extend the Exchange
Offer as necessary to provide to such holders a period of five to ten business
days after such amendment, depending upon the significance of the amendment and
the manner of disclosure to Holders of the Old Notes. if the Exchange Offer
would otherwise expire during such five to ten business day period.
26
<PAGE> 27
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
ACCRUED AMOUNTS ON THE NOTES
The New Notes will bear interest at a rate equal to 9 5/8% per annum from
the last date on which interest was paid on the Old Notes surrendered in
exchange therefor or, if no interest has been paid, from the date of original
issue of such Old Notes. Interest on the Notes is payable semi-annually on June
15 and December 15 of each year, commencing on June 15, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder of Old Notes must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the instructions to the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes and any other required documents, so that it is
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
Any financial institution that is a participant in DTC (the "Book-Entry
Transfer Facility") may make book-entry delivery of the Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account in accordance with the Book-Entry Transfer Facility procedure
for such transfer. Although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth in "-- Exchange Agent" below prior to 5:00 p.m., New York City time,
on the Expiration Date. DELIVERY OF DOCUMENTS TO THE COMPANY IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
The method of delivery of the tendered Old Notes, the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder. Instead of delivery by mail, it is recommended that the
Holder use an overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure timely delivery. No Letter of Transmittal or Old
Notes should be sent to the Company.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
ANY BENEFICIAL HOLDER WHOSE OLD NOTES ARE REGISTERED IN THE NAME OF ITS
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO WISHES
TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT SUCH
REGISTERED HOLDER TO TENDER ON ITS BEHALF. IF SUCH BENEFICIAL HOLDER WISHES TO
TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER MUST, PRIOR TO COMPLETING AND
EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING ITS OLD NOTES, EITHER MAKE
APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE OLD NOTES IN SUCH HOLDER'S
NAME OR OBTAIN A PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE
TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
27
<PAGE> 28
Signatures on a Letter of Transmittal (or a facsimile thereof) or a notice
of withdrawal, as the case may be, must be guaranteed by an Eligible Institution
(as defined below) unless the Old Notes tendered pursuant thereto are tendered
(i) by a registered Holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal (or a facsimile thereof) or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by or through a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
institution which falls within the definition of "Eligible Guarantor
Institution" contained in Rule 17Ad-15 promulgated by the Commission under the
Exchange Act (each an "Eligible Institution").
If the Letter of Transmittal (or facsimile thereof) is signed by a person
other than the registered Holder of the Old Notes tendered thereby, such Old
Notes must be endorsed or accompanied by appropriate bond powers signed as the
name of the registered Holder or Holders appears on the Old Notes, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If the Letter of Transmittal (or facsimile thereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding on all parties. The Company reserves the
absolute right to reject any and all Old Notes not properly tendered or any Old
Notes the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to the Exchange Offer and/or
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Company shall determine. None of the Company, the Exchange Agent nor
any other person shall be under any duty to give notification of defect or
irregularities with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which any defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
Holder(s) of Old Notes, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being acquired
in the ordinary course of such Holder's business, that such Holder has not
engaged in, nor intends to engage in, any distribution of the New Notes and has
no arrangement or understanding with any person to participate in the
distribution of such New Notes, and that such Holder is not an "affiliate" (as
defined under Rule 405 of the Securities Act) of the Company or any of its
subsidiaries. If the Holder is a broker-dealer that will receive New Notes for
is own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, such Holder by tendering
will acknowledge that it will deliver a Prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the
28
<PAGE> 29
Exchange Agent, or cannot complete the procedure for book-entry transfer, prior
to 5:00 p.m. on the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the date of execution of the Notice of Guaranteed
Delivery, the Letter of Transmittal (or facsimile thereof) together with
the certificate(s) representing the Old Notes to be tendered in proper form
for transfer (or a confirmation of a book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility of Old Notes delivered
electronically) and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of a bookentry
transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility of Old Notes delivered electronically) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within three New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery. Upon request to the
Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who
wish to tender their Old Notes according to the guaranteed delivery
procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the principal amount of such
Old Notes), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, which determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes which have been tendered but which are not accepted for payment will
be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company may
terminate or amend the Exchange Offer as provided herein and will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, if any of the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder,
violates applicable law or any applicable policy of the Commission; or
29
<PAGE> 30
(b) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might impair the ability
of the Company to proceed with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the reasonable judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer.
If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "-- Withdrawal of Tenders") or (iii) waive certain of such conditions
with respect to the Exchange Offer and accept all properly tendered Old Notes
which have not been withdrawn or revoked. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver in
a manner reasonably calculated to inform Holders of Old Notes of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, (i) if, because of any change in applicable law or applicable
policy thereof by the Commission the Company is not permitted to effect the
Exchange Offer, (ii) the Exchange Offer is not consummated within 180 days after
the date of original issue of the Old Notes, (iii) the Initial Purchaser so
requests within six months after consummation of the Exchange Offer with respect
to the Old Notes not eligible to be exchanged for New Notes in the Exchange
Offer and held by it following consummation of the Exchange Offer or (iv) any
Holder of Old Notes notified the Company within 20 days of the consummation of
the Exchange Offer that, for certain specified reasons, such Holder is precluded
from participating in the Exchange Offer or, in the case of any Holder that
participates in the Exchange Offer, such Holder does not receive freely
tradeable New Notes on the date of the exchange and such Holder notifies the
Company within six months of such date, then the Company shall file a Shelf
Registration Statement. Thereafter, the Company's obligation to consummate the
Exchange Offer shall be terminated.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By registered or certified mail:
IBJ Schroder Bank & Trust-Company
Bowling Green Station
P.O. Box 84
New York, New York 10274-0084
Attention: Reorganization Operations Department
By hand or by overnight courier:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Securities Processing Window
Subcellar one, (SC-1)
By facsimile: (212) 858-2611
Attention: Customer Service
Confirm by telephone: (212) 858-2103
30
<PAGE> 31
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the Prospectus and related documents to the beneficial owners of the
Old Notes, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate not to exceed $750,000,
and include fees and expenses of the Exchange Agent and Trustee under the
Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the Holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the Holder or any
other person(s)) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
that is, face value as reflected in the Company's accounting records on the date
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized upon the consummation of the Exchange Offer. The issuance costs
incurred in connection with the Exchange Offer will be capitalized and amortized
over the term of the New Notes.
A copy of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
31
<PAGE> 32
CAPITALIZATION
The following table sets forth as of December 31, 1997, the consolidated
capitalization of the Company.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Long-term debt, including current maturities(1):
Debt of Foreign Subsidiaries.............................. $ 5,400
New Credit Facility(1).................................... --
Industrial Development Bonds.............................. 6,000
Old Notes................................................. 175,000
--------
Total long-term debt including current
maturities....................................... 186,400
Stockholders' equity........................................ 77,502
--------
Total capitalization.............................. $263,902
========
</TABLE>
- ---------------
(1) There is $25.0 million available for borrowing under the New Credit Facility
for general corporate purposes, subject to a borrowing base limitation. See
"Description of Other Indebtedness -- The New Credit Facility."
32
<PAGE> 33
PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1997 gives effect to the Transactions as if each had
occurred at January 1, 1997.
The Unaudited Pro Forma Combined Statement of Operations has been prepared
using the purchase method of accounting for the ECA Acquisition and the Elastex
Acquisition, whereby the total cost of each acquisition is allocated to the
tangible and intangible assets acquired and liabilities assumed based upon their
respective fair values at the effective dates of such acquisitions. For purposes
of the Unaudited Pro Forma Combined Statement of Operations, such allocations
have been made based upon currently available information and management's
estimates.
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 is based on the audited financial statements for the year
ended December 31, 1997 of the Company and the unaudited financial statements
for the fiscal period ended December 1, 1997 of ECA and the year ended November
1, 1996 of Elastex. The unaudited financial statements reflect all adjustments,
consisting of normal recurring accruals, which in the opinion of management of
the applicable company are necessary for a presentation of results for the
respective periods in accordance with the basis of presentation described in the
respective company's financial statements.
The Unaudited Pro Forma Combined Statement of Operations does not purport
to represent what the results of operations of the Company would actually have
been if any of the Transactions had occurred on such dates or to project the
results of operations of the Company for any future date or period. The
Unaudited Pro Forma Combined Statement of Operations set forth below should be
read in conjunction with the respective Consolidated Financial Statements and
Notes thereto of the Company and ECA incorporated by reference or included
elsewhere in this Prospectus, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
33
<PAGE> 34
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
WORLDTEX ELASTEX ECA ADJUSTMENTS PRO FORMA
-------- ------- ------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $203,256 $14,964 $65,506 $ -- $283,726
Cost of goods sold................ 167,272 12,265 48,678 -- 228,215
-------- ------- ------- -------- --------
Gross profit...................... 35,984 2,699 16,828 -- 55,511
Selling, general and
administrative expenses......... 16,770 1,132 7,652 1,275(a) 26,829
-------- ------- ------- -------- --------
Operating profit.................. 19,214 1,567 9,176 (1,275) 28,682
Interest expense.................. 7,043 21 1,182 9,693(b) 17,939
Other income (expense), net....... (302) (43) -- -- (345)
-------- ------- ------- -------- --------
Income before income taxes........ 11,869 1,503 7,994 (10,968) 10,398
Income taxes...................... 5,377 -- 3,078(d) (3,633)(c) 4,822
-------- ------- ------- -------- --------
Net income........................ $ 6,492 $ 1,503 $ 4,916 $ (7,335) $ 5,576
======== ======= ======= ======== ========
OTHER OPERATING DATA(e):
Depreciation and amortization..... $ 6,845 $ 377 $ 1,699 $ 1,999 $ 10,920
Capital expenditures.............. 7,706 1 2,572 -- 10,279
Cash interest expense............. 17,239
Ratio of earnings to fixed
charges(f)...................... 1.45x
</TABLE>
- ---------------
(a) Reflects (i) amortization of goodwill associated with the acquisitions of
Elastex and ECA of $1.4 million for the year ended December 31, 1997 and
(ii) reduction of lease expense of $122,000 for the year ended December 31,
1997 resulting from the buyout of certain leases of Elastex.
(b) Reflects (i) pro forma interest expense calculated using an assumed interest
rate of 9 5/8% per annum on the Senior Notes and (ii) estimated additional
amortization of deferred financing costs of $567,000 for the year ended
December 31, 1997. If actual interest rates vary by 25 basis points from
assumed rates, total pro forma interest expense will increase or decrease by
$466,000 for the year ended December 31, 1997.
(c) Reflects an assumed effective corporate income tax rate of 38% on the
earnings of Elastex, ECA and the pro forma adjustments.
(d) Reflects an assumed effective corporate income tax rate of 38.5% on the
earnings of ECA on a historical basis.
(e) Management believes that EBITDA is a measure useful to investors, although
the Company's measures of EBITDA may not be comparable to other similarly
titled measures presented by other companies. Pro forma EBITDA for the year
ended December 31, 1997 of $39.3 million, which includes net pro forma
adjustments of $724,000 (depreciation and amortization of $2.0 million less
additional cash pro forma expenses of $1.3 million, would result in a pro
forma EBITDA/cash interest ratio of 2.28x, an EBITDA (less capital
expenditures)/cash interest expense ratio of 1.68x, and a total debt/EBITDA
ratio of 4.79x. EBITDA represents income before income taxes plus interest
expense, depreciation and amortization for the applicable company. EBITDA
should not be considered as an alternative measure of net income or cash
provided by operating activities (both as determined in accordance with
generally accepted accounting principles), but is presented to provide
additional information relating to the Company's debt service capability.
EBITDA should not be considered in isolation or as a substitute for other
measures of financial performance or liquidity.
(f) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and a portion
of rental expense which is representative of the interest factor in these
rentals.
34
<PAGE> 35
SELECTED HISTORICAL FINANCIAL INFORMATION
WORLDTEX
The following table sets forth selected consolidated financial information
of the Company for each of the five years in the period ended December 31, 1997.
Such information was derived from the Consolidated Financial Statements of the
Company, which in the case of the three-year period ended December 31, 1997 have
been audited by KPMG Peat Marwick LLP, independent public accountants. The
consolidated financial statements as of December 31, 1997 and 1996, and for each
of the years in the three-year period ended December 31, 1997, and the report
thereon, are incorporated by reference in this Prospectus. The selected
consolidated financial information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus and the Consolidated Financial
Statements and Notes thereto of the Company incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 203,256 $207,829 $187,981 $164,654 $152,709
Cost of goods sold................................... 167,272 168,754 156,519 138,666 125,739
--------- -------- -------- -------- --------
Gross profit......................................... 35,984 39,075 31,462 25,988 26,970
Selling, general and administrative expenses......... 16,770 16,582 15,708 13,502 12,108
--------- -------- -------- -------- --------
Operating profit..................................... 19,214 22,493 15,754 12,486 14,862
Interest expense..................................... 7,043 5,826 5,693 3,951 3,298
Other income (expense), net.......................... (302) 694 170 333 (74)
--------- -------- -------- -------- --------
Income before income taxes........................... 11,869 17,361 10,231 8,868 11,490
Income tax expense................................... 5,377 6,415 4,979 3,058 4,206
--------- -------- -------- -------- --------
Net income before extraordinary item................. 6,492 10,946 5,252 5,810 7,284
Extraordinary item, net.............................. 1,344 -- -- -- --
--------- -------- -------- -------- --------
Net Income........................................... $ 5,148 $ 10,946 $ 5,252 $ 5,810 $ 7,284
========= ======== ======== ======== ========
OTHER OPERATING DATA:
Cash Flows provided (used):
Operating.......................................... $ (1,497) $ 15,032 $ 12,046 $ 9,592 $ 11,288
Investing.......................................... (101,278) (14,934) (15,434) (8,953) (6,090)
Financing.......................................... 113,904 399 2,182 128 (3,318)
EBITDA (a)........................................... 25,757 29,471 22,057 17,708 18,869
Depreciation and amortization........................ 6,845 6,284 6,133 4,889 4,081
Capital expenditures................................. 7,706 13,785 8,356 8,077 5,803
Ratio of earnings to fixed charges (b)............... 2.49x 3.63x 2.65x 3.07x 4.14x
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................................... $ 87,743 $ 47,470 $ 47,342 $ 42,53 $ 34,554
Total assets......................................... 312,439 206,032 196,065 166,405 145,996
Total debt........................................... 188,219 70,730 71,126 61,821 60,337
Stockholders' equity................................. 77,502 85,178 78,939 69,033 59,042
</TABLE>
(See Notes to the Selected Historical Financial Information on following page.)
35
<PAGE> 36
ECA
The following table sets forth selected financial information of ECA for
each of the three fiscal years in the period ended December 28, 1996. Such
information was derived from the stand alone Financial Statements of ECA, which
have been audited and are included elsewhere in this Prospectus. The following
table also sets forth the selected financial information of ECA as of September
28, 1996 and September 27, 1997 and for the thirty-nine week periods then ended.
For convenience, the thirty-nine week periods ended September 28, 1996 and
September 27, 1997 are referred to as the nine months then ended. Such
information was derived from the unaudited stand alone Financial Statements of
ECA. Such unaudited Financial Statements, in the opinion of ECA's management,
include all adjustments (consisting of normal recurring accruals) necessary for
a stand alone presentation of the financial position and results of operations
for such periods in accordance with the basis of presentation described in Note
1 to the audited ECA financial statements. The results of operations for the
nine months ended September 27, 1997 are not necessarily indicative of results
that may be expected for the full year. The selected financial information set
forth below should be read in conjunction with the Financial Statements and
Notes thereto of ECA included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
----------------------------- ------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, DECEMBER 28, DECEMBER 30, DECEMBER 31,
1997 1997 1996 1995 1994
------------- ------------- ------------ ------------ ------------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $52,739 $41,779 $55,798 $ 58,055 $61,339
Cost of goods sold................ 38,914 31,151 41,828 45,060 45,666
------- ------- ------- -------- -------
Gross profit...................... 13,825 10,628 13,970 12,995 15,673
Selling, general and
administrative expenses......... 6,447 5,241 6,664 6,219 9,379
------- ------- ------- -------- -------
Operating income.................. 7,378 5,387 7,306 6,776 6,294
Interest expense.................. 983 615 814 1,147 1,001
------- ------- ------- -------- -------
Net income........................ $ 6,395 $ 4,772 $ 6,492 $ 5,629 $ 5,293
======= ======= ======= ======== =======
OTHER OPERATING DATA:
Cash Flows provided (used):
Operating....................... $ 5,323 $ 4,737 $ 3,747 $ 11,287 $ 5,785
Investing....................... (2,174) (673) (1,138) 116 (835)
Financing....................... (3,079) (4,036) (2,612) (11,446) (4,952)
EBITDA(a)......................... 8,766 7,060 9,183 8,719 8,287
Depreciation and amortization..... 1,388 1,673 1,877 1,943 1,992
Capital expenditures.............. 2,174 678 1,171 944 1,371
Ratio of earnings to fixed
charges(b)...................... 5.10x 5.00x 6.25x 4.42x 5.51x
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................... $20,286 $15,436 $18,356 $ 13,055 $16,757
Total assets...................... 35,168 28,738 30,189 25,955 32,468
Total debt........................ 6,000 6,000 6,000 6,000 6,700
Divisional equity................. 24,258 17,798 20,942 16,362 21,478
</TABLE>
- ---------------
(a) Management believes that EBITDA is a measure useful to investors, although
the Company's measures of EBITDA may not be comparable to other similarly
titled measures presented by other companies. EBITDA represents income
before income taxes plus interest expense, depreciation and amortization for
the applicable company. EBITDA should not be considered as an alternative
measure of net income or cash provided by operating activities (both as
determined in accordance with generally accepted accounting principles), but
is presented to provide additional information relating to the Company's
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity.
(b) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and a portion
of rental expense which is representative of the interest factor in these
rentals.
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company believes that it is one of the largest suppliers of covered
elastic yarn in the world and the largest manufacturer of woven and knitted
narrow elastic fabrics in the world (based on 1997 net sales). Covered elastic
yarns manufactured by the Company are principally used in the production of
sheer and opaque pantyhose, men's, women's and children's socks, sweaters,
swimwear, active and athletic wear and men's, women's and children's stretch
apparel. Narrow elastic fabrics are elasticized fabric bands, typically under
six inches in width, that are used as components in the production of a broad
range of apparel products, such as waistbands for men's, women's and children's
underwear, athletic apparel and other garments, straps, facings and edgings in
women's intimate apparel and elastic bands in women's hosiery.
The Company's covered elastic yarn business operates around the world
through its subsidiaries Regal, based in Hickory, North Carolina, Rubyco, based
in Montreal, Canada, Filix, based in Troyes, France, and Fibrexa, based in
Bogota, Colombia. The Company also has a 38% interest in a manufacturing joint
venture in Estonia, has entered into a joint venture agreement for the
establishment of manufacturing operations in China and is currently in
negotiations for a similar venture in India.
The Company's narrow elastic fabrics business is conducted through Elastex,
acquired October 3, 1997, based in Asheboro, North Carolina and through ECA,
acquired on December 1, 1997 based in Columbiana, Alabama. ECA and Elastex
together own five manufacturing facilities, in Columbiana, Alabama, Asheboro,
North Carolina, Hemingway, South Carolina and Woolwine, Virginia.
Worldtex is a holding company, the only assets of which are the stock of
its subsidiaries. All of the operations of Worldtex are conducted through its
direct and indirect wholly owned subsidiaries. Accordingly, Worldtex's ability
to service its indebtedness and meet its other obligations is dependent upon
earnings and cash flow of its subsidiaries and the payment of funds by those
subsidiaries to Worldtex in the form of loans, dividends or otherwise. In
addition, the ability of Worldtex's subsidiaries to pay dividends, repay
intercompany liabilities or make other advances to Worldtex is subject to
restrictions imposed by corporate law and certain United States, state and
foreign tax considerations.
A substantial portion of the Company's sales and operating profits have
historically been derived from international operations and export sales, which
are subject in varying degrees to risks inherent in doing business abroad. Such
risks include the possibility of unfavorable circumstances arising from host
country laws or regulations. In addition, foreign operations include risks of
partial or total expropriation; currency exchange rate fluctuations and
restrictions on currency repatriation; significant taxation policies; the
disruption of operations from labor and political disturbances, insurrection or
war; and the requirements of partial local ownership of operations in certain
countries. Moreover, any change in the value of the currencies of the foreign
countries in which the Company does business against the U.S. dollar could have
a material adverse impact on the Company's business, financial condition and
results of operations.
The textile and retail apparel industries are highly cyclical and are
characterized by rapid shifts in fashion and consumer demand, as well as
competitive pressures and price and demand volatility. The demand for the
Company's products is principally dependent upon the level of United States
demand for retail apparel. The demand for retail apparel is in turn dependent on
United States consumer spending, which may be adversely affected by an economic
downturn, changing retailer and consumer demands, a decline in consumer
confidence or spending, and other factors beyond the Company's control. In
recent years, sales in the United States of sheer pantyhose have declined.
Although pantyhose manufacturers have historically accounted for a significant
portion of the Company's sales of covered elastic yarn, the Company's business
strategy includes the continued development of new end use applications for
covered elastic yarn.
Spandex and nylon are the principal raw materials used in the manufacture
of covered elastic yarn by Worldtex. In 1997 Worldtex purchased over half of its
nylon and spandex from a single source, DuPont. In recent years, DuPont and its
competitors have expanded their spandex production capacity, and Worldtex has
37
<PAGE> 38
been able to obtain sufficient supplies to meet its customers' requirements. If
the supply of spandex from DuPont should be interrupted or cease for any reason,
Worldtex believes it might be difficult to find adequate alternative suppliers
of spandex.
The textile and apparel industries are highly competitive. The apparel
markets are served by a variety of producers, many of which are located in
rapidly growing, low-wage countries and use textiles produced in those regions.
Many of these textile producers have substantially greater financial and other
resources and lower cost of funds than the Company. Unifi, Spanco and Worldtex
are the three largest suppliers of covered elastic yarns in the United States.
Unifi, which is also a leading producer of other yarns, acquired Spanco in 1997.
The Company cannot predict the effect that such acquisition will have on the
Company, although Unifi has substantially greater financial resources than the
Company and is less leveraged.
The Company is in the process of assessing the Year 2000 issue and the
estimated costs necessary for the Company's remediation plan. The Company does
not expect the Year 2000 issue to have a material effect on the Company's
business, operations or financial condition. The Company plans to remediate all
Year 2000 issues during 1998 and 1999 and does not expect remediation costs to
have a material impact on results of operations, liquidity and capital
resources.
The following table sets forth the percentage of Worldtex's historical
sales and operating profit (loss) accounted for by each of Worldtex's geographic
areas during the periods indicated, which in the case of 1997 reflects the ECA
Acquisition (effective from December 1, 1997) and the Elastex Acquisition
(effective from October 3, 1997). For purposes of determining operating profit,
parent company expenses have been allocated to each area in accordance with its
percentage of total sales. See Note 12 of the Notes to Consolidated Financial
Statements of Worldtex for additional financial information (net sales,
operating profits and identifiable assets) by geographic location.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
----------------- ----------------- --------------------
NET OPERATING NET OPERATING NET OPERATING
SALES PROFIT SALES PROFIT SALES PROFIT(LOSS)
----- --------- ----- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
North America.................................. 48% 19% 41% 11% 42% (1%)
Europe......................................... 45% 67% 53% 85% 54% 94%
South America.................................. 7% 14% 6% 4% 4% 7%
</TABLE>
RESULTS OF OPERATIONS -- WORLDTEX
The following table sets forth the relationship of percentages which
certain income and expense items have to net sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Sales................................................... 100.0% 100.0% 100.0%
===== ===== =====
Gross margin................................................ 17.7% 18.8% 16.7%
Selling, general & administrative expenses.................. 8.2 8.0 8.3
----- ----- -----
Operating profit............................................ 9.5 10.8 8.4
Interest expense............................................ 3.5 2.8 3.1
Other income (expense) -- net............................... (0.2) 0.4 0.1
----- ----- -----
Income before income taxes.................................. 5.8% 8.4% 5.4%
===== ===== =====
</TABLE>
1997 vs. 1996
Sales for the twelve months ended December 31, 1997 were $203.3 million and
net income before extraordinary item was $6.5 million, compared with sales of
$207.8 million and net income of $10.9 million for the comparable period in
1996. Diluted net income per share was $.44 for 1997 compared with $.75 in 1996.
38
<PAGE> 39
Worldtex's sales in 1997 decreased $4.6 million, or 2.2%, when compared with
1996. Sales in the Company's European operations decreased $17.4 million, or
15.8%, compared with 1996, primarily because of the stronger U.S. dollar versus
the French franc, which reduced the French subsidiary's sales by approximately
$12.7 million (assuming currency translation of 1997 sales at the rate
applicable to 1996 results). In the Company's North American operations, sales
increased $11.9 million, or 13.7%, from 1996 levels, primarily because of the
inclusion of the narrow fabrics operations acquired in October and December
which added $8.8 million in sales. The reduced value of the Canadian dollar
lowered North American sales by approximately $0.4 million in currency
translations (assuming currency translation of 1997 sales at the rate applicable
to 1996 results). Sales in the Company's South American operation, net of
intercompany sales of $9.5 million and $6.1 million for 1997 and 1996,
respectively, increased 7.6% compared with the prior year. The reduced value of
the Colombian peso lowered 1997 sales by $2.4 million (assuming currency
translation of 1997 sales at the rate applicable to 1996 results).
The volume increase for 1997 in North America was due primarily to
increased market share and expanding diversification into markets that offer
higher margins. Sales from the French operations, net of currency translations
for reporting purposes, decreased approximately 4.3% in 1997 compared with 1996
primarily due to soft economic conditions to Europe. The volume increases in
South America reflect the Company's continuing efforts to expand production in
its lower cost operations.
Worldtex's gross margin in 1997 decreased to 17.7% of net sales as compared
to 18.8% for 1996. Gross profit margins decreased primarily due to an
unfavorable change in the French subsidiary's product mix. Gross profit margins
also decreased because the company's manufacturing costs were spread over lower
sales. Selling and administrative expenses increased as a percentage of net
sales to 8.2% in 1997 from 8% in 1996 primarily because the fixed component of
these expenses was spread over a lower sales base.
The increase in interest expense of $1.2 million was caused primarily by
the $175 million Senior Notes issued December 1, 1997 in connection with the
acquisitions of Elastex and ECA.
1996 vs. 1995
Worldtex's sales in 1996 increased $19.8 million, or 10.6%, when compared
with 1995. Sales in the Company's European operation increased $9.2 million, or
9.2%, compared with 1995, primarily because of increased demand for covered yarn
used by the weaving industry in Europe. The lower value of the French franc
compared with the U.S. dollar reduced 1996 sales by $2.6 million. In the
Company's North American operations, sales increased $5.6 million, or 6.9%, from
1995 levels, primarily because of increased demand in non-pantyhose end used for
covered elastic yarn. Sales in the Company's South American operation were $11.8
million (excluding $6.2 million of inter-company sales) compared with $6.7
million in 1995 primarily due to a full year of operation in 1996 compared with
the partial year of 1995. The reduced value of the Colombian peso lowered 1996
sales by $1.8 million.
Worldtex's gross margin increased in 1996 to 18.8% of sales as compared to
16.7% for 1995. This increase was primarily caused by increased sales resulting
from the Company's continuing efforts to develop additional applications and end
uses for its products, lower manufacturing costs of the Company's Colombian
operations and reduced costs associated with the 1995 restructuring.
Additionally, the Company's fixed expenses were spread over substantially higher
sales.
Selling and administrative expense increased in 1996 by $.9 million to
$16.6 million. The increase was caused principally by the increased business
levels in 1996 and the full year operation of the Colombian subsidiary acquire
in April 1995.
The increase in interest expense of $.1 million was caused primarily by
weighted average outstanding debt increasing approximately 8% but was mostly
offset by lower average interest rates.
1995 vs. 1994
Worldtex's sales in 1995 increased $23.3 million, or 14.2%, when compared
with 1994. Sales in the Company's European operation increased $24.2 million, or
31.6%, compared with 1994, primarily because of
39
<PAGE> 40
increased demand for covered yarn used by the weaving and knitting industries in
Europe. The increased value of the French franc over the U.S. dollar increased
1995 sales by 11.0%. In the Company's North American operations, sales declined
$7.5 million, or 8.5%, from 1994 levels, primarily because of slower retail
sales for pantyhose that contain covered yarn and continued competitive
pressures caused by excess industry capacity. Fibrexa, S.A., the company
acquired by the Company as of April 1, 1995, contributed sales of $6.6 million.
The Company recorded nonrecurring charges in 1995 of $2.6 million. A
restructuring charge of $1.7 million ($1.3 million of which was reflected as
cost of goods sold and $.4 million as selling and administrative expenses), was
recorded in the fourth quarter to take account of the closing of two facilities.
In the third quarter a reserve was increased to accommodate higher corporate
taxes in France which resulted in $.9 million in deferred tax expense.
Worldtex's gross margin increased in 1995 to 16.7% of sales as compared to
15.8% for 1994. Gross margin increased to 17.4% before the restructuring charge
recorded in the fourth quarter which included $1.3 million recorded as cost of
goods sold. This increase in gross margin was primarily due to improved margins
of the Company's French operation, attributable to the strong demand in Europe
for the specialty yarns produced by the Company's French subsidiary and the
favorable exchange rate. In addition, the Company's fixed expenses were spread
over substantially higher sales.
Selling and administrative expense increased in 1995 by $2.2 million to
$15.7 million. The increase was caused principally by the increased business
levels of European operations, the acquisition of the Colombian subsidiary in
April 1995 and the $.4 million fourth quarter restructure charge.
The increase in interest expense of $1.7 million was caused primarily by
higher effective interest rates in 1995 and by additional borrowings to acquire
the Colombian subsidiary.
RESULTS OF OPERATIONS -- ECA
The following table sets forth the relationship of percentages which
certain income and expense items have to net sales. For convenience, the
thirty-nine week periods ending September 28, 1996 and September 27, 1997 are
hereinafter referred to as the nine months then ended.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
------------------------------------------ -----------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31, SEPTEMBER 27, SEPTEMBER 28,
1996 1995 1994 1997 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Gross margin...................... 25.0% 22.4% 25.5% 26.2% 25.4%
Selling, general &
administrative.................. 11.9 10.7 15.3 12.2 12.5
----- ----- ----- ----- -----
Operating profit.................. 13.1 11.7 10.2 14.0 12.9
Interest expense.................. 1.5 2.0 1.6 1.9 1.5
----- ----- ----- ----- -----
Income before income taxes........ 11.6% 9.7% 8.6% 12.1% 11.4%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 27, 1997 vs. September 28, 1996
Sales for the nine months ended September 27, 1997 were $52.7 million and
net income was $6.4 million compared with sales of $41.8 million and net income
of $4.8 million for the comparable period in 1996.
For the nine months ended September 27, 1997, sales increased by $11.0
million or 26.2% compared with the same period in 1996. This increase was due
primarily to regaining a larger volume of sales to ECA's largest customer,
Warnaco.
Gross profit margin increased 0.8%, as a percentage of net sales, for the
nine months ended September 27, 1997 compared to the corresponding period in
1996.
Selling and administrative expenses increased by $1.2 million for the nine
months ended September 27, 1997, or 23% compared to the 1996 period, principally
due to additional expenses relating to higher levels of
40
<PAGE> 41
sales and a $0.5 million provision for potential bad debts as a result of
financial difficulties of two significant customers. As a percentage of net
sales, selling and administrative expenses decreased by 0.3%, for the nine
months ended September 27, 1997 compared to the comparable period in 1996 as a
result of the higher level of sales in the 1997 period to which our expenses
were applicable.
Interest expenses increased by .4%, as a percentage of net sales, for the
nine months ended September 27, 1997 compared to the same period in 1996. This
increase was principally due to higher interest rates in 1997.
1996 vs. 1995
ECA's net sales in 1996 decreased 3.9%, as a percentage of net sales, to
$55.8 million from $58.1 million in 1995. This decrease was primarily due to a
reduction in sales to ECA's largest customer, Warnaco. At the end of 1994, ECA
raised prices to Warnaco and realized a decline in sales in both 1995 and 1996.
ECA's gross margin increased in 1996 to 25.0% of net sales as compared to
22.4% for 1995. This increase was attributable to increased operational
efficiencies compared to 1995, as costs and overhead associated with the
unrealized sales to Warnaco were absorbed by a shift in product mix and
personnel adjustments.
Selling and administrative expenses as a percentage of net sales increased
in 1996 by 1.2%. This increase was caused principally by an increase in legal
costs associated with the defense of ECA's patented QuikCord(R) technology. As a
percentage of total sales, selling and administrative expenses were 11.9% in
1996, as compared to 10.7% in 1995.
Interest expense decreased by $.3 million. This decrease was caused by a
reduction in working capital requirements.
1995 vs. 1994
ECA's net sales in 1995 decreased $3.3 million, or 5.4%, when compared to
1994. This was principally attributable to a decline in sales to ECA's largest
customer, Warnaco. At the end of 1994, ECA raised prices to Warnaco and realized
a decline in sales in both 1995 and 1996.
ECA's gross margin decreased in 1995 to 22.4% of net sales as compared to
25.5% for 1994. This decrease was due to the unabsorbed costs associated with
ECA's personnel and overhead structure, which had been augmented in anticipation
of higher sales volume to Warnaco.
Selling and administrative expense decreased in 1995 by $3.2 million, or
33.7%. This decrease in expense was caused primarily by a reduction in legal
expenses associated with the defense of ECA's patented QuikCord(R) technology.
Interest expense in 1995 increased by $0.15 million. This increase was the
result of greater working capital requirements.
INCOME TAXES
Income tax provisions for Worldtex have been calculated in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"). Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the carrying amounts of assets and
liabilities for tax purposes and financial statement purposes and operating loss
and tax credit carryforwards. 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 tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The French
parliament enacted a provision that increased the corporate tax rate from 33.33%
to 36.67% in July 1995. The rate increase resulted in a $0.9 million charge to
the 1995 tax provision to increase the deferred tax liability as of January 1,
1995 to the higher enacted income tax rate. In 1997, France increased the
corporate tax rate from 36.67% to 41.67%, which resulted in a charge to increase
the reserve for deferred income taxes of approximately $1.2 million and an
additional charge of $.5 million in the fourth quarter to reflect the
retroactive effect of the tax increase for all of 1997.
41
<PAGE> 42
LIQUIDITY; CAPITAL RESOURCES
The principal indicators of the Company's liquidity are cash flows from
operating activities and cash flows from financing activities, primarily
borrowings under the Company's credit facilities.
On December 1, 1997, the Company issued and sold $175.0 million principal
amount of the Old Notes for net proceeds (before deduction of transaction
expenses) of approximately $170.0 million, which was used to pay the purchase
price in the ECA Acquisition, repay certain indebtedness and to pay transaction
fees and expenses relating thereto. The Company expects to use the balance of
the net proceeds from the sale of the Notes for general corporate purposes.
Worldtex used $1.5 million from its operating activities in 1997, compared
to generating $15 million in 1996 and $12 million in 1995. The decrease in net
cash provided in 1997 was caused primarily by the decrease in net income and the
increase in working capital investments.
EBITDA represents income before income taxes plus interest expense,
depreciation and amortization and is provided as additional information relating
to the Company's debt service capacity. EBITDA for the years ended December 31,
1997, 1996 and 1995 was $25.8 million, $29.5 million and $22.1 million,
respectively. Depreciation and amortization for the years ended December 31,
1997, 1996 and 1995 was $6.8 million, $6.3 million and $6.1 million,
respectively.
During 1997, capital expenditures amounted to $7.7 million. Capital
expenditures were $13.8 million in 1996 and $8.4 million in 1995. The majority
of such capital expenditures during the years 1995-1997 was primarily used to
purchase additional manufacturing equipment in order to increase and improve
efficiencies to the Company's production capacity. The Company currently expects
that capital expenditures for 1998 will aggregate approximately $12.0 million,
primarily for machinery and property improvements.
During the second quarter of 1995, a wholly owned subsidiary of the Company
acquired substantially all of the assets of Fibrexa, S.A., a manufacturer of
covered yarn based in Bogota, Columbia. The consideration for the purchase of
Fibrexa was approximately $4.4 million in cash, assumption of approximately $6.5
million in debt and contingent payments based on earnings from the Company's
South American operations over a five year period.
On October 3, 1997, the Company purchased Elastex for approximately $7.7
million and paid $0.6 million to cancel an equipment operating lease assumed
from the seller, which funds were borrowed under the Existing Credit Facility.
On December 1, 1997, a wholly-owned subsidiary of the Company purchased
substantially all of the assets of ECA for a cash purchase price of
approximately $76.3 million, which was funded with a portion of the net proceeds
from the Offering. In connection with the ECA Acquisition, such subsidiary of
the Company assumed an industrial revenue bond obligation relating to ECA in the
aggregate principal amount of $6.0 million, operating leases (as to which the
present value of remaining lease payment obligations will not exceed $2.3
million) and certain current liabilities.
The Company's business strategy includes the pursuit of strategic
acquisitions of other businesses. Any acquisition would be funded through cash
on hand (including the balance of the net proceeds of the Offering and cash
generated by the Company's operations), the issuance of additional securities,
the sale of other assets or the incurrence of additional indebtedness (including
borrowings under the New Credit Facility). The Company's ability to sell assets
and incur indebtedness are restricted under the Indenture and the New Credit
Facility.
In 1994, the Company entered into an interest rate swap agreement with a
commercial bank that effectively converted the interest rate on one-half of its
$50 million 7.50% senior notes to a floating rate for three years ending July
1999. The agreement effectively changed the interest rate to approximately
6.24%, 7.87%, 7.08%, 6.59%, 6.77%, 6.52% and 6.77% for the six month intervals
ended January 21, 1995 through January 21, 1998. The effective rate was 6.49%
for the six months ending July 21, 1998. Net amounts due under this agreement
decreased interest expense for 1997 by $.257 million, for 1996 by $.20 million
and for 1995 by $.02 million. The 7.50% senior notes were repaid with a portion
of the proceeds of the Offering. Such interest rate swap agreement was
terminated effective March 26, 1998, and such termination will not have a
42
<PAGE> 43
material effect on the financial condition or results of operations of the
Company. The Company may enter into interest rate swap agreements relating to
the Notes in the future.
In connection with the ECA Acquisition, the Company entered into the New
Credit Facility and repaid and terminated the Existing Credit Facility. The New
Credit Facility provides for revolving credit borrowings in an aggregate
principal amount of up to $25.0 million. The New Credit Facility terminates and
all amounts borrowed thereunder will be due December 1, 2002. Loans under the
New Credit Facility bear interest at rates based upon a base rate (the higher of
the NationsBank, N.A. prime rate or the Federal Funds rate), certificates of
deposit rates or Eurodollar rates, in each case plus an applicable margin. Loans
under the New Credit Facility are guaranteed by all U.S. subsidiaries of the
Company and are required to be secured by liens on the accounts receivable and
inventory of the Company and its U.S. subsidiaries, 100% of the outstanding
capital stock of the Company's U.S. subsidiaries and 65% of the outstanding
capital stock of each of the Foreign Subsidiaries. For a more complete
description of the New Credit Facility, see "Description of Other Indebtedness."
At December 31, 1997, $25.0 million was available to the Company for future
borrowings under the New Credit Facility. In addition, at such date Filix had
$15.0 million, Rubyco $1.0 million and Fibrexa $4.8 million of U.S. dollar
equivalent credit available under bank lines of credit. Amount outstanding as of
December 31, 1997 were $1.5 million for Fibrexa, $0.3 million for Rubyco and
none outstanding for Filix. The most restrictive covenant of the New Credit
Facility and Indenture limits short-term borrowings by the Company's
subsidiaries to a total of $15.0 million. Worldtex believes that these lines of
credit, together with internally generated funds and access to other financing
sources, will provide sufficient liquidity for the Company's expected short-term
and long-term cash requirements.
As a result of the ECA Acquisition and the Offering, the Company is highly
leveraged. The Company's ability to make scheduled payments of principal of, or
to pay the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures will
depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations
and anticipated revenue growth, management believes that cash flow from
operations and available cash, together with available borrowings under the New
Credit Facility, will be adequate to meet the Company's future liquidity needs
for at least the next several years. The Company may, however, need to refinance
all or a portion of the principal of the Notes on or prior to maturity. There
can be no assurance that the Company's business will generate sufficient cash
flow from operations, that anticipated revenue growth and operating improvements
will be realized or that future borrowings will be available under the New
Credit Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect any
such refinancing on commercially reasonable terms or at all.
The Company's high degree of leverage could have important consequences to
holders of the Notes, including, but not limited to: (i) making it more
difficult for the Company to satisfy its obligations with respect to the Notes,
(ii) increasing the Company's vulnerability to general adverse economic and
industry conditions, (iii) limiting the Company's ability to obtain additional
financing to fund future working capital, capital expenditures, and other
general corporate requirements, (iv) requiring the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
of, and interest on, its indebtedness, thereby reducing the availability of such
cash flow to fund working capital, capital expenditures, research and
development or other general corporate purposes, (v) limiting the Company's
flexibility in planning for, or reacting to, changes in its business and the
industry, and (vi) placing the Company at a competitive disadvantage vis-a-vis
less leveraged competitors. In addition, the Indenture and the New Credit
Facility contain financial and other restrictive covenants that limit the
ability of the Company to, among other things, borrow additional funds. Failure
by the Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company. In addition, the degree to which the Company is leveraged could prevent
it from repurchasing all of the Notes tendered to it upon the occurrence of a
Change of Control. See "Description of Notes -- Repurchase at Option of
Holder -- Change of Control" and "Description of Other Indebtedness -- New
Credit Facility."
43
<PAGE> 44
THREE-YEAR COMPARISONS
Total long-term debt was $185.8 million, $67.8 million and $68.9 million,
respectively, at December 31, 1997, 1996 and 1995.
Working capital was $87.7 million, $47.5 million and $47.3 million,
respectively, at December 31, 1997, 1996 and 1995.
Net worth was $77.5 million, $85.2 million and $78.9 million, respectively,
at December 31, 1997, 1996 and 1995.
The number of days that sales were represented by accounts receivable was
68 (net of $10.3 million net receivables acquired on December 1, 1997 in
connection with the ECA Acquisition), 69 and 68, respectively, at December 31,
1997, 1996 and 1995. Net accounts receivable increased by approximately $6.5
million (including the acquired ECA receivables), or 16.2%, in 1997 compared
with 1996, and sales increased 2.2%. Inventories, as a percentage of cost of
sales, were 32.4% (including $11.6 million of inventory or 6.9% of cost of sales
assumed in connection with the ECA Acquisition on December 1, 1997) at December
31, 1997, 22.1% at December 31, 1996 and 21.5% at December 31, 1995.
INFLATION
The results of operations and financial condition of Worldtex and ECA are
based upon historical cost. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of estimates required, Worldtex
believes the effects on the results of operations and financial condition have
been minor. Worldtex will continue to monitor the impact of inflation in setting
its pricing and other policies.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued SFAS No. 128,
Earnings Per Share(EPS), which supersedes APB No. 15, Earnings Per Share. This
statement requires companies to replace the presentations of primary EPS and
fully diluted EPS with basic EPS and diluted EPS. The FASB has issued SFAS No.
129, Disclosure of Information about Capital Structure. This statement
establishes standards for disclosing information about an entity's capital
structure. The FASB has issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires the disclosure of comprehensive income, which includes
revenue, expenses, gains and losses that were previously recorded directly to
equity in financial statements under SFAS Nos. 52, 80, 87 and 115. The FASB has
issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. This statement requires public companies to report certain
financial and descriptive information about their reportable operating segments.
The FASB has also issued SFAS No. 132, Employers' Disclosures About Pension and
Other Postretirement Benefits. This statement amends the disclosure requirements
of SFAS Nos. 87, 88 and 106. The Company expects to adopt SFAS No. 128 in the
fourth quarter of fiscal 1997 and SFAS Nos. 129, 130, 131 and 132 in fiscal
1998. The Company does not believe the implementation of the new statements will
have a material impact on its consolidated financial statements.
44
<PAGE> 45
BUSINESS
GENERAL
The Company believes that it is one of the largest suppliers of covered
elastic yarn in the world (based on 1997 sales). Covered elastic yarns are used
by the Company's customers to produce stretch fabrics for apparel that provide
enhanced styling capabilities, better shape retention, and improved aesthetics,
durability and comfort. The principal products that utilize covered elastic yarn
produced by the Company are sheer and opaque pantyhose, men's, women's and
children's socks, sweaters, swimwear, active and athletic wear and men's,
women's and children's stretch apparel. During 1997, Worldtex yarns were used in
the products of some of the world's best known brands and designers, including
Giorgio Armani, Hugo Boss, Pierre Cardin, Liz Claiborne, Danskin, Dim, Christian
Dior, Fogal, Fruit of the Loom, Givenchy, Jockey, Calvin Klein, Evan Picone,
Polo, Round the Clock, Nina Ricci, Ellen Tracy and others. The Company, which
was one of the first independent producers of covered elastic yarn when it began
operations in 1934, currently operates 11 manufacturing and distribution
facilities located in the United States, Canada, France and South America. The
Company also has a 38% interest in a joint venture production facility in
Estonia, and currently plans joint venture production facilities in China and
India. For the year ended December 31, 1997, Worldtex had net sales of $203.3
million.
As a result of the ECA Acquisition and the Elastex Acquisition, the Company
believes that it is the largest manufacturer of woven and knitted narrow elastic
fabrics in the world (based on 1997 sales). Narrow elastic fabrics are
elasticized fabric bands, typically under six inches in width, that are used as
components in the production of a broad range of apparel products, such as
waistbands for men's, women's and children's underwear, athletic apparel and
other garments, straps, facing and edgings in women's intimate apparel and
elastic bands in women's hosiery. For the year ended December 28, 1996, ECA had
net sales of $55.8 million, and for the year ended November 1, 1996, Elastex had
net sales of $15.8 million. During 1996, ECA's and Elastex's narrow elastic
fabrics were used in apparel produced by Bassett Walker, Fruit of the Loom,
Tommy Hilfiger, Jockey, Michael Jordan Sports, Donna Karan, Calvin Klein, Ralph
Lauren, Russell Corporation, Sara Lee (Hanes products), Vanity Fair, Warnaco
(Warner, Olga and Speedo brands) and others. ECA and Elastex together own a
total of five manufacturing facilities, which are located in Alabama, North
Carolina, South Carolina and Virginia. On a pro forma basis assuming that the
ECA Acquisition and the Elastex Acquisition had been consummated January 1,
1997, the Company would have had net sales of $283.7 million for the year ended
December 31, 1997.
INDUSTRY OVERVIEW
In recent years, the worldwide fabric/apparel industry has been undergoing
significant changes relating to the types of garments produced. Specifically,
two trends have significantly impacted the Company: (i) the growth of covered
elastic yarn applications in fabric/apparel production, and (ii) increased
consumer demand for more casual, comfortable and durable apparel. As a leading
supplier of covered elastic yarns and narrow elastic fabrics, the Company
believes it is well-positioned to benefit from both of these trends.
Covered elastic yarns are produced by wrapping nylon, polyester, cotton or
other fibers around spandex or latex rubber. The core of spandex or rubber
provides stretch capability and durability, while the wrapped fiber results in
more comfort to the touch and permits the covered yarn to be dyed. Advanced
manufacturing equipment permits production of ultrafine covered elastic yarns
that result in fabrics comparable in appearance to natural fibers, but with
superior flexibility, shape retention and durability. Historically, covered
elastic yarns were principally used in the manufacture of women's pantyhose and
other hosiery products. However, advances in production techniques and trends in
consumer apparel preferences have led to a substantial expansion of the end uses
for covered elastic yarn. Today, covered elastic yarn is used in a broad range
of apparel, including sweaters, swimwear, running clothes, athletic uniforms,
slacks, skirts and dresses, as well as in pantyhose and socks.
Consumer demand for increased comfort has also favorably affected the
market for narrow elastic fabrics. These fabrics are produced by weaving covered
elastic yarn or knitting spandex or latex rubber, in each case
45
<PAGE> 46
with other yarn, such as nylon, polyester or cotton, in order to create narrow
bands of elasticized fabric. Although the market for narrow elastic fabrics has
been relatively flat over the past five years, demand has grown during such
period for intimate apparel and athletic wear that include designer or other
logos in the waistband, which are generally higher-margin products compared to
unadorned elasticized waistbands. ECA has focused on the development and
production of such specialized waistbands, through investment in advanced
weaving machines, development of specialized dyeing techniques and close working
relationships with apparel producers to determine their requirements, and ECA is
currently the leading manufacturer of such waistbands in the United States.
BUSINESS STRATEGY
The Company's strategy is to increase revenues and margins through
expansion into new markets while reducing costs. The Company's business plan
consists of the following key elements:
- MAINTAIN LEADING POSITION IN NICHE MARKETS. The Company believes that it
is one of the largest suppliers of covered elastic yarn in the world
(based on 1997 sales). The Company believes that such leadership is based
primarily on the high quality of the Company's products, the Company's
responsiveness to customer's needs and the Company's initiative and
creativity in developing new end uses for covered elastic yarns. ECA has
followed a similar strategy to become, it believes, the largest producer
of narrow elastic fabrics in the world (based on 1997 sales). As a result
of their focus on quality and service, both Worldtex and ECA have
exclusive or significant supplier relationships for certain product lines
with certain leading apparel manufacturers. The Company intends to focus
on maintaining leadership in niche markets, such as covered elastic yarn
and narrow elastic fabrics, where it can market its specialized expertise
to more broadly-based fabric and apparel producers. The Company believes
that this expertise, when applied to produce high quality products and to
develop solutions to customers' needs, should result in growth in sales
of the Company's products.
- CONTINUE TO DEVELOP NEW END USES FOR COVERED ELASTIC YARN AND NARROW
ELASTIC FABRIC. In 1992, 65.4% of the Company's sales were to pantyhose
manufacturers, as compared to 38.4% of sales in 1996. Sales of pantyhose
in the United States during this period have declined approximately 13%,
although the Company's sales (including sales outside the United States)
have grown 19% during the period. The Company has actively worked with
apparel fabric producers and others to develop new fabrics utilizing
covered elastic yarn. For example, the Company was selected by DuPont to
create and manufacture yarns for use in the production of casual shoes to
be sold by Marks and Spencer in the European market, and the Company has
also developed covered elastic yarn solutions for furniture slip covers,
lace lingerie and stretch denim fabrics. Similarly, ECA has sought to be
a leader in the development of narrow elastic fabric products, including
its focus on weaving designer logos into elastic waistbands, its
production of the patented "QuikCord"(R) system that embeds a drawstring
within an elastic waistband, and its production of silicon-backed narrow
elastics used in certain specialty hosiery. In addition, the growth in
consumer demand for more casual, comfortable and durable garments has
increased the interest of apparel fabric producers in the development of
new covered elastic yarn and narrow elastic fabric applications. In light
of the Company's long history and extensive knowledge relating to the
production of covered elastic yarn and ECA's and Elastex's extensive
experience and expertise regarding narrow elastic fabrics, the Company is
well positioned to work with apparel fabric manufacturers and others in
developing new end uses for covered elastic yarns and narrow elastic
fabrics.
- EXPAND INTERNATIONAL OPERATIONS. Prior to 1995, the Company's
manufacturing facilities were based in the United States, Canada and
France. In 1995, the Company acquired Fibrexa, a covered elastic yarn
manufacturer located in Colombia, and established a manufacturing joint
venture in Estonia. In 1997, the Company entered into a letter of intent
to form a joint venture for the establishment of manufacturing facilities
in China, and it is currently in negotiations for a similar venture in
India. Although the Estonian, Chinese and Indian ventures are relatively
small -- each involving an investment of less than $1 million -- the
Company believes that the potential for growth in these markets is
significant. These new operations are expected to provide improved access
to growing new
46
<PAGE> 47
markets for the Company's products, as well as cost-efficient facilities
capable of manufacturing covered elastic yarn for export to the Company's
customers worldwide. For example, the Company has shifted manufacturing
equipment to its lower-cost South American operation, Fibrexa. In 1997,
Fibrexa had net sales of $22.2 million, including sales to other
subsidiaries of the Company of $9.5 million for resale in North America
and Europe. This compares to total net sales by Fibrexa of $17.9 million,
including sales to other subsidiaries of the Company of $6.7 million in
1996. The Company plans to expand Fibrexa's production capacity
substantially in the near term.
- PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue
acquisitions of companies in niche segments of the textile industry. The
Company plans to seek businesses that offer the opportunity to improve
the Company's financial results through increased purchasing power with
suppliers, elimination of duplicative operations or cross-selling of
products to common customers. For example, DuPont, Globe and Bayer are
major suppliers of raw materials to the Company, ECA and Elastex, and the
Company expects that its increased purchasing power as a result of the
ECA Acquisition will result in more favorable supply agreements. In
addition, the Company expects to shift ECA's production of covered
elastic yarns to the Company's existing covering operations to allow ECA
to focus on narrow elastic fabric production, and Worldtex will replace
other suppliers as ECA's sole source for covered elastic yarns and
textured nylon. Moreover, the Company expects to distribute and market
the narrow elastic fabric products of ECA and Elastex through its
existing European, North American and South American sales operations.
THE ECA ACQUISITION
On December 1, 1997, a wholly-owned subsidiary of the Company purchased
substantially all of the assets of ECA for a cash purchase price of
approximately $76.3 million, which was funded with a portion of the net proceeds
from the sale of the Old Notes. In connection with the ECA Acquisition, such
subsidiary of the Company assumed an industrial revenue bond obligation relating
to ECA in the aggregate principal amount of $6.0 million, operating leases (as
to which the present value of remaining lease payment obligations will not
exceed $2.3 million) and certain current liabilities.
COVERED ELASTIC YARN BUSINESS
Worldtex believes that Regal is one of the two largest suppliers of covered
elastic yarn in the United States, that Filix is the largest in Europe, that
Rubyco is the largest in Canada and that Fibrexa is the largest in South America
(in each case measured by 1997 sales). Regal's and Rubyco's products are sold
primarily in their respective home countries, Filix sells principally to
European Community countries and Fibrexa sells principally in South American
countries, as well as to other Worldtex subsidiaries.
Products
The covered elastic yarn manufactured by Worldtex is produced by wrapping
material, principally nylon, polyester, cotton or other fibers, around spandex
or latex rubber. The core of spandex or rubber provides stretch capability and
durability, while the wrapped fiber results in more comfort to the touch.
Worldtex's principal product is nylon covered spandex used in the
manufacture of a variety of men's, women's and children's apparel. Worldtex also
sells covered spandex and covered latex rubber for use in the manufacture of
men's, women's and children's socks. Cotton-covered spandex yarn sold by
Worldtex is used primarily in the manufacture of ladies' opaque tights and of
fashion and active-wear apparel.
Sales and Distribution
The Company's manufacturing and distribution centers are strategically
located to serve the Company's principal markets. The Company's operations in
the United States and Canada serve customers throughout North America, its
operations in France and joint venture in Estonia serve Europe and its
operations in Bogota, Colombia serve South America and also provide lower-cost
products for the Company's other markets. In addition, the Company has entered
into a joint venture for the establishment of manufacturing
47
<PAGE> 48
facilities in China, and it is currently in negotiations for a similar venture
in India. Upon implementation of the Chinese and Indian ventures, the Company
will have strategically located manufacturing facilities able to promptly supply
customers' needs in major fabric producing markets around the world.
As of December 31, 1997, the Company maintained a marketing staff located
in Hickory, North Carolina, Troyes, France, Montreal, Canada, and Bogota,
Columbia. Each sales employee has a designated territory. In addition, certain
sales personnel are specialists in designated applications for covered yarn,
such as circular knitting or woven fabrics. The sales staff is compensated by
salary and sales incentive bonus. The Company also has a network of independent
sales agents compensated on a commission basis.
The Company's sales force is trained to work with the customer to develop
new uses for covered elastic yarns that may improve the customer's products. The
Company's 63 years experience in the production and utilization of covered
elastic yarns has provided the Company with expertise not generally available to
more broadly-based fabric and apparel producers. The Company utilizes this
expertise to develop solutions utilizing covered elastic yarns for the
customer's fabric needs.
Customers
In 1997, the Company served over 1,500 customers, and no single customer
accounted for more than 10% of 1997 sales. The Company's ten largest customers
in 1997 accounted for 28% of 1997 sales.
The Company's customers are principally producers of fabric sold for use in
apparel products. In 1997, the Company's principal customers included, in the
United States, Jockey International, Ithaca Industries, U.S. Textile Corp. and
Danskin; in Europe, Iril, S.A., Vanwijnsberghe and Gaillard, S.A.; in Canada,
Doris Hosiery, Hafner Elastics and Nalpac; and in South America, Richi, CMR and
Valenciana. During 1996, Worldtex yarns were used in the products of some of the
world's best known brands and designers, including Giorgio Armani, Hugo Boss,
Pierre Cardin, Liz Claiborne, Danskin, Dim, Christian Dior, Fogal, Fruit of the
Loom, Givenchy, Jockey, Calvin Klein, Evan Picone, Polo, Round the Clock, Nina
Ricci and Ellen Tracy.
Manufacturing
Covered elastic yarns are produced by wrapping strands of conventional
fabric materials around elastic materials such as spandex or latex rubber. In
the manufacturing process, a "cover component" such as nylon, polyester, cotton,
or other fiber is fed through high-speed spindles where it is wrapped or twisted
around a "core component" of spandex or latex rubber. Strands of elastic may be
single or double covered, depending on the desired end use application. After
wrapping, the yarn, which is white in color and otherwise unfinished, is then
wound on a "take-up package" which is adaptable to the customer's machinery and
equipment for further processing.
Worldtex's research and development activities are directed toward
improvements in existing products and manufacturing processes and toward
development of new uses for its products. During 1996, Worldtex's expenditures
for these purposes totaled less than 1% of its sales.
Raw Materials
In 1997, approximately 60% of the Company's operating expenses were
attributable to raw material costs. The principal raw materials utilized by the
Company are spandex, nylon and rubber. Spandex is principally supplied by
DuPont, Globe and Bayer, and Globe is also a principal supplier of rubber. The
major suppliers of nylon to the Company in 1997 were DuPont, BASF, Nilit,
Nylstar and Radaci. In 1997 Worldtex purchased over half of its nylon and
spandex from a single source, DuPont. In recent years, DuPont and its
competitors have expanded their spandex production capacity, and Worldtex has
been able to obtain sufficient supplies to meet its customers' requirements. If
the supply of spandex from DuPont should be interrupted or cease for any reason,
Worldtex believes it might be difficult to find adequate alternative suppliers
of spandex.
48
<PAGE> 49
Competition
While Worldtex believes that it is one of the largest suppliers of covered
elastic yarn in the world (based on 1997 sales), several companies actively
compete with Worldtex, at least one of which has greater assets and financial
resources than Worldtex. In the United States, Unifi, Spanco and Worldtex are
the leading suppliers of covered elastic yarn, and Unifi has recently acquired
Spanco. The Company cannot predict the effect that such acquisition will have on
its business. See "Risk Factors -- Competition; Risks Associated with Changing
Industry." Most of Worldtex's major customers do not buy exclusively from
Worldtex. Competition is based primarily on product quality, customer service
and price.
Employees
As of December 31, 1997, Worldtex had a total of approximately 1,227
employees engaged in its covered elastic yarn operations. Of these,
approximately 422 were employed in the United States by Regal, approximately 160
were employed in Canada by Rubyco, approximately 333 were employed in France by
Filix and approximately 312 were employed in Colombia by Fibrexa. A substantial
amount of the covered elastic yarn sold by Filix is produced by subcontractors,
whose employees are not included in the foregoing totals. Employees of Regal and
Fibrexa are not covered by collective bargaining agreements, and certain
employees of Filix and Rubyco are covered by such agreements. Worldtex has
experienced no significant labor problems during recent years in its covered
elastic yarn operations and considers its employee relations to be good.
NARROW ELASTIC FABRICS BUSINESS
The Company believes that ECA and Elastex together comprise the leading
supplier of woven and knitted narrow elastic fabrics to the apparel industry in
the world (based on 1997 sales).
Products
Narrow elastic fabrics are elasticized fabric bands, typically under six
inches in width, that are used as components in the production of a broad range
of apparel products, such as waistbands for men's, women's and children's
underwear, athletic apparel and other garments, straps, facings and edgings in
women's intimate apparel and elastic bands in women's hosiery.
ECA and Elastex manufacture a full range of narrow elastic fabric products,
from specialty designs to commodity items. These varied product offerings,
together with sophisticated weaving and dyeing capabilities, enable the Company
to provide bundled and customized products to its customers.
In addition to a traditional line of woven elastic inserts and commodity
narrow elastic fabrics, ECA has enhanced its product line with several narrow
elastic fabric product advancements. For example, in 1983, ECA developed and
patented QuikCord, which embeds a drawstring within an elastic waistband. This
product offers cost savings to apparel manufacturers by avoiding the costly
operation of threading the drawstring cord through the elastic. Cordon
Cristal(TM), a banded silicon-backed narrow elastic fabric used in women's
thigh-high hosiery, is another trademarked ECA product. ECA's most advanced
narrow fabrics products are waistbands with brand name logos and other designs
woven into the elastics, principally used in designer label underwear. ECA
believes that it currently has the largest number of operating logo looms in the
United States.
Elastex produces generic narrow elastic fabric for use in apparel. In
addition, Elastex manufactures gauze and elastic wrap products for the medical
industry and specialized elastic fabric used by the automotive industry.
Sales and Distribution
ECA and Elastex sell their products to apparel manufacturers throughout the
United States, and have begun selling to foreign manufacturers. ECA has a sales
staff with an average of over ten years of experience in the narrow elastics
industry. Sales offices are based in Greensboro, North Carolina, Miami, Florida,
San Francisco and Los Angeles, California, and New York, New York. There is no
product specialization among
49
<PAGE> 50
the salesforce, and each salesperson calls on an average of 25 accounts
regularly. The salesforce is compensated by salary and bonus incentive awards.
ECA's key marketing strategy is to sell a customized product and service
program that meets specific customer needs and to create relationships with
designers at premier apparel manufacturers such as Calvin Klein, Ralph Lauren,
Tommy Hilfiger, Donna Karan and Jockey. A customer's order often comprises more
than one type of narrow elastic fabric product, and ECA believes that it is
critical to offer a coordinated comprehensive supply program for its customers.
Customers
In 1997, ECA and Elastex served over 700 customer accounts. Two customers
were responsible for 32% of 1997 sales, and the ten largest customers accounted
for 53% of 1997 sales.
ECA's and Elastex's top 15 customers in 1997 included apparel manufacturers
such as Bassett Walker, Fruit of the Loom, Tommy Hilfiger, Jockey, Michael
Jordan Sports, Donna Karan, Calvin Klein, Ralph Lauren, Russell Corporation,
Sara Lee (Hanes products), Vanity Fair, Warnaco (Warner, Olga and Speedo brands)
and others. The principal customer in 1997 for Elastex's medical product was
Johnson & Johnson and for its automotive products was Crotty Corporation, a
supplier of General Motors Corporation.
Manufacturing
Knit elastic fabrics are primarily used in underwear and sportswear
applications. Most commodity knit elastic products are not "finished," and the
elastic yarn in the fabric is often bare. In contrast, the elastic yarn used in
woven elastic fabrics is covered by natural or synthetic yarns and the products
are finished or dyed. ECA and Elastex each operate a dye house for such purpose.
Nylon, polyester, spandex and rubber are the basic raw materials used in
the manufacture of narrow elastic fabrics. At the start of the manufacturing
process for woven narrow elastic fabrics, natural or synthetic yarns, such as
nylon, polyester or cotton, are "warped" (transferred) onto beams used to hold
warped yarns. During warping, the appropriate number of yarns are collected onto
"creels" (spool-like yarn holders) and then wound onto beams configured for the
width of the narrow fabric and for the appropriate set-up of the loom.
For the manufacturing of knit elastics, the natural or synthetic yarns and
the elastic threads (spandex or rubber) are knitted together to form the knitted
elastic narrow fabric products on the knitting machines. In woven narrow elastic
fabrics, the elastic threads must be covered. High-speed covering machines wrap
the elastic core with natural or synthetic yarns under tension to cover the
elastic. The covered elastic is collected on take-up packages and then is
typically put onto beams. ECA's proprietary covering technology allows the
covered elastic to be fed directly onto the loom, thereby eliminating a step
wherein the covered elastic is wound onto beams and then sent to the looms. On
ECA's weaving looms, the covered elastic is woven with the synthetic yarns from
the beams to create the narrow elastic fabrics. If logos are required, special
looms are used and programmed to weave into the narrow elastic fabric the name
of the designer or brand, such as Calvin Klein or Jockey.
All woven narrow fabrics are "finished." The rough-edged materials that
result from the weaving process are put through a finishing process during which
the narrow elastic fabrics are wetted and resin-treated and then dryed. Certain
knitted narrow elastics are finished as well, depending on customer
requirements. Due to ECA's focus on the high-end knitted products for intimate
apparel, many of its fine quality knitted elastics are finished and dyed.
Narrow fabrics may be dyed according to color formulations developed
in-house to meet specific customer color requirements. ECA's dyeing processes
include continuous acid, pressure beam or batch dyeing methods. ECA believes
that it has the largest and most diversified dye lab, computer color matching
equipment and dyeing equipment in the industry. ECA uses lab equipment which
simulates the dye process, resulting in high accuracy of dye quality and color
uniformity in actual production.
50
<PAGE> 51
ECA licensed the process for making silicon-backed fabrics from Cheynet, a
major French narrow elastic fabric manufacturer, in 1989. This process is
typically used for narrow elastics found in hosiery products, particularly in
thigh-high stockings. Silicon is applied to knit, lace and simulated lace
uniformly on one side of the fabric and then dried to create a non-slip band.
The band grips the thigh allowing the stocking to stay in place without garters.
The silicon-backed fabrics are banded (requiring special robotic equipment) to
the specific size requirements of the customers before inspection and final
packaging.
Raw Materials
Raw materials costs comprised approximately 42% of ECA's 1997 costs of
production. Key raw materials for ECA include synthetic fibers, such as nylon
and polyester, spandex, rubber, cotton, chemical dyes and silicon. The Company
buys its synthetic materials and spandex primarily from DuPont and Bayer. Its
rubber supply originates in Malaysia and is obtained via various US importers.
Chemical dyes and auxiliary dye ingredients are supplied by various prominent
chemical companies, such as Crompton & Knowles and Ciba-Geigy, and silicon is
supplied by Dow Corning.
Competition
ECA believes that it is the leader in many of the market categories in
which it operates. There are approximately ten competitors who manufacture
narrow elastic fabrics for the apparel industry. Principal competitors in logo
elastics include CMI -- United Elastics and George C. Moore. Over the years,
competitors have created their own drawstring systems which compete with the
QuikCord design, and principal competitors with regard to this product include
Southern Webbing and Asheboro Elastics.
Employees
As of December 31, 1997, Worldtex had a total of approximately 845
employees engaged in its narrow elastics fabrics operations. Of these,
approximately 639 were employed by ECA and 206 were employed by Elastex. None of
these employees are unionized.
51
<PAGE> 52
PROPERTIES
Worldtex maintains its headquarters in Hickory, North Carolina, on property
owned by Regal and used for its administrative personnel.
Covered Elastic Yarn
The Company operates a total of eleven covered elastic yarn manufacturing
plants and distribution centers, of which seven are owned and four are leased.
In addition, the Company has a 38% interest in a joint venture in Estonia that
owns and operates a 52,000 square foot covered elastic yarn manufacturing and
distribution facility. In general, the Company's facilities are adequate and
suitable for the purposes for which they are utilized by the Company. The plants
and distribution centers are listed below:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET OWNED/LEASED USE
-------- ----------- ------------ ---
<S> <C> <C> <C>
UNITED STATES:
Hickory, NC............. 82,000 Owned Manufacturing Plant and Headquarters
of Regal
Hickory, NC............. 144,000 Owned Manufacturing Plant
Hickory, NC............. 41,000 Owned Manufacturing Plant
Hickory, NC............. 18,000 Leased Distribution Center
Hickory, NC............. 80,000 Leased Distribution Center
CANADA:
Montreal, Quebec........ 85,000 Leased Manufacturing Plant and Headquarters
of Rubyco
FRANCE:
Troyes.................. 48,000 Owned Distribution Center and Headquarters
of Filix
Athis................... 202,000 Owned Manufacturing Plant
Conde................... 195,000 Owned Manufacturing Plant
Le Grand Serre.......... 94,000 Owned Manufacturing Plant
COLOMBIA:
Bogota.................. 130,000 Leased Manufacturing Plant and Headquarters
of Fibrexa
</TABLE>
Narrow Elastic Fabrics
ECA and Elastex operate a total of five manufacturing plants, all of which
are owned. In addition, a rented sales office is maintained in New York City.
The manufacturing plants are listed below.
<TABLE>
<CAPTION>
LOCATION SQUARE FEET OWNED/LEASED USE
-------- ----------- ------------ ---
<S> <C> <C> <C>
UNITED STATES:
Columbiana, AL...................... 165,000 Owned Manufacturing Plant
Columbiana, AL...................... 115,000 Owned Manufacturing Plant
Asheboro, NC........................ 115,000 Owned Manufacturing Plant
Hemingway, SC....................... 62,000 Owned Manufacturing Plant
Woolwine, VA........................ 77,000 Owned Manufacturing Plant
</TABLE>
LEGAL MATTERS
There is currently no pending legal dispute that is reasonably likely to
have a material adverse effect on the Company.
52
<PAGE> 53
DESCRIPTION OF OTHER INDEBTEDNESS
THE NEW CREDIT FACILITY
The New Credit Facility provides for up to $25.0 million in revolving
credit loans ("Revolving Credit Loans") and commercial letters of credit.
Availability of borrowings is subject to a borrowing base equal to 85% of the
Company's and its U.S. subsidiaries' eligible accounts receivable and 50% of
their eligible inventory. Borrowings under the New Credit Facility are secured
by a first priority lien on the outstanding capital stock of the Company's U.S.
subsidiaries and 65% of the outstanding capital stock of each of the Foreign
Subsidiaries and all present and future accounts receivable and inventory of the
Company and its U.S. subsidiaries. The New Credit Facility will terminate
December 1, 2002.
All Revolving Credit Loans bear interest, at the Company's option (subject
to a performance based pricing grid), at: (i) the London Interbank Offered Rate
("LIBOR"), as adjusted, plus up to 1.75%, (ii) a certificates of deposit rate,
as adjusted, plus up to 1.75% or (iii) a base rate (the higher of the
NationsBank, N.A. prime rate or the Federal Funds rate plus 0.50%) plus up to
0.75%.
The Company pays a commitment fee of up to 0.375% per annum of the unused
commitment under the New Credit Facility. Such fee is payable quarterly in
arrears.
The Company pays a letter of credit fee equal to the interest rate spread
on LIBOR loans on the outstanding amount of all letters of credit and a fronting
and negotiation fee of 0.125% per annum of the outstanding amount of each letter
of credit. Such fees are payable quarterly in arrears. In addition, the Company
pays customary transaction charges in connection with any letter of credit.
The New Credit Facility contains customary covenants and restrictions on
the Company's ability to engage in certain activities. In addition, the New
Credit Facility provides that the Company must meet certain financial conditions
including (i) a minimum consolidated current ratio, (ii) a maximum leverage
ratio and (iii) a minimum interest coverage ratio. The New Credit Facility
includes customary events of default.
OTHER INDEBTEDNESS
Each of the Company's Foreign Subsidiaries maintains credit facilities for
working capital purposes. At December 31, 1997, Filix had available
approximately $15.0 million, Rubyco had available approximately $1.0 million,
and Fibrexa had available approximately $4.2 million under various bank lines of
credit and overdraft facilities. At December 31, 1997, Filix had no outstanding
debt under these agreements, Rubyco had outstanding $0.3 million and Fibrexa had
outstanding $1.5 million. In addition, at such date Fibrexa had $1.7 million in
variable interest long-term debt obligations due 2000 and Filix had $3.7 million
in capitalized lease obligations and fixed interest debt obligations due 2002.
In connection with the ECA Acquisition, the Company assumed obligations
with respect to an Industrial Development Bond financing relating to ECA in an
aggregate principal amount of $6 million. These bonds bear interest at
approximately 60% of the prime rate, require no amortization and are due in full
in 2014. The letter of credit supporting these bonds is secured by ECA's
Columbiana, Alabama facility.
53
<PAGE> 54
DESCRIPTION OF NOTES
GENERAL
The Notes are issued under the Indenture, dated as of December 1, 1997,
among the Company, as issuer, the Guarantors and IBJ Schroder Bank & Trust
Company, as trustee (the "Trustee"). The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Indenture and the Registration Rights Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. Copies
of the proposed form of Indenture and Registration Rights Agreement are
available as set forth below under "-- Additional Information." The definitions
of certain terms used in the following summary are set forth below under
"-- Certain Definitions." For purposes of this summary, the term "Company"
refers only to Worldtex, Inc. and not to any of its Subsidiaries.
The Notes are general unsecured obligations of the Company and rank pari
passu in right of payment to all existing and future unsubordinated Indebtedness
of the Company, including Indebtedness under the New Credit Facility. The
obligations of the Company under the New Credit Facility, however, are secured
by the accounts receivable and inventory of the Company and its U.S.
Subsidiaries, as well as by all of the outstanding capital stock of the
Company's U.S. Subsidiaries and 65% of the outstanding capital stock of each of
the Company's Foreign Subsidiaries. Accordingly, the New Credit Facility
effectively ranks senior in right of payment to the Notes to the extent of the
assets subject to such security interest. The Company's payment of principal,
premium, if any, interest and Liquidated Damages, if any, on the Notes is fully
and unconditionally guaranteed on a senior unsecured basis by the Guarantors,
but Subsidiary Guarantees are not provided by the Foreign Subsidiaries. The
Subsidiary Guarantees rank pari passu in right of payment with all unsecured and
unsubordinated indebtedness of the Guarantors but secured indebtedness of a
Guarantor (including the secured guarantees granted under the New Credit
Facility) effectively ranks senior in right of payment to the Notes to the
extent of the assets subject to such security interest. The Notes effectively
rank junior to the secured and unsecured indebtedness and trade payables of the
Foreign Subsidiaries. As of December 31, 1997, the Company and the Guarantors
had approximately $181.0 million of unsecured indebtedness outstanding
(including $175 million principal amount of Old Notes), the Company had an
additional approximately $25.0 million of secured Indebtedness available to be
incurred under the New Credit Facility and the Foreign Subsidiaries would have
had approximately $23.3 million of Indebtedness and trade payables outstanding.
The terms of the Indenture permit the Company and its subsidiaries to incur
additional Indebtedness (including secured Indebtedness), subject to certain
limitations. See "Risk Factors -- Ranking of the Notes and Subsidiary
Guarantees."
The Company is a holding company, the only assets of which are the stock of
its subsidiaries. All of the operations of the Company are conducted through its
direct and indirect wholly owned subsidiaries. Accordingly, the Company's
ability to service its indebtedness, including the Notes, is dependent upon
earnings and cash flow of its subsidiaries and the payment of funds by those
subsidiaries to the Company in the form of loans, dividends or otherwise. In
addition, the ability of the Company's subsidiaries to pay dividends, repay
intercompany liabilities or make other advances to the Company is subject to
restrictions imposed by corporate law and certain United States, state and
foreign tax considerations. Although the Guarantors have provided the Subsidiary
Guarantees, such Subsidiary Guarantees may not be enforceable under certain
circumstances. See "Risk Factors -- Fraudulent Transfer Considerations;
Unenforceability of Subsidiary Guarantees."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $175.0 million and
will mature on December 15, 2007. Interest on the New Notes accrues at the rate
of 9 5/8% per annum from the last date on which interest was paid on the Old
Notes surrendered in exchange therefor, or if no interest has been paid, from
the date of
54
<PAGE> 55
the original issuance of such Old Notes. Interest on the New Notes is payable
semi-annually in arrears on June 15 and December 15 of each year, commencing on
June 15, 1998, to Holders of record on the immediately preceding June 1 and
December 1. Interest is computed on the basis of a 360-day year comprised of
twelve 30-day months. Principal, premium, if any, and interest and Liquidated
Damages on the Notes is payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest and Liquidated Damages may be made by
check mailed to the Holders of the Notes at their respective addresses set forth
in the register of Holders of Notes; provided that all payments of principal,
premium, interest and Liquidated Damages with respect to Notes the Holders of
which have given wire transfer instructions to the Company are required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York is the office of the Trustee maintained for such
purpose. The Notes are issued in denominations of $1,000 and integral multiples
thereof.
SUBSIDIARY GUARANTEES
The Notes are fully and unconditionally guaranteed by each of the existing
and future U.S. Subsidiaries of the Company, but Subsidiary Guarantees are not
provided by the Company's Foreign Subsidiaries. The Guarantees rank pari passu
in right of payment with all existing and future unsecured and unsubordinated
Indebtedness of the Guarantors, including the guarantees granted under the New
Credit Facility, but secured Indebtedness of a Guarantor effectively ranks
senior in right of payment to the Notes to the extent of the assets subject to
such security interest. The Guarantors' obligations under the New Credit
Facility are secured by a lien on the accounts receivable and inventory of the
Guarantors and, accordingly, such indebtedness ranks prior to the Subsidiary
Guarantees with respect to such assets. See "Risk Factors -- Fraudulent Transfer
Considerations; Unenforceability of Subsidiary Guarantees."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, and the Indenture; and (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Repurchase
at Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to December 15,
2002. Thereafter, the Notes are subject to redemption at any time at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002...................................................... 104.813%
2003...................................................... 103.208%
2004...................................................... 101.604%
2005 and thereafter....................................... 100.000%
</TABLE>
55
<PAGE> 56
Notwithstanding the foregoing, at any time on or before, December 15, 2000,
the Company may redeem up to 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price of 109.625% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of a
public offering of common stock of the Company; provided that at least $113.75
million in aggregate principal amount of Notes remain outstanding immediately
after the occurrence of such redemption (excluding Notes held by the Company or
any of its Subsidiaries); and provided, further, that such redemption shall
occur within 45 days of the date of the closing of such public offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes has the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or
56
<PAGE> 57
an integral multiple thereof. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company's New Credit Facility (which provides for borrowings up to $25
million) provides that a Change of Control constitutes an event of default. In
addition, the exercise by the Holders of Notes of their right to require the
Company to repurchase the Notes could cause a default under the New Credit
Facility, even if the Change of Control itself did not, due to the financial
effect of such repurchases on the Company. Finally, the Company's ability to pay
cash to the Holders of Notes upon a repurchase may be limited by the Company's
then existing financial resources. There can be no assurance that the Company
will have the financial resources necessary or be permitted by its other debt
agreements to repurchase the Notes upon the occurrence of a Change of Control.
See "Risk Factors -- Change of Control."
The Company is not required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
The Indenture provides that the Company will be prohibited from disposing
of all or substantially all its assets, consolidating with or merging into any
other corporation, person or entity under certain circumstances. For a
discussion of certain financial requirements that must be met in such contexts,
see "Certain Covenants -- Merger, Consolidation or Sale of Assets." Other than
these requirements, the Indenture does not contain any covenants or provisions
which may afford the applicable Trustee or Holders protection in the event of a
highly leveraged transaction, including transactions effected by management or
affiliates, which may or may not result in a Change of Control.
The Indenture provides that the Trustee may waive the provisions under the
Indenture relative to the Company's obligations to make an offer to repurchase
the Notes as a result of a Change of Control if directed to do so by the holders
of a majority in principal amount of the Notes then outstanding.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 80% of the consideration therefor received by the Company
or such Subsidiary is in the form of cash; provided that the amount of (x) any
liabilities (as shown on the Company's or such Subsidiary's most recent balance
sheet), of the Company or any Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Subsidiary from
further liability and (y) any securities, notes or other obligations received by
the Company or any such Subsidiary from such transferee that are contempora-
57
<PAGE> 58
neously (subject to ordinary settlement periods) converted by the Company or
such Subsidiary into cash (to the extent of the cash received), shall be deemed
to be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds either (i) to the acquisition of a
majority of the assets of, or a majority of the Voting Stock of, another
Permitted Business, the making of a capital expenditure or the acquisition of
other long-term assets that are used or useful in a Permitted Business or (ii)
to reduce Indebtedness of the Company or any Subsidiary under a Credit Facility.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the first
sentence of this paragraph will be deemed to constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company is
required to make an offer to all Holders of Notes and all holders of other
Indebtedness containing provisions similar to those set forth in the Indenture
with respect to offers to purchase or redeem with the proceeds of sales of
assets (an "Asset Sale Offer") to purchase the maximum principal amount of Notes
and such other Indebtedness that may be purchased out of the Excess Proceeds, at
an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the date of purchase, in accordance with the procedures set forth in the
Indenture and such other Indebtedness. To the extent that any Excess Proceeds
remain after consummation of an Asset Sale Offer, the Company may use such
Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If
the aggregate principal amount of Notes and such other Indebtedness tendered
into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes and such other Indebtedness
to be purchased on a pro rata basis. Upon completion of such offer to purchase,
the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's or any of
its Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any of
its Subsidiaries) or to the direct or indirect holders of the Company's or any
of its Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions payable (x) in Equity Interests (other than
Disqualified Stock) of the Company or (y) to the Company or a Subsidiary of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Subsidiary of the
Company); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes, except a payment of interest or principal at Stated
Maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted
58
<PAGE> 59
Payments permitted by clauses (ii), (iii), (iv) and (v) of the next
succeeding paragraph), is less than the sum, without duplication, of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from October 1, 1997 to the end of the Company's
most recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate net cash proceeds received by the
Company since the date of the Indenture as a contribution to its common
equity capital or from the issue or sale of Equity Interests of the Company
(other than Disqualified Stock) or from the issue or sale of Disqualified
Stock or debt securities of the Company that have been converted into such
Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) $2.0 million.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, other Equity Interests of
the Company (other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause (c)
(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or
other acquisition of subordinated Indebtedness with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; (v) the making of any Restricted Investment in
exchange for, or out of the net cash proceeds of, the substantially concurrent
sale (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such Restricted Investment shall be
excluded from clause (c)(ii) of the preceding paragraph; and (vi) the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Subsidiary of the Company held by any
employee or director of the Company (or any of its Subsidiaries) pursuant to any
management equity subscription agreement or stock option agreement approved by
the Board of Directors of the Company; provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $250,000 in any twelve-month period and no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be conclusive and shall be delivered to
the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and the Guarantors may incur
Indebtedness or issue
59
<PAGE> 60
preferred stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock or preferred stock is issued
would have been at least 2.0 to 1, determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or preferred stock had
been issued, as the case may be, at the beginning of such four-quarter period.
The Indenture also provides that the Company and the Guarantors will not
incur any Indebtedness that is contractually subordinated in right of payment to
any other Indebtedness of the Company or the Guarantors unless such Indebtedness
is also contractually subordinated in right of payment to the Notes on
substantially identical terms; provided, however, that no Indebtedness of the
Company or the Guarantors shall be deemed to be contractually subordinated in
right of payment to any other Indebtedness of the Company or the Guarantors
solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company or a Guarantor of Indebtedness and
letters of credit (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company and its
Subsidiaries thereunder) under Credit Facilities; provided that the
aggregate principal amount of all Indebtedness and letters of credit of the
Company and its Subsidiaries outstanding under Credit Facilities after
giving effect to such incurrence does not exceed an amount equal to the
greater of (x) $25.0 million less the aggregate amount of all Net Proceeds
of Asset Sales applied to reduce Indebtedness of the Company or any
Subsidiary under a Credit Facility or (y) the sum of 85% of Eligible
Receivables and 60% of Eligible Inventory as of the date of such
incurrence;
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes and the Exchange Notes;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Subsidiary, in an aggregate principal amount not to exceed
$5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, renew, defease, refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was permitted by
the Indenture to be incurred under the first paragraph hereof or clauses
(iii), (iv) or (v) of this paragraph;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company or any of its
Subsidiaries; provided, however, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the Notes and
(ii)(A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Subsidiary thereof and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a
Subsidiary thereof shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Subsidiary, as the
case may be, that was not permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of (a) fixing or
hedging interest rate risk with respect to any Indebtedness that is
permitted by the terms of this Indenture to be outstanding or (b) limiting
currency exchange rate risks in connection with transactions entered into
in the ordinary course of business;
60
<PAGE> 61
(viii) the guarantee by the Company or any of the Subsidiaries of the
Company of Indebtedness of the Company or a Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(ix) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Subsidiary in the ordinary
course of business; and
(x) the incurrence by the Company or any of its Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (x), not to exceed $15.0
million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (x) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and the
payment of dividends on Disqualified Stock in the form of additional shares of
the same class of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in Fixed
Charges of the Company as accrued.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, enter into any sale and leaseback transaction; provided
that the Company or any Subsidiary may enter into a sale and leaseback
transaction if (i) the Company could have (a) incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Incurrence of
Additional Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien
to secure such Indebtedness pursuant to the covenant described above under the
caption "-- Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and the Company applies the proceeds of
such transaction in compliance with, the covenant described above under the
caption "Repurchase of the Option of Holders -- Asset Sales."
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Indenture and
the Notes, (c) applicable law, (d) any instrument governing
61
<PAGE> 62
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (e) customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (f) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (g) any agreement for the sale of a Subsidiary that
restricts distributions by that Subsidiary pending its sale, (h) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced, (i) Liens securing Indebtedness otherwise
permitted to be incurred pursuant to the provisions of the covenant described
above under the caption "-- Liens" that limits the right of the debtor to
dispose of the assets securing such Indebtedness, (j) provisions with respect to
the disposition or distribution of assets or property in joint venture
agreements and other similar agreements entered into in the ordinary course of
business and (k) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Registration Rights Agreement, the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default or Event of Default
exists; and (iv) except in the case of a merger of the Company with or into a
Wholly Owned Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that would have been obtained
in a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying
62
<PAGE> 63
that such Affiliate Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors and (b) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions: (i) reasonable employee compensation and other benefit
arrangements approved by the disinterested members of the Board of Directors of
the Company, (ii) transactions between or among the Company and/or its
Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company, (iv) reasonable indemnities of officers,
directors and employees of the Company or any Subsidiary permitted by applicable
law and (v) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "-- Restricted Payments."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Wholly Owned Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Subsidiary of
the Company), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interests in such Wholly Owned Subsidiary and
(b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the covenant described above under
the caption "-- Asset Sales," and (ii) will not permit any Wholly Owned
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Subsidiary of
the Company.
Business Activities
The Company will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not be
material to the Company and its Subsidiaries taken as a whole.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports, in each case within the time periods specified in the Commission's
rules and regulations. In addition, following the consummation of the exchange
offer contemplated by the Registration Rights Agreement, whether or not required
by the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
within the time periods specified in the Commission's rules and regulations
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and
63
<PAGE> 64
prospective investors upon request. In addition, the Company and the Guarantors
have agreed that, for so long as any Notes remain outstanding, they will furnish
to the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of the Guarantors shall
acquire or create another U.S. Subsidiary after the date of the Indenture, then
such newly acquired or created Subsidiary shall become a Guarantor by executing
a Supplemental Indenture and deliver an Opinion of Counsel, in accordance with
terms of the Indenture.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes, (ii) default in payment when due
of the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Subsidiaries to comply with the provisions described under
the captions "-- Change of Control," "-- Asset Sales," "-- Restricted Payments"
or "-- Incurrence of Indebtedness and Issuance of Preferred Stock", (iv) failure
by the Company or any of its Subsidiaries for 60 days after notice to comply
with any of its other agreements in the Indenture or the Notes; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Subsidiaries (or the payment of which is guaranteed
by the Company or any of its Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more, provided that this clause (v) will
not apply to any Payment Default on, or acceleration of, the Existing Senior
Notes so long as such Existing Senior Notes are repaid in full within 30 days of
the Closing Date; (vi) failure by the Company or any of its Subsidiaries to pay
final judgments (other than judgments as to which a reputable insurance company
has acknowledged full coverage in writing) aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
64
<PAGE> 65
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to December 15, 2002 then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same
65
<PAGE> 66
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one
66
<PAGE> 67
of the covenants described above under the caption "-- Repurchase at the Option
of Holders") or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or benefits
to the Holders of Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Worldtex, Inc., 212
12th Avenue, N.E., Hickory, NC, 28601, Attention: Treasurer.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes have been issued to qualified institutional buyers in the
form of a permanent global certificate in definitive, fully registered form (the
"Global Note") and the New Notes will be issued in the form of a permanent
global certificate in definitive, fully registered form (the "Global New Note"
and, together with the Global Old Note, the "Global Notes"). The Global Old Note
was deposited on the date of the closing of the sale of the Old Notes with, or
on behalf of, DTC and registered in the name of the nominee of DTC. Except as
set forth below, the Global Notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
67
<PAGE> 68
DTC has also advised that pursuant to procedures established by it
ownership of beneficial interest in the Global Notes will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC (with respect to Participants' interest), the Participants and the indirect
participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities which they own. Consequently, the
ability to transfer beneficial interests in the Global Notes is limited to such
extent.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global New Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interest in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Notes (including principal and interest), is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown on the
records of DTC unless DTC has reason to believe it will not receive payment on
such payment date. Payments by the Participants and the Indirect Participants to
the beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee or
the Company. Neither the Company nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Interest in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. See "-- Same Day
Settlement and Payment."
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the right
to exchange the Global Notes for legended Notes in certificated form, and to
distribute such Notes to its Participants.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global New Note is exchangeable for definitive New Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global New
Notes and the Company thereupon fails to appoint a successor depositary or (y)
has ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Certificated Notes or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Notes. In addition,
beneficial interests in a Global New Note may be exchanged for Certificated
Notes upon request but only upon prior written notice given to the Trustee by or
on behalf of DTC in accordance with the Indenture. In all cases, Certificated
Notes
68
<PAGE> 69
delivered in exchange for any Global Note or beneficial interests therein will
be registered in the names, and issued in any approved denominations, requested
by or on behalf of the depositary (in accordance with its customary procedures).
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Notes in
certificated form, the Company will make all payments of principal, premium, if
any, interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The Notes represented by the Global Notes are expected to be eligible
to trade in the Depositary's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Notes will, therefore, be required by
the Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Notes will also be settled in
immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption "-- Repurchase at the Option of Holders -- Change of Control" and/or
the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of
its Subsidiaries of Equity Interests of any of the Company's Subsidiaries, in
the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess of
$1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding
the foregoing, the following items shall not be deemed to be Asset Sales: (i) a
transfer of assets by the Company to a Subsidiary or by a Subsidiary to the
Company or to another Subsidiary, (ii) an issuance of Equity Interests by a
Subsidiary to the Company or to another Subsidiary, (iii) a Restricted Payment
that is permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments," (iv) the sale or lease of equipment,
inventory, accounts receivable or other assets in the ordinary course of
business, (v) the sale or other disposition of cash or Cash Equivalents, and (v)
the making of a Permitted Investment.
69
<PAGE> 70
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any lender party to the New
Credit Facility or with any domestic commercial bank having capital and surplus
in excess of $500 million and a Thompson Bank Watch Rating of "B" or better,
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and
in each case maturing within six months after the date of acquisition and (vi)
money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act); (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company; (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above) becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares); (iv) the first
day on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors or; (iv) the Company consolidates with, or merges
with or into, any Person, or any Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction in which any of
the outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where the
Voting Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent
70
<PAGE> 71
that any such expense was deducted in computing such Consolidated Net Income,
plus (iv) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash expenses of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior governmental approval (that has not been obtained), and
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof that is a Guarantor, (ii)
the Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded and (iv) the cumulative effect of
a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Credit Facility) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time. Indebtedness under Credit Facilities
outstanding on the date on which
71
<PAGE> 72
Notes are first issued and authenticated under the Indenture shall be deemed to
have been incurred on such date in reliance on the exception provided by clause
(i) or (ii) of the definition of Permitted Debt.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments."
"Eligible Inventory" means, as of any date of determination, all inventory
of the Company and its Subsidiaries, wherever located, valued in accordance with
GAAP and reflected on the most recent consolidated balance sheet of the Company
prior to such date of determination for which financial statements of the
Company are available.
"Eligible Receivables" means, as of any date of determination, all accounts
receivable of the Company and its Subsidiaries (including amounts denominated as
due from factor) arising out of the sale of inventory or manufacturing services
in the ordinary course of business, valued in accordance with GAAP and reflected
on the most recent consolidated balance sheet of the Company prior to such date
of determination for which financial statements of the Company are available.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture (including without limitation the $6
million principal amount Industrial Development Bonds (NFA Corp. Project),
Series 1992A, issued by the Industrial Development Board of the City of
Columbiana, Alabama), until such amounts are repaid.
"Existing Senior Notes" means the 7.50% Senior Notes due July 1, 2004 of
the Company.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) and (ii) the consolidated interest of
such Person and its Subsidiaries that was capitalized during such period, and
(iii) any interest expense on Indebtedness of another Person that is Guaranteed
by such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Subsidiaries, other than dividend payments on Equity Interests payable solely in
Equity Interests of the Company (other than Disqualified Stock) or to the
Company or a Subsidiary of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period.
72
<PAGE> 73
In the event that the referent Person or any of its Subsidiaries incurs,
assumes, Guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Company or any of its Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means each of (i) Willcox & Gibbs Filix of Delaware, Inc.,
Regal Manufacturing Company, Inc., Elastic Corporation of America, Inc.,
Elastex, Inc., Regal Yarns of Argentina, Inc., Worldtex Colombiana I, Inc. and
Worldtex Colombiana II, Inc. and (ii) any other subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest or currency rate swaps, caps, collars, floors or
other similar agreements and (ii) other agreements or arrangements designed to
protect such Person against fluctuations in interest rates or currency exchange
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other
73
<PAGE> 74
obligations), advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "-- Certain Covenants -- Restricted
Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien (other than Indebtedness under a Credit Facility) on the asset
or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, dated as of
December 1, 1997, by and among the Company, NationsBank, N.A., and the other
lenders named therein, providing for up to $25.0 million of revolving credit
borrowings, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the same or similar line of business as the
Company or any of its Subsidiaries was engaged in on the date that the Notes
were originally issued or any reasonable extension or expansion thereof.
"Permitted Investments" means (a) any Investment in the Company or in a
Subsidiary of the Company that is engaged in a Permitted Business; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Subsidiary of the Company in a Person that is engaged in a Permitted Business,
if as a result of such Investment (i) such Person becomes a Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary of the Company; (d) any Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "-- Repurchase at the Option of Holders -- Asset Sales";
74
<PAGE> 75
(e) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of the Company; and (f) other
Investments in any Person having an aggregate fair market value (measured on the
date each such Investment was made and without giving effect to subsequent
changes in value), when taken together with all other Investments made pursuant
to this clause (f) that are at the time outstanding, not to exceed $5.0 million.
"Permitted Liens" means (i) Liens on assets of the Company or any of the
Guarantors securing obligations of such persons under Credit Facilities that
were permitted by the terms of the Indenture to be incurred; (ii) Liens in favor
of the Company; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Subsidiary of the
Company; provided that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company or such Subsidiary;
(iv) Liens on property existing at the time of acquisition thereof by the
Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens or deposits
to secure the performance of statutory obligations, surety or appeal bonds,
performance bonds, leases and return of money bonds or other obligations of a
like nature incurred in the ordinary course of business; (vi) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of
the third paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (vii) Liens existing on the date of the Indenture; (viii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (ix) Liens to secure Permitted Refinancing Indebtedness,
provided that such Liens extend only to the assets that secured the Indebtedness
refinanced with the proceeds of such Permitted Refinancing Indebtedness; (x)
statutory Liens of landlords and Liens of carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen and other Liens imposed by law incurred in the
ordinary course of business for sums not delinquent or being contested in good
faith, if such reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made in respect thereof; (xi) Liens securing
Hedging Obligations and (xii) easements, rights-of-way, municipal and zoning
ordinances and similar charges, encumbrances, title defects or other
irregularities that do not materially interfere with the ordinary course of
business of the Company and its Subsidiaries; (xiii) Liens on assets of
Subsidiaries securing Indebtedness of such persons that was permitted by the
terms of the Indenture to be incurred; and (xiv) Liens incurred in the ordinary
course of business of the Company or any Subsidiary of the Company with respect
to obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Senior
Notes on terms at least as favorable to the Holders of Senior Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
75
<PAGE> 76
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"U.S. Subsidiary" means any Subsidiary that is incorporated in a State in
the United States or the District of Columbia or that guaranteed any
Indebtedness of the Company.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person, by one or more Wholly Owned Subsidiaries of such Person or by such
person and one or more Wholly Owned Subsidiaries of such Person.
76
<PAGE> 77
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer will not be treated as a taxable transaction for federal income tax
purposes because the New Notes do not differ materially in kind or extent from
the Old Notes. Accordingly, no gain or loss should be recognized by a Holder who
exchanges an Old Note for a New Note pursuant to the Exchange Offer, and each
New Note should be viewed as a continuation of the corresponding Old Note. For
purposes of determining gain or loss upon a subsequent sale or exchange of the
New Notes, a holder's initial basis in the New Notes will be the same as such
holder's adjusted basis in the Old Notes exchanged therefor, and the holding
period of a holder for the New Note should include the period during which such
holder held such corresponding Old Note.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a discussion of certain United States federal income and
estate tax consequences of the acquisition, ownership and disposition of Notes
by an initial beneficial owner of Notes that, for United States federal income
tax purposes, is not a "United States person" (a "Non-United States Holder").
This discussion is based upon the United States federal tax law now in effect,
which is subject to change, possibly retroactively. For purposes of this
discussion, a "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof, an estate whose income is includible in gross income for
United States federal income tax purposes regardless of its source, or a trust
if (i) a U.S. court is able to exercise primary supervision over the
administration of the trust and (ii) one or more United States persons have the
authority to control all substantial decisions of the trust. The tax treatment
of the holders of the Notes may vary depending upon their particular situations.
United States persons acquiring the Notes are subject to different rules from
those discussed below. In addition, certain other holders (including insurance
companies, tax exempt organizations, financial institutions and broker-dealers)
may be subject to special rules not discussed below. PROSPECTIVE INVESTORS ARE
URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF NOTES, AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER
TAXING JURISDICTION.
INTEREST
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and (i) the Non-United States
Holder does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company; (ii) the Non-United States
Holder is not a controlled foreign corporation with respect to which the Company
is a "related person" within the meaning of the United States Internal Revenue
Code of 1986, as amended (the "Code"); and (iii) either (A) the Non-United
States Holder certifies, under penalties of perjury, that such holder is not a
United States person and provides such holder's name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial organization") and holds the Notes certifies, under penalties of
perjury, that such statement has been received from the Non-United States Holder
by it or by another financial organization and furnishes the payor with a copy
thereof.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other disposition
of a Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Note as a capital asset,
77
<PAGE> 78
such holder is present in the United States for 183 or more days in the taxable
year and certain other requirements are met.
FEDERAL ESTATE TAXES
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting requirements will not apply to such payments with respect
to which either the requisite certification, as described above, has been
received or an exemption has otherwise been established; provided that neither
the Company nor its paying agent has actual knowledge that the holder is a
United States person or that the conditions of any other exemption are not in
fact satisfied. Under temporary Treasury regulations, these information
reporting and backup withholding requirements will apply, however, to the gross
proceeds paid to a Non-United States Holder on the disposition of the Notes by
or through a United States office of a United States or foreign broker, unless
the holder certifies to the broker under penalties of perjury as to its name,
address and status as a foreign person or the holder otherwise establishes an
exemption. Information reporting requirements, but not backup withholding, will
also apply to a payment of the proceeds of a disposition of the Notes by or
through a foreign office of a United States broker or foreign brokers with
certain types of relationships to the United States unless such broker has
documentary evidence in its file that the holder of the Notes is not a United
States person, and such broker has no actual knowledge to the contrary, or the
holder otherwise establishes an exception. Neither information reporting nor
backup withholding generally will apply to a payment of the proceeds of a
disposition of the Notes by or through a foreign office of a foreign broker not
subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather modify certain certification
procedures and forms and clarify reliance standards applicable to withholding
agents. The final regulations are generally effective for payments made after
December 31, 1998, subject to certain transition rules. NON-UNITED STATES
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT,
IF ANY, OF THE NEW FINAL REGULATIONS.
PLAN OF DISTRIBUTION
Each broker-dealer who holds Old Notes that are Transfer Restricted
Securities that were acquired for its own account as a result of market-making
activities or other trading activities (other than Transfer Restricted
Securities acquired directly from the Company) may exchange such Old Notes
pursuant to the Exchange Offer; however, such broker-dealer may be deemed an
"underwriter" within the meaning of the Securities Act and must, therefore,
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus as it may be amended or supplemented from time
to time may be used by a broker-dealer for such purpose. The Company has agreed
that for a period of 180 days after the Exchange Offer is consummated, it will,
upon reasonable request, make this Prospectus, as amended or supplemented,
available promptly to any broker-dealer for use in connection with any such
resale.
78
<PAGE> 79
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions and concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the effective date of the Registration
Statement of which this Prospectus is a part, the Company will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. The Company has agreed to pay the expenses incident to the Exchange
Offer and will indemnify the Holders of the Old Notes against certain
liabilities, including certain liabilities under the Securities Act, in
connection with the Exchange Offer.
LEGAL MATTERS
The legality of the New Notes will be passed upon by Hughes Hubbard & Reed
LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Worldtex, Inc.,
appearing in Worldtex, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing therein, and upon the
authority of said firm as experts in accounting and auditing.
The statements of assets, liabilities, and divisional equity of ECA as of
December 28, 1996, December 30, 1995 and December 31, 1994, and the related
statements of income, divisional equity and cash flows for each of the three
fiscal years in the period ended December 28, 1996, included in this Prospectus
which is part of this registration statement, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in this Prospectus which is part of this registration statement (which
report expressed an unqualified opinion and includes an explanatory paragraph
referring to the basis of presentation of the ECA financial statements) and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act for the registration of the New Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to the
Company and the New Notes offered hereby, reference is made to the Registration
Statement and to the exhibits filed therewith. Statements contained in this
Prospectus concerning the contents of any contract or other document are not
necessarily complete. With respect to each such contract or other document filed
with the Commission as an exhibit to
79
<PAGE> 80
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Such reports, proxy statements and
other information, including the exhibits thereto, can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: 500 West Madison Street, Suite 1400, Chicago, IL
60661 and 7 World Trade Center, Suite 1300, New York, NY 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a website at http:www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. In addition,
such material can be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish (excluding exhibits and schedules) to the holders
of the Notes and file with the Commission (unless the Commission will not accept
such a filing) as specified in the Commission's rules and regulations: (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual financial statements only, a report thereon by the Company's
independent certified public accountants and (ii) all reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified in
the Commission's rules and regulations. In addition, for so long as any of the
Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owner of the Notes in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act.
80
<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ELASTIC CORPORATION OF AMERICA (A DIVISION OF NFA CORP.)
Audited Financial Statements:
Independent Auditors' Report.............................. F-2
Statements of assets, liabilities and divisional equity as
of December 28, 1996, December 30, 1995 and December
31, 1994............................................... F-3
Statements of income and divisional equity for the fiscal
years ended December 28, 1996, December 30, 1995 and
December 31, 1994...................................... F-4
Statements of cash flows for the fiscal years ended
December 28, 1996, December 30, 1995 and December 31,
1994................................................... F-5
Notes to Financial Statements............................. F-6
Unaudited Financial Statements:
Statement of assets, liabilities and divisional equity as
of September 27, 1997.................................. F-11
Statements of income and divisional equity for the
thirty-nine weeks ended September 27, 1997 and
September 28, 1996..................................... F-12
Statements of cash flows for the thirty-nine weeks ended
September 27, 1997 and September 28, 1996.............. F-13
Notes to Unaudited Financial Statements................... F-14
</TABLE>
F-1
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
NFA Corp.
Chestnut Hill, Massachusetts
We have audited the accompanying statements of assets, liabilities and
divisional equity of the Elastic Corporation of America ("ECA") (a division of
NFA Corp. ("NFA")) as of December 28, 1996, December 30, 1995, and December 31,
1994, and the related statements of income and divisional equity, and cash flows
for the periods then ended. These financial statements are the responsibility of
ECA'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, such financial statements present fairly, in all material
respects, the financial position of ECA at December 28, 1996, December 30, 1995,
and December 31, 1994, and the results of its operations and its cash flows for
the periods then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared from the separate
records maintained by ECA and may not necessarily be indicative of the
conditions that would have existed or the results of operations if ECA had been
operated as an unaffiliated company. As discussed in Note 1 to the financial
statements, a portion of expenses represents allocations made from NFA
home-office items applicable to ECA and other NFA corporate charges.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 14, 1997
F-2
<PAGE> 83
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY
DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 109,005 $ 111,559 $ 153,853
Accounts receivable, less allowance for doubtful
accounts of $330,000, $230,000, and $230,000,
respectively (Note 9).......................... 9,569,967 6,865,331 9,652,638
Employee loans.................................... 233,188 94,987 84,687
Inventories (Note 2).............................. 10,676,161 8,646,900 10,174,377
Prepaid expenses.................................. 297,433 194,118 316,335
----------- ----------- -----------
Total current assets...................... 20,885,754 15,912,895 20,381,890
----------- ----------- -----------
Property, plant and equipment:
Land.............................................. 159,558 159,558 159,558
Building and leasehold improvements............... 5,346,247 5,251,544 4,482,994
Machinery and equipment........................... 19,476,965 18,722,645 18,372,419
Construction in progress.......................... 286,500 144,520 361,847
----------- ----------- -----------
25,269,270 24,278,267 23,376,818
Less accumulated depreciation and amortization.... 16,137,534 14,440,390 12,542,623
----------- ----------- -----------
Property, plant and equipment -- net........... 9,131,736 9,837,877 10,834,195
----------- ----------- -----------
Escrow funds restricted under bond indenture........ -- 8,808 1,031,517
----------- ----------- -----------
Deferred financing cost............................. 171,615 195,079 220,043
----------- ----------- -----------
Total..................................... $30,189,105 $25,954,659 $32,467,645
=========== =========== ===========
</TABLE>
LIABILITIES AND DIVISIONAL EQUITY
<TABLE>
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................................. $ 1,959,779 $ 1,079,467 $ 1,832,469
Accrued pension costs (Note 4).................... -- 556,050 395,372
Accrued commissions............................... 20,475 100,000 269,356
Accrued expenses (other).......................... 549,343 422,854 427,383
Current maturities of long-term debt (Note 3)..... -- 700,000 700,000
----------- ----------- -----------
Total current liabilities................. 2,529,597 2,858,371 3,624,580
Long-term debt (Note 3)............................. 6,000,000 6,000,000 6,700,000
Deferred compensation (Note 6)...................... 717,496 734,512 664,796
----------- ----------- -----------
Total liabilities................................... 9,247,093 9,592,883 10,989,376
Commitments (Note 5)
Divisional equity (Note 7).......................... 20,942,012 16,361,776 21,478,269
----------- ----------- -----------
Total..................................... $30,189,105 $25,954,659 $32,467,645
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 84
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
STATEMENTS OF INCOME AND DIVISIONAL EQUITY
FIFTY-TWO-WEEK PERIODS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
AND FIFTY-THREE-WEEK PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Net sales (Note 9)................................. $55,797,589 $ 58,055,129 $61,339,740
Cost of sales...................................... 41,827,674 45,059,635 45,666,324
----------- ------------ -----------
Gross profit....................................... 13,969,915 12,995,494 15,673,416
----------- ------------ -----------
Selling, general and administrative expenses (Notes
8 and 10)........................................ 6,664,083 6,219,131 9,379,301
Interest expense (Notes 3, 7, and 8)............... 813,898 1,147,251 1,000,785
----------- ------------ -----------
Total expenses..................................... 7,477,981 7,366,382 10,380,086
----------- ------------ -----------
Net income......................................... 6,491,934 5,629,112 5,293,330
Divisional equity, beginning of period............. 16,361,776 21,478,269 20,729,793
Distributions to corporate......................... (1,911,698) (10,745,605) (4,544,854)
----------- ------------ -----------
Divisional equity, end of period................... $20,942,012 $ 16,361,776 $21,478,269
=========== ============ ===========
PRO FORMA DATA: (Unaudited)(1)
Historical income before provision for income
taxes............................................ $ 6,491,934 $ 5,629,112 $ 5,293,330
Pro forma provision for income taxes............... 2,499,395 2,167,208 2,037,932
----------- ------------ -----------
Pro forma net income............................... $ 3,992,539 $ 3,461,904 $ 3,255,398
=========== ============ ===========
</TABLE>
- ---------------
(1) Included to show the tax impact on ECA's historical operations assuming ECA
was a taxable entity.
See notes to financial statements.
F-4
<PAGE> 85
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
STATEMENTS OF CASH FLOWS
FIFTY-TWO-WEEK PERIODS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
AND FIFTY-THREE-WEEK PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income......................................... $ 6,491,934 $ 5,629,112 $ 5,293,330
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of property, plant and
equipment..................................... -- (15,081) (3,000)
Depreciation and amortization.................... 1,876,702 1,943,071 1,992,437
Changes in assets and liabilities:
Accounts receivable, net...................... (2,842,837) 2,777,007 (978,832)
Inventories................................... (2,029,261) 1,527,477 (992,703)
Prepaid expenses.............................. (103,315) 122,217 170,463
Accounts payable and accrued expenses......... 371,226 (766,209) (4,544)
Deferred compensation......................... (17,016) 69,716 307,682
----------- ------------ -----------
Net cash provided by operating
activities............................. 3,747,433 11,287,310 5,784,833
----------- ------------ -----------
Cash Flows From Investing Activities:
Addition to property, plant and equipment.......... (1,170,937) (943,513) (1,370,691)
Decrease in escrow funds restricted under bond
indenture........................................ 8,808 1,022,709 335,546
Proceeds from sale of equipment.................... 23,840 36,805 200,240
----------- ------------ -----------
Net cash (used in) provided by investing
activities............................. (1,138,289) 116,001 (834,905)
----------- ------------ -----------
Cash Flow From Financing Activities:
Repayments on notes payables....................... -- -- (7,299)
Payments for long-term debt........................ (700,000) (700,000) (400,000)
Cash remitted to corporate......................... (1,911,698) (10,745,605) (4,544,854)
----------- ------------ -----------
Net cash used in financing activities.... (2,611,698) (11,445,605) (4,952,153)
----------- ------------ -----------
Net Decrease in Cash:.............................. (2,554) (42,294) (2,225)
Cash, Beginning of Period:......................... 111,559 153,853 156,078
----------- ------------ -----------
Cash, end of Period:............................... $ 109,005 $ 111,559 $ 153,853
=========== ============ ===========
Supplemental Cash Flow Information Cash paid for
interest......................................... $ 379,969 $ 399,678 $ 294,302
=========== ============ ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 86
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Elastic Corporation of America ("ECA") is a
division of NFA Corp. ("NFA"). ECA is engaged in the manufacture and
distribution of narrow elastic and other specialty textiles. On September 19,
1997, NFA entered into a letter of intent to sell the ECA business of NFA.
The accompanying financial statements include the historical basis
financial statements of ECA. ECA has been operated as a division of NFA, sharing
corporate services (audit, legal and group administrative functions) with other
NFA divisions. The financial statements have been prepared from the separate
records maintained for the ECA division for the periods presented, and include
the historical assets, liabilities, revenues and expenses related to the ECA
division. For the periods presented, selling, general and administrative
expenses include a historical corporate charge which was determined based on
1.5% of sales. In addition, historical employee pension costs were determined
based on number of personnel. A historical cost of capital, at prime, is also
charged by NFA for the average daily balance of net advances and loans
("divisional equity") in excess of specified amounts (Note 7).
While management believes that all of the allocation methods used are
reasonable, amounts allocated for corporate charges are not necessarily
indicative of what they would be if ECA operated as an unaffiliated entity.
Management believes that the selling, general and administrative expenses
represented by the corporate charge for ECA would have been approximately
$200,000 (unaudited) annually, or approximately $637,000 (unaudited), $671,000
(unaudited) and $720,000 (unaudited) less, for 1996, 1995 and 1994,
respectively, had ECA operated as an unaffiliated entity.
The historical corporate charges included in selling, general and
administrative expenses were $836,964, $870,827 and $920,096 for 1996, 1995 and
1994, respectively.
The financial information included herein does not reflect any adjustments
that may be made by the buyer to record the allocation of purchase price to the
assets purchased and liabilities assumed in preparing an opening balance sheet,
nor does it reflect what the results of operations are expected to be in the
future or what the financial position and results of operations would have been
had ECA been a separate stand-alone entity during the periods presented.
Cash -- ECA was included in the centralized cash management system of NFA,
whereby net daily cash activity of ECA's zero balance disbursement account was
charged or credited to ECA through its divisional equity account (Note 7 ). Cash
balances represent amounts associated with payroll and other miscellaneous bank
accounts.
Inventories -- Inventories are stated at the lower of cost, on a first-in,
first-out ("FIFO") method, or market.
Property, Plant and Equipment -- Property, plant and equipment is recorded
at cost. Depreciation and amortization are computed principally by use of the
straight-line method over the estimated useful lives (generally three to thirty
years).
Deferred Financing Cost -- The cost relating to long-term debt is
capitalized and amortized using the interest method over the maturities of the
related obligation.
Revenue Recognition -- Sales are reflected in the statements of income and
divisional equity when products are shipped.
Income Taxes -- NFA has elected to be an S Corporation for federal income
tax purposes. Income earned by NFA is allocated to stockholders who are
responsible for the payment of taxes thereon. The states in
F-6
<PAGE> 87
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO FINANCIAL STATEMENTS
which ECA operates permit S Corporation status for state income tax purposes. As
a result of ECA operating in states which permit S Corporation status, no
provision for income taxes has been provided in the accompanying financial
statements.
Use of Estimates -- The preparation of ECA's financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Impairment of Long-Lived Assets -- In March 1995, the Financial Accounting
Standards Board ("FASB") issued 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." ECA's adoption of SFAS No. 121 in 1996 had
no financial statement impact.
Fiscal Year -- ECA operates on a fifty-two or fifty-three-week year ending
on the last Saturday in December. The fiscal years ended December 28, 1996 and
December 30, 1995 contained fifty-two weeks and December 31, 1994 contained
fifty-three weeks.
2. INVENTORIES
Inventories at the balance sheet dates are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials and supplies........... $ 2,019,078 $2,152,763 $ 2,318,698
Work in process...................... 4,774,643 3,968,341 3,830,128
Finished goods....................... 3,882,440 2,525,796 4,025,551
----------- ---------- -----------
$10,676,161 $8,646,900 $10,174,377
=========== ========== ===========
</TABLE>
3. LONG-TERM DEBT
Long-term debt at the balance sheet dates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Industrial Revenue Bonds, Columbiana,
Alabama ("IRB-AL") rental payments
payable $700,000 annually through
1996, the remaining $6 million is
due June 1, 2014 plus interest at
variable rates ranging from
3.12%-4.15%........................ $ 6,000,000 $6,700,000 $ 7,400,000
Less current maturities.............. -- (700,000) (700,000)
----------- ---------- -----------
$ 6,000,000 $6,000,000 $ 6,700,000
=========== ========== ===========
</TABLE>
In June 1992 NFA entered into a lease agreement ("the Agreement") with the
Industrial Development Board of the City of Columbiana ("IDBCC"). Pursuant to
the agreement, IDBCC, the issuer of $8,100,000 of Revenue Bonds ("the Bonds")
issued for the purpose of financing the cost of acquiring, constructing and
equipping an industrial facility ( ECA's Headquarters, "the NFA Project"),
leased the NFA Project to NFA. NFA agreed to pay rentals to IDBCC equal to the
debt service on the Bonds. The final maturity of the Bonds and the termination
of the lease was June 1, 2004. IDBCC assigned and pledged to the bond trustee
all of its rights under the lease. As security for the payment of the debt
service on the Bonds, NFA entered into a
F-7
<PAGE> 88
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO FINANCIAL STATEMENTS
Guaranty Agreement in favor of the bond trustee, guaranteeing payment on the
debt service. The Guaranty is supported by an irrevocable direct pay Letter of
Credit ("LOC") which permits the bond trustee to draw an amount sufficient to
pay, when due, the principal of, and up to 200 days interest on, the bonds. The
LOC was established to not exceed $6,333,334. There were no balances drawn or
outstanding on this LOC at the balance sheet dates. As security for NFA's
obligations under the LOC, NFA and IDBCC executed a mortgage, assignment of
leases and security agreement in favor of the bank that issued the LOC, whereby
the bank was granted a mortgage, and security interest in the NFA project. Under
the terms of the Agreement and bond indenture, funds available to NFA were
required to be deposited into an escrow project fund with the bond trustee. Use
of such funds was limited to the NFA Project. NFA is also required to comply
with certain affirmative and negative covenants; these covenants restrict NFA
from incurring other indebtedness, limit distributions of income and require the
maintenance of certain financial ratios. NFA was in compliance with these
covenants at the balance sheet dates. The obligation associated with the bond
issuance and the related capital costs of the NFA Project have been recorded by
ECA.
The capitalized costs of the NFA project were approximately $7,700,000,
$7,700,000 and $7,100,000 at December 28, 1996, December 30, 1995 and December
31, 1994, respectively.
The net book value of the NFA Project costs was approximately $3,900,000,
$4,100,000, and $4,400,000 at December 28, 1996, December 30, 1995, and December
31, 1994, respectively.
In May 1997 the lease was amended to extend the term of the agreement from
June 1, 2004 to June 1, 2014. In conjunction with the execution of the
amendment, bond holders approved an amendment to the bond indenture to remove
the requirements for scheduled annual mandatory redemption of the bonds on June
1, 1997 and thereafter. The indenture was also amended to extend the final
maturity of the bonds from June 1, 2004 to June 1, 2014. The expiration of the
LOC has been extended to March 31, 1999. The scheduled maturity of long-term
debt as of December 28, 1996 reflects the lease amendment.
4. RETIREMENT PLANS
Until December 30, 1995, NFA had a noncontributory defined benefit
retirement plan covering substantially all nonunion employees, including
employees of ECA. The plan provided benefits to employees upon retirement that
were correlated to the Social Security law.
The benefits under the plan were based on the employee's highest seven
years of compensation. NFA's policy was to fund the minimum required
contribution necessary to meet the present and future obligations of the plan.
Contributions were intended to provide not only benefits attributed to service
to date but also for those expected to be earned in the future. Contributions
were made to a tax-exempt master trust. Plan assets consisted principally of
listed equity securities, corporate obligations and U.S. Government bonds.
In 1995, NFA adopted a plan amendment, effective December 31, 1995, ceasing
the addition of new participants to the plan. The plan obligations were
remeasured using an assumed discount rate of 6% and a long-term rate of return
of 6%. In 1996 the plan was terminated and the plan obligation was settled in
1997. NFA recognized a curtailment gain of approximately $1,129,000 upon
amending the plan. There was no allocation of the curtailment gain to ECA. As
all activity determined costs have previously been recorded, NFA believes that
it has no further costs relating to this plan after 1995.
F-8
<PAGE> 89
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO FINANCIAL STATEMENTS
Pension costs for 1995 and 1994 related to the employees of the ECA
business were determined based on actuarial calculations and allocations, based
on number of employees, as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Service cost -- benefits earned during the
period........................................... $ 431,849 $ 358,790
Interest cost on projected benefit obligation...... 362,245 295,712
Actual return on plan asset........................ (237,710) (266,630)
Net amortization and deferral...................... 916 (11,743)
--------- ---------
Net pension expense................................ $ 557,300 $ 376,129
========= =========
</TABLE>
NFA maintains a 401(k) defined contribution plan covering substantially all
employees. Beginning in 1996, the plan includes an employer annually elective
matching contribution provision. The 401(k) expense applicable to ECA employees
amounted to $77,115 in 1996.
5. COMMITMENTS
NFA leases certain equipment and vehicles under noncancelable leases
expiring at various dates through 2002. Certain of these leases contain renewal
and purchase options. Future minimum rental commitments on leases applicable to
the ECA business were as follows:
<TABLE>
<S> <C>
1997................................................... $ 801,318
1998................................................... 603,043
1999................................................... 561,259
2000................................................... 551,805
2001................................................... 493,820
2002................................................... 97,342
----------
$3,108,587
==========
</TABLE>
Rentals charged to operations under these leases were $759,505, $623,772,
and $214,177 for 1996, 1995, and 1994, respectively.
Under patent agreements entered into by NFA, NFA is required to pay
royalties relating to the sale of certain ECA products. Royalty amounts charged
to selling, general and administrative expenses were $385,200, $381,900, and
$460,500 for 1996, 1995, and 1994, respectively.
6. DEFERRED COMPENSATION AND EMPLOYMENT AGREEMENTS
NFA has established nonqualified unfunded deferred compensation agreements
for certain ECA employees. One agreement provides for fixed monthly benefits
payable until February 1, 1997, on which date the remaining balance will be paid
out in full. The outstanding unfunded obligation under this agreement amounted
to $98,022 and was included in accrued expenses at December 28, 1996. The other
agreement is part of an employment agreement and pertains to a bonus arrangement
based on ECA's annual pretax income in excess of a specified base, less certain
adjustments. The base amounts for periods subsequent to December 31, 1994 were
not exceeded and, as such, no accrual has been recorded for 1995 and 1996. The
deferred compensation is payable on January 1, 2006, or earlier in the event of
termination, and earns interest at 66% of the prime rate (8.5% at December 28,
1996). The employment agreement, which expires on January 1, 2006, provides for
an annual base salary of $160,000, effective January 1, 1996 with annual
increases based on the greater of the consumer price index or a specified
amount. The minimum base salary will be $200,000 through December 31, 2000 and
$240,000 thereafter. Provisions of the agreement also
F-9
<PAGE> 90
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO FINANCIAL STATEMENTS
provide for the payment by NFA of a portion of the proceeds, subject to certain
conditions, from a sale, as defined, of NFA. Proceeds to which the employee
would be entitled shall be determined based on a formula as specified in the
agreement. As a result of the letter of intent entered into by NFA (Note 1), NFA
intends on paying a portion of the proceeds from the proposed sale of ECA to the
employee under this provision of his employment agreement. The financial
statements do not include any amounts that might be payable upon the sale of
ECA. Any amounts paid will be recorded in the period in which a sale is
consummated. Severance payments are also provided for under the agreement.
Deferred compensation expense, including interest, aggregated $43,724,
$40,218, and $285,432 in 1996, 1995, and 1994, respectively.
7. DIVISIONAL EQUITY
Divisional equity represents NFA's investment in the ECA business and is
comprised of permanent loans and advances, net income of the ECA business,
intracompany receivables and payables and cumulative receipts less disbursements
through ECA's zero balance cash account. NFA charges ECA an interest (or cost of
capital) charge based on the average daily balance of divisional equity in
excess of $7,500,000 at prime (8.5%, 8.5%, and 8% at December 28, 1996, December
30, 1995, and December 31, 1994, respectively) (Note 8).
8. RELATED-PARTY TRANSACTIONS
ECA is charged a home office service fee of 1.5% of its total sales by NFA.
The home office service fee, which is included in selling, general and
administrative expense, was $836,922, $870,827, and $920,097 for 1996, 1995, and
1994, respectively.
ECA is also charged a cost of capital in the form of interest by NFA (Note
7). Total interest expense charged to ECA by NFA was $437,157, $703,282, and
$629,063 for 1996, 1995, and 1994, respectively.
9. SIGNIFICANT CUSTOMERS
During 1996, 1995, and 1994, one unrelated customer accounted for
approximately 13%, 24%, and 29%, and another unrelated customer accounted for
approximately 10%, 9%, and 10%, respectively, of ECA's revenues. Additionally,
at December 28, 1996, December 30, 1995, and December 31, 1994, accounts
receivable from one customer approximated 31%, 31%, and 42%, respectively;
accounts receivable from the other customer approximated 6%, 4%, and 4%,
respectively, of ECA's accounts receivable.
10. CONTINGENCIES
NFA is a defendant in certain litigation relating to counterclaims filed
against ECA in connection with patents used by ECA. It is the opinion of
management that any losses in connection with this matter will not have a
material adverse effect on the financial position or results of operations of
ECA. Legal fees associated with certain litigation have been recorded by ECA in
the amount of approximately $855,200, $49,000, and $956,700 for 1996, 1995, and
1994, respectively. In addition, in 1995, NFA settled certain litigation
pertaining to ECA for $2,000,000. This amount, which was recorded by NFA in
1994, has been allocated to ECA and is included in selling, general and
administrative expenses for 1994.
F-10
<PAGE> 91
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash........................................................ $ 179,772
Accounts receivable less allowance for doubtful accounts
of $906,000............................................ 11,826,938
Employee loans............................................ 213,544
Inventories............................................... 11,752,408
Prepaid expenses.......................................... 506,278
-----------
Total current assets.............................. 24,478,940
-----------
Property, plant and equipment:
Land...................................................... 159,558
Building and leasehold improvements....................... 5,577,360
Machinery and equipment................................... 20,154,087
Construction in progress.................................. 1,551,835
-----------
27,442,840
Less accumulated depreciation............................. 17,513,209
-----------
9,929,631
-----------
Other assets................................................ 759,786
-----------
Total............................................. $35,168,357
===========
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,827,182
Accrued expenses.......................................... 1,365,728
Current maturities of long-term debt...................... --
-----------
Total current liabilities......................... 4,192,910
Long-term debt.............................................. 6,000,000
Deferred compensation....................................... 717,496
-----------
Total liabilities................................. 10,910,406
-----------
Commitments
Divisional equity........................................... 24,257,951
-----------
Total............................................. $35,168,357
===========
</TABLE>
See notes to financial statements.
F-11
<PAGE> 92
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
STATEMENTS OF INCOME AND DIVISIONAL EQUITY
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales................................................... $52,738,894 $41,779,106
Cost of sales............................................... 38,913,629 31,151,218
----------- -----------
Gross Profit................................................ 13,825,265 10,627,888
----------- -----------
Selling, general and administrative expenses................ 6,447,226 5,241,023
Interest expense............................................ 983,361 615,274
----------- -----------
Total expenses.............................................. 7,430,587 5,856,297
----------- -----------
Net income.................................................. 6,394,678 4,771,591
----------- -----------
Divisional equity, beginning of period...................... 20,942,012 16,361,776
Distributions to corporate.................................. (3,078,739) (3,335,556)
----------- -----------
Divisional equity, end of period............................ $24,257,951 $17,797,811
=========== ===========
</TABLE>
F-12
<PAGE> 93
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
STATEMENTS OF CASH FLOWS
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,394,678 $ 4,771,591
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,387,502 1,673,151
Changes in assets and liabilities provided (used) cash:
Accounts receivable, net............................... (2,837,327) (2,424,444)
Inventories............................................ (1,076,247) (1,222,345)
Prepaid expenses....................................... (208,845) (108,271)
Accounts payable and accrued expenses.................. 1,663,315 2,102,149
Deferred compensation.................................. -- (54,533)
----------- -----------
Net cash provided operating activities............ 5,323,076 4,737,298
----------- -----------
Cash flows from investing activities:
Decrease in escrow funds restricted under bond
indenture.............................................. -- 4,778
Additions to property, plant and equipment................ (2,173,570) (677,931)
----------- -----------
(2,173,570) (673,153)
----------- -----------
Cash flows from financing activities:
Cash remitted to NFA Corp................................. (3,078,739) (3,335,556)
Payments for long term debt............................... -- (700,000)
----------- -----------
(3,078,739) (4,035,556)
----------- -----------
Net increase cash........................................... 70,767 28,589
Cash, beginning of period................................... 109,005 111,559
----------- -----------
Cash, end of period......................................... $ 179,772 $ 140,148
=========== ===========
Supplemental cash flow information -- cash paid for
interest.................................................. 240,734 256,878
----------- -----------
</TABLE>
F-13
<PAGE> 94
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Elastic Corporation of America ("ECA") is a
division of NFA Corp. ("NFA"). ECA is engaged in the manufacture and
distribution of narrow elastic and other specialty textiles. On December 1,
1997, NFA sold the ECA business to Worldtex, Inc.
The accompanying unaudited interim financial statements include the
historical basis financial statements of ECA. ECA has been operated as a
division of NFA, sharing corporate services (audit, legal and group
administrative functions) with other NFA divisions. The financial statements
have been prepared from the separate records maintained for the ECA division.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. As such, these interim financial statements should be read in
conjunction with ECA's 1996 financial statements and notes thereto.
In the opinion of ECA management, the accompanying interim unaudited
financial statements as of September 27, 1997 and for the thirty-nine weeks
ended September 27, 1997 have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a presentation of the financial position
and operating results of ECA for the period in accordance with the basis of
presentation described in Note 1 to the audited ECA financial statements.
Accounts Receivable and Other Assets -- Other assets consist of long term
accounts receivable and deferred financing costs. Accounts receivable and Other
Assets include approximately $1,900,000 (of which $600,000 was classified as
long term accounts receivable) of accounts receivable which were not sold to
Worldtex, Inc. At September 27, 1997, ECA provided for an additional allowance
of $500,000 for doubtful accounts. Subsequently, in December 1997, the entire
amount of accounts receivable not sold were determined to be substantially
uncollectible.
2. INVENTORIES
Inventories at the balance sheet date are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 27,
1997
-------------
<S> <C>
Raw materials and supplies.............................. $ 2,377,046
Work in process......................................... 5,398,844
Finished goods.......................................... 3,976,518
-----------
$11,752,408
===========
</TABLE>
3. LONG-TERM DEBT
In June 1992 NFA entered into a lease agreement ("the Agreement") with the
Industrial Development Board of the City of Columbiana ("IDBCC"). Pursuant to
the agreement, IDBCC, the issuer of $8,100,000 of Revenue Bonds ("the Bonds")
issued for the purpose of financing the cost of acquiring, constructing and
equipping an industrial facility (ECA's Headquarters, "the NFA Project"), leased
the NFA Project to NFA. NFA agreed to pay rentals to IDBCC equal to the debt
service on the Bonds. The final maturity of the Bonds and the termination of the
lease was June 1, 2004. IDBCC assigned and pledged to the bond trustee all of
its rights under the lease. As security for the payment of the debt service on
the Bonds, NFA entered into a Guaranty Agreement in favor of the bond trustee,
guaranteeing payment on the debt service. The Guaranty is supported by an
irrevocable direct pay Letter of Credit ("LOC") which permits the bond trustee
to draw an amount sufficient to pay, when due, the principal of, and up to 200
days interest on, the bonds. The LOC was
F-14
<PAGE> 95
ELASTIC CORPORATION OF AMERICA
(A DIVISION OF NFA CORP.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
established to not exceed $6,333,334. There were no balances drawn or
outstanding on this LOC at the balance sheet dates. As security for NFA's
obligations under the LOC, NFA and IDBCC executed a mortgage, assignment of
leases and security agreement in favor of the bank that issued the LOC, whereby
the bank was granted a mortgage, and security interest in the NFA project. Under
the terms of the Agreement and bond indenture, funds available to NFA were
required to be deposited into an escrow project fund with the bond trustee. Use
of such funds was limited to the NFA Project. NFA is also required to comply
with certain affirmative and negative covenants; these covenants restrict NFA
from incurring other indebtedness, limit distributions of income and require the
maintenance of certain financial ratios. NFA was in compliance with these
covenants at the balance sheet dates. The obligations associated with the bond
issuance and the related capital costs of the NFA Project have been recorded by
ECA.
In May 1997 the lease was amended to extend the term of the agreement from
June 1, 2004 to June 1, 2014. In conjunction with the execution of the
amendment, bond holders approved an amendment to the bond indenture to remove
the requirements for scheduled annual mandatory redemption of the bonds on June
1, 1997 and thereafter. The indenture was also amended to extend the final
maturity of the bonds from June 1, 2004 to June 1, 2014. The expiration of the
LOC has been extended to March 31, 1999.
4. DEFERRED COMPENSATION AND EMPLOYMENT AGREEMENTS
NFA has established nonqualified unfunded deferred compensation agreements
for certain ECA employees. One agreement provides for fixed monthly benefits
payable until February 1, 1997, on which date the remaining balance was paid out
in full. The other agreement is part of an employment agreement and pertains to
a bonus arrangement based on ECA's annual pretax income in excess of a specified
base, less certain adjustments. The base amounts for periods subsequent to
December 31, 1994 were not exceeded and, as such, no accrual has been recorded
subsequent to December 31, 1994. The deferred compensation is payable on January
1, 2006, or earlier in the event of termination, and earns interest at 66% of
the prime rate. The employment agreement, which expires on January 1, 2006,
provides for an annual base salary of $160,000, effective January 1, 1996 with
annual increases based on the greater of the consumer price index or a specified
amount. The minimum base salary will be $200,000 through December 31, 2000 and
$240,000 thereafter. Provisions of the agreement also provide for the payment by
NFA of a portion of the proceeds, subject to certain conditions, from a sale, as
defined, of NFA. Proceeds to which the employee would be entitled shall be
determined based on a formula as specified in the agreement. As a result of the
sale of the assets of the ECA business to Worldtex, Inc. on December 1, 1997,
amounts due to the employee under the provision of his employment agreement were
paid by NFA. The amounts paid were recorded in the period in which the sale was
consummated. Severance payments are also provided for under the agreement.
5. DIVISIONAL EQUITY
Divisional equity represents NFA's investment in the ECA business and is
comprised of permanent loans and advances, net income of the ECA business,
intracompany receivables and payables and cumulative receipts less disbursements
through ECA's zero balance cash account. NFA charges ECA an interest (or cost of
capital) charge based on the average daily balance of divisional equity in
excess of $7,500,000 at prime.
6. CONTINGENCIES
NFA is a defendant in certain litigation relating to counterclaims filed
against ECA in connection with patents used by ECA. It is the opinion of
management that any losses in connection with this matter will not have a
material adverse effect on the financial position or results of operations of
ECA.
F-15
<PAGE> 96
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE INITIAL PURCHASER. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS NOT BEEN A CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 5
Risk Factors........................... 17
The Company............................ 22
Use of Proceeds........................ 23
The Exchange Offer..................... 24
Capitalization......................... 32
Pro Forma Combined Financial
Information.......................... 33
Selected Historical Financial
Information.......................... 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 37
Business............................... 45
Description of Other Indebtedness...... 53
Description of Notes................... 54
Certain United States Federal Tax
Considerations....................... 77
Plan of Distribution................... 78
Legal Matters.......................... 79
Experts................................ 79
Available Information.................. 79
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
WORLDTEX
OFFER TO EXCHANGE ITS
9 5/8% SERIES B SENIOR NOTES
DUE 2007 WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL
OF ITS OUTSTANDING 9 5/8%
SERIES A SENIOR NOTES DUE 2007
---------------------------
PROSPECTUS
---------------------------
APRIL 17 , 1998
======================================================
