<PAGE> 1
As filed with the Securities and Exchange Commission on November 17, 1997
Registration No. 333-36663
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 2392 75-2147728
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number)
organization)
4111 MINT WAY
DALLAS, TEXAS 75237
(214) 333-3225
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN H. KARNES, JR., ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
PILLOWTEX CORPORATION
4111 MINT WAY
DALLAS, TEXAS 75237
(214) 333-3225
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)
-----------------------
Copies to:
TROY B. LEWIS, ESQ. DENNIS J. BLOCK, ESQ.
JONES, DAY, REAVIS & POGUE WEIL, GOTSHAL & MANGES LLP
2300 TRAMMELL CROW CENTER 767 FIFTH AVENUE
2001 ROSS AVENUE NEW YORK, NEW YORK 10153
DALLAS, TEXAS 75201 (212) 310-8000
(214) 220-3939
Approximate date of commencement of proposed sale to the public: AS
SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE AND
ALL OTHER CONDITIONS TO THE MERGER OF A WHOLLY OWNED SUBSIDIARY OF PILLOWTEX
CORPORATION ("PILLOWTEX") WITH AND INTO FIELDCREST CANNON, INC. ("FIELDCREST")
PURSUANT TO THE AGREEMENT AND PLAN OF MERGER FILED AS EXHIBIT 2.1 HERETO (AS
AMENDED, THE "MERGER AGREEMENT") HAVE BEEN SATISFIED OR WAIVED.
If any of the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [ ]
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
================================================================================
<PAGE> 2
PRELIMINARY COPY -- FOR THE INFORMATION OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
PILLOWTEX CORPORATION
4111 MINT WAY
DALLAS, TEXAS 75237
November __, 1997
Dear Shareholders:
You are invited to attend the Special Meeting of Shareholders of
Pillowtex Corporation ("Pillowtex") to be held on ____________, December __,
1997, at 9:00 a.m., Central Time, at Pillowtex's corporate headquarters, 4111
Mint Way, Dallas, Texas (including any postponement or adjournment thereof, the
"Pillowtex Special Meeting").
At the Pillowtex Special Meeting, you will be asked to consider and
vote upon a proposal to approve the issuance (the "Share Issuance") of up to
5,600,000 shares of Common Stock, par value $0.01 per share, of Pillowtex
("Pillowtex Common Stock") and of 65,000 shares of Series A Redeemable
Convertible Preferred Stock, par value $0.01 per share, of Pillowtex
("Pillowtex Preferred Stock") in connection with the acquisition by Pillowtex
of Fieldcrest Cannon, Inc. ("Fieldcrest") and related financing transactions.
The acquisition by Pillowtex of Fieldcrest will be effected by means of a
merger (the "Merger") of a wholly owned subsidiary of Pillowtex with and into
Fieldcrest. The Merger will result in Fieldcrest becoming a wholly owned
subsidiary of Pillowtex.
The Merger is provided for in an Agreement and Plan of Merger dated as
of September 10, 1997 (as amended, the "Merger Agreement") by and among
Pillowtex, a wholly owned subsidiary of Pillowtex, and Fieldcrest. As a result
of the Merger, each outstanding share of Common Stock, par value $1.00 per
share, of Fieldcrest ("Fieldcrest Common Stock") will be converted into a right
to receive total consideration valued at $34.00, consisting of (i) a cash
payment in an amount equal to $27.00 and (ii) a number (the "Conversion
Number") of shares of Pillowtex Common Stock equal to the quotient obtained by
dividing $7.00 by the average of the closing sales prices per share of
Pillowtex Common Stock on the New York Stock Exchange (the "NYSE") for each of
the 20 consecutive trading days immediately preceding the fifth trading day
prior to the closing date for the Merger (the "Determination Price"), except
that, absent an election by Pillowtex as described below, the Conversion Number
will not be more than 0.333 or less than 0.269. If the Determination Price is
less than $21.00, Pillowtex will have the right to elect to increase the cash
portion of such consideration and/or the Conversion Number such that the
aggregate value of the cash and Pillowtex Common Stock (valued at the
Determination Price) comprising such consideration equals $34.00 and, if
Pillowtex does not so elect, Fieldcrest will have the right to terminate the
Merger Agreement.
For example, assuming the Determination Price is $________ (i.e., the
closing price per share of Pillowtex Common Stock as reported in the NYSE
Composite Tape on November __, 1997, the last full trading day prior to the
date of the accompanying Joint Proxy Statement/Prospectus), the Conversion
Number would be ________. You may obtain by telephone from Innisfree M&A
Incorporated at (888) 750-5834 the average of the closing sales prices per
share of the Pillowtex Common Stock on the NYSE for the 20 consecutive trading
days immediately prior to the date of your call and the Conversion Number that
would result if the Determination Price were to equal such average. Because
the actual Determination Price and Conversion Number will not be determinable
until the fifth trading day prior to the closing date for the Merger (the
"Determination Date"), you should bear in mind that the actual Determination
Price and Conversion Number may vary from the example set forth above and from
information obtained from Innisfree M&A Incorporated prior to the Determination
Date. The prices at which shares of Pillowtex Common Stock may trade are
subject to fluctuation based on many factors, including general economic and
industry conditions and the performance of, and investor expectations for,
Pillowtex. The following table sets forth the Conversion Number resulting from
each of the Determination Prices indicated:
<PAGE> 3
<TABLE>
<CAPTION>
Resulting
Determination Price Conversion Number
------------------- -----------------
<S> <C>
$26.00 0.269
$25.00 0.280
$24.00 0.292
$23.00 0.304
$22.00 0.318
$21.00 0.333
</TABLE>
As a result of the Merger, each outstanding share of $3.00 Series A
Convertible Preferred Stock, par value $0.01 per share, of Fieldcrest
("Fieldcrest Preferred Stock"), other than shares converted into Fieldcrest
Common Stock prior to the Merger, will be converted into a right to receive
total consideration valued at $58.12, consisting of (i) a cash payment equal to
the product of (a) the amount of the cash payment to be made on account of each
share of Fieldcrest Common Stock converted in the Merger and (b) 1.7094 and
(ii) a number of shares of Pillowtex Common Stock equal to the product of (a)
the Conversion Number and (b) 1.7094.
Pillowtex's Board of Directors has determined that the Merger is in
the best interests of Pillowtex and its shareholders and has unanimously
approved the Merger and the related financing transactions described in the
accompanying Joint Proxy Statement/Prospectus. At the request of Pillowtex, on
September 5, 1997, Bear, Stearns & Co. Inc. ("Bear Stearns"), Pillowtex's
financial advisor, delivered to the Board of Directors of Pillowtex an oral
opinion, which was subsequently confirmed in a written opinion dated as of
September 10, 1997, to the effect that, as of such date and subject to the
assumptions and qualifications set forth in its written opinion, the total
consideration to be received in respect of each outstanding share of Fieldcrest
Common Stock and each outstanding share of Fieldcrest Preferred Stock in
connection with the Merger was fair, from a financial point of view, to the
shareholders of Pillowtex.
Pillowtex's shareholders must approve the issuance (i.e., the Share
Issuance) of both the shares of Pillowtex Common Stock to be issued in
connection with the Merger and the shares of Pillowtex Preferred Stock (which
will be convertible into Pillowtex Common Stock) to be issued in connection
with the financing transactions relating to the Merger in order to comply with
the requirements of the NYSE. Under the NYSE's shareholder approval policy,
shareholder approval generally is required prior to the issuance of securities
when common stock or securities convertible into common stock are to be issued
in any transaction or series of related transactions if (i) upon issuance the
common stock will have voting power equal to or in excess of 20% of the voting
power outstanding before the issuance of such stock or convertible securities
or (ii) the number of shares of common stock to be issued will be equal to or
in excess of 20% of the number of shares of common stock outstanding before
such issuance. Pillowtex's shareholders are not otherwise being asked to
approve the cash payments to be made to Fieldcrest's stockholders in connection
with the Merger or to approve the financing transactions related to the Merger
that will enable Pillowtex to make such cash payments.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF
PILLOWTEX VOTE "FOR" THE APPROVAL OF THE SHARE ISSUANCE.
Only shareholders of record at the close of business on November 5,
1997 (the "Pillowtex Record Date") are entitled to notice of and to vote at the
Pillowtex Special Meeting. As of the Pillowtex Record Date, Charles M. Hansen,
Jr., Chairman of the Board and Chief Executive Officer of Pillowtex, Mary R.
Silverthorne, a director of Pillowtex, the John H. Silverthorne Marital Trust
B, and the John H. Silverthorne Family Trust A owned, in the aggregate,
approximately 52.4% of the outstanding shares of Pillowtex Common Stock. Each
of Mr. Hansen, Ms. Silverthorne, and such trusts has agreed to vote the shares
of Pillowtex Common Stock held by such shareholder for the approval of the
Share Issuance. Accordingly, the approval of the Share Issuance is expected to
occur irrespective of whether or the manner in which other holders of Pillowtex
Common Stock vote their shares.
The Merger Agreement provides that, if the Pillowtex shareholders fail
to approve the Share Issuance, among other things, (i) the consideration to be
paid to the holders of Fieldcrest Common Stock will be a cash payment in an
amount equal to $34.00 per share and (ii) the consideration to be paid to
holders of Fieldcrest Preferred Stock will be a cash payment in an amount equal
to $58.12 per share. If the Pillowtex shareholders were to fail to approve the
Share Issuance, there can be no assurance that Pillowtex would be able to
obtain financing adequate to enable it to pay the amounts described in the
immediately preceding sentence on terms acceptable to
<PAGE> 4
Pillowtex, if at all. However, for the reasons described in the immediately
preceding paragraph, the approval by Pillowtex shareholders of the Share
Issuance is expected to occur.
The holders of Pillowtex Common Stock will not have any appraisal
rights in connection with the Merger or the Share Issuance.
Please read carefully the accompanying Notice of Special Meeting of
Shareholders and Joint Proxy Statement/Prospectus for additional information
regarding the Share Issuance. Whether or not you plan to attend the Pillowtex
Special Meeting, please complete, sign, and date the enclosed proxy card and
return it promptly in the enclosed postage prepaid envelope. If you attend the
Pillowtex Special Meeting, you may vote in person if you wish, even though you
have previously returned your proxy card.
Sincerely,
Charles M. Hansen, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE> 5
PRELIMINARY COPY -- FOR THE INFORMATION OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
PILLOWTEX CORPORATION
4111 MINT WAY
DALLAS, TEXAS 75237
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER __, 1997
--------------------
To the Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of
Pillowtex Corporation ("Pillowtex") is to be held on __________, December __,
1997, at 9:00 a.m., Central Time, at Pillowtex's corporate headquarters, 4111
Mint Way, Dallas, Texas (including any postponement or adjournment thereof, the
"Pillowtex Special Meeting") for the following purpose:
To consider and vote upon the issuance (the "Share Issuance") of
up to 5,600,000 shares of Common Stock, par value $0.01 per share, of
Pillowtex (the "Pillowtex Common Stock") and of 65,000 shares of
Series A Redeemable Convertible Preferred Stock, par value $0.01 per
share, of Pillowtex (the "Pillowtex Preferred Stock") in connection
with acquisition by Pillowtex of Fieldcrest Cannon, Inc.
("Fieldcrest") and related financing transactions. The acquisition by
Pillowtex of Fieldcrest will be effected by means of a merger (the
"Merger") of a wholly owned subsidiary of Pillowtex with and into
Fieldcrest, whereupon Fieldcrest will become a wholly owned subsidiary
of Pillowtex.
Please read the accompanying Joint Proxy Statement/Prospectus
carefully. The Joint Proxy Statement/Prospectus and the Appendices thereto
form a part of this Notice.
Pillowtex's shareholders must approve the issuance (i.e., the Share
Issuance) of both the shares of Pillowtex Common Stock to be issued in
connection with the Merger and the shares of Pillowtex Preferred Stock (which
will be convertible into Pillowtex Common Stock) to be issued in connection
with the related financing transactions in order to comply with the
requirements of the New York Stock Exchange (the "NYSE"). Under the NYSE's
shareholder approval policy, shareholder approval generally is required prior
to the issuance of securities when common stock or securities convertible into
common stock are to be issued in any transaction or series of related
transactions if (i) upon issuance the common stock will have voting power equal
to or in excess of 20% of the voting power outstanding before the issuance of
such stock or convertible securities or (ii) the number of shares of common
stock to be issued will be equal to or in excess of 20% of the number of shares
of common stock outstanding before such issuance. Pillowtex's shareholders are
not otherwise being asked to approve the cash payments to be made to
Fieldcrest's stockholders in connection with the Merger or to approve the
financing transactions related to the Merger that will enable Pillowtex to make
such cash payments.
Only shareholders of record at the close of business on November 5,
1997 (the "Pillowtex Record Date") are entitled to notice of and to vote at the
Pillowtex Special Meeting. As of the Pillowtex Record Date, Charles M. Hansen,
Jr., Chairman of the Board and Chief Executive Officer of Pillowtex, Mary R.
Silverthorne, a director of Pillowtex, the John H. Silverthorne Marital Trust
B, and the John H. Silverthorne Family Trust A owned, in the aggregate,
approximately 52.4% of the outstanding shares of Pillowtex Common Stock. Each
of Mr. Hansen, Ms. Silverthorne, and such trusts has agreed to vote the shares
of Pillowtex Common Stock held by such shareholder for the approval of the
Share Issuance. Accordingly, the approval of the Share Issuance is expected to
occur irrespective of whether or the manner in which other holders of Pillowtex
Common Stock vote their shares.
The Merger Agreement provides that, if the Pillowtex shareholders fail
to approve the Share Issuance, among other things, (i) the consideration to be
paid to the holders of Fieldcrest Common Stock will be a cash
<PAGE> 6
payment in an amount equal to $34.00 per share and (ii) the consideration to be
paid to holders of Fieldcrest Preferred Stock will be a cash payment in an
amount equal to $58.12 per share. If the Pillowtex shareholders were to fail
to approve the Share Issuance, there can be no assurance that Pillowtex would
be able to obtain financing adequate to enable it to pay the amounts described
in the immediately preceding sentence on terms acceptable to Pillowtex, if at
all. However, for the reasons described in the immediately preceding
paragraph, the approval by Pillowtex shareholders of the Share Issuance is
expected to occur.
The holders of Pillowtex Common Stock will not have any appraisal
rights in connection with the Merger or the Share Issuance.
By Order of the Board of Directors
Charles M. Hansen, Jr.
Chairman of the Board and
Chief Executive Officer
Dallas, Texas
November __, 1997
<PAGE> 7
PRELIMINARY COPY -- FOR THE INFORMATION OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
FIELDCREST CANNON, INC.
ONE LAKE CIRCLE DRIVE
KANNAPOLIS, NORTH CAROLINA 28081
November __, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Fieldcrest Special Meeting") of Fieldcrest Cannon, Inc. ("Fieldcrest") to
be held at 10:00 a.m., Eastern Time, on __________, December __, 1997, at 1271
Avenue of the Americas, New York, New York.
As described in the accompanying Joint Proxy Statement/Prospectus, at
the Fieldcrest Special Meeting you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
September 10, 1997 (as amended, the "Merger Agreement"), by and among Pillowtex
Corporation ("Pillowtex"), Pegasus Merger Sub, Inc. ("Sub") and Fieldcrest
pursuant to which Sub will be merged with and into Fieldcrest (the "Merger"),
with Fieldcrest continuing as the surviving corporation and becoming a wholly
owned subsidiary of Pillowtex.
Pursuant to the Merger Agreement, each outstanding share of Common
Stock, par value $1.00 per share, of Fieldcrest ("Fieldcrest Common Stock")
will be converted into a right to receive total consideration valued at $34.00,
consisting of (i) a cash payment in an amount equal to $27.00 and (ii) a number
(the "Conversion Number") of shares of Common Stock, par value $0.01 per share,
of Pillowtex ("Pillowtex Common Stock") equal to the quotient obtained by
dividing $7.00 by the average of the closing sales prices per share of
Pillowtex Common Stock on the New York Stock Exchange (the "NYSE") for each of
the 20 consecutive trading days immediately preceding the fifth trading day
prior to the Merger (the "Determination Price"), except that, absent an
election by Pillowtex as described below, the Conversion Number will not be
more than 0.333 or less than 0.269. If the Determination Price is less than
$21.00, Pillowtex will have the right to elect to increase the cash portion of
such merger consideration and/or the Conversion Number such that the sum of (i)
the cash portion of such merger consideration and (ii) the product of (a) the
Conversion Number and (b) the Determination Price equals $34.00 and, if
Pillowtex does not so elect, Fieldcrest will have the right to terminate the
Merger Agreement. The Fieldcrest directors presently expect that they would
exercise their right to terminate the Merger Agreement if the Determination
Price were to be below $21.00 and Pillowtex does not increase the merger
consideration as described in the preceding sentence. If the Fieldcrest
directors were to determine, based on the facts and circumstances existing at
the time, that it would not be in the best interests of Fieldcrest's
stockholders to terminate the Merger Agreement upon such occurrences, then
notice of that determination would be given and Fieldcrest would at that time
resolicit proxies from Fieldcrest's stockholders regarding the vote on the
Merger Agreement.
For example, assuming the Determination Price is $________ (i.e., the
closing price per share of Pillowtex Common Stock as reported in the NYSE
Composite Tape on November __, 1997, the last full trading day prior to the
date of the accompanying Joint Proxy Statement/Prospectus), the Conversion
Number would be ________. You may obtain by telephone from Morrow & Company,
Inc. at (800) 662-5200 the average of the closing sales prices per share of the
Pillowtex Common Stock on the NYSE for the 20 consecutive trading days
immediately prior to the date of your call and the Conversion Number that would
result if the Determination Price were to equal such average. Because the
actual Determination Price and Conversion Number will not be determinable until
the fifth trading day prior to the closing date for the Merger (the
"Determination Date"), you should bear in mind that the actual Determination
Price and Conversion Number may vary from the example set forth above and from
information obtained from Morrow & Company, Inc. prior to the Determination
Date. The prices at which shares of Pillowtex Common Stock may trade are
subject to fluctuation based on many factors, including general economic and
industry conditions and the performance of, and investor expectations for,
<PAGE> 8
Pillowtex. The following table sets forth the Conversion Number resulting from
each of the Determination Prices indicated:
<TABLE>
<CAPTION>
Resulting
Determination Price Conversion Number
------------------- -----------------
<S> <C>
$26.00 0.269
$25.00 0.280
$24.00 0.292
$23.00 0.304
$22.00 0.318
$21.00 0.333
</TABLE>
As a result of the Merger, each outstanding share of $3.00 Series A
Convertible Preferred Stock, par value $0.01 share, of Fieldcrest ("Fieldcrest
Preferred Stock"), other than shares converted into Fieldcrest Common Stock
prior to the Merger, will be converted into a right to receive total
consideration valued at $58.12, consisting of (i) a cash payment equal to the
product of (a) the amount of the cash payment to be made on account of each
share of Fieldcrest Common Stock converted in the Merger and (b) 1.7094 and
(ii) a number of shares of Pillowtex Common Stock equal to the product of (a)
the Conversion Number and (b) 1.7094.
Consummation of the Merger is subject to certain conditions, including
approval and adoption of the Merger Agreement by the affirmative vote of the
holders of 662/3% or more of the outstanding shares of the Fieldcrest Common
Stock. Holders of Fieldcrest Preferred Stock are not entitled to vote at the
Fieldcrest Special Meeting.
Your Board of Directors has carefully reviewed and considered the
terms and conditions of the Merger Agreement and has determined that the Merger
Agreement and the Merger are fair to and in the best interests of Fieldcrest
and its stockholders, and has approved and adopted the Merger Agreement. In
addition, Fieldcrest's financial advisor, Credit Suisse First Boston
Corporation, has rendered its opinion to the effect that, as of the date of
such opinion and based upon and subject to the matters set forth therein, the
consideration to be received by holders of the Fieldcrest Common Stock in the
Merger was fair to such holders from a financial point of view. THE BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Holders of Fieldcrest Common Stock who do not vote in favor of
approving and adopting the Merger Agreement and who otherwise comply with the
applicable statutory procedures of Section 262 of the Delaware General
Corporation Law (the "DGCL") will be entitled to appraisal rights under Section
262 of the DGCL. Holders of Fieldcrest Preferred Stock who comply with the
applicable statutory procedures of Section 262 of the DGCL will also be
entitled to appraisal rights under Section 262 of the DGCL. A summary of the
provisions of Section 262 of the DGCL, including a summary of the requirements
that must be complied with by holders of Fieldcrest Common Stock or Fieldcrest
Preferred Stock desiring to assert appraisal rights, is set forth in the
accompanying Joint Proxy Statement/Prospectus under the heading "The
Merger--Appraisal Rights." The entire text of Section 262 of the DGCL is
attached as Appendix D to the Joint Proxy Statement/Prospectus.
Detailed information concerning the proposed Merger is set forth in
the accompanying Joint Proxy Statement/Prospectus. I urge you to read the
enclosed material carefully and request that you promptly complete and return
the enclosed proxy in the enclosed return envelope, which requires no postage
if mailed in the United States. If you attend the Fieldcrest Special Meeting,
you may vote in person even if you have previously returned your proxy. Your
vote is important regardless of the number of shares you own.
Sincerely,
James M. Fitzgibbons
Chairman of the Board and
Chief Executive Officer
<PAGE> 9
PRELIMINARY COPY -- FOR THE INFORMATION OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
FIELDCREST CANNON, INC.
ONE LAKE CIRCLE DRIVE
KANNAPOLIS, NORTH CAROLINA 28081
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER __, 1997
--------------------
To the Stockholders:
Notice is hereby given that a Special Meeting of Stockholders of
Fieldcrest Cannon, Inc. ("Fieldcrest") will be held on __________, December __,
1997, at 10:00 a.m., Eastern Time, at 1271 Avenue of the Americas, New York,
New York (including any postponement or adjournment thereof, the "Fieldcrest
Special Meeting") for the following purpose:
To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of September 10, 1997 (as
amended, the "Merger Agreement"), by and among Pillowtex Corporation,
a Texas corporation ("Pillowtex"), Pegasus Merger Sub, Inc., a
Delaware corporation and a wholly owned subsidiary of Pillowtex
("Sub"), and Fieldcrest, pursuant to which Sub will be merged with and
into Fieldcrest (the "Merger"), with Fieldcrest continuing as the
surviving corporation and becoming a wholly owned subsidiary of
Pillowtex.
The Merger Agreement and the Merger are described in detail in the
accompanying Joint Proxy Statement/Prospectus.
The Fieldcrest Board of Directors has fixed November 5, 1997 as the
record date for the determination of stockholders entitled to notice of and to
vote at the Fieldcrest Special Meeting or any adjournments or postponements
thereof. Only holders of record of Fieldcrest's Common Stock, par value $1.00
per share ("Fieldcrest Common Stock"), at the close of business on that date
will be entitled to notice of and to vote at the Fieldcrest Special Meeting.
Holders of Fieldcrest's $3.00 Series A Convertible Preferred Stock ("Fieldcrest
Preferred Stock") are not entitled to vote at the Fieldcrest Special Meeting.
Holders of Fieldcrest Common Stock who do not vote in favor of
approving and adopting the Merger Agreement and who otherwise comply with the
applicable statutory procedures of Section 262 of the Delaware General
Corporation Law (the "DGCL") will be entitled to appraisal rights under Section
262 of the DGCL. Holders of Fieldcrest Preferred Stock who comply with the
applicable statutory procedures of Section 262 of the DGCL will also be
entitled to appraisal rights under Section 262 of the DGCL. A summary of the
provisions of Section 262 of the DGCL, including a summary of the requirements
that must be complied with by holders of Fieldcrest Common Stock or Fieldcrest
Preferred Stock desiring to assert appraisal rights, is set forth in the
accompanying Joint Proxy Statement/Prospectus under the heading "The
Merger--Appraisal Rights." The entire text of Section 262 of the DGCL is
attached as Appendix D to the Joint Proxy Statement/Prospectus.
The accompanying Joint Proxy Statement/Prospectus describes the Merger
Agreement, the proposed Merger and certain actions to be taken in connection
with the Merger. Please read the Joint Proxy Statement/Prospectus carefully.
To ensure that your vote will be counted, please complete, date and sign the
enclosed proxy card and return it promptly in the enclosed postage-paid
envelope, whether or not you plan to attend Fieldcrest Special Meeting. You
may revoke your proxy in the manner described in the accompanying Joint Proxy
Statement/Prospectus at any time before it is voted at the Fieldcrest Special
Meeting. Executed proxies with no instructions indicated thereon will be voted
"FOR" approval and adoption of the Merger Agreement.
By Order Of The Board of Directors,
Mark R. Townsend
Secretary
Kannapolis, North Carolina
November __, 1997
<PAGE> 10
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE MARK, DATE, SIGN
AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE FIELDCREST
SPECIAL MEETING.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR CERTIFICATES.
<PAGE> 11
PRELIMINARY COPY -- FOR THE INFORMATION OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1997
JOINT PROXY STATEMENT
OF
PILLOWTEX CORPORATION
AND
FIELDCREST CANNON, INC.
--------------------
PROSPECTUS OF PILLOWTEX CORPORATION
This Joint Proxy Statement/Prospectus is furnished to holders of shares of
Common Stock, par value $0.01 per share (the "Pillowtex Common Stock"), of
Pillowtex Corporation, a Texas corporation ("Pillowtex"), in connection with
the solicitation by and on behalf of the Board of Directors of Pillowtex (the
"Pillowtex Board") of proxies for use at a Special Meeting of Shareholders of
Pillowtex (the "Pillowtex Special Meeting") to be held at Pillowtex's corporate
headquarters, 4111 Mint Way, Dallas, Texas, at 9:00 a.m., Central Time, on
__________, December __, 1997. This Joint Proxy Statement/Prospectus, the
Notice of Special Meeting of Shareholders, and the accompanying proxy card are
first being sent to holders of Pillowtex Common Stock on or about November __,
1997.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
shares of Common Stock, par value $1.00 per share (the "Fieldcrest Common
Stock"), of Fieldcrest Cannon, Inc., a Delaware corporation ("Fieldcrest"), in
connection with the solicitation by and on behalf of the Board of Directors of
Fieldcrest (the "Fieldcrest Board") of proxies for use at a Special Meeting of
Stockholders of Fieldcrest (the "Fieldcrest Special Meeting") to be held at
1271 Avenue of the Americas, New York, New York, at 10:00 a.m., Eastern Time,
on __________, December __, 1997. This Joint Proxy Statement/Prospectus, the
Notice of Special Meeting of Stockholders, and the accompanying proxy card are
first being sent to holders of Fieldcrest Common Stock on or about November __,
1997.
At the Pillowtex Special Meeting, holders of record of Pillowtex Common
Stock as of the close of business on November 5, 1997 (the "Pillowtex Record
Date") will consider and vote upon a proposal to approve the issuance (the
"Share Issuance") of up to 5,600,000 shares of Pillowtex Common Stock and of
65,000 shares of Series A Redeemable Convertible Preferred Stock, par value
$0.01 per share, of Pillowtex (the "Pillowtex Preferred Stock") in connection
with the acquisition by Pillowtex of Fieldcrest and related financing
transactions. The acquisition by Pillowtex of Fieldcrest will be effected by
means of a merger (the "Merger") of a wholly owned subsidiary of Pillowtex
("Newco") with and into Fieldcrest.
At the Fieldcrest Special Meeting, holders of record of Fieldcrest Common
Stock as of the close of business on November 5, 1997 (the "Fieldcrest Record
Date") will consider and vote upon the approval and adoption of the Agreement
and Plan of Merger, dated as of September 10, 1997 (as amended, the "Merger
Agreement"), by and among Pillowtex, Newco, and Fieldcrest. See "The Merger"
for a description of the Merger Agreement and the Merger.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
Pillowtex included in a Registration Statement on Form S-4 (together with any
amendments thereto, the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the issuance of up to 5,600,000
shares of Pillowtex Common Stock in connection with the Merger. All
information concerning Pillowtex contained in this Joint Proxy
Statement/Prospectus has been furnished by Pillowtex, and all information
concerning Fieldcrest contained in this Joint Proxy Statement/Prospectus has
been furnished by Fieldcrest.
At the effective time of the Merger, each then-outstanding share of
Fieldcrest Common Stock (other than any shares held in the treasury of
Fieldcrest, by any of its subsidiaries, or directly or indirectly by Pillowtex,
which shares will be canceled and shares held by stockholders, if any, who
properly exercised their appraisal rights under Delaware law) will be converted
into the right to receive total consideration valued at $34.00, consisting of
(i) a cash payment in an amount equal to $27.00 and (ii) a number (the
"Conversion Number") of shares of Pillowtex Common Stock equal to the quotient
obtained by dividing $7.00 by the average of the closing prices per share of
Pillowtex Common Stock on the New York Stock Exchange ("NYSE") for each of the
20 consecutive trading days immediately preceding the fifth trading day prior
to the closing date for the Merger (the "Determination Price"), except that,
absent an election by Pillowtex as described below, the Conversion Number will
not be more than 0.333 or less than 0.269. If the Determination Price is less
than $21.00, Pillowtex will have the right to elect to increase the cash
portion of such consideration and/or the Conversion Number such that the sum of
(i) the cash portion of such consideration and (ii) the product of (a) the
Conversion Number and (b) the Determination Price equals $34.00 and, if
Pillowtex does not so elect, Fieldcrest will have the right to terminate the
Merger Agreement. See "The Merger--The Merger Agreement--Consideration to be
Paid in the Merger."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREOF FOR A DISCUSSION OF CERTAIN
RISKS OF OWNERSHIP OF PILLOWTEX COMMON STOCK AND OTHER MATTERS THAT YOU SHOULD
CONSIDER IN DETERMINING HOW TO VOTE UPON THE MATTERS DESCRIBED ABOVE.
Terms used in this Joint Proxy Statement/Prospectus with initial capital
letters are defined herein at the pages indicated in the "Index of Defined
Terms."
--------------------
THE SHARES OF PILLOWTEX COMMON STOCK OFFERED HEREBY HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Joint Proxy Statement/Prospectus is November __, 1997.
<PAGE> 12
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PILLOWTEX,
FIELDCREST, OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF PILLOWTEX OR FIELDCREST SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
Each of Pillowtex and Fieldcrest is subject to the information and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files periodic reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission also maintains a Website, located at
http://www.sec.gov, that contains reports, proxy statements, and other
information regarding registrants that file electronically with the Commission.
Copies of such reports, proxy statements, and other information also can be
obtained by mail from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy
statements, and other information relating to Pillowtex and Fieldcrest may also
be inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005.
As permitted under the Securities Act and the Exchange Act, this Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information can be inspected and
copied or obtained from the Commission in the manner described above.
Statements contained in this Joint Proxy Statement/Prospectus as to the
contents of any other document referred to herein are not necessarily complete,
and each such statement is qualified in all respects by reference to the copy
of such other document filed as an exhibit to the Registration Statement.
NOTE REGARDING FORWARD-LOOKING INFORMATION
THIS JOINT PROXY STATEMENT/PROSPECTUS MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"MAY," "WILL," "COULD," "SHOULD," "EXPECT," "ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREOF.
SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED ON VARIOUS ASSUMPTIONS
AND ESTIMATES AND ARE INHERENTLY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING RISKS AND UNCERTAINTIES RELATING TO THE POSSIBLE INVALIDITY OF THE
UNDERLYING ASSUMPTIONS AND ESTIMATES AND POSSIBLE CHANGES OR DEVELOPMENTS IN
SOCIAL, ECONOMIC, BUSINESS, INDUSTRY, MARKET, LEGAL, AND REGULATORY
CIRCUMSTANCES AND CONDITIONS AND ACTIONS TAKEN OR OMITTED TO BE TAKEN BY THIRD
PARTIES, INCLUDING CUSTOMERS, SUPPLIERS, BUSINESS PARTNERS, AND COMPETITORS AND
LEGISLATIVE, REGULATORY, JUDICIAL, AND OTHER GOVERNMENTAL AUTHORITIES AND
OFFICIALS. IN ADDITION TO ANY RISKS AND UNCERTAINTIES SPECIFICALLY IDENTIFIED
IN THE TEXT SURROUNDING SUCH FORWARD-LOOKING STATEMENTS, THE STATEMENTS IN
"RISK FACTORS" BEGINNING ON PAGE 13 OF THIS JOINT PROXY STATEMENT/PROSPECTUS OR
IN THE REPORTS, PROXY STATEMENTS, AND OTHER INFORMATION REFERRED TO IN
"AVAILABLE INFORMATION" CONSTITUTE CAUTIONARY
ii
<PAGE> 13
STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL AMOUNTS,
RESULTS, EVENTS, AND CIRCUMSTANCES TO DIFFER MATERIALLY FROM THOSE REFLECTED
IN SUCH FORWARD-LOOKING STATEMENTS.
iii
<PAGE> 14
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
NOTE REGARDING FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Pillowtex Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recommendation of the Pillowtex Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Opinion of Pillowtex's Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Fieldcrest Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recommendation of the Fieldcrest Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Opinion of Fieldcrest's Financial Advisor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Merger Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selected Per Share Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Market Price Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Significant Leverage and Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Restrictions on Payment of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Ability to Achieve Cost Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Risks Associated with Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Dependence on Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Dependence on Supply Sources in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Adverse Retail Industry Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Dependence on Key Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Dependence on Brand Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Risk of Loss of Material Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Influence by Significant Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Dependence on Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Seasonality of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Industry Competition and Competitive Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certain Provisions of Pillowtex's Articles of Incorporation, Bylaws, and Other Agreements . . . . . . . . . . . 18
THE PILLOWTEX SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Voting at the Pillowtex Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Proxies; Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
iv
<PAGE> 15
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE FIELDCREST SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Voting at the Fieldcrest Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Proxies; Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Pillowtex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Fieldcrest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Certain Prior Transactions Between Pillowtex and Fieldcrest. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Pillowtex's Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Opinion of Pillowtex's Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Fieldcrest's Reasons for the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Opinion of Fieldcrest's Financial Advisor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Certain Projected Financial Information of Fieldcrest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Stock Exchange Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Delisting and Deregistration of Fieldcrest Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
POST-MERGER BUSINESS OF PILLOWTEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Business Presently Operated by Pillowtex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Business Presently Operated by Fieldcrest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Certain Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
PRO FORMA CAPITALIZATION OF PILLOWTEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF PILLOWTEX . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 70
MANAGEMENT OF PILLOWTEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Director Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Stock Option Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Supplemental Executive Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Compensation Committee Interlocks and Insider Participation. . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Certain Relationships And Related-Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
</TABLE>
v
<PAGE> 16
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
Page
----
<S> <C>
OWNERSHIP OF CERTAIN SECURITIES OF PILLOWTEX AND FIELDCREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Pillowtex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Fieldcrest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
MERGER FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
New Pillowtex Bank Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Pillowtex Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
New Pillowtex Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Standby Bridge Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
OTHER POST-MERGER INDEBTEDNESS OF PILLOWTEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Existing Pillowtex Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Fieldcrest Convertible Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Pillowtex Deed of Trust Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Pillowtex Industrial Revenue Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Fieldcrest Industrial Revenue Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
DESCRIPTION OF PILLOWTEX CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Authorized Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Series A Redeemable Convertible Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Future Stock Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
RESTRICTIONS ON RESALES OF
PILLOWTEX COMMON STOCK BY AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
CERTAIN CORPORATE GOVERNANCE MATTERS OF PILLOWTEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Antitakeover Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Classified Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Shareholder Nominations and Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Shareholder Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Fair Price Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Texas Business Combination Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Director Liability Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
COMPARISON OF RIGHTS OF HOLDERS OF
FIELDCREST COMMON STOCK AND PILLOWTEX COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Authorized Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Amendment of Articles or Certificate of Incorporation and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 93
Approval of Mergers, Dissolution, and Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Action without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
</TABLE>
vi
<PAGE> 17
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Limitation of Director Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Indemnification of Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Nomination of Directors; Proposal of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Dividends and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Certain Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Derivative Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
PROPOSALS BY PILLOWTEX SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
PROPOSALS BY FIELDCREST STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
INDEX TO HISTORICAL FINANCIAL INFORMATION
OF PILLOWTEX AND FIELDCREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDIX A -- Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B -- Opinion of Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
APPENDIX C -- Opinion of Credit Suisse First Boston Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
APPENDIX D -- Text of Delaware General Corporation Law Section 262 . . . . . . . . . . . . . . . . . . . . . . . . . D-1
</TABLE>
vii
<PAGE> 18
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1997 Pillowtex Management Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29, 88
1999 EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Aggregate Dividends Owed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Aggregate Dividends Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Alabama Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Antitrust Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Apollo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Applicable Dividend Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Article 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Base Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Base Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Beacon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Bear Stearns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bridge Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Cash Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Catch Up Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Certificate of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Comparable HT Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Conversion Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 3
Corporate Functionaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Covered Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
CSFB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Dayton Hudson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Determination Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 4
DGCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Disney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Dividend Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Dividend Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
DuPont . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Enterprise Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
Existing Pillowtex Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Fieldcrest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Fieldcrest Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Fieldcrest Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Fieldcrest Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Fieldcrest Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Fieldcrest Convertible Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
ix
<PAGE> 19
INDEX OF DEFINED TERMS (CONT'S)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fieldcrest ERISA Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Fieldcrest Management Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Fieldcrest Named Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Fieldcrest Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fieldcrest Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Fieldcrest Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fieldcrest Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Fieldcrest Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Fieldcrest SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fieldcrest Sensitivity Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Fieldcrest Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Final Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Financing Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Financing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 59, 61
FTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Imperial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Indemnified Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
interested shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Liquidation Preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
LTM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29, 34
Mandatory Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
MBFC Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Nasdaq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
New Pillowtex Bank Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
New Pillowtex Bank Facilities Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
New Pillowtex Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Newco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
NYSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Option Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Option Conversion Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PEDFA Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Phenix City Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Pillowtex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Pillowtex Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Pillowtex Base Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Pillowtex Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Pillowtex Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Pillowtex Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Pillowtex Downside Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Pillowtex Named Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Pillowtex Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Pillowtex Preferred Stock Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Pillowtex Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Pillowtex Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
</TABLE>
ix
<PAGE> 20
INDEX OF DEFINED TERMS (CONT'D)
<TABLE>
<CAPTION>
Page
---
<S> <C>
Pillowtex Trust Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Potential Acquiror . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Potential Acquisition Candidate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Potential Business Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Precedent Textile Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Pro Forma Cost Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Rollover Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Rowan County Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Scottsboro Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 203 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Selected Home Textile Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Selected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Share Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Special Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Standby Bridge Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Standby Bridge Loan Facility Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Surviving Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TBCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Termination Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
TIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Torfeaco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Transaction Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Transaction Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Triangle Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
UNITE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Wal-Mart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
x
<PAGE> 21
SUMMARY
The following is a summary of certain information contained in this Joint
Proxy Statement/Prospectus. This summary is not intended to be complete and is
qualified in its entirety by the more detailed information contained elsewhere
in this Joint Proxy Statement/Prospectus and the attached Appendices, all of
which should be reviewed carefully. As required by the context, references in
this Joint Proxy Statement/Prospectus to "Pillowtex," "Fieldcrest," or the
"Surviving Company" should be construed as references to Pillowtex, Fieldcrest,
or the Surviving Company, as the case may be, together with their respective
predecessors and subsidiaries. References to "fiscal" years are references to
fiscal years of Pillowtex (which end on December 31 for years prior to 1995 and
on the Saturday nearest December 31 for years after 1994) or to fiscal years of
Fieldcrest (which end on December 31), as the case may be.
THE PARTIES
Pillowtex. Pillowtex, founded in 1954, is a leading North American designer,
manufacturer, and marketer of bed pillows, blankets, mattress pads, and down
comforters. Other complementary bedroom textile furnishings offered by
Pillowtex include comforter covers, featherbeds, pillow protectors, decorative
pillows, bedspreads, synthetic comforters, pillow shams, dust ruffles, and
window treatments. Pillowtex has positioned itself as a single-source supplier
to retailers for top-of-the-bed home textile furnishings (other than sheets),
offering a broad assortment of products across multiple price points.
Pillowtex markets its products primarily to department stores, mass merchants,
wholesale clubs, specialty retail stores, catalogs, and institutional
distributors. The mailing address of Pillowtex's principal executive offices
is 4111 Mint Way, Dallas, Texas 75237, and its telephone number is (214)
333-3225. See "The Parties--Pillowtex" and "Post-Merger Business of
Pillowtex--Business Presently Operated by Pillowtex."
Fieldcrest. Fieldcrest was incorporated under the laws of Delaware in 1953
and is principally involved in the manufacture and sale of home furnishing
products. Fieldcrest designs, manufactures, and markets a broad range of
household textile products consisting of towels, sheets, comforters, bath rugs,
and furniture coverings. Fieldcrest's customers consist principally of
department stores, chain stores, mass merchants, specialty home furnishing
stores, catalog warehouse clubs and other retail outlets, and institutional,
government, and contract accounts. The mailing address of Fieldcrest's
principal executive offices is One Lake Circle Drive, Kannapolis, North
Carolina 28081, and its telephone number is (704) 939-2000. See "The
Parties--Fieldcrest" and "Post-Merger Business of Pillowtex--Business Presently
Operated by Fieldcrest."
THE PILLOWTEX SPECIAL MEETING
Time, Date, and Place. The Pillowtex Special Meeting will be held on
__________, December __, 1997, at 9:00 a.m., Central Time, at Pillowtex's
corporate headquarters, 4111 Mint Way, Dallas, Texas.
Purpose. The purpose of the Pillowtex Special Meeting is for Pillowtex's
shareholders to consider and vote upon a proposal to approve the issuance of up
to 5,600,000 shares of Pillowtex Common Stock and of 65,000 shares of Pillowtex
Preferred Stock in connection with the Merger and related financing
transactions (i.e., the Share Issuance). See "The Pillowtex Special Meeting."
Pillowtex's shareholders must approve the issuance (i.e., the Share Issuance)
of both the shares of Pillowtex Common Stock to be issued in connection with
the Merger and the shares of Pillowtex Preferred Stock (which will be
convertible into Pillowtex Common Stock) to be issued in connection with the
financing transactions relating to the Merger in order to comply with the
requirements of the NYSE. Under the NYSE's shareholder approval policy,
shareholder approval generally is required prior to the issuance of securities
when common stock or securities convertible into common stock are to be issued
in any transaction or series of related transactions if (i) upon issuance the
common stock will have voting power equal to or in excess of 20% of the voting
power outstanding before the issuance of such stock or convertible securities
or (ii) the number of shares of common stock to be issued will be equal to or
in excess of 20% of the number of shares of common stock outstanding
<PAGE> 22
before such issuance. Pillowtex's shareholders are not being asked to approve
the cash payments to be made to Fieldcrest's stockholders in connection with
the acquisition by Pillowtex of Fieldcrest or to approve the financing
transactions related to the Merger that will enable Pillowtex to make such cash
payments. See "--Merger Financing" and "Merger Financing."
Record Date; Shares Entitled to Vote. At the Pillowtex Special Meeting,
shareholders will be entitled to one vote for each outstanding share of
Pillowtex Common Stock held of record as of the close of business on the
Pillowtex Record Date. As of the Pillowtex Record Date, there were 10,786,819
shares of Pillowtex Common Stock outstanding and entitled to vote at the
Pillowtex Special Meeting, and there were 317 holders of record of Pillowtex
Common Stock. See "The Pillowtex Special Meeting--Voting at the Pillowtex
Special Meeting."
Required Vote. The affirmative vote of the holders of a majority of the
shares of Pillowtex Common Stock present at the Pillowtex Special Meeting and
entitled to vote is required for the approval of the Share Issuance. As of the
Pillowtex Record Date, directors and executive officers of Pillowtex and their
affiliates beneficially owned, in the aggregate, approximately 52.9% of the
outstanding shares of Pillowtex Common Stock. As of the Pillowtex Record Date,
Charles M. Hansen, Jr., Chairman of the Board and Chief Executive Officer of
Pillowtex, Mary R. Silverthorne, a director of Pillowtex, the John H.
Silverthorne Marital Trust B, and the John H. Silverthorne Family Trust A
owned, in the aggregate, approximately 52.4% of the outstanding shares of
Pillowtex Common Stock. Each of Mr. Hansen, Ms. Silverthorne, and such trusts
has agreed to vote the shares of Pillowtex Common Stock held by such
shareholder for the approval of the Share Issuance. Accordingly, the approval
of the Share Issuance is expected to occur irrespective of whether or the
manner in which other holders of Pillowtex Common Stock vote their shares.
Revocation of Proxies. Any proxy given pursuant to this solicitation may be
revoked by the person giving it at any time before the proxy is voted at the
Pillowtex Special Meeting. A proxy may be revoked by filing with the Secretary
of Pillowtex prior to the voting of the proxy either a written instrument
revoking the proxy or an executed proxy bearing a later date, or by voting in
person at the Pillowtex Special Meeting. Attendance at the Pillowtex Special
Meeting will not, in itself, constitute the revocation of a proxy. See "The
Pillowtex Special Meeting--Proxies; Revocation."
RECOMMENDATION OF THE PILLOWTEX BOARD
The Pillowtex Board unanimously approved the Merger and the related financing
transactions at a meeting held on September 5, 1997. The Pillowtex Board
believes that the Merger is in the best interests of Pillowtex and its
shareholders and unanimously recommends that Pillowtex shareholders vote FOR
the approval of the Share Issuance.
OPINION OF PILLOWTEX'S FINANCIAL ADVISOR
Bear, Stearns & Co. Inc. ("Bear Stearns") was retained by Pillowtex to act as
its financial advisor in connection with the Merger. At the request of
Pillowtex, on September 5, 1997, Bear Stearns delivered to the Pillowtex Board
an oral opinion, which was subsequently confirmed in a written opinion dated as
of September 10, 1997, to the effect that, as of such date and subject to the
assumptions and qualifications set forth in the written opinion, the total
consideration to be received in respect of each outstanding share of Fieldcrest
Common Stock and each outstanding share of Fieldcrest Preferred Stock was fair,
from a financial point of view, to the shareholders of Pillowtex. The full
text of the written opinion of Bear Stearns is set forth as Appendix B to this
Joint Proxy Statement/Prospectus. Pillowtex shareholders are urged to read
this opinion carefully and in its entirety. See "The Merger--Opinion of
Pillowtex's Financial Advisor."
2
<PAGE> 23
THE FIELDCREST SPECIAL MEETING
Time, Date, and Place. The Fieldcrest Special Meeting will be held on
__________, December __, 1997, at 10:00 a.m., Eastern Time, at 1271 Avenue of
the Americas, New York, New York.
Purpose. The purpose of the Fieldcrest Special Meeting is for stockholders
of Fieldcrest to consider and vote upon the approval and adoption of the Merger
Agreement, a copy of which is attached hereto as Appendix A. See "The
Fieldcrest Special Meeting."
Record Date; Shares Entitled to Vote. At the Fieldcrest Special Meeting,
stockholders will be entitled to one vote for each outstanding share of
Fieldcrest Common Stock held of record as of the close of business on the
Fieldcrest Record Date. As of the Fieldcrest Record Date, there were 9,243,602
shares of Fieldcrest Common Stock outstanding and entitled to vote at the
Fieldcrest Special Meeting, and there were 1,798 holders of record of
Fieldcrest Common Stock. Holders of Fieldcrest's $3.00 Series A Convertible
Preferred Stock ("Fieldcrest Preferred Stock") are not entitled to vote at the
Fieldcrest Special Meeting. See "The Fieldcrest Special Meeting--Voting at the
Fieldcrest Special Meeting."
Required Vote. The affirmative vote of the holders of two-thirds or more of
the outstanding shares of Fieldcrest Common Stock entitled to vote thereon is
required for the approval and adoption of the Merger Agreement. As of the
Fieldcrest Record Date, directors and executive officers of Fieldcrest and
their affiliates owned beneficially, in the aggregate, approximately 4.6% of
the voting power of the outstanding shares of Fieldcrest Common Stock.
Revocation of Proxies. Any proxy given pursuant to this solicitation may be
revoked by the person giving it at any time before the proxy is voted at the
Fieldcrest Special Meeting. A proxy may be revoked by filing with the
Secretary of Fieldcrest prior to the voting of the proxy either a written
instrument revoking the proxy or an executed proxy bearing a later date, or by
voting in person at the Fieldcrest Special Meeting. Attendance at the
Fieldcrest Special Meeting will not, in itself, constitute the revocation of a
proxy. See "The Fieldcrest Special Meeting--Proxies; Revocation."
RECOMMENDATION OF THE FIELDCREST BOARD
The Fieldcrest Board approved the Merger Agreement at a meeting held on
September 10, 1997. The Fieldcrest Board believes that the Merger is in the
best interests of Fieldcrest and its stockholders and recommends that
Fieldcrest stockholders vote FOR the approval and adoption of the Merger
Agreement.
OPINION OF FIELDCREST'S FINANCIAL ADVISOR
Credit Suisse First Boston Corporation ("CSFB") was retained by a special
committee of the Fieldcrest Board (the "Special Committee") to act as its
exclusive financial advisor with respect to an evaluation of a variety of
strategic and financial alternatives. At the request of the Special Committee,
on September 10, 1997, CSFB delivered to the Fieldcrest Board its written
opinion that, as of such date and based upon and subject to the matters set
forth therein, the consideration (which term, for purposes of such opinion,
means, for each outstanding share of Fieldcrest Common Stock, (i) $27.00 in
cash and (ii) the number of shares of Pillowtex Common Stock equal to the
Conversion Number) to be received by the holders of the Fieldcrest Common Stock
in the Merger was fair to such stockholders from a financial point of view.
The full text of the opinion of CSFB is set forth as Appendix C to this Joint
Proxy Statement/Prospectus. Fieldcrest stockholders are urged to read this
opinion carefully and in its entirety. See "The Merger--Opinion of
Fieldcrest's Financial Advisor."
3
<PAGE> 24
THE MERGER
General. On the terms and subject to the conditions set forth in the Merger
Agreement, Newco will be merged with and into Fieldcrest, with Fieldcrest being
the surviving corporation in the Merger (as such, the "Surviving Company"). At
the effective time of the Merger (the "Effective Time"), each then-outstanding
share of common stock of Newco will be converted into one share of common stock
of the Surviving Company, which will thereby become a wholly owned subsidiary
of Pillowtex.
Conversion of Fieldcrest Shares. At the Effective Time, each
then-outstanding share of Fieldcrest Common Stock (other than any shares held
in the treasury of Fieldcrest, by any of its subsidiaries, or directly or
indirectly by Pillowtex, which shares will be canceled and shares held by
stockholders, if any, who properly exercised their appraisal rights under
Delaware law) will be converted into the right to receive total consideration
valued at $34.00, consisting of (i) a cash payment in an amount equal to $27.00
and (ii) a number (the "Conversion Number") of shares of Pillowtex Common Stock
equal to the quotient obtained by dividing $7.00 by the average of the closing
prices per share of Pillowtex Common Stock on the NYSE for each of the 20
consecutive trading days immediately preceding the fifth trading day prior to
the Closing Date for the Merger (the "Determination Price"), except that,
absent an election by Pillowtex as described below, the Conversion Number will
not be more than 0.333 or less than 0.269. If the Determination Price is less
than $21.00, Pillowtex will have the right to elect to increase the cash
portion of such consideration and/or the Conversion Number such that the sum of
(i) the cash portion of such consideration and (ii) the product of (a) the
Conversion Number and (b) the Determination Price equals $34.00 and, if
Pillowtex does not so elect, Fieldcrest will have the right to terminate the
Merger Agreement. See "The Merger--The Merger Agreement--Consideration to be
Paid in the Merger." The Fieldcrest directors presently expect that they would
exercise their right to terminate the Merger Agreement if the Determination
Price were to be below $21.00 and Pillowtex does not increase the merger
consideration as described in the preceding sentence. If the Fieldcrest
directors were to determine, based on the facts and circumstances existing at
the time, that it would not be in the best interests of Fieldcrest's
stockholders to terminate the Merger Agreement upon such occurrences, then
notice of that determination would be given and Fieldcrest would at that time
resolicit proxies from Fieldcrest's stockholders regarding the vote on the
Merger Agreement. Restricted shares of Fieldcrest Common Stock issued pursuant
to Fieldcrest's Long-Term Incentive Plan will be converted on the same basis as
all other shares of Fieldcrest Common Stock in the Merger.
For example, assuming the Determination Price is $________ (i.e., the closing
price per share of Pillowtex Common Stock as reported in the NYSE Composite
Tape on November __, 1997, the last full trading day prior to the date of the
accompanying Joint Proxy Statement/Prospectus), the Conversion Number would be
________. Pillowtex shareholders and Fieldcrest stockholders may obtain by
telephone from Innisfree M&A Incorporated at (888) 750-5834 or Morrow &
Company, Inc. at (800) 662-5200 the average of the closing sales prices per
share of the Pillowtex Common Stock on the NYSE for the 20 consecutive trading
days immediately prior to the date of your call and the Conversion Number that
would result if the Determination Price were to equal such average. Because
the actual Determination Price and Conversion Number will not be determinable
until the fifth trading day prior to the Closing Date for the Merger (the
"Determination Date"), Pillowtex shareholders and Fieldcrest stockholders
should bear in mind that the actual Determination Price and Conversion Number
may vary from the example set forth above and from information obtained from
Innisfree M&A Incorporated or Morrow & Company, Inc. prior to the Determination
Date. The prices at which shares of Pillowtex Common Stock may trade are
subject to fluctuation based on many factors, including general economic and
industry conditions and the performance of, and investor expectations for,
Pillowtex. See "Risk Factors--Market Risk." The following table sets forth
the Conversion Numbers resulting from each of the Determination Prices
indicated:
4
<PAGE> 25
<TABLE>
<CAPTION>
Resulting
Determination Price Conversion Number
------------------- -----------------
<S> <C>
$26.00 0.269
$25.00 0.280
$24.00 0.292
$23.00 0.304
$22.00 0.318
$21.00 0.333
</TABLE>
At the Effective Time, each then-outstanding share of Fieldcrest Preferred
Stock (other than shares converted into Fieldcrest Common Stock prior to the
Closing Date and any shares held in the treasury of Fieldcrest, by any of its
subsidiaries, or directly or indirectly by Pillowtex, which shares will be
cancelled and shares held by stockholders, if any, who properly exercised their
appraisal rights under Delaware law) will be converted into a right to receive
total consideration valued at $58.12, consisting of (i) a cash payment equal to
the product of (a) the amount of the cash payment to be made on account of each
share of Fieldcrest Common Stock converted in the Merger and (b) 1.7094 and
(ii) a number of shares of Pillowtex Common Stock equal to the product of (a)
the Conversion Number and (b) 1.7094. See "The Merger--The Merger
Agreement--Consideration to be Paid in the Merger."
For a description of the principal differences between the rights of
holders of Fieldcrest Common Stock and Pillowtex Common Stock, see "Comparison
of Rights of Holders of Fieldcrest Common Stock and Pillowtex Common Stock."
Treatment of Fieldcrest Options. Each holder of an outstanding option (a
"Fieldcrest Option") to purchase shares of Fieldcrest Common Stock may, prior
to the Effective Time, elect to receive for each share of Fieldcrest Common
Stock subject to such Fieldcrest Option an amount in cash equal to the
difference between $34.00 and the per share exercise price of such Fieldcrest
Option. At the Effective Time, each outstanding Fieldcrest Option, other than
Fieldcrest Options in respect of which the above-described election was made,
will be assumed by Pillowtex and will constitute an option to purchase, in lieu
of each share of Fieldcrest Common Stock previously subject thereto, a number
of shares of Pillowtex Common Stock (increased to the nearest whole share)
equal to the product of (i) the number of shares of Fieldcrest Common Stock
subject to such Fieldcrest Option immediately prior to the Effective Time and
(ii) a conversion number (the "Option Conversion Number") equal to the quotient
obtained by dividing $34.00 by the Determination Price, at an exercise price
per share of Pillowtex Common Stock (increased to the nearest whole cent) equal
to the exercise price per share of Fieldcrest Common Stock subject to such
Fieldcrest Option immediately prior to the Effective Time divided by the Option
Conversion Number. The Option Conversion Number will not be more than 1.619 or
less than 1.308, except that, if Pillowtex elects to increase the Conversion
Number as described above, the Option Conversion Number will be increased such
that the product of (i) the Option Conversion Number and (ii) the Determination
Price equals $34.00. See "The Merger--The Merger Agreement--Treatment of
Fieldcrest Stock Options."
Treatment of Fieldcrest SARs. Each holder of an outstanding stock
appreciation right issued by Fieldcrest (a "Fieldcrest SAR") will be paid, at
or immediately prior to the Effective Time, a cash amount equal to the product
of (i) the difference between $34.00 and the grant price of such Fieldcrest SAR
and (ii) the number of shares subject to such Fieldcrest SAR. See "The
Merger--The Merger Agreement--Treatment of Fieldcrest SARs."
Treatment of Fieldcrest Convertible Debentures. Fieldcrest's 6%
Convertible Debentures due 2012 (the "Fieldcrest Convertible Debentures"),
which are convertible into shares of Fieldcrest Common Stock at a conversion
price of $44.25 per share (subject to adjustment upon the occurrence of certain
events), will remain outstanding immediately after the Effective Time. As a
result of the Merger, Fieldcrest Convertible Debentures will become convertible
into the same consideration that the holder of the number of shares of
Fieldcrest Common Stock into which such Fieldcrest Convertible Debentures might
have been converted immediately prior to the Merger would be entitled to
receive in the Merger. For example, a Fieldcrest Convertible Debenture having
an aggregate principal amount of $1,000 will become convertible into (i) a cash
payment equal to the product of
5
<PAGE> 26
(a) the amount of the cash payment to be made on account of each share of
Fieldcrest Common Stock converted in the Merger and (b) 22.60 and (ii) a number
of shares of Pillowtex Common Stock equal to the product of (i) the Conversion
Number and (ii) 22.60. See "The Merger--The Merger Agreement--Treatment of
Fieldcrest Convertible Debentures."
Fractional Shares. No fractional shares of Pillowtex Common Stock will be
issued pursuant to the Merger. In lieu of any such fractional shares, each
holder of Fieldcrest Common Stock or Fieldcrest Preferred Stock who otherwise
would be entitled to receive a fractional share of Pillowtex Common Stock
pursuant to the Merger will be paid an amount in cash (without interest),
rounded to the nearest cent, equal to the product of (i) the fraction of a
share of Pillowtex Common Stock to which such holder would otherwise be
entitled and (ii) the closing sales price of Pillowtex Common Stock on the NYSE
on the date on which the Merger is consummated (the "Closing Date"). Any
fractional shares of Pillowtex Common Stock that would otherwise be issuable
upon the conversion of Fieldcrest Convertible Debentures will be eliminated and
settled in the manner provided in the indenture setting forth the terms of the
Fieldcrest Convertible Debentures.
Consequences of Failure to Approve the Share Issuance. The Merger
Agreement provides that, if the Pillowtex shareholders fail to approve the
Share Issuance, (i) the consideration to be paid to holders of Fieldcrest
Common Stock will be a cash payment in an amount equal to $34.00 per share,
(ii) the consideration to be paid to holders of Fieldcrest Preferred Stock will
be a cash payment in an amount equal to $58.12 per share, (iii) each holder of
a Fieldcrest Option will receive for each share of Fieldcrest Common Stock
subject to such Fieldcrest Option an amount in cash equal to the difference
between $34.00 and the per share exercise price of such Fieldcrest Option, and
(iv) the conditions described below in clauses (ii) and (iv) under the caption
"--Conditions to the Merger" will be inapplicable. See "The Merger--The Merger
Agreement--Consequences of Failure to Approve the Share Issuance." If the
Pillowtex shareholders were to fail to approve the Share Issuance, there can be
no assurance that Pillowtex would be able to obtain financing adequate to
enable it to pay the amounts described in the immediately preceding sentence on
terms acceptable to Pillowtex, if at all. However, for the reasons described
above under the caption "--The Pillowtex Special Meeting--Required Vote," the
approval by Pillowtex shareholders of the Share Issuance is expected to occur.
Effective Time of the Merger. The Merger will become effective at the time
that a certificate of merger (the "Certificate of Merger") is filed with the
Secretary of State of the State of Delaware. Subject to the provisions of the
Merger Agreement, the parties will file the Certificate of Merger on the fifth
business day following the date on which the requisite vote of the shareholders
of Pillowtex and the stockholders of Fieldcrest is obtained and the various
other conditions set forth in the Merger Agreement (other than those that by
their nature are to be satisfied at the closing) are satisfied or waived or on
such other date as the parties may agree.
Conditions to the Merger. The obligations of Pillowtex and Fieldcrest to
consummate the Merger are conditioned upon, among other things, (i) approval
and adoption of the Merger Agreement by Fieldcrest's stockholders; (ii)
approval of the Share Issuance by Pillowtex's shareholders; (iii) the absence
of any order or injunction that prohibits the consummation of the Merger; (iv)
the shares of Pillowtex Common Stock to be issued in connection with the Merger
having been authorized for listing on the NYSE, subject to official notice of
issuance; (v) the Registration Statement having been declared effective by the
Commission and not being subject to any stop order or proceeding seeking the
same; and (vi) the waiting period pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), having expired or been
terminated. See "The Merger--The Merger Agreement--Conditions to the Merger."
Termination. The Merger Agreement may be terminated under certain
circumstances, including by mutual written consent of Pillowtex and Fieldcrest
and by either Pillowtex or Fieldcrest if the other party commits certain
breaches of its representations, warranties, or covenants contained in the
Merger Agreement or if the Merger is not consummated on or before December 31,
1997. If the Merger Agreement is terminated by Fieldcrest under specified
circumstances involving a determination by the Fieldcrest Board to accept a
proposal relating to an alternative transaction or is terminated by Pillowtex
following specified actions of the Fieldcrest Board relating to its approval or
recommendation of the Merger Agreement or the Merger or the endorsement or
recommendation of
6
<PAGE> 27
a proposal relating to an alternative transaction, Fieldcrest will be required
to pay to Pillowtex a termination fee in the amount of $15.0 million. See "The
Merger--The Merger Agreement--Termination."
Governmental and Regulatory Matters. In connection with the transactions
contemplated by the Merger Agreement, Pillowtex and Fieldcrest have made
filings or applications with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division")
pursuant to the HSR Act. Consummation of the Merger is conditioned upon, among
other things, the expiration or termination of the waiting period under the HSR
Act. Such waiting period expired at 11:59 p.m. on October 17, 1997. See "The
Merger--The Merger Agreement--Conditions to the Merger" and "--Regulatory
Approvals."
Appraisal Rights. Under the Delaware General Corporation Law (the "DGCL"),
appraisal rights will be available to holders of Fieldcrest Common Stock and
holders of Fieldcrest Preferred Stock in connection with the Merger. Any such
holder desiring to exercise appraisal rights must follow precisely the
procedures prescribed by the DGCL, which procedures are summarized in "The
Merger--Appraisal Rights." The holders of Pillowtex Common Stock will not have
any appraisal rights in connection with the Merger or the Share Issuance.
Interests of Certain Persons in the Merger. As a result of the Merger, the
Fieldcrest Named Executive Officers would be entitled to receive aggregate cash
payments of $2,850,000 in respect of their Fieldcrest Options and merger
consideration with an aggregate value of $290,666 in respect of their
restricted shares of Fieldcrest Common Stock. Fieldcrest directors (other than
those included in the amounts set forth above with respect to the Fieldcrest
Named Executive Officers) would be entitled to receive aggregate cash payments
of $758,875 in respect of their Fieldcrest Options and $58,625 in respect of
their Fieldcrest SARs. See "The Merger--Interests of Certain Persons in the
Merger" for a discussion of other matters with respect to which Fieldcrest
management and the Fieldcrest Board have an interest in addition to their
interests as stockholders of Fieldcrest generally.
Certain Federal Income Tax Consequences. The receipt by a Fieldcrest
stockholder of the merger including any cash amounts received by dissenting
stockholders pursuant to the exercise of appraisal rights) in exchange for
shares of Fieldcrest Common Stock or Fieldcrest Preferred Stock will be a
taxable transaction for federal income tax purposes. In general, for federal
income tax purposes, a stockholder will recognize gain (or loss) equal to the
difference between (i) the sum of the amount of cash and the fair market value
of the Pillowtex Common Stock received pursuant to the Merger and (ii) the tax
basis of the shares of Fieldcrest Common Stock or Fieldcrest Preferred Stock
exchanged pursuant to the Merger. Fieldcrest stockholders should consult their
own tax advisors with respect to the specific tax consequences of the Merger in
their individual circumstances. See "The Merger--Certain Federal Income Tax
Consequences."
Accounting Treatment. It is expected that the Merger will be accounted for
as an acquisition of Fieldcrest by Pillowtex, using the purchase method of
accounting. Under the purchase method of accounting, the purchase price paid
by Pillowtex for Fieldcrest (including direct costs of the Merger) will be
allocated to the identifiable assets of Fieldcrest based upon estimates of the
fair market value of Fieldcrest's identifiable assets and liabilities as of the
Effective Time, with the excess of the purchase price over the fair market
value of Fieldcrest's net identifiable assets being allocated to goodwill. On
a pro forma basis, giving effect to the consummation of the Merger and the
Financing Transactions as if such transactions had been consummated on
September 27, 1997, the excess of the purchase price over the fair market value
of Fieldcrest's identifiable assets would have been approximately $170.6
million. See Note 1 of "Notes to Unaudited Pro Forma Combined Financial
Information."
MERGER FINANCING
Pillowtex intends to finance the Merger and refinance certain indebtedness
of Pillowtex and Fieldcrest through a combination of (i) borrowings under new
senior revolving credit and term loan facilities (the "New Pillowtex Bank
Facilities"), (ii) the issuance and sale of the Pillowtex Preferred Stock, and
(iii) the issuance and sale of new subordinated debt securities (the "New
Pillowtex Subordinated Notes"). In the event that less than $135.0 million
aggregate principal amount of New Pillowtex Subordinated Notes shall have been
issued and sold as of the
7
<PAGE> 28
Closing Date, Pillowtex may borrow an amount corresponding to such shortfall
under a standby bridge loan facility (the "Standby Bridge Loan Facility").
Pillowtex has entered into (i) a commitment letter with NationsBank of
Texas, N.A. providing for the New Pillowtex Bank Facilities (the "New Pillowtex
Bank Facilities Commitment"), (ii) a Preferred Stock Purchase Agreement with
Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and
Apollo (UK) Partners III, L.P. (collectively, "Apollo") providing for the
issuance and sale of 65,000 shares of Pillowtex Preferred Stock (the "Pillowtex
Preferred Stock Commitment"), and (iii) a commitment letter with NationsBridge,
L.L.C. providing for the Standby Bridge Loan Facility (the "Standby Bridge Loan
Facility Commitment" and, together with the New Pillowtex Bank Facilities
Commitment and the Pillowtex Preferred Stock Commitment, the "Financing
Commitments").
The financings contemplated by the Financing Commitments and the proposed
issuance and sale of New Pillowtex Subordinated Notes are described in greater
detail in "Merger Financing." The obligations of third parties under the
Financing Commitments to extend loans or purchase Pillowtex Preferred Stock, as
the case may be, are subject to various specified conditions. Because such
conditions relate to matters beyond Pillowtex's control, there can be no
assurance that such conditions will be timely satisfied.
8
<PAGE> 29
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION OF PILLOWTEX
The following pro forma combined financial information gives effect to the
consummation of the Merger and the Financing Transactions as if such
transactions had been consummated on September 27, 1997, in the case of the
Unaudited Pro Forma Condensed Combined Balance Sheet of Pillowtex, and on
December 31, 1995, the first day of Pillowtex's 1996 fiscal year, in the case
of the Unaudited Pro Forma Condensed Combined Statements of Operations of
Pillowtex. As used herein, the term "Financing Transactions" means (i)
estimated initial borrowings under the New Pillowtex Bank Facilities of $430.2
million, (ii) the issuance and sale of $150.0 million aggregate principal
amount of New Pillowtex Subordinated Notes resulting in estimated net proceeds
of $146.4 million, (iii) the issuance and sale of 65,000 shares of Pillowtex
Preferred Stock resulting in estimated net proceeds of $63.5 million, (iv) the
repayment of all amounts outstanding under Pillowtex's and Fieldcrest's
existing bank credit facilities, and (v) the satisfaction and discharge of all
indebtedness represented by Fieldcrest's 11.25% Senior Subordinated Debentures
Due 2002 to 2004 pursuant to an irrevocable deposit of amounts sufficient to
provide for the redemption thereof. Because the Standby Bridge Loan Facility
is expected to be drawn upon, if at all, only in the event that less than
$135.0 million aggregate principal amount of New Pillowtex Subordinated Notes
shall have been issued and sold as of the Closing Date, the pro forma combined
financial information presented herein assumes that no amounts will be borrowed
thereunder.
The pro forma combined financial information is presented for illustrative
purposes only and is not necessarily indicative of what Pillowtex's actual
financial position or results of operations would have been had the
above-referenced transactions been consummated as of the above-referenced dates
or of the financial position or results of operations that may be reported by
Pillowtex in the future. The pro forma combined financial information should
be read in conjunction with the historical financial statements of Pillowtex
and Fieldcrest, the related notes, and the other information contained
elsewhere in this Joint Proxy Statement/Prospectus. See "Available
Information," "Unaudited Pro Forma Combined Financial Information of
Pillowtex," and "Index to Historical Financial Information of Pillowtex and
Fieldcrest."
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF PILLOWTEX
SEPTEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
-----------
<S> <C>
Total current assets............................................... $ 679,148
Property, plant, and equipment, net................................ 491,308
Goodwill, net...................................................... 216,316
Other assets, net.................................................. 60,205
----------
Total assets................................................... $1,446,977
==========
Total current liabilities.......................................... $ 251,372
Long-term debt..................................................... 823,619
Deferred income taxes.............................................. 62,972
Other non-current liabilities...................................... 52,962
Redeemable convertible preferred stock............................. 63,500
Shareholders' equity............................................... 192,552
----------
Total liabilities and shareholders' equity..................... $1,446,977
==========
</TABLE>
9
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS OF PILLOWTEX
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
FISCAL YEAR NINE MONTHS
ENDED ENDED
DECEMBER 28, 1996 SEPTEMBER 27, 1997
----------------- ------------------
<S> <C> <C>
Net sales..................................................... $1,583,151 $1,191,268
Cost of goods sold............................................ 1,364,368 998,887
Selling, general, and administrative expenses................. 135,875 111,100
Restructuring charge.......................................... 8,130 --
---------- ----------
Earnings from operations...................................... 74,778 81,281
Interest expense.............................................. 62,129 51,805
Other income, net............................................. (5,604) (2,021)
---------- ----------
Earnings before income taxes and extraordinary items.......... 18,253 31,497
Income taxes.................................................. 8,895 13,705
---------- ----------
Earnings before extraordinary items........................... 9,358 17,792
Dividends on preferred shares................................. (1,950) (1,463)
---------- ----------
Earnings before extraordinary items applicable to
common stock................................................ $ 7,408 $ 16,329
========== ==========
</TABLE>
SELECTED PER SHARE FINANCIAL INFORMATION
The following table sets forth selected historical per share financial
information for each of Pillowtex and Fieldcrest and unaudited pro forma per
share financial information for Pillowtex giving effect to the consummation of
the Merger and the Financing Transactions, as if such transactions had been
consummated as of September 27, 1997, in the case of book value information,
and December 31, 1995, the first day of Pillowtex's 1996 fiscal year, in the
case of earnings information. The information presented below is derived from
(i) the consolidated historical financial statements of Pillowtex and
Fieldcrest, including the related notes thereto, contained elsewhere in this
Joint Proxy Statement/Prospectus and (ii) the pro forma financial information,
including the notes thereto, contained elsewhere in this Joint Proxy
Statement/Prospectus, and should be read in conjunction therewith. See
"Available Information," "Unaudited Pro Forma Financial Information of
Pillowtex," and "Index to Historical Financial Information of Pillowtex and
Fieldcrest." The pro forma per share information set forth herein assumes the
issuance of 3,447,632 shares of Pillowtex Common Stock in connection with the
Merger (computed based on an assumed Determination Price of $24.00 and an
assumed Conversion Number of 0.292). See Note 1 of "Notes to Unaudited Pro
Forma Combined Financial Information." The pro forma information set forth
below is not necessarily indicative of what Pillowtex's actual financial
position or results of operations would have been had the above-referenced
transactions been consummated as of the above-referenced dates or of the
financial position or results of operations that may be reported by Pillowtex
in the future.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
DECEMBER 28, 1996 SEPTEMBER 27, 1997
----------------- ------------------
<S> <C> <C>
PILLOWTEX--HISTORICAL
Earnings per common share before
extraordinary items..................................... $ 1.39 $ 0.99
Book value per common share............................... 9.42 10.27
Dividends per common share................................ 0.20 0.18
PILLOWTEX PRO FORMA
Earnings per common share before
extraordinary items..................................... 0.53 1.06
Book value per common share............................... 12.91 13.53
Dividends per common share................................ 0.15 0.14
</TABLE>
10
<PAGE> 31
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 27, 1997
----------------- ------------------
<S> <C> <C>
FIELDCREST--HISTORICAL
Earnings (loss) per common share before
extraordinary items................................... $ (.38) $ 1.23
Book value per common share............................. 23.63 21.58
Dividends per common share.............................. -- --
FIELDCREST PRO FORMA EQUIVALENTS
Earnings per common share before
extraordinary items................................... 0.15 0.31
Book value per common share............................. 3.77 3.95
Dividends per common share.............................. 0.04 0.04
</TABLE>
Pillowtex currently intends to continue to pay quarterly dividends of $0.06
per share on the Pillowtex Common Stock. Pillowtex's dividend policy will be
reviewed by the Pillowtex Board from time to time in light of, among other
things, Pillowtex's results of operations and financial position. In addition,
Pillowtex's ability to pay dividends on the Pillowtex Common Stock in the
future will be restricted pursuant to the terms of various instruments
governing its indebtedness and the terms of the Pillowtex Preferred Stock.
Accordingly, there can be no assurance that Pillowtex will pay any dividends in
the future or, if dividends are paid, as to the amount thereof. See "Risk
Factors--Restrictions on Payment of Dividends."
MARKET PRICE INFORMATION
The Pillowtex Common Stock trades on the NYSE under the symbol "PTX." The
following table sets forth the high and low sales prices per share of Pillowtex
Common Stock as reported on the NYSE Composite Tape for each fiscal quarter in
fiscal years 1995 and 1996 and for the other periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---------- ---------
<S> <C> <C>
Quarter Ended:
April 1, 1995................................................ $ 10 1/8 $ 8
July 1, 1995................................................. 11 1/2 8 3/4
September 30, 1995........................................... 13 9 5/8
December 30, 1995............................................ 13 11
Quarter Ended:
March 30, 1996............................................... $ 12 1/2 $ 10 1/2
June 30, 1996................................................ 13 3/4 12
September 30, 1996........................................... 14 3/8 10 5/8
December 28, 1996............................................ 18 1/4 12 7/8
Quarter Ended:
March 29, 1997............................................... $ 18 3/8 $ 15 7/8
June 28, 1997................................................ 23 1/4 16 1/2
September 27, 1997........................................... 28 13/16 21
December 27, 1997 (through November __)......................
</TABLE>
11
<PAGE> 32
The Fieldcrest Common Stock trades on the NYSE under the symbol "FLD." The
following table sets forth the high and low sales prices per share of
Fieldcrest Common Stock as reported on the NYSE Composite Tape for each fiscal
quarter in fiscal years 1995 and 1996 and for the other periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----------- ----------
<S> <C> <C>
Quarter Ended:
March 31, 1995...................................... $ 25 3/8 $ 19 7/8
June 30, 1995....................................... 24 1/8 19 3/4
September 30, 1995.................................. 24 7/8 21 1/4
December 31, 1995................................... 22 1/4 15 3/4
Quarter Ended:
March 31, 1996...................................... $ 21 1/2 $ 16 3/8
June 30, 1996....................................... 22 1/4 19 1/4
September 30, 1996.................................. 20 1/8 13 1/2
December 31, 1996................................... 16 12 7/8
Quarter Ended:
March 31, 1997...................................... $ 17 3/8 $ 15 1/4
June 30, 1997....................................... 19 3/8 15 1/8
September 30, 1997.................................. 34 15/16 17 1/2
December 31, 1997 (through November __).............
</TABLE>
The Fieldcrest Preferred Stock is admitted for trading on the National
Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq").
The Fieldcrest Preferred Stock trades on The Nasdaq Small Cap Market tier of
The Nasdaq Stock Market under the symbol "FLDC.P." The following table sets
forth for the high and low closing bid quotations in the over-the-counter
market for the Fieldcrest Preferred Stock as reported on Nasdaq for each fiscal
quarter in fiscal years 1995 and 1996 and for the other periods indicated.
These quotations represent inter-dealer prices, without adjustment for retail
markups, markdowns, or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
Quarter Ended:
March 31, 1995................................. $ 52 1/2 $ 43 1/2
June 30, 1995.................................. 50 45
September 30, 1995............................. 53 46
December 31, 1995.............................. 52 42 7/8
Quarter Ended:
March 31, 1996................................. $ 47 $ 42 1/4
June 30, 1996.................................. 48 1/4 44 1/4
September 30, 1996............................. 45 1/4 38 3/8
December 31, 1996.............................. 39 3/4 37 1/2
Quarter Ended:
March 31, 1997................................. $ 42 3/4 $ 38 3/4
June 30, 1997.................................. 46 1/2 41 1/4
September 30, 1997............................. 62 45 1/4
December 31, 1997 (through November __)........
</TABLE>
On September 10, 1997, the last full trading day prior to the public
announcement by Pillowtex and Fieldcrest of the execution of the Merger
Agreement, the closing price per share of Pillowtex Common Stock as reported on
the NYSE Composite Tape was $2313/16, and the closing price per share of
Fieldcrest Common Stock as so reported was $331/2. On November ___, 1997, the
last full trading day prior to the date of this Joint Proxy
Statement/Prospectus, the closing price per share of Pillowtex Common Stock as
reported on the NYSE
12
<PAGE> 33
Composite Tape was $_____, and the closing price per share of Fieldcrest Common
Stock as so reported was $_____. On September 10, 1997, the last date of a
reported trade prior to the public announcement by Pillowtex and Fieldcrest of
the Merger Agreement, the closing bid quotation for the Fieldcrest Preferred
Stock as reported on Nasdaq was $59. On November ___, 1997, the last date of a
reported trade of Fieldcrest Preferred Stock prior to the date of this Joint
Proxy Statement/Prospectus, the closing bid quotation for the Fieldcrest
Preferred Stock was $_________. Pillowtex shareholders and Fieldcrest
stockholders are encouraged to obtain current market quotations.
RISK FACTORS
See "Risk Factors" for a discussion of certain risks of ownership of
Pillowtex Common Stock and other matters that should be considered in
determining how to vote upon the matters described herein.
13
<PAGE> 34
RISK FACTORS
Prior to voting on the proposals described herein, Pillowtex shareholders and
Fieldcrest stockholders should carefully consider the risk factors discussed
below as well as all of the information contained elsewhere in this Joint Proxy
Statement/Prospectus, including the Appendices hereto. See also "Note
Regarding Forward-Looking Information." Any or all of the risk factors
discussed below could have a material adverse effect on the business, financial
condition, results of operations, and prospects of Pillowtex and its
subsidiaries, including, from and after the Effective Time, Fieldcrest, and/or
on the price at which shares of Pillowtex Common Stock may trade.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
Pillowtex is, and following consummation of the Merger and the Financing
Transactions will continue to be, highly leveraged. At September 27, 1997, on
a pro forma basis, after giving effect to the consummation of the Merger and
the Financing Transactions, Pillowtex would have had total outstanding
long-term indebtedness (including the current portion of long-term
indebtedness) of approximately $829.9 million and total shareholders' equity of
approximately $192.5 million. See "Pro Forma Capitalization of Pillowtex." In
addition, subject to restrictions contained in instruments governing its
indebtedness, Pillowtex and its subsidiaries may incur additional indebtedness
from time to time to finance acquisitions or capital expenditures or for
general corporate purposes.
The level of Pillowtex's indebtedness could have important consequences to
the business activities of Pillowtex, including: (i) a substantial portion of
Pillowtex's cash flow from operations must be dedicated to debt service and
will not be available for other purposes; (ii) Pillowtex's ability to obtain
additional debt financing in the future for other acquisitions, working
capital, capital expenditures, or research and development may be limited; and
(iii) Pillowtex's level of indebtedness could limit its flexibility in reacting
to changes in its industry or economic conditions generally.
Pillowtex's ability to service its debt obligations will depend upon its
future operating performance, which will be affected by prevailing economic
conditions and financial, business, and other factors, certain of which are
beyond its control, as well as the availability of borrowings under the New
Pillowtex Bank Facilities or any other credit arrangement. Pillowtex will
require substantial amounts of cash to fund scheduled payments of principal and
interest on its outstanding indebtedness, as well as future capital
expenditures and any increased working capital requirements. If Pillowtex is
unable to meet its cash requirements out of cash flow from operations and its
available borrowings, there can be no assurance that it will be able to obtain
alternative financing or that it will be permitted to do so under the terms of
the New Pillowtex Bank Facilities or its other indebtedness. In the absence of
such financing, Pillowtex's ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results, or to fund capital expenditures or research and development costs may
be adversely affected. If Pillowtex does not generate sufficient increases in
cash flow from operations to repay its indebtedness at maturity, it could
attempt to refinance such indebtedness; however, no assurance can be given that
such refinancing would be available on terms acceptable to Pillowtex, if at
all.
RESTRICTIVE COVENANTS
Certain instruments governing indebtedness of Pillowtex will contain a number
of restrictive covenants and events of default, including covenants limiting
capital expenditures, incurrence of debt, and sales of assets. In addition,
under certain instruments governing indebtedness of Pillowtex, Pillowtex will
be required to maintain specified financial ratios and satisfy certain
financial condition tests. Pillowtex's ability to maintain and satisfy those
ratios and tests may be affected by events beyond its control, and there can be
no assurance that Pillowtex will be able to do so. As a result of these
covenants, the ability of Pillowtex to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
significantly restricted and Pillowtex may be prevented from engaging in
transactions that might otherwise be considered beneficial to Pillowtex. See
"Merger Financing" and "Other Post-Merger Indebtedness of Pillowtex."
14
<PAGE> 35
SECURITY INTERESTS
Upon consummation of the Merger and the Financing Transactions, all of the
capital stock of Pillowtex's domestic subsidiaries, 65% of the capital stock of
all foreign subsidiaries, and substantially all of the domestic assets of
Pillowtex and all of its subsidiaries will be subject to various liens and
security interests. If a holder of a security interest becomes entitled to
exercise its rights as a secured party, it would have the right to foreclose
upon and sell or otherwise transfer the collateral subject to its security
interest, and the collateral would be correspondingly unavailable to Pillowtex
or the subsidiary owning such collateral and to other creditors of Pillowtex or
such subsidiary, except to the extent, if any, that the value of the affected
collateral exceeds the amount of the indebtedness in respect of which such
foreclosure rights are exercised.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
Pillowtex currently intends to continue to pay quarterly dividends of $0.06
per share on the Pillowtex Common Stock. Pillowtex's dividend policy will be
reviewed by the Pillowtex Board from time to time in light of, among other
things, Pillowtex's results of operations and financial position. In addition,
certain instruments governing the indebtedness of Pillowtex and the terms of
the Pillowtex Preferred Stock will restrict Pillowtex's ability to pay
dividends or make other distributions to holders of Pillowtex Common Stock.
Pursuant to terms of such instruments, the ability of Pillowtex to pay
dividends or make other distributions will be subject to its ability to
maintain certain financial ratios and satisfy certain financial condition
tests. Accordingly, there can be no assurance that Pillowtex will pay any
dividends in the future or, if dividends are paid, as to the amount thereof.
See "Merger Financing," "Other Post-Merger Indebtedness of Pillowtex," and
"Description of Pillowtex Capital Stock--Series A Redeemable Convertible
Preferred Stock."
ABILITY TO ACHIEVE COST SAVINGS
Pillowtex has identified approximately $21.6 million of annual cost savings
that it expects to realize as a result of the Merger. These cost savings are
expected to be achieved through the elimination of certain duplicative
corporate and administrative expenses. Pillowtex additionally expects to
realize significant ongoing cost savings, including at least $8.4 million
within the first twelve months after consummation of the Merger, by: (i)
eliminating other redundant cost functions; (ii) improving procurement
efficiencies by exploiting the combined company's purchasing power (iii)
reducing trade advertising; (iv) rationalizing and streamlining operations; and
(v) reducing the use of outside consultants.
In an effort to maximize cost savings, Pillowtex intends to review
Fieldcrest's trend toward outsourcing certain manufacturing and corporate
functions on a case by case basis. For example, during 1996 Fieldcrest began
outsourcing a portion of its sheeting yarn requirements, which is expected to
result in approximately $7.1 million of cost savings for 1997. Pillowtex
initially intends to continue Fieldcrest's outsourcing practices in areas that
appear to result in reduced operating costs, such as in sheeting yarn spinning,
and may increase or curtail the use of outsourcing in spinning and other areas
based on future cost and other considerations, although the potential impact of
any future outsourcing decisions on the combined companies' operating results
cannot be determined at this time. Fieldcrest also outsourced its information
technology services and functions to Lockheed Martin Corporation beginning in
1996. Such services and functions will cost Fieldcrest approximately $25.2
million in 1997, and, although Pillowtex intends to seek opportunities for cost
savings with respect to information technology services and functions, it
intends to continue to use Lockheed Martin Corporation for such services
pursuant to the existing agreement between Fieldcrest and such company.
There can be no assurance as to the timing or amount of any cost savings that
may actually be realized, or that unforseen costs and expenses, decreases in
sales or revenues, or other factors will not offset any cost savings actually
realized.
15
<PAGE> 36
RISKS ASSOCIATED WITH ACQUISITIONS
Pillowtex expects to continue a strategy of identifying and acquiring
companies, like Fieldcrest, with complementary products or services that may be
expected to enhance the operations and profitability of Pillowtex. There can
be no assurances that Pillowtex will be able to integrate the operations of
Fieldcrest or any other acquired company successfully with the operations of
Pillowtex or that any of such acquisitions, including the acquisition of
Fieldcrest, will prove profitable.
DEPENDENCE ON RAW MATERIALS
The raw materials on which Pillowtex is primarily dependent include the raw
feather and down that Pillowtex uses to produce natural fill pillows and down
comforters. The People's Republic of China ("China") is currently the primary
source of raw feather and down for Pillowtex. See "--Dependence on Supply
Sources in China." The raw materials on which Fieldcrest is primarily
dependent include the cotton and synthetic fibers that Fieldcrest uses to
manufacture its home furnishing products.
The raw materials used by Pillowtex and Fieldcrest are generally available
from a number of sources, and no significant shortage of such materials is
currently anticipated. However, Pillowtex and Fieldcrest use significant
quantities of such raw materials, which are subject to price fluctuations, and
there can be no assurance that shortages of such materials will not occur in
the future, which could increase the cost of or delay the shipment of products.
From and after the Effective Time, cotton will be the primary raw material
used in Pillowtex's business. Cotton is an agricultural product and,
consequently, its availability is subject to weather conditions and other
factors affecting agricultural markets. There have been historical periods of
rapid and significant movement in the price of cotton, both upward and
downward. There can be no assurance that Pillowtex will be able to pass on any
increase in the price of cotton or other raw materials to its customers.
DEPENDENCE ON SUPPLY SOURCES IN CHINA
In fiscal year 1996 and the nine months ended September 27, 1997,
approximately 83% and 84%, respectively, of the raw feather and down that
Pillowtex used to produce natural fill pillows and down comforters was imported
from China.
Pillowtex's relationships with its suppliers in China could be disrupted or
adversely affected due to a number of factors, including governmental
regulation, fluctuation in exchange rates, and changes in economic and
political conditions in China. If Pillowtex's supply sources in China were
disrupted for any reason, Pillowtex believes, based on existing market
conditions, that it could establish alternative supply relationships. However,
because establishing these relationships involves numerous uncertainties
relating to delivery requirements, price, payment terms, quality control, and
other matters, Pillowtex is unable to predict whether such relationships would
be on terms satisfactory to Pillowtex.
Pillowtex's relationships with its suppliers in China are also subject to
risks associated with changes in United States legislation and regulations
relating to imports, including quotas, duties, and taxes, and other charges or
restrictions on imports. Products that Pillowtex imports from China currently
receive preferential tariff treatment accorded goods from countries granted
"most favored nation" status. Under the Trade Act of 1974, the President of
the United States is authorized, upon making specified findings, to waive
certain restrictions that would otherwise render China ineligible for most
favored nation treatment. The President has waived these provisions each year
since 1979. Most favored nation status was accordingly renewed in June 1997
despite legislation pursued by Congress demanding that China desist from
certain trade and military activities. Congress will continue to monitor these
activities and may encourage the President to reconsider the renewal of most
favored nation status for China in June 1998 and no assurance can be given that
China will continue to enjoy this status in the future. Raw materials and
finished products entering the United States from China without the benefit of
most favored nation treatment would be subject to significantly higher duty
rates.
16
<PAGE> 37
ADVERSE RETAIL INDUSTRY CONDITIONS
Each of Pillowtex and Fieldcrest sells its products to a number of department
stores and other major retailers who have experienced financial difficulties
during the past several years. Some of these retailers have recently emerged
from the protection of federal bankruptcy laws and some current retail
customers of Pillowtex and Fieldcrest may seek protection under the federal
bankruptcy laws or state insolvency laws in the future. As a result of these
financial difficulties and bankruptcy and insolvency proceedings, Pillowtex and
Fieldcrest may be unable to collect some or all amounts owed by these retail
customers. Additionally, all or part of the operations of a retail customer
that seeks bankruptcy or other debtor protection may be discontinued or sales
of Pillowtex's or Fieldcrest's products to such a customer may be curtailed or
terminated as a result of bankruptcy or insolvency proceedings.
DEPENDENCE ON KEY LICENSES
Pillowtex holds licenses with organizations such as Polo/Ralph Lauren
Corporation, The Walt Disney Company ("Disney"), and others, using such
well-known trademarks and trade names as Ralph Lauren and Disney's Mickey
UNLIMITED(R), Mickey's Stuff for Kids(R), and Mickey & Co.(R). Although the
significance of specific licenses varies from year to year, a substantial
portion of Pillowtex's net sales for fiscal year 1996 and the nine month period
ended September 27, 1997 were attributable to products sold under licensed
trademarks and trade names. These licenses generally require the payment of
royalties based on net sales, including the payment of minimum annual
royalties, and expire at various dates through 1999. No assurance can be given
that Pillowtex will be able to renew these licenses on acceptable terms upon
their expiration or will be able to acquire new licenses to use other popular
trademarks. Pillowtex's license with Polo/Ralph Lauren Corporation provides
that if Charles M. Hansen, Jr., Pillowtex's Chairman of the Board and Chief
Executive Officer, and Mary R. Silverthorne, a director of Pillowtex, or their
immediate families, in the aggregate, cease to beneficially own at least 25% of
the outstanding Pillowtex Common Stock, such license will become subject to
termination at the option of the licensor.
Fieldcrest also holds licenses with third parties, including Waverly(R),
Adrienne Vittadini(R), and Ellen Tracy(R). Fieldcrest, however, primarily
manufactures and markets products bearing its own proprietary brand names. See
"--Dependence on Brand Names."
DEPENDENCE ON BRAND NAMES
In fiscal year 1996, approximately 93% of Fieldcrest's net sales were from
sales of products bearing Fieldcrest's principal proprietary brand names of
Royal Velvet(R), Cannon(R), Charisma(R), Fieldcrest(R), Royal Family(R),
Caldwell(R), Monticello(R), SureFit(R), and St. Mary's(R). The remaining 7% of
Fieldcrest's 1996 net sales were from sales of private label products.
Accordingly, Pillowtex's future success may depend in part upon the goodwill
associated with Fieldcrest's brand names.
Fieldcrest's principal brand names are registered in the United States and
certain foreign countries. However, there can be no assurance that the steps
taken by Fieldcrest to protect its proprietary rights in such brand names will
be adequate to prevent the misappropriation thereof in the United States or
abroad. In addition, the laws of some foreign countries do not protect
proprietary rights in brand names to the same extent as do the laws of the
United States.
RISK OF LOSS OF MATERIAL CUSTOMERS
In fiscal year 1996, sales to Wal-Mart Stores, Inc. ("Wal-Mart") and Dayton
Hudson Corporation ("Dayton Hudson") accounted for 14% and 13% of Pillowtex's
total sales, respectively. For the nine months ended September 27, 1997, sales
to Wal-Mart and Dayton Hudson accounted for 12% and 13%, respectively, of
Pillowtex's total sales. No other single customer accounted for more than 10%
of Pillowtex's total sales during such periods.
17
<PAGE> 38
In fiscal year 1996, sales to Wal-Mart and its affiliates accounted for 21%
of Fieldcrest's total sales. For the nine months ended September 30, 1997,
sales to Wal-Mart and its affiliates accounted for 25% of Fieldcrest's total
sales. No other single customer accounted for more than 10% of Fieldcrest's
net sales during such periods.
On a pro forma basis, after giving effect to the consummation of the Merger
as if it had been consummated December 31, 1995, sales to Wal-Mart would have
accounted for 19% of Pillowtex's total sales for fiscal 1996 and sales to the
top ten customers would have accounted for 57% of total sales for such period.
Consistent with industry practice, neither Pillowtex nor Fieldcrest operates
under a long-term written supply contract with any of its customers. From and
after the Effective Time, the business, financial condition, and results of
operations of Pillowtex could be materially adversely affected by the loss of
Dayton Hudson or Wal-Mart as a customer. Pillowtex does not anticipate a
reduction in customer orders after the Effective Time solely as a result of the
overlap of customers of both Pillowtex and Fieldcrest, though there can be no
assurance in this regard.
LABOR RELATIONS
Pillowtex has approximately 4,000 employees, approximately 16% of which are
subject to collective bargaining agreements. Fieldcrest has approximately
11,000 employees, approximately 28% of which are subject to collective
bargaining agreements.
Since 1991, the Union of Needletrades, Industrial, and Textile Workers
("UNITE") has campaigned to organize approximately 5,500 additional hourly
workers at five Fieldcrest plants, including Fieldcrest's main manufacturing
facility in Kannapolis, North Carolina. Fieldcrest has opposed UNITE's
organizing efforts. Although a majority of employees at these plants recently
voted not to select UNITE as a bargaining representative, the results of such
election are subject to legal challenge. There can be no assurance as to
whether or when, the results of such election will be certified or a new
election will be scheduled. It is impossible to predict what effect, if any, a
lengthy continuation of another organizing campaign will have on the
productivity of the Fieldcrest workforce.
INFLUENCE BY SIGNIFICANT SHAREHOLDERS
As of November 5, 1997, the Pillowtex Record Date, Charles M. Hansen, Jr.,
Mary R. Silverthorne, and certain trusts for which Ms. Silverthorne acts as
trustee (i.e., the John H. Silverthorne Marital Trust B, the John H.
Silverthorne Family Trust A, the Bridget Russell Silverthorne Trust A, and the
John H. Silverthorne, Jr. Trust A) owned, in the aggregate, approximately 52.7%
of the outstanding shares of the Pillowtex Common Stock. Assuming 3,447,632
shares of Pillowtex Common Stock are issued in connection with the Merger, Mr.
Hansen, Ms. Silverthorne, and such trusts would own, in the aggregate,
approximately 39.9% of the then-outstanding shares of Pillowtex Common Stock
after giving effect to the Merger and related financing transactions. It is
anticipated, however, that such shareholders will continue to exert significant
influence over the management and direction of Pillowtex.
DEPENDENCE ON KEY PERSONNEL
Pillowtex's business is managed by or under the direction of Charles M.
Hansen, Jr., who serves as Chairman of the Board and Chief Executive Officer.
Pillowtex believes that its future success will be highly dependent upon its
ability to attract and retain skilled managers and other personnel, including
Mr. Hansen. The loss of Mr. Hansen's services could have a material adverse
effect on Pillowtex.
18
<PAGE> 39
SEASONALITY OF BUSINESS
Pillowtex's business is subject to a pattern of seasonal fluctuation. During
the past three years, sales and earnings from operations generated during the
second half of the year averaged approximately 61% and 66%, respectively, of
Pillowtex's total sales and earnings from operations. Pillowtex's needs for
working capital increase in the second half of the year and, accordingly, total
debt levels tend to peak in the third and fourth quarters, falling off again in
the first quarter of the following year. The amount of Pillowtex's sales
generated during the second half of the year generally depends upon a number of
factors, including the level of retail sales for home textile furnishings
during the fall and winter, weather conditions affecting the level of sales of
down comforters and blankets (which are sold in greater quantities in cold
weather), general economic conditions, and other factors beyond Pillowtex's
control.
Fieldcrest's business is subject to a similar pattern of seasonal
fluctuation, having greater sales volume in the last three quarters of the
calendar year than in the first calendar quarter. Accordingly, it is likely
that Fieldcrest's operating performance in the first quarter of a given
calendar year will be less favorable than operating performance in the last
three quarters.
INDUSTRY COMPETITION AND COMPETITIVE FACTORS
Each of Pillowtex and Fieldcrest participates in a highly competitive
industry. Each of Pillowtex and Fieldcrest competes with a number of
established manufacturers, importers, and distributors of home textile
furnishings, some of which have greater financial, distribution, manufacturing,
and marketing resources. See "Post-Merger Business of Pillowtex--Certain Other
Matters--Competition."
MARKET RISK
Pillowtex Common Stock is listed for trading on the NYSE. The prices at
which shares of Pillowtex Common Stock trade are subject to fluctuation based
on many factors, including general economic and industry conditions and the
performance of, and investor expectations for, Pillowtex. No assurance can be
given that a holder of Pillowtex Common Stock will be able to sell such
securities at any particular price.
CERTAIN PROVISIONS OF PILLOWTEX'S ARTICLES OF INCORPORATION, BYLAWS, AND OTHER
AGREEMENTS
Pillowtex's Restated Articles of Incorporation (the "Pillowtex Articles"),
Pillowtex's Amended and Restated Bylaws (the "Pillowtex Bylaws"), and certain
agreements to which Pillowtex is a party contain provisions that may have the
effect of delaying, deferring, or preventing a change in control of Pillowtex.
In addition, the Pillowtex Articles authorize the issuance of up to 30,000,000
shares of Pillowtex Common Stock and 20,000,000 shares of preferred stock of
Pillowtex. The Pillowtex Board will have the power to determine the price and
terms under which any additional capital stock may be issued and, subject to
the terms of any issued and outstanding preferred stock (including without
limitation the Pillowtex Preferred Stock), to fix the terms of such preferred
stock, and existing Pillowtex shareholders will not have preemptive rights with
respect thereto. See "Description of Pillowtex Capital Stock--Future Stock
Issuances."
19
<PAGE> 40
THE PILLOWTEX SPECIAL MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by Pillowtex to its
shareholders in connection with the solicitation of proxies, by and on behalf of
the Pillowtex Board, for use at the Pillowtex Special Meeting. The Pillowtex
Special Meeting will be held on __________, December __, 1997 at 9:00 a.m.,
Central Time, at Pillowtex's corporate headquarters, 4111 Mint Way, Dallas,
Texas. The purpose of the Pillowtex Special Meeting is for Pillowtex
shareholders to consider and vote upon a proposal to approve the issuance of up
to 5,600,000 shares of Pillowtex Common Stock and of 65,000 shares of Pillowtex
Preferred Stock in connection with the Merger and related financing transactions
(i.e., the Share Issuance).
THE PILLOWTEX BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF
PILLOWTEX AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT PILLOWTEX
SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE SHARE ISSUANCE.
VOTING AT THE PILLOWTEX SPECIAL MEETING
The holders of record of shares of Pillowtex Common Stock as of the close of
business on November 5, 1997, the Pillowtex Record Date, are entitled to notice
of and to vote at the Pillowtex Special Meeting. As of the Pillowtex Record
Date, there were 10,786,819 shares of Pillowtex Common Stock outstanding, and
there were 317 holders of record of Pillowtex Common Stock. Each outstanding
share of Pillowtex Common Stock is entitled to one vote at the Pillowtex Special
Meeting. Shares of Pillowtex Common Stock held in the treasury of Pillowtex or
by any of its subsidiaries are not considered to be outstanding.
The holders of shares representing a majority of the shares of Pillowtex
Common Stock outstanding as of the Pillowtex Record Date will constitute a
quorum for the transaction of business at the Pillowtex Special Meeting. If the
persons present or represented by proxy at the Pillowtex Special Meeting
constitute holders of shares representing less than a majority of the shares of
Pillowtex Common Stock outstanding as of the Pillowtex Record Date, the
Pillowtex Special Meeting may be adjourned to a subsequent date for the purpose
of obtaining a quorum.
Pursuant to the Merger Agreement, the consummation of the Merger is
conditioned upon, among other things, the approval of the Share Issuance by the
affirmative vote of the holders of a majority of shares of Pillowtex Common
Stock present at the Pillowtex Special Meeting and entitled to vote thereon.
Abstentions (i.e., properly executed proxies marked "ABSTAIN") will be, but
shares represented by broker non-votes (i.e., shares held by brokers or nominees
which are represented at a meeting but with respect to which the broker or
nominee is not empowered to vote on a particular proposal) will not be, included
in determining the number of shares held by persons present or represented by
proxy at the Pillowtex Special Meeting for purposes of determining whether a
quorum exists. With respect to the vote on the proposal described herein,
abstentions will be included in vote totals and will have the effect of negative
votes, but shares represented by broker non-votes will not be included in vote
totals and will therefore have no impact on the outcome of the vote.
As of the Pillowtex Record Date, directors and executive officers of Pillowtex
and their affiliates owned beneficially, in the aggregate, approximately 52.9%
of the outstanding shares of Pillowtex Common Stock. As of the Pillowtex Record
Date, Charles M. Hansen, Jr., Chairman of the Board and Chief Executive Officer
of Pillowtex, Mary R. Silverthorne, a director of Pillowtex, the John H.
Silverthorne Marital Trust B, and the John H. Silverthorne Family Trust A owned,
in the aggregate, approximately 52.4% of the currently outstanding shares of
Pillowtex Common Stock. Each of Mr. Hansen, Ms. Silverthorne, and such trusts
has agreed to vote the shares of Pillowtex Common Stock held by such shareholder
for the approval of the Share Issuance. Accordingly, the approval of the Share
Issuance is expected to occur irrespective of whether or the manner in which
other holders of Pillowtex Common Stock vote their shares.
20
<PAGE> 41
PROXIES; REVOCATION
All shares of Pillowtex Common Stock represented at the Pillowtex Special
Meeting by properly executed proxies received prior to or at the Pillowtex
Special Meeting, unless such proxies shall have been revoked, will be voted at
the Pillowtex Special Meeting in accordance with the instructions on the
proxies. If no instructions are indicated, such proxies will be voted for the
approval of the Share Issuance.
A proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted at the Pillowtex Special
Meeting. A proxy may be revoked by filing with the Secretary of Pillowtex prior
to the voting of the proxy either a written instrument revoking the proxy or an
executed proxy bearing a later date, or by voting in person at the Pillowtex
Special Meeting. Attendance at the Pillowtex Special Meeting will not, in
itself, constitute the revocation of a proxy.
Pillowtex and Fieldcrest will share the cost of the preparation of this Joint
Proxy Statement/Prospectus and the solicitation of proxies for voting at the
Pillowtex Special Meeting and the Fieldcrest Special Meeting. Pillowtex may
solicit proxies otherwise than by the use of the mails, in that certain officers
and regular employees of Pillowtex, without additional compensation, may use
their personal efforts, by telephone or otherwise, to obtain proxies. Pillowtex
will also request persons and entities holding shares in their names, or in the
name of their nominees, that are beneficially owned by others, to send proxy
materials to and obtain proxies from such beneficial owners and will reimburse
such holders for their reasonable expenses in so doing. Pillowtex has retained
Innisfree M&A Incorporated to assist it in the solicitation of proxies using the
means referred to above, at an anticipated cost of $5,000, plus reasonable
expenses.
THE FIELDCREST SPECIAL MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by Fieldcrest to its
stockholders in connection with the solicitation of proxies, by and on behalf of
the Fieldcrest Board, for use at the Fieldcrest Special Meeting. The Fieldcrest
Special Meeting will be held on __________, December __, 1997 at 10:00 a.m.,
Eastern Time, at 1271 Avenue of the Americas, New York, New York. The purpose of
the Fieldcrest Special Meeting is for Fieldcrest stockholders to consider and
vote upon the approval and adoption of the Merger Agreement.
THE FIELDCREST BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF
FIELDCREST AND ITS STOCKHOLDERS AND RECOMMENDS THAT FIELDCREST STOCKHOLDERS VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
VOTING AT THE FIELDCREST SPECIAL MEETING
The holders of record of shares of Fieldcrest Common Stock as of the close of
business on November 5, 1997, the Fieldcrest Record Date, are entitled to vote
such shares at the Fieldcrest Special Meeting. Holders of Fieldcrest Preferred
Stock will not be entitled to vote at the Fieldcrest Special Meeting. As of the
Fieldcrest Record Date, there were outstanding 9,243,602 shares of Fieldcrest
Common Stock and there were 1,798 holders of record of Fieldcrest Common Stock.
Each outstanding share of Fieldcrest Common Stock is entitled to one vote at the
Fieldcrest Special Meeting. Shares of Fieldcrest Common Stock held in the
treasury of Fieldcrest or by any of its subsidiaries are not considered to be
outstanding.
The holders of shares representing a majority of the shares of Fieldcrest
Common Stock outstanding as of the Fieldcrest Record Date will constitute a
quorum for the transaction of business at the Fieldcrest Special Meeting. If
the persons present or represented by proxy at the Fieldcrest Special Meeting
constitute the holders of shares representing less than a majority of shares of
Fieldcrest Common Stock outstanding as of the Fieldcrest
21
<PAGE> 42
Record Date, the Fieldcrest Special Meeting may be adjourned to a subsequent
date for the purpose of obtaining a quorum.
Pursuant to the Merger Agreement, the consummation of the Merger is
conditioned upon, among other things, the approval and adoption of the Merger
Agreement by the affirmative vote of the holders of two-thirds of shares of
Fieldcrest Common Stock entitled to vote thereon. Abstentions will be, but
broker non-votes will not be, included in determining the number of shares held
by persons present or represented by proxy at the Fieldcrest Special Meeting for
purposes of determining whether a quorum exists. Because approval of the
proposal to adopt the Merger Agreement will require the affirmative vote of
shares representing two-thirds of the outstanding shares of Fieldcrest Common
Stock and entitled to vote thereon, abstentions and broker non-votes will have
the effect of negative votes thereon.
As of the Fieldcrest Record Date, directors and executive officers of
Fieldcrest and their affiliates owned beneficially, in the aggregate,
approximately 4.6% of the voting power of the outstanding shares of Fieldcrest
Common Stock.
PROXIES; REVOCATION
All shares of Fieldcrest Common Stock represented at the Fieldcrest Special
Meeting by properly executed proxies received prior to or at the Fieldcrest
Special Meeting, unless such proxies shall have been revoked, will be voted at
the Fieldcrest Special Meeting in accordance with the instructions on the
proxies. If no instructions are indicated, such proxies will be voted for the
approval and adoption of the Merger Agreement and otherwise in the discretion
of the proxy holders as to any other matter which may properly come before the
Fieldcrest Special Meeting, including a motion to adjourn or postpone the
Fieldcrest Special Meeting for the purpose of soliciting additional proxies or
otherwise; except that no proxy which is voted against the proposal to approve
and adopt the Merger Agreement will be voted in favor of any such adjournment
or postponement.
A proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted at the Fieldcrest Special
Meeting. A proxy may be revoked by filing with the Secretary of Fieldcrest
prior to the voting of the proxy either a written instrument revoking the proxy
or an executed proxy bearing a later date, or by voting in person at the
Fieldcrest Special Meeting. Attendance at the Fieldcrest Special Meeting will
not, in itself, constitute the revocation of a proxy.
Pillowtex and Fieldcrest will share the cost of the preparation of this Joint
Proxy Statement/Prospectus and the solicitation of proxies for voting at the
Fieldcrest Special Meeting. Fieldcrest may solicit proxies otherwise than by
the use of the mails, in that certain officers and regular employees of
Fieldcrest, without additional compensation, may use their personal efforts, by
telephone or otherwise, to obtain proxies. Fieldcrest will also request persons
and entities holding shares in their names, or in the name of their nominees,
that are beneficially owned by others, to send proxy materials to and obtain
proxies from such beneficial owners and will reimburse such holders for their
reasonable expenses in so doing. Fieldcrest has retained Morrow & Company, Inc.
to assist it in the solicitation of proxies using the means referred to above,
at an anticipated cost of $7,500, plus a fee of $3.50 per telephone call and
reasonable expenses.
THE PARTIES
PILLOWTEX
Pillowtex, founded in 1954, is a leading North American designer,
manufacturer, and marketer of bed pillows, blankets, mattress pads, and down
comforters. Other complementary bedroom textile furnishings offered by
Pillowtex include comforter covers, featherbeds, pillow protectors, decorative
pillows, bedspreads, synthetic comforters, pillow shams, dust ruffles, and
window treatments. Pillowtex has positioned itself as a single-source supplier
to retailers for top-of-the-bed home textile furnishings (other than sheets),
offering a broad assortment of
22
<PAGE> 43
products across multiple price points. Pillowtex markets its products
primarily to department stores, mass merchants, wholesale clubs, specialty
retail stores, catalogs, and institutional distributors.
For additional information concerning the business of Pillowtex, see
"Post-Merger Business of Pillowtex--Business Presently Operated by Pillowtex."
See also "Available Information" and "Index to Historical Financial Information
of Pillowtex and Fieldcrest."
FIELDCREST
Fieldcrest was incorporated under the laws of Delaware in 1953 and is
principally involved in the manufacture and sale of home furnishing products.
Fieldcrest designs, manufactures, and markets a broad range of household
textile products consisting of towels, sheets, comforters, bath rugs, and
furniture coverings. Fieldcrest's customers consist principally of department
stores, chain stores, mass merchants, specialty home furnishing stores, catalog
warehouse clubs, and other retail outlets and institutional, government, and
contract accounts.
For additional information concerning the business of Fieldcrest, see
"Post-Merger Business of Pillowtex--Business Presently Operated by Fieldcrest.
See also "Available Information" and "Index to Historical Financial Information
of Pillowtex and Fieldcrest."
CERTAIN PRIOR TRANSACTIONS BETWEEN PILLOWTEX AND FIELDCREST
In November 1996, Pillowtex acquired from Fieldcrest certain assets
comprising Fieldcrest's blanket operations for a purchase price of
approximately $28.3 million. In connection with such transaction, Pillowtex
and Fieldcrest entered into an exclusive 25-year license agreement (the
"Pillowtex/Fieldcrest License Agreement") pursuant to which Pillowtex is
permitted to manufacture and sell various goods, including bed pillows,
mattress pads, down comforters, and blankets, bearing Fieldcrest's principal
brand names. The Pillowtex/Fieldcrest License Agreement provides for annual
royalties ranging from 1% to 3% of net sales of licensed products over the term
of the agreement. The Pillowtex/Fieldcrest License Agreement replaced certain
other licensing agreements originally entered into between Pillowtex and
Fieldcrest in 1990 and 1991, pursuant to which Fieldcrest had granted Pillowtex
the right to manufacture and sell bed pillows, mattress pads, down comforters,
and certain other products (not including blankets) bearing certain of the
Fieldcrest brand names. Such licensing agreements also provided for annual
royalties computed as a percentage of the net sales of all licensed products.
As a result of the Merger, Pillowtex, on a consolidated basis, will
cease to incur royalty expenses in connection with the use of the Fieldcrest
brands on the goods contemplated by the Pillowtex/Fieldcrest License Agreement.
THE MERGER
BACKGROUND OF THE MERGER
In late November 1996, as a result of Fieldcrest's recent disappointing
financial results, the outside directors of Fieldcrest met to review and
discuss the condition of Fieldcrest and the alternatives available to the
Fieldcrest directors to increase and maximize the value of the Fieldcrest
Common Stock. The directors determined that at the next regularly scheduled
meeting of directors the Fieldcrest Board would formally designate a Special
Committee comprised of all of Fieldcrest's independent directors to review
strategic options. The independent directors also determined to name S. Roger
Horchow as the Chairman of the Special Committee, to retain Weil, Gotshal &
Manges LLP as the Special Committee's legal counsel, and to interview a number
of nationally recognized investment banking firms that had not previously
performed services for Fieldcrest. The Special Committee subsequently retained
one of the firms interviewed to act as its financial advisor on an interim
basis. Following a number of meetings in early 1997, the Special Committee
determined that it would not be in the best interests of Fieldcrest or its
stockholders to attempt any extraordinary transaction in early 1997 and to
continue their consideration of a number of alternatives, including a sale of
Fieldcrest, a major acquisition to strengthen
23
<PAGE> 44
Fieldcrest's bedding operations, or continuing as an independent company and
executing the current business plan, with a view towards a decision later in
1997.
In March 1997, the Special Committee requested CSFB to assist the
Special Committee with its evaluation of strategic alternatives, including a
possible business combination with an industry participant identified by the
Special Committee for the primary purpose of strengthening Fieldcrest's bedding
operations (the "Potential Business Combination") or a sale of Fieldcrest.
Pursuant to an engagement letter signed in May 1996 by Fieldcrest, as
supplemented and amended by a letter signed in March 1997, CSFB had been
retained as Fieldcrest's exclusive financial advisor in connection with the
types of extraordinary transactions under consideration by the Special
Committee.
On March 17, 1997, Fieldcrest received a confidential letter from an
industry participant (the "Potential Acquiror") expressing its interest in
acquiring Fieldcrest for $21.00 per share of Fieldcrest Common Stock in cash,
subject to a normal due diligence review, execution of a definitive agreement,
and the receipt of necessary approvals from governmental agencies. The
Potential Acquiror also said in its letter that, following the execution of a
definitive agreement, it would be willing to allow Fieldcrest to "shop" for a
limited time the terms of the definitive agreement and would ask if Fieldcrest
were able to obtain terms more favorable, that it be allowed to meet the more
favorable prices and terms.
On March 19, 1997, the Special Committee met with its advisors to review
the Potential Acquiror's letter. The Special Committee unanimously determined
that the Potential Acquiror's expression of interest was financially inadequate
and reaffirmed the Special Committee's belief that early 1997 was not a
propitious time to attempt to sell the entire company. The Special Committee
instructed its advisors to commence discussions with the industry participant
identified by the Special Committee as a potential acquisition candidate (the
"Potential Acquisition Candidate") while at the same time remaining prepared to
discuss any reasonable proposal that the Potential Acquiror or any other third
party might be willing to make to acquire Fieldcrest.
On March 24, 1997, Fieldcrest responded to the Potential Acquiror's
March 17 letter and indicated that it was not interested in proceeding with
such a transaction at that time. On March 26, 1997, the Potential Acquiror
wrote to Fieldcrest and reiterated its belief that Fieldcrest should pursue a
sale to the Potential Acquiror. The Potential Acquiror also stated that if its
due diligence review of Fieldcrest suggested greater value than $21.00 per
share, the Potential Acquiror "will consider it." On April 1, 1997, Fieldcrest
wrote to the Potential Acquiror and reiterated its lack of interest in pursuing
such a transaction at that time. On April 9, 1997, the Potential Acquiror once
again wrote to Fieldcrest and reiterated its interest in commencing discussions
with Fieldcrest.
As part of its business strategy, Pillowtex from time to time pursues
acquisitions of companies that offer products it believes will complement its
existing lines and will provide product, marketing, channel of distribution,
or operational synergies. On May 8, 1997, the Pillowtex Board authorized
Pillowtex' s management to explore the merits of a possible transaction
involving Fieldcrest and to negotiate with Fieldcrest regarding the possible
terms and conditions of such a transaction.
On March 30, 1997, Fieldcrest and the Potential Acquisition Candidate
signed a confidentiality agreement for the purpose of exchanging non-public
information and commencing discussions regarding a possible transaction.
On May 19, 1997, Fieldcrest received a letter from Pillowtex in which
Pillowtex expressed an interest in a possible acquisition of Fieldcrest.
Pillowtex stated that its preliminary indication of value was in the range of
$24.00 to 28.00 per share of Fieldcrest Common Stock and that value and terms
were subject to a satisfactory due diligence review and dependent upon the
final structure and form of consideration. Pillowtex proposed that the parties
enter into a confidentiality agreement for the purpose of exchanging non-public
information and commencing discussions.
On May 23, 1997, the Special Committee had a meeting to receive an
update on the status of discussions with the Potential Acquisition Candidate
and to review the May 19 Pillowtex letter. The Special Committee authorized
its legal counsel to prepare and negotiate a confidentiality agreement for
execution by Fieldcrest and Pillowtex.
24
<PAGE> 45
On June 13, 1997, Fieldcrest and Pillowtex executed a confidentiality agreement
and began exchanging non-public information.
In late June 1997, the Potential Acquisition Candidate made a proposal
regarding the material terms of a business combination transaction. Pursuant
to the proposal, Fieldcrest would issue 7,000,000 shares of Fieldcrest Common
Stock to acquire the Potential Acquisition Candidate, which would result in the
stockholders of the Potential Acquisition Candidate owning approximately 43% of
Fieldcrest following the transaction. The stockholders of the Potential
Acquisition Candidate also would receive warrants for 600,000 shares of
Fieldcrest Common Stock exercisable at $20.00 per share and warrants for an
additional 600,000 shares of Fieldcrest Common Stock exercisable at $25.00 per
share. The proposal also provided that the current Fieldcrest directors would
constitute a majority of the directors following the transaction. The senior
management of the Potential Acquisition Candidate would be elected as the
senior managers of Fieldcrest following the transaction and management would
receive options to purchase 750,000 shares of Fieldcrest Common Stock at $20.00
per share and an additional 750,000 shares of Fieldcrest Common Stock at $25.00
per share, which options would immediately vest at closing.
In July 1997, the Special Committee had a meeting with its advisors to
discuss developments. Following a review of the proposal of the Potential
Acquisition Candidate, the directors directed CSFB to advise the Potential
Acquisition Candidate that its proposal provided for too many shares of
Fieldcrest Common Stock to be issued to the stockholders of the Potential
Acquisition Candidate. The directors also directed CSFB to inform the
Potential Acquisition Candidate that the numbers of shares of Fieldcrest Common
Stock proposed to be covered by warrants and options were excessive and that
the exercise prices were too low.
In June 1997, the Potential Acquiror expressed an interest in discussing
a possible transaction involving Fieldcrest and conducting a due diligence
review. At a July 1997 meeting, the Special Committee's legal counsel reported
on his discussions concerning a confidentiality agreement with the legal
counsel for the Potential Acquiror. During these discussions, the Special
Committee's legal advisor was apprised that the Potential Acquiror's primary
interest was in the towel portion of Fieldcrest's business, that any proposal
that the Potential Acquiror might make would contemplate a divestiture of some
or all of the bedding business to a third party, and that a group including
certain members of Fieldcrest management might be involved in such a
transaction. During the remainder of July 1997, CSFB continued its preliminary
analysis of the Potential Business Combination and its discussions with
representatives of the Potential Acquisition Candidate and Pillowtex. The
Special Committee's legal counsel continued its discussions with the legal
counsel for the Potential Acquiror regarding the terms of the confidentiality
agreement and the procedures for delivering information.
On August 7, 1997, the Special Committee met with its advisors to review
developments and to receive separate presentations from representatives of the
Potential Acquisition Candidate and Pillowtex. The Special Committee first
heard a presentation from members of the senior management of the Potential
Acquisition Candidate regarding their history of operating the Potential
Acquisition Candidate and their views on the benefits of the Potential Business
Combination.
Following the presentation, the Special Committee then met with the
Chief Executive Officer of Pillowtex and members of his senior management team,
as well as representatives of Bear Stearns, Pillowtex's financial advisor.
During this meeting, Pillowtex proposed for the Special Committee's
consideration an acquisition by Pillowtex of Fieldcrest for $30.00 per share of
Fieldcrest Common Stock in cash. Pursuant to the proposal, Pillowtex would
acquire Fieldcrest in a two-step process, with a tender offer for all of the
outstanding shares of Fieldcrest Common Stock followed by a second-step merger.
Pillowtex's proposal was subject to the completion of its due diligence review
of Fieldcrest and provided for a 90-day exclusivity period during which
Fieldcrest would discuss only with Pillowtex the terms of a sale of or other
extraordinary transaction involving Fieldcrest. After considering the
Pillowtex presentation, the Special Committee discussed the Pillowtex
presentation and advised Pillowtex that its $30.00 per share proposal was
insufficient and that Fieldcrest could not agree to any exclusivity period.
The Special Committee urged the Pillowtex representatives to complete their due
diligence review and to make an improved proposal. Certain of the Special
Committee members also expressed the view at the August 7 meeting
25
<PAGE> 46
that they would not support a transaction that had a value to the Fieldcrest
stockholders of less than $34.00 per share of Fieldcrest Common Stock.
On August 7, 1997, the Chairman of the Special Committee also received a
letter from the Potential Acquiror enclosing a signed copy of the
confidentiality agreement that had been negotiated by the parties' respective
legal counsel. In the letter, the Potential Acquiror reiterated its interest
in acquiring Fieldcrest and stated that its range of value was $26.00 to $29.00
per share of Fieldcrest Common Stock in cash, subject to a normal due diligence
review, execution of a definitive agreement, and the receipt of necessary
approvals from governmental agencies.
At a meeting of the Pillowtex Board held on August 11, 1997, Pillowtex's
management reported to the Pillowtex Board on the August 7 meeting with the
Special Committee and the status of its due diligence review of Fieldcrest.
Following such report, the Pillowtex Board authorized Pillowtex's management to
continue to explore the merits of a possible transaction involving Fieldcrest
and to continue to negotiate with Fieldcrest regarding the possible terms and
conditions of such a transaction.
On August 13, 1997, the Special Committee held a meeting with its
advisors to receive an update regarding developments. CSFB noted that the
Potential Acquisition Candidate had modified its proposal to provide for the
issuance of 4,500,000 shares of Fieldcrest Common Stock at the closing of the
transaction, the possibility for the issuance of an additional 3,000,000 shares
dependent on Fieldcrest's future share price performance and financial results,
and no warrants to purchase additional shares of Fieldcrest Common Stock. CSFB
and the Special Committee's legal counsel also reviewed their discussions with
Pillowtex's financial advisor, which indicated that subject to the satisfactory
resolution of all issues and the execution of a definitive merger agreement,
Pillowtex might be willing to pay cash and Pillowtex Common Stock with a
combined value of $34.00 per share of Fieldcrest Common Stock. Pillowtex's
preliminary indication was that $26.00 would be paid in cash and $8.00 in
Pillowtex Common Stock.
Following the presentation, the Special Committee directed CSFB to
advise the Potential Acquisition Candidate that its revised proposal still
provided for the issuance of too many shares of Fieldcrest Common Stock in the
transaction. The Special Committee also directed CSFB to urge Pillowtex to
increase the value of its proposal and the cash portion of the proposed merger
consideration. The Special Committee also directed its legal counsel to
prepare a draft merger agreement for submission to Pillowtex.
On September 2, 1997, the respective legal and financial advisors of
Fieldcrest and Pillowtex met to discuss the Pillowtex proposal, Pillowtex's
proposed financing for the transaction, and the draft merger agreement that had
been previously furnished to Pillowtex by Fieldcrest's legal counsel. During
the meeting, Pillowtex informed the Special Committee's advisors that $34.00
per share of Fieldcrest Common Stock was its best price and that the proposed
financing necessitated effecting the transaction in a one-step merger as
opposed to the previously contemplated tender offer and second-step merger.
The advisors also discussed a number of issues, including the cash and stock
composition of the proposed merger consideration, the "collar" provisions for
the stock portion of the merger consideration, the parties' respective
termination rights, the amount of the termination fee to be payable to
Pillowtex in certain circumstances, and the conditions to the transaction.
On September 3, 1997, the Special Committee's advisors reported to the
Special Committee on their meeting with Pillowtex and other developments. CSFB
also reported on its discussions with the Potential Acquisition Candidate and
the Potential Acquiror, who had been provided with all of the due diligence
information it had requested from Fieldcrest. CSFB also advised the Special
Committee that it had been informed that the acquisition group to whom the
Potential Acquiror had contemplated selling Fieldcrest's bedding business had
been unable to formulate a proposal for the Potential Acquiror's review and
consideration.
The Special Committee instructed its advisors to continue the
discussions with Pillowtex, as well as the Potential Acquisition Candidate and
the Potential Acquiror.
On September 4, 1997, the Special Committee met with its legal and
financial advisors to review a revised proposal that CSFB had received from the
Potential Acquisition Candidate following the Special Committee's
26
<PAGE> 47
meeting of September 3. Following a full discussion, the Special Committee
determined that the revised proposal was not substantially different from the
previous proposal that had been rejected by the Special Committee.
At a meeting held on September 5, 1997, the Pillowtex Board met with its
legal and financial advisors and reviewed in detail the terms of the proposed
acquisition of Fieldcrest by Pillowtex and the related financing transactions.
Following such review, the Pillowtex Board unanimously approved the Merger and
the related financing transactions and authorized the execution and delivery of
the Merger Agreement and the Financing Commitments.
On September 8, 1997, the Special Committee met again with its advisors
to review the Pillowtex proposal and the status of negotiations. CSFB and the
Special Committee's legal counsel reviewed the material terms of the proposed
transaction, including Pillowtex's proposal to provide consideration consisting
of $27.00 in cash and $7.00 of Pillowtex Common Stock for each share of
Fieldcrest Common Stock, the treatment of the Pillowtex Preferred Stock on an
"as converted" basis, the "collar" provisions, and Fieldcrest's right to
terminate the Merger Agreement under certain circumstances if the average per
share closing price of the Pillowtex Common Stock in the measurement period was
below $21.00. The advisors also discussed the limited conditions to closing,
Fieldcrest's right to terminate the merger agreement if it received a superior
proposal, and the $15.0 million termination fee that had resulted from the
negotiations. CSFB also reviewed the financing for the proposed transaction as
well as its valuation analyses of Fieldcrest based upon various methodologies.
CSFB also discussed its valuation of the Pillowtex Common Stock. The Special
Committee then reviewed with its legal counsel the limited number of open
issues remaining on the draft Merger Agreement.
The Special Committee's advisors also discussed the status of
discussions with the Potential Acquisition Candidate and Potential Acquiror.
It was reported that the Potential Acquiror had over the prior weekend
requested permission to discuss a transaction involving Fieldcrest with the
Potential Acquisition Candidate, which had been granted. Following the grant
of permission, no further revised proposal was received from the Potential
Acquisition Candidate or the Potential Acquiror.
After a thorough review of all factors that it deemed relevant to its
decision, including those noted below under "--Fieldcrest's Reasons for the
Merger," the Special Committee unanimously agreed that the Merger Agreement
should be approved at a meeting of the full Board of Directors following the
resolution of all outstanding issues.
On the evening of September 10, 1997, the Fieldcrest Board met to
approve the terms of the Merger Agreement that had resulted from negotiations
between the parties. The Special Committee's legal counsel reported on the
satisfactory resolution of the issues that had been open as of the time of the
Special Committee's prior meeting. A representative of CSFB then delivered
CSFB's written opinion to the effect that, as of such date and based upon and
subject to the matters set forth therein, the consideration (which term, for
purposes of such opinion, means, for each outstanding share of Fieldcrest
Common Stock, (i) $27.00 in cash and (ii) the number of shares of Pillowtex
Common Stock equal to the Conversion Number) to be received by the holders of
the Fieldcrest Common Stock in the Merger was fair to such stockholders from a
financial point of view. All directors present at the meeting voted in favor
of the approval of the Merger Agreement, except for Mr. Fitzgibbons, who
abstained for the stated reason that he had not been part of the Special
Committee's deliberations over the past year. One member of the Special
Committee who had evidenced his approval of the transaction at the Special
Committee's prior meeting was unable to participate in the September 10 Board
meeting. The Fieldcrest Board authorized Mr. Fitzgibbons to execute and
deliver the Merger Agreement on behalf of Fieldcrest and resolved to recommend
that the stockholders of Fieldcrest approve the Merger Agreement at a special
meeting to be held with respect thereto. Fieldcrest and Pillowtex then
executed and delivered the Merger Agreement and, the following morning,
Pillowtex issued a press release announcing the Merger.
PILLOWTEX'S REASONS FOR THE MERGER
The Pillowtex Board has determined that the Merger is in the best
interests of Pillowtex and its shareholders. ACCORDINGLY, THE PILLOWTEX BOARD
HAS UNANIMOUSLY APPROVED THE MERGER AND THE RELATED FINANCING
27
<PAGE> 48
TRANSACTIONS AND RECOMMENDS THAT THE PILLOWTEX SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF THE SHARE ISSUANCE.
The Merger is intended to accomplish several marketing and operational
objectives which Pillowtex management believes will enhance Pillowtex's
competitive position and profitability. Pillowtex's principal reasons for the
Merger are as follows:
o From a sales and marketing standpoint, the Merger will expand
Pillowtex's product lines into the bath and fashion bedding segments,
facilitate cross-branding of Pillowtex products using Fieldcrest's
well-known brands, solidify Pillowtex's position as a one-stop source
for home textile products to the retail industry, and diversify
Pillowtex's offerings, thereby decreasing Pillowtex's reliance on any
single product line.
o Operationally, the Merger will provide Pillowtex with state-of-the-art
towel manufacturing operations, an experienced manufacturing management
pool and labor force, and ample factory capacity to accommodate future
expansion in order to maximize economies of scale and operational
efficiencies.
o In addition, the Fieldcrest facilities to be acquired through the Merger
are located predominantly in areas where Pillowtex has existing
operations, allowing effective allocation of the two companies' combined
management resources.
o The Merger is also expected to give Pillowtex the opportunity to obtain
additional benefits through volume purchasing of certain raw materials,
such as polyester and packaging materials.
o Pillowtex's management believes that the Merger will result in a lower
cost structure and allow Pillowtex to compete more effectively over the
long term as the home textile industry continues to consolidate and
retailers increasingly differentiate suppliers based on price, size, and
stability. In this regard, Pillowtex has identified approximately $21.6
million of annual cost savings that it expects to realize as a result of
the Merger. These cost savings are expected to be achieved through the
elimination of certain duplicative corporate and administrative
expenses. Pillowtex additionally expects to realize significant ongoing
cost savings, including at least $8.4 million within the first twelve
months after consummation of the Merger, by: (i) eliminating other
redundant cost functions; (ii) improving procurement efficiencies by
exploiting the combined company's purchasing power (iii) reducing trade
advertising; (iv) rationalizing and streamlining operations; and (v)
reducing the use of outside consultants. See "Risk Factors--Ability to
Achieve Cost Savings."
In reaching its determination with respect to the Merger and its
recommendation with respect to the Share Issuance, the Pillowtex Board
considered a number of factors, including without limitation the reasons for
the Merger described above. In view of the numerous factors taken into
consideration, the Pillowtex Board did not consider it practical to, and did
not attempt to, quantify or otherwise assign relative weights to the factors
considered by it in reaching its decision.
OPINION OF PILLOWTEX'S FINANCIAL ADVISOR
General. Pillowtex retained Bear Stearns in June 1997 to provide advice
to the Pillowtex Board regarding certain financial aspects of the Merger. Bear
Stearns was engaged to provide advice regarding valuation and transaction
structure, assist Pillowtex in its efforts to obtain financing and in
negotiations with Fieldcrest and its advisors, present to the Pillowtex Board a
valuation analysis and financial review of the Merger, render its opinion to
the Pillowtex Board as to the fairness of the total consideration to be
received in respect of each outstanding share of Fieldcrest Common Stock and
each outstanding share of Fieldcrest Preferred Stock, from a financial point of
view, to the shareholders of Pillowtex, and provide other investment banking
and financial advisory services as requested by Pillowtex.
On September 5, 1997, Bear Stearns delivered to the Pillowtex Board an
oral opinion, which was subsequently confirmed in a written opinion dated as of
September 10, 1997, to the effect that, as of such date and
28
<PAGE> 49
subject to the assumptions and qualifications set forth in its written opinion,
the total consideration to be received in respect of each outstanding share of
Fieldcrest Common Stock and each outstanding share of Fieldcrest Preferred
Stock was fair, from a financial point of view, to the shareholders of
Pillowtex. The full text of Bear Stearns' written opinion is set forth as
Appendix B to this Joint Proxy Statement/Prospectus and describes the
assumptions made, matters considered, and limits on the review undertaken.
Pillowtex shareholders are urged to read this opinion carefully and in its
entirety. The summary of Bear Stearns' opinion set forth in this Joint Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion. Bear Stearns has consented to the inclusion of its written
opinion as Appendix B to this Joint Proxy Statement/Prospectus and to the
references to such opinion herein.
The opinion of Bear Stearns is intended for the benefit and use of the
Pillowtex Board, and does not constitute a recommendation of the Merger or
related financing transactions or a recommendation to any shareholder of
Pillowtex as to how any such shareholder should vote with respect to the
approval of the Share Issuance. In rendering its opinion, Bear Stearns is not
expressing any opinion as to what the value of Pillowtex Common Stock or
Fieldcrest Common Stock actually will be at the time of the Merger or the
prices at which Pillowtex Common Stock will trade during the period following
announcement of the Merger or subsequent to the consummation of the Merger.
Finally, the Bear Stearns opinion does not address Pillowtex's underlying
business decision to effect the Merger. It should be understood that, although
subsequent developments may affect the conclusions reached in the Bear Stearns
opinion, Bear Stearns does not have any obligation to, and does not intend to,
update, revise, or reaffirm its opinion.
The form and amount of consideration to be paid by Pillowtex pursuant to
the Merger Agreement were determined by arm's-length negotiations between
Pillowtex and Fieldcrest and were not based on any recommendation by Bear
Stearns, although Bear Stearns provided advice to Pillowtex from time to time
with respect thereto. Except as otherwise noted herein, no limitations were
imposed by Pillowtex on Bear Stearns with respect to the investigations made or
the procedures followed by Bear Stearns in rendering its opinion.
In the course of performing its reviews and analyses for rendering its
opinion, Bear Stearns: (i) reviewed the Merger Agreement in substantially
final form; (ii) reviewed Pillowtex's Annual Reports on Form 10-K for the
years ended December 31, 1994 through December 28, 1996, and its Quarterly
Reports on Form 10-Q for the quarters ended March 29 and June 28, 1997; (iii)
reviewed Fieldcrest's Annual Reports on Form 10-K for the years ended December
31, 1994 through 1996, and its Quarterly Reports on Form 10-Q for the quarters
ended March 31 and June 30, 1997; (iv) reviewed certain operating and financial
information of Pillowtex and Fieldcrest, including projections and projected
cost savings and operating synergies, provided to Bear Stearns by Pillowtex's
and Fieldcrest's management relating to their respective businesses and
prospects; (v) met with certain members of Pillowtex's and Fieldcrest's senior
management to discuss their respective operations, historical financial
statements, and future prospects and their views of the business, operational,
and strategic benefits, cost savings, potential synergies, and other
implications of the Merger; (vi) reviewed the historical prices and trading
volumes of the Pillowtex Common Stock and the Fieldcrest Common Stock; (vii)
reviewed publicly available financial data and stock market performance data of
other publicly held companies which Bear Stearns deemed generally comparable to
Pillowtex and Fieldcrest; (viii) reviewed the financial terms of recent
acquisitions of companies that Bear Stearns deemed generally comparable to
Fieldcrest; and (ix) conducted such other studies, analyses, inquiries, and
investigations as Bear Stearns deemed appropriate.
In the course of its review, Bear Stearns relied upon and assumed,
without independent verification, the accuracy and completeness of the
financial and other information provided to it by Pillowtex and Fieldcrest.
With respect to Pillowtex's and Fieldcrest's projected financial results
(including projected cost savings and operating synergies resulting from the
Merger), Bear Stearns assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Pillowtex and Fieldcrest as to the expected future performance
of Pillowtex and Fieldcrest, respectively. Bear Stearns also assumed that the
Merger and financing thereof would not violate, result in a default under, or
be in contravention of the terms of, any material agreement, to which any of
Pillowtex, Fieldcrest, or their respective subsidiaries is a party. Bear
Stearns did not assume any responsibility for the independent verification of
the information or the projections (including projected cost savings and
operating synergies resulting from the Merger) provided to it and Bear Stearns
further
29
<PAGE> 50
relied upon the assurances of the managements of Pillowtex and Fieldcrest that
they are unaware of any facts that would make the information or projections
(including projected cost savings and operating synergies resulting from the
Merger) provided to Bear Stearns incomplete or misleading. In arriving at its
opinion, Bear Stearns did not perform or obtain any independent appraisal of
the assets or liabilities of Pillowtex or Fieldcrest. The Bear Stearns opinion
is necessarily based on economic, market, and other conditions, and the
information made available to Bear Stearns, as of the date of the opinion.
In connection with preparing and rendering its opinion, Bear Stearns
performed a variety of valuation, financial, and comparative analyses. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to summary description. Bear Stearns believes that its analyses
must be considered as a whole, and that selecting portions of its analyses and
the factors considered by it, without considering all such factors and
analyses, could create an incomplete view of the processes underlying its
opinion. Moreover, the estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Accordingly, such
estimates are inherently subject to substantial uncertainties.
The following is a summary of the material valuation, financial, and
comparative analyses presented by Bear Stearns to the Pillowtex Board on
September 5, 1997 in connection with the Bear Stearns opinion, which was orally
rendered to the Pillowtex Board on such date and subsequently confirmed in a
written opinion dated as of September 10, 1997.
Analysis of Selected Precedent M&A Transactions. Bear Stearns reviewed
and analyzed the publicly available financial terms of three selected recent
merger and acquisition transactions in the textiles industry (collectively, the
"Precedent Textile Transactions") and compared the financial terms of such
transactions to those of the Merger for purposes of this analysis. These three
transactions included: (i) Dyersburg Corporation's pending acquisition of AIH
Inc.; (ii) VF Corp's acquisition of Nutmeg Industries; and (iii) Fruit of the
Loom's acquisition of Salem Sportswear. Bear Stearns reviewed the prices paid
in the Precedent Textile Transactions and analyzed various operating and
financial information and imputed valuation multiples and ratios. Bear Stearns
noted that none of the Precedent Textile Transactions were identical to the
Merger and that, accordingly, any analysis of the Precedent Textile
Transactions necessarily involved complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that would necessarily affect the acquisition value of Fieldcrest
versus the acquisition values of the companies to which Fieldcrest was being
compared. Bear Stearns' analysis of the Precedent Textile Transactions
indicated that the range of multiples of Enterprise Value (defined as market
equity value plus debt plus preferred stock plus minority interest less cash)
to latest twelve months ("LTM") revenue, EBITDA (defined as earnings before
interest, taxes, and depreciation and amortization), and EBIT (defined as
earnings before interest and taxes) were 0.7x to 2.0x, 7.8x to 12.9x, and 9.1x
to 15.6x, respectively, yielding harmonic means (excluding any multiples that
were greater than twice or less than half the median) of 1.0x, 9.2x, and 11.8x,
respectively. Bear Stearns compared these multiples to Fieldcrest's implied
transaction multiples based on the aggregate value of the total consideration
to be received in respect of each outstanding share of Fieldcrest Common Stock
and each outstanding share of Fieldcrest Preferred Stock, the fair market value
of Fieldcrest's indebtedness, and certain expenses to be incurred to achieve
the costs savings ("Pro Forma Cost Savings") that are reflected in the pro
forma financial information presented elsewhere in the Joint Proxy
Statement/Prospectus (such aggregate value being referred to herein as the
"Transaction Value") relative to Fieldcrest's LTM operating results including
the Pro Forma Cost Savings and relative to Pillowtex management's estimate of
Fieldcrest's 1997 operating results including the Pro Forma Cost Savings (the
"1997 Pillowtex Management Forecast"). As the Merger was expected to close
near the end of 1997 and as Pillowtex's management did not believe Fieldcrest's
LTM operating performance was indicative of the normalized results of the
business since these results did not fully reflect the effects of Fieldcrest's
recent operational restructuring, Bear Stearns focused on the transaction
multiples implied by the 1997 Pillowtex Management Forecast in addition to the
transaction multiples implied by Fieldcrest's LTM operating results. Bear
Stearns noted that (i) the implied multiple of Transaction Value to the 1997
Pillowtex Management Forecast revenue was lower than the harmonic mean and the
range of the Precedent Textile Transactions' LTM revenue multiples; (ii) the
implied multiple of Transaction Value to the 1997 Pillowtex Management Forecast
EBITDA was lower than the harmonic mean and the range of the Precedent Textile
Transactions' LTM EBITDA multiples; and (iii) the implied multiple of
30
<PAGE> 51
Transaction Value to the 1997 Pillowtex Management Forecast EBIT was lower than
the harmonic mean and within the range of the Precedent Textile Transactions'
LTM EBIT multiples. Applying the harmonic mean multiples for the Precedent
Textile Transactions of LTM revenue, EBITDA and EBIT of 1.0x, 9.2x, and 11.8x,
respectively, to the 1997 Pillowtex Management Forecast revenue, EBITDA and
EBIT resulted in an implied entity value range of $920.4 million to $1,092.5
million, the low-end of which was above the Transaction Value.
Discounted Cash Flow Analysis. Bear Stearns performed a discounted cash
flow ("DCF") analysis of Fieldcrest based on fiscal 1998 through fiscal 2002
projections provided by Pillowtex management ("Base Case"). Bear Stearns used
discount rates of 8% to 10%, based on a textile industry weighted average cost
of capital of 8.3% (as calculated by Bear Stearns), and terminal EBITDA
multiples of 6.0x to 8.0x. Bear Stearns noted the low-end terminal multiple
represents a 10% discount to the harmonic mean EBITDA multiple of the
Comparable HT Companies, while the high-end terminal multiple is within the
range of the Comparable HT Companies' EBITDA multiples and is 13% below the
harmonic mean of the Precedent Textile Transactions' EBITDA multiples. The
Base Case DCF analysis utilized Pillowtex's management forecast of Fieldcrest's
future operating results which assumed (i) revenue growth, based on the 1997
Pillowtex Management Forecast, of 2% per annum from 1998 to 2002, (ii)
increasing gross margin, including cost savings in excess of the Pro Forma Cost
Savings, from 16.9% to 18.5% during the period 1998 to 2002, and (iii)
increasing operating income margin, including cost savings in excess of the Pro
Forma Cost Savings, from 7.9% to 11.5% during the period 1998 to 2002. This
analysis implied an entity value range of $891.6 million to $1,218.0 million,
the low-end of which was above the Transaction Value.
Analysis of Certain Publicly Traded Companies. Bear Stearns compared
certain operating and financial information for Pillowtex and Fieldcrest to
certain publicly available operating, financial, trading, and valuation
information of five selected home textile companies. These companies included
Burlington Industries, Inc., Crown Crafts, Inc., Springs Industries, Inc.,
Thomaston Mills, Inc., and Westpoint Stevens Inc. (collectively, the
"Comparable HT Companies"). Although Bear Stearns used these companies for
comparison purposes, none of such companies are identical to Fieldcrest. Bear
Stearns' analysis indicated that the Comparable HT Companies were trading in a
range of Enterprise Value to LTM revenue, EBITDA, and EBIT of 0.4x to 1.6x,
5.9x to 9.3x, and 9.8x to 18.1x, respectively, yielding harmonic means
(excluding any multiples that were greater than twice or less than half the
median) of 0.6x, 6.7x, and 10.6x, respectively. Bear Stearns compared the
Comparable HT Companies' LTM multiples to Fieldcrest's implied transaction
multiples based on the Transaction Value relative to Fieldcrest's LTM operating
results including the Pro Forma Cost Savings and relative to the 1997 Pillowtex
Management Forecast. As the Merger was expected to close near the end of 1997
and as Pillowtex's management did not believe Fieldcrest's LTM operating
performance was indicative of the normalized results of the business since
these results did not fully reflect the effects of Fieldcrest's recent
operational restructuring, Bear Stearns focused on the transaction multiples
implied by the 1997 Pillowtex Management Forecast in addition to the
transaction multiples implied by Fieldcrest's LTM operating results. Bear
Stearns noted that (i) the implied multiple of Transaction Value to the 1997
Pillowtex Management Forecast revenue was within the range of the Comparable HT
Companies' LTM revenue multiples; (ii) the implied multiple of Transaction
Value to the 1997 Pillowtex Management Forecast EBITDA was lower than the
harmonic mean and within the range of the Comparable HT Companies' LTM EBITDA
multiples; and (iii) the implied multiple of Transaction Value to the 1997
Pillowtex Management Forecast EBIT was lower than the harmonic mean and the
range of the Comparable HT Companies' LTM EBIT multiples. Applying the
harmonic mean multiples for the Comparable HT Companies of LTM revenue, EBITDA
and EBIT of 0.6x, 6.7x, and 10.6x, respectively, to the 1997 Pillowtex
Management Forecast revenue, EBITDA, and EBIT resulted in an implied entity
value range of $655.5 million to $826.8 million. Bear Stearns noted that the
Transaction Value was within the lower half of this range.
In addition, Bear Stearns conducted such other analyses and reviews as
it deemed necessary, including analyzing the potential pro forma effect of the
Merger on Pillowtex's earnings per share and reviewing historical and projected
financial and operating data for both Pillowtex and Fieldcrest, selected
investment research reports on each of Pillowtex and Fieldcrest, and available
information regarding the individual and institutional holdings of Pillowtex
Common Stock and Fieldcrest Common Stock.
31
<PAGE> 52
Pursuant to the terms of its engagement letter, Pillowtex has paid Bear
Stearns an initial cash retainer fee of $50,000 and a $500,000 fee upon Bear
Stearns' rendering of its opinion, and has further agreed to pay Bear Stearns a
$2.45 million fee contingent upon consummation of the Merger. In addition,
Bear Stearns will receive a fee of $1.3 million for introducing Apollo
Management, L.P. and certain of its affiliates to Pillowtex (and acting as
Pillowtex's financial advisor with respect to the Pillowtex Preferred Stock
Commitment). Pillowtex also has agreed to reimburse Bear Stearns for its
reasonable out-of-pocket expenses, and to indemnify Bear Stearns and certain
related persons against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of its engagement.
Bear Stearns may actively trade the equity securities of Pillowtex
and/or Fieldcrest for its own account and for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Bear Stearns is an internationally recognized investment banking firm
and was selected as financial advisor to Pillowtex in connection with the
Merger and asked to provide advice to Pillowtex in the Merger negotiations and
render its opinion in connection with the Merger based on Bear Stearns'
qualifications, expertise, and reputation in providing advice to companies in
merger transactions. As part of its investment banking business, Bear Stearns
is engaged regularly in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bidding, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate, and other purposes.
FIELDCREST'S REASONS FOR THE MERGER
The Fieldcrest Board has determined that the terms of the Merger
Agreement and the Merger are fair to, and in the best interests of,
Fieldcrest's stockholders. ACCORDINGLY, THE FIELDCREST BOARD HAS APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF FIELDCREST VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
In reaching its determination, the Fieldcrest Board consulted with its
legal counsel and financial advisor and gave significant consideration to a
number of factors, including without limitation the factors referred to below.
In view of the wide variety of factors bearing on its decision, the Fieldcrest
Board did not consider it practical to, and did not attempt to, quantify or
otherwise assign relative weights to the factors it considered in reaching its
decision.
The material factors considered by the Fieldcrest Board were:
o The premium of the merger consideration to the historical market prices
for the Fieldcrest Common Stock, including the fact that the merger
consideration represents a premium of approximately 140% over the market
price of the Fieldcrest Common Stock at the time the independent
directors of Fieldcrest first met in late November 1996 to consider
alternatives to increase and maximize the value of the Fieldcrest Common
Stock and the treatment of Pillowtex Preferred Stock on an "as
converted" basis, which the Fieldcrest Board viewed as equitable. The
Merger consideration per share of Fieldcrest Common Stock (valued at
$34.00 per share) represented a premium of approximately 1.5% over the
closing price per share of Fieldcrest Common Stock as reported on the
NYSE Composite Tape on September 10, 1997, the last full trading day
prior to the public announcement by Pillowtex and Fieldcrest of the
execution of the Merger Agreement.
o The discussions between the Special Committee's advisors and the
Potential Acquisition Candidate and the Potential Acquiror and the
Special Committee's view that the Merger is a more attractive
transaction for Fieldcrest's stockholders than any transaction or
interest proposed or expressed by these third parties.
o The Special Committee's review of the financial performance and
condition, business, and prospects of Fieldcrest and its consideration
of historical and pro forma financial and other information relating to
Pillowtex and the Pillowtex Common Stock.
32
<PAGE> 53
o The Special Committee's consideration of current conditions in the
textile industry and the historical cyclical nature of the industry,
which the Fieldcrest Board felt made a sale more attractive.
o The terms of the Merger Agreement, including without limitation the form
of consideration, the price protection afforded by the "collar"
provisions of the Merger Agreement, Fieldcrest's right to terminate the
Merger Agreement in the event that the per share average market price of
the Pillowtex Common Stock in the relevant determination period falls
below $21.00 and Pillowtex does not offer to increase the merger
consideration, and Fieldcrest's ability, under certain circumstances, to
terminate the Merger Agreement to accept an acquisition proposal deemed
by the Fieldcrest directors to be superior to the Merger upon payment of
a termination fee to Pillowtex.
o The provision by Pillowtex to Fieldcrest of commitment letters from
financing sources to provide funds necessary to effect the Merger, the
Fieldcrest Board's views regarding the likelihood that Pillowtex would
be able to complete the Merger on a timely basis, and the fact that the
Merger Agreement provides for limited conditions (and no financing
condition) to the obligation of Pillowtex to consummate the Merger.
o The written opinion dated September 10, 1997 of CSFB that, as of such
date and based upon and subject to the matters set forth therein, the
consideration (which term, for purposes of such opinion, means, for each
outstanding share of Fieldcrest Common Stock, (i) $27.00 in cash and
(ii) the number of shares of Pillowtex Common Stock equal to the
Conversion Number) to be received by the holders of the Fieldcrest
Common Stock in the Merger was fair to such stockholders from a
financial point of view.
o The effect of the Merger on Fieldcrest's other constituencies, including
its employees and customers, and the terms of the Merger Agreement
relating to employee matters.
OPINION OF FIELDCREST'S FINANCIAL ADVISOR
CSFB has acted as exclusive financial advisor to the Special Committee
in connection with the Merger. CSFB was selected by Fieldcrest based on CSFB's
experience, expertise, and familiarity with Fieldcrest and its business. CSFB
is an internationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate and other
purposes.
At the request of the Special Committee, on September 10, 1997, the date
on which the Merger Agreement was executed, CSFB delivered to the Fieldcrest
Board its written opinion that, as of such date and based upon and subject to
the matters set forth therein, the consideration (which term, for purposes of
such opinion, means, for each outstanding share of Fieldcrest Common Stock, (i)
$27.00 in cash and (ii) the number of shares of Pillowtex Common Stock equal to
the Conversion Number) to be received by the holders of the Fieldcrest Common
Stock in the Merger was fair to such stockholders from a financial point of
view.
The full text of CSFB's written opinion to the Fieldcrest Board, which
sets forth the procedures followed, assumptions made, matters considered, and
limitations on the review undertaken, is attached as Appendix C to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. Holders of
Fieldcrest Common Stock are urged to read this opinion carefully and in its
entirety. CSFB's opinion is directed to the Fieldcrest Board and relates only
to the fairness from a financial point of view of the consideration (which
term, for purposes of such opinion, means, for each outstanding share of
Fieldcrest Common Stock, (i) $27.00 in cash and (ii) the number of shares of
Pillowtex Common Stock equal to the Conversion Number) to be received by
holders of the Fieldcrest Common Stock in the Merger and does not address any
other aspect of the proposed Merger and does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the Merger Agreement.
The summary of the opinion of CSFB set forth in this Joint Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion. CSFB has consented to the inclusion of its written opinion as
Appendix C to this Joint Proxy Statement/Prospectus and to the references to
such opinion herein.
33
<PAGE> 54
In arriving at its opinion, CSFB reviewed certain publicly available
business and financial information relating to Fieldcrest and Pillowtex, as
well as a draft dated September 9, 1997 of the Merger Agreement. CSFB also
reviewed certain other information, including financial forecasts, provided to
it by Fieldcrest and Pillowtex, and met with Fieldcrest's and Pillowtex's
managements to discuss the business and prospects of Fieldcrest and Pillowtex.
CSFB also considered certain financial and stock market data of
Fieldcrest and Pillowtex and compared that data with similar data for other
publicly held companies in businesses similar to that of Fieldcrest and
Pillowtex and considered the financial terms of certain other business
combinations and other transactions which have recently been effected. CSFB
also considered such other information, financial studies, analyses, and
investigations and financial, economic, and market criteria as CSFB deemed
relevant.
In connection with its review, CSFB did not assume any responsibility
for independent verification of any of the foregoing information and relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts, CSFB assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Fieldcrest and Pillowtex as to the future
financial performance of Fieldcrest and Pillowtex. In addition, CSFB did not
make an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Fieldcrest or Pillowtex, nor was CSFB furnished
with any such evaluations or appraisals. CSFB's opinion was necessarily based
upon financial, economic, market, and other conditions as they existed and
could be evaluated on the date of its opinion. CSFB did not express any
opinion as to what the value of the Pillowtex Common Stock actually will be
when issued to Fieldcrest's stockholders pursuant to the Merger or the prices
at which such Pillowtex Common Stock will trade subsequent to the Merger. In
connection with its engagement, CSFB approached third parties to solicit
indications of interest in a possible acquisition of Fieldcrest and held
preliminary discussions with certain of these parties prior to the date of the
opinion. For purposes of its opinion, CSFB did not consider other strategic
alternatives to the sale of Fieldcrest that might then have been available to
Fieldcrest.
In preparing its opinion, CSFB performed a variety of financial and
comparative analyses, including those described below. The preparation of a
fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. In arriving at its opinion, CSFB made qualitative judgments as to
the significance and relevance of each analysis and factor considered by it.
Accordingly, CSFB believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, CSFB made
numerous assumptions with respect to Fieldcrest, Pillowtex, industry
performance, regulatory, general business, economic, market, and financial
conditions, and other matters, many of which are beyond the control of
Fieldcrest and Pillowtex. No company, transaction, or business used in such
analyses as a comparison is identical to Fieldcrest or Pillowtex or the
proposed Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, such analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading, or other values of the
companies, business segments, or transactions being analyzed. The estimates
contained in such analyses and the ranges of valuations resulting from any
particular analysis are not necessarily indicative of actual or predictive of
future results or values, which may be significantly more or less favorable
than those suggested by such analyses. In addition, analyses relating to the
value of businesses or securities do not purport to be appraisals or to reflect
the prices at which business and securities actually may be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty.
CSFB's opinion and financial analyses were only one of many factors considered
by the Fieldcrest Board in its evaluation of the Merger and should not be
viewed as determinative of the views of the Fieldcrest Board with respect to
the merger consideration or the proposed Merger.
The following is a summary of the material analyses performed by CSFB in
connection with its opinion dated September 10, 1997.
34
<PAGE> 55
Fieldcrest Discounted Cash Flow Analysis. CSFB's discounted cash flow
analysis was based on two forecast scenarios: a scenario derived from
management's views of future operating and financial performance (the
"Fieldcrest Management Case") and a revised case derived from the Fieldcrest
Management Case (the "Fieldcrest Sensitivity Case"). The Fieldcrest Management
Case assumed management's internal projections for 1997 and 1998, and extended
the forecast to 2007 based on CSFB's discussions with Fieldcrest management.
From 1999 to 2007 the Management Case assumed a 4.0% revenue growth and an
improvement in the margin for earnings before interest, taxes, depreciation,
and amortization ("EBITDA") from 8.8% in 1997 to 12.6% in 2001 and thereafter.
The Fieldcrest Sensitivity Case assumed the same revenue growth trend as in the
Management Case and a more moderate increase in the EBITDA margin from 8.8% in
1997 to 12.3% in 2002 and thereafter. CSFB calculated an enterprise value
reference range for Fieldcrest based upon the present value of Fieldcrest's
ten-year stream of unlevered free cash flows and fiscal year 2007 terminal
value. The fiscal year 2007 terminal value of Fieldcrest was calculated by
applying to Fieldcrest's fiscal year 2007 EBITDA multiples ranging from 6.0x to
6.5x, based on the EBITDA multiples from the Fieldcrest Selected Companies
Analysis and the Fieldcrest Selected Transactions Analysis described below.
Unlevered free cash flows and terminal value estimates were then discounted to
the present using discount rates of 10.5% to 11.0%, based on Fieldcrest's
estimated weighted average cost of capital. This analysis resulted in an
enterprise value reference range for Fieldcrest of $720 to $787 million, or
$33.97 to $39.62 per share of Fieldcrest Common Stock, for the Fieldcrest
Management Case and $676 to $741 million, or $30.30 to $35.75 per share of
Fieldcrest Common Stock, for the Fieldcrest Sensitivity Case.
Fieldcrest Selected Companies Analysis. CSFB compared certain financial
information of Fieldcrest to corresponding data of the following selected
publicly traded companies in the home textiles industry: Springs Industries
Inc., Westpoint Stevens Inc., Burlington Industries Inc., Cone Mills
Corporation, Pillowtex Corporation, Dyersburg Corporation, Thomaston Mills,
Inc. and Crown Crafts Inc. (collectively, the "Selected Home Textile
Companies"), all of which CSFB considered to be reasonably comparable to
Fieldcrest. CSFB compared the enterprise value (which was defined by CSFB for
purposes of this analysis as adjusted market value) of the Selected Home
Textile Companies as multiples of estimated fiscal 1997 EBITDA and compared
stock prices to 1997 and 1998 earnings per share ("EPS"). Estimated financial
data for the Selected Home Textile Companies was based on estimates of equity
research analysts. Applying a range of selected multiples for the Selected
Home Textile Companies of fiscal 1997 EBITDA and 1997 and 1998 EPS of 6.0x to
6.5x, 12.0x to 14.0x, and 10.0x to 12.0x, respectively, to corresponding
financial data of Fieldcrest resulted in a reference range of approximately
$22.50 to $26.50 per share of Fieldcrest Common Stock.
Fieldcrest Selected Transactions Analysis. CSFB analyzed the purchase
prices and implied transaction multiples paid or proposed to be paid in
selected merger and acquisition transactions involving companies in the home
textile sector, consisting of the following (acquirer/target): Avondale/Triarc
Cos. (Graniteville), Springs Industries/Dundee Mills, Pillowtex/Beacon
Manufacturing, Galey & Lord/Burlington Industries, Mohawk Industries/Aladdin
Mills, Valley Fashions/West Point - Pepperell, Mohawk Industries/Karastan
Bigelow, Unifi/Pioneer Yarns Mills, Interface Inc./Bentley Mills, Springs
Industries/Fieldcrest Cannon (not completed), Unifi/Vintage Yarns,
Unifi/Macfield, Coats Viyella/Tootal Group, and RSI Corp./Delta Woodside
Industries (collectively, the "Selected Transactions"). CSFB compared
enterprise values for the surviving entities as multiples of sales, EBITDA, and
earnings before interest and taxes ("EBIT") in each case for the latest 12
months ("LTM"). All multiples were based on historical financial information
available at the time of announcement of the transaction. Applying a range of
selected multiples for the Selected Transactions of LTM sales, EBITDA, and EBIT
of 0.6x to 0.7x, 6.5x to 7.5x, and 10.0x to 11.0x, respectively, to
corresponding financial data of Fieldcrest resulted in a reference range of
approximately $29.00 to $37.00 per share of Fieldcrest Common Stock.
Fieldcrest Aggregate Reference Ranges. On the basis of the valuation
methodologies described above, CSFB derived an aggregate reference range for
Fieldcrest of approximately $30.00 to $37.00 per share of Fieldcrest Common
Stock.
CSFB also performed the following analyses with regard to Pillowtex
Common Stock.
35
<PAGE> 56
Pro Forma Merger Analysis. CSFB analyzed the potential pro forma effect
of the Merger on Pillowtex's EPS for the fiscal years 1998 through 2001, based
on the Fieldcrest Sensitivity Case and the Pillowtex Base Case. After giving
effect to synergies anticipated by Pillowtex's management in the Merger, the
analysis indicated that the Merger would be accretive to Pillowtex's EPS on a
fully diluted basis by 1.6% in fiscal year 1998, 12.2% in fiscal year 1999,
26.2% in fiscal year 2000 and 37.6% in fiscal year 2001. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
Pillowtex Discounted Cash Flow Analysis. CSFB's discounted cash flow
analysis for Pillowtex was based on two forecast scenarios: a scenario derived
from management's views of future operating and financial performance (the
"Pillowtex Base Case") and a downside case derived from the Pillowtex Base Case
(the "Pillowtex Downside Case"). The Pillowtex Base Case assumed management
forecasts for 1997 and revenue growth and margin improvements in line with
management's expectations. The Pillowtex Base Case assumed revenue growth of
4.0% from 1998 to 2000 and 3.5% from 2001 to 2007, and EBITDA margins rising
gradually from 11.3% in 1997 to 13.0% in 2000 and remaining constant
thereafter. The Pillowtex Downside Case assumed more moderate revenue growth
and margin improvements. The Pillowtex Downside Case assumed revenue growth of
3.0% from 1998 to 2000 and 2.5% from 2001 to 2007, as well as an EBITDA margin
increase from 11.3% in 1997 to 12.5% in 2000, remaining constant thereafter.
CSFB calculated a reference range for Pillowtex based upon the present value of
Pillowtex's ten-year stream of unlevered free cash flows and fiscal year 2007
terminal value. The fiscal year 2007 terminal value of Pillowtex was
calculated by applying to Pillowtex's fiscal year 2007 EBITDA multiples ranging
from 6.5x to 7.0x, based on the EBITDA multiples from the Pillowtex Selected
Companies Analysis described below. Unlevered free cash flows and terminal
value estimates were then discounted to the present using discount rates of
10.0% to 10.5%, based on Pillowtex's estimated weighted average cost of
capital. This analysis resulted in a reference range for Pillowtex Common
Stock of $23.70 to $27.10 per share for the Pillowtex Base Case and $18.40 to
$21.36 per share for the Pillowtex Downside Case.
Pillowtex Selected Companies Analysis. CSFB compared certain financial
information of Pillowtex to corresponding data of the Selected Home Textile
Companies. The universe of comparables for Pillowtex was the same as for
Fieldcrest. CSFB compared the enterprise value of the Selected Home Textile
Companies as multiples of estimated fiscal 1997 EBITDA and 1997 and 1998 EPS.
Estimated financial data for the Selected Home Textile Companies was based on
estimates of equity research analysts. Applying a range of selected multiples
for the Selected Home Textile Companies of estimated 1997 EBITDA, and 1997 and
1998 EPS of 6.5x to 7.5x, 13.0x to 14.0x, and 11.0x to 12.0x, respectively, to
corresponding financial data of Pillowtex resulted in a reference range for
Pillowtex Common Stock of approximately $22.00 to $25.00 per share.
Pursuant to the terms of CSFB's engagement, the Special Committee has
agreed, on behalf of Fieldcrest, to pay CSFB for its services in connection
with the proposed Merger (i) a financial advisory fee of $275,000 (which will
be credited against the Transaction Fee), upon execution of the most recent
amendment to the engagement letter and (ii) upon consummation of the Merger, a
transaction fee of $3.8 million, plus 1% of the total fair market value (on the
date of payment) of all consideration paid to Fieldcrest or its stockholders
for the equity of Fieldcrest, including common stock, preferred stock, options,
and warrants (the "Transaction Fee"). Fieldcrest has also agreed to reimburse
CSFB for out-of-pocket expenses incurred by CSFB in performing its services,
including fees and expenses of legal counsel and any other advisor retained by
CSFB, and to indemnify CSFB and certain related persons and entities against
certain liabilities, including liabilities under the federal securities laws,
related to or arising out of CSFB's engagement.
CSFB has in the past performed certain investment banking services for
Fieldcrest, for which CSFB has received customary fees. In the ordinary course
of its business, CSFB and its affiliates may actively trade the debt and equity
securities of Fieldcrest and Pillowtex for their own accounts and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
36
<PAGE> 57
CERTAIN PROJECTED FINANCIAL INFORMATION OF FIELDCREST
In the course of the discussions described in "The Merger--Negotiations
Resulting in the Merger Agreement," Fieldcrest provided Pillowtex and its
financial advisor with certain business and financial information which was not
publicly available. Such information included, among other things, certain
financial projections for 1997 (the "Fieldcrest Projections") prepared by the
management of Fieldcrest. The Fieldcrest Projections do not take into account
any of the potential effects of the Merger. Set forth below is a summary of
the Fieldcrest Projections provided to Pillowtex.
SUMMARY STATEMENT OF INCOME
1997 FORECAST AS OF JULY 12, 1997
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1997
FORECAST
---------
<S> <C>
Net sales $ 1,151.3
Total cost of sales 970.6
---------
Gross profit 180.7
Selling, general, and administrative expenses 118.8
---------
Operating income 61.9
Interest expense 25.8
Other income 2.0
---------
Income before income taxes 38.1
Income taxes 14.1
---------
Net income $ 24.0
=========
Preferred dividends (4.5
---------
Earnings on common $ 19.5
=========
Earnings per share $ 2.13
=========
</TABLE>
The Fieldcrest Projections are included in this Joint Proxy
Statement/Prospectus only because such information was provided to Pillowtex
and Bear Stearns, its financial advisor, which relied upon such projections
when performing its analysis of Merger and in formulating its opinion as to the
fairness, from a financial point of view, of the total consideration to be
received in respect of each outstanding share of Fieldcrest Common Stock and
each outstanding share of Fieldcrest Preferred Stock to the shareholders of
Pillowtex. As a matter of course, neither Pillowtex nor Fieldcrest makes
public projections or forecasts of its anticipated financial position or
results of operations. Accordingly, neither Pillowtex nor Fieldcrest
anticipates that it will, and each of them disclaims any obligation to, furnish
updated projections to any person, cause such information to be included in
documents required to be filed with the Commission, or otherwise make such
information public (irrespective in any such case of whether the Fieldcrest
Projections, in light of events or developments occurring after the date
hereof, cease to have a reasonable basis).
While presented with numerical specificity, the Fieldcrest Projections
are based upon a variety of assumptions relating to general economic conditions
and the business of Fieldcrest which may not be realized and are subject to
significant uncertainties and contingencies, many of which are beyond the
control of Pillowtex and Fieldcrest. There can be no assurance that the
Fieldcrest Projections will be realized and actual results may vary materially
from those shown. The inclusion of the Fieldcrest Projections herein should
not be regarded as an indication that
37
<PAGE> 58
any of Pillowtex, Fieldcrest, or their respective financial advisors considers
such projections to be an accurate prediction of future events.
The Fieldcrest Projections were not prepared with a view to public
disclosure or compliance with published guidelines of the Commission or the
guidelines established by the American Institute of Certified Public
Accountants.
The Fieldcrest Projections should be evaluated in conjunction with the
historical financial statements and other information contained in reports and
statements filed with the Commission from time to time by Pillowtex and
Fieldcrest and the information set forth under the captions "Note Regarding
Forward-Looking Information" and "Risk Factors."
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger
Agreement. This summary is not a complete description of the terms and
conditions of the Merger Agreement and is qualified in its entirety by
reference to the full text of the Merger Agreement, which is incorporated by
reference and a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus.
The Merger. On the terms and subject to the conditions of the Merger
Agreement, at the Effective Time Newco will be merged with and into Fieldcrest
in accordance with the applicable provisions of the DGCL and the separate
corporate existence of Newco will thereupon cease (with the Surviving Company
being a subsidiary of Pillowtex).
On the fifth business day following the date on which the last of the
conditions set forth in the Merger Agreement (other than those that by their
nature are to be satisfied at the closing) is satisfied or waived, Newco and
Fieldcrest will cause a certificate of merger to be filed with the Secretary of
State of the State of Delaware as provided in the DGCL. Upon completion of
such filing, the Merger will become effective in accordance with the DGCL. The
Merger will have the effects specified in the DGCL.
Consideration to be Paid in the Merger. The Merger Agreement provides
that, on the terms and subject to the conditions of the Merger Agreement and in
accordance with the DGCL, at the Effective Time, by virtue of the Merger and
without any action on the part of any holder thereof: (i) each share of
Fieldcrest Common Stock issued and outstanding immediately prior to the
Effective Time (excluding shares of Fieldcrest Common Stock owned by
Fieldcrest, Pillowtex, or any subsidiary of Pillowtex or Fieldcrest and
Dissenting Shares) will be converted into the right to receive (a) a cash
payment in an amount equal to $27.00 (the "Cash Amount") and (b) a number of
fully paid and nonassessable shares of Pillowtex Common Stock equal to the
Conversion Number, i.e., the quotient, rounded to the third decimal place,
obtained by dividing $7.00 by the Determination Price (i.e., the average of the
closing sales prices of Pillowtex Common Stock as reported on the NYSE
Composite Transactions List for each of the 20 consecutive trading days
immediately preceding the fifth trading day prior to the Closing Date),
provided that if the actual quotient obtained thereby is less than 0.269, the
Conversion Number will be 0.269, and if the actual quotient obtained thereby is
more than 0.333, the Conversion Number will be 0.333, and provided further
that, if the Determination Price is less than $21.00, Pillowtex will have the
right to elect to increase the Cash Amount and/or the Conversion Number such
that the sum of (1) the Cash Amount and (2) the product of (A) the Conversion
Number and (B) the Determination Price equals $34.00 and, if Pillowtex does not
so elect, Fieldcrest will have the right to terminate the Merger Agreement;
(ii) each share of Fieldcrest Preferred Stock issued and outstanding
immediately prior to the Effective Time (excluding shares of Fieldcrest
Preferred Stock owned by Fieldcrest, Pillowtex, or any subsidiary of Fieldcrest
or Pillowtex and Dissenting Shares) will be converted into the right to receive
(a) a cash payment equal to the product of (1) the Cash Amount and (2) 1.7094
and (b) a number of fully paid and nonassessable shares of Pillowtex Common
Stock equal to the product of (1) the Conversion Number and (2) 1.7094; and
(iii) each share of common stock of Newco issued and outstanding immediately
prior to the Effective Time will be converted into and become one validly
issued, fully paid, and nonassessable share of common stock, par value $0.01
per share, of the Surviving Company. Each share of Fieldcrest Common Stock or
Fieldcrest Preferred Stock issued and outstanding immediately prior to the
38
<PAGE> 59
Effective Time that is owned by Fieldcrest, Pillowtex, or any subsidiary of
Pillowtex or Fieldcrest will automatically be canceled and retired without
payment of any consideration therefor and will cease to exist. The Fieldcrest
Board presently expects that it would exercise Fieldcrest's right to terminate
the Merger Agreement if the Determination Price were to be below $21.00 and
Pillowtex does not increase the merger consideration as described above. If
the Fieldcrest Board were to determine, based on the facts and circumstances
existing at the time, that it would not be in the best interests of
Fieldcrest's stockholders to terminate the Merger Agreement upon such
occurrences, then notice of that determination would be given and Fieldcrest
would at that time resolicit proxies from Fieldcrest's stockholders regarding
the vote on the Merger Agreement.
Dissenting Shares. In the event the Merger is effected and Fieldcrest
stockholders are entitled to receive the applicable consideration described
above, any shares of Fieldcrest Common Stock or Fieldcrest Preferred Stock
issued and outstanding immediately prior to the Effective Time held by a holder
who has the right to demand and who has properly demanded an appraisal of such
shares of Fieldcrest Common Stock or Fieldcrest Preferred Stock, as applicable,
in accordance with Section 262 of the DGCL (or any successor provision)
("Dissenting Shares") will not be converted into the right to receive the
applicable consideration, unless such holder fails to perfect or otherwise
loses such holder's right to such appraisal. If, after the Effective Time,
such holder fails to perfect or loses any such right to appraisal, each
Dissenting Share of such holder shall be treated as a share of Fieldcrest
Common Stock or Fieldcrest Preferred Stock, as applicable, that has been
converted as of the Effective Time into the right to receive the applicable
consideration, in accordance with the terms of the Merger Agreement.
Treatment of Fieldcrest Stock Options. The Merger Agreement provides
that each holder of a then-outstanding Fieldcrest Option, whether or not then
exercisable or fully vested, may elect, prior to the Effective Time, in
settlement thereof, to receive from Fieldcrest immediately prior to the
Effective Time for each share of Fieldcrest Common Stock subject to such
Fieldcrest Option an amount in cash equal to the difference between $34.00 and
the per share exercise price of such Fieldcrest Option, to the extent $34.00 is
greater than the per share exercise price of such Fieldcrest Option (such
excess amount, the "Option Consideration"). The Merger Agreement further
provides that, at the Effective Time, each outstanding Fieldcrest Option, other
than Fieldcrest Options for which an election to receive cash in settlement
thereof has been made pursuant to the Merger Agreement, shall be assumed by
Pillowtex and shall constitute an option to acquire, on substantially the same
terms and subject to substantially the same conditions as were applicable under
such Fieldcrest Option, including without limitation term, exercisability,
status as an "incentive stock option" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and termination provisions, a number of
shares of Pillowtex Common Stock (increased to the nearest whole share) equal
to the product of (i) the number of shares of Fieldcrest Common Stock subject
to such Fieldcrest Option immediately prior to the Effective Time and (ii) the
Option Conversion Number, (i.e., the quotient, rounded to the third decimal
place, obtained by dividing $34.00 by the Determination Price) at an exercise
price per share of Pillowtex Common Stock (increased to the nearest whole cent)
equal to the exercise price per share of Fieldcrest Common Stock subject to
such Fieldcrest Option immediately prior to the Effective Time divided by the
Option Conversion Number; provided that if the actual quotient obtained thereby
is less than 1.308, the Option Conversion Number will be 1.308, and if the
actual quotient obtained thereby is more than 1.619, the Option Conversion
Number will be 1.619, and provided further that, if Pillowtex elects to
increase the Conversion Number as described above, the Option Conversion Number
will be increased such that the product of (A) the Option Conversion Number and
(B) the Determination Price equals $34.00.
Fieldcrest has agreed to use its best efforts to obtain all necessary
waivers, consents, or releases from holders of Fieldcrest Options under the
Stock Option Plans and take any such other action as may be reasonably
necessary to give effect to the transactions described above and, with respect
to the Fieldcrest Options for which an election to receive cash in settlement
thereof has been made, to cause each such Fieldcrest Option to be surrendered
to Fieldcrest and canceled, whether or not any Option Consideration is payable
with respect thereto, at the Effective Time. The surrender of a Fieldcrest
Option to Pillowtex will be deemed a release of any and all rights the holder
had or may have had in such Fieldcrest Option, other than the right to receive
the Option Consideration in respect thereof. Pillowtex has also agreed to take
all corporate action necessary to reserve for issuance a sufficient number of
shares of Pillowtex Common Stock for delivery upon exercise of substitute
Fieldcrest Options, to register such shares with the Commission on an
appropriate registration statement, to maintain the effectiveness of such
39
<PAGE> 60
registration statement as long as the substitute options remain outstanding,
and to use all reasonable efforts to cause the shares of Pillowtex Common Stock
subject to the Fieldcrest Options to be listed on the NYSE and such other
exchanges as Pillowtex may determine.
Treatment of Fieldcrest SARs. Each holder of an outstanding Fieldcrest
SAR will be paid, at or immediately prior to the Effective Time, a cash amount
equal to the product of (i) the difference between $34.00 and the grant price
of such Fieldcrest SAR and (ii) the number of shares subject to such Fieldcrest
SAR.
Treatment of Fieldcrest Convertible Debentures. The Merger Agreement
provides that at the closing, (i) Fieldcrest will execute and deliver to the
trustee under the Indenture pursuant to which the Fieldcrest Convertible
Debentures were issued a supplemental indenture to become effective at the
Effective Time, providing that the holder of each Fieldcrest Convertible
Debenture outstanding immediately following the Effective Time shall have the
right thereafter, during the period such Fieldcrest Convertible Debenture shall
be convertible as specified in such Indenture, to convert such Fieldcrest
Convertible Debenture only into the amount of cash and Pillowtex Common Stock
receivable by reason of the Merger by a holder of the number of shares of
Fieldcrest Common Stock into which such Fieldcrest Convertible Debenture might
have been converted immediately prior to the Effective Time (subject to
subsequent adjustment as provided in such Indenture) and (ii) Pillowtex will
execute and deliver to such trustee, as part of such supplemental indenture, an
undertaking to reserve and keep available out of its authorized but unissued
capital stock, a number of shares of Pillowtex Common Stock sufficient to
permit the conversion of all outstanding Fieldcrest Convertible Debentures and
to cause to be issued and delivered to Fieldcrest for subsequent delivery by
Fieldcrest in accordance with such supplemental indenture and Indenture shares
of Pillowtex Common Stock upon the conversion of any Fieldcrest Convertible
Debenture. As a result of the Merger, for example, a Fieldcrest Convertible
Debenture having an aggregate principal amount of $1,000 will become
convertible into (i) a cash payment equal to the product of (a) the amount of
the cash payment to be made on account of each share of Fieldcrest Common Stock
converted in the Merger and (b) 22.60 and (ii) a number of shares of Pillowtex
Common Stock equal to the product of (a) the Conversion Number and (b) 22.60.
Fractional Shares. No fractional shares of Pillowtex Common Stock will
be issued pursuant to the Merger. In lieu of any such fractional shares, each
holder of Fieldcrest Common Stock or Fieldcrest Preferred Stock who otherwise
would be entitled to receive a fractional share of Pillowtex Common Stock
pursuant to the Merger will be paid an amount in cash (without interest),
rounded to the nearest cent, equal to the product of (i) the fraction of a
share of Pillowtex Common Stock to which such holder would otherwise be
entitled and (ii) the closing sales price of Pillowtex Common Stock on the NYSE
on the Closing Date. Any fractional shares of Pillowtex Common Stock that
would otherwise be issuable upon the conversion of Fieldcrest Convertible
Debentures will be eliminated and settled in the manner provided in the
Indenture setting forth the terms of the Fieldcrest Convertible Debentures.
Consequences of Failure to Approve the Share Issuance. The Merger
Agreement provides that, notwithstanding anything to the contrary set forth
therein, if Pillowtex's shareholders fail to approve the Share Issuance at the
Pillowtex Special Meeting: (i) the consideration to be paid to holders of
Fieldcrest Common Stock will be a cash payment in an amount equal to $34.00 per
share; (ii) the consideration to be paid to holders of Fieldcrest Preferred
Stock will be a cash payment in an amount equal to $58.12 per share; (iii) each
holder of a Fieldcrest Option will receive for each share of Fieldcrest Common
Stock subject to such Fieldcrest Option an amount in cash equal to the
difference between $34.00 and the per share exercise price of such Fieldcrest
Option; and (iv) the conditions described below in clauses (ii) and (iv) of the
first paragraph under the caption "--Conditions to the Merger" below will be
inapplicable. If the Pillowtex shareholders were to fail to approve the Share
Issuance, there can be no assurance that Pillowtex would be able to obtain
financing adequate to enable it to pay the amounts described in the immediately
preceding sentence on terms acceptable to Pillowtex, if at all. However, as of
the Pillowtex Record Date, Charles M. Hansen, Jr., Chairman of the Board and
Chief Executive Officer of Pillowtex, Mary R. Silverthorne, a director of
Pillowtex, the John H. Silverthorne Marital Trust B, and the John H.
Silverthorne Family Trust A owned, in the aggregate, approximately 52.4% of the
outstanding shares of Pillowtex Common Stock and each of Mr. Hansen and Ms.
Silverthorne has separately agreed to vote such shares of Pillowtex Common
Stock for the approval of the Share Issuance. Accordingly, the approval by
40
<PAGE> 61
Pillowtex's shareholders of the Share Issuance is expected to occur
irrespective of whether or the manner in which other Pillowtex shareholders
vote their shares.
Representations and Warranties. The Merger Agreement contains various
representations and warranties of the parties thereto. These include
representations by Fieldcrest with respect to: (i) organization, standing, and
corporate power; (ii) capitalization; (iii) authority and noncontravention;
(iv) Commission reports; (v) absence of certain changes or events; (vi) benefit
plans; (vii) taxes; (viii) voting requirements; (ix) compliance with laws; (x)
opinion of financial advisor; (xi) investment banking fees and commissions;
(xii) litigation; (xiii) environmental laws; (xiv) material contracts; (xv)
labor matters; (xvi) rights plan matters; and (xvii) real property and other
assets.
Pillowtex and Newco have also made certain representations and
warranties with respect to: (i) organization, standing, and corporate power;
(ii) capitalization; (iii) authority and noncontravention; (iv) Commission
reports; (v) absence of certain changes or events; (vi) certain matters with
respect to Newco and financing arrangements; (vii) investment banking fees and
commissions; (viii) compliance with laws; (ix) environmental laws; and (x)
litigation.
No representations and warranties made by Fieldcrest, Pillowtex, or
Newco will survive beyond the Effective Time.
No Solicitation. The Merger Agreement provides that, from and after the
date of the Merger Agreement until the termination of the Merger Agreement,
Fieldcrest will not, and will not authorize or permit any of its subsidiaries,
or any of its or their affiliates, officers, directors, employees, agents, or
representatives (including without limitation any investment banker, financial
advisor, attorney, or accountant retained by Fieldcrest or any of its
subsidiaries), to, directly or indirectly, initiate, solicit, or encourage
(including by way of furnishing information or assistance), or take any other
action to facilitate, any inquiries, any expression of interest, or the making
of any proposal that constitutes, or may reasonably be expected to lead to, an
Acquisition Proposal, or enter into or maintain or continue discussions or
negotiate with any person in furtherance of such inquiries or to obtain an
Acquisition Proposal or agree to or endorse any Acquisition Proposal; except
that nothing in the Merger Agreement will prohibit the Fieldcrest Board from
furnishing information to, or entering into, maintaining, or continuing
discussions or negotiations with, any person that makes an unsolicited
Acquisition Proposal after the date of the Merger Agreement, if, and to the
extent that, the Fieldcrest Board, after consultation with and based upon the
advice of independent legal counsel, determines in good faith that (i) such
Acquisition Proposal would be more favorable to the Fieldcrest stockholders
than the Merger and (ii) the failure to take such action would result in a
breach by the Fieldcrest Board of its fiduciary duties to the Fieldcrest
stockholders under applicable law, and, prior to furnishing any non-public
information to such person, receives from such person an executed
confidentiality agreement with provisions no less favorable to Fieldcrest than
the confidentiality agreement entered into by Pillowtex and Fieldcrest in
connection with the Merger. The Merger Agreement further provides that
Fieldcrest will promptly notify Pillowtex if it is prepared to provide access
to the properties, books, or records of Fieldcrest or any of its subsidiaries
to any person who has made an Acquisition Proposal, and Fieldcrest will at such
time inform Pillowtex of the material terms of any such Acquisition Proposal.
For purposes of the Merger Agreement, "Acquisition Proposal" means an inquiry,
offer, or proposal regarding any of the following (other than the transactions
contemplated by the Merger Agreement with Pillowtex or Newco) involving
Fieldcrest: (i) any merger, consolidation, share exchange, recapitalization,
business combination, or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer, or other disposition of all or
substantially all of the assets of Fieldcrest and its subsidiaries, taken as a
whole, in a single transaction or series of related transactions; (iii) any
tender offer or exchange offer for 33% or more of the outstanding shares of
capital stock of Fieldcrest or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan, or intention to do any of the foregoing, or any agreement to
engage in any of the foregoing.
Conditions to the Merger. Pursuant to the Merger Agreement, the
obligation of each party to effect the Merger is subject to the satisfaction or
written waiver on or prior to the Closing Date of the following conditions: (i)
the Merger Agreement shall have been approved and adopted by the affirmative
vote of the requisite number of Fieldcrest stockholders in the manner required
pursuant to Fieldcrest's Restated Certificate of Incorporation, as
41
<PAGE> 62
amended (the "Fieldcrest Certificate"), Fieldcrest's Amended and Restated
Bylaws (the "Fieldcrest Bylaws"), the DGCL and other applicable law, and the
rules of the NYSE; (ii) the Share Issuance shall have been approved by the
affirmative vote of the requisite number of shareholders of Pillowtex in the
manner required pursuant to the Pillowtex Articles and the Pillowtex Bylaws,
the Texas Business Corporation Act (the "TBCA") and other applicable law, and
the rules of the NYSE, (iii) no temporary restraining order, preliminary or
permanent injunction, or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; (iv) the shares of Pillowtex
Common Stock issuable to the Fieldcrest stockholders pursuant to the Merger
Agreement shall have been approved for listing on the NYSE, subject to official
notice of issuance; (v) the Registration Statement shall have been declared
effective under the Securities Act and not be the subject of any stop order or
proceedings seeking a stop order; and (vi) all necessary waiting periods under
the HSR Act applicable to the Merger shall have expired or been terminated.
The obligation of Pillowtex and Newco to effect the Merger is further
subject to satisfaction or written waiver on or prior to the Closing Date of
the following conditions: (i) the representations and warranties of Fieldcrest
contained in the Merger Agreement, which representations and warranties shall
be deemed for purposes of this condition not to include any qualification or
limitation with respect to materiality (whether by reference to "Material
Adverse Effect" or otherwise), shall be true and correct as of the Closing
Date, except where the matters in respect of which such representations and
warranties are not true and correct, in the aggregate, have not had or would
not have a Material Adverse Effect on Fieldcrest, with the same effect as
though such representations and warranties were made as of the Closing Date,
and Pillowtex and Newco shall have received a certificate signed on behalf of
Fieldcrest by an authorized officer of Fieldcrest to such effect; (ii)
Fieldcrest shall have performed in all material respects all obligations
required to be performed by it under the Merger Agreement at or prior to the
Closing Date, and Pillowtex and Newco shall have received a certificate signed
on behalf of Fieldcrest by an authorized officer of Fieldcrest to such effect;
and (iii) since the date of the Merger Agreement, Fieldcrest and its
subsidiaries, taken as a whole, shall not have experienced any change, event,
or occurrence particular to them (excluding industry, economic, financial, and
other matters generally affecting businesses other than and in addition to
Fieldcrest and its subsidiaries) that has had or would have a Material Adverse
Effect on Fieldcrest, other than resulting from any matter disclosed in any
documents filed with the Commission by Fieldcrest or in a disclosure schedule
to the Merger Agreement.
The obligation of Fieldcrest to effect the Merger is further subject to
satisfaction or waiver on or prior to the Closing Date of the following
conditions: (i) the representations and warranties of each of Pillowtex and
Newco contained in the Merger Agreement, which representations and warranties
shall be deemed for purposes of this condition not to include any qualification
or limitation with respect to materiality (whether by reference to "Material
Adverse Effect" or otherwise), shall be true and correct as of the Closing
Date, except where the matters in respect of which such representations and
warranties are not true and correct, in the aggregate, has not had or would not
have a Material Adverse Effect on Newco, with the same effect as though such
representations and warranties were made as of the Closing Date, and Fieldcrest
shall have received a certificate signed on behalf of Pillowtex and Newco by an
authorized officer of Pillowtex to such effect; (ii) each of Pillowtex and
Newco shall have performed in all material respects all obligations required to
be performed by it under the Merger Agreement at or prior to the Closing Date,
and Fieldcrest shall have received a certificate signed on behalf of Pillowtex
by an authorized officer of Pillowtex to such effect; and (iii) since the date
of the Merger Agreement, Pillowtex and its subsidiaries, taken as a whole,
shall not have experienced any change or occurrence particular to them
(excluding industry, economic, financial, and other matters generally affecting
businesses other than and in addition to Pillowtex and its subsidiaries) that
has had or would have a Material Adverse Effect on Pillowtex, other than
resulting from any matter disclosed in any document filed with the Commission
by Pillowtex or in a disclosure schedule to the Merger Agreement.
Termination. The Merger Agreement may be terminated and the
transactions contemplated thereby may be abandoned at any time prior to the
Effective Time, notwithstanding approval and adoption thereof by the Fieldcrest
stockholders, in any one of the following circumstances: (i) by mutual written
consent duly authorized by the Pillowtex Board and the Fieldcrest Board; (ii)
by Pillowtex or Fieldcrest, if, without any material breach by such terminating
party of its obligations under the Merger Agreement, the Effective Time shall
not have occurred on or before December 31, 1997; (iii) by Pillowtex or
Fieldcrest, if any federal or state court of competent jurisdiction or
42
<PAGE> 63
other governmental authority shall have issued an order, decree, or ruling, or
taken any other action permanently restraining, enjoining, or otherwise
prohibiting the Merger and such order, decree, ruling, or other action shall
have become final and non-appealable; (iv) by Pillowtex or Fieldcrest, if the
Fieldcrest Stockholders Meeting shall have been held and the Merger Agreement
shall not have been approved and adopted by the affirmative vote of the
requisite number of Fieldcrest stockholders; (v) by Fieldcrest, if it shall
have received an Acquisition Proposal and shall have advised Pillowtex in
writing that the Fieldcrest Board, after consultation with and based upon the
advice of independent legal counsel, determined in good faith that failure to
accept such Acquisition Proposal would result in a breach by the Fieldcrest
Board of its fiduciary duties to Fieldcrest's stockholders under applicable
law, except that the Merger Agreement may not be so terminated unless
simultaneously with the termination Fieldcrest shall have made the payment to
Pillowtex of the Termination Fee; (vi) by Pillowtex, if the Fieldcrest Board
shall have (a) withdrawn, modified, or amended in any adverse respect its
approval or recommendation of the Merger Agreement, the Merger, or the other
transactions contemplated by the Merger Agreement, (b) approved, endorsed, or
recommended to its stockholders an Acquisition Proposal, or (c) resolved to do
any of the foregoing; or (vii) by Pillowtex or Fieldcrest if (a) the other
party shall have failed to comply in any material respect with any of the
material covenants and agreements contained in the Merger Agreement to be
complied with or performed by such party at or prior to such date of
termination, and such failure continues for 20 business days after the actual
receipt by such party of a written notice from the other party setting forth in
detail the nature of such failure, or (b) a representation or warranty of the
other party contained in the Merger Agreement shall have been untrue in any
respect on the date when made (or in the case of any representations and
warranties that are made as of a different date, as of such different date) and
the matters in respect of which such representation and warranty shall have
been untrue has had or would have a Material Adverse Effect on such other
party. In the event the Merger Agreement is terminated based upon an event
described in clause (v) or (vi) above, Fieldcrest will be required to pay a
termination fee in the amount of $15.0 million (the "Termination Fee") to
Pillowtex.
Fieldcrest Stockholders Meeting. The Merger Agreement provides that
Fieldcrest will take all action necessary, in accordance with the DGCL, the
Exchange Act and other applicable law, the rules of the NYSE, and the
Fieldcrest Certificate and the Fieldcrest Bylaws, to convene a special meeting
of Fieldcrest stockholders as promptly as practicable after the effectiveness
of the Registration Statement for the purpose of considering and voting upon
the Merger Agreement. The Merger Agreement provides that, subject to
Fieldcrest's right to terminate the Merger Agreement described in clause (v) of
the paragraph under the caption "--Termination" above, the Fieldcrest Board
will recommend that the holders of the shares of Fieldcrest Common Stock vote
in favor of the approval and adoption of the Merger Agreement at the Fieldcrest
Special Meeting and such recommendation will be included in this Joint Proxy
Statement/Prospectus.
Pillowtex Shareholders Meeting. The Merger Agreement provides that
Pillowtex will take all action necessary in accordance with Exchange Act and
other applicable law, the rules of the NYSE, and the Pillowtex Articles and the
Pillowtex Bylaws, to convene a special meeting of the Pillowtex shareholders as
promptly as practicable after the effectiveness of the Registration Statement
for the purpose of considering and voting upon the Share Issuance. The Merger
Agreement provides that the Pillowtex Board will recommend that the holders of
the Pillowtex Common Stock vote in favor of and approve the Share Issuance.
Consents, Approvals, and Filings. The Merger Agreement provides that
each of the parties to the Merger Agreement will (i) make promptly its
respective filings, and thereafter make any other required submissions, under
the HSR Act, the Securities Act, and the Exchange Act with respect to the
Merger and the other transactions contemplated thereby (together, the
"Transactions") and (ii) use its reasonable best efforts to take, or cause to
be taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate and make effective the Transactions, including without limitation
using its reasonable best efforts to obtain all licenses, permits (including
without limitation environmental permits), consents, approvals, authorizations,
qualifications, and orders of governmental authorities, and parties to
contracts with Fieldcrest and its subsidiaries as are necessary for the
consummation of the Transactions and to fulfill the conditions to the Merger.
In addition, Pillowtex has agreed, among other things, to use its best efforts
to obtain any government clearances required for completion of the Merger
(including through compliance with the HSR Act) and to take any and all of the
following actions to the extent necessary to obtain the approval of any
governmental authority with jurisdiction over the enforcement of any applicable
laws regarding the Merger:
43
<PAGE> 64
enter into negotiations; provide information; substantially comply with any
second request for information pursuant to the HSR Act; enter into and perform
agreements or submit to judicial or administrative orders and sell or otherwise
dispose of, or hold separate (through the establishment of a trust or
otherwise) particular assets or categories of assets or businesses of
Pillowtex, Fieldcrest, or any of their affiliates; except that Pillowtex will
not be required to take any such action that would have a Material Adverse
Effect on Pillowtex and its subsidiaries (including the Surviving Company)
taken as a whole following the Effective Time. See "The Merger--Regulatory
Approvals."
Indemnification. The Merger Agreement provides that the certificate of
incorporation and by-laws of the Surviving Company will contain the provisions
with respect to indemnification set forth in the Fieldcrest Certificate and the
Fieldcrest Bylaws on the date of the Merger Agreement, which provisions will
not be amended, repealed, or otherwise modified for a period of six years after
the Effective Time in any manner that would adversely affect the rights
thereunder of individuals who at any time prior to the Effective Time were
directors or officers of Fieldcrest in respect of actions or omissions
occurring at or prior to the Effective Time (including without limitation the
transactions contemplated by the Merger Agreement), unless such modification is
required by law. The Merger Agreement further provides that Fieldcrest will,
and from and after the Effective Time, Pillowtex will, or will cause the
Surviving Company to, indemnify, defend, and hold harmless each person who is
now, or has previously been at any time or becomes prior to the Effective Time,
an officer or director of Fieldcrest (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorneys' fees
and expenses), liabilities, or judgments or amounts that are paid in
settlement, with the approval of the indemnifying party (which approval is not
to be unreasonably withheld), of or in connection with any threatened or actual
claim, action, suit, proceeding, or investigation based in whole or in part on
or arising in whole or in part out of the fact that such person is or was a
director or officer of Fieldcrest whether pertaining to any matter existing or
occurring at or prior to the Effective Time and whether asserted or claimed
prior to, or at or after, the Effective Time ("Indemnified Liabilities"),
including all Indemnified Liabilities based in whole or in part on, or arising
in whole or in part out of, or pertaining to the Merger Agreement or the
transactions contemplated thereby, in each case, to the full extent a
corporation is permitted under the DGCL to indemnify its own directors or
officers as the case may be (and Pillowtex and the Surviving Company, as the
case may be, will pay expenses in advance of the final disposition of any such
action or proceeding to each Indemnified Party to the full extent permitted by
law). Fieldcrest, Pillowtex, and Newco have agreed that all rights to
indemnification, including provisions relating to advances of expenses incurred
in defense of any action or suit, existing in favor of the Indemnified Parties
with respect to matters occurring through the Effective Time, will survive the
Merger and will continue in full force and effect for a period of not less than
six years from the Effective Time.
The Merger Agreement further provides that for a period of four years
after the Effective Time, Pillowtex will cause to be maintained in effect the
current policies of directors' and officers' liability insurance maintained by
Fieldcrest (except that Pillowtex may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions that are no less
advantageous in any material respect to the Indemnified Parties), with respect
to matters arising before the Effective Time, except that Pillowtex will not be
required to pay an annual premium for such insurance in excess of 200% of the
last annual premium paid by Fieldcrest prior to the date of the Merger
Agreement, but in such case will purchase as much coverage as possible for such
amount.
Employee Benefit Matters. Pillowtex, Newco, and Fieldcrest have agreed
in the Merger Agreement to certain matters with respect to the compensation and
benefit programs of the Surviving Company and its subsidiaries. The Merger
Agreement provides that Pillowtex will, and will cause its subsidiaries
following the Effective Time (including the Surviving Company) to: () honor
and provide for payment of all obligations and benefits under all of
Fieldcrest's employee benefit plans (the "Fieldcrest Plans") in accordance with
their terms; () provide employee benefits which are substantially comparable in
the aggregate to the level of employee benefits provided by Fieldcrest and its
subsidiaries under Fieldcrest's employee benefit plans (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended) (the
"Fieldcrest ERISA Plans") in effect as of the Closing Date for the benefit of
employees or former employees who are or had been employees of Fieldcrest or
any of its subsidiaries on or before the Closing Date ("Covered Employees"),
until the earlier of December 31, 1999 or the second anniversary of the Closing
Date; () honor and provide for the payment of all obligations and benefits
under all employment or severance agreements between Fieldcrest and any Covered
Employee in accordance with
44
<PAGE> 65
their terms; and () provide until the first anniversary of the Closing Date for
the benefit of Covered Employees who remain in the employ of the Surviving
Company or Pillowtex or any of its affiliates employee compensation that is in
the aggregate at a level substantially comparable to the compensation
(including base pay and incentive-type compensation) provided by Fieldcrest and
its subsidiaries under the compensation arrangements in effect as of the
Closing Date.
The Merger Agreement also provides that Pillowtex will cause the
Surviving Company (i) to maintain Fieldcrest's Short-Term Incentive
Compensation Plan without adverse change until the end of the 1997 calendar
year and (ii) to continue without adverse change the severance plan maintained
by Fieldcrest and its subsidiaries as of the date hereof until the first
anniversary of the Closing Date.
The Merger Agreement further provides that, if Covered Employees are
included in any benefit plan (including without limitation provision for
vacation) of Pillowtex or its subsidiaries, Covered Employees will receive
credit as employees of Fieldcrest and its subsidiaries to the same extent such
service was counted under similar Fieldcrest Plans for purposes of eligibility,
vesting, eligibility for retirement, and, with respect to vacation, disability,
and severance, benefit accrual and that, if Covered Employees are included in
any medical, dental, or health plan other than the plan or plans they
participated in on the Closing Date, any such plans will not include
pre-existing condition exclusions, except to the extent such exclusions were
applicable under the similar Fieldcrest Plan on the Closing Date, and will
provide credit for any deductibles and co-payments applied or made with respect
to each Covered Employee in the calendar year of the change.
In the Merger Agreement, the parties thereto acknowledged that nothing
therein will be deemed to be a commitment on the part of Pillowtex or the
Surviving Company to provide employment to any person for any period of time
and, except as otherwise provided in the Merger Agreement, nothing will be
deemed to prevent Pillowtex or the Surviving Company from amending or
terminating any Fieldcrest Plan in accordance with its terms.
Fees and Expenses. The Merger Agreement provides that, except as
described above, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement will be
paid by the party incurring the expenses, except that the costs incurred in
connection with printing and mailing proxy materials to Fieldcrest stockholders
and Pillowtex shareholders will be shared equally by Pillowtex and Fieldcrest.
Amendment. Subject to the applicable provisions of the DGCL, the Merger
Agreement may be modified or amended at any time prior to the Effective Time,
by Pillowtex, Newco, and Fieldcrest by written agreement executed and delivered
by duly authorized officers of the respective parties, except that after
approval and adoption of the Merger Agreement by the Fieldcrest stockholders,
no amendment will be made which would reduce the amount or change the type of
consideration into which each share of Fieldcrest Common Stock or Fieldcrest
Preferred Stock will be converted upon consummation of the Merger. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
STOCK EXCHANGE LISTING
Prior to the Effective Time, Pillowtex will file an application to list
the shares of Pillowtex Common Stock to be issued in connection with the Merger
on the NYSE, subject to official notice of issuance. It is a condition to the
parties' obligations to consummate the Merger that such shares will have been
approved for listing, subject to official notice of issuance. See "--The
Merger Agreement--Conditions to the Merger." The shares of Pillowtex Common
Stock are traded on the NYSE under the symbol "PTX."
DELISTING AND DEREGISTRATION OF FIELDCREST COMMON STOCK
If the Merger is consummated, the Fieldcrest Common Stock will be
delisted from the NYSE, the Fieldcrest Preferred Stock will be removed from
quotation by the Nasdaq, and both the Fieldcrest Common Stock and the
Fieldcrest Preferred Stock will be deregistered under the Exchange Act.
45
<PAGE> 66
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of
accounting, in accordance with generally accepted accounting principles. Under
the purchase method of accounting, the purchase price paid by Pillowtex for
Fieldcrest (including direct costs of the Merger) will be allocated to the
identifiable assets of Fieldcrest based upon estimates of the fair value of
Fieldcrest's identifiable assets and liabilities as of the Effective Time, with
the excess of the purchase price over the fair value of Fieldcrest's net
identifiable assets being allocated to goodwill. After the Merger, the
financial condition and results of operations of Fieldcrest will be included in
the consolidated financial condition and results of operations of Pillowtex.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the opinion of Jones, Day, Reavis
& Pogue delivered to Pillowtex and the opinion of Weil, Gotshal & Manges LLP
delivered to Fieldcrest, copies of which are filed as Exhibits 8.1 and 8.2,
respectively, to the Registration Statement and summarizes certain of the
principal federal income tax considerations of the Merger that are generally
applicable to holders of Fieldcrest Common Stock and Fieldcrest Preferred
Stock. This discussion does not deal with all income tax considerations that
may be relevant to particular Fieldcrest stockholders in light of their
particular circumstances, such as stockholders who are dealers in securities,
foreign persons, or stockholders who acquired their shares in connection with
stock option or stock purchase plans or in other compensatory transactions. No
foreign, state, or local tax considerations are addressed herein. ACCORDINGLY,
FIELDCREST STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL, AND
FOREIGN TAX CONSEQUENCES, OF THE MERGER IN THEIR INDIVIDUAL CIRCUMSTANCES.
Receipt of the Merger Consideration. The receipt by a Fieldcrest
stockholder of the merger consideration (including any cash amounts received by
dissenting stockholders pursuant to the exercise of appraisal rights) in
exchange for shares of Fieldcrest Common Stock or Fieldcrest Preferred Stock
will be a taxable transaction for federal income tax purposes. In general, for
federal income tax purposes, a stockholder will recognize gain (or loss) equal
to the difference between (i) the sum of the amount of cash and the fair market
value of the Pillowtex Common Stock received pursuant to the Merger and (ii)
the tax basis of the shares of Fieldcrest Common Stock or Fieldcrest Preferred
Stock exchanged pursuant to the Merger. Gain (or loss) must be determined
separately for each block of shares of Fieldcrest Common Stock or Fieldcrest
Preferred Stock (i.e., shares acquired at the same cost in a single
transaction) converted to shares of Pillowtex Common Stock and cash in the
Merger. Assuming that such shares of Fieldcrest Common Stock or Fieldcrest
Preferred Stock constitute capital assets in the stockholder's hands, such gain
(or loss) will be long-term gain (or loss) if, at the Effective Time, the
shares of Fieldcrest Common Stock or Fieldcrest Preferred Stock were held for
more than one year. The recently enacted Taxpayer Relief Act of 1997 reduces
the rate of federal income tax imposed on capital gains with respect to capital
assets held more than 18 months by noncorporate taxpayers. The basis of the
Pillowtex Common Stock received pursuant to the Merger will be its fair market
value at the time of the Merger, and the holding period thereof will begin on
the day following the day on which the Effective Time occurs.
Backup Withholding. Payments in connection with the Merger may be
subject to "backup withholding" at a 31% rate. Backup withholding generally
applies if the stockholder (a) fails to furnish his social security number or
other taxpayer identification number ("TIN"), (b) furnishes an incorrect TIN,
(c) fails properly to report interest or dividends, or (d) under certain
circumstances, fails to provide a certified statement, signed under penalties
of perjury, that the TIN provided is his correct number and that he is not
subject to backup withholding. Backup withholding is not an additional tax but
merely an advance payment, which may be refunded to the extent it results in an
overpayment of tax. Any amounts withheld from a payment to a stockholder under
the backup withholding rules will be allowed as a credit against such
stockholder's federal income tax liability, provided that the required
information is provided to the Internal Revenue Service. Certain persons
generally are exempt from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include the reportable payments in income. Each
stockholder should consult with his
46
<PAGE> 67
own tax advisor as to his qualification for exemption from withholding and the
procedure for obtaining such exemption.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO.
THUS, FIELDCREST STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER IN THEIR INDIVIDUAL CIRCUMSTANCES,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, AND OTHER APPLICABLE TAX LAWS, AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
REGULATORY APPROVALS
Pillowtex and Fieldcrest must observe the notification and waiting
period requirements of the HSR Act before the Merger may be consummated. The
HSR Act provides for an initial 30-calendar day waiting period following the
filing with the Antitrust Division and the FTC of certain Notification and
Report Forms by Pillowtex and Fieldcrest. The HSR Act further provides that
if, within the initial 30-calendar day waiting period, the FTC or the Antitrust
Division issues a request for additional information or documents, the waiting
period will be extended until 11:59 p.m. on the twentieth day after the date of
substantial compliance by the filing parties with such request. Only one such
extension of the initial waiting period is permitted under the HSR Act;
however, the filing parties may voluntarily extend the waiting period.
Pillowtex and Fieldcrest have made the requisite initial filings under
the HSR Act in connection with the Merger. The initial waiting period with
respect to such filings expired at 11:59 p.m. on October 17, 1997.
The FTC and the Antitrust Division frequently scrutinize the legality
under the antitrust laws of transactions such as the Merger. At any time
before or after the Effective Time, the FTC or the Antitrust Division could,
among other things, seek under the antitrust laws to enjoin the Merger or to
cause Pillowtex to divest itself, in whole or in part, of Fieldcrest or of
other businesses conducted by Pillowtex. Under certain circumstances, private
parties and state governmental authorities may also bring legal action under
the antitrust laws challenging the Merger. See "--The Merger
Agreement--Conditions to the Merger" and "--Consents, Approvals, and Filings."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. Certain members of Fieldcrest's management and the Fieldcrest
Board may be deemed to have certain interests in the Merger that are in
addition to their interests as stockholders of Fieldcrest generally. Such
interests relate to, among other things, provisions in the Merger Agreement
regarding the treatment of outstanding Fieldcrest Options and Fieldcrest SARs,
the performance and provision of obligations and benefits under existing
severance agreements and compensation and benefit plans, and the
indemnification of and provision of insurance coverage for the directors and
officers of Fieldcrest. The Fieldcrest Board was aware of these interests and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby. See "The Merger Agreement--Treatment of
Fieldcrest Stock Options," "--Treatment of Fieldcrest SARs," "--Employee
Benefit Matters," and "--Indemnification."
Fieldcrest Stock Options. Under Fieldcrest's 1995 Employee Stock Option
Plan, as of September 30, 1997, the executive officers of Fieldcrest listed in
the summary compensation table included in Fieldcrest's proxy statement
relating to its 1997 Annual Meeting of Stockholders other than one such
executive officer who retired from Fieldcrest effective as of May 1, 1997
(collectively, the "Fieldcrest Named Executive Officers") held Fieldcrest
Options to purchase an aggregate of 195,000 shares of Fieldcrest Common Stock
at exercise prices between $20.625 and $22.375 per share. Under Fieldcrest's
Director Stock Option Plan, as of November 5, 1997, the Fieldcrest directors
held Fieldcrest Options to purchase an aggregate of 61,000 shares of Fieldcrest
Common Stock at exercise prices between $13.00 and $25.625 per share. Under a
stock option agreement between Fieldcrest and James M. Fitzgibbons, as of
November 5, 1997, there were outstanding Fieldcrest
47
<PAGE> 68
Options to purchase an aggregate of 20,000 shares of Fieldcrest Common Stock at
an exercise price of $14.875 per share. Assuming the foregoing persons elected
to receive cash consideration in settlement of their Fieldcrest Options as a
result of the Merger, the Fieldcrest Named Executive Officers would be entitled
to aggregate payments of $2,850,000 and the Fieldcrest directors would be
entitled to receive aggregate payments of $758,875 in respect of their
Fieldcrest Options.
Fieldcrest SARs. Under Fieldcrest's 1994 Employee and Director Stock
Appreciation Rights Plan, as of November 5, 1997, there were outstanding 7,000
Fieldcrest SARs held by the non-employee directors having a grant price of
$25.625. The Fieldcrest directors would be entitled to receive aggregate cash
payments of $58,625 in respect of such Fieldcrest SARs as a result of the
Merger.
Fieldcrest Restricted Stock. As of November 5, 1997, there were 8,549
outstanding shares of Fieldcrest Common Stock granted under the Fieldcrest
Long-Term Incentive Plan held by the Fieldcrest Named Executive Officers that
remained subject to risk of forfeiture. Each of such shares will vest as a
result of the Merger and will be converted in the Merger into the right to
receive cash and shares of Pillowtex Common Stock as described in "The
Merger--The Merger Agreement--Consideration to Be Paid in the Merger." Assuming
the merger consideration has a value of $34.00 per share of Fieldcrest Common
Stock, the Fieldcrest Named Executive Officers would receive value in the
aggregate amount of $290,666 in respect of their restricted shares as a result
of the Merger.
Fieldcrest Retention Agreements. Approximately 60 executives of
Fieldcrest are parties to agreements under which they are entitled to a
lump-sum payment of an amount based on their base salary in the event of a
change in control of Fieldcrest (which will occur as a result of the Merger)
and a subsequent not-for-cause termination or constructive termination. Under
the agreements, upon a change in control of Fieldcrest and a subsequent
not-for-cause termination or constructive termination, the following executive
officers would be entitled to receive a lump-sum payment of their base salary
otherwise payable over the number of years specified: J. M. Fitzgibbons, 3
years; J. M. Nevin, 2 years; R. E. Dellinger, 2 years; and T. R. Staab, 2
years.
Other Matters. Pillowtex, Newco, and Fieldcrest have agreed in the
Merger Agreement to certain matters with respect to the compensation and
benefit programs of the Surviving Company and its subsidiaries. The Merger
Agreement provides that Pillowtex will, and will cause its subsidiaries
following the Effective Time (including the Surviving Company) to: (i) honor
and provide for payment of all obligations and benefits under all Fieldcrest
Plans in accordance with their terms; (ii) provide employee benefits which are
substantially comparable in the aggregate to the level of employee benefits
provided by Fieldcrest and its subsidiaries under the Fieldcrest ERISA Plans in
effect as of the Closing Date for the benefit of employees or former employees
who are or had been employees of Fieldcrest or any of its subsidiaries on or
before the Closing Date (i.e., Covered Employees), until the earlier of
December 31, 1999 or the second anniversary of the Closing Date; (iii) honor
and provide for the payment of all obligations and benefits under all
employment or severance agreements between Fieldcrest and any Covered Employee
in accordance with their terms; and (iv) provide until the first anniversary of
the Closing Date for the benefit of Covered Employees who remain in the employ
of the Surviving Company or Pillowtex or any of its affiliates employee
compensation that is in the aggregate at a level substantially comparable to
the compensation (including base pay and incentive-type compensation) provided
by Fieldcrest and its subsidiaries under the compensation arrangements in
effect as of the Closing Date.
The Merger Agreement also provides that Pillowtex will cause the
Surviving Company (i) to maintain Fieldcrest's Short-Term Incentive
Compensation Plan without adverse change until the end of the 1997 calendar
year and (ii) to continue without adverse change the severance plan maintained
by Fieldcrest and its subsidiaries as of the date hereof until the first
anniversary of the Closing Date.
The Merger Agreement further provides that, if Covered Employees are
included in any benefit plan (including without limitation provision for
vacation) of Pillowtex or its subsidiaries, Covered Employees will receive
credit as employees of Fieldcrest and its subsidiaries to the same extent such
service was counted under similar Fieldcrest Plans for purposes of eligibility,
vesting, eligibility for retirement, and, with respect to vacation, disability,
and severance, benefit accrual and that, if Covered Employees are included in
any medical, dental, or health plan other
48
<PAGE> 69
than the plan or plans they participated in on the Closing Date, any such plans
will not include pre-existing condition exclusions, except to the extent such
exclusions were applicable under the similar Fieldcrest Plan on the Closing
Date, and will provide credit for any deductibles and co-payments applied or
made with respect to each Covered Employee in the calendar year of the change.
APPRAISAL RIGHTS
Under Delaware law, holders of Fieldcrest Common Stock and holders of
Fieldcrest Preferred Stock are entitled to appraisal rights in connection with
the Merger. Any holder of record of Fieldcrest Common Stock or Fieldcrest
Preferred Stock who objects to the Merger may elect to have his shares
appraised under the procedures of the DGCL and to be paid the appraised value
of his shares, which, pursuant to Section 262 of the DGCL, will be the shares'
fair value exclusive of any element of value arising from the accomplishment or
expectation of the Merger. An appraisal proceeding may result in a
determination of fair value less than or greater than the value of the
consideration payable in respect of such shares.
Any holder of Fieldcrest Common Stock or Fieldcrest Preferred Stock
contemplating the exercise of appraisal rights is urged to review carefully the
provisions of Section 262 of the DGCL (a copy of which is attached as Appendix
D hereto), particularly with respect to the procedural steps required to
perfect the right of appraisal. The right of appraisal may be lost if the
procedural requirements of Section 262 of the DGCL are not followed exactly.
Set forth below, to be read in conjunction with the full text of Section 262 of
the DGCL attached as Appendix D hereto, is a summary of the procedures relating
to exercise of the right of appraisal.
Under Section 262 of the DGCL, a corporation, not less than 20 calendar
days prior to the meeting at which a proposed merger is to be voted on, must
notify each of its stockholders entitled to appraisal rights as of the record
date of the meeting that such appraisal rights are available and include in
such notice a copy of Section 262 of the DGCL. THIS JOINT PROXY
STATEMENT/PROSPECTUS CONSTITUTES SUCH NOTICE TO THE HOLDERS OF FIELDCREST
COMMON STOCK AND FIELDCREST PREFERRED STOCK.
A stockholder electing to exercise his, her, or its rights under Section
262 of the DGCL must deliver to Fieldcrest, before the taking of a vote with
respect to the adoption of the Merger Agreement, a written demand for appraisal
which reasonably informs Fieldcrest of the identity of the stockholder and that
the stockholder intends thereby to demand appraisal of his, her, or its shares.
A proxy or vote against the adoption of the Merger Agreement, or an abstention
or broker non-vote, will not constitute such a demand; a stockholder electing
to take such action must do so by a separate written demand. Such demands
should be mailed or delivered to Mark R. Townsend, Secretary, Fieldcrest
Cannon, Inc., One Lake Circle Drive, Kannapolis, North Carolina 28081. Within
ten calendar days after the Effective Time, the Surviving Company will notify
each stockholder who has made a proper written demand and who has not voted in
favor of adoption of the Merger Agreement of the Effective Time. A vote in
favor of the approval and adoption of the Merger Agreement will have the effect
of waiving all appraisal rights.
Within 120 calendar days after the Effective Time, Fieldcrest or any
stockholder who has complied with the foregoing notice requirement and any
other applicable requirements may file a petition in the Delaware Court of
Chancery (the "Court") demanding a determination of the value of the shares of
all stockholders who have complied with such provisions. However, because
Fieldcrest has no obligation to file such a petition and does not currently
intend to do so if any stockholders exercise appraisal rights, any stockholder
that desires that such a petition be filed is advised to do so on a timely
basis. If neither Fieldcrest nor any dissenting stockholder files a petition
for appraisal within 120 calendar days, all appraisal rights will terminate.
Any holder of shares may withdraw a demand for appraisal at any time within 60
calendar days after the Effective Time (or thereafter with the written consent
of Fieldcrest) and receive, pursuant to the terms of the Merger, the applicable
consideration for his, her, or its shares of Fieldcrest Common Stock or
Fieldcrest Preferred Stock. Notwithstanding the foregoing, no appraisal
proceeding in the Court will be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
49
<PAGE> 70
Within 120 calendar days after the Effective Time, any stockholder who
has complied with the above-described notice requirements and any other
applicable requirements may also deliver to Fieldcrest a written request for a
statement listing the aggregate number of shares of Fieldcrest Common Stock or
Fieldcrest Preferred Stock with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such a
statement will be mailed to the stockholder within ten calendar days after his
written request for it is received by Fieldcrest or within ten calendar days
after the Effective Time, whichever is later.
Upon the filing of any petition by a stockholder demanding appraisal,
service of a copy thereof will be made upon Fieldcrest, which will, within 20
calendar days after such service, file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by Fieldcrest. If a petition is filed by Fieldcrest, the petition will
be accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, will give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to Fieldcrest and to
the stockholders shown on the list at the addresses therein stated, and such
notice will also be given by publishing a notice at least one week from the day
of the hearing in a newspaper of general circulation published in Wilmington,
Delaware, or such publication as the Court deems advisable. The forms of the
notices by mail and by publication will be approved by the Court, and the costs
thereof will be borne by Fieldcrest.
After determining the stockholders entitled to an appraisal under
Section 262 of the DGCL, the Court will appraise the shares, determining their
fair value exclusive of any element of value arising from the accomplishment or
expectation of the Merger together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court will take into account all relevant factors. The Court will
direct the payment of the appraised value of the shares, together with
interest, if any, by Fieldcrest to the stockholders entitled thereto upon
surrender to Fieldcrest of the certificates representing such shares. The
costs of the appraisal proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including without limitation reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
of the shares entitled to an appraisal.
After the Effective Time, no stockholder who has demanded his appraisal
rights as set forth above will be entitled to vote his shares for any purpose
or to receive payment of dividends or other distributions on his shares (except
dividends or other distributions payable to stockholders of record at a date
prior to the Effective Time).
50
<PAGE> 71
POST-MERGER BUSINESS OF PILLOWTEX
INTRODUCTION
Following the Effective Time of the Merger, Pillowtex will operate the
businesses presently operated by Pillowtex and Fieldcrest. It is contemplated,
however, that following the consummation of the Merger Pillowtex will implement
measures intended to maximize economies of scale, operating efficiencies, and
cost savings in the operation of the businesses of Pillowtex and Fieldcrest on
a combined basis. For additional information in this regard, see "The
Merger--Pillowtex's Reasons for the Merger" and "Discussion and Analysis of
Financial Condition and Results of Operations."
Information regarding the business presently operated by each of
Pillowtex and Fieldcrest is set forth below.
BUSINESS PRESENTLY OPERATED BY PILLOWTEX
Products.
General. Pillowtex, originally founded in 1954 as a pillow
manufacturer, expanded its product lines through acquisitions into other
categories of top-of-the-bed home textiles including mattress pads, comforters,
and blankets. Pillowtex has been successful in integrating these acquisitions
into its existing operations, resulting in increased sales, more efficient
distribution, and a broader product line.
Pillowtex originally expanded its product line to include blankets
through the acquisition of Manetta Mills, Inc. in August 1993 and Tennessee
Woolen Mills, Inc. in September 1993. In addition, in December 1994, Pillowtex
acquired substantially all of the assets of Beacon Manufacturing Company
("Beacon"), a manufacturer of cotton and synthetic blankets and throws.
Pillowtex expanded its manufacturing operations into Canada through the
acquisition of Torfeaco Industries, Ltd. ("Torfeaco"), a manufacturer of
fashion and synthetic bedding products, in December 1993, and Imperial Feather
Company ("Imperial"), a manufacturer of bedding products, including natural
fill and synthetic bed pillows, down comforters, and comforter covers, in
August 1994. In 1996, Pillowtex acquired certain assets from Fieldcrest's
blanket operations, including a large number of newer, more efficient looms
that have been installed at Pillowtex's other blanket facilities.
The combination of its historic pillow operations with the acquired
top-of-the-bed product lines has enabled Pillowtex to build its core business
around four utility bedding product lines that have a low risk of obsolescence.
These include bed pillows (including natural fill, synthetic fiber fill, and
latex), blankets (including cotton, wool blends, acrylic, and polyester
blankets and throws), down comforters, and mattress pads (including thread
quilt, sonic quilt, and convoluted foam). Pillowtex also sells other bedroom
textile furnishings, including comforter covers, featherbeds, pillow
protectors, decorative pillows, bedspreads, synthetic comforters, pillow shams,
dust ruffles, and window treatments.
Bed Pillows. Pillowtex believes that it is a leading manufacturer and
marketer of bed pillows in the United States and Canada. Pillowtex produces
and markets a broad line of traditional bed pillows, as well as specially
designed bed pillows such as the BedMate(R) body pillow and Great Shapes(R)
pillows, including Euro Square, U-Neck, and Neck Roll. Pillowtex offers
products at various levels of quality and price, from synthetic pillows sold at
retail prices as low as $4 to fine white goose down pillows sold at a retail
price of up to approximately $185.
Pillowtex believes that it is a leading feather and down pillow
manufacturer in the United States and Canada, offering products filled with
quality goose and duck down, or blends of feather and down, in a range of
grades. These materials, known as "natural fill," are noted for their loft and
resiliency.
51
<PAGE> 72
Pillowtex also manufactures and markets a full line of bed pillows
featuring staple (cut and crimped), tow (continuous filament), and cluster
(individual ball) synthetic fiber fills. Pillowtex believes that it is a
leading supplier of premium synthetic and latex bed pillows in the United
States and Canada.
Blankets. Pillowtex believes that it is a leading producer of blankets
in the United States and Canada, manufacturing woven and nonwoven conventional
and thermal weave blankets and throws in a wide assortment of fibers, including
cotton, wool blend, acrylic, and polyester. Pillowtex is the exclusive
supplier in the United States and Canada of blankets for Polo/Ralph Lauren
Corporation. Pillowtex has a strong presence in the infant blanket market with
products ranging from nonwoven receiving blankets, to jacquard throws, to the
finest Supima(R) cotton crib blanket. Pillowtex also designs and manufactures
a full line of decorative cotton and acrylic jacquard throws.
Down Comforters. Pillowtex was a pioneer in marketing down comforters
in the United States, and Pillowtex believes that it is a leading manufacturer
and marketer of down comforters in the United States and Canada. Down
comforters have become increasingly popular for both their insulation and
fashion qualities, selling well in both warm and cool climates. They sell at
department stores at prices ranging from $70 to approximately $400.
Increasingly popular higher end comforters typically offer more down fill,
sport higher thread count shells, and feature more appealing "surface
interest," such as damask dots, stripes, and checks.
Mattress Pads. Pillowtex believes that it is a leading manufacturer and
marketer of mattress pads in the United States and Canada, producing and
marketing a complete line of mattress pads, including sizes for adults and
children, natural and synthetic filled, flat, and fitted as well as its skirted
Adjust-A-Fit(R) mattress pad, an adjustable fit mattress pad made with
Lycra(R), a multidirectional stretch material produced by E.I. DuPont de
Nemours & Co. ("DuPont"). The Adjust-A-Fit(R) mattress pad correctly fits a
broad range of mattress thicknesses, including pillow top mattresses.
Other Bedroom Textiles. Pillowtex offers a variety of other
complementary bedroom textile products including comforter covers, featherbeds,
pillow protectors, synthetic fill comforters, decorative pillows, pillow shams,
dust ruffles, and window treatments. These products represent a source of
additional profitability as "add-on" sales for retailers.
Marketing, Sales, and Distribution. Pillowtex markets its products to
virtually all major retailers through channels of distribution that include
department and specialty stores, mass merchants, discounters, and catalogs, as
well as institutional suppliers. Pillowtex believes that it is one of the
principal suppliers of bedroom textile products to several of the largest
retailers in the United States. Pillowtex's top ten customers accounted for
approximately 65% of total sales in 1996. Wal-Mart and Dayton Hudson accounted
for 14% and 13% of Pillowtex's total sales in 1996, respectively. No other
customer accounted for more than 10% of total sales in 1996. For the nine
months ended September 27, 1997, sales to Wal-Mart and Dayton Hudson accounted
for 12% and 13%, respectively, of Pillowtex's total sales. Consistent with
industry practice, Pillowtex does not generally operate under long-term written
supply contracts with its customers. See "Risk Factors--Risk of Loss of
Material Customers."
Pillowtex's current international business is concentrated in Canada,
although it also sells in Mexico, Latin America, and overseas. Pillowtex's
acquisition of Torfeaco in 1993, and of Imperial and Beacon in 1994, greatly
enhanced Pillowtex's market position in Canada and its relationships with
important Canadian retailers.
Pillowtex's relationship with the Polo/Ralph Lauren Corporation began in
1987 and Ralph Lauren is among Pillowtex's most important licensed trademarks.
Pillowtex holds an exclusive license for pillows, down comforters, mattress
pads, and blankets in the United States and Canada, and a non-exclusive license
to manufacture, and in certain cases to sell, a variety of fashion bedding
products in the territory. Such licenses expire on June 30, 1998. Ralph
Lauren products are sold worldwide to fine department and specialty stores.
In an effort to maximize Pillowtex's product exposure and increase
sales, Pillowtex works closely with its major customers to assist them in
merchandising and promoting Pillowtex's products to the consumer. In addition
to frequent personal consultation with the employees of these customers,
Pillowtex meets with its customers' senior
52
<PAGE> 73
management periodically to jointly develop merchandise assortments and plan
promotional events specifically tailored to that customer. Pillowtex provides
merchandising assistance with store layouts, fixture designs, advertising, and
point of sale displays and also provides customers with preprinted, customized
advertising materials designed to increase sales.
Pillowtex's electronic data interchange system allows customers to
place, and allows Pillowtex to fill, track, and bill, orders by computer. This
system enables Pillowtex to ship products on a "quick response" basis.
Pillowtex generally employs salespeople who have many years of industry
experience. Most salespeople are compensated with a combination of salary and
discretionary bonus. Certain Ralph Lauren products are sold by the Polo/Ralph
Lauren Corporation sales force.
Trademarks and License Agreements. Pillowtex markets its products under
its own proprietary trademarks, trade names, and customer-owned private labels,
as well as certain licensed trademarks and trade names. Pillowtex uses
trademarks, trade names, and private labels as merchandising tools to assist
its customers in coordinating their product offerings and differentiating their
products from those of their competitors.
Pillowtex owns various trademarks and trade names, including Beacon(R),
Nettle Creek(R), Softie(R), Globe(R), and BedMate(R). Pillowtex regards its
trademarks and trade names as valuable assets and vigorously protects them
against infringement.
Pillowtex holds the exclusive license for the highly regarded Ralph
Lauren trademark for pillows, down comforters, mattress pads, and blankets in
the United States and Canada. In addition, Pillowtex holds a non-exclusive
license to manufacture, and in certain cases sell, a variety of fashion bedding
products under the Ralph Lauren trademark in North America. Pillowtex's
licenses with Polo/Ralph Lauren Corporation expire on June 30, 1998. In
addition, Pillowtex manufactures and sells various goods, including pillows,
blankets, and throws under non-exclusive license agreements with Disney for the
Disney standard characters including Mickey Mouse, Minnie Mouse, and Donald
Duck, as well as other characters and film properties such as Winnie the Pooh
and the Lion King. These license agreements generally require royalty payments
based upon product sales, including payments of minimum annual royalties, and
generally expire at various future dates from 1997 to 1998. See "Risk
Factors--Dependence on Key Licenses."
In 1996, Pillowtex entered into exclusive license agreements with
Fieldcrest for the manufacture and sale of various goods including bed pillows,
mattress pads, and down comforters under the Royal Velvet(R), Cannon(R),
Charisma(R), and Touch of Class(R) trademarks. See "The Parties--Certain Prior
Transactions Between Pillowtex and Fieldcrest."
Product Development. Pillowtex's product development staff creates and
develops products with new or superior performance characteristics in
cooperation with various outside sources, including its suppliers and
customers. Pillowtex believes that this ability is an important competitive
advantage. As a result, Pillowtex commits time and resources to identifying
new materials, designs, and products from a variety of domestic and
international vendors.
In addition to internal product development, Pillowtex's acquisitions
have expanded its product lines and enhanced its manufacturing and other
resources available for developing existing and new product lines.
Manufacturing, Raw Materials, and Imports. Pillowtex operates an
extensive network of manufacturing and distribution facilities in Texas, North
Carolina, South Carolina, Tennessee, California, Pennsylvania, Mississippi,
Illinois, and Toronto, Canada. Pillowtex's nationwide manufacturing and
distribution network enables Pillowtex to ship pillows, mattress pads, and
comforters cost effectively to all major cities in the United States and
Canada. The hub of the network for pillows and comforters is located in
Dallas, Texas, where Pillowtex operates what it believes to be the largest
feather and down processing facility in North America, producing significant
economies of scale. Feather and down are processed by state-of-the-art
computerized washing and sorting equipment and are sorted into a variety of
mixtures and grades used in manufacturing natural fill pillows and comforters.
The raw
53
<PAGE> 74
materials are shipped along with imported products to Pillowtex's regional
facilities for final assembly and distribution to customers. Pillowtex also
operates an automated sewing facility in Dallas, Texas, where high speed,
computerized machines cut and sew fabric into pillow shells.
Many of Pillowtex's regional manufacturing facilities produce natural
fill and synthetic fill pillows. Natural fill pillows are assembled by blowing
processed feather and down into the pillow shell and sewing the open seam
closed. Synthetic fill pillows are produced on machines known as garnets that
pull, comb, and expand compressed polyester fibers. Once expanded, the fibers
are inserted into a pillow shell and the open seam is sewn shut.
Mattress pads are manufactured at the California, Mississippi,
Pennsylvania, and Toronto, Canada facilities by two automated methods. The
traditional quilt sewing method uses high speed equipment that sews the top,
bottom, and fill material together. The sonic method fuses the top, bottom,
and fill material together.
Pillowtex's line of natural fill comforters are manufactured by
Pillowtex at its California, Illinois, Pennsylvania, Mississippi, and Toronto,
Canada locations using processed down from the Dallas facility. Pillowtex
imports the majority of its comforter shells from China, Hong Kong, and India.
Pillowtex produces blankets and spins yarn at manufacturing facilities
in North Carolina, South Carolina, and Tennessee. These plants provide full
vertical production capability, including spinning, weaving, dyeing, and
finishing. During 1996, Pillowtex acquired a 746,600 square foot warehouse in
Mauldin, South Carolina to consolidate the operations of four smaller
warehouses in a more central distribution facility.
In late 1996, Pillowtex acquired certain assets from Fieldcrest's
blanket operations, including newer and faster equipment which has been
installed at Pillowtex's existing blanket facilities. As with its other lines
of business, Pillowtex plans the continuation of equipment and plant upgrades
over the next several years in order to increase production efficiency and add
capacity.
Pillowtex's quality control program is designed to assure that its
products meet predetermined quality standards established both internally and
by its customers. Pillowtex has devoted significant resources to support its
quality improvement efforts. Each manufacturing facility is staffed with a
quality control team that identifies and resolves quality issues. Pillowtex
attempts to maintain close contact with customer quality control or other
appropriate personnel to assure that Pillowtex understands the customer's
requirements.
Pillowtex analyzes feather and down and other raw materials, as well as
finished products of both Pillowtex and its competitors, at its facilities in
Dallas, Texas. Pillowtex maintains a computerized tracking system to monitor
feather and down processing from the receipt of raw materials through the
delivery of finished products. At the blanket production plants, numerous
distinct quality check points are monitored throughout the manufacturing
process. Pillowtex also has a program with its major suppliers to assure the
consistency of purchased raw materials by imposing strict standards and
materials inspection, and requiring rapid response to Pillowtex's complaints.
The principal raw materials that Pillowtex uses in manufacturing its
products are: feather and down; synthetic (polyester and acrylic), cotton, and
wool fibers; and cotton and polyester-cotton blend fabrics. Pillowtex imports
feather and down from several sources outside the United States. A majority of
such purchases are from China, where feather and down are by-products of ducks
and geese raised for food. Pillowtex believes that it is currently the largest
United States importer of feather and down from China, the world's largest
producing country. Pillowtex is generally able to purchase feather and down
from its suppliers in China on open credit terms without letters of credit.
See "Risk Factors--Dependence on Supply Sources in China."
As of July 1, 1996, quota restrictions on down comforter shells from
China were eliminated, allowing Pillowtex to import shells on an unlimited and
as-needed basis.
Pillowtex purchases its Adjust-A-Fit(R) mattress pad Lycra(R) skirting
from DuPont. Because of DuPont's patent on Lycra(R), it is the exclusive
supplier for this material. Pillowtex believes that the risk that DuPont will
cease to
54
<PAGE> 75
manufacture and sell Lycra(R) to Pillowtex is minimal. Pillowtex purchases
synthetic fiber from, among others, DuPont, Wellman, Inc., Monsanto Company,
Cytec Industries Inc., Hoechst Celanese Textile Fibers, and Kanematsu U.S.A.
Inc. To reduce the effect of potential price fluctuations, Pillowtex makes
commitments from time to time for future purchases of synthetic and natural
fibers. In 1996, Pillowtex experienced some decreases in costs of cotton and
synthetic raw materials, however, cotton in particular is subject to price
volatility. See "Risk Factors--Dependence on Raw Materials."
Pillowtex uses fabric purchased from third parties in the production of
pillow shells, comforter covers, and various other products. Although
Pillowtex believes that fabric is a commodity-type product that is available
from numerous sources, Pillowtex currently purchases large quantities of pillow
ticking fabric from a single supplier, Santee Print Works, in order to control
costs and quality. Consistent with industry practice, Pillowtex and Santee
Print Works have not entered into a long-term supply contract; however, to
reduce the effect of potential price fluctuations Pillowtex makes commitments
from time to time for future purchases from Santee Print Works.
Management of Pillowtex believes that its relationships with its
suppliers are good.
Employees. As of November 5, 1997, Pillowtex had approximately 4,000
employees. Pillowtex is subject to five collective bargaining agreements
covering approximately 625 employees. These agreements are between Pillowtex
and each of United Auto Workers; Warehouse, Mail Order, Office, Technical and
Professional Employees (Teamsters); and UNITE. One of these agreements expires
August 1, 1999; the remainder expire in the first quarter of 2000.
To date, none of these unions have engaged in strikes or work stoppages
against Pillowtex. Pillowtex believes that its relationships with both its
union and non-union employees are good. See "Risk Factors--Labor Relations."
Facilities. The following table summarizes certain information
concerning certain of Pillowtex's facilities:
<TABLE>
<CAPTION>
APPROX. OWNED/
LOCATION PRINCIPAL USE SQUARE FEET LEASED
-------- ------------- ----------- ------
<S> <C> <C> <C>
Dallas, Texas Headquarters and feather and down processing 104,000 Owned
Dallas, Texas General administration, manufacturing and distribution 150,000 Owned
Los Angeles, California Manufacturing and distribution 320,000 Leased
Tunica, Mississippi Manufacturing and distribution 288,000 Owned
Hanover, Pennsylvania Manufacturing and distribution 291,000 Owned
Rocky Mount, North Carolina Manufacturing and distribution 139,000 Owned
Rocky Mount, North Carolina Manufacturing and distribution 78,000 Leased
Chicago, Illinois Manufacturing and distribution 121,000 Owned
New York, New York Principal sales office and showroom 12,500 Leased
Monroe, North Carolina Manufacturing and distribution 288,000 Leased
Goodlettsville, Tennessee Warehouse and distribution 158,000 Leased
Lebanon, Tennessee Warehouse and distribution 53,000 Leased
Lebanon, Tennessee Manufacturing 175,000 Owned
Toronto, Ontario, Canada Manufacturing and distribution 99,000 Leased
Toronto, Ontario, Canada Manufacturing and distribution 60,000 Leased
Swannanoa, North Carolina Manufacturing, distribution, warehouse, and office 1,425,000 Owned
Swannanoa, North Carolina Outlet Store 5,000 Owned
Asheville, North Carolina Warehouse 177,000 Leased
Asheville, North Carolina Warehouse 254,000 Leased
Asheville, North Carolina Warehouse 185,000 Leased
Westminster, South Carolina Manufacturing, distribution, warehouse, and office 652,000 Owned
Westminster, South Carolina Warehouse 29,000 Leased
Newton, North Carolina Manufacturing and distribution 297,000 Leased
Mauldin, South Carolina Warehouse and distribution 746,600 Owned
</TABLE>
Pillowtex also maintains small sales offices for its sales staff in
Arkansas, California, Massachusetts, Minnesota, North Carolina, and Washington.
55
<PAGE> 76
Pillowtex believes that its facilities are generally well maintained, in
good operating condition and adequate for its current needs. Pillowtex will
continue to emphasize improvements at these plants, upgrading the physical
plant and purchasing additional and newer machinery and equipment.
Legal Proceedings. Louisville Bedding Company ("Louisville") filed a
complaint for patent infringement against Pillowtex in the United States
District Court for the Western District of Kentucky, Louisville Division, in
1994. Louisville's complaint alleges that certain of Pillowtex's
Adjust-A-Fit(R) mattress pad product lines infringe on certain of Louisville's
patents. Louisville's allegations relate both to Pillowtex's current mattress
pad product line as well as to certain discontinued product lines sold from
1991 through 1995. Louisville's complaint seeks an injunction against
Pillowtex's sale of its current Adjust-A-Fit(R) mattress pad line, as well as
an accounting of profits and unspecified damages relating to both Pillowtex's
current and discontinued product lines. In addition, Louisville's complaint
seeks trebled damages, interest, costs, and attorneys' fees.
During April of 1997, Louisville voluntarily dismissed its infringement
claims against Pillowtex's current opening price point mattress pad line and,
during October of 1997, the district court granted summary judgment for
Pillowtex on the issue of infringement with respect to Pillowtex's current
premium product. In Pillowtex's view, the district court's opinion completely
removed all of its current products from the case. Louisville disagrees as to
the scope of the district court's opinion, and the parties are awaiting
clarification from the court on this aspect of the order. Pillowtex believes
that the issues with respect to the court's order will be resolved in its
favor, and, accordingly, Pillowtex does not expect the Louisville suit to have
any effect on Pillowtex's continued right to market its current line of
Adjust-A-Fit(R) mattress pads. Notwithstanding the foregoing, Louisville
continues to allege that Pillowtex's discontinued product lines infringed upon
the Louisville patents at the time of their sale and continue to seek an
accounting of profits, trebled damages, interest, costs, and attorneys' fees
with respect to Pillowtex's discontinued mattress pad line. Pillowtex
continues to deny Louisville's allegations and is vigorously defending the
suit.
BUSINESS PRESENTLY OPERATED BY FIELDCREST
Products
General. Fieldcrest manufactures and markets quality bed and bath
products, including towels, sheets, comforters, and bath rugs, which are sold
under such brand names as Royal Velvet(R), Cannon(R), Fieldcrest(R),
Charisma(R), St. Mary's(R), and Royal Family(R).
Towels. Fieldcrest's bathroom textile products include bath, hand, and
fingertip towels, washcloths, and bath mats. Royal Velvet(R), Cannon(R),
Charisma(R), Fieldcrest(R), and St. Mary's(R) are well-known, high quality
towel brand names, providing Fieldcrest with a strong market position in key
sectors of the United States market. Fieldcrest is also recognized as a color
leader in the towel industry as it markets 40 colors in its Royal Velvet(R)
franchise. In the marketplace, Fieldcrest differentiates its towels by using
fine ring spun cotton yarns to produce Royal Velvet(R) towels and pima cotton
yarns for Charisma(R). The towel line includes solid color cam and dobby
towels, woven stripes, and fancy jacquards, as well as printed towels. Retail
prices of Fieldcrest's towels range from $1.99 for a 25 inch by 40 inch solid
color towel to $24.99 for a 30 inch by 52 inch Charisma(R) towel made of
Supima(R) cotton.
Bath Rugs. Fieldcrest markets a variety of bath and accent rugs in
conjunction with its towel offering. Sizes range from 18 inches by 30 inches
to 50 inches by 30 inches. Products are marketed under the Royal Velvet(R),
Charisma(R), Fieldcrest(R) Cannon(R), and Cannon Royal Family(R) brands, as
well as private labels. Retail prices for bath rugs range from $4.99 to
$35.00.
Other Bath Products. Fieldcrest markets shower curtains and ceramic
bath accessories as complementary bath products for its towel and bath mat
product lines. Most of these products are purchased from third party vendors.
Retail prices for shower curtains range from $11.99 for decorative vinyl prints
to $75 for a valanced, fabric shower curtain; retail prices for bath
accessories start at $5.99 for a plastic soap dish up to $75 for a hand-painted
metal wastebasket.
56
<PAGE> 77
Sheets and Fashion Bedding. Fieldcrest produces a wide variety of
sheets, ranging from a 128-thread count sheet of blended cotton and polyester
to top-of-the-line 310-thread count 100% cotton sheets. Its principal brand
names for this product line include Cannon(R), Fieldcrest(R), Royal Velvet(R),
and Charisma(R), all of which are widely recognized by consumers. Among
Fieldcrest's sheeting strengths are solid color sheets with coordinating
decorative bedding accessories. In addition to sheets, Fieldcrest's fashion
bedding products consist of matching comforters, duvet covers, and pillow shams
along with coordinated ruffled or pleated bed sheets. Retail prices of
Fieldcrest's sheets start at approximately $6.99 for a twin size, 128-thread
count sheet set and extend to $150.00 for a king size, 310-thread count
Charisma(R) sheet. Comforters are sold at retail prices as low as $19.99 for a
solid color twin size to approximately $440.00 for a king size Charisma(R)
comforter.
Furniture Covering Products. Fieldcrest also manufactures and markets a
full line of ready-made furniture coverings through its SureFit(R) operations.
Product sizes include chair, love-seat, sofa, and large sofa. These products
sell at retail prices ranging from $16.99 for lower-end solid and
polyester-cotton prints to $199.99 for novelty upholstery weight sofa covers.
Marketing, Sales, and Distribution. Fieldcrest offers its customers a
broad selection of home textile items, from affordably priced cotton-polyester
blend products to the finest 100% pima and Supima(R) cotton products. Design
leadership is a key element of Fieldcrest's marketing strategy. Fieldcrest
employs in-house design staff, as well as licensing designer names such as
Waverly(R), Adrienne Vittadini(R), Court of Versailles(R), and Ellen Tracy(R).
Fieldcrest's products are marketed by its sales and marketing staff consisting
of approximately 115 professionals and distributed nationally to customers for
ultimate retail sale. Fieldcrest generally introduces new products to the
retail trade during the April and October industry home textile markets, while
private label products manufactured by Fieldcrest are introduced throughout the
year. Fieldcrest's top ten customers accounted for approximately 53% of total
sales for fiscal 1996. In 1996, Wal-Mart was Fieldcrest's largest customer,
representing approximately 21% of total sales. No other customer accounted for
more than 10% of total sales in 1996. See "Risk Factors--Risk of Loss of
Material Customers."
As a supplement to its primary distribution channels, Fieldcrest
operates retail outlet stores which sell Fieldcrest's products directly to
customers. These stores sell both first quality merchandise and seconds or
"off-goods." Fieldcrest's strategy is to locate its outlet stores in regions
which are not served by its primary customers and to sell its products at
competitive retail prices. Fieldcrest believes that its retail outlet stores
provide an effective channel for the distribution of its inventory of second
quality merchandise and enhances its distribution of first quality products in
regions where consumers would not otherwise have access to Fieldcrest's
products. In 1996, retail outlet stores sales were $46.3 million or 4.2% of
total sales.
Fieldcrest segments its use of brand names by distribution channel to
solidify the perceived value of such brands and maintain their integrity.
Royal Velvet(R), Fieldcrest(R), and Cannon Royal Family(R) brand name bed and
bath products are distributed primarily to leading department stores, specialty
home furnishing stores, and catalog merchants. St. Mary's(R) and Cannon(R)
brand name bed and bath products are distributed through mass merchants.
Fieldcrest supports its brands with national consumer advertising. In
addition, Fieldcrest utilizes private brands through large chain stores and
also sells a smaller amount of unbranded products to institutional and
government customers. In 1996, approximately 93% of Fieldcrest's sales were
derived from products carrying Fieldcrest's brand names.
The Fieldcrest sales organization works closely with its customers in
the development of new product, production planning, and forecasting of the
business. Fieldcrest is currently working with several mass retailers on
vendor-managed and co-managed inventory replenishment. Fieldcrest also
develops in-store collateral signing for its retail customers on the Royal
Velvet(R) bed and bath events.
Fieldcrest sales and marketing personnel generally are experienced
industry professionals with diverse backgrounds in the home textiles business
and compensated with a salary and a performance-oriented bonus.
57
<PAGE> 78
Trademarks and License Agreements. Fieldcrest owns various trademarks
and trade names, including Royal Velvet(R), Cannon(R), Charisma(R),
Fieldcrest(R), Royal Family(R), Caldwell(R), and St. Mary's(R). Recent
consumer research has shown that Cannon(R) is not only the most recognized
towel brand in the United States, but is also the sixth most recognized
domestic consumer brand. Fieldcrest's other principal brand names are widely
recognized in the industry and along with Cannon(R), represent excellence and
value in product quality, fashion, and design. Fieldcrest regards its
trademarks and trade names as valuable assets and vigorously protects them
against infringement. See "Risk Factors--Dependence on Brand Names."
Fieldcrest utilizes license agreements with Waverly(R), Adrienne
Vittadini(R), Court of Versailles(R), Ellen Tracy(R), and others. Fieldcrest
is only partially dependent upon such licenses in certain product lines and the
loss of any exclusivity in these areas would not materially adversely affect
overall profitability.
Product Development. Fieldcrest works closely with its customers to
develop new products that would provide value to its customers and stimulate
sales. In 1996, Fieldcrest and Wal-Mart associates worked together to develop
Sahara(R), a new towel that features the patented Cannon DryFast(R) System for
quicker drying. DryFast(R) is a special combination of spinning, weaving, and
finishing processes that results in super-absorbency. In 1997, Fieldcrest
extended its offering of DryFast(R) products to kitchen towels, tub mats, and
bath sheets.
Manufacturing, Raw Materials, and Imports. Fieldcrest is principally
vertically integrated in that it purchases raw materials, principally cotton
and synthetic fibers, and converts these materials into finished consumer
products. Fieldcrest operates 15 principal manufacturing facilities in the
United States; nine in North Carolina, one in Georgia, three in Alabama, one in
Pennsylvania, and one in Virginia. Generally, each facility ships its finished
products directly to the customer. Fieldcrest has and will continue to
implement electronic data interchange and vendor-managed inventory programs
with major customers in order to minimize the lead time for customer orders and
permit a more efficient, targeted manufacturing schedule.
Fieldcrest produces bath towels at its facilities in Virginia, North
Carolina, Georgia, and Alabama. Cotton and synthetic fibers are spun into yarn
utilizing Fieldcrest's spinning capacity and, then, woven into fabric or greige
cloth. The greige cloth is finished, dyed, cut, and sewn into finished towel
products. Fieldcrest's Fieldale, Virginia facility generally produces the
higher quality, department and specialty stores' products. The Columbus,
Georgia and Phenix City, Alabama facilities generally support Fieldcrest's mass
merchant business segment. The Kannapolis, North Carolina facility is capable
of producing both types of products and, as a result, is used to support both
segments.
Bed sheet products are produced in Fieldcrest's facilities in the
Kannapolis, North Carolina area. As with Fieldcrest's towel operations, these
facilities provide the full range of Fieldcrest's sheet products for
substantially all channels of distribution. Cotton and synthetic fibers are
spun into yarn and woven into greige cloth for finishing, dyeing, cutting, and
sewing. In late 1995, however, Fieldcrest outsourced certain yarn production
and closed two operations to take advantage of certain cost savings made
available by a supplier of yarn.
Fieldcrest produces comforters and other decorative bedding products
such as pillow shams and decorative pillows at its Eden and Laurel Hill, North
Carolina facilities. Finished cloth generally is supplied by Fieldcrest's bed
sheet operations. The cloth is cut, polyester fiber-fill is inserted, and the
product is sewn and packaged for shipment to retail customers.
Bath rugs are produced in Fieldcrest's Scottsboro, Alabama facility.
Tufted yarn is punched into fabric and cut into a uniform height. A latex
coating is applied to the underside of the fabric to hold the fibers. The
product is dyed, cut, and finished. Furniture coverings are produced at
Fieldcrest's SureFit(R) operations in Bethlehem, Pennsylvania. Finished cloth
is purchased from third-party vendors, and cut and sewn into generally four
sizes to match standard furniture sizes.
Fieldcrest's quality control program is designed to assure that its
products meet predetermined quality standards established both internally and
by its customers. Fieldcrest has devoted significant resources to support
58
<PAGE> 79
quality improvement efforts. Each manufacturing facility is staffed with a
quality control team that identifies and resolves quality control issues.
Fieldcrest attempts to maintain close contact with customer quality control or
other appropriate personnel to assure that Fieldcrest understands the
customer's requirements.
Over the past years, Fieldcrest has initiated a number of modernization
programs. For example, Fieldcrest replaced a substantial portion of its
Fieldale, Virginia weaving capacity with modern rapier looms, reducing unit
cost and the proportion of off-goods produced. In 1996, Fieldcrest completed
its $86.0 million Phenix City, Alabama weaving facility. This program included
the installation of 172 Tsudakoma air-jet looms, automatic cutting and sewing
stations, and new warehouse sortation operations, making Phenix City one of the
world's most state-of-the-art towel facilities.
Fieldcrest's basic raw materials are cotton and synthetic fibers. These
materials are generally available from a wide variety of sources, and no
significant shortage of such materials is currently anticipated. Domestic
cotton merchants are Fieldcrest's primary source of cotton, and domestic fiber
producers are Fieldcrest's primary source of synthetic fibers. Fieldcrest uses
significant quantities of cotton which is subject to ongoing price
fluctuations. Fieldcrest in the ordinary course of business may arrange for
purchase commitments with vendors for future cotton requirements.
Employees. As of November 5, 1997, Fieldcrest had approximately 11,000
employees. Fieldcrest is subject to three collective bargaining agreements
covering approximately 3,000 employees. These agreements are between
Fieldcrest and each of UNITE, United Textile Workers of America, and United
Food and Commercial Workers International Union. The agreements expire January
6, 2000, March 28, 1998, and June 28, 1998, respectively.
Since 1991, UNITE has campaigned to organize approximately 5,500
additional hourly workers at five Fieldcrest plants, including Fieldcrest's
main manufacturing facility in Kannapolis, North Carolina. Fieldcrest has
opposed UNITE's organizing efforts. Although a majority of employees at these
plants recently voted not to select UNITE as a bargaining representative, the
results are subject to legal challenge. There can be no assurances as to
whether or when the results of such election will be certified or a new
election will be scheduled. It is impossible to predict the effect, if any, a
lengthy continuation of another organizing campaign will have on the
productivity of the Fieldcrest workforce. See "Risk Factors--Labor Relations."
Fieldcrest believes that its relationships with both its union and
nonunion employees are good.
Facilities. The following table summarizes certain information
concerning certain of Fieldcrest's principal facilities:
<TABLE>
<CAPTION>
APPROX. OWNED/
LOCATION PRINCIPAL USE SQUARE FEET LEASED
- ----------------------------- -------------------------------------- ----------- -----------
<S> <C> <C> <C>
Kannapolis, North Carolina Offices, manufacturing and warehouse 5,863,041 Owned
Kannapolis, North Carolina Manufacturing 760,939 Owned
Concord, North Carolina Manufacturing 1,114,524 Owned
Eden, North Carolina Manufacturing and warehouse 529,273 Owned
Eden, North Carolina Warehouse 185,214 Owned
Rockwell, North Carolina Manufacturing 98,240 Owned
Salisbury, North Carolina Manufacturing 229,361 Owned
Salisbury, North Carolina Manufacturing and warehouse 567,000 Owned
Spencer, North Carolina Manufacturing 548,819 Owned
Laurel Hill, North Carolina Manufacturing and warehouse 238,072 Owned
Scottsboro, Alabama Manufacturing and warehouse 272,800 Owned
Phenix City, Alabama Manufacturing and warehouse 348,555 Owned
Columbus, Georgia Manufacturing and warehouse 649,519 Owned
New York, New York Sales office and showroom 64,490 Leased
Allentown, Pennsylvania Manufacturing and warehouse 315,000 Leased
Fieldale, Virginia Manufacturing and warehouse 973,253 Owned
</TABLE>
In addition to the foregoing, Fieldcrest maintains certain warehousing
and distribution centers in the states where its manufacturing facilities are
located and maintains small sales and marketing offices in seven additional
59
<PAGE> 80
states. Fieldcrest also owns various other properties, both developed and
undeveloped, which are unrelated to its manufacturing operations. Certain of
these properties were acquired throughout the years for investment or ancillary
to specific acquisitions. Some of such properties are currently held for
investment by Fieldcrest, some are listed for sale, and some are leased by
Fieldcrest to third parties.
The facilities of Fieldcrest are considered to be generally well
maintained, in good operating condition, and adequate for its current needs.
Significant capital expenditures for new plants, modernization, and
improvements have been made in recent years. The plants generally operate on
either a three shift basis for a five-day week or a four shift basis for a
seven-day week during 50 weeks a year except during periods of curtailment.
Legal Proceedings. Fieldcrest is involved in various claims and
lawsuits incidental to its business; however, the outcome of these suits is not
expected to have a material effect on Fieldcrest's financial position or
results of operations.
CERTAIN OTHER MATTERS
Backlog. The amount of both Pillowtex's and Fieldcrest's backlog orders
at any particular time is affected by a number of factors, including
seasonality and scheduling of the manufacturing and shipment of products. In
general, both Pillowtex's and Fieldcrest's electronic data interchange and
"quick response" capabilities have resulted in shortened lead times between
submission of purchase orders and delivery and lowered the level of backlog
orders. Consequently, Pillowtex believes that the amount of its backlog is not
an appropriate indicator of levels of future production.
Competition. The home textile industry consists of 15 product
categories including area rugs, bath rugs, bath towels, blankets,
comforters/bedspreads, curtains/draperies, decorative pillows, down comforters,
kitchen textiles, mattress pads, sheets/pillowcases, shower curtains, sleep
pillows, table linen, and throws. This industry is highly competitive. Both
Pillowtex and Fieldcrest compete with a number of established manufacturers,
importers, and distributors of home textile furnishings, some of which have
greater financial, distribution, and marketing resources. Pillowtex's and
Fieldcrest's current competitors consist primarily of domestic suppliers of bed
pillows, blankets, mattress pads, down comforters, other bedroom textile
furnishings, towels, sheets, and bath rugs. See "Risk Factors--Industry
Competition and Competitive Factors."
After the consummation of the Merger, Pillowtex will compete on the
basis of price, quality, brand names, and service. Pillowtex believes that the
principal competitive factors affecting its business and, after the Merger, the
combined business operations of Pillowtex and Fieldcrest, include its sales and
marketing expertise, its ability to create and develop products offering
superior performance characteristics, its relationships with customers, and its
manufacturing and distribution capabilities.
Government Regulation. Each of Pillowtex and Fieldcrest is subject to
various federal, state, and local environmental laws and regulations governing
the discharge, storage, handling, and disposal of various substances, including
provisions of the California Health and Safety Code pertaining to air quality
management. Each of Pillowtex and Fieldcrest is subject to federal and state
laws and regulations that require products such as bed pillows and comforters
to bear product content labels containing specified information, including
their place of origin and fiber content. In addition, Pillowtex's and
Fieldcrest's operations are governed by a variety of federal, state, local, and
foreign laws and regulations relating to worker safety and health, advertising,
importing and exporting, and other matters applicable to businesses in general.
All laws and regulations are subject to change and Pillowtex cannot predict
what effect, if any, changes in laws and regulations might have on its
business.
60
<PAGE> 81
PRO FORMA CAPITALIZATION OF PILLOWTEX
The following table sets forth the historical capitalization of each of
Pillowtex and Fieldcrest as of September 27, 1997 and September 30, 1997,
respectively, and the pro forma capitalization of Pillowtex as of September 27,
1997, adjusted to give effect to the consummation of the Merger and the
Financing Transactions, as if such transactions had been consummated on
September 27, 1997. As used herein, the term "Financing Transactions" means
(i) estimated initial borrowings under the New Pillowtex Bank Facilities of
$430.2 million, (ii) the issuance and sale of $150.0 million aggregate
principal amount of New Pillowtex Subordinated Notes resulting in estimated net
proceeds of $146.4 million, (iii) the issuance and sale of 65,000 shares of
Pillowtex Preferred Stock resulting in estimated net proceeds of $63.5 million,
(iv) the repayment of all amounts outstanding under Pillowtex's and
Fieldcrest's existing bank credit facilities, and (v) the satisfaction and
discharge of all indebtedness represented by Fieldcrest's 11.25% Senior
Subordinated Debentures Due 2002 to 2004 pursuant to an irrevocable deposit of
amounts sufficient to provide for the redemption thereof. Because the Standby
Bridge Loan Facility is expected to be drawn upon, if at all, only in the event
that less than $135.0 million aggregate principal amount of New Pillowtex
Subordinated Notes shall have been issued and sold as of the Closing Date, the
pro forma information presented herein assumes that no amounts will be borrowed
thereunder.
The pro forma information set forth below is presented for illustrative
purposes only and is not necessarily indicative of what Pillowtex's actual
consolidated capitalization would have been had the foregoing transactions been
consummated on September 27, 1997, nor does it give effect to (i) any
transactions other than the foregoing transactions and those discussed in the
Notes to Unaudited Pro Forma Combined Financial Information of Pillowtex
included elsewhere in this Joint Proxy Statement/Prospectus or (ii) Pillowtex's
or Fieldcrest's respective results of operations since September 27, 1997 and
September 30, 1997, respectively. Accordingly, the pro forma information set
forth below does not purport to be indicative of Pillowtex's consolidated
capitalization as of the date hereof, the Effective Time, or any other future
date.
The following table should be read in conjunction with the historical financial
statements of Pillowtex and Fieldcrest, the unaudited pro forma combined
financial information, the related notes, and the other information contained
elsewhere in this Joint Proxy Statement/Prospectus. See "Available
Information," "Unaudited Pro Forma Combined Financial Information of Pillowtex,
and "Index to Historical Financial Information of Pillowtex and Fieldcrest."
61
<PAGE> 82
CAPITALIZATION
SEPTEMBER 27, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------- PRO FORMA
PILLOWTEX FIELDCREST COMBINED
-------------------------------- ----------
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt.............................. $ 1,553 $ 4,697 $ 6,250
----------- ----------- ----------
Total short-term debt........................................ 1,553 4,697 6,250
Long-term debt:
Revolving credit borrowings.................................... 86,350 100,000 180,155 (a)
Senior bank term A............................................. -- -- 125,000
Senior bank term B............................................. -- -- 125,000
New Pillowtex Subordinated Notes............................... -- -- 150,000
Existing Pillowtex Subordinated Notes.......................... 125,000 -- 125,000
Fieldcrest Convertible Subordinated Debentures................. -- 112,500 99,688 (b)
Fieldcrest Senior Subordinated Debentures...................... -- 85,000 --
Deed of Trust Note............................................. 2,199 -- 2,199
PEDFA Industrial Revenue Bonds................................. 2,310 -- 2,310
MBFC Industrial Revenue Bonds.................................. 2,760 -- 2,760
Industrial Development Bonds due 2021.......................... -- 10,000 10,000
Industrial Revenue Installment Bonds due 2002.................. -- 1,320 1,320
Other long-term debt........................................... 187 -- 187
----------- ----------- ----------
Total long-term debt......................................... $ 218,806 308,820 823,619
----------- ----------- ----------
Total debt................................................. 220,359 313,517 829,869
Pillowtex Series A Redeemable Convertible Preferred Stock,
$0.01 par value, 200,000 shares authorized,
65,000 shares issued and outstanding (as adjusted)............. -- -- 63,500
Shareholders' equity:
Preferred Stock, $0.01 par value, 20,000,000 shares
authorized, none issued and outstanding (Pillowtex
historical); $0.01 par value, 10,000,000 shares
authorized, 1,500,000 shares issued and outstanding
(Fieldcrest historical); $0.01 par value, 20,000,000
shares authorized, none issued and outstanding (as adjusted)... -- 15 --
Common Stock, $0.01 par value, 30,000,000 shares authorized,
10,786,819 shares issued and outstanding (Pillowtex
historical); $0.01 par value, 25,000,000 shares authorized,
12,850,002 shares issued and outstanding (Fieldcrest
historical); $0.01 par value, 30,000,000 shares authorized,
14,234,451 shares issued and outstanding (as adjusted)........ 108 12,850 142
Additional paid-in capital...................................... 60,825 226,758 143,534
Retained earnings............................................... 50,316 106,923 49,348 (c)
----------- ----------- ----------
Treasury stock, 3,606,400 shares (Fieldcrest historical);
0 shares (as adjusted)........................................ -- (117,225) --
Currency translation adjustment................................. (472) -- (472)
----------- ----------- ----------
Total shareholders' equity.................................... 110,777 229,321 192,552
----------- ----------- ----------
Total capitalization...................................... $ 331,136 $ 542,838 $1,085,921
=========== =========== ==========
Ratio of total debt to total capitalization............... 66.55% 57.76% 76.42% (d)
=========== =========== ===========
</TABLE>
- ---------------------------
(a) Reflects a net reduction in revolving credit borrowings of $6,195.
(b) Reflects an adjustment to record the Fieldcrest Convertible Debentures
at fair market value.
(c) Reflects a charge of $968, net of income tax benefit, for the write off
of Pillowtex unamortized debt issuance costs.
(d) Including the Pillowtex Preferred Stock together with total debt, the
ratio would be 82.27%.
See Notes to Unaudited Pro Forma Combined Financial Information.
62
<PAGE> 83
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF PILLOWTEX
The following unaudited pro forma combined financial statements of
Pillowtex give effect to the consummation of the Merger and the Financing
Transactions, as if such transactions had been consummated: (i) on September
27, 1997, in the case of the Unaudited Pro Forma Combined Balance Sheet at
September 27, 1997 and (ii) on December 31, 1995, the first day of Pillowtex's
1996 fiscal year, in the case of the Unaudited Pro Forma Combined Statement of
Operations for the fiscal year ended December 28, 1996 and the nine months
ended September 27, 1997. As used herein, the term "Financing Transactions"
means (i) estimated initial borrowings under the New Pillowtex Bank Facilities
of $430.2 million, (ii) the issuance and sale of $150.0 million aggregate
principal amount of New Pillowtex Subordinated Notes resulting in estimated net
proceeds of $146.4 million, (iii) the issuance and sale of 65,000 shares of
Pillowtex Preferred Stock resulting in estimated net proceeds of $63.5 million,
(iv) the repayment of all amounts outstanding under Pillowtex's and
Fieldcrest's existing bank credit facilities, and (v) the satisfaction and
discharge of all indebtedness represented by Fieldcrest's 11.25% Senior
Subordinated Debentures Due 2002 to 2004 pursuant to an irrevocable deposit of
amounts sufficient to provide for the redemption thereof. Because the Standby
Bridge Loan Facility is expected to be drawn upon, if at all, only in the event
that less than $135.0 million aggregate principal amount of New Pillowtex
Subordinated Notes shall have been issued and sold as of the Closing Date, the
pro forma combined financial information presented herein assumes that no
amounts will be borrowed thereunder.
The following unaudited pro forma combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
what Pillowtex's actual financial position or results of operations would have
been had the foregoing transactions been consummated on such dates, nor does it
give effect to (i) any transactions other than the foregoing transactions and
those described in the accompanying Notes to Unaudited Pro Forma Combined
Financial Information of Pillowtex, (ii) Pillowtex's or Fieldcrest's results of
operations since September 27, 1997 and September 30, 1997, respectively, or
(iii) one-time charges of approximately $5.5 million, $1.9 million of which
will be cash charges, expected to result from the Merger and the integration
of the operations of Pillowtex and Fieldcrest. Although the following
unaudited pro forma combined financial information gives effect to assumed
annual cost savings of $21.6 million, it does not give effect to an additional
$8.4 million of annual cost savings expected to be achieved following
consummation of the Merger. See "Risk Factors--Ability to Achieve Cost
Savings." The pro forma combined financial information does not purport to be
indicative of Pillowtex's financial position or results of operations as of the
date hereof or for any period ended on the date hereof, as of the Closing Date,
or for any period ending at the Closing Date, or as of or for any other future
date or period.
The following unaudited pro forma combined financial information is
based upon the historical financial statements of Pillowtex and Fieldcrest and
should be read in conjunction with such historical financial statements, the
related notes, and the other information contained elsewhere in this Joint
Proxy Statement/Prospectus. See "Available Information" and "Index to
Historical Financial Information of Pillowtex and Fieldcrest." In the
preparation of the following unaudited pro forma combined financial
information, it has been generally assumed that the historical value of
Fieldcrest's assets and liabilities approximates the fair value thereof (except
as described in the accompanying Notes to Unaudited Pro Forma Combined
Financial Information of Pillowtex), as an independent valuation has not been
completed. Pillowtex will be required to determine the fair value of the
assets and liabilities of Fieldcrest (including intangible assets) as of the
Effective Time. Although such determination of fair value is not presently
expected to result in values that are materially greater or less than the
values assumed in the preparation of the following unaudited pro forma combined
financial information, there can be no assurance with respect thereto. The
Unaudited Pro Forma Combined Balance Sheet at September 27, 1997 is based upon
Pillowtex's financial position at September 27, 1997 and upon Fieldcrest's
financial position at September 30, 1997. The Unaudited Pro Forma Combined
Statement of Operations for the fiscal year ended December 28, 1996 is based
upon Pillowtex's results of operations for its fiscal year ended December 28,
1996 and upon Fieldcrest's results of operations for its fiscal year ended
December 31, 1996. The Unaudited Pro Forma Combined Statement of Operations
for the nine months ended September 27, 1997 is based upon Pillowtex's results
of operations for the nine months ended September 27, 1997 and upon
Fieldcrest's results of operations for the nine months ended September 30,
1997.
63
<PAGE> 84
The home textiles and furnishings industry is seasonal in nature, with a
higher proportion of sales and earnings ususally being generated in the third
and fourth quarters of the fiscal year than in other periods. Because of this
seasonality and other factors, results of operations for interim periods are
not necessarily indicative of results of operations for an entire fiscal year.
See "Risk Factors--Seasonality of Business."
64
<PAGE> 85
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BALANCE SHEET
SEPTEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- -------------------------------
PILLOWTEX FIELDCREST ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................ $ 34 $ 5,475 $ -- (2) $ 5,509
Accounts receivable ................................. 104,353 170,071 -- 274,424
Inventories ......................................... 150,084 202,064 38,000 (1) 390,148
Prepaid expenses and other current assets ........... 6,849 2,218 -- 9,067
----------- ----------- ----------- -----------
Total current assets .............................. 261,320 379,828 38,000 679,148
Property, plant, and equipment, net ................... 98,916 342,392 50,000 (1) 491,308
Goodwill, net ......................................... 45,683 6,465 164,168 (1) 216,316
Other assets, net ..................................... 13,249 60,794 (27,051)(1) 60,205
(1,600)(3)
14,813 (4)
----------- ----------- ----------- -----------
Total assets .......................................... $ 419,168 $ 789,479 $ 238,330 $ 1,446,977
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 50,699 $ 63,893 $ -- $ 114,592
Accrued expenses .................................. 25,253 69,435 (632)(3) 94,056
Current portion of long-term debt ................. 1,553 4,697 -- 6,250
Deferred income taxes ............................. 2,581 20,593 13,300 36,474
----------- ----------- ----------- -----------
Total current liabilities ....................... 80,086 158,618 12,668 251,372
Long-term debt ........................................ 218,806 308,820 295,993 823,619
Deferred income taxes ................................. 9,499 39,758 13,715 62,972
Other non-current liabilities ......................... -- 52,962 -- 52,962
----------- ----------- ----------- -----------
Total liabilities ............................... 308,391 560,158 322,376 1,190,925
Redeemable convertible preferred stock ................ -- -- 63,500 63,500
Shareholders' equity:
Preferred stock ..................................... -- 15 (15)(6) --
Common stock ........................................ 108 12,850 (12,816)(6) 142
Additional paid-in capital .......................... 60,825 226,758 (144,049)(6) 143,534
Retained earnings ................................... 50,316 106,923 (106,923)(6) 49,348
(968)(3)
Treasury stock ........................................ -- (117,225) 117,225 --
Currency translation adjustment ....................... (472) -- -- (472)
----------- ----------- ----------- -----------
Total shareholders' equity ........................ 110,777 229,321 (147,546) 192,552
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity ........ $ 419,168 $ 789,479 $ 238,330 $ 1,446,977
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Information.
65
<PAGE> 86
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- -------------------------------
PILLOWTEX FIELDCREST ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................................. $ 490,655 $ 1,092,496 $ -- $ 1,583,151
Cost of goods sold .................................... 411,048 956,522 3,713 1,364,368
(6,915)(8)
----------- ----------- ----------- -----------
Gross profit .......................................... 79,607 135,974 3,202 218,783
Selling, general, and administrative expenses ......... 41,445 105,405 (530)(1) 135,875
412 (7)
(14,644)(8)
4,266 (7)
(479)(9)
Restructuring charges ................................. -- 8,130 -- 8,130
----------- ----------- ----------- -----------
Earnings from operations ............................ 38,162 22,439 14,177 74,778
Nonoperating (income) expense:
Interest expense .................................... 13,971 26,869 21,289 62,129
Other income, net ................................... -- (5,604) -- (5,604)
----------- ----------- ----------- -----------
Total nonoperating expense ...................... 13,971 21,265 21,289 56,525
----------- ----------- ----------- -----------
Earnings before income taxes and extraordinary items 24,191 1,174 (7,112) 18,253
Income taxes .......................................... 9,459 114 678 8,895
----------- ----------- ----------- -----------
Earnings before extraordinary items ................. 14,732 1,060 (6,434) 9,358
Preferred dividends ................................... -- (4,500) 2,550 (1,950)
----------- ----------- ----------- -----------
Earnings (loss) before extraordinary
items applicable to common stock .................. $ 14,732 $ (3,440) $ (3,884) $ 7,408
=========== =========== =========== ===========
OTHER OPERATING DATA:
Depreciation and amortization ....................... $ 12,775 $ 36,678 $ 56,835
EBITDA(14) .......................................... 50,937 59,117 131,613
Primary earnings per share:
Earnings (loss) before extraordinary items .......... $ 1.39 $ (0.38) $ 0.53
=========== =========== ===========
Weighted average common shares outstanding .......... 10,617,722 9,023,958 14,065,354 (13)
=========== =========== ===========
Fully diluted earnings per share:
Earnings (loss) before extraordinary items .......... $ -- $ 0.53
=========== ===========
Weighted average common shares outstanding .......... 14,413,901 14,065,354 (13)
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Information.
66
<PAGE> 87
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- -------------------------------
PILLOWTEX FIELDCREST ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................................. $ 370,633 $ 820,635 $ -- $ 1,191,268
Cost of goods sold .................................... 305,674 695,615 2,784 998,887
(5,186)(8)
----------- ----------- ----------- -----------
Gross profit ........................................ 64,959 125,020 2,402 192,381
Selling, general, and administrative expenses ......... 33,728 85,563 (398)(1) 111,100
310 (7)
(10,983)(8)
3,199 (7)
(319)(9)
----------- ----------- ----------- -----------
Earnings from operations ............................ 31,231 39,457 10,593 81,281
Nonoperating (income) expense:
Interest expense .................................... 13,957 18,708 19,140 51,805
Other income, net ................................... -- (2,021) -- (2,021)
----------- ----------- ----------- -----------
Total nonoperating expense ...................... 13,957 16,687 19,140 49,784
----------- ----------- ----------- -----------
Earnings before income taxes and extraordinary ...... 17,274 22,770 (8,547) 31,497
items
Income taxes .......................................... 6,702 8,087 (1,084)(11) 13,705
----------- ----------- ----------- -----------
Earnings before extraordinary items ................. 10,572 14,683 (7,463) 17,792
Preferred dividends ................................... -- (3,375) 1,912 (12) (1,463)
----------- ----------- ----------- -----------
Earnings before extraordinary items applicable
to common stock ................................... $ 10,572 $ 11,308 $ (5,551) $ 16,329
=========== =========== =========== ===========
OTHER OPERATING DATA:
Depreciation and amortization ....................... $ 10,642 $ 26,241 $ 42,459
EBITDA(14) .......................................... 41,873 65,698 123,740
Primary earnings per share:
Earnings before extraordinary items ................. $ 0.99 $ 1.23 $ .06 (13)
=========== =========== ===========
Weighted average common shares outstanding .......... 10,669,225 9,204,171 16,825,190
=========== =========== ===========
Fully diluted earnings per share:
Earnings before extraordinary items ................. $ 1.23 $ 1.06 (13)
=========== ===========
Weighted average common shares outstanding .......... 9,247,477 16,825,190
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Information.
67
<PAGE> 88
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) In connection with the Merger, each outstanding share of Fieldcrest Common
Stock will be converted into the right to receive total consideration
valued at $34.00, assumed to consist of $27.00 in cash and 0.292 shares of
Pillowtex Common Stock, and each outstanding share of Fieldcrest Preferred
Stock will be converted into a right to receive total consideration valued
at $58.12, assumed to consist of $46.15 in cash and 0.499 shares of
Pillowtex Common Stock. For purposes of the unaudited pro forma combined
financial information contained herein, the fair market value of Pillowtex
Common Stock is assumed to be $24.00 per share, which approximates the
market price of the Pillowtex Common Stock on September 10, 1997, the
trading day immediately preceding the date of the first public announcement
of the Merger. The aggregate purchase price assumed to be paid by Pillowtex
in connection with the acquisition of Fieldcrest pursuant to the Merger is
summarized below.
<TABLE>
<S> <C>
ISSUANCE OF PILLOWTEX COMMON STOCK:
Number of shares of Fieldcrest Common Stock
assumed to be outstanding at the Effective Time 9,243,602
Assumed conversion ratio 0.292
------------
Number of shares of Pillowtex Common Stock assumed
to be issued to holders of Fieldcrest Common
Stock in connection with the Merger 2,699,132
------------
Number of shares of Fieldcrest Preferred Stock
assumed to be outstanding at the Effective Time 1,500,000
Assumed conversion ratio 0.499
------------
Number of shares of Pillowtex Common Stock assumed
to be issued to holders of Fieldcrest Preferred
Stock in connection with the Merger 748,500
------------
Total shares of Pillowtex Common Stock assumed to
be issued in connection with the Merger 3,447,632
============
AGGREGATE PURCHASE PRICE:
Cash assumed to be paid to holders of Fieldcrest
Common Stock (9,243,602 shares at $27.00 per
share) $249,577,000
Cash assumed to be paid to holders of Fieldcrest
Preferred Stock (1,500,000 shares at $46.15 per
share) 69,225,000
Assumed fair value of Pillowtex Common Stock
assumed to be issued in connection with the
Merger (3,447,632 shares at $24.00 per share) 82,743,000
Severance costs assumed to be incurred in
connection with the Merger 15,000,000 (a)
Assumed settlement of Fieldcrest Options and
Fieldcrest SARs 6,641,000 (b)
Early call premium on Fieldcrest 11.25% Senior
Subordinated Debentures 4,250,000
Financial advisors, legal, accounting, and other
professional fees 12,799,000
------------
Aggregate purchase price $440,235,000
</TABLE>
68
<PAGE> 89
<TABLE>
<S> <C>
Aggregate purchase price $440,235,000
Less net book value of assets acquired 229,321,000
Excess of cost over net book value of assets
acquired 210,914,000
Less adjustments to record assets and liabilities
acquired at fair market value:
Inventory 38,000,000 (c)
Property, plant, and equipment 50,000,000 (d)
Goodwill (6,465,000)(e)
Other assets (27,051,000)(f)
Deferred income taxes - current (13,300,000)(g)
Long-term debt 12,812,000 (h)
Deferred income taxes - noncurrent (13,715,000)(g) 40,281,000
---------- ------------
Excess of cost over fair market value of net
assets acquired (i) $170,633,000
============
</TABLE>
(a) Reflects severance costs to be incurred in connection with the
Merger in accordance with EITF 95-3, "Recognition of
Liabilities in Connection with a Purchase Business
Combination."
(b) Reflects the settlement of the Fieldcrest Options and
Fieldcrest SARs assuming (i) that the holder of each
Fieldcrest Option outstanding as of September 30, 1997 elects
to receive an amount in cash equal to the difference between
$34.00 and the per share exercise price of such Fieldcrest
Option and (ii) that the holder of each Fieldcrest SAR
outstanding as of September 30, 1997 is paid cash in an amount
equal to the product of (i) the difference between $34.00 and
the grant price of such Fieldcrest SAR and (ii) the number of
shares subject to such Fieldcrest SAR, in each case as
provided in the Merger Agreement.
(c) Reflects principally the elimination of Fieldcrest's last-in,
first-out reserve, together with certain offsetting
adjustments necessary to state inventory at fair market value.
(d) Reflects a preliminary adjustment to fair value of
Fieldcrest's property, plant, and equipment. The preliminary
adjustment is based upon internal estimates and is allocated
as follows:
<TABLE>
<S> <C>
Land $ 5,000,000
Buildings 20,000,000
Machinery and Equipment 25,000,000
------------
$ 50,000,000
</TABLE>
(e) Reflects the elimination of Fieldcrest's existing goodwill of
$6,465,000. The reversal of the related amortization was
$530,000 for the year ended December 28, 1996 and $398,000 for
the nine months ended September 27, 1997.
(f) Reflects an adjustment to record the (i) preliminary fair
value remeasurement of Fieldcrest's pension asset resulting in
a reduction of $17,049,000, (ii) elimination of the asset
related to the Fieldcrest licensing agreement with Pillowtex
of $6,576,000, and (iii) write-off of the unamortized balance
of debt issuance costs related to Fieldcrest's bank credit
facility and 11.25% Senior Subordinated Debentures of
$3,426,000.
(g) To record a $27,015,000 deferred tax liability related to the
temporary difference between the financial statement carrying
amount and the tax basis of the Fieldcrest acquired assets as
adjusted
69
<PAGE> 90
at an assumed income tax rate of 35.0% for the years in which
those differences are expected to be recovered or settled.
(h) Reflects the adjustment to record the Fieldcrest Convertible
Debentures at an amount that approximates the market value of
the Fieldcrest Convertible Debentures on September 10, 1997,
the trading day immediately preceding the date of the first
public announcement of the Merger. The discount of $12,812,000
will be amortized to interest expense using the interest
method over the remaining life of the Fieldcrest Convertible
Debentures.
If it were assumed that all of the outstanding Fieldcrest
Convertible Debentures were converted into shares of
Fieldcrest Common Stock immediately prior to the Effective
Time (rather than remaining outstanding), then (i) at
September 27, 1997, on a pro forma combined basis, Pillowtex
would have had total assets of $1,428,346,000, total long-term
debt of $795,003,000, and total shareholders' equity of
$210,999,000, (ii) for the fiscal year ended December 28,
1996, on a pro forma combined basis, Pillowtex would have had
interest expense of $59,262,000, earnings before income taxes
and extraordinary items of $21,586,000, earnings before
extraordinary items of $11,559,000, and earnings before
extraordinary items per share of $0.65, and (iii) for the nine
months ended September 27, 1997, on a pro forma combined
basis, Pillowtex would have had interest expense of
$49,801,000, earnings before income taxes and extraordinary
items of $33,850,000, earnings before extraordinary items of
$19,353,000, and earnings before extraordinary items per share
of $1.10.
(i) Upon completion of its determination of fair values, Pillowtex
may identify intangible assets (such as trade names) to which
a portion of the purchase price should be allocated. Pillowtex
believes that the amortization period for such identifiable
intangible assets will also be 40 years.
(2) Reflects the adjustment to record the following:
<TABLE>
<S> <C>
Initial borrowings under the New Pillowtex Bank
Facilities $ 430,155,000
Gross proceeds from the issuance and sale of New
Pillowtex Subordinated Debentures 150,000,000
Gross proceeds from the issuance and sale of
Pillowtex Preferred Stock 65,000,000
Cash assumed to be paid to holders of Fieldcrest
Common Stock (9,243,602 shares at $27.00 per
share) (249,577,000)
Cash assumed to be paid to holders of Fieldcrest
Preferred Stock (1,500,000 shares at $46.15 per
share) (69,225,000)
Repayment of Pillowtex's revolving credit facility (86,350,000)
Repayment of Fieldcrest's revolving credit
facility (100,000,000)
Satisfaction and discharge of Fieldcrest's 11.25%
Senior Subordinated Debentures (85,000,000)
Severance costs assumed to be incurred in
connection with the Merger (see note 1(a)) (15,000,000)
Assumed settlement of Fieldcrest Options and
Fieldcrest SARs (see note 1(b)) (6,641,000)
Early call premium on Fieldcrest 11.25% Senior
Subordinated Debentures (4,250,000)
Financial advisors, legal, accounting, and other
professional fees (29,112,000)
--------------
$ --
==============
</TABLE>
(3) Reflects the adjustment to (a) write off the unamortized balance of
debt issuance costs related to the existing Pillowtex bank credit
facility of $1,600,000, (b) record the related tax benefit of $632,000
and (c) record a net reduction in retained earnings of $968,000.
70
<PAGE> 91
(4) Reflects the adjustment to record the following:
<TABLE>
<S> <C>
Additional bank borrowings required to finance the Merger $ 430,155,000
Issuance and sale of New Pillowtex Subordinated Debentures 150,000,000
Repayment of Pillowtex's revolving credit facility (86,350,000)
Repayment of Fieldcrest's revolving credit facility (100,000,000)
Satisfaction and discharge of Fieldcrest's 11.25% Senior
Subordinated Debentures (85,000,000)
Discount of the Fieldcrest Convertible Debentures at
fair market value (see note 1(h)) (12,812,000)
---------------
$ 295,993,000
===============
</TABLE>
Additionally, debt issuance costs of $14,813,000 were incurred in
connection with the Merger.
(5) Reflects the issuance and sale of 65,000 shares of Pillowtex Preferred
Stock at an offering price of $1,000 per share, net of estimated
offering costs of $1,500,000.
(6) Reflects the (i) elimination of Fieldcrest's equity which will be
cancelled upon consummation of the Merger, (ii) issuance of 3,447,632
shares of Pillowtex Common Stock at a par value of $0.01 in connection
with the Merger, and (iii) the related additional paid-in capital of
$82,709,000.
(7) Reflects incremental depreciation and amortization expense as a result
of the preliminary adjustment to fair value of Fieldcrest's property,
plant, and equipment and the excess of cost over fair market value of
the net assets acquired (see note 1) as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
ESTIMATED DECEMBER 28, ENDED
USEFUL LIFE 1996 SEPTEMBER 27, 1997
----------- ------------ ------------------
<S> <C> <C> <C>
Additional depreciation of Fieldcrest
Merger property, plant, and
equipment 8 to 20 years $ 4,125,000 $ 3,094,000
============ ============
Amortization of excess of cost over
fair value of net assets acquired 40 years $ 4,266,000 $ 3,199,000
============ ============
</TABLE>
(8) Reflects the elimination of duplicate corporate expenses of $21,559,000
for the year ended December 28, 1996 and $16,169,000 for the nine
months ended September 27, 1997.
(9) Reflects the reversal of the amortization related to Pillowtex's debt
issuance costs which have been written off in connection with the
Merger (see note 3) of $479,000 for the year ended December 28, 1996
and $319,000 for the nine months ended September 27, 1997.
(10) Reflects an adjustment to record additional interest expense,
amortization of debt issuance costs, and the amortization of the
discount on the Fieldcrest Convertible Debentures incurred in
connection with the Merger. For each 1 would change by $654,000 and
$511,000 for the year ended December 28, 1996 and the nine months ended
September 27, 1997, respectively.
If, in lieu of the issuance and sale of $150,000,000 aggregate
principal amount of New Pillowtex Subordinated Notes, Pillowtex were
assumed to have borrowed $135,000,000 under the Standby Bridge Bank
Facility and an additional $15,000,000 under the New Pillowtex Bank
Facilities, then (i) for the year ended December 28, 1996, on a pro
forma combined basis, Pillowtex would have had interest expense of
$64,970,000, earnings before income taxes and extraordinary items of
$15,412,000, earnings before extraordinary items of $7,639,000, and
earnings before extraordinary items per share of $0.40 and (ii) for the
nine months ended September 27, 1997, on a pro forma combined basis,
71
<PAGE> 92
Pillowtex would have had interest expense of $59,050,000, earnings
before income taxes and extraordinary items of $24,252,000, earnings
before extraordinary items of $13,409,000, and earnings before
extraordinary items per share of $0.77.
(11) Reflects the income tax benefit related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 39.5%.
(12) Reflects an adjustment to (i) reverse Fieldcrest's historical preferred
stock dividends and (ii) record the dividends on the Pillowtex
Preferred Stock assuming a 3% dividend rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 28, ENDED
1996 SEPTEMBER 27, 1997
------------ ------------------
<S> <C> <C>
Reversal of historical Fieldcrest Preferred Stock dividends $ (4,500,000) $ (3,375,000)
Addition of Pillowtex Preferred Stock dividends 1,950,000 1,463,000
------------- -------------
$ (2,550,000) $ (1,912,000)
============== ==============
</TABLE>
If Pillowtex were to fail to attain specified earnings per share
targets in 1999, dividends for fiscal years after 1999 would increase
from the initial 3.0% rate to 7.0% or 10.0% and Pillowtex would be
required to pay an additional dividend consisting of shares of
Pillowtex Preferred Stock, in each case as described below in
"Description of Pillowtex Capital Stock--Series A Redeemable
Convertible Preferred Stock--Dividends."
(13) The assumed conversion of the Fieldcrest Convertible Debentures and the
Pillowtex Preferred Stock would have an anti-dilutive effect on
earnings per share for the year ended December 28, 1996, and therefore
has been excluded from the computation thereof.
The assumed conversion of the Fieldcrest Convertible Debentures would
have an anti-dilutive effect on earnings per share for the nine months
ended September 27, 1997, and therefore has been excluded from the
computation thereof.
(14) EBITDA is income before income taxes plus depreciation and amortization
expense and interest expense net. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
and/or incur indebtedness; however, EBITDA should not be considered as
an alternative to net income (as a measure of operating results) or to
cash flows (as a measure of liquidity) computed in accordance with
generally accepted accounting principles. In addition, EBITDA as
presented herein may not be directly comparable to EBITDA as reported
by other companies.
72
<PAGE> 93
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the consummation of the Merger and the Financing
Transactions, Pillowtex will operate the existing businesses of Pillowtex and
Fieldcrest on a combined basis under a new capital structure. See "Post-Merger
Business of Pillowtex," "Pro Forma Capitalization of Pillowtex," and "Unaudited
Pro Forma Combined Financial Information of Pillowtex." Accordingly, the
financial condition and results of operations of Pillowtex after the Closing
Date will not be directly comparable to the historical financial conditions or
results of operations of Pillowtex and Fieldcrest, either individually or on a
combined basis. See Pillowtex's and Fieldcrest's managements' discussions and
analyses of the historical financial conditions and results of operations of
Pillowtex and Fieldcrest, respectively, contained elsewhere in this Joint Proxy
Statement/Prospectus. See "Available Information" and "Index to Historical
Financial Information of Pillowtex and Fieldcrest."
Pillowtex will have three principal sources of liquidity during the period
immediately following the Closing Date: (i) cash on hand, (ii) borrowing
capacity under the New Pillowtex Bank Facilities, and (iii) cash generated by
operations. See "Unaudited Pro Forma Combined Financial Information of
Pillowtex" and "Merger Financing--New Pillowtex Bank Facilities." Immediately
following the Closing Date, Pillowtex expects to have at least $143.5 million of
borrowing capacity under the New Pillowtex Bank Facilities.
As a result of the Merger, each Fieldcrest Convertible Debenture will
become convertible, at the option of the holder, into cash and shares of
Pillowtex Common Stock as contemplated by the Merger Agreement. See "The
Merger--The Merger Agreement--Treatment of the Fieldcrest Convertible
Debentures." Pillowtex expects to utilize funds available under the New
Pillowtex Bank Facilities to pay any cash due upon conversion of Fieldcrest
Convertible Debentures. If all of the outstanding Fieldcrest Convertible
Debentures were so converted following the consummation of the Merger, cash in
the amount of approximately $71.1 million would be due and payable to the
holders thereof.
Pillowtex anticipates that it will incur certain restructuring charges
related to the integration of the operations of Pillowtex and Fieldcrest during
the fourth quarter of 1997 or the first quarter of 1998. The charges are
estimated to total approximately $5.5 million, of which approximately $1.9
million relate to cash items. Such unusual charges include costs related to
consolidation of manufacturing and distribution facilities, severance
obligations, and integration of management information systems.
73
<PAGE> 94
MANAGEMENT OF PILLOWTEX
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of Pillowtex as of November 5, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles M. Hansen, Jr. 57 Chairman of the Board, Chief Executive Officer, and
Director
Jeffrey D. Cordes 39 President, Chief Operating Officer, and Director
Christopher N. Baker 37 President-- Manufacturing Division and Director
Kevin M. Finlay 48 President-- Sales and Marketing Division and
Director
Scott E. Shimizu 44 Executive Vice President-- Sales and Marketing and
Director
John H. Karnes 36 Vice President and General Counsel
Ronald M. Wehtje 35 Vice President and Controller
Paul G. Gillease 65 Director
Ralph W. La Rovere 62 Director
William B. Madden 58 Director
M. Joseph McHugh 59 Director
Mary R. Silverthorne 61 Director
</TABLE>
Charles M. Hansen, Jr. has been a director of Pillowtex since 1970 and has
been Chief Executive Officer and Chairman of the Board of Directors since
December 1992. From 1973 through February 1997, he served as President of
Pillowtex. He is also a director of Triangle Pacific Corporation ("Triangle
Pacific") and the Southern Methodist University Cox School of Business. His term
as a director expires in 2000.
Jeffrey D. Cordes has been a director of Pillowtex since May 1995 and was
appointed President and Chief Operating Officer in February 1997. Since May
1994, he served as Executive Vice President and Chief Financial Officer of
Pillowtex. From 1985 until May 1994, he served as Vice President--Administration
and Planning of Pillowtex. His term as a director expires in 1998.
Christopher N. Baker has been a director of Pillowtex since May 1995 and
was appointed President of the Manufacturing Division in February 1997. He
served as President -- Pillowtex Division since February 1995 and as Senior Vice
President -- Sales and Marketing since January 1993. From 1991 through January
1993, Mr. Baker served as Vice President of Operations of The Company Store,
Inc., an apparel and home furnishings catalog merchandiser. From 1985 to 1991,
Mr. Baker held various accounting and manufacturing positions with Pillowtex,
including Executive Vice President -- Manufacturing from 1988 to 1991. Mr.
Baker's term as a director expires in 1998.
Kevin M. Finlay joined Pillowtex in March 1997 as President of the Sales
and Marketing Division and was appointed a director in May 1997. Previously, and
since 1994, Mr. Finlay served as President of the Bedding Division at
Fieldcrest. He joined Fieldcrest in 1971 and served in a variety of positions of
increasing responsibility, including Executive Vice President of Sales beginning
in 1989. Mr. Finlay was further promoted to
74
<PAGE> 95
Corporate Vice President and President of Fieldcrest's Blanket Division in 1992.
His term as a director expires in 1998.
Scott E. Shimizu was appointed in February 1996 to fill a vacancy on the
Pillowtex Board. He had served as a member of the Pillowtex Board from May 1994
to May 1995. He has been Executive Vice President -- Sales and Marketing since
December 1992, and has served as Executive Vice President since 1988. His term
as a director expires in 1999.
John H. Karnes joined Pillowtex as Vice President and General Counsel in
February 1997. Mr. Karnes previously served as Vice President, General Counsel,
and Corporate Secretary for AMRE, Inc., a holding company engaged in home
improvements and franchising since April 1996. From June 1994 through December
1995, he was Vice President and General Counsel for Pratt Hotel Corporation and
Hollywood Casino Corp., holding companies engaged in hotel management and
gaming. He served as Deputy General Counsel of Apache Corporation, an oil and
gas exploration and production company, from June 1991 to June 1994. Prior to
joining Apache, Mr. Karnes practiced law with the law firm of Kirkland & Ellis.
Ronald M. Wehtje has been Vice President and Controller since March 1996
and served as Division Controller from December 1994 to March 1996. Prior to
that time, he served in various positions of increasing responsibility since
joining Pillowtex in 1986 as an internal auditor.
Paul G. Gillease became a director of Pillowtex in October 1993. From 1989
until retiring in late 1993, Mr. Gillease was Vice President and General Manager
of DuPont Textiles, a division of DuPont. Previously, he served in a variety of
marketing and business management positions within DuPont. Mr. Gillease is also
a director of Galey & Lord, Inc. and Guilford Mills, Inc. His term as a director
expires in 1999.
Ralph W. La Rovere was appointed a director of Pillowtex in May 1997. He
recently retired from J.C. Penney Company, Inc. after a 36-year career in
various managerial positions in New York, Los Angeles, and Dallas. He most
recently served as Vice President and Director of Merchandising for the Home and
Leisure Division of J.C. Penney Company, Inc. Mr. La Rovere's term as a director
expires in 1999.
William B. Madden became a director of Pillowtex in February 1993. He has
been the President of Madden Securities Corporation, a general securities and
investment banking firm located in Dallas, Texas since 1986. Mr. Madden is also
Chairman of the Board of Mercantile Bank and Trust, and is a director of E. W.
Blanch Holdings, Inc. Mr. Madden's term as a director expires in 2000.
M. Joseph McHugh became a director of Pillowtex in February 1993. He has
served as President and Chief Operating Officer and a director of Triangle
Pacific, a manufacturer and distributor of wood flooring and kitchen and
bathroom cabinets, since 1994. From 1981 until November 1994, he served as
Senior Executive Vice President and Chief Financial Officer of Triangle Pacific.
Mr. McHugh's term as a director expires in 2000.
Mary R. Silverthorne has been a director of Pillowtex since December 1992.
She has been actively involved in charitable and civic activities for many years
and is a director of the Retina Foundation of the Southwest (Dallas), the
Foundation Fighting Blindness, the North Texas Taping for the Blind, and the
Assistance League of Dallas. She has not been engaged in business activities
during the past five years. Her term as a director expires in 1998.
The Pillowtex Board currently consists of ten members and is classified
into three classes. Directors serve for three-year terms or until their
successors are duly elected and qualified. Subject to applicable employment
agreements, all officers of Pillowtex are appointed by and serve at the
discretion of the Pillowtex Board.
75
<PAGE> 96
EMPLOYMENT AGREEMENTS
Pillowtex entered into an employment agreement with Mr. Hansen, effective
January 1, 1993, pursuant to which Pillowtex agreed to employ Mr. Hansen as its
Chairman of the Board, President, and Chief Executive Officer until December 31,
1999. Mr. Hansen receives a base salary of $750,000 per year, subject to such
increases as the Compensation Committee of the Pillowtex Board may determine. In
addition, Mr. Hansen is entitled to bonuses at the discretion of the
Compensation Committee of the Pillowtex Board, life insurance benefiting his
designees in the amount of $3.0 million, and disability payments equal to 60% of
his base salary at the time of disability for the longer of five years or the
remaining term of his employment agreement. If Mr. Hansen is terminated other
than as permitted by the employment agreement, he will be entitled to an
immediate payment equal to his compensation for the remainder of the term on a
"grossed up" basis to reimburse him for the income taxes on such payment. Mr.
Hansen is also entitled to an annual "gross up" payment to reimburse him for
income taxes due arising out of certain fringe benefits received from Pillowtex.
The employment agreement permits Pillowtex to terminate Mr. Hansen without
further compensation for, among other things, courses of conduct that
demonstrably affect Pillowtex's reputation in a materially adverse manner,
provided Mr. Hansen first has the opportunity to terminate the conduct after
receiving notice. Mr. Hansen may also voluntarily terminate his employment with
Pillowtex at any time. See "Risk Factors--Dependence on Key Personnel." The
employment agreement, nevertheless, contains a provision prohibiting Mr. Hansen
from competing with Pillowtex during the term of his employment and for a period
of one year after termination.
Pursuant to an amendment to Mr. Hansen's employment agreement, dated July
26, 1993, the $3.0 million term life insurance coverage provided to Mr. Hansen
was changed to an equal amount of split dollar life insurance. Under the terms
of a split dollar life insurance agreement between Pillowtex and Mr. Hansen,
dated July 26, 1993, Pillowtex agreed to maintain the premium payments that
would have been payable by Pillowtex had the term life insurance remained in
effect, and to loan to Mr. Hansen the balance of the premiums as they become
due. Amounts loaned to Mr. Hansen in connection with these premium payments are
evidenced by a promissory note to Pillowtex, and bear interest quarterly, at a
floating annual interest rate equal to the greater of the federal mid-term
interest rate as published by the Internal Revenue Service or the lowest rate at
which Pillowtex could borrow funds under its bank loan agreements. As of
September 27, 1997, the amount outstanding under the promissory note was
$213,304. The promissory note is due August 5, 2003, or such earlier date as may
be required pursuant to the terms of the split dollar life insurance agreement.
Mr. Hansen has executed an assignment of the split dollar life insurance policy
in favor of Pillowtex as security for payment of amounts loaned to Mr. Hansen in
connection therewith.
In April 1997, Pillowtex also entered into employment agreements with the
following five executive officers: Jeffrey D. Cordes, Christopher N. Baker,
Kevin M. Finlay, Scott E. Shimizu, and John H. Karnes. The employment agreements
provide for an initial base salary of $400,000, $275,000, $300,000, $275,000 and
$180,000, respectively. In addition, the employment agreements provide that each
executive is entitled to participate in Pillowtex's incentive bonus plans
established for executive officers and in any supplemental executive retirement
plan that the Company may adopt. Mr. Finlay's agreement further provides for a
signing bonus in the amount of $300,000 and the reimbursement of certain
relocation expenses and provides that during the first two years of the term of
his agreement he will receive bonuses aggregating at least $150,000 per year.
Each employment agreement provides for an initial employment term of three
years with an automatic extension of one year each anniversary date beginning
with the second anniversary date, with the result being that the term will have
a remaining duration of two years upon each and every anniversary; except that
no such extension will occur if either party gives the other party written
notice of its intent not to extend the agreement at least 15 months prior to the
anniversary upon which the extension would otherwise occur. Pillowtex may
terminate the executive's employment for "cause," and the executive may
terminate his employment upon the occurrence of a "potential change of control"
or for "good reason" following a "change of control." If Pillowtex terminates
the executive's employment without "cause," Pillowtex is required to pay the
executive certain amounts, including the executive's base salary through the
remaining employment term and certain benefits under the incentive bonus plans.
If, after a "change of control," the executive's employment is terminated by the
executive
76
<PAGE> 97
for "good reason" or is terminated by Pillowtex without "cause," or, in certain
circumstances, if, after the occurrence of a "potential change of control," the
executive's employment is either voluntarily terminated by the executive other
than for "good reason" or terminated by Pillowtex without "cause," such
executive will be entitled to receive certain amounts, including a severance
payment determined in accordance with the provisions of the employment
agreement. The Merger will not constitute a "change of control" or a "potential
change of control" under any such employment agreement.
Each employment agreement also includes certain noncompetition,
nondisclosure, and nonsolicitation provisions.
DIRECTOR COMPENSATION
Pillowtex pays each non-employee director an annual fee of $30,000 and
$1,000 for each committee meeting attended. Directors who are also employees of
Pillowtex do not receive compensation as directors. Pillowtex also reimburses
each director for ordinary and necessary travel expenses related to such
director's attendance at board and committee meetings. For a discussion of
Pillowtex's 1993 Stock Option Plan (as amended and restated, the "Stock Option
Plan") and the grant of certain nonqualified stock options to the nonemployee
directors of Pillowtex under the Stock Option Plan, see "--Stock Option Plan."
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
paid or accrued for services rendered to Pillowtex for the last three fiscal
years to Pillowtex's Chief Executive Officer and the highest compensated
executive officers who served as executive officers during 1996 and whose
individual total cash compensation exceeded $100,000 (such persons being
hereinafter referred to collectively as the "Pillowtex Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) OPTIONS/SARS (#) COMPENSATION (2)
------------------ ---- ---------- --------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Hansen, Jr.
Chairman of the Board of 1996 $ 750,000 $206,054 $ 107,389 -- $ 2,250
Directors and 1995 750,000 -- 71,331 -- 450
Chief Executive Officer 1994 750,000 -- 97,254 -- 288
Jeffrey D. Cordes 1996 275,000 75,553 -- 10,000 330
President and Chief 1995 265,000 27,500 -- 5,000 66
Operating Officer 1994 203,208 -- -- 5,000 66
Christopher N. Baker 1996 275,000 113,330 -- 10,000 330
President- 1995 265,000 27,500 -- 5,000 66
Manufacturing Division 1994 180,417 -- -- 5,000 54
Scott E. Shimizu 1996 275,000 75,553 -- 10,000 510
Executive Vice President- 1995 245,000 27,500 -- 5,000 102
Sales & Marketing 1994 209,750 -- -- -- 102
Ronald M. Wehtje 1996 111,042 20,000 -- 12,000 251
Vice President and 1995 70,875 8,000 -- -- 54
Controller 1994 60,000 3,000 -- -- 54
</TABLE>
- ------------------------------------
(1) Certain of Pillowtex's executive officers receive personal benefits in
addition to salary and cash bonuses. In 1996, the amount of such personal
benefits paid to Mr. Hansen included $28,339 and $24,071 for reimbursement
of income taxes incurred by Mr. Hansen due as a result of certain benefits
received in 1994 and 1996, respectively. In 1995, the amount of such
personal benefits paid to Mr. Hansen included $20,972 for reimbursement of
estimated income taxes paid by Mr. Hansen as a result of certain benefits
received in 1995. In 1994, the amount of such personal benefits paid to Mr.
Hansen included $28,794 for reimbursement of income taxes paid by Mr.
Hansen as a result of certain benefits paid
77
<PAGE> 98
in 1993. Consistent with rules and regulations promulgated by the
Commission, (i) the amount of personal benefits has been omitted from the
table for each Pillowtex Named Executive Officers for whom the aggregate
amount of such compensation did not exceed the lesser of $50,000 or 10% of
the total of the annual salary and bonus reported for such Pillowtex Named
Executive Officers and (ii) detail regarding individual amounts paid to Mr.
Hansen that do not exceed 25% of the total personal benefits received by
Mr. Hansen has been omitted from this footnote.
(2) For Messrs. Hansen, Cordes, Baker, Shimizu, and Wehtje, these amounts were
paid for the years indicated for group term life insurance.
Grants of Stock Options. The following table sets forth information
concerning stock options granted during 1996 by Pillowtex to the Pillowtex Named
Executive Officers. The present values of stock options granted in 1996 are
calculated under a Black-Scholes options pricing model, a mathematical formula
used to value options. The actual amount, if any, realized upon the exercise of
stock options will depend upon the amount by which the market price of Pillowtex
Common Stock exceeds the exercise price on the date of exercise. There is no
assurance that the present values of stock options reflected in this table will
actually be realized.
INDIVIDUAL OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS PRESENT
UNDERLYING GRANTED TO EXERCISE OR VALUE AT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION DATE OF
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE GRANT (2)
- ---- ------------- -------------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Charles M. Hansen, Jr. -- -- -- -- --
Jeffrey D. Cordes 10,000 4.4 12.00 03/24/06 47,100
Christopher N. Baker 10,000 4.4 12.00 03/24/06 47,100
Scott E. Shimizu 10,000 4.4 12.00 03/24/06 47,100
Ronald M. Wehtje 12,000 5.3 12.00 03/24/06 56,520
</TABLE>
- ------------------------------------
(1) Options become exercisable in four 25% increments beginning on the first
anniversary date of the grant.
(2) The Black-Scholes options pricing model used to calculate the values at
date of grant considers a number of factors to estimate the option's
present value, including the stock's historic volatility calculated using
the daily closing market price of the Pillowtex Common Stock, the expected
term of the option, interest rates, and the stock's expected dividend
yield. The assumptions used in the valuation of the options were: stock
price volatility - 38.82%, expected term - 5 years, interest rate - 5.99%,
and dividend yield - 1.14%.
Stock Option Exercises and Fiscal Year End Stock Option Values. Set forth
in the table below is information concerning the exercise of stock options and
freestanding SARs during 1996 and the amount held and the value thereof as of
December 28, 1996 by each Pillowtex Named Executive Officer:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUES AT DECEMBER 28, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
DECEMBER 28, 1996 (#) AT DECEMBER 28, 1996 ($)
--------------------------- ------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Hansen, Jr. -- -- -- -- -- --
Jeffrey D. Cordes -- -- 21,429 22,143 89,291 124,947
Christopher N. Baker -- -- 21,429 22,143 89,291 124,947
Scott E. Shimizu -- -- 22,679 20,893 97,116 122,772
Ronald M. Wehtje -- -- -- 12,000 -- 72,000
</TABLE>
78
<PAGE> 99
STOCK OPTION PLAN
Under the Stock Option Plan, options to purchase shares of Pillowtex Common
Stock may be granted to key employees and non-employee directors of Pillowtex
and its subsidiaries for the purchase of an aggregate of up to 1,500,000 shares
of Pillowtex Common Stock. Options may not be transferred other than by will or
by the laws of descent and distribution.
As of November 5, 1997, 1,303,405 shares of Pillowtex Common Stock that
were not the subject of outstanding options remained available for issuance
under the Stock Option Plan.
Stock appreciation rights may be issued under the Stock Option Plan in
connection with grants of options. A stock appreciation right entitles the
optionee to receive, without payment to Pillowtex, the aggregate fair market
value per share of Pillowtex Common Stock with respect to which such stock
appreciation right is being exercised, less the aggregate exercise price of such
shares as provided in the related option.
Option grants may provide for the exercise of options in installments and
upon such terms, conditions, and restrictions as are set forth therein. However,
the exercise price of options may not be less than 100% of the fair market value
per share of Pillowtex Common Stock on the date the option is granted, and no
option may terminate later than ten years from the date it is granted.
Options granted under the Stock Option Plan may be incentive stock options
or nonqualified stock options, except that no incentive stock option may be
granted to an employee who owns more than 10% of the voting power of all classes
of stock of Pillowtex or its parent or subsidiaries unless the exercise price is
at least 110% of the fair market value of the Pillowtex Common Stock at the time
of grant and the incentive stock option is not exercisable for more than five
years from the date of grant.
There is no limit on the fair market value of incentive stock options that
may be granted to an employee in any calendar year, but no employee may be
granted incentive stock options that first become exercisable during a calendar
year for the purchase of stock with an aggregate fair market value (determined
as of the date of grant of each option) in excess of $100,000. An incentive
stock option (or an installment thereof) counts against the annual limitation
only in the year it first becomes exercisable. Incentive stock options may not
be granted to non-employee directors.
Full payment for shares purchased upon exercising an option may be made in
cash or by check or, if so provided in the applicable grant, by tendering shares
of Pillowtex Common Stock at the fair market value per share at the time of
exercise, or on such other terms as are provided in the applicable grant. The
Stock Option Plan does not require a participant to hold shares received upon
the exercise of an option (including shares acquired as a result of prior
exercises of options) if the participant elects to pay for the shares that are
the subject of the option with shares of Pillowtex Common Stock.
Unless sooner terminated by action of the Pillowtex Board, the Stock Option
Plan will terminate in February 2003, and no options may thereafter be granted
under the plan.
PENSION PLAN
Pillowtex maintains a defined benefit pension plan (the "Pension Plan")
covering substantially all of its employees, other than employees of Pillowtex's
Canadian subsidiary, Torfeaco, and other employees subject to collective
bargaining agreements. Pillowtex funds the Pension Plan through annual
contributions in an amount between the minimum required and the maximum amount
that can be deducted for federal income taxes.
The following table presents certain information concerning annual benefits
provided under the Pension Plan.
79
<PAGE> 100
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE (1)
---------------------------------------------------------------------------------------------------
REMUNERATION (2) 15 20 25 30 35
- ---------------- ------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 16,682 $ 22,242 $ 27,803 $ 33,363 $ 38,924
150,000 20,432 27,242 34,053 40,863 47,674
175,000 20,432 27,242 34,053 40,863 47,674
200,000 20,432 27,242 34,053 40,863 47,674
225,000 20,432 27,242 34,053 40,863 47,674
250,000 20,432 27,242 34,053 40,863 47,674
300,000 20,432 27,242 34,053 40,863 47,674
</TABLE>
- --------------------
(1) Estimated credited years of service as of November 5, 1997 for the
Pillowtex Named Executive Officers are as follows: Charles M. Hansen, Jr. -
33 years; Jeffrey D. Cordes - 14 years; Christopher N. Baker - 11 years;
Scott E. Shimizu - 16 years; and Ronald M. Wehtje - 11 years.
(2) An employee's compensation for purposes of determining pension benefits is
calculated on substantially the same basis as the employee's cash
compensation set forth in the Summary Compensation Table, excluding
commissions, overtime, bonuses, and other compensation disclosed therein.
The final average compensation (equal to the highest consecutive five-year
average of the participant's compensation in the ten-year period before
retirement or termination) of any participant may not exceed $250,000. In
addition, the Internal Revenue Service maximum compensation allowed for
benefits for the 1996 plan year is $150,000. Therefore, 1996 covered
compensation for all employees would be limited to $150,000.
Benefits under the Pension Plan are integrated with Social Security and are
computed as straight life annuities. The benefits shown are not offset by any
other Pillowtex benefits or by Social Security.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Under Pillowtex's Supplemental Executive Retirement Plan (the "SERP"), the
Compensation Committee of the Pillowtex Board may designate key executive
employees of Pillowtex and its subsidiaries as eligible to receive a
supplemental retirement benefit upon the employee's retirement or other
termination of employment. The SERP was designed as a performance-based plan,
and, as described below, the amount of benefits to be received by a participant
under the SERP is generally dependent upon the market price of Pillowtex Common
Stock.
The SERP's objective, when combined with Pillowtex's qualified pension plan
and Social Security benefits, is to provide to participants at age 65 a targeted
benefit of 50% of final average compensation. However, the actual benefit to be
received by any participant will be determined solely by the vested balance in
such participant's SERP account at the time of retirement or other termination
of employment. A participant's targeted benefit will be reduced proportionately
if the participant will have fewer than 30 years of service with Pillowtex at
age 65.
For each participant in the SERP, the Compensation Committee of the
Pillowtex Board will credit to a supplemental retirement account each year an
amount (the "scheduled annual accrual") necessary to accumulate an account
balance sufficient to pay the participant's targeted retirement benefit
beginning at age 65, assuming each credited accrual earned 12% per year
compounded. The Compensation Committee of the Pillowtex Board has the authority
to establish and revise the discount rates and other assumptions used to
calculate a participant's scheduled annual accrual (subject to certain
limitations following a "change in control"). Each scheduled annual accrual will
be expressed as a number of phantom shares (i.e., a hypothetical measurement
unit equivalent to one share of Pillowtex Common Stock, subject to certain
adjustments) determined by dividing the amount of the scheduled annual accrual
by the market value per share of Pillowtex Common Stock on the date of such
contribution. Each participant's supplemental retirement account will be deemed
to be invested solely in phantom shares, and the balance of a participant's
account as of any date will be determined by multiplying (i) the number of
phantom shares credited to such participant's account at the time of
determination by (ii) the market value per share of Pillowtex Common Stock on
such date.
For purposes of calculating a participant's targeted benefit under the
SERP, final average compensation is the projected total cash compensation for
the five consecutive years of employment ending at age 65. To the extent a
participant's compensation exceeds the median compensation for an employee
holding a comparable position in firms with comparable sales (including but not
limited to firms within Pillowtex's industry), as determined by the Compensation
Committee of the Pillowtex Board, such excess compensation will not be taken
into account for any purpose under the SERP.
A participant will be vested in such participant's supplemental retirement
account to the same extent that such participant has a vested interest in such
participant's employer-provided benefit under the Pension Plan, subject to
immediate vesting in the event such participant becomes disabled or in the event
of a "change in control." In
80
<PAGE> 101
addition, a participant will be given credit for additional years of service for
purposes of vesting under the SERP (but not for purposes of calculating the
amount of a participant's supplemental retirement benefit) if required under the
terms of a participant's employment contract with Pillowtex.
Under the SERP, which will be unfunded, payment of a participant's interest
in such participant's supplemental retirement account will be made or will begin
upon the participant's retirement or other termination of employment. Such
payment will be made in the form of a single lump sum cash payment unless the
participant elects to receive installment payments. Upon the death of a
participant who is receiving a supplemental retirement benefit, such
participant's supplemental retirement account balance will continue to be paid
in accordance with the form of payment elected by such participant prior to
death. If a participant who is entitled to receive a supplemental retirement
benefit dies before payment of such benefit begins, the supplemental retirement
account balance will be paid as a death benefit to the beneficiary designated by
the participant or, if none has been designated, to the participant's surviving
spouse, or, if there is no surviving spouse, to the participant's estate. The
death benefit will be paid to the beneficiary in a single lump sum payment
unless the beneficiary elects otherwise in accordance with the terms of the
SERP.
In the event of a "change in control," (i) the balance of such
participant's account as of the date of the "change in control" will be
determined (based on the number of phantom shares credited to such participant's
account as of such date) and (ii) such participant's account will thereupon be
converted into a hypothetical fixed-income investment earning 12% per annum
(subject to reduction to 8% per annum upon commencement of installment payments
of the balance of a participant's supplemental retirement account) and will no
longer be deemed to be invested in phantom shares. In addition, in the event of
a "change in control," a participant's scheduled annual accrual will be stated
as a dollar amount, and will no longer be expressed as a number of phantom
shares. The Merger will not constitute a "change in control" for purposes of the
SERP.
The SERP may be amended at any time by the Compensation Committee of the
Pillowtex Board or by the full Pillowtex Board. Any such amendment may reduce
prospectively the earnings factor to be applied to a participant's supplemental
retirement account, or may change the hypothetical investment of account
balances from phantom shares to any other hypothetical investment, but no
amendment or termination may have the effect of decreasing a participant's
account balance as of the date of such action. Moreover, in the event of a
"change in control," the SERP may not be amended with respect to any participant
in any manner that would adversely affect such participant's existing or future
benefit under the SERP without such participant's written consent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Pillowtex Board consists entirely of
non-employee directors. The members of the Pillowtex Board who served on the
Compensation Committee during 1996 were Messrs. Gillease, Madden, and Mrs.
Silverthorne.
Charles M. Hansen, Jr. has served on the board of directors of Triangle
Pacific since 1992 and currently serves on its compensation committee. M. Joseph
McHugh is a director and executive officer of Triangle Pacific and was elected
as a director of Pillowtex in February 1993. Except as described above, no
executive officer of Pillowtex serves as a member of the Compensation Committee
or other committee of the Pillowtex Board performing similar functions of any
other entity.
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
In February 1996, Pillowtex entered into an agreement with Paul G.
Gillease, a director of Pillowtex, to provide management consulting services to
Pillowtex. The agreement provides for a monthly consulting fee of $9,000 and
reimbursement of travel expenses, and is cancelable by Pillowtex or Mr. Gillease
upon 90 days notice.
81
<PAGE> 102
OWNERSHIP OF CERTAIN SECURITIES OF PILLOWTEX AND FIELDCREST
PILLOWTEX
The following table sets forth certain information concerning the
beneficial ownership of Pillowtex Common Stock, as of November 5, 1997, by each
person known by Pillowtex to own beneficially more than 5% of the outstanding
Pillowtex Common Stock, certain executive officers and each director of
Pillowtex, and all executive officers and directors as a group. Except as
otherwise indicated, Pillowtex believes that the owners named below have sole
voting and investment power with respect to all shares of Pillowtex Common Stock
indicated.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
----------------------
NAME NUMBER PERCENT
- ---- ------- -------
<S> <C> <C>
Charles M. Hansen, Jr. (1)................................................ 2,653,104 24.6%
John H. Silverthorne Marital Trust B (2).................................. 2,368,893 22.0
Mary R. Silverthorne (2).................................................. 662,811 6.1
Paul G. Gillease.......................................................... 8,853 *
Ralph W. La Rovere........................................................ 300 *
William B. Madden (3)..................................................... 9,322 *
M. Joseph McHugh (3)...................................................... 3,822 *
Jeffrey D. Cordes (3)..................................................... 36,767 *
Christopher N. Baker (3).................................................. 8,850 *
Kevin M. Finlay........................................................... -- *
Scott E. Shimizu (3)...................................................... 6,950 *
Ronald M. Wehtje ......................................................... 5 *
Pioneering Management Corporation (4)..................................... 549,900 5.1%
All executive officers and directors as a
group (12 persons) (3).................................................. 5,759,677 53.1%
</TABLE>
- ------------------------------------
* Less than 1%
(1) Mr. Hansen's address is 4111 Mint Way, Dallas, Texas 75237.
(2) The address of the John H. Silverthorne Marital Trust B and Mrs.
Silverthorne is 4111 Mint Way, Dallas, Texas, 75237. Under the rules and
regulations of the Commission, Mrs. Silverthorne may be deemed the
beneficial owner of the shares held by the John H. Silverthorne Marital
Trust B because she is its independent trustee. In addition, Mrs.
Silverthorne, in her capacity as trustee, may be deemed the beneficial
owner of 42,857 shares held by the John H. Silverthorne Family Trust A,
14,285 shares held by the Bridget Russell Silverthorne Trust A, and 14,285
shares held by the John H. Silverthorne, Jr. Trust A. Mrs. Silverthorne
disclaims beneficial ownership of any shares other than the 591,384 shares
that she holds of record.
(3) Includes options that are currently exercisable, or become exercisable
within 60 days of the date hereof, to purchase the number of shares of
Pillowtex Common Stock indicated for the following persons: Mr. Gillease
(2,929), Mr. Madden (3,822), Mr. McHugh (3,822), Mr. Cordes (32,322) Mr.
Baker (3,750), and Mr. Shimizu (5,000).
(4) The address of Pioneering Management Corporation, a Delaware corporation,
is 60 State Street, Boston, Massachusetts, 02109. According to the Schedule
13G filed by Pioneering Management Corporation with the Commission which
reflects ownership as of December 31, 1996, Pioneering Management
Corporation owns all of such shares with sole dispositive power and sole
voting power.
FIELDCREST
The following table sets forth certain information concerning the
beneficial ownership of Fieldcrest Common Stock, as of November 5, 1997, by each
person known by Fieldcrest to own beneficially more than 5% of the outstanding
Fieldcrest Common Stock, certain executive officers and each director of
Fieldcrest, and all executive officers and directors as a group. Except as
otherwise indicated, Fieldcrest believes that the owners named below have sole
voting and investment power with respect to all shares of Fieldcrest Common
Stock indicated.
82
<PAGE> 103
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
----------------------
NAME NUMBER PERCENT
- ---- ------- -------
<S> <S> <C>
James M. Fitzgibbons (1)(2)(3)(4)(5)...................................... 139,675 1.50%
William E. Ford(6)........................................................ 7,700 *
John C. Harned (7)........................................................ 15,000 *
Noah T. Herndon (8)....................................................... 12,000 *
S. Roger Horchow (6)...................................................... 7,000 *
W. Duke Kimbrell (9)(10).................................................. 309,282 3.33%
C. J. Kjorlien (7)........................................................ 32,000 *
Alexandra Stoddard (11)................................................... 4,000 *
John M. Nevin (4)(5)...................................................... 50,094 *
Robert E. Dellinger (3)(4)(5)............................................. 58,285 *
Thomas R. Staab (3)(4)(5)................................................. 56,576 *
The Prudential Insurance Company
of America (12)........................................................ 816,890 8.56%
Prudential Plaza
Newark, New Jersey 07102-3777
Mario J. Gabelli (13)..................................................... 682,901 7.13%
One Corporate Center
Rye, New York 10580-1434
Dimensional Fund Advisors Inc. (14)....................................... 476,700 5.16%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Mellon Bank Corporation (15).............................................. 468,678 5.07%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
All directors and executive officers of
Fieldcrest as a group (15 persons, including
the ones listed above)(5)(16).......................................... 712,376 7.47%
</TABLE>
- ------------------------------------
* Less than 1%
(1) Includes 8,000 shares of Fieldcrest Common Stock that may be purchased upon
the exercise of options granted under Fieldcrest's Director Stock Option
Plan.
(2) Includes 20,000 shares of Fieldcrest Common Stock covered by an option that
Fieldcrest granted to Mr. Fitzgibbons pursuant to a stock option agreement
dated as of September 11, 1991 between Fieldcrest and Mr. Fitzgibbons. The
option is exercisable at $14.875 per share, which was the closing price per
share of Fieldcrest Common Stock on the NYSE on September 11, 1991, and may
be exercised in whole or in part at any time before September 10, 1998,
provided Mr. Fitzgibbons is on the date of exercise an employee of
Fieldcrest.
(3) Includes outstanding shares of Fieldcrest Common Stock granted under
Fieldcrest's Long-Term Incentive Plan as of November 5, 1997, certain of
which shares are subject to forfeiture.
(4) Includes shares that may be purchased within 60 days upon the exercise of
options granted under Fieldcrest 's 1995 Employee Stock Option Plan. Shares
that may be purchased by Fieldcrest Named Executive Officers are as
follows: J.M. Fitzgibbons -- 30,000 shares; John M. Nevin -- 11,250 shares;
R.E. Dellinger -- 22,500 shares; and T.R. Staab -- 22,500 shares.
(5) Includes shares of Fieldcrest Common Stock that may be purchased upon the
exercise of options granted under Fieldcrest's 1995 Employee Stock Option
Plan. Although some of these options are not exercisable at present, they
will become exercisable within 60 days if the Merger is consummated. Shares
that may be exercised if the merger is consummated include: J.M.
Fitzgibbons--30,000; R.E. Dellinger--22,500; T.R. Staab--22,500; J.M.
Nevin-- 33,750; and other executive officers--8,600.
(6) Includes 5,000 shares of Fieldcrest Common Stock that may be purchased upon
the exercise of options granted under Fieldcrest's Director Stock Option
Plan.
(7) Includes 10,000 shares of Fieldcrest Common Stock that may be purchased
upon the exercise of options granted under Fieldcrest's Director Stock
Option Plan.
(8) Includes 4,000 shares of Fieldcrest Common Stock that may be purchased upon
the exercise of options granted under Fieldcrest's Director Stock Option
Plan.
(9) Includes 3,000 shares of Fieldcrest Common Stock that may be purchased upon
the exercise of options granted under Fieldcrest's Director Stock Option
Plan.
(10) Includes 50,000 shares owned by daughters of Mr. Kimbrell and 51,282 shares
that may be acquired upon the conversion of 30,000 shares of Fieldcrest
Preferred Stock owned by Parkdale Mills, Inc. Mr. Kimbrell is an owner and
the Chairman of the Board and Chief Executive Officer of Parkdale Mills.
Mr. Kimbrell shares voting and investment power as to all the shares owned
by Parkdale Mills.
83
<PAGE> 104
(11) Includes 2,000 shares of Fieldcrest Common Stock that may be purchased upon
the exercise of options granted under Fieldcrest's Director Stock Option
Plan.
(12) According to information contained in a statement on Schedule 13G filed
with the Commission, as of December 31, 1996, The Prudential Insurance
Company of America is the beneficial owner of 816,890 shares of Fieldcrest
Common Stock (including shares that may be acquired upon the conversion of
Fieldcrest Preferred Stock and Fieldcrest Convertible Debentures) and has
sole voting, shared voting, sole dispositive, and shared dispositive power
with respect to 3,200, 490,310, 3,200, and 494,610, respectively, of these
shares.
(13) According to information contained in a statement on Schedule 13D filed
with the Commission, as of October 31, 1997, GAMCO Investors, Inc., Gabelli
Funds, Inc., and Gabelli Foundation, Inc. had the sole dispositive power
over 682,901 shares of Fieldcrest Common Stock (including shares that may
be acquired upon the conversion of Fieldcrest Preferred Stock and
Fieldcrest Convertible Debentures) and sole voting power with respect to
666,701 of these shares. Each of Mario J. Gabelli and Gabelli Funds, Inc.
is deemed to have beneficial ownership of the securities beneficially owned
by each of the foregoing persons.
(14) According to information contained in a statement on Schedule 13G filed
with the Commission, as of December 31, 1996, Dimensional Fund Advisors
Inc. is the beneficial owner of 476,700 shares of Fieldcrest Common Stock
and has sole voting, shared voting, and sole dispositive power with respect
to 318,100, 476,700, and 476,700, respectively, of these shares.
(15) According to information contained in a statement on Schedule 13G filed
with the Commission, as of December 31, 1996, Mellon Bank Corporation is
the beneficial owner of 468,678 shares of Fieldcrest Common Stock and has
sole voting, sole dispositive, and shared dispositive power with respect to
388,678, 417,000, and 51,768, respectively, of these shares.
(16) Includes 47,000 shares of Fieldcrest Common Stock that may be purchased
upon the exercise of options granted under Fieldcrest's Director Stock
Option Plan, 119,200 shares of Fieldcrest Common Stock that may be
purchased by employees within 60 days upon the exercise of options granted
under Fieldcrest's 1995 Employee Stock Option Plan, 12,545 outstanding
shares of Fieldcrest Common Stock that have been granted to directors and
executive officers under Fieldcrest's Long-Term Incentive Plan and that are
subject to forfeiture, and 20,000 shares of Fieldcrest Common Stock covered
by the option granted to Mr. Fitzgibbons as described in note (6) above.
84
<PAGE> 105
MERGER FINANCING
INTRODUCTION
In order to finance the Merger and the repayment of certain indebtedness of
Fieldcrest, refinance the existing senior bank credit facility of Pillowtex, and
provide working capital for the combined enterprise that will result from the
Merger, Pillowtex has negotiated and entered into (i) the New Pillowtex Bank
Facilities Commitment with NationsBank of Texas, N.A., which provides for new
senior revolving credit and term loan facilities and (ii) the Pillowtex
Preferred Stock Commitment with Apollo, which provides for the issuance and sale
of 65,000 shares of Pillowtex Preferred Stock. In addition, Pillowtex has
negotiated and entered into the Standby Bridge Loan Facility Commitment with
NationsBridge, L.L.C., which provides for a standby bridge loan facility.
Pillowtex intends to finance the Merger and the repayment of certain
indebtedness of Fieldcrest and to refinance the existing senior bank credit
facility of Pillowtex through a combination of (i) borrowings under the New
Pillowtex Bank Facilities, (ii) the issuance and sale of Pillowtex Preferred
Stock, and (iii) the issuance and sale of New Pillowtex Subordinated Notes. In
the event that less than $135.0 million aggregate principal amount of New
Pillowtex Subordinated Notes shall have been issued and sold as of the Closing
Date, Pillowtex may borrow an amount corresponding to such shortfall under the
Standby Bridge Loan Facility.
The financings contemplated by the Financing Commitments, together with the
proposed sale by Pillowtex of the New Pillowtex Subordinated Notes, are briefly
summarized below.
The obligations of third parties under the Financing Commitments to extend
loans or purchase Pillowtex Preferred Stock, as the case may be, are subject to
various specified conditions. Because such conditions relate to matters beyond
Pillowtex's control, there can be no assurance that such conditions will be
timely satisfied.
NEW PILLOWTEX BANK FACILITIES
The New Pillowtex Bank Facilities Commitment provides for, on the terms and
subject to the conditions set forth therein, (i) a $350.0 million revolving
credit facility (including $40.0 million for standby and commercial letters of
credit and up to $15.0 million for swing line loans) (the "Revolver") and (ii) a
$250.0 million term loan facility (the "Term Loan"). The Term Loan will consist
of a $125.0 million Tranche A Term Loan and a $125.0 million Tranche B Term
Loan. The Revolver will terminate on December 31, 2003. The Tranche A Term Loan
and the Tranche B Term Loan will begin scheduled amortization of principal
quarterly in arrears commencing in 1999 and 1998, respectively, with final
maturities on December 31, 2003 and December 31, 2004, respectively. Pillowtex
expects to draw fully on the Term Loan at the closing of the New Pillowtex Bank
Facilities and to draw a portion of the Revolver contemporaneously with the
closing of the Merger. Pillowtex will initially pay quarterly a commitment fee
of 50 basis points per annum calculated on the unused portion of the Revolver.
The commitment fee could, however, be reduced during future periods depending
upon the ratio of Pillowtex's consolidated indebtedness to EBITDA.
The Revolver and the Tranche A Term Loan will bear interest, at the option
of Pillowtex, at a rate per annum equal to either (i) the LIBOR interbank rate,
adjusted for reserves, plus a margin of up to 225 basis points, or (ii) the
"Base Rate" (which is the higher of (a) the prime rate then in effect and
published by NationsBank of Texas, N.A. and (b) the Federal Funds rate plus
0.5%), plus a margin of up to 75 basis points, subject to adjustments in
accordance with the terms of the New Pillowtex Bank Facilities Commitment. The
specific margin in any particular case will depend upon the ratio of Pillowtex's
consolidated indebtedness to EBITDA, as calculated based upon Pillowtex's
quarterly financial statements. The Tranche B Term Loan will bear interest on a
similar basis, plus an additional margin of 50 basis points, but will not bear
interest at a rate less than the LIBOR interbank rate plus 200 basis points or
the Base Rate plus 50 basis points. The initial interest rates will not be less
than (i) the LIBOR interbank rate plus 200 basis points or the Base Rate plus 50
basis points for the Revolver and the Tranche A Term Loan and (ii) the LIBOR
interbank rate plus 250 basis points or the Base Rate plus 100 basis points for
the Tranche B Term Loan, and will not be subject to any change until the receipt
of Pillowtex's March 31, 1998 financial statements.
85
<PAGE> 106
The Revolver and the Term Loan will be guaranteed by each of the domestic
subsidiaries of Pillowtex, including the Surviving Company and its domestic
subsidiaries, and will be secured by first priority liens on all of the capital
stock of each domestic subsidiary of Pillowtex, including the Surviving Company
and its domestic subsidiaries, and by 65% of the capital stock of each foreign
subsidiary of Pillowtex and Fieldcrest. Pillowtex will also grant a first
priority security interest in all of its presently unencumbered and future
domestic assets and properties and all presently unencumbered and future
domestic assets and properties of each of its subsidiaries, including the
Surviving Company and its subsidiaries. The Term Loan will be subject to
mandatory prepayment from all net cash proceeds of asset sales and debt
issuances by Pillowtex or any of its subsidiaries after the Merger (except for
refinancing or redemption of the Standby Bridge Loan Facility, if utilized), 50%
of the net cash proceeds of equity issuances by Pillowtex or any of its
subsidiaries after the Merger (excluding equity proceeds that are applied to
repay or redeem the Standby Bridge Loan Facility, if utilized), and 75% of
excess cash flow. All mandatory prepayments will be applied pro rata between the
Tranche A Term Loan and the Tranche B Term Loan (and within each tranche pro
rata) to reduce the remaining installments of principal.
The initial funding of the New Pillowtex Bank Facilities will be subject to
various conditions precedent, including, among others: (i) Pillowtex having not
less than $40.0 million of availability under the Revolver immediately after the
initial funding of the New Pillowtex Bank Facilities; (ii) Pillowtex having
issued not less than $135.0 million aggregate principal amount of New Pillowtex
Subordinated Notes and/or Bridge Notes; (iii) Pillowtex having issued not less
than $65.0 million aggregate liquidation preference of Pillowtex Preferred
Stock; and (iv) Pillowtex having issued new common stock in connection with the
Merger for not less than 20.58% of the aggregate value of the Fieldcrest Common
Stock and Fieldcrest Preferred Stock outstanding. The New Pillowtex Bank
Facilities Commitment provides that the definitive documentation will include
representations, warranties, and covenants (including financial covenants) usual
and customary for credit facilities such as the New Pillowtex Bank Facilities,
and that the New Pillowtex Bank Facilities will be subject to usual and
customary events of default, including without limitation nonpayment of
principal, interest, or fees, violation of any covenant, inaccurate
representations and warranties, bankruptcy, actual or asserted invalidity of any
loan documents or security interests, change of control, and cross-default with
other material agreements and indebtedness of Pillowtex.
PILLOWTEX PREFERRED STOCK
The Pillowtex Preferred Stock Commitment provides for, on the terms and
subject to the conditions set forth therein, the issuance and sale to Apollo of
65,000 shares of Pillowtex Preferred Stock as of the Closing Date. The issuance
and sale of such shares are expected to result in net proceeds to Pillowtex of
approximately $63.5 million. For a description of the terms of the Pillowtex
Preferred Stock, see "Description of Pillowtex Capital Stock--Series A
Redeemable Convertible Preferred Stock."
The purchase by Apollo of Pillowtex Preferred Stock pursuant to the
Pillowtex Preferred Stock Commitment will be subject to various conditions
precedent including, among others: (i) Pillowtex having not less than $40.0
million of availability under the Revolver immediately after the funding of the
New Pillowtex Bank Facilities; (ii) Pillowtex having entered into definitive
documentation for the New Pillowtex Bank Facilities as contemplated by the New
Pillowtex Bank Facilities Commitment and all conditions to the initial funding
thereunder having been satisfied; (iii) Pillowtex having issued not less than
$135.0 million aggregate principal amount of New Pillowtex Subordinated Notes
and/or Bridge Notes; and (iv) Pillowtex and Fieldcrest having no outstanding
indebtedness for borrowed money or preferred stock other than (a) the existing
industrial revenue bonds of Pillowtex and Fieldcrest, (b) the Existing Pillowtex
Subordinated Notes, (c) the Fieldcrest Convertible Debentures, and (d) other
indebtedness for borrowed money not exceeding $1.0 million.
Pursuant to the Pillowtex Preferred Stock Commitment, holders of 20% or
more of the outstanding Pillowtex Preferred Stock will be provided with
reasonable access to management of Pillowtex and with detailed financial and
operating data.
Pursuant to the Pillowtex Preferred Stock Commitment, upon the occurrence
of certain conditions, holders of Pillowtex Preferred Stock will have the right
to require Pillowtex to file a registration statement with the Commission to
register shares of Pillowtex Common Stock receivable by such holders upon
conversion of Pillowtex
86
<PAGE> 107
Preferred Stock. Holders will also have so-called "piggyback" registration
rights with respect to shares of Pillowtex Common Stock receivable upon
conversion of Pillowtex Preferred Stock.
NEW PILLOWTEX SUBORDINATED NOTES
Pillowtex intends to issue and sell up to $150.0 million aggregate
principal amount of its New Pillowtex Subordinated Notes on or prior to the
Closing Date. Although the specific terms of the New Pillowtex Subordinated
Notes have not yet been established, (i) for purposes of the pro forma combined
financial information presented in this Joint Proxy Statement/Prospectus, the
principal thereof is assumed to bear interest at a rate of 93 semi-annually in
arrears, (ii) the New Pillowtex Subordinated Notes are expected to be due and
payable in full in 2007, and (iii) the indenture or other instrument under which
they are to be issued is expected to contain affirmative, restrictive, and
financial covenants and to specify events of default generally comparable to the
covenants and events of default contained and specified in the indenture
pursuant to which the Existing Pillowtex Subordinated Notes were issued. See
"Other Post-Merger Indebtedness of Pillowtex--Existing Pillowtex Subordinated
Notes." For purposes of the pro forma combined financial information presented
in the Joint Proxy Statement/Prospectus, it has been assumed that the New
Pillowtex Subordinated Notes will be issued and sold as of the Closing Date,
resulting in net proceeds to Pillowtex of approximately $146.4 million.
STANDBY BRIDGE LOAN FACILITY
The Standby Bridge Loan Facility Commitment provides for, on the terms and
subject to the conditions set forth therein, a standby bridge loan facility
pursuant to which up to $150.0 million will be available to Pillowtex to finance
the Merger and complete the related refinancings in the event that less than
$135.0 million aggregate principal amount of New Pillowtex Subordinated Notes
shall have been issued and sold as of the Closing Date. Pillowtex presently does
not intend to utilize the Standby Bridge Loan Facility. In the event it becomes
necessary to utilize the Standby Bridge Loan Facility, borrowings thereunder
would initially be evidenced by senior subordinated bridge notes ("Bridge
Notes"). The terms of the Bridge Notes would be less favorable to Pillowtex than
the anticipated terms of the New Pillowtex Subordinated Notes. Interest on the
Bridge Notes would be payable at a floating rate higher than the fixed rate of
interest expected to be borne by the New Pillowtex Subordinated Notes, which
floating rate would increase at specified intervals as long as the Bridge Notes
were outstanding (subject to certain limitations). The Bridge Notes would mature
one year from the date of issuance and, if not repaid in full, could, subject to
certain conditions, be satisfied at that time through the issuance and delivery
of senior subordinated rollover notes with a maturity of nine years (the
"Rollover Notes"). Interest on the Rollover Notes would also be payable at a
floating rate which would increase at specified intervals (subject to certain
limitations).
OTHER POST-MERGER INDEBTEDNESS OF PILLOWTEX
INTRODUCTION
The principal long-term indebtedness of Pillowtex expected to be
outstanding following the Merger, in addition to the indebtedness described
under "Merger Financing" above, is described briefly below.
EXISTING PILLOWTEX SUBORDINATED NOTES
Pillowtex presently has outstanding $125.0 million aggregate principal
amount of its 10% Senior Subordinated Notes due 2006 (the "Existing Pillowtex
Subordinated Notes"). The Existing Pillowtex Subordinated Notes bear interest at
a rate of 10% per annum, payable semiannually in arrears on May 15 and November
15 of each year. The Existing Pillowtex Subordinated Notes are scheduled to
mature in their entirety on November 15, 2006. Pillowtex has the option to
redeem the Existing Pillowtex Subordinated Notes, in whole or in part, at any
time on or after November 15, 2001, at redemption prices starting at 105% of
stated principal on November 15, 2001 and decreasing at a rate of 1.667% per
year to 100% on and after November 15, 2004, plus all accrued and unpaid
interest to the redemption date. There is no mandatory redemption of the
Existing Pillowtex Subordinated Notes except upon a change in control. Upon the
occurrence of a "change in control," each holder of Existing Pillowtex
87
<PAGE> 108
Subordinated Notes will have the right to require Pillowtex to repurchase all or
any part of such holder's Existing Pillowtex Subordinated Notes pursuant to a
"change of control" offer at a price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon
to the date of purchase. The Merger will not constitute a "change in control"
for purposes of the Existing Pillowtex Subordinated Notes.
The Existing Pillowtex Subordinated Notes are subject to certain covenants
which restrict, among other things, Pillowtex's ability to incur additional
indebtedness and issue preferred stock, incur liens to secure subordinated
indebtedness, pay dividends or make certain other restricted payments, apply net
proceeds from certain asset sales, enter into certain transactions with
affiliates, incur indebtedness that is subordinate in right of payment to any
senior indebtedness and senior in right of payment to the Existing Pillowtex
Subordinated Notes, merge or consolidate with any other person, sell stock of
subsidiaries, or sell, assign, transfer, lease, convey, or otherwise dispose of
substantially all of the assets of Pillowtex.
FIELDCREST CONVERTIBLE DEBENTURES
Fieldcrest presently has outstanding $116.5 million aggregate principal
amount of its 6.0% Convertible Subordinated Debentures due 2012. After the
Effective Time, the Fieldcrest Convertible Debentures will remain outstanding as
debt obligations of the Surviving Company. The Fieldcrest Convertible Debentures
bear interest at the rate of 6.0% per annum payable on March 15 and September 15
of each year. The Fieldcrest Convertible Debentures are presently convertible
into shares of Fieldcrest Common Stock at a conversion price of $44.25 per
share, subject to adjustment upon the occurrence of certain events. As a result
of the Merger, Fieldcrest Convertible Debentures will become convertible into
the same consideration that a holder of the number of shares of Fieldcrest
Common Stock into which such Fieldcrest Convertible Debentures might have been
converted immediately prior to the Merger would be entitled to receive in the
Merger. For example, a Fieldcrest Convertible Debenture having an aggregate
principal amount of $1,000 will become convertible into (i) a cash payment equal
to the product of (a) the amount of the cash payment to be made on account of
each share of Fieldcrest Common Stock converted in the Merger and (b) 22.60 and
(ii) a number of shares of Pillowtex Common Stock equal to the product of (a)
the Conversion Number and (b) 22.60.
The Fieldcrest Convertible Debentures are presently redeemable at their
stated principal amount, in whole or in part, at the option of Fieldcrest, plus
any accrued and unpaid interest to the date of redemption. The Fieldcrest
Convertible Debentures are subject to mandatory redemption at their stated
principal amount plus any accrued and unpaid interest pursuant to a sinking fund
provision whereby Fieldcrest is required on March 15 of the years 1997 to 2011
inclusive, to deposit with the indenture trustee an amount equal to 5.0% of the
original $125.0 million aggregate principal amount of Fieldcrest Convertible
Debentures. The sinking fund provision is designed to cause the redemption of
75% of the Fieldcrest Convertible Debentures as of their maturity date.
PILLOWTEX DEED OF TRUST NOTE
Pillowtex presently has outstanding a $2.5 million deed of trust note
collateralized by land and buildings (the "Pillowtex Trust Note"). The Pillowtex
Trust Note bears interest at 10.5% per annum, payable monthly in arrears, and
matures on July 1, 1998.
PILLOWTEX INDUSTRIAL REVENUE BONDS
Pillowtex has certain obligations in respect of certain industrial revenue
bonds issued by the Pennsylvania Economic Development Financing Authority (the
"PEDFA Bonds"). The PEDFA Bonds are collateralized by certain funds established
and agreements executed in connection with the issuance of the PEDFA Bonds,
including an irrevocable direct pay letter of credit issued by NationsBank, N.A.
(formerly NCNB National Bank of North Carolina), for the account of Pillowtex,
in the initial face amount of $5.7 million in support of the PEDFA Bonds. Such
letter of credit provides assurance that payments on the PEDFA Bonds will be
made as scheduled. The PEDFA Bonds bear interest, payable semiannually, at a
variable rate (7.00% to 7.85% per annum), and mature serially in annual amounts
ranging from $285,000 to $640,000 through April 1, 2002. Approximately $2.8
million aggregate principal amount of PEDFA Bonds is presently outstanding.
88
<PAGE> 109
Pillowtex also has certain obligations in respect of certain industrial
revenue bonds issued by the Mississippi Business Finance Corporation (the "MBFC
Bonds"). The MBFC Bonds are collateralized by buildings, equipment, and certain
agreements executed in connection with the issuance of the MBFC Bonds, including
(i) a security interest in the lease agreement between Pillowtex (as lessee) and
Tunica County, Mississippi, covering the real property on which Pillowtex
constructed facilities with the proceeds of the issuance of the MBFC Bonds, and
(ii) an irrevocable direct pay letter of credit issued by NationsBank of Texas,
N.A., for the account of Pillowtex, in the initial face amount of $4.7 million
in support of the MBFC Bonds. The letter of credit provides assurance that
payments on the MBFC Bonds will be made as scheduled. The MBFC Bonds bear
interest, payable monthly (or, in certain circumstances, quarterly), at a
variable rate (2.75% to 4.5% per annum), provide for annual principal payments
of $460,000 beginning July 1, 1995, and mature on July 1, 2004. Approximately
$3.2 million aggregate principal amount of MBFC Bonds is presently outstanding.
FIELDCREST INDUSTRIAL REVENUE BONDS
Fieldcrest has certain obligations in respect of industrial revenue bonds
issued by various state and municipal industrial authorities. First, Fieldcrest
has certain obligations in respect of certain industrial revenue bonds issued by
the Industrial Development Board of the City of Phenix City, Alabama (the
"Phenix City Bonds"). The Phenix City Bonds are collateralized by land,
equipment, buildings, and a security interest in the lease agreement between
Fieldcrest (as lessee) and such Board covering the property and facilities that
were acquired with the proceeds of the issuance of the Phenix City Bonds. The
Phenix City Bonds bear interest, payable semiannually, at a rate equal to 5.63%
per annum, and mature serially in annual amounts ranging from $165,000 to
$335,000 through February 1, 1998. Approximately $355,000 aggregate principal
amount of the Phenix City Bonds is presently outstanding.
Fieldcrest also has certain obligations in respect of certain industrial
revenue bonds issued by the Rowan County Industrial Facilities and Pollution
Control Financing Authority of the State of North Carolina (the "Rowan County
Bonds"). The Rowan County Bonds are collateralized by, among other things, a
security interest in the lease agreement between Fieldcrest (as lessee) and such
Authority covering the property and facilities that were acquired with the
proceeds of the issuance of the Rowan County Bonds. The Rowan County Bonds bear
interest, payable semiannually, at a rate equal to 7.25% per annum, and mature
serially in annual amounts ranging from $165,000 to $190,000 through October 1,
2001. Approximately $685,000 aggregate principal amount of the Rowan County
Bonds is presently outstanding.
Fieldcrest has additional obligations in respect of certain industrial
revenue bonds issued by the Industrial Development Board of the City of
Scottsboro, Alabama (the "Scottsboro Bonds"). The Scottsboro Bonds are
collateralized by land, equipment, buildings, and a security interest in the
lease agreement between Fieldcrest (as lessee) and the Board covering the
property that was acquired with the proceeds of the issuance of the Scottsboro
Bonds. The Scottsboro Bonds bear interest, payable semiannually, at a rate equal
to 6.75% per annum, provide for annual principal payments of $200,000 beginning
September 1, 1998, and mature on September 1, 2002. Approximately $1.0 million
aggregate principal amount of the Scottsboro Bonds is presently outstanding.
Fieldcrest has further obligations in respect of certain industrial revenue
bonds issued by the State Industrial Development Authority of the State of
Alabama (the "Alabama Bonds"). The Alabama Bonds are collateralized by certain
funds established and agreements executed in connection with the issuance of the
Alabama Bonds, including an irrevocable direct pay letter of credit issued by
CoreStates Bank, N.A., for the account of Fieldcrest, in the initial face amount
of $10.2 million. Such letter of credit provides assurance that the payments on
the Alabama Bonds will be made as scheduled. The Alabama Bonds bear interest at
a variable rate (approximating the LIBOR interbank rate), and mature on July 1,
2021. Approximately $10.0 million aggregate principal amount of the Alabama
Bonds is presently outstanding.
89
<PAGE> 110
DESCRIPTION OF PILLOWTEX CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
General. The Pillowtex Articles provide that the authorized capital stock
of Pillowtex consists of 30,000,000 shares of Pillowtex Common Stock, and
20,000,000 shares of preferred stock, per value $0.01 per share.
Common Stock. The holders of Pillowtex Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders. Subject to preferential rights of any issued and outstanding
preferred stock, including the Pillowtex Preferred Stock, holders of Pillowtex
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Pillowtex Board out of funds legally available therefor. In the
event of a liquidation, dissolution, or winding-up of Pillowtex, holders of
Pillowtex Common Stock are entitled to share ratably in all assets of Pillowtex,
if any, remaining after payment of liabilities and the liquidation preferences
of any issued and outstanding preferred stock, including the Pillowtex Preferred
Stock. Holders of Pillowtex Common Stock have no preemptive rights, no
cumulative voting rights, and no rights to convert their shares of Pillowtex
Common Stock into any other securities of Pillowtex or any other entity. The
Pillowtex Common Stock is not subject to redemption or sinking fund redemption.
The Pillowtex Common Stock is listed on the New York Stock Exchange under
the symbol "PTX." Chase Mellon Shareholder Services, L.L.C. is the transfer
agent and registrar for the Pillowtex Common Stock.
Preferred Stock. The Pillowtex Board has the authority to issue up to
20,000,000 shares of preferred stock in one or more series and, subject to the
terms of any issued and outstanding preferred stock (including without
limitation the Pillowtex Preferred Stock), to fix the designations, preferences,
limitations, and relative rights of all shares of each such series, including
without limitation dividend rates, conversion rights, voting rights, redemption
and sinking fund provisions, liquidation preferences, and the number of shares
constituting each such series, without any further vote or action by the holders
of Pillowtex Common Stock. The issuance of one or more series of preferred stock
will likely decrease the amount of earnings and assets available for
distribution to holders of Pillowtex Common Stock as dividends or upon
liquidation, respectively, and may adversely affect the rights and powers,
including voting rights, of the holders of Pillowtex Common Stock. The issuance
of preferred stock also could have the effect of delaying, deterring, or
preventing a change in control of Pillowtex.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
General. The Pillowtex Preferred Stock Commitment provides for, on the
terms and subject to the conditions set forth therein, the issuance and sale to
Apollo of 65,000 shares of Pillowtex Preferred Stock at an offering price of
$1,000 per share, which is expected to result in net proceeds to Pillowtex of
approximately $63.5 million. See "Merger Financing--Pillowtex Preferred Stock."
Liquidation Preference; Ranking. Each share of Pillowtex Preferred Stock
will have a liquidation preference of $1,000, plus accrued and unpaid dividends
(the "Liquidation Preference"). The Pillowtex Preferred Stock will rank senior
in right of payment to all common equity stock and all other classes of
preferred stock of Pillowtex (other than parity securities), but will rank
junior in right of payment to all indebtedness of Pillowtex. The terms of the
Pillowtex Preferred Stock will restrict, among other things, Pillowtex's ability
to pay dividends or make certain other restricted payments on the Pillowtex
Common Stock.
Dividends. Subject to the provisions described below, the Pillowtex
Preferred Stock will accrue dividends from the issue date through and including
December 31, 1999 at a rate per annum equal to 3.0%. Beginning on January 1,
2000 through and including the date ten and one-half years after the initial
issuance of the Pillowtex Preferred Stock (the "Mandatory Redemption Date"), the
Pillowtex Preferred Stock will accrue dividends, based upon Pillowtex's earnings
per share for the 1999 fiscal year ("1999 EPS"), at a rate per annum
("Applicable Dividend Rate") equal to (i) 3.0%, if 1999 EPS is greater than or
equal to $2.70, (ii) 7.0%, if 1999 EPS is greater than or equal to $2.35 but
less than $2.70, or (iii) 10.0%, if 1999 EPS is less than $2.35. Pillowtex may
at its option pay dividends in cash during each quarterly period during calendar
years 1998 and 1999 at a rate in excess of
90
<PAGE> 111
3.0%. Following the date on which the final determination of 1999 EPS is made
("Final Determination Date"), Pillowtex will promptly determine the aggregate
amount of dividends actually paid (whether in cash or additional shares of
Pillowtex Preferred Stock) (the "Aggregate Dividends Paid") and the aggregate
amount of dividends that would have been paid on the Pillowtex Preferred Stock
from the issue date of the Pillowtex Preferred Stock through and including the
last Dividend Payment Date prior to the Final Determination Date ("Aggregate
Dividends Owed"), assuming (i) the dividend rate for calendar 1997 (if
applicable) and calendar 1998 was (a) 3.0% per annum if 1999 EPS is equal to or
greater than $2.35 or (b) 10.0% per annum if 1999 EPS is less than $2.35, (ii)
the dividend rate for calendar 1999 was the Applicable Dividend Rate, and (iii)
any incremental dividends included in calculating dividends described in clauses
(i) and (ii) which were not paid after giving effect to dividends paid (whether
in cash or in shares of Pillowtex Preferred Stock) as of the Dividend Payment
Date with respect to which they were paid, were paid in additional shares of
Pillowtex Preferred Stock (including the effect of all dividends earned on
unpaid dividends). If the Aggregate Dividends Paid is less than the Aggregate
Dividends Owed, Pillowtex will pay to the holders of Pillowtex Preferred Stock a
number of additional shares of Pillowtex Preferred Stock equal to the difference
between the Aggregate Dividends Owed and the Aggregate Dividends Paid (the
"Catch Up Dividend"). If the Aggregate Dividends Paid is more than the Aggregate
Dividends Owed, then an amount equal to the difference will be offset against
dividends payable on the next succeeding Dividend Payment Date or Dividend
Payment Dates, as the case may be. The following table sets forth for each of
the three categories of 1999 EPS indicated the applicable dividend rate from and
after January 1, 2000 and the number of shares to be issued as a Catch Up
Dividend (assuming that the Pillowtex Preferred Stock were to be initially
issued on December 31, 1997, that dividends due prior to January 1, 2000 are
paid in cash when due at a rate per annum of 3.0%, and that the Determination
Price is $24.00 per share):
<TABLE>
<CAPTION>
APPLICABLE DIVIDEND
ACCRUAL RATE AT APPLICABLE CATCH UP
1999 EPS JANUARY 1, 2000 DIVIDEND
- ------------------------------- ------------------------------- -------------------------
<S> <C> <C>
$2.70 or greater 3.0% per annum N/A
$2.35 to $2.69 7.0% per annum 2,669.05 shares
$2.34 or less 10.0% per annum 9,952.15 shares
</TABLE>
If the Determination Price is less than $23.00, each of the $2.35 and $2.70
targets for 1999 EPS will be reduced by an amount equal to the product of (x)
0.065 and (y)(i) $23.00 minus (ii) the Determination Price. All dividends will
be cumulative, whether or not declared, on a daily basis from the date of
issuance and will be payable quarterly, in arrears, on March 31, June 30,
September 30, and December 31 (each a "Dividend Payment Date"). Dividends (in
the form of additional dividends due) will compound quarterly on all unpaid
dividends from the Dividend Payment Date with respect thereto until the date of
payment. At the option of Pillowtex, dividends other than the Catch Up Dividend
will be payable either in cash or in kind (through the issuance of additional
shares of Pillowtex Preferred Stock) for the first five years after issuance and
will be payable only in cash thereafter.
In the event that after the fifth anniversary of the initial issuance of
the Pillowtex Preferred Stock, Pillowtex fails to pay dividends in cash on the
Dividend Payment Date when due, the dividend rate applicable to any period in
which any such dividends remain unpaid will be increased by 0.5% per quarter for
each quarter in which any such dividends remain unpaid (such rate increase, the
"Dividend Increase"). The applicable dividend rate plus the Dividend Increase
applicable to any period will not exceed the lesser of (i) 18.0% per annum and
(ii) the maximum rate permitted by applicable law. After a Dividend Increase,
when Pillowtex pays all accrued and unpaid dividends, and upon the payment of
dividends on the next Dividend Payment Date at the rate in effect prior to
giving effect to any Dividend Increase, the annual dividend rate will be
decreased to the otherwise applicable dividend rate.
Conversion. At the option of the holders thereof, at any time or from time
to time, each share of the Pillowtex Preferred Stock will be convertible into
the number of shares of Pillowtex Common Stock as is determined by dividing (i)
the sum of (a) $1,000 and (b) any unpaid dividends on such share by (ii) an
initial conversion price equal to $24.00 per share, except that if the
Determination Price is less than $23.00, then the conversion price will
91
<PAGE> 112
be equal to the Determination Price plus $1.00, subject to subsequent adjustment
in certain circumstances to prevent dilution.
Optional Redemption. Pillowtex will have the right to, at any time and from
time to time after the fourth anniversary of the initial issuance of the
Pillowtex Preferred Stock, call all or any portion of the Pillowtex Preferred
Stock for redemption at a redemption price equal to (i) the Liquidation
Preference plus (ii) the product of (a) a premium, which declines ratably from
the percentage equal to the applicable dividend rate on such fourth anniversary
to zero on the Mandatory Redemption Date, and (b) the Liquidation Preference
(minus any accrued and unpaid dividends from the Dividend Payment Date prior to
the date fixed for redemption).
Mandatory Redemption. Each share of Pillowtex Preferred Stock will be
subject to mandatory redemption on the Mandatory Redemption Date at a redemption
price equal to $1,000, plus accrued and unpaid dividends.
Voting Rights. Except as described below and as otherwise required by law,
holders of Pillowtex Preferred Stock are not entitled to any vote on matters
presented to shareholders of Pillowtex.
So long as any shares of the Pillowtex Preferred Stock are outstanding,
Pillowtex may not (i) amend the Pillowtex Articles so as to (a) affect adversely
the specified rights, preferences, privileges, or voting rights of holders of
shares of Pillowtex Preferred Stock or (b) authorize the issuance of additional
shares of any class of senior securities or (ii) merge, consolidate, or enter
into any other reclassification that would (a) materially affect adversely the
special or relative rights, preferences, privileges, or voting rights of the
Pillowtex Preferred Stock or (b) result in a breach of the terms of the
Pillowtex Preferred Stock without, in any such case, the affirmative vote or
consent of holders of more than 50% of the outstanding shares of the Pillowtex
Preferred Stock. In addition, any amendment to the Pillowtex Articles that would
alter in any material respect the dividend rates, liquidation preference,
redemption rights, or conversion rights of the Pillowtex Preferred Stock will
require the affirmative vote or consent of each holder of Pillowtex Preferred
Stock.
In the event of Pillowtex's failure to pay dividends or the occurrence of
certain breaches that shall have continued for a period of 60 days after notice
thereof from any holder of Pillowtex Preferred Stock, within ten business days
of such events, the number of members on the Pillowtex Board would be
automatically increased by 25% and the holders of the Pillowtex Preferred Stock
would be entitled to elect directors to fill the new positions created by such
expansion, so long as such nonpayment of dividends and breaches were not cured
after notice thereof, except that if the event of default related to (i) the
failure to redeem the Pillowtex Preferred Stock, (ii) a breach of certain
restrictions on Pillowtex's activities, or (iii) a bankruptcy event with respect
to Pillowtex or any of its subsidiaries, there would be no 60-day grace period
or right to cure and the holders' right to so elect directors would continue for
as long as the Pillowtex Preferred Stock were outstanding.
FUTURE STOCK ISSUANCES
In addition to the Pillowtex Common Stock to be issued or to become
issuable to holders of Fieldcrest Common Stock, holders of Fieldcrest Preferred
Stock, holders of Fieldcrest Options, and holders of Fieldcrest Convertible
Debentures in connection with the Merger, the Pillowtex Preferred Stock to be
issued to Apollo pursuant to the Pillowtex Preferred Stock Commitment, and the
Pillowtex Common Stock and any additional Pillowtex Preferred Stock to be
issuable pursuant to the terms of the Pillowtex Preferred Stock, Pillowtex is
and may become obligated to issue additional shares of Pillowtex Common Stock
pursuant to awards granted under equity-based compensation plans, including the
Stock Option Plan.
Pillowtex is also authorized to issue additional shares of capital stock
from time to time. Under Texas law, in the absence of actual fraud in the
transaction, the judgment of the directors as to the value of consideration
received upon the issuance of a corporation's capital stock is conclusive. In
addition, as permitted by Texas law, under the Pillowtex Articles Pillowtex's
shareholders will not have preemptive rights to purchase additional shares of
92
<PAGE> 113
Pillowtex capital stock upon any issuance of such shares authorized by the
Pillowtex Board. See "Risk Factors--Certain Provisions of Pillowtex's Articles
of Incorporation, Bylaws, and other Agreements."
RESTRICTIONS ON RESALES OF
PILLOWTEX COMMON STOCK BY AFFILIATES
The shares of Pillowtex Common Stock to be issued to the stockholders of
Fieldcrest in the Merger are being registered under the Securities Act pursuant
to the Registration Statement. However, because some stockholders of Fieldcrest
are or may be "affiliates" of Fieldcrest at the time of the Fieldcrest Special
Meeting, such persons will not be able to resell the Pillowtex Common Stock
received by them in the Merger unless such Pillowtex Common Stock is registered
for resale under the Securities Act, is sold in compliance with an applicable
exemption from the registration requirements of the Securities Act, or is sold
in compliance with Rule 145 under the Securities Act.
Rule 145 permits holders of securities received in a merger or other
exchange to sell such securities without registration under the Securities Act
provided such sale is made in compliance with certain provisions of Rule 144 or
certain holding period requirements have been satisfied. The applicable
provisions of Rule 144 allow a holder of such securities to sell, without
registration, within any three month period a number of shares of such
securities that does not exceed the greater of 1% of the number of outstanding
securities in question or the average weekly trading volume in the securities in
question during the four calendar weeks preceding a specified date subject to
the satisfaction of certain other requirements regarding the manner of sale and
the availability of current public information regarding the issuer. Rule 145
also permits a holder of such securities to sell such securities without
registration if: (i) such holder is not an affiliate of the issuer and a period
of at least one year has elapsed since the date such securities were acquired
from the issuer in the transaction, and the issuer meets the requirements of
Rule 144 regarding the availability of current public information or (ii) such
holder is not, and has not been for at least three months, an affiliate of the
issuer and a period of at least two years has elapsed since the date such
securities were acquired from the issuer in the transaction.
CERTAIN CORPORATE GOVERNANCE MATTERS OF PILLOWTEX
ANTITAKEOVER PROVISIONS
The Pillowtex Articles and Pillowtex Bylaws contain certain provisions
described below that may reduce the likelihood of a change in management or
voting control of Pillowtex without the consent of the Pillowtex Board. These
provisions could have the effect of delaying, deterring, or preventing tender
offers or takeover attempts that some or a majority of Pillowtex's shareholders
might consider to be in their best interests, including offers or attempts that
might result in a premium over the market price for Pillowtex Common Stock. See
"Risk Factors--Certain Provisions of Pillowtex's Articles of Incorporation,
Bylaws, and other Agreements."
CLASSIFIED BOARD
Beginning with the 1994 annual meeting of shareholders, the Pillowtex
Board has been divided into three classes, the initial terms of which expired at
the 1995, 1996, and 1997 annual meetings of shareholders, respectively.
Beginning in 1995, one class of directors is elected on a rotating basis at each
annual meeting of shareholders for a three-year term. Directors of Pillowtex are
elected by the affirmative vote of a plurality of the shares cast at a meeting
at which a quorum is present. Shareholders may remove a director only with cause
and upon the affirmative vote of the holders of not less than 80% of the
outstanding voting stock. The Pillowtex Board has the right to appoint up to two
persons to fill vacancies on the Pillowtex Board during any period between two
successive annual meetings of shareholders. The classification of the Pillowtex
Board may have the effect of deterring or delaying a takeover of Pillowtex
because it may take at least two years to gain control of the Pillowtex Board.
See "Comparison of Rights of Holders of Fieldcrest Common Stock and Pillowtex
Common Stock--Directors--Pillowtex."
93
<PAGE> 114
SHAREHOLDER NOMINATIONS AND PROPOSALS
The Pillowtex Bylaws establish advance notice procedures with regard to the
nomination, other than by or at the direction of the Pillowtex Board or a
committee thereof, of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of shareholders of
Pillowtex. These procedures provide that the notice of proposed shareholder
nominations for the election of directors must be received at the principal
executive offices of Pillowtex not less than 50 days nor more than 60 days prior
to the meeting at which directors are to be elected (or, if fewer than 50 days'
notice of prior public disclosure of the meeting date is given or made by
Pillowtex, not later than ten days after the day on which the notice was mailed
or such public disclosure was made). These procedures also provide that, at an
annual meeting, and subject to any other applicable requirements, only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the Pillowtex Board or by a shareholder who has given timely prior
written notice to Pillowtex of such shareholder's intention to bring such
business before the meeting. For the shareholder's notice to be timely, it must
be delivered to or mailed and received at the principal executive offices of
Pillowtex not later than the date that corresponds to 120 days prior to the date
Pillowtex's proxy statement was released to shareholders in connection with the
previous year's annual meeting of shareholders. Such notice must contain certain
information specified in the Pillowtex Bylaws. See "Comparison of Rights of
Holders of Fieldcrest Common Stock and Pillowtex Common Stock--Proposal of
Business; Nomination of Directors--Pillowtex."
AMENDMENT OF BYLAWS
The Pillowtex Bylaws can be amended only by the Pillowtex Board or by the
affirmative vote of the holders of at least 80% of the shares entitled to vote
generally in the election of directors. See "Comparison of Rights of Holders of
Fieldcrest Common Stock and Pillowtex Common Stock--Amendment of Articles or
Certificate of Incorporation and Bylaws--Pillowtex."
SHAREHOLDER ACTION
The Pillowtex Articles provide that special meetings of the shareholders
may be called only by the Chief Executive Officer, the President, the Board of
Directors, or the holders of at least 50% of all shares entitled to vote at the
proposed meeting. See "Comparison of Rights of Holders of Fieldcrest Common
Stock and Pillowtex Common Stock--Special Meetings--Pillowtex."
PREFERRED STOCK
The Pillowtex Articles permit the Pillowtex Board to issue preferred stock
at any time without shareholder approval. Preferred stock is sometimes used to
discourage or make more difficult attempts to take control of a company by means
of a merger, tender offer, proxy contest, or otherwise, through the issuance
without shareholder approval of shares with supervoting rights or other features
that would thwart a takeover by reducing the ability of the suitor to acquire
the necessary voting shares to obtain control.
FAIR PRICE PROVISION
The Pillowtex Articles include a so-called "fair price" provision that
requires the affirmative vote of the holders of at least 662 approve certain
business combinations effected within three years after the date on which the
person became an interested shareholder. These "business combinations" include a
merger with an interested shareholder, or disposition of assets having a fair
market value of at least 10% of the fair market value of all of Pillowtex's
assets or outstanding stock to an interested shareholder, a liquidation proposed
by an interested shareholder, the issuance of securities to an interested
shareholder, or the reclassification of Pillowtex securities or a similar
transaction that increases the interested shareholder's proportionate ownership
in Pillowtex. An "interested shareholder" is anyone who owns or controls,
directly or indirectly, or together with others, 15% or more of Pillowtex's
voting stock. However, a business combination with an interested shareholder
will not require shareholder approval if (i) a majority of disinterested
directors approves the business combination or the transaction in which the
interested
94
<PAGE> 115
shareholder becomes such, (ii) the business combination involves the
distribution to the shareholders of cash or other consideration that satisfies
the "fair price" criteria set forth in the Pillowtex Articles, which generally
require that all shareholders receive equal treatment, an adequate price, and
adequate disclosure, (iii) upon consummation of the transaction that resulted in
the shareholder becoming an interested shareholder, the interested shareholder
owns at least 85% of the voting stock of Pillowtex outstanding at the time the
transaction commenced, or (iv) the business combination is proposed after the
public announcement or notice of a transaction meeting specified criteria and
before consummation or abandonment of such transaction. The fair price provision
of the Pillowtex Articles may not be amended without the affirmative vote of
holders of at least 80% of all shares entitled to vote. See "Comparison of
Rights of Holders of Fieldcrest Common Stock and Pillowtex Common
Stock--Approval of Merger, Dissolution, and Asset Sales--Pillowtex."
TEXAS BUSINESS COMBINATION STATUTE
Article 13 of the TBCA ("Article 13"), in general, prohibits a Texas
corporation from engaging in certain business combinations with an affiliated
shareholder for three years following the date the shareholder first became an
affiliated shareholder, unless: (i) the business combination or the transaction
resulting in the shareholder becoming an affiliated shareholder is approved by
the board before such date or (ii) the business combination is approved by
holders of at least two-thirds of the voting shares (excluding the affiliated
shareholder's shares) not less than six months after such date. For purposes of
Article 13, "business combinations" include, among others, the following types
of transactions: mergers, share exchanges, and conversions with certain other
entities; sales, leases, and other dispositions of assets greater than 10% of
the total market value of the corporation's assets, outstanding common stock, or
earning power or net income; issuances of stock and securities not issued to
other shareholders on a similar basis; and liquidations, dissolutions, and other
transactions involving benefits not received by other shareholders. For purposes
of Article 13, an "affiliated shareholder" generally is a person or group that
owns or controls at least 20% of the voting shares of the corporation. Article
13, which became effective as of September 1, 1997, will not apply to business
combinations of any corporation that adopts an amendment to its articles of
incorporation or bylaws before December 31, 1997 expressly electing not to be
governed by Article 13. Pillowtex has not adopted, and does not intend to adopt,
any such amendment. See "Comparison of Right of Holders of Fieldcrest Common
Stock and Pillowtex Common Stock--Approval of Merger, Dissolution, and Asset
Sales--Pillowtex."
DIRECTOR LIABILITY LIMITATION
As authorized by the Texas Miscellaneous Corporation Laws Act, the
Pillowtex Articles provide that Pillowtex's directors will have no personal
liability to Pillowtex or its shareholders for monetary damages for breach or
alleged breach of the directors' duty of care. This provision has no effect on
director liability for (i) a breach of the directors' duty of loyalty, (ii) acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, (iii) an act or omission for which the liability of a
director is expressly provided by an applicable statute, or (iv) any transaction
from which a director derives an improper personal benefit. In addition, under
the Pillowtex Articles, any additional liabilities permitted to be eliminated by
subsequent legislation will automatically be eliminated without further
shareholder vote, unless additional shareholder approval is required by such
legislation. See "Comparison of Rights of Holders of Fieldcrest Common Stock and
Pillowtex Common Stock--Limitation of Director Liability--Pillowtex."
The principal effect of the limitation of liability provision is that a
shareholder is unable to prosecute an action for monetary damages against a
director of Pillowtex unless the shareholder can demonstrate one of the
specified bases for liability. This provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws.
The Pillowtex Articles do not eliminate its directors' duty of care.
However, the inclusion of this provision in the Pillowtex Articles may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breach of their fiduciary duties, even though such an action, if
successful, might otherwise benefit Pillowtex and its shareholders. This
provision should not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of the duty of care.
95
<PAGE> 116
INDEMNIFICATION
The Pillowtex Bylaws also provide that Pillowtex will indemnify its
directors, officers, employees, and agents to the fullest extent permitted by
Texas law. Pillowtex is generally required to indemnify its directors, officers,
employees, and agents against all judgments, fines, settlements, legal fees, and
other expenses incurred in connection with pending or threatened legal
proceedings because of the person's position with Pillowtex or another entity
that the person serves at Pillowtex's request, subject to certain conditions,
and to advance funds to enable them to defend against such proceedings. To
receive indemnification, the director, officer, employee, or agent must have
been successful in the legal proceeding or acted in good faith and in what was
reasonably believed to be a lawful manner and Pillowtex's best interest. See
"Comparison of Rights of Holders of Fieldcrest Common Stock and Pillowtex Common
Stock--Indemnification of Officers and Directors--Pillowtex."
Pillowtex has entered into Indemnification Agreements with each of its
directors pursuant to which Pillowtex has agreed to indemnify the directors to
the full extent authorized or permitted by the TBCA.
COMPARISON OF RIGHTS OF HOLDERS OF
FIELDCREST COMMON STOCK AND PILLOWTEX COMMON STOCK
GENERAL
Fieldcrest is incorporated under the laws of the state of Delaware.
Pillowtex is incorporated under the laws of the state of Texas. The rights of
Fieldcrest's stockholders are currently governed by the DGCL, the Fieldcrest
Certificate, and the Fieldcrest Bylaws. If Fieldcrest's stockholders approve and
adopt the Merger Agreement, Pillowtex's shareholders approve the Share Issuance,
and the Merger becomes effective, stockholders of Fieldcrest will become
shareholders of Pillowtex. For that reason, after the Effective Time of the
Merger, their rights will be governed by the TBCA, the Pillowtex Articles, and
the Pillowtex Bylaws.
Shares of Fieldcrest Preferred Stock entitle the holders thereof to
specified preferences and relative rights, including preferences as to payment
of dividends and upon liquidation and rights relating to the conversion,
redemption, and voting of such shares. As a result of the Merger, holders of
shares of Fieldcrest Preferred Stock will no longer have such specified rights,
but, subject to their right under Delaware law to seek appraisal of such shares,
will instead have the right to receive cash and shares of Pillowtex Common Stock
as described above under the caption "The Merger--The Merger
Agreement--Consideration to be Paid in the Merger."
THE FOLLOWING IS A COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF FIELDCREST
COMMON STOCK WITH THE RIGHTS OF HOLDERS OF PILLOWTEX COMMON STOCK. IT IS NOT
INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
RELEVANT PROVISIONS OF THE LAWS AND DOCUMENTS DISCUSSED BELOW.
AUTHORIZED CAPITAL STOCK
Fieldcrest. The total number of authorized shares of capital stock of
Fieldcrest is 50,000,000 shares, of which 25,000,000 shares are Fieldcrest
Common Stock, 15,000,000 shares are Class B Common Stock, par value $1.00 per
share, of Fieldcrest ("Fieldcrest Class B Common Stock"), and 10,000,000 shares
are preferred stock, par value $0.01 per share. There are no shares of
Fieldcrest Class B Common Stock outstanding.
Pillowtex. The total number of authorized shares of capital stock of
Pillowtex is 50,000,000 shares, of which 30,000,000 shares are Pillowtex Common
Stock and 20,000,000 shares are preferred stock, par value $0.01 per share.
See "Description of Pillowtex Capital Stock--Authorized Capital Stock."
96
<PAGE> 117
AMENDMENT OF ARTICLES OR CERTIFICATE OF INCORPORATION AND BYLAWS
Fieldcrest. Under the DGCL, an amendment to a corporation's certificate of
incorporation requires the approval of the board of directors and the approval
of holders of a majority of the outstanding stock entitled to vote thereon. The
holders of the outstanding shares of a class are entitled to vote as a separate
class on a proposed amendment that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
the shares of such class, or alter or change the powers, preferences, or special
rights of the shares of such class so as to affect them adversely.
The Fieldcrest Bylaws may be amended by a majority of the Fieldcrest Board
or by holders of a majority of the outstanding stock entitled to vote thereon.
Pillowtex. Under the TBCA, an amendment to a corporation's articles of
incorporation requires approval of the board of directors and the approval of
holders of at least two-thirds of the outstanding shares entitled to vote
thereon. The holders of outstanding shares of a class are entitled to vote as a
separate class on a proposed amendment that would increase or decrease the
aggregate number of authorized shares of such class, increase or decrease the
par value of the shares of such class, effect an exchange, reclassification, or
cancellation of all or part of the shares of such class, effect an exchange, or
create a right of exchange, of all or any part of the shares of another class
into the shares of such class, change the designations, preferences,
limitations, or relative rights of the shares of such class, or have certain
other specified effects. The Pillowtex Articles provide that the so-called "fair
price" provision and the provisions relating to amendments to the Pillowtex
Bylaws contained therein may be amended only by the affirmative vote of holders
of at least 80% of the outstanding shares entitled to vote thereon.
The Pillowtex Bylaws may be amended by a majority of the Pillowtex Board or
by holders of at least 80% of the outstanding stock entitled to vote thereon.
See "Certain Corporate Governance Matters of Pillowtex--Amendment of Bylaws."
APPROVAL OF MERGERS, DISSOLUTION, AND ASSET SALES
Fieldcrest. Under the DGCL, a merger, consolidation, dissolution, or sale
or other disposition of substantially all of a corporation's assets generally
requires the approval of the board of directors and holders of a majority of the
outstanding stock entitled to vote thereon. However, the DGCL provides that no
vote of the stockholders of the surviving corporation is required, unless the
certificate of incorporation provides otherwise, to approve a merger if: (i) the
agreement of merger does not amend in any respect the corporation's certificate
of incorporation; (ii) each share of the corporation's stock outstanding
immediately prior to the merger is to be an identical outstanding or treasury
share of the surviving corporation after the merger; and (iii) either (a) no
shares of common stock of the surviving corporation and no shares, securities,
or obligations convertible into such stock are to be issuable as a result of the
merger or (b) the increase in the outstanding shares as a result of the merger
does not exceed 20% of the shares of common stock of the surviving corporation
outstanding immediately prior to the effective date of the merger.
The Fieldcrest Certificate provides that, in the case of a merger or
consolidation of Fieldcrest with, or the sale of substantially all of the assets
of Fieldcrest to, another person (other than a corporation a majority of whose
voting stock is held by Fieldcrest), two-thirds of the votes entitled to be cast
must be cast in favor of such matter.
In addition to the foregoing, Section 203 of the DGCL ("Section 203"), in
general, prohibits certain business combinations between a Delaware corporation
and an interested stockholder within three years of the time such stockholder
became an interested stockholder unless (i) prior to such time the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, exclusive of shares owned by directors who are also
officers and by certain employee stock plans, or (iii) after such time, the
business combination is approved by the board of directors and authorized by the
affirmative vote at a stockholders' meeting of at least 66 2/3% of the
outstanding voting stock
97
<PAGE> 118
which is not owned by the interested stockholder. In addition, the restrictions
of Section 203 do not apply to business combinations proposed after the public
announcement or notice of a transaction meeting specified criteria and before
consummation or abandonment of such transaction. For purposes of Section 203,
"business combinations" include, among others, the following types of
transactions between the interested stockholder and the corporation: mergers and
consolidations; sales, pledges, transfers and other dispositions (including as
part of a dissolution) of assets having an aggregate market value equal to 10%
or more of either the aggregate market value of all assets of the corporation on
a consolidated basis or the aggregate market value of all the outstanding stock
of the corporation; certain transactions that would increase the interested
stockholder's proportionate share ownership of the stock of any class or series
of the corporation or such subsidiary; and transactions involving the receipt by
the interested stockholder of the benefit of any loans, advances, guarantees,
pledges, or other financial benefits provided by or through the corporation. For
purposes of Section 203, an "interested stockholder" generally is any person who
is the beneficial owner of 15% or more of the outstanding voting stock of the
corporation, and the affiliates and associates of such person.
Pillowtex. Under the TBCA, a merger or dissolution generally requires the
approval of the board of directors and holders of at least two-thirds of the
outstanding shares entitled to vote thereon. However, the TBCA provides that
approval by the shareholders of a corporation on a plan of merger is not
required if: (i) the corporation is the sole surviving corporation in the
merger; (ii) the articles of incorporation of the corporation will not differ
from its articles of incorporation before the merger; (iii) each shareholder of
the corporation whose shares were outstanding immediately before the effective
date of the merger will hold the same number of shares, with identical
designations, preferences, limitations, and relative rights, immediately after
the effective date of the merger; (iv) the voting power of the number of voting
shares outstanding immediately after the merger, plus the voting power of the
number of voting shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or the exercise of rights
to purchase securities issued pursuant to the merger), will not exceed by more
than 20% the voting power of the total number of voting shares of the
corporation outstanding immediately before the merger; (v) the number of
participating shares outstanding immediately after the merger, plus the number
of participating shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or the exercise of rights
to purchase securities issued pursuant to the merger), will not exceed by more
than 20% the total number of participating shares of the corporation outstanding
immediately before the merger; and (vi) the board of directors of the
corporation adopts a resolution approving the plan of merger. Under the TBCA, a
disposition of all, or substantially all, of the property and assets of a
corporation may be made upon such terms and conditions and for such
consideration as may be authorized by the board of directors, without
authorization or consent of the shareholders, if the corporation will either
continue to engage in one or more businesses or apply a portion of the
consideration received in connection with the transaction to the conduct of a
business in which it engages following the transaction.
The Pillowtex Articles include a so-called "fair price" provision that
requires the affirmative vote of holders of at least 662 business combinations
effected within three years after the date on which the person became an
interested shareholder. For description of such provision, see "Certain
Corporate Governance Matters of Pillowtex--Fair Price Provision."
Pillowtex is also subject to Article 13 of the TBCA, which, in general,
prohibits a Texas corporation from engaging in certain business combinations
with any affiliated shareholder for three years following the date the
shareholder first became an affiliated shareholder, unless: (i) the business
combination or the transaction resulting in the shareholder becoming an
affiliated shareholder is approved by the board before such date or (ii) the
business combination is approved by holders of at least two-thirds of the voting
shares (excluding the affiliated shareholder's shares) not less than six months
after such date. For a description of Article 13, see "Certain Corporate
Governance Matters of Pillowtex--Texas Business Combination Statute."
98
<PAGE> 119
SPECIAL MEETINGS
Fieldcrest. Under the DGCL, a special meeting of stockholders may be called
by the board of directors or by such persons as may be authorized by the
certificate of incorporation or by the bylaws. The Fieldcrest Bylaws provide
that a special meeting of stockholders may be called only by the Chief Executive
Officer, Secretary, or a majority of the Fieldcrest Board. Consequently, holders
of Fieldcrest Common Stock do not have the ability to call a special meeting of
stockholders.
Pillowtex. Under the TBCA, a special meeting of shareholders may be called
by either (i) the president, the board of directors, or such other person or
persons as may be authorized by the articles of incorporation or by the bylaws
or (ii) the holders of shares entitled to cast not less than 10% of all shares
entitled to vote at the special meeting, unless a different percentage, not to
exceed 50%, is provided for in the articles of incorporation. The Pillowtex
Articles and the Pillowtex Bylaws provide that a special meeting of shareholders
may be called only by the Chief Executive Officer, the President, or the Board
of Directors or by the holders of at least 50% of all the shares entitled to
vote at the proposed special meeting. See "Certain Corporate Governance
Matters--Shareholder Action."
ACTION WITHOUT A MEETING
Fieldcrest. Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a stockholders'
meeting may be taken without a meeting pursuant to the written consent of the
holders of the number of shares that would have been required to effect the
action at an actual meeting of stockholders.
The Fieldcrest Certificate does not address action without a stockholders'
meeting.
Pillowtex. Under the TBCA, any action required or permitted to be taken at
a shareholders' meeting may be taken without a meeting pursuant to the written
consent of the holders of all of the shares entitled to vote with respect to the
action that is the subject of the consent, except that the articles of
incorporation may provide that such action may be taken pursuant to the written
consent of the holders of shares having not less than the minimum number of
votes that would have been necessary to take such action at a meeting at which
the holders of all shares entitled to vote on the action were present and voted.
The Pillowtex Articles do not address action without a shareholders' meeting.
DIRECTORS
Fieldcrest. The Fieldcrest Bylaws provide that the number of directors
shall be determined by resolution of the Fieldcrest Board. The number of
directors of Fieldcrest is currently fixed at eight. Each director serves for a
term of one year or until his or her earlier death, resignation, or removal.
Directors of Fieldcrest may be removed with or without cause by the affirmative
vote of the holders of a majority of the outstanding shares of Fieldcrest
capital stock entitled to vote thereon, except that the directors elected by the
holders of a particular class or series of capital stock may be removed without
cause only by vote of the holders of a majority of the outstanding shares of
such class or series. Vacancies on the Fieldcrest Board may be filled by a
majority of the remaining directors, although less than a quorum, or by a sole
remaining director. Directors of Fieldcrest are elected by plurality of the
votes of shares of Fieldcrest capital stock entitled to vote thereon present in
person or by proxy at the meeting at which directors are elected. There is no
cumulative voting in the election of Fieldcrest directors.
Pillowtex. The Pillowtex Bylaws provide that the number of directors shall
be determined by resolution of the Pillowtex Board. The number of directors of
Pillowtex is currently fixed at ten. The directors are divided into three
classes, with directors in each class serving a staggered term of three years or
until his or her earlier death, resignation, or removal. Directors of Pillowtex
may be removed with cause by the affirmative vote of the holders of not less
than 80% of the shares of Pillowtex capital stock entitled to vote thereon.
Vacancies on the Pillowtex Board may be filled by a majority of the remaining
directors, although less than a quorum, or by a sole remaining director, except
that the directors may not fill more than two such directorships during any
period between two successive annual meetings of shareholders. Directors of
Pillowtex are elected by plurality of the votes of shares of Pillowtex capital
stock entitled to vote thereon present in person or by proxy at the meeting at
which directors are elected.
99
<PAGE> 120
There is no cumulative voting in the election of Pillowtex directors. See
"Certain Corporate Governance Matters of Pillowtex--Classified Board."
LIMITATION OF DIRECTOR LIABILITY
Fieldcrest. Under the DGCL, a certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except that such provision cannot eliminate or limit the
liability of a director: (i) for any breach of a director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) statutory liability for unlawful payment of dividends or unlawful stock
purchase or redemption; or (iv) for any transaction from which the director
derived an improper personal benefit. The Fieldcrest Certificate provides that a
director will under no circumstances have any personal liability to Fieldcrest
or its stockholders for monetary damages for breach of fiduciary duty, except
for those specific breaches and acts or omissions with respect to which the DGCL
expressly provides such personal liability cannot be eliminated or limited.
Pillowtex. Under the Texas Miscellaneous Corporation Laws Act, articles of
incorporation may provide that a director of the corporation will not be liable,
or will be liable only to the extent provided in the articles of incorporation,
to the corporation or its shareholders for monetary damages for an act or
omission in the director's capacity as a director, except that articles of
incorporation cannot eliminate or limit the liability of a director to the
extent the director is found liable for: (i) a breach of the director's duty of
loyalty to the corporation or its shareholders; (ii) an act or omission not in
good faith that constitutes a breach of duty of the director to the corporation
or an act or omission that involves intentional misconduct or a knowing
violation of the law; (iii) a transaction from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; or (iv) an act or omission for which
the liability of a director is expressly provided by an applicable statute. The
Pillowtex Articles provide that, to the fullest extent permitted by Texas
statutory and decisional law, a director of Pillowtex will not be liable to
Pillowtex or its shareholders for any act or omission in such director's
capacity as a director. In addition, under the Pillowtex Articles, any
additional liabilities permitted to be eliminated by subsequent legislation will
automatically be eliminated without further shareholder vote, unless additional
shareholder approval is required by such legislation. See "Certain Corporate
Governance Matters of Pillowtex--Director Liability Limitation."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Fieldcrest. Under the DGCL, (i) a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit, or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was unlawful
and (ii) a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the person acted in
good faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought determines upon applicable that, despite the
100
<PAGE> 121
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court deems proper.
Under the DGCL, to the extent that a present or former director or officer
of a corporation has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to in the immediately preceding
sentence, or in defense of any claim, issue, or matter referred to therein, such
person must be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection therewith.
The DGCL provides that any indemnification under the provisions described
in the second preceding paragraph (unless ordered by a court) will be made by
the corporation only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee, or
agent is proper in the circumstances because the person has met the applicable
standard of conduct, which determination will be made, with respect to a person
who is a director or officer at the time of such determination, (i) by a
majority vote of the directors who are not parties to such action, suit, or
proceeding, even though less than a quorum, or (ii) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (iii) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (iv) by the stockholders.
Under the DGCL, expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative, or investigative
action, suit, or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit, or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation. Such expenses (including attorneys' fees)
incurred by former directors and officers or other employees and agents may be
so paid upon such terms and conditions, if any, as the corporation deems
appropriate.
Under the DGCL, a corporation has power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the DGCL.
The Fieldcrest Certificate provides that Fieldcrest will indemnify every
officer and director of Fieldcrest to the fullest extent allowed by law, except
as otherwise provided in the Fieldcrest Bylaws. The Fieldcrest Bylaws provide
for the indemnification to the full extent permitted under the DGCL. The
Fieldcrest Bylaws also provide that Fieldcrest has the power to purchase and
maintain insurance as permitted by the DGCL.
Pillowtex. Under the TBCA, a corporation may indemnify a person who was,
is, or is threatened to be made a named defendant or respondent in any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, arbitrative, or investigative, any appeal in such an
action, suit, or proceeding, or any inquiry or investigation that could lead to
such an action, suit, or proceeding (a "proceeding"), because the person is or
was a director of the corporation or, while a director of the corporation, is or
was serving at the request of the corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, employee benefit plan, other
enterprise, or other entity, but only if it is determined in the manner
described below that the person: (i) conducted himself in good faith; (ii)
reasonably believed (a) in the case of conduct in his official capacity as a
director of the corporation, that his conduct was in the corporation's best
interests, and (b) in all other cases, that his conduct was at least not opposed
to the corporation's best interests; and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. Except
to the extent described in the next following sentence, a director may not be
indemnified under the TBCA in respect of a proceeding in which the person is
found liable on the basis that personal benefit was improperly received by him,
whether or not the benefit resulted from an action taken in the person's
official capacity, or in which the person is found liable to the corporation. A
person may be indemnified as described in the second preceding sentence against
judgments, penalties (including excise and similar taxes), fines, settlements,
and reasonable expenses (including court costs and attorneys' fees) actually
incurred by the person in connection with a proceeding, except that if the
person is found liable to the corporation or is found liable on the basis that
personal
101
<PAGE> 122
benefit was improperly received by the person, the indemnification (i) is
limited to reasonable expenses (including court costs and attorneys' fees)
actually incurred by the person in connection with the proceeding and (ii) will
not be made in respect of any proceeding in which the person shall have been
found liable for willful or intentional misconduct in the performance of his
duty to the corporation.
Under the TBCA, a corporation must indemnify a director against reasonable
expenses (including court costs and attorneys' fees) incurred by him in
connection with a proceeding in which he is a named defendant or respondent
because he is or was a director of the corporation or, while a director of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another foreign or domestic corporation, employee benefit plan,
other enterprise, or other entity, if he has been wholly successful, on the
merits or otherwise, in the defense of the proceeding. Under the TBCA, if, in a
suit for the indemnification required as described in the immediately preceding
sentence, a court of competent jurisdiction determines that the director is
entitled to such indemnification, the court will order indemnification and will
award to the director the expenses (including court costs and attorneys' fees)
incurred in securing the indemnification. Under the TBCA, if, upon application
of a director, a court of competent jurisdiction determines, after giving any
notice the court considers necessary, that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not he has met the requirements for indemnification described in the first
sentence of the immediately preceding paragraph or has been found liable in the
circumstances described in the second sentence of such paragraph, the court may
order the indemnification that the court determines is proper and equitable,
except that if the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification will be limited to reasonable expenses (including court costs
and attorneys' fees) actually incurred by the person in connection with the
proceeding.
A determination that indemnification as described in the first sentence of
the second preceding paragraph is permissible must be made: (i) by a majority
vote of a quorum consisting of directors who at the time of the vote are not
named defendants or respondents in the proceeding; (ii) if such a quorum cannot
be obtained, by a majority vote of a committee of the board of directors,
designated to act in the matter by a majority vote of all directors, consisting
solely of two or more directors who at the time of the vote are not named
defendants or respondents in the proceeding; (iii) by special legal counsel
selected by the board of directors or a committee of the board by vote as
described in clauses (i) and (ii) above, or, if such a quorum cannot be obtained
and such a committee cannot be established, by a majority vote of all directors;
or (iv) by the shareholders in a vote that excludes the shares held by directors
who are named defendants or respondents in the proceeding. Under the TBCA,
authorization of indemnification and determination as to reasonableness of
expenses must be made in the same manner as the determination that
indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses must be
made in the manner described in clause (iii) of the immediately preceding
sentence for the selection of special legal counsel; a provision contained in
the articles of incorporation, the bylaws, a resolution of shareholders or
directors, or an agreement that makes mandatory the indemnification permitted
under the TBCA will be deemed to constitute authorization of indemnification in
the manner required by the TBCA even though such provision may not have been
adopted or authorized in the same manner as the determination that
indemnification is permissible. The TBCA provides that reasonable expenses
(including court costs and attorneys' fees) incurred by a director who was, is,
or is threatened to be made a named defendant or respondent in a proceeding may
be paid or reimbursed by the corporation, in advance of the final disposition of
the proceeding and without the determination, authorization, or determination
described above, after the corporation receives a written affirmation by the
director of his good faith belief that he has met the standard of conduct
necessary for indemnification and a written undertaking by or on behalf of the
director to repay the amount paid or reimbursed if it is ultimately determined
that he has not met the standard or if it is ultimately determined that
indemnification of the director against expenses incurred by him in connection
with that proceeding is prohibited by the TBCA; a provision contained in the
articles of incorporation, the bylaws, a resolution of shareholders or
directors, or an agreement that makes mandatory the payment or reimbursement of
expenses permitted under the TBCA will be deemed to constitute authorization of
that payment or reimbursement.
102
<PAGE> 123
Under the TBCA, an officer of the corporation must be indemnified as, and
to the same extent described in the second preceding paragraph, for a director.
A corporation may indemnify and advance expenses to an officer, employee, or
agent of the corporation to the same extent that it may indemnify and advance
expenses to directors as described above. In addition, under the TBCA, a
corporation may indemnify and advance expenses to persons who are not or were
not officers, employees, or agents of the corporation but who are or were
serving at the request of the corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, employee benefit plan, other
enterprise, or other entity, to the same extent that it may indemnify and
advance expenses to directors.
Under the TBCA, a corporation may purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director, officer,
employee, or agent of the corporation or who is or was serving at the request of
the corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, employee benefit plan, other enterprise, or other entity, against
any liability asserted against him and incurred by him in such a capacity or
arising out of his status as such a person, whether or not the corporation would
have the power to indemnify him against that liability under the TBCA.
The Pillowtex Articles do not address indemnification of directors,
officers, or other persons. However, the Pillowtex Bylaws provide that: (i)
Pillowtex will indemnify persons who are or were directors or officers (both in
their capacities as directors and officers and, if serving at the request of
Pillowtex as a director, officer, trustee, employee, agent, or similar
functionary of another foreign or domestic corporation, trust, partnership,
joint venture, sole proprietorship, employee benefit plan, or other enterprise,
in each of those capacities) to the full extent permitted by the TBCA; (ii)
Pillowtex will pay or reimburse, in advance of the final disposition of any
proceeding, to all persons who are or were directors or officers of Pillowtex
all reasonable expenses incurred by such persons to the full extent permitted by
the TBCA; and (iii) Pillowtex will indemnify persons who are or were employees
or agents (other than directors or officers), or persons who are not or were not
employees or agents but who are or were serving at the request of Pillowtex as
directors, officers, trustees, employees, agents, or similar functionaries of
another foreign or domestic corporation, trust, partnership, joint venture, sole
proprietorship, employee benefit plan or other enterprise (collectively,
together with the directors and officers, "Corporate Functionaries"), to the
full extent permitted by the TBCA. The Pillowtex Bylaws also provide that
Pillowtex may purchase or maintain insurance on behalf of any Corporate
Functionary against any liability asserted against him and incurred by him in
such a capacity or arising out of his status as a Corporate Functionary, whether
or not Pillowtex would have the power to indemnify him against the liability
under the TBCA or the Pillowtex Bylaws.
See "Certain Corporate Governance Matters of Pillowtex--Indemnification."
NOMINATION OF DIRECTORS; PROPOSAL OF BUSINESS
Fieldcrest. The Fieldcrest Bylaws contain detailed advance notice and
informational procedures which must be complied with in order for a stockholder
to nominate a person to serve as a director. The Fieldcrest Bylaws generally
require a stockholder to give notice of a proposed nominee in advance of the
stockholders meeting at which directors will be elected. In addition, the
Fieldcrest Bylaws contain detailed advance notice and informational procedures
which must be followed in order for a Fieldcrest stockholder to propose an item
of business for consideration at a meeting of Fieldcrest stockholders.
Pillowtex. The Pillowtex Bylaws also contain detailed advance notice and
informational procedures which must be complied with in order for a stockholder
to nominate a person to serve as a director. The Pillowtex Bylaws generally
require a stockholder to give notice of a proposed nominee in advance of the
stockholders meeting at which directors will be elected. In addition, the
Pillowtex Bylaws contain detailed advance notice and informational procedures
which must be followed in order for a Pillowtex shareholder to propose an item
of business for consideration at a meeting of Pillowtex shareholders. For a
description of such provisions, see "Certain Corporate Governance Matters of
Pillowtex--Shareholder Nominations and Proposals."
103
<PAGE> 124
DIVIDENDS AND DISTRIBUTIONS
Fieldcrest. Under the DGCL, a corporation may pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which
declared and for the preceding fiscal year. The DGCL also provides that
dividends may not be paid out of net profits if, after the payment of the
dividend, the corporation's capital would be less than the capital represented
by the outstanding stock of all classes having a preference upon the
distribution of assets.
Pillowtex. Under the TBCA, a corporation may make distributions if the
distribution does not exceed the corporation's surplus and the corporation would
not become insolvent after giving effect to the distribution.
CERTAIN APPRAISAL RIGHTS
Fieldcrest. The DGCL generally entitles a stockholder to exercise appraisal
rights upon a merger or consolidation of the corporation effected pursuant to
the DGCL if the holder complies with the requirements of Section 262 thereof.
However, the DGCL does not provide appraisal rights for stockholders of a
corporation upon such a merger or consolidation if the stock of the corporation
is listed on a national securities exchange or designated as a national market
system security on the Nasdaq or held by more than 2,000 holders and
stockholders are not required by the terms of the merger or consolidation to
accept for their stock anything except: (i) shares of stock of the corporation
surviving or resulting from such merger or consolidation, or depository receipt
in respect thereof; (ii) shares of stock of any other corporation, or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national market
system security on the Nasdaq or held of record by more than 2,000 holders;
(iii) cash in lieu of fractional shares or fractional depository receipts; or
(iv) any combination of the shares of stock, depository receipts, and cash in
lieu of fractional shares or fractional depository receipts.
Pillowtex. The TBCA generally entitles a shareholder to exercise its
appraisal rights upon a merger of the corporation effected pursuant to the TBCA
if the holder complies with the requirements of Articles 5.12 and 5.13 thereof,
provided shareholder approval of the merger is required in the TBCA and the
shareholder holds shares of a class that was entitled to vote thereon. However,
the TBCA does not provide appraisal rights for shareholders with respect to any
plan of merger in which there is a single surviving or new domestic or foreign
corporation or from any plan of exchange, if (i) the shares held by the
shareholder are part of a class or series, shares of which are (a) listed on a
national securities exchange, (b) listed on the Nasdaq Stock Market (or
successor quotation system) or designated as a national market security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or successor entity, or (c) held of record by not less than 2,000 holders,
(ii) the shareholder is not required by the terms of the plan of merger or
exchange to accept for the shareholder's shares any consideration that is
different than the consideration (other than cash in lieu of fractional shares
that the shareholder would otherwise be entitled to receive) to be provided to
any other holder of shares of the same class or series of shares held by such
shareholder, and (iii) the shareholder is not required by the terms of the plan
of merger or exchange to accept for the shareholder's shares any consideration
other than (a) shares of a corporation that, immediately after the merger or
exchange, will be part of a class or series, shares of which are listed, or
authorized for listing, on a national securities exchange or approved for
quotation as a national market security on an interdealer quotation system by
the National Association of Securities Dealers, Inc., or successor entity, or
held of record by not less than 2,000 holders, (b) cash in lieu of fractional
shares otherwise entitled to be received, or (c) a combination of such shares
and cash in lieu of fractional shares.
DERIVATIVE ACTIONS
Fieldcrest. Derivative actions may be brought under the DGCL by a
stockholder on behalf of, and for the benefit of, the corporation. The DGCL
provides that a stockholder must aver in the complaint that he or she was a
stockholder of the corporation at the time of the transaction of which he
complains. However, no action may be brought by a stockholder unless he first
seeks remedial action on his claim from the corporation's board of directors,
unless such a demand for redress is excused. The board of directors of a
Delaware corporation can appoint an independent litigation committee to review a
stockholder's request for a derivative action and the litigation
104
<PAGE> 125
committee, acting reasonably and in good faith, can terminate the stockholder's
action subject to a court's review of such committee's independence, good faith,
and reasonable investigation. Under the DGCL, the court in a derivative action
may apply a variety of legal and equitable remedies on behalf of the corporation
which vary depending on the facts and circumstances of the case and the nature
of the claim brought.
Pillowtex. Derivation actions may be brought under the TBCA by a
shareholder in the right of the corporation. The TBCA provides that a
shareholder (including a beneficial owner whose shares are held in a voting
trust or by a nominee on the beneficial owner's behalf) may not commence or
maintain a derivative proceeding unless the shareholder (i) was a shareholder of
the corporation at the time of the act or omission complained of or became a
shareholder by operation of law from a person that was a shareholder at that
time and (ii) fairly and adequately represents the interests of the corporation
in enforcing the right of the corporation. The TBCA further provides that no
shareholder may commence or maintain a derivative action until (i) a written
demand is filed with the corporation setting forth with particularity the act,
omission, or other matter that is the subject of the claim or challenge and
requesting that the corporation take suitable action and (ii) 90 days have
expired since the date the demand was made (unless irreparable injury to the
corporation is being suffered or would result by waiting for 90 day period to
expire) or the corporation has rejected the demand. A court is required to
dismiss a derivative proceeding if (i) a majority vote of independent and
disinterested directors, (ii) a majority vote of a committee of two or more
independent and interested directors, or (iii) a panel of one or more
independent and disinterested persons appointed by the court determines in good
faith, after conducting a reasonable inquiry and based on the factors that the
person or group deems appropriate under the circumstances, that the continuation
of the derivative proceeding is not in the best interests of the corporation. If
a derivative proceeding is commenced after a demand is rejected, the petition
must allege with particularity facts that establish that the rejection was not
made in accordance with the procedure and criteria described above. The TBCA
also provides that, upon termination of a derivative proceeding, the court may
order (i) a corporation to pay the expenses of the plaintiff incurred in the
proceeding if it finds that the proceeding has resulted in a substantial benefit
to the corporation, (ii) the plaintiff to pay the expenses of the corporation or
any defendant incurred in investigating and defending the proceeding if it finds
that the proceeding was commenced or maintained without reasonable cause or for
an improper purpose, or (iii) a party to pay the expenses incurred by another
party (including the corporation) because of the filing of a pleading, motion,
or other paper, if it finds that the pleading, motion, or other paper (a) was
not well grounded in fact after reasonable inquiry, (b) was not warranted by
existing law or a good faith argument for the extension, modification, or
reversal of existing law, or (c) was interposed for an improper purpose, such as
to harass or to cause unnecessary delay or needless increase in the cost of
litigation.
LEGAL MATTERS
The validity of the Pillowtex Common Stock to be issued in connection with
the Merger will be passed upon for Pillowtex by Jones, Day, Reavis & Pogue,
Dallas, Texas.
EXPERTS
The consolidated financial statements of Pillowtex as of December 30, 1995
and December 28, 1996, and for each of the years in the three-year period ended
December 28, 1996 have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
in this Joint Proxy Statement/Prospectus, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Fieldcrest at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
included in this Joint Proxy Statement/Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
105
<PAGE> 126
PROPOSALS BY PILLOWTEX SHAREHOLDERS
Any proposal of a shareholder of Pillowtex intended to be presented at the
1998 Annual Meeting of Shareholders of Pillowtex must be received in writing by
the Secretary of Pillowtex by November 29, 1997 for inclusion, if appropriate,
in the proxy, notice of meeting, and proxy statement relating to such annual
meeting.
PROPOSALS BY FIELDCREST STOCKHOLDERS
Any proposal of a stockholder of Fieldcrest intended to be presented at the
1998 Annual Meeting of Stockholders of Fieldcrest must be received in writing by
the Secretary of Fieldcrest by November 29, 1997 for inclusion, if appropriate,
in the proxy, notice of meeting, and proxy statement relating to such annual
meeting. If the Merger is consummated, it is anticipated that no such annual
meeting will be held.
106
<PAGE> 127
INDEX TO HISTORICAL FINANCIAL INFORMATION
OF PILLOWTEX AND FIELDCREST
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTORY NOTE...............................................................................................F-3
PILLOWTEX HISTORICAL FINANCIAL INFORMATION
Selected Historical Financial Information.......................................................................F-4
Selected Quarterly Financial Information........................................................................F-6
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the fiscal year ended December 28, 1996................................................................F-8
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the quarterly period ended September 27, 1997.........................................................F-14
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants........................................................F-17
Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996.................................F-18
Consolidated Statements of Earnings for the years ended December 31, 1994,
December 30, 1995 and December 28, 1996...................................................................F-19
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994,
December 30, 1995 and December 28, 1996...................................................................F-20
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
December 30, 1995 and December 28, 1996...................................................................F-21
Notes to Consolidated Financial Statements................................................................F-22
Schedule II - Valuation and Qualifying Accounts...........................................................F-36
Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of December 28, 1996 and September 27, 1997................................F-38
Consolidated Statements of Earnings for the three months ended September 28, 1996 and
September 27, 1997........................................................................................F-39
Consolidated Statements of Earnings for the nine months ended September 28, 1996 and
September 27, 1997........................................................................................F-40
Consolidated Statements of Cash Flows for the nine months ended September 28, 1996 and
September 27, 1997........................................................................................F-41
Notes to Consolidated Financial Statements................................................................F-42
</TABLE>
F-1
<PAGE> 128
<TABLE>
<S> <C>
FIELDCREST HISTORICAL FINANCIAL INFORMATION
Selected Historical Financial Information .....................................................................F-48
Selected Quarterly Financial Information.......................................................................F-50
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the fiscal year ended December 31, 1996...............................................................F-52
Management's Discussion and Analysis of Financial Condition and Results of Operations
for the quarterly period ended September 30, 1997.........................................................F-56
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants........................................................F-59
Consolidated Statements of Operations and Retained Earnings for the years ended
December 31, 1994, 1995 and 1996..........................................................................F-60
Consolidated Statements of Financial Position as of December 31, 1995 and 1996............................F-61
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996..........................................................................F-62
Notes to Consolidated Financial Statements................................................................F-63
Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Financial Position as of December 31, 1996 and September 30, 1997..............F-77
Consolidated Statements of Income and Retained Earnings for the three months ended
September 30, 1996 and 1997 and the nine months ended September 30, 1996 and 1997.........................F-78
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1997...............F-79
Notes to Consolidated Financial Statements................................................................F-80
</TABLE>
F-2
<PAGE> 129
INTRODUCTORY NOTE
The historical financial information relating to each of Pillowtex and
Fieldcrest set forth in the following pages, including the information set
forth under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations" has been derived substantially from
reports filed with the Commission by Pillowtex and Fieldcrest, as applicable,
prior to the date hereof. See "Available Information." Consequently, such
information is not necessarily current as of the date hereof, and shall be
deemed to be modified or superseded, as applicable, by the information
contained elsewhere in this Joint Proxy Statement/Prospectus.
The financial condition and results of operations of Pillowtex, after
giving effect to the Merger and the Financing Transactions, will not be
comparable to the historical financial condition or results of operations of
Pillowtex or Fieldcrest, either individually or on a combined basis. See "Pro
Forma Capitalization of Pillowtex," "Unaudited Pro Forma Combined Financial
Information of Pillowtex," and "Discussion and Analyses of Financial Condition
and Results of Operations."
F-3
<PAGE> 130
PILLOWTEX CORPORATION
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------------------------------
1992 1993(1) 1994(2) 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales ............................ $ 273,462 $ 291,624 $ 349,520 $ 474,899 $ 490,655
Cost of goods sold ................... 222,611 238,155 294,714 395,922 411,048
--------- --------- --------- --------- ---------
Gross profit ......................... 50,851 53,469 54,806 78,977 79,607
Selling, general, and ................ 33,376 29,227 36,399 42,508 41,445
--------- --------- --------- --------- ---------
administrative expenses
Earnings from operations ............. 17,475 24,242 18,407 36,469 38,162
Interest expense ..................... 4,997 3,042 6,361 17,491 13,971
Other expense (income), net .......... 1,049 -- (379) -- --
--------- --------- --------- --------- ---------
Earnings before income taxes ......... 11,429 21,200 12,425 18,978 24,191
and extraordinary loss
Income taxes ......................... 529 8,420 4,736 7,509 9,459
--------- --------- --------- --------- ---------
Earnings before extraordinary ........ 10,900 12,780 7,689 11,469 14,732
loss
Extraordinary loss, net .............. -- -- -- -- (609)
--------- --------- --------- --------- ---------
Net earnings(3) ...................... 10,900 12,780 7,689 11,469 14,123
Accretion to repurchase price
of common stock subject to
repurchase ......................... 2,500 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings available to
common stock shareholders(3) ....... $ 8,400 $ 12,780 $ 7,689 $ 11,469 $ 14,123
--------- --------- --------- --------- ---------
Earnings per share before
extraordinary loss(3) .............. $ 1.29 $ 1.31 $ 0.73 $ 1.08 $ 1.39
Extraordinary loss, net .............. -- -- -- -- (.06)
--------- --------- --------- --------- ---------
Net earnings per share(3) ............ $ 1.29 $ 1.31 $ 0.73 $ 1.08 $ 1.33
--------- --------- --------- --------- ---------
OTHER DATA:
Depreciation and ..................... $ 3,104 $ 3,868 $ 6,365 $ 11,994 $ 12,775
amortization
Capital expenditures ................. 5,869 7,135 10,538 12,448 21,040
BALANCE SHEET DATA:
Working capital ...................... $ 65,567 $ 78,141 $ 122,738 $ 110,128 $ 150,506
Total assets ......................... 131,542 180,967 319,544 324,710 375,714
Long-term debt ....................... 63,599 63,735 177,149 153,472 194,851
Shareholders' equity ................. 7,072 69,329 76,478 87,990 100,004
<CAPTION>
NINE MONTHS ENDED
-------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------- ---------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales ............................ $ 335,770 $ 370,633
Cost of goods sold ................... 280,272 305,674
--------- ---------
Gross profit ......................... 55,498 64,959
Selling, general, and ................ 31,170 33,728
--------- ---------
administrative expenses
Earnings from operations ............. 24,328 31,231
Interest expense ..................... 10,279 13,957
Other expense (income), net .......... -- --
--------- ---------
Earnings before income taxes ......... 14,049 17,274
and extraordinary loss
Income taxes ......................... 5,495 6,702
--------- ---------
Earnings before extraordinary ........ 8,554 10,572
loss
Extraordinary loss, net .............. -- --
--------- ---------
Net earnings(3) ...................... 8,554 10,572
Accretion to repurchase price
of common stock subject to
repurchase ......................... -- --
--------- ---------
Net earnings available to
common stock shareholders(3) ....... $ 8,554 $ 10,572
--------- ---------
Earnings per share before
extraordinary loss(3) .............. $ 0.81 $ 0.99
Extraordinary loss, net .............. -- --
--------- ---------
Net earnings per share(3) ............ $ 0.81 $ 0.99
--------- ---------
OTHER DATA:
Depreciation and ..................... $ 9,440 $ 10,642
amortization
Capital expenditures ................. 2,981 13,891
BALANCE SHEET DATA:
Working capital ...................... $ 152,787 $ 181,234
Total assets ......................... 370,670 419,168
Long-term debt ....................... 180,200 218,806
Shareholders' equity ................. 95,042 110,777
</TABLE>
- --------------------
(1) Results for fiscal 1993 reflect the operations of Manetta Home
Fashions, Inc. from August 30, 1993, Tennessee Woolen Mills, Inc. from
September 7, 1993 and Torfeaco Industries Limited from December 1,
1993.
(2) Results for fiscal 1994 reflect the operations of Imperial Feather
Company from August 19, 1994 and Beacon Manufacturing Company from
December 1, 1994.
(3) On a pro forma basis, giving effect to the termination of Pillowtex's
status as an S corporation under subchapter S of the Internal Revenue
Code (which termination resulted from the initial public offering of
Pillowtex Common Stock), as if such termination had occurred on
January 1, 1992, net earnings, net earnings available to common stock
shareholders, earnings per share before extraordinary loss, and net
earnings per share would have been $7,692, $5,192, $.80, and $.80,
respectively, for fiscal 1992 and $12,877, $12,877, $1.32, and $1.32,
respectively, for fiscal 1993.
F-4
<PAGE> 131
[This page intentionally left blank.]
F-5
<PAGE> 132
PILLOWTEX CORPORATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 QUARTER ENDED
--------------------------------------------------------------
APRIL 1 JULY 1 SEPTEMBER 30 DECEMBER 30
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 94,740 $ 90,788 $ 146,824 $ 142,547
Gross profit 16,454 16,126 24,365 22,032
Net earnings 1,162 1,088 4,738 4,481
Earnings per common share 0.11 0.10 0.45 0.42
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED
--------------------------------------------------------------
MARCH 30 JUNE 29 SEPTEMBER 28 DECEMBER 28
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 100,794 $ 91,185 $ 143,791 $ 154,885
Gross profit 15,568 15,615 24,315 24,109
Earnings before extraordinary loss 941 1,491 6,122 6,178
Net earnings 941 1,491 6,122 5,569
Earnings per common share 0.09 0.14 0.58 0.52
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTER ENDED
--------------------------------------------------
MARCH 29 JUNE 28 SEPTEMBER 27
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 113,763 $ 104,894 $ 151,977
Gross profit 18,706 19,701 26,552
Earnings before extraordinary loss 1,651 1,871 7,050
Earnings per common share 0.16 0.18 0.66
</TABLE>
F-6
<PAGE> 133
[This page intentionally left blank.]
F-7
<PAGE> 134
PILLOWTEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
GENERAL
The Company, originally founded in 1954 as a pillow manufacturer,
expanded its product lines through acquisitions into other categories of
top-of-the-bed home textiles including mattress pads, comforters, and blankets.
The Company has been successful in integrating these acquisitions into its
existing operations, resulting in increased sales, more efficient distribution,
and a broader product line.
The Company originally expanded its product line to include blankets
through the acquisition of Manetta Mills, Inc. ("Manetta") in August 1993 and
Tennessee Woolen Mills, Inc. ("TWM") in September 1993. In addition, in
December 1994, the Company acquired substantially all of the assets of Beacon
Manufacturing Company ("Beacon"), a manufacturer of cotton and synthetic
blankets and throws. The Company expanded its manufacturing operations into
Canada through the acquisition of Torfeaco Industries, Ltd. ("Torfeaco"), a
manufacturer of fashion and synthetic bedding products, in December 1993, and
Imperial Feather Company ("Imperial"), a manufacturer of bedding products,
including natural fill and synthetic bed pillows, down comforters, and
comforter covers, in August 1994.
Each of these acquisitions was accounted for under the purchase method
of accounting, and, accordingly, the results of operations of each acquired
company have been included in the Consolidated Statements of Earnings since its
respective acquisition date. Due to the number, magnitude, and timing of the
Company's acquisitions, the Company's operating results, as reflected in the
Consolidated Financial Statements, are not directly comparable on a
year-to-year or quarter-to-quarter basis.
In November 1996, the Company purchased certain assets of Fieldcrest
Cannon, Inc.'s ("Fieldcrest") blanket operations, including selected equipment,
inventory, and an exclusive long-term license for the use of certain trademarks
and trade names.
On March 17, 1993, the Company completed an initial public offering of
its Common Stock with the issuance of 4,085,000 shares at $14.00 per share.
The Company received net proceeds of $52.1 million after deducting offering
costs. On November 12, 1996, the Company completed a private offering for an
aggregate principal amount of $125 million of 10% Senior Subordinated Notes
(the "Notes") due November 15, 2006. After deducting offering costs, the
Company received net proceeds of approximately $121.7 million.
INCOME TAXES
From March 1, 1987 until March 23, 1993, the Company elected to be taxed
as an S Corporation under Subchapter S of the Internal Revenue Code and
comparable provisions of certain state tax laws, and, therefore, paid no
federal income taxes and no state taxes in certain states during this period.
The Company paid cash dividends in 1993 and 1994 to fund the payment of the
federal and state income tax liabilities of the Company's shareholders
attributable to its Subchapter S earnings.
RESULTS OF OPERATIONS
The following table presents certain statements of earnings data as a
percentage of sales for the periods indicated and should be read in conjunction
with the historical financial information of the Company contained elsewhere
herein.
F-8
<PAGE> 135
<TABLE>
<CAPTION>
YEAR ENDED 12/31/94 12/30/95 12/28/96
- ---------- -------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 84.3 83.4 83.8
Gross profit 15.7 16.6 16.2
Selling, general and administrative expenses 10.4 9.0 8.4
Earnings from operations 5.3 7.7 7.8
Interest expense 1.8 3.7 2.8
Other income 0.1 - -
Earnings before income taxes and extraordinary loss 3.6 3.9 4.9
Extraordinary loss - - 0.1
Net earnings 2.2 2.4 2.9
</TABLE>
1996 VS. 1995
Net Sales. Net sales were $490.7 million in 1996, representing an
increase of $15.8 million or 3.3% as compared to $474.9 million in 1995. This
increase reflected strong bed pillow sales which have increased by $19.8
million, mattress pad sales which are up by $6.7 million, and fashion bedding
sales which have increased by $7.6 million. These increases were partially
offset by lower sales in the other product areas, the largest of which was
blankets from Beacon Division due to a weak retail climate for blankets.
Gross Profit. Gross profit margins decreased to 16.2% in 1996 from
16.6% in 1995 due primarily to a highly competitive pricing environment in
blankets, lower blanket sales, and start-up operational issues at the Company's
Newton cotton yarn spinning facility, which negatively impacted margins
throughout the first half of 1996. However, margins began to show improvement
on a year-over-year basis during the second half of 1996.
SG&A. Selling, general, and administrative ("SG&A") expenses fell by
$1.1 million to $41.4 million in 1996, from $42.5 million in 1995, and, as a
percentage of sales, SG&A expenses decreased to 8.4% from 9.0% in the
respective periods. These decreases reflected the Company's continuing success
at reducing these costs, of which the largest category to decline was
advertising expense.
Interest. Interest expense decreased to $14.0 million in 1996, from
$17.5 million in 1995. Interest expense fell due to lower borrowings and
decreased average interest rates.
Taxes. The effective tax rate for 1996 decreased to 39.1% compared to
39.6% for 1995, primarily due to lower state taxes.
Extraordinary Loss. An extraordinary loss of $0.6 million was recorded
in 1996 related to the write-off of deferred finance costs for the Company's
term loan, which was retired with a portion of the proceeds from the private
offering of the Notes.
Net Earnings. Net earnings increased to $14.1 million in 1996, from
$11.5 million in 1995. As a percentage of sales, net earnings increased to
2.9% in 1996, from 2.4% in 1995.
1995 VS. 1994
Net Sales. Net sales were $474.9 million in 1995, representing an
increase of $125.4 million or 35.9% as compared to sales of $349.5 million in
1994. This increase resulted primarily from the inclusion of 12 months of
sales of blankets from Beacon during 1995. Due to generally weak retail buying
conditions, sales of the Company's core product lines were largely flat.
F-9
<PAGE> 136
Gross Profit. Gross profit margins increased to 16.6% in 1995, from
15.7% in 1994. Margins were supported by product price increases implemented
in 1995 and increased operating productivity at the Company's manufacturing
facilities, the latter of which resulted from efficiencies achieved through the
further successful integration of the blanket plants acquired in 1993 and 1994.
Margin increases were offset in part by a sales mix change that included a
greater percentage of blanket sales in 1995, which generally carry lower
margins than the Company's other products, by increases in raw material prices,
and by a higher percentage of closeout goods in the sales mix.
SG&A. SG&A expenses grew by $6.1 million to $42.5 million in 1995, from
$36.4 million in 1994, due primarily to the acquisition in December 1994 of
Beacon. As a percentage of sales, however, SG&A expenses fell significantly,
to 9.0% in 1995, from 10.4% in 1994. This decrease was the result of the study
and implementation of a comprehensive cost cutting plan throughout the Company,
including expenses related to the integration of the blanket plants acquired in
1993 and 1994, as well as reductions in salaries, travel, advertising,
professional fees, and other general administrative expenses. The changes were
necessary to bring the Company's cost structure in line with the expectations
of management.
Interest. Interest expense increased to $17.5 million in 1995, from
$6.4 million in 1994, due to increased debt levels and interest rates. Higher
borrowings related to the acquisition of Beacon in 1994 and the inventory
carrying costs resulting from earlier purchases of certain imported products in
expectation of closure of quota categories applicable to certain goods imported
from China.
Taxes. The effective tax rate in 1995 grew to 39.6%, compared to 38.1%
in 1994, due to the expiration of certain tax credits and to a reduction in
tax-exempt earnings.
Net Earnings. Net earnings increased to $11.5 million in 1995, from
$7.7 million in 1994, as a result of improved gross margins and marked
decreases in SG&A expenses, partially offset by increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The primary uses of cash by the Company have historically been to
provide funds for operations, make expenditures for capital improvements,
equipment, and facilities, repay indebtedness, pay cash dividends to
shareholders, repurchase shares of common stock, and make acquisitions. In
1997, the Company's most significant capital commitments include the payment of
interest, royalty payments under license agreements, capital improvement
expenditures, and operating lease payments.
The Company's principal capital resources included cash flow generated
by operations and borrowings under the Company's $175 million revolving bank
credit facilities (the "Credit Agreement").
The Company consummated the private offering of the Notes in November
1996, resulting in proceeds to the Company, net of $3.3 million in financing
costs, of approximately $121.7 million. The Company used these net proceeds
(i) to retire the indebtedness outstanding under the Company's previously
existing term loan of $70.4 million, (ii) to finance the acquisition of certain
assets of Fieldcrest's blanket operations for approximately $28.3 million,
(iii) to temporarily reduce indebtedness under the revolving credit facility
(the "Revolver") by approximately $14.6 million, and (iv) to acquire a
warehouse facility in Mauldin, S.C. for approximately $8.4 million.
Concurrently with the private offering of the Notes, the Company amended
and restated the Revolver under its Credit Agreement. The Credit Agreement
provides for borrowings in an aggregate principal amount of up to $175.0
million. Indebtedness under the Credit Agreement is guaranteed by each
domestic subsidiary of the Company and is secured by the Company's accounts
receivable and inventory and by (i) 100% of the capital stock of the Company's
domestic subsidiaries and (ii) 65% of the capital stock of the Company's
foreign subsidiaries. Loans made pursuant to the Credit Agreement may be
borrowed, repaid, and reborrowed from time to time until the fifth anniversary
of the establishment of the Credit Agreement, subject to satisfaction of
certain conditions on the date of any such borrowing. As of December 28, 1996,
the outstanding principal balance of the Revolver was $61.0 million. Letters
of credit were outstanding under the Revolver with an aggregate undrawn face
amount of $11.6 million, and unused availability under the Revolver was $102.4
million.
F-10
<PAGE> 137
Amounts outstanding under the Credit Agreement bear interest at a rate
based, at the Company's option, upon (i) either NationsBank of Texas, N.A.'s
("NationsBank") base rate or LIBOR (the London Interbank Offered Rate) plus
0.875% or (ii) NationsBank's reserve-adjusted CD rate plus 1.000%. These rates
are subject to decrease based upon the Company's achievement of (i) certain
senior unsecured debt ratings or (ii) certain ratios of funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The weighted
average annual interest rate on outstanding borrowings under the Credit
Agreement during 1996 was 7.02%, and the effective rate at December 28, 1996
was 6.39%.
The Company from time to time enters into interest rate swap agreements
in order to minimize the risk of fluctuations in interest rates. The Company
currently has interest rate swap agreements in place covering approximately
$215.0 million of indebtedness which expire at various dates, with some
extending through November 2000, with an average interest rate of 6.24%.
The Credit Agreement contains a number of financial, affirmative, and
negative covenants that regulate the Company's operations. Financial covenants
require maintenance of certain ratios of current assets to current liabilities,
funded debt to EBITDA, and minimum cash flow coverages, and require the Company
to maintain a minimum tangible net worth. Negative covenants restrict, among
other things, the incurrence of debt, the existence of liens, transactions with
affiliates, loans, advances, and investments by the Company, payment of
dividends and other distributions to shareholders, dispositions of assets,
mergers, consolidations, and dissolutions, contingent liabilities, changes in
business, and acquisitions. As of December 28, 1996, the Company was in
compliance with all covenants under the Credit Agreement.
In 1995, the Company's capital expenditures were $12.4 million,
including a total of $8.7 million for improvements and equipment purchases
related to the blanket production facilities and approximately $0.3 million
related to Torfeaco. For 1996, the Company's capital expenditures were $21.0
million, most of which were used to upgrade the physical plants and purchase
machinery and equipment for the blanket facilities, including $6.3 million for
equipment purchased from Fieldcrest. In addition, the Company purchased a
warehouse in Mauldin, South Carolina, for approximately $8.4 million, to
replace certain warehouse facilities leased by Beacon. The Company expects to
spend approximately $12.9 million in 1997, including approximately $10.9
million at the blanket facilities in North Carolina, South Carolina, and
Tennessee. The balance of the capital expenditures for 1997 will be used for
regular maintenance and improvements at the Company's other manufacturing
facilities and to continue the upgrade of the Company's computer system.
On each of March 27, 1996, June 26, 1996, September 26, 1996, and
December 16, 1996, the Company paid a cash dividend to shareholders of record
on March 13, 1996, June 12, 1996, September 11, 1996, and December 2, 1996,
respectively, of $.05 per share.
Historically, a significant portion of the Company's net sales has been
generated during the second half of the year. During each of the past three
years, sales and earnings from operations during the second half of the year
averaged 60.9% and 72.2%, respectively, of the Company's total sales and
earnings from operations. Consequently, working capital requirements and,
therefore, total debt levels, reach their highest levels as net sales peak in
the third and fourth quarters of the year.
The Company believes that cash flow generated from operations and funds
provided by the Notes and available under the Revolver will be adequate to meet
its working capital and related financing needs for the foreseeable future.
RECENT ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock for both interim and annual periods ending
after December 15, 1997. The management of the Company does not expect the
impact from adopting the provisions of Statement No. 128 in fiscal year 1997 to
be material.
F-11
<PAGE> 138
In June 1996, the Financial Accounting Standards Board issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Statement No. 125 has been
amended by Statement No. 127, which amends the effective date of certain
provisions for these transactions occurring after December 31, 1997. The
management of the Company does not believe that the impact from adopting the
provisions of Statement No. 125 in fiscal year 1998 will be material.
F-12
<PAGE> 139
[This page intentionally left blank.]
F-13
<PAGE> 140
PILLOWTEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto for the quarterly
period ended September 27, 1997, and with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended December 28,
1996.
RESULTS OF OPERATIONS
Net Sales. Net sales were $151,977,000 for the three months ended
September 27, 1997 representing an increase of $8,186,000 or 5.7% compared to
$143,791,000 for the three months ended September 28, 1996. Net sales for the
nine months ended September 27, 1997 increased $34,863,000 or 10.4% to
$370,633,000 as compared to $335,770,000 for the same period in 1996. These
increases reflected strong bed pillow, mattress pad, fashion bedding, and
blanket sales, due in part to the inclusion of the newly acquired Fieldcrest
blanket business. The largest increase in sales comes from the blanket business
which was $6,273,000 higher for the three months and $24,638,000 higher for the
nine months ended September 27, 1997 when compared to the same periods for
1996.
Gross Profit. The gross profit percentage for the third quarter ended
September 27, 1997 increased to 17.5% from 16.9% for the third quarter of 1996.
For the nine months ended September 27, 1997, the gross profit increased to
17.5% from 16.5% for the same period in 1996. The gross margin improvement
resulted primarily from lower raw material costs and greater efficiencies
through improved utilization of plant capacities, generated by continued
capital investments in machinery and facilities. The Company also successfully
continued its cost reduction initiatives. There are no significant items for
the third quarter that stand out when compared to the prior year but for the
nine months ended September 27, 1997 the gross margin improved by $3,535,000 as
a result of lower raw material costs.
SG&A. Selling, general, and administrative ("SG&A") expenses for the
three months ended September 27, 1997 decreased to $10,112,000 from $10,614,000
for the same period in 1996, and decreased as a percentage of sales to 6.7% in
the third quarter of 1997 from 7.4% for the same period in 1996. For the nine
months ended September 27, 1997, SG&A expenses increased to $33,728,000 from
$31,170,000 for the same period in 1996. SG&A expenses as a percentage of
sales decreased to 9.1% for the nine-month period ended September 27, 1997 as
compared to 9.3% for the first nine months in 1996. SG&A for the three-month
period ended September 27, 1997 remained flat when compared to the same period
in 1996. SG&A for the nine-month period increased when compared with the same
period in 1996 due primarily to higher compensation and travel costs. These
increases were due in part to the filling of new staff positions and positions
which were vacant in 1996. SG&A as a percent of sales for the three- and
nine-month periods ended September 27, 1997 continued to improve when compared
to the same periods in 1996 reflecting the Company's commitment to containing
these costs.
Interest. Interest expense for the third quarter of 1997 increased by
$1,257,000 or 34.3% to $4,921,000 from $3,664,000 for the same period in 1996.
Interest expense for the nine months ended September 27, 1997 increased by
$3,678,000 or 35.8% to $13,957,000 from $10,279,000 for the nine months ended
September 28, 1996, principally due to higher borrowings associated with
seasonal inventory increases, installation of new equipment, capital
improvements, and increased average interest rates.
Taxes. The effective tax rate for the three months ended September 27,
1997 decreased to 38.8% compared to 39.0% for the three months ended September
28, 1996. The effective tax rate for the nine months ended September 27, 1997
decreased to 38.8% from 39.1% for the nine months ended September 28, 1996,
primarily due to lower state taxes.
Net Earnings. Net earnings for the three months ended September 27,
1997 increased $928,000 or 15.2% to $7,050,000 or $.66 per share, compared to
net earnings of $6,122,000 or $.58 per share for the same period in 1996. As a
percentage of sales, net earnings for the three months ended September 27, 1997
increased to 4.7% from
F-14
<PAGE> 141
4.3% for the same period in 1996. Net earnings for the nine months ended
September 27, 1997 increased $2,018,000 or 23.6% to $10,572,000 or $.99 per
share, from $8,554,000 or $.81 per share for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 1997, the outstanding principal balance under the
Company's $175,000,000 secured revolving credit facility was $86,350,000, with
$9,861,000 committed to outstanding letters of credit, and $78,789,000
available for other needs. The increase in borrowings in the third quarter of
1997 was due primarily to the seasonal expansion of inventories and the
installation of new equipment and capital improvements at our production
facilities.
The Company enters into interest rate swap agreements to minimize the
risk of fluctuations in interest rates. The Company currently has interest rate
swap agreements in place covering approximately $125,000,000 of indebtedness
which expire in November 2000, with an average interest rate of 9.62%.
On September 29, 1997, the Company paid a dividend of $.06 per share to
shareholders of record on September 15, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock for both interim and annual periods ending
after December 15, 1997. Management of the Company does not expect the impact
from adopting the provisions of Statement No. 128 in fiscal year 1997 to be
material.
As previously announced by the Company in its press release dated
September 11, 1997 and its Form 8-K dated September 10, 1997, on September 10,
1997, the Company, a wholly owned subsidiary of the Company ("Newco"), and
Fieldcrest Cannon, Inc. ("Fieldcrest") entered into an agreement pursuant to
which, on the terms and subject to the conditions set forth therein, Newco will
be merged with and into Fieldcrest (the "Merger"), and Fieldcrest will thereby
become a wholly owned subsidiary of the Company. The Merger, and the financing
thereof, will have a significant impact on the capitalization of the Company.
GOVERNMENT REGULATIONS
As of July 1, 1996, quota restrictions on down comforter shells imported
from China were eliminated, allowing the Company to import shells on an
unlimited and as-needed basis.
Products that the Company imports from China currently receive
preferential tariff treatment accorded goods from countries granted "most
favored nation" status. Under the Trade Act of 1974, the President of the
United States is authorized, upon making specified findings, to waive certain
restrictions that would otherwise render China ineligible for most favored
nation treatment. The President has waived these provisions each year since
1979; however, no assurance can be given that China will continue to enjoy this
status. Raw materials and finished products entering the United States from
China without the benefit of most favored nation treatment would be subject to
significantly higher duty rates. However, the Company believes that the loss
of China's most favored nation status is not likely to have a material adverse
effect on the Company's business, financial condition, or results of
operations.
F-15
<PAGE> 142
[This page intentionally left blank.]
F-16
<PAGE> 143
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Pillowtex Corporation:
We have audited the consolidated financial statements of Pillowtex
Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pillowtex
Corporation and subsidiaries as of December 30, 1995 and December 28, 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 28, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
February 6, 1997
F-17
<PAGE> 144
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 411 $ 20
Receivables (note 8):
Trade, less allowance for doubtful accounts of $2,195 in ......... 71,684 78,482
1995 and $2,346 in 1996
Other ............................................................ 2,284 4,480
Inventories (notes 4 and 8) ........................................ 107,404 133,495
Deferred income taxes (note 9) ..................................... 2,419 2,567
Prepaid expenses ................................................... 1,644 2,613
--------- ---------
Total current assets ................................... 185,846 221,657
Property, plant and equipment, net (notes 5 and 8) ................... 84,567 94,267
Intangible assets, at cost less accumulated amortization ............. 51,779 57,113
of $2,500 in 1995 and $3,843 in 1996
Other assets ......................................................... 2,518 2,677
--------- ---------
$ 324,710 $ 375,714
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (note 6) .......................................... $ 42,090 $ 45,481
Accrued expenses (note 6) .......................................... 21,137 22,156
Current portion of long-term debt (note 8) ......................... 11,916 1,868
Income taxes payable ............................................... 575 1,646
--------- ---------
Total current liabilities .............................. 75,718 71,151
Long-term debt, net of current portion (note 8) ...................... 153,472 194,851
Deferred income taxes (note 9) ....................................... 7,530 9,708
Shareholders' equity (notes 8 and 10):
Preferred stock, $0.01 par value; authorized 20,000,000 ............ -- --
shares; none issued and outstanding
Common stock, $0.01 par value; authorized 30,000,000 ............... 106 106
shares; 10,617,722 shares issued and outstanding
Additional paid-in capital ......................................... 58,427 58,427
Retained earnings .................................................. 29,666 41,665
Currency translation adjustment .................................... (209) (194)
--------- ---------
Total shareholders' equity ............................. 87,990 100,004
Commitments and contingencies (notes 7 and 12)
--------- ---------
$ 324,710 $ 375,714
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 145
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales .................................................... $ 349,520 $ 474,899 $ 490,655
Cost of goods sold ........................................... 294,714 395,922 411,048
--------- --------- ---------
Gross profit ............................................... 54,806 78,977 79,607
Selling, general and administrative expenses ................. 36,399 42,508 41,445
--------- --------- ---------
Earnings from operations ................................... 18,407 36,469 38,162
Interest expense ............................................. 6,361 17,491 13,971
Other income, net ............................................ (379) -- --
--------- --------- ---------
5,982 17,491 13,971
--------- --------- ---------
Earnings before income taxes and extraordinary loss ........ 12,425 18,978 24,191
Income taxes (note 9) ........................................ 4,736 7,509 9,459
--------- --------- ---------
Earnings before extraordinary loss ......................... 7,689 11,469 14,732
Extraordinary loss, net of income tax benefit of $391 (note 8) -- -- (609)
--------- --------- ---------
Net Earnings ............................................... $ 7,689 $ 11,469 $ 14,123
========= ========= =========
Earnings per common share before extraordinary loss .......... $ 0.73 $ 1.08 $ 1.39
Extraordinary loss ........................................... -- -- (0.06)
--------- --------- ---------
Earnings per common share .................................... $ 0.73 $ 1.08 $ 1.33
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 146
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL CURRENCY TOTAL
NUMBER PAR PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 ..... 10,590,224 $ 106 $ 58,044 $ 11,179 $ -- $ 69,329
Exercise of stock options ......... 27,498 -- 352 -- -- 352
Dividends declared (note 11) ...... -- -- -- (140) -- (140)
Currency translation changes ...... -- -- -- -- (752) (752)
Net earnings ...................... -- -- -- 7,689 -- 7,689
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1994 ..... 10,617,722 106 58,396 18,728 (752) 76,478
Other ............................. -- -- 31 -- -- 31
Dividends declared ($.05
per share)....................... -- -- -- (531) -- (531)
Currency translation changes ...... -- -- -- -- 543 543
Net earnings ...................... -- -- -- 11,469 -- 11,469
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 30, 1995 ..... 10,617,722 106 58,427 29,666 (209) 87,990
Dividends declared ($.20
per share) ...................... -- -- -- (2,124) -- (2,124)
Currency translation changes ...... -- -- -- -- 15 15
Net earnings ...................... -- -- -- 14,123 -- 14,123
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 28, 1996 ..... 10,617,722 $ 106 $ 58,427 $ 41,665 $ (194) $ 100,004
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 147
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ........................................................... $ 7,689 $ 11,469 $ 14,123
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ..................................... 6,365 11,994 12,775
Deferred income taxes ............................................. (174) 3,635 2,030
Loss (gain) on disposal of property, plant and equipment .......... (39) 74 40
Changes in operating assets and liabilities, net of businesses
acquired:
Trade receivables ............................................. 11,362 714 (7,040)
Inventories ................................................... (13,526) (172) (26,107)
Accounts payable .............................................. 4,585 (3,698) 6,267
Other assets and liabilities .................................. (198) 1,869 (1,374)
--------- --------- ---------
Net cash provided by operating activities ................... 16,064 25,885 714
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment .................... 156 119 19
Purchases of property, plant and equipment ............................. (10,538) (12,448) (21,040)
Purchase of other assets ............................................... (951) -- --
Payments for businesses purchased, net of cash acquired ................ (116,253) -- --
Other .................................................................. (42) (2,235) (4,112)
--------- --------- ---------
Net cash used in investing activities ....................... (127,628) (14,564) (25,133)
--------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in checks not yet presented for payment ............ 853 8,155 (2,526)
Proceeds from issuance of bonds ........................................ -- -- 125,000
Retirement of long-term debt ........................................... (6,884) (5,056) (89,357)
Borrowings on revolving credit loans ................................... 103,350 47,150 62,000
Repayments of revolving credit loans ................................... (49,510) (61,500) (66,600)
Proceeds from long-term debt ........................................... 64,750 645 635
Debt issuance costs .................................................... (3,107) (350) (3,000)
Proceeds from exercise of stock options ................................ 352 -- --
Dividends paid ......................................................... (244) (531) (2,124)
--------- --------- ---------
Net cash provided by (used in) financing activities ......... 109,560 (11,487) 24,028
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............. (11) 6 --
--------- --------- ---------
Net change in cash and cash equivalents .................................. (2,015) (160) (391)
Cash and cash equivalents at beginning of year ........................... 2,586 571 411
--------- --------- ---------
Cash and cash equivalents at end of year ................................. $ 571 $ 411 $ 20
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 148
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(1) GENERAL
Pillowtex Corporation and subsidiaries ("the Company") operate primarily
in one industry segment which includes the design, manufacture and
marketing of bed pillows, mattress pads, down comforters, blankets,
throws and other bedroom textile furnishings. Virtually all of the
Company's assets are located in North America. The Company supplies its
products primarily to customers in the retail sector, including
department stores, mass merchants, wholesale clubs, specialty retail
stores, catalogs and institutions.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of Pillowtex Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Fiscal Year
Beginning in 1995, the Company's fiscal year ends on the Saturday
closest to December 31. The fiscal year-ends for the
consolidated financial statements presented are December 31,
1994, December 30, 1995 and December 28, 1996.
(c) Statements of Cash Flows
For purposes of reporting cash flows, the Company considers all
short-term investments with original maturities of three months
or less to be cash equivalents.
Supplemental disclosures of cash flow information for the years
ended December 31, 1994, December 30, 1995 and December 28, 1996
follow:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest paid ......... $ 5,134 $ 15,632 $ 15,234
========= ========= =========
Income taxes paid ..... $ 5,451 $ 3,793 $ 6,483
========= ========= =========
</TABLE>
(d) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
F-22
<PAGE> 149
(e) Property, Plant and Equipment
Depreciation is provided generally using the straight-line method
in amounts sufficient to amortize the cost of the assets over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
---------------------
<S> <C>
Buildings and improvements 10-30 years
Machinery and equipment 5-12 years
Data processing equipment 5 years
Furniture and fixtures 5 years
</TABLE>
Leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets or the remaining term of the
lease using the straight-line method. Interest costs of $273,000
incurred during the year ended December 28, 1996, for the
purchase and construction of long-term assets were capitalized
and are being amortized over the related assets' estimated useful
lives. Renewals and betterments are capitalized and depreciated
over the remaining life of the specific property unit.
(f) Intangibles
Intangible assets consist primarily of goodwill ($48,079,000 and
$46,667,000 as of December 30, 1995 and December 28, 1996,
respectively) recorded in connection with the Company's
acquisitions (see note 3). Goodwill represents the excess of
purchase price over net identifiable tangible and intangible
assets acquired. Additions to goodwill during 1995 were
primarily related to the finalization of purchase price
allocations for previous acquisitions. Amortization is provided
using the straight-line method, the majority of which is over the
estimated useful life of 40 years.
Other intangible assets consist principally of deferred loan
costs, trademarks and noncompete agreements amortized over
periods ranging from 2 to 20 years.
The Company assesses the recoverability of goodwill by
determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
impairment, if any, is measured based on projected discounted
future operating cash flows.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on December 31, 1995, the first day of fiscal year
1996. This statement requires that long-lived assets and certain
identifiable intangible assets be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this statement did not have a
material impact on the Company's consolidated financial
statements.
(h) Income Taxes
Deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income
F-23
<PAGE> 150
in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(i) Stock Option Plan
Prior to fiscal year 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly,
compensation expense was recorded on the date of grant only if
the current market price of the underlying stock exceeded the
exercise price. At the beginning of fiscal year 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995
and future years as if the fair-value based method defined in
SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(j) Revenue Recognition
Revenue is recognized upon shipment of products. Reserves for
sales returns and allowances are recorded in the same accounting
period as the related revenues.
(k) Advertising Expenses
The Company expenses advertising costs as incurred. Advertising
expense was approximately $3,899,000, $3,004,000 and $3,223,000
during the years ended December 31, 1994, December 30, 1995 and
December 28, 1996, respectively.
(l) Earnings Per Share
Earnings per share for 1994, 1995 and 1996 are based on
10,603,660 weighted average shares of common stock outstanding in
1994 and 10,617,722 weighted average shares of common stock
outstanding in 1995 and 1996. Common share equivalents in the
form of stock options are excluded from the earnings per share
calculations since they have no material dilutive effect.
(m) Foreign Currency Translation and Transactions
The Company's foreign subsidiaries use the local currency as the
functional currency. The assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars using
current exchange rates and revenues and expenses are translated
at average monthly exchange rates. The resulting translation
adjustments are recorded in a separate component of shareholders'
equity. Foreign currency transaction gains and losses are
included in the consolidated statements of earnings and were not
material in any of the years presented.
(n) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
F-24
<PAGE> 151
(3) ACQUISITIONS
Businesses Acquired
On August 19, 1994, the Company, through its subsidiary, Torfeaco
Industries, Ltd. ("Torfeaco"), purchased certain business assets
including receivables, inventory and fixed assets of Imperial
Feather Company of Canada ("Imperial") for approximately
$3,600,000. Imperial was a family-owned and long-established
producer of high quality bedding products, including natural fill
and synthetic bed pillows, down comforters and comforter covers.
The funds for the acquisition were provided by the Company's
revolving credit facility.
On December 1, 1994, the Company purchased substantially all of
the net assets of Beacon Manufacturing Company ("Beacon"), for a
purchase price of $100,823,000 in cash, plus the assumption of
approximately $11,028,000 in liabilities, which were repaid at the
time of acquisition. Beacon is a manufacturer of cotton and
synthetic blankets and throws headquartered in Swannanoa, North
Carolina. The funds for this acquisition were provided primarily
from borrowings under a $240,000,000 Credit Facility with
NationsBank of Texas, N.A., which was modified in conjunction with
the acquisition.
These acquisitions have been accounted for as purchases and,
accordingly, results of operations of the acquired companies have
been included in the consolidated statements of earnings since the
acquisition dates.
A summary of the assets acquired and liabilities assumed for the
year ended December 31, 1994 follows:
<TABLE>
<S> <C>
Current assets ............................. $ 60,746
Property, plant and equipment .............. 36,566
Intangible assets .......................... 32,372
Other assets ............................... 28
Current liabilities ........................ (13,459)
---------
Cash paid, net of cash acquired ......... $ 116,253
=========
</TABLE>
Assets Acquired
On November 18, 1996, the Company purchased certain assets of Fieldcrest
Cannon's blanket operations for a purchase price of $28,304,000 in cash.
The acquisition included selected equipment ($6,300,000), inventory
($18,004,000) and an exclusive long-term license for the use of certain
trademarks and tradenames ($4,000,000). The funds for the acquisition
were provided by the Company's private offering of Senior Subordinated
Notes (see note 8).
(4) INVENTORIES
Inventories consist of the following at December 30, 1995 and December
28, 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Finished goods .................... $ 37,670 $ 56,085
Work-in-process ................... 35,980 33,436
Raw materials ..................... 31,851 41,955
Supplies .......................... 1,903 2,019
---------- ----------
$ 107,404 $ 133,495
========== ==========
</TABLE>
Inventory balances are net of inventory reserves of approximately
$2,525,000 and $3,285,000 at December 30, 1995 and December 28, 1996,
respectively.
F-25
<PAGE> 152
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following at December 30, 1995 and December 28, 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Land .............................................. $ 1,504 $ 2,847
Buildings and improvements ........................ 35,676 44,713
Machinery and equipment ........................... 69,364 74,580
Data Processing equipment ......................... 4,342 6,714
Furniture and fixtures ............................ 3,006 2,070
Leasehold improvements ............................ 1,205 1,403
Projects in progress .............................. 2,881 5,660
--------- ---------
117,978 137,987
Less accumulated depreciation and amortization .... (33,411) (43,720)
--------- ---------
$ 84,567 $ 94,267
========= =========
</TABLE>
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable includes $11,757,000 at December 30, 1995 and
$9,231,000 at December 28, 1996 of checks not yet presented for payment
on zero balance disbursement accounts.
Accrued expenses consist of the following at December 30, 1995 and
December 28, 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Accrued customer rebates ............................ $ 3,477 $ 5,220
Employee-related compensation and benefits .......... 5,166 4,159
Accrued advertising ................................. 2,875 927
Accrued royalties and commissions ................... 3,560 4,831
Accrued insurance and worker's compensation
reserves .......................................... 1,095 2,117
Accrued interest and commitment fees ................ 3,085 1,831
Other accrued expenses .............................. 1,879 3,071
--------- ---------
$ 21,137 $ 22,156
========= =========
</TABLE>
(7) PENSION PLAN
The Company has a defined benefit pension plan covering substantially
all of its non-union employees. The Company's funding policy provides
for annual contributions of an amount between the minimum required and
maximum amount that can be deducted for federal income tax purposes.
Pension plan assets consist primarily of investments in publicly traded
corporate common stocks and bonds, as well as U.S. government
obligations.
Net pension expense includes the following components for the years
ended December 31, 1994, December 30, 1995 and December 28, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost ....................................... $ 339 $ 585 $ 766
Interest cost on projected benefit obligation ...... 381 402 523
Actual (return) loss on plan assets ................ 163 (1,041) (564)
Net amortization and deferral ...................... (518) 684 133
--------- --------- ---------
Net pension expense ............................. $ 365 $ 630 $ 858
========= ========= =========
</TABLE>
F-26
<PAGE> 153
A reconciliation of the funded status of the pension plan at December
30, 1995 and December 28, 1996 follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested benefit obligation ............................... $ 5,032 $ 5,492
Nonvested benefit obligation ............................ 226 421
--------- ---------
Accumulated benefit obligation ........................ $ 5,258 $ 5,913
========= =========
Projected benefit obligation for services rendered ........ (6,441) (7,286)
to date
Pension plan assets at fair value ......................... 5,338 6,275
--------- ---------
Pension plan assets less than projected ............... (1,103) (1,011)
benefit obligation
Unrecognized net asset at March 1, 1987 being ............. (68) (60)
recognized over 17 years
Unrecognized prior service costs .......................... 278 243
Amortization and deferral of net (gains) and losses ....... 293 (88)
--------- ---------
Net pension liability included in accrued expenses .... $ (600) $ (916)
========= =========
</TABLE>
The following assumptions were used in determining the actuarial present
value of the projected benefit obligation and net pension expense:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Discount rate .................................. 8.75% 7.25% 7.75%
Rate of increase in future compensation ........ 5.0 4.0 4.0
Expected long-term rate of return on assets .... 8.5 8.5 8.5
</TABLE>
(8) LONG-TERM DEBT
Long-term debt consists of the following at December 30, 1995 and
December 28, 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<C> <C> <C>
10% Senior Subordinated Notes due 2006 ............................... $ -- $ 125,000
Revolver ............................................................. 65,600 61,000
Term loan ............................................................ 87,500 --
Deed of trust note, collateralized by land and buildings, with ....... 3,039 2,762
interest at 10.5% per annum, payable in monthly installments
of approximately $49, maturing on July 1, 1998
Industrial revenue bonds - Pennsylvania Economic Development ......... 3,645 3,235
Financing Authority (PEDFA), collateralized by land and
building, with variable rate interest (7.35% to 7.85% per annum)
maturing serially in annual amounts ranging from $355
to $640 through April 1, 2002
Industrial revenue bonds - Mississippi Business Finance .............. 4,140 3,680
Corporation, collateralized by land, building and equipment,
with variable rate interest (2.75% to 4.5% per annum) payable
monthly and annual principal payments of $460 beginning
July 1, 1995 and maturing on July 1, 2004
Other ................................................................ 1,464 1,042
--------- ---------
165,388 196,719
Less current portion ................................................. (11,916) (1,868)
--------- ---------
$ 153,472 $ 194,851
========= =========
</TABLE>
F-27
<PAGE> 154
On November 12, 1996, the Company completed a private offering of $125,000,000
of 10% Senior Subordinated Notes (the "Notes") due November 15, 2006 with
interest payable semiannually, commencing May 15, 1997. The Company used the
proceeds to retire the outstanding indebtedness under the Company's previously
existing term loan, to finance the acquisition of certain assets of Fieldcrest
Cannon's blanket operations (see note 3), to temporarily reduce indebtedness
under the Revolver and to acquire a warehouse facility. In connection with the
retirement of the term loan, the Company charged the related unamortized
deferred loan costs to expense resulting in an extraordinary loss on debt
extinguishment of $609,000, net of related income taxes of $391,000.
The Notes do not have a mandatory redemption; however, the Company may redeem
the Notes on or after November 15, 2001 in whole or in part. The Notes are
general unsecured obligations of the Company, subordinated in right of payment
to all existing and future senior indebtedness, including borrowings under the
credit facility described below. Upon a change in control, 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, if any, to
the date of repurchase.
The Notes are unconditionally guaranteed on a senior subordinated basis by each
of the existing and future domestic subsidiaries of the Company and each other
subsidiary of the Company that guarantees the Company's obligations under the
credit facility described below (see note 15). The guarantees are subordinated
in right of payment to all existing and future senior indebtedness of the
relevant guarantor.
The Notes are subject to certain covenants which restrict, among other things,
the Company's ability to incur additional indebtedness and issue preferred
stock, incur liens to secure subordinated indebtedness, pay dividends or make
certain other restricted payments, apply net proceeds from certain asset sales,
enter into certain transactions with affiliates, incur indebtedness that is
subordinate in right of payment to any senior indebtedness and senior in right
of payment to the Notes, merge or consolidate with any other person, sell stock
of subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose
of substantially all of the assets of the Company. As of December 28, 1996,
the Company was in compliance with all covenants under the Notes.
Concurrently with the private offering of the Notes, the Company entered into
an Amended and Restated Credit Facility (the "Facility") with a group of banks
for which NationsBank of Texas, N.A. ("NationsBank") acts as Agent. The
Facility replaced a prior credit agreement with NationsBank and a syndicate of
banks, and provides for a $ 175,000,000 revolving credit line (the "Revolver")
with a term of five years expiring November 11, 2001. As of December 28, 1996,
letters of credit were outstanding under the Revolver with an aggregate undrawn
face amount of $11,645,000 and unused availability under the Revolver was
$102,355,000.
Amounts outstanding under the Facility bear interest at a rate based, at the
Company's option, upon (i) either NationsBank's base rate or LIBOR (the London
Interbank Offered Rate) plus 0.875% or (ii) NationsBank's reserve-adjusted CD
rate plus 1.000%. These rates are subject to decrease based upon the Company's
achievement of (i) certain senior unsecured debt ratings or (ii) certain ratios
of funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The weighted average annual interest rate on
outstanding borrowings under the Credit Agreements during 1996 was 7.02% and
the effective rate at December 28, 1996 was 6.39%.
The Company enters into interest rate swap agreements to minimize the risk of
fluctuations in interest rates. The Company currently has interest rate swap
agreements in place covering approximately $215,000,000 of indebtedness which
expire at various dates with some extending through November 2000, with an
average interest rate of 6.24%.
The Facility is secured by a pledge of the receivables and inventory of the
Company and its domestic subsidiaries, 100% of the present and future capital
stock of all of the Company's present and future direct and indirect domestic
subsidiaries, and approximately 65% of the present and future capital stock of
all of the Company's present and future foreign subsidiaries.
F-28
<PAGE> 155
The Facility contains a number of financial, affirmative and negative covenants
which, among other things, require maintenance of certain ratios of current
assets to current liabilities, funded debt to EBITDA, and cash flow coverages,
and require the Company to maintain a minimum tangible net worth. Negative
covenants restrict, among other things, the incurrence of debt, the existence
of liens, transactions with affiliates, loans, advances and investments by the
Company, payment of dividends and other distributions to shareholders,
dispositions of assets, mergers, consolidations and dissolutions, contingent
liabilities, changes in business and acquisitions. As of December 28, 1996,
the Company was in compliance with all covenants under the Facility.
The interest rates on the deed of trust note and industrial revenue bonds
differ from current market rates. The fair value of these financial
instruments, estimated by discounting the future cash flows using rates
currently available, is approximately $9,654,000 and $9,492,000 at December 30,
1995 and December 28, 1996, respectively. Other debt is at current market
rates; therefore, the fair value approximates carrying value.
Aggregate maturities of long-term debt for each of the five years following
December 28, 1996 and thereafter, assuming the unpaid principal balance at
December 28, 1996 under the Revolver remains unchanged, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------- --------
<S> <C>
1997 $ 1,868
1998 3,672
1999 1,084
2000 1,015
2001 62,060
Thereafter 127,020
</TABLE>
(9) INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
U.S. federal - current ................ $ 4,159 $ 2,632 $ 6,604
U.S. federal - deferred ............... (40) 3,412 1,793
State and foreign taxes - current ..... 751 1,242 825
State and foreign taxes - deferred .... (134) 223 237
--------- --------- ---------
$ 4,736 $ 7,509 $ 9,459
========= ========= =========
</TABLE>
A reconciliation of income tax expense computed using the U.S. federal
statutory income tax rate of 35% of earnings before income taxes and
extraordinary loss to the actual provision for income taxes follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected tax at U.S. statutory rate ................. $ 4,349 $ 6,642 $ 8,467
State and foreign taxes, net of federal benefit ..... 414 652 555
Nondeductible meals and entertainment expenses ...... 170 162 166
Other ............................................... (197) 53 271
--------- --------- ---------
$ 4,736 $ 7,509 $ 9,459
========= ========= =========
</TABLE>
F-29
<PAGE> 156
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 30,
1995 and December 28, 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net deferred tax assets:
Inventory costs and reserves ........... $ 760 $ 1,113
Accrued employee benefits .............. 287 422
Allowance for doubtful accounts ........ 266 544
State deferred taxes ................... 1,106 488
--------- ---------
Current deferred tax asset ........... 2,419 2,567
--------- ---------
Net deferred tax liabilities:
Package design costs ................... 141 336
Depreciable assets ..................... (5,830) (9,057)
State deferred income taxes ............ (1,008) (562)
Goodwill ............................... (633) (565)
Other .................................. (200) 140
--------- ---------
Noncurrent deferred tax liability .... (7,530) (9,708)
--------- ---------
Net deferred tax liability ........... $ (5,111) $ (7,141)
========= =========
</TABLE>
(10) STOCK OPTIONS
Effective February 17, 1993, the Company established a stock option
plan, under which options may be granted to eligible employees and
nonemployee directors of the Company. Under the stock option plan, the
Board of Directors may grant either nonqualified stock options or
incentive stock options. Additionally, the plan provides for the
reservation and issuance of up to 1,200,000 shares of the Company's
common stock.
At December 28, 1996, there were 689,135 additional shares available for
grant under the stock option plan. The per share weighted-average fair
value of stock options granted during 1995 and 1996 was $2.75 and $4.65,
respectively, on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Expected dividend yield ..................... 1.14% 1.14
Stock price volatility ...................... 38.82% 38.82
Risk-free interest rate ..................... 6.66% 6.16
Expected option term ........................ 5 years 5 years
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net earnings:
As reported ..................... $ 11,469 $ 14,123
Pro forma ....................... 11,443 13,986
Earnings per share:
As reported ..................... 1.08 1.33
Pro forma ....................... 1.08 1.32
</TABLE>
F-30
<PAGE> 157
Pro forma net earnings reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected
over the options' vesting period of four years and compensation cost for
options granted prior to January 1, 1995 is not considered.
All options are granted at an exercise price not less than the fair
market value of the common stock at the date of grant. The option
period may not be more than ten years from the date the option is
granted and generally the options may be exercised ratably over a
four-year period or as otherwise specified by the Board of Directors.
A summary of option activity during 1994, 1995 and 1996 follows:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE ($)
------- ------------------
<S> <C> <C>
Outstanding at December 31, 1993
(no shares exercisable) ................................ 447,871 14.00 - 14.88
Granted ................................................ 86,431 15.13 - 19.00
Canceled ............................................... (142,863) 14.00 - 14.88
Exercised .............................................. (27,498) 14.00
---------
Outstanding at December 31, 1994
(69,378 shares exercisable) ............................ 363,941 14.00 - 19.00
Granted ................................................ 187,000 8.88 - 14.00
Canceled ............................................... (114,002) 8.88 - 19.00
---------
Outstanding at December 30, 1995
(130,719 shares exercisable) ........................... 436,939 8.88 - 19.00
Granted ................................................ 225,500 12.00 - 15.75
Canceled ............................................... (151,574) 8.88 - 19.00
---------
Outstanding at December 28, 1996
(176,345 shares exercisable) ........................... 510,865 8.88 - 19.00
---------
</TABLE>
(11) RELATED PARTY TRANSACTIONS
Dividends payable to the former Subchapter S shareholders were declared
and paid in 1994 to satisfy certain federal and state tax liabilities
attributable to their share of earnings during the period that the
Company was a Subchapter S corporation for tax purposes.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
Manufacturing facilities at certain locations, a showroom and warehouse
space are leased under noncancelable operating lease agreements. These
leases generally require the Company to pay all executory costs such as
maintenance and taxes. Rental expense for operating leases was
approximately $1,928,000, $3,061,000 and $5,285,000 during 1994, 1995
and 1996, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) which expire at
various dates through 2005 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------- ---------
<S> <C> <C>
1997 $ 5,381
1998 4,510
1999 3,660
2000 2,904
2001 2,391
Thereafter 5,606
</TABLE>
F-31
<PAGE> 158
From time to time, the Company is a party to various legal proceedings
arising in the ordinary course of business. While any proceeding or
litigation has an element of uncertainty, management believes that the
final outcome of all matters currently pending will not have a
materially adverse effect on the Company's financial position or results
of operations.
(13) SEGMENT DATA AND CONCENTRATION OF CREDIT RISK
The Company's customers are located primarily throughout the United
States and Canada and concentration of credit risks with respect to the
Company's unsecured trade receivables is considered to be limited.
Although the Company closely monitors the creditworthiness of its
customers, adjusting credit policies and limits as needed, a customers'
ability to pay is largely dependent upon the retail industry's economic
environment.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends, and other information. The Company has trade receivables which
are due from certain customers who are experiencing financial
difficulties. However, in the opinion of management of the Company, the
allowance for doubtful accounts is adequate and trade receivables are
presented at net realizable value.
Sales to the Company's two individual major customers, including their
affiliated entities, accounted for approximately 13% each of net sales
in 1994, 14% and 13% in 1995 and 14% and 13% in 1996. Sales to foreign
customers were approximately 9% of net sales in 1994, 8% in 1995 and 7%
in 1996.
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited financial data of the Company for
each quarter of 1995 and 1996:
<TABLE>
<CAPTION>
1995 QUARTER ENDED
------------------------------------------------------
APRIL 1 JULY 1 SEPTEMBER 30 DECEMBER 30
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales ...................... $ 94,740 $ 90,788 $146,824 $142,547
Gross profit ................... 16,454 16,126 24,365 22,032
Net earnings ................... 1,162 1,088 4,738 4,481
Earnings per common share ...... 0.11 0.10 0.45 0.42
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED
-----------------------------------------------------------
MARCH 30 JUNE 29 SEPTEMBER 28 DECEMBER 28
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales ...................... $ 100,794 $ 91,185 $ 143,791 $ 154,885
Gross profit ................... 15,568 15,615 24,315 24,109
Earnings before ................ 941 1,491 6,122 6,178
extraordinary loss
Net earnings ................... 941 1,491 6,122 5,569
Earnings per common share ...... 0.09 0.14 0.58 0.52
</TABLE>
F-32
<PAGE> 159
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(15) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial
information for the Company, segregating the Parent and guarantor
subsidiaries from nonguarantor subsidiaries. The guarantor subsidiaries
are wholly owned subsidiaries of the Company and guarantees are full,
unconditional and joint and several. Separate financial statements of
the guarantor subsidiaries are not presented because management believes
that these financial statements would not be material to investors.
<TABLE>
<CAPTION>
DECEMBER 30, 1995
-----------------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Trade receivables $ 38,408 $ 28,445 $ 4,831 $ -- $ 71,684
Receivable from affiliates 130,765 -- -- (130,765) --
Inventories 47,744 47,966 11,694 -- 107,404
Other current assets 3,674 6,294 1,070 (4,280) 6,758
------------ ------------ ------------ ------------ ------------
Total current assets 220,591 82,705 17,595 (135,045) 185,846
Property, plant and equipment, net 31,419 50,151 2,997 -- 84,567
Intangibles 4,036 44,988 2,755 -- 51,779
Other assets 48,816 132 1 (46,431) 2,518
------------ ------------ ------------ ------------ ------------
Total assets $ 304,862 $ 177,976 $ 23,348 $ (181,476) $ 324,710
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Accounts payable and accrued
liabilities $ 39,588 $ 19,735 $ 3,904 $ -- $ 63,227
Payable to affiliates -- 121,970 8,795 (130,765) --
Other current liabilities 16,650 82 39 (4,280) 12,491
------------ ------------ ------------ ------------ ------------
Total current liabilities 56,238 141,787 12,738 (135,045) 75,718
Noncurrent liabilities 155,707 4,663 632 -- 161,002
------------ ------------ ------------ ------------ ------------
Total liabilities 211,945 146,450 13,370 (135,045) 236,720
Shareholders' equity 92,917 31,526 9,978 (46,431) 87,990
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders'
equity $ 304,862 $ 177,976 $ 23,348 $ (181,476) $ 324,710
============ ============ ============ ============ ============
<CAPTION>
DECEMBER 28, 1996
-----------------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Trade receivables $ -- $ 73,438 $ 5,044 $ -- $ 78,482
Receivable from affiliates 196,678 -- -- (196,678) --
Inventories -- 125,803 7,692 -- 133,495
Other current assets -- 8,911 769 -- 9,680
------------ ------------ ------------ ------------ ------------
Total current assets 196,678 208,152 13,505 (196,678) 221,657
Property, plant and equipment, net 714 90,664 2,889 -- 94,267
Intangibles 6,136 48,298 2,679 -- 57,113
Other assets 80,147 901 -- (78,371) 2,677
------------ ------------ ------------ ------------ ------------
Total assets $ 283,675 $ 348,015 $ 19,073 $ (275,049) $ 375,714
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Accounts payable and accrued
liabilities $ -- $ 64,501 $ 3,136 $ -- $ 67,637
Payable to affiliates -- 192,395 4,283 (196,678) --
Other current liabilities 306 3,041 167 -- 3,514
------------ ------------ ------------ ------------ ------------
Total current liabilities 306 259,937 7,586 (196,678) 71,151
Noncurrent liabilities 185,950 17,978 631 -- 204,559
------------ ------------ ------------ ------------ ------------
Total liabilities 186,256 277,915 8,217 (196,678) 275,710
Shareholders' equity 97,419 70,100 10,856 (78,371) 100,004
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders'
equity $ 283,675 $ 348,015 $ 19,073 $ (275,049) $ 375,714
============ ============ ============ ============ ============
</TABLE>
F-33
<PAGE> 160
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------
DECEMBER 31, 1994
----------------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 279,625 $ 53,588 $ 27,396 $ (11,089) $ 349,520
Cost of goods sold 230,323 49,774 25,706 (11,089) 294,714
------------ ------------ ------------ ------------ ------------
Gross profit 49,302 3,814 1,690 -- 54,806
Selling, general and 27,510 7,618 1,271 -- 36,399
------------ ------------ ------------ ------------ ------------
administrative expenses
Earnings (loss) from 21,792 (3,804) 419 -- 18,407
operations
Interest expense and other, net 3,883 2,486 (387) -- 5,982
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 17,909 (6,290) 806 -- 12,425
income taxes
Income taxes 6,949 (2,255) 42 -- 4,736
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 10,960 (4,035) 764 -- 7,689
extraordinary item
Extraordinary loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ 10,960 $ (4,035) $ 764 $ -- $ 7,689
============ ============ ============ ============ ============
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------
DECEMBER 30, 1995
----------------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 278,052 $ 178,823 $ 37,241 $ (19,217) $ 474,899
Cost of goods sold 226,842 154,124 34,173 (19,217) 395,922
------------ ------------ ------------ ------------ ------------
Gross profit 51,210 24,699 3,068 -- 78,977
Selling, general and 25,211 15,586 1,711 -- 42,508
------------ ------------ ------------ ------------ ------------
administrative expenses
Earnings (loss) from 25,999 9,113 1,357 -- 36,469
operations
Interest expense and other, net 4,161 13,321 9 -- 17,491
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 21,838 (4,208) 1,348 -- 18,978
income taxes
Income taxes 8,399 (1,298) 408 -- 7,509
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 13,439 (2,910) 940 -- 11,469
extraordinary item
Extraordinary loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ 13,439 $ (2,910) $ 940 $ -- $ 11,469
============ ============ ============ ============ ============
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------
DECEMBER 28, 1996
----------------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 78,959 $ 403,386 $ 31,480 $ (23,170) $ 490,655
Cost of goods sold 60,215 345,269 28,734 (23,170) 411,048
------------ ------------ ------------ ------------ ------------
Gross profit 18,744 58,117 2,746 -- 79,607
Selling, general and 8,831 30,938 1,676 -- 41,445
------------ ------------ ------------ ------------ ------------
administrative expenses
Earnings (loss) from 9,913 27,179 1,070 -- 38,162
operations
Interest expense and other, net 5,017 8,973 (19) -- 13,971
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 4,896 18,206 1,089 -- 24,191
income taxes
Income taxes 1,921 7,329 209 -- 9,459
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 2,975 10,877 880 -- 14,732
extraordinary item
Extraordinary loss 609 -- -- -- 609
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ 2,366 $ 10,877 $ 880 $ -- $ 14,123
============ ============ ============ ============ ============
</TABLE>
F-34
<PAGE> 161
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------
DECEMBER 31, 1994
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities $ 21,902 $ 2,498 $ (8,347) $ -- $ 16,053
Net cash provided by
(used in) investing
activities (26,902) (98,512) (2,214) -- (127,628)
Net cash provided by
(used in) financing
activities 3,953 95,637 9,970 -- 109,560
------------ ------------ ------------ ------------ ------------
Net change in cash and
cash equivalents (1,047) (377) (591) -- (2,015)
Cash and cash equivalents
at beginning of period 1,600 393 593 -- 2,586
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents
at end of period $ 553 $ 16 $ 2 $ -- $ 571
============ ============ ============ ============ ============
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------
DECEMBER 30, 1995
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities $ 31,506 $ (7,654) $ 2,039 $ -- $ 25,891
Net cash provided by
(used in) investing
activities (167) (13,716) (681) -- (14,564)
Net cash provided by
(used in) financing
activities (31,489) 21,357 (1,355) -- (11,487)
------------ ------------ ------------ ------------ ------------
Net change in cash and
cash equivalents (150) (13) 3 -- (160)
Cash and cash equivalents
at beginning of period 552 17 2 -- 571
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents
at end of period $ 402 $ 4 $ 5 $ -- $ 411
============ ============ ============ ============ ============
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------
DECEMBER 28, 1996
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities $ 23,496 $ (12,512) $ 6,239 $ -- $ (3,286)
Net cash provided by
(used in) investing
activities 14,972 (35,533) (572) -- (21,133)
Net cash provided by
(used in) financing
activities (38,870) 48,053 (5,664) -- 24,028
------------ ------------ ------------ ------------ ------------
Net change in cash and
cash equivalents (402) 8 3 -- (391)
Cash and cash equivalents
at beginning of period 402 4 5 -- 411
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents
at end of period $ -- $ 12 $ 8 $ -- $ 20
============ ============ ============ ============ ============
</TABLE>
F-35
<PAGE> 162
SCHEDULE II
PILLOWTEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
-------------------------- ------------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO OTHER WRITE-OFFS/ AT END
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS (RECOVERIES) OF PERIOD
- ----------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1994 $ 1,773 $ 390 $ 962(2) $ 192(1) $ 2,933
========== ========== ========== ========== ==========
Year ended December 30, 1995 2,933 685 176(3) 1,599(1) 2,195
========== ========== ========== ========== ==========
Year ended December 28, 1996 2,195 210 (89) (30)(1) 2,346
========== ========== ========== ========== ==========
Inventory reserves:
Year ended December 31, 1994 2,711 1,335 1,916(2) 40 5,922
========== ========== ========== ========== ==========
Year ended December 30, 1995 5,922 1,416 (3,186)(4) 1,627 2,525
========== ========== ========== ========== ==========
Year ended December 28, 1996 2,525 2,130 -- 1,370 3,285
========== ========== ========== ========== ==========
</TABLE>
- ------------------
(1) Accounts written off, less recoveries.
(2) Reserves for acquired companies as of the date of acquisition.
(3) Adjustments to the reserves for acquired companies after the date of
acquisition.
(4) Charged against related inventory account.
F-36
<PAGE> 163
[This page intentionally left blank.]
F-37
<PAGE> 164
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 20 $ 34
Receivables:
Trade, less allowance for doubtful accounts of $2,346 in 1996 .... 78,482 100,376
and $2,428 in 1997
Other ............................................................ 4,480 3,977
Inventories ........................................................ 133,495 150,084
Prepaid expenses ................................................... 2,613 4,150
Deferred income taxes .............................................. 2,567 2,699
--------- ---------
Total current assets ................................... 221,657 261,320
Property, plant and equipment, less accumulated depreciation of ...... 94,267 98,916
$43,720 and $52,065 in 1996 and 1997, respectively
Intangible assets, at cost less accumulated amortization of $3,843 ... 57,113 56,094
and $4,988 in 1996 and 1997, respectively
Other assets ......................................................... 2,677 2,838
--------- ---------
$ 375,714 $ 419,168
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 45,481 $ 50,699
Accrued expenses ................................................... 22,156 25,253
Current portion of long-term debt .................................. 1,868 1,553
Income taxes payable ............................................... 1,646 2,581
--------- ---------
Total current liabilities .............................. 71,151 80,086
Long-term debt, net of current portion ............................... 194,851 218,806
Deferred income taxes ................................................ 9,708 9,499
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 20,000,000 shares; .... -- --
none issued and outstanding
Common stock, $0.01 par value; authorized 30,000,000 shares; ....... 106 108
10,617,722 and 10,786,819 shares issued and outstanding in
1996 and 1997, respectively
Additional paid-in capital ......................................... 58,427 60,825
Retained earnings .................................................. 41,665 50,316
Currency translation adjustment .................................... (194) (472)
--------- ---------
Total shareholders' equity ............................. 100,004 110,777
--------- ---------
$ 375,714 $ 419,168
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 165
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 27, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Net sales ........................................ $ 143,791 $ 151,977
Cost of goods sold ............................... 119,476 125,425
---------- ----------
Gross profit ................................. 24,315 26,552
Selling, general and administrative expenses ..... 10,614 10,112
---------- ----------
Earnings from operations ..................... 13,701 16,440
Interest expense ................................. 3,664 4,921
---------- ----------
Earnings before income taxes ................. 10,037 11,519
Income taxes ..................................... 3,915 4,469
---------- ----------
Net earnings ................................. $ 6,122 $ 7,050
========== ==========
Earnings per common share ........................ $ 0.58 $ 0.66
---------- ----------
Weighted average common shares ................... 10,618 10,744
========== ==========
Dividends declared per common share .............. $ 0.05 $ 0.06
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 166
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 27, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net sales ........................................ $ 335,770 $ 370,633
Cost of goods sold ............................... 280,272 305,674
--------- ---------
Gross profit ................................. 55,498 64,959
Selling, general and administrative expenses ..... 31,170 33,728
--------- ---------
Earnings from operations ..................... 24,328 31,231
Interest expense ................................. 10,279 13,957
--------- ---------
Earnings before income taxes ................. 14,049 17,274
Income taxes ..................................... 5,495 6,702
--------- ---------
Net earnings ................................. $ 8,554 $ 10,572
========= =========
Earnings per common share ........................ $ 0.81 $ 0.99
========= =========
Weighted average common shares ................... 10,618 10,669
========= =========
Dividends declared per common share .............. $ 0.15 $ 0.18
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 167
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ...................................................... $ 8,554 $ 10,572
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization ............................... 9,440 10,642
Deferred income taxes ....................................... 1,447 (341)
Provision for doubtful accounts ............................. (11) 585
Loss (gain) on disposal of property, plant and equipment .... 5 (1,153)
Changes in operating assets and liabilities:
Trade receivables ....................................... (21,371) (22,535)
Inventories ............................................. (28,075) (17,659)
Accounts payable ........................................ 2,666 (258)
Accrued expenses ........................................ 49 3,244
Other assets and liabilities ............................ (1,134) (1,297)
--------- ---------
Net cash used in operating activities ............... (28,430) (18,200)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ............... 17 1,723
Purchases of property, plant and equipment ........................ (2,981) (13,891)
Other ............................................................. (112) --
--------- ---------
Net cash used in investing activities ............... (3,076) (12,168)
--------- ---------
Cash flows from financing activities:
Increase in checks not yet presented for payment .................. 6,068 5,617
Retirement of long-term debt ...................................... (18,566) (1,709)
Borrowings on revolving credit loans .............................. 110,000 104,450
Repayments of revolving credit loans .............................. (64,800) (79,100)
Dividends paid .................................................... (1,592) (1,276)
Proceeds from stock option exercises .............................. -- 2,400
--------- ---------
Net cash provided by financing activities ........... 31,110 30,382
--------- ---------
Net change in cash and cash equivalents ............................... (396) 14
Cash and cash equivalents at beginning of period ...................... 411 20
--------- ---------
Cash and cash equivalents at end of period ............................ $ 15 $ 34
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................... $ 11,885 $ 10,721
========= ---------
Income taxes .................................................. $ 2,928 $ 6,871
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE> 168
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Pillowtex Corporation and subsidiaries (the "Company") include all
adjustments, consisting only of normal, recurring adjustments and
accruals, which are, in the opinion of management, necessary for fair
presentation of the results of operations and financial position. The
unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Company's annual report on Form 10-K filed with the Securities and
Exchange Commission on March 17, 1997 for the fiscal year ended
December 28, 1996.
(2) INVENTORIES
Inventories consisted of the following at December 28, 1996 and
September 27, 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Finished goods $ 56,085 $ 65,491
Work-in-process 33,436 37,460
Raw materials 41,955 44,005
Supplies 2,019 3,128
-------- --------
$133,495 $150,084
======== ========
</TABLE>
(3) EARNINGS PER COMMON SHARE
Earnings per share is based on the weighted average number of common
shares outstanding and equivalent shares from dilutive stock options,
if any. As of September 28, 1996 and September 27, 1997, there were
stock options outstanding for 510,865 and 570,390 common shares,
respectively. Stock options are excluded from the calculations since
they have no material dilutive effect on per share data.
F-42
<PAGE> 169
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS)
(4) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial
information for the Company, segregating Pillowtex Corporation (the
"Parent") and guarantor subsidiaries from non-guarantor subsidiaries.
The guarantor subsidiaries are wholly owned subsidiaries of the Company
and guarantees are full, unconditional and joint and several. Separate
financial statements of the guarantor subsidiaries are not presented
because management believes that these financial statements would not
be material to investors.
<TABLE>
<CAPTION>
DECEMBER 28, 1996
-------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Trade receivables $ -- $ 73,438 $ 5,044 $ -- $ 78,482
Receivable from affiliates 196,678 -- -- (196,678) --
Inventories -- 125,803 7,692 -- 133,495
Other current assets -- 8,911 769 -- 9,680
---------- ---------- ---------- ---------- ----------
Total current assets 196,678 208,152 13,505 (196,678) 221,657
Property, plant and equipment, net 714 90,664 2,889 -- 94,267
Intangibles 6,136 48,298 2,679 -- 57,113
Other assets 80,147 901 -- (78,371) 2,677
---------- ---------- ---------- ---------- ----------
Total assets $ 283,675 $ 348,015 $ 19,073 $ (275,049) $ 375,714
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Accounts payable and accrued liabilities $ -- $ 64,501 $ 3,136 $ -- $ 67,637
Payable to affiliates -- 192,395 4,283 (196,678) --
Other current liabilities 306 3,041 167 -- 3,514
---------- ---------- ---------- ---------- ----------
Total current liabilities 306 259,937 7,586 (196,678) 71,151
Noncurrent liabilities 185,950 17,978 631 -- 204,559
---------- ---------- ---------- ---------- ----------
Total liabilities 186,256 277,915 8,217 (196,678) 275,710
Shareholders' equity 97,419 70,100 10,856 (78,371) 100,004
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $ 283,675 $ 348,015 $ 19,073 $ (275,049) $ 375,714
========== ========== ========== ========== ==========
<CAPTION>
SEPTEMBER 27, 1997
-------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Trade receivables $ -- $ 96,823 $ 3,553 $ -- $ 100,376
Receivable from affiliates 196,708 -- -- (196,708) --
Inventories -- 142,505 7,579 -- 150,084
Other current assets -- 10,383 477 -- 10,860
---------- ---------- ---------- ---------- ----------
Total current assets 196,708 249,711 11,609 (196,708) 261,320
Property, plant and equipment, net 618 95,834 2,464 -- 98,916
Intangibles 5,998 47,508 2,588 -- 56,094
Other assets 107,471 1,005 -- (105,638) 2,838
---------- ---------- ---------- ---------- ----------
Total assets $ 310,795 $ 394,058 $ 16,661 $ (302,346) $ 419,168
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Accounts payable and accrued liabilities $ -- $ 72,284 $ 3,668 $ -- $ 75,952
Payable to affiliates -- 195,951 757 (196,708) --
Other current liabilities 86 3,755 293 -- 4,134
---------- ---------- ---------- ---------- ----------
Total current liabilities 86 271,990 4,718 (196,708) 80,086
Noncurrent liabilities 211,350 16,542 413 -- 228,305
---------- ---------- ---------- ---------- ----------
Total liabilities 211,436 288,532 5,131 (196,708) 308,391
Shareholders' equity 99,359 105,526 11,530 (105,638) 110,777
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $ 310,795 $ 394,058 $ 16,661 $ (302,346) $ 419,168
========== ========== ========== ========== ==========
</TABLE>
F-43
<PAGE> 170
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS)
(4) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 28, 1996
----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 5,115 $ 137,800 $ 6,714 $ (5,838) $ 143,791
Cost of goods sold 2,572 116,797 5,945 (5,838) 119,476
---------- ---------- ---------- ---------- ----------
Gross profit 2,543 21,003 769 -- 24,315
Selling, general and
administrative expenses 587 9,576 451 -- 10,614
---------- ---------- ---------- ---------- ----------
Earnings from operations 1,956 11,427 318 -- 13,701
Interest expense and other, net 2,194 1,472 (2) -- 3,664
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
income taxes (238) 9,955 320 -- 10,037
Income taxes (83) 3,889 109 -- 3,915
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ (155) $ 6,066 $ 211 $ -- $ 6,122
========== ========== ========== ========== ==========
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 27, 1997
----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 5,188 $ 145,839 $ 8,141 $ (7,191) $ 151,977
Cost of goods sold 3,043 122,484 7,089 (7,191) 125,425
---------- ---------- ---------- ---------- ----------
Gross profit 2,145 23,355 1,052 -- 26,552
Selling, general and
administrative expenses 767 8,977 368 -- 10,112
---------- ---------- ---------- ---------- ----------
Earnings from operations 1,378 14,378 684 -- 16,440
Interest expense and other, net (34) 4,957 (2) -- 4,921
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
income taxes 1,412 9,421 686 -- 11,519
Income taxes 494 3,883 92 -- 4,459
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 918 $ 5,538 $ 594 $ -- $ 7,050
========== ========== ========== ========== ==========
</TABLE>
F-44
<PAGE> 171
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS)
(4) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 28, 1996
----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 73,427 $ 255,882 $ 23,131 $ (16,670) $ 335,770
Cost of goods sold 57,353 217,871 21,718 (16,670) 280,272
---------- ---------- ---------- ---------- ----------
Gross profit 16,074 38,011 1,413 -- 55,498
Selling, general and
administrative expenses 7,971 21,955 1,244 -- 31,170
---------- ---------- ---------- ---------- ----------
Earnings from operations 8,103 16,056 169 -- 24,328
Interest expense and other, net 6,193 4,102 (16) -- 10,279
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 1,910 11,954 185 -- 14,049
Income taxes 876 4,662 (43) -- 5,495
---------- ---------- ---------- ---------- ----------
Net earnings $ 1,034 $ 7,292 $ 228 $-- $ 8,554
========== ========== ========== ========== ==========
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 27, 1997
----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 13,073 $ 354,728 $ 19,087 $ (16,255) $ 370,633
Cost of goods sold 8,217 296,599 17,113 (16,255) 305,674
---------- ---------- ---------- ---------- ----------
Gross profit 4,856 58,129 1,974 -- 64,959
Selling, general and
administrative expenses 2,550 30,097 1,081 -- 33,728
---------- ---------- ---------- ---------- ----------
Earnings from operations 2,306 28,032 893 -- 31,231
Interest expense and other, net (679) 14,641 (5) -- 13,957
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 2,985 13,391 898 -- 17,274
Income taxes 1,045 5,565 92 -- 6,702
---------- ---------- ---------- ---------- ----------
Net earnings $ 1,940 $ 7,826 $ 806 $ -- $ 10,572
========== ========== ========== ========== ==========
</TABLE>
F-45
<PAGE> 172
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS)
(4) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 28, 1996
-----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (6,605) $ (20,890) $ 3,514 $ -- $ (28,430)
Net cash provided by (used in)
investing activities 38,379 (41,430) (25) -- (3,076)
Net cash provided by (used in)
financing activities (32,176) 62,323 (3,486) -- 31,110
---------- ---------- ---------- ---------- ----------
Net change in cash and cash
equivalents (402) 3 3 -- (396)
Cash and cash equivalents at
beginning of period 402 4 5 -- 411
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end
of period $ -- $ 7 $ 8 $ -- $ 15
========== ========== ========== ========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 27, 1997
---------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (3,042) $ (15,947) $ 3,361 $ -- $ (18,200)
Net cash provided by (used in)
investing activities (27,600) 15,503 (71) -- (12,168)
Net cash provided by (used in)
financing activities 30,642 458 (3,290) -- 30,382
---------- ---------- ---------- ---------- ----------
Net change in cash and cash
equivalents -- 14 -- -- 14
Cash and cash equivalents at
beginning of period -- 12 8 -- 20
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end
of period $ -- $ 26 $ 8 $ -- $ 34
========== ========== ========== ========== ==========
</TABLE>
F-46
<PAGE> 173
[This page intentionally left blank.]
F-47
<PAGE> 174
FIELDCREST CANNON, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
------------------------------------------------------------------ ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales ...................... $ 981,773 $ 1,000,107 $ 1,063,731 $ 1,095,193 $ 1,092,496 $ 812,995 $ 820,635
Cost of sales .................. 818,729 834,701 898,437 966,642 956,522 706,482 695,615
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit ................... 163,044 165,406 165,294 128,551 135,974 106,513 125,020
Selling, general, and
administrative expenses ...... 102,189 101,843 94,756 108,194 105,405 78,406 85,563
Restructuring charges .......... -- 10,000 -- 20,469 8,130 8,130 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) ........ 60,855 53,563 70,538 (112) 22,439 19,977 39,457
Interest expense ............... 34,149 27,659 23,268 27,630 26,869 21,496 18,708
Other expense (income), net .... 130 (975) 987 67 (5,604) 519 (2,021)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes ................. 26,576 26,879 46,283 (27,809) 1,174 (2,038) 22,770
Income taxes ................... 10,886 11,913 15,538 (12,084) 114 (764) 8,087
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before accounting changes .... 15,690 14,966 30,745 (15,725) 1,060 (1,274) 14,683
Income from discontinued
operations ................... 4,739 3,201 -- -- -- -- --
Gain from disposition of
discontinued operations ...... -- 9,207 -- -- -- -- --
Extraordinary charge - early
retirement of debt ........... (5,179) -- -- -- -- -- --
Cumulative effect of
accounting changes ........... -- (70,305) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .............. 15,250 (42,931) 30,745 (15,725) 1,060 (1,274) 14,683
Preferred dividends ............ -- (463) (4,500) (4,500) (4,500) (3,375) (3,375)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) on common ...... $ 15,250 $ (43,394) $ 26,245 $ (20,225) $ (3,440) $ (4,649) $ 11,308
=========== =========== =========== =========== =========== =========== ===========
Primary earnings (loss)
per share .................... $ 1.35 $ (3.70) $ 3.02 $ (2.28) $ (0.38) $ (0.52) $ 1.23
Fully diluted earnings
(loss) per share ............. 1.78 -- 2.51 -- -- (0.52) 1.23
Weighted average primary
shares outstanding ........... 11,256 11,733 8,696 8,875 9,024 9,003 9,247
Weighted average fully
diluted shares outstanding ... 14,083 11,733 14,086 14,265 14,414 9,003 9,247
OTHER DATA:
Depreciation and amortization .. $ 31,370 $ 31,539 $ 29,828 $ 31,746 $ 36,678 $ 26,979 $ 26,241
Capital expenditures ........... 20,687 21,594 51,929 64,153 33,386 21,035 46,214
BALANCE SHEET DATA:
Working capital ................ $ 296,580 $ 262,326 $ 282,461 $ 268,477 $ 229,010 $ 288,103 $ 221,210
Total assets ................... 863,991 740,446 782,665 812,946 768,493 832,992 789,479
Long-term debt ................. 353,419 294,611 317,744 365,262 311,496 373,748 308,820
Stockholders' equity ........... 284,478 193,330 231,202 215,431 215,755 213,689 229,321
</TABLE>
F-48
<PAGE> 175
[This page intentionally left blank.]
F-49
<PAGE> 176
FIELDCREST CANNON, INC.
SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales ................................... $ 250.0 $ 277.8 $ 285.2 $ 279.5
Gross profit ................................ 34.9 36.0 35.7 29.4
Operating income ............................ 6.1 11.0 2.9 2.5
Net income (loss) ........................... (.7) 2.1 (2.7) 2.3
Primary earnings (loss) per share ........... (.20) .11 (.43) .13
Fully diluted earnings (loss) per share ..... (.20) .11 (.43) .13
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales ................................... $ 257.0 $ 273.1 $ 280.5 $ 284.6
Gross profit ................................ 43.0 34.4 40.1 11.1
Operating income ............................ 12.4 4.2 6.7 (23.4)
Net income (loss) ........................... 3.6 (1.6) -- (17.7)
Primary earnings (loss) per share ........... .28 (.30) (.13) (2.11)
Fully diluted earnings (loss) per share ..... .28 (.30) (.13) (2.11)
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTER ENDED
----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
---------- ---------- ------------
<S> <C> <C> <C>
Net sales ................................... $ 262.9 $ 270.7 $ 287.5
Gross profit ................................ 35.7 45.3 43.9
Operating income ............................ 9.2 15.7 14.5
Net income .................................. 2.0 6.8 4.7
Primary earnings per share .................. .10 .62 .51
Fully diluted earnings per share ............ .10 .55 .47
</TABLE>
F-50
<PAGE> 177
[This page intentionally left blank.]
F-51
<PAGE> 178
FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
1996 COMPARED TO 1995
Net sales for 1996 were $1,092.5 million compared to $1,095.2 million
for 1995, a decrease of .2%. The decline was primarily due to the sale of the
Blanket Division in November 1996. Net sales increased 1.3% after excluding
Blanket Division sales for both periods. The increase in sales other than
blankets was due primarily to volume increases. Gross profit margins increased
from 11.7% in 1995 to 12.4% in 1996 primarily because of reduced manufacturing
costs associated with the new towel weaving facility in Phenix City, Alabama
and the outsourcing of the Bed Division yarn production. These cost reductions
were partially offset by $4.1 million of equipment relocation and training
costs related to the consolidation and closing of two towel facilities.
Selling, general, and administrative expenses as a percent of sales
decreased from 9.9% in 1995 to 9.6% in 1996. The decrease was due primarily to
lower advertising and other selling expenses. These lower expenses were
partially offset by higher costs related to the outsourcing of the Company's
information technology services and functions in August 1996.
Operating income for 1996 was reduced $8.1 million by restructuring
charges of $3.6 million for closing a towel weaving plant and a yarn
manufacturing plant and $4.5 million for employee termination benefits and
disposal costs related to the sale of certain Blanket Division assets. See
Note 2 of the Notes to Consolidated Financial Statements. Before the
restructuring charges, operating income in 1996 was $30.5 million, or 2.8% of
sales, compared to $20.4 million, or 1.9% of sales, in 1995.
Net interest expense decreased $.8 million in 1996. The decrease was
primarily due to $2.1 million of interest income received with refunds of
federal income taxes during 1996. Excluding the effects of the interest
income, interest expense increased due to higher average debt and interest
rates during 1996.
Other income of $5.6 million related primarily to the sale of two
warehouse distribution centers and a towel yarn facility that were no longer
used by the Company.
The effective income tax rate was 9.7% in 1996 compared to an
effective income tax benefit of 43.5% in 1995. See Note 11 of the Notes to
Consolidated Financial Statements.
Net income was $1.1 million, or a loss of $.38 per share after $4.5
million of preferred dividends, in 1996 compared to a loss of $15.7 million, or
$2.28 per share, in 1995. Excluding the effects of the restructuring charges,
net income was $6.1 million, or $.18 per share, in 1996, compared to a loss of
$3.6 million, or $.91 per share, in 1995.
1995 COMPARED TO 1994
Net sales for 1995 were $1,095.2 million compared to $1,063.7 million
for 1994, an increase of 3%. The $31.5 million increase includes $47.0 million
of furniture coverings from the Sure Fit business acquired in January 1995.
The 1.5% decrease in sales, after adjusting for the Sure Fit acquisition, was
due to lower volumes which were only partially offset by price increases
implemented in the last half of 1994 and during 1995. The volume decline
occurred in the second half of the year and is attributed primarily to weakness
in retail sales. Gross profit margins decreased from 15.5% in 1994 to 11.7% in
1995 primarily because of higher raw material prices and lower mill activity.
Selling, general, and administrative expenses as a percent of sales
increased from 8.9% in 1994 to 9.9% in 1995. The increase was due primarily to
increased advertising and other selling expenses.
F-52
<PAGE> 179
Operating income for 1995 was also reduced by $20.5 million of
restructuring charges resulting from the reorganization of the Company's New
York operations, which included severance and termination benefits for 54
employees, a related voluntary early retirement program, which was accepted by
87 employees, and closing two yarn mills. See Note 2 of the Notes to
Consolidated Financial Statements. The reorganization of the New York office
and related early retirement program are expected to reduce pre-tax annual
costs by approximately $8 million. The Company has contracted to purchase yarn
from outside vendors and expects annual pre-tax savings of $8 to $9 million.
Before the restructuring charges, operating income in 1995 was $20.4 million,
or 1.8% of sales, compared to $70.5 million, or 6.6% of sales, in 1994.
Interest expense increased $4.3 million in 1995. The increase was due
to higher rates under the revolver and an increase in average debt outstanding.
Debt increased during 1995 because of the Sure Fit acquisition and the
Company's increased level of capital expenditures. In 1994 the Company
allocated $1.6 million of interest costs to the Amoskeag assets held for sale.
An income tax benefit equal to 43.5% of the 1995 pre-tax loss was recognized in
1995, compared to an effective income tax rate of 33.6% on pre-tax income in
1994. A $1.7 million favorable settlement of prior years income taxes in 1994
reduced the 1994 effective tax rate by 3.7%. See Note 11 of the Notes to
Consolidated Financial Statements.
Net loss from continuing operations of $15.7 million, or $2.28 per
share, was incurred in 1995 compared to net income of $30.7 million, or $3.02
per share, in 1994. The loss before restructuring charges was $3.6 million, or
$.91 per share, in 1995 compared to income of $29.0 million, or $2.82 per
share, in 1994 after excluding the favorable settlements of prior years income
taxes of $1.7 million from 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for working capital,
principally inventory and accounts receivable, and capital expenditures. The
Company historically has financed these requirements, including its working
capital requirements which follow a seasonal pattern, with funds generated from
its operations and through borrowings under its revolving credit agreements.
The table below summarizes the Company cash provided by operating and financing
activities and cash provided by (used in) investing activities.
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
CASH PROVIDED (USED):
Net income (loss) $ 1,060 $(15,725)
Depreciation and amortization 36,678 31,746
Deferred income taxes (2,184) (2,384)
Working capital, excluding effects
of acquisition of Sure Fit and
sale of Blanket Division inventories 8,256 12,613
Other (3,409) 1,597
Financial activities (53,164) 42,386
TOTAL CASH PROVIDED (USED) (12,763) 70,233
CASH USED FOR:
Additions to plant and equipment (33,386) (64,153)
Sale of plant and equipment 15,483 1,218
Proceeds from sale of Blanket
Division inventories and equipment 26,189 --
Proceeds from net assets held for sale -- 23,241
Purchase of Sure Fit, net of cash acquired -- (27,300)
TOTAL CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 8,286 (66,994)
INCREASE (DECREASE) IN CASH $ (4,477) $ 3,239
</TABLE>
F-53
<PAGE> 180
Working capital requirements decreased in 1996 primarily because
accounts receivables decreased $13.6 million in connection with the closing of
the Blanket Division operations. Working capital requirements decreased in
1995 primarily because accounts receivables decreased $10.6 million.
Total debt as a percent of total capitalization (long-term debt,
short-term debt, and shareowners' equity) was 60% at December 31, 1996,
compared to 63% at the end of 1995.
Capital expenditures totaled $33.4 million in 1996 compared to $64.2
million spent in 1995. Capital expenditures for 1997 are expected to be
approximately $70 million. Included in the 1995 capital expenditures is $37.2
million for a new weaving plant at the Company's Columbus, Ga./Phenix City,
Ala. towel mill which was completed during 1996. It is anticipated that
financing of future capital expenditures will be provided by cash flows from
operations, borrowings under the Company's revolving credit facility, and,
possibly, the sale of long-term debt or equity securities.
The Company's revolving credit facility in place during 1996 allowed
the Company to borrow up to $195 million through January 3, 1998. Effective
January 30, 1997, the Company refinanced its existing revolving credit facility
with a new revolving credit facility which allows the Company to borrow up to
$200 million through January 30, 2002. Outstanding letters of credit reduce
the availability under the revolving credit facility by $12.6 million. The
Company uses its revolving credit facility for long-term debt purposes and its
seasonal borrowing requirements during the year. Short-term borrowings are
required during the year to finance seasonal increases in inventories and
receivables.
The new revolving credit facility requires, among other things, that
the Company maintain certain financial ratios with regard to interest coverage
and funded debt. It allows payment of $4.5 million of preferred dividends
annually, but does not allow dividends on Common Stock. The agreement also
places restrictions on the Company's ability to incur debt or liens, to make
certain investments and to effect certain mergers, consolidations, sales of
assets, or changes in control.
At December 31, 1996, borrowings under the $195 million revolving term
debt agreement totaled $95.7 million. Interest rates on the replaced revolving
term debt were, at the Company's option, at the prime rate, or at a
Euromarket-based rate plus 2.25%. The borrowing rate decreased to a
Euromarket-based rate plus 2% on January 31, 1997 under the new facility.
Annual earnings for 1996 were reduced by pre-tax restructuring charges
of $8.1 million which reduced net income by $5.1 million or $.56 per share.
Quarterly earnings for 1996 were reduced by restructuring charges of $3.6
million, or $.25 per share, and $4.5 million, or $.31 per share, for the first
and third quarters, respectively. The restructuring charges in the first
quarter were related to the closing of two towel mills. The third quarter
charges were the result of closing the Blanket facilities in Eden, North
Carolina. Net income in the fourth quarter was increased $3.8 million, or $.42
per share, by pre-tax gains of $6.1 million related primarily to sale of two
warehouse distribution centers and a towel yarn facility that were no longer
used by the Company.
Annual earnings for 1995 were reduced by pre-tax restructuring charges
of $20.5 million which increased the net loss by $12.1 million, or $1.37 per
share. Quarterly earnings for 1995 were reduced by restructuring charges of
$3.9 million, or $.28 per share; $4.5 million, or $.32 per share; $7.1 million,
or $.53 per share; and $4.9 million or $.23 per share for the first, second,
third, and fourth quarters, respectively. The restructuring charges during the
first three quarters were related to the reorganization of the Company's New
York operations and a related early retirement program. The fourth quarter
charges were the result of closing two yarn mills.
Quarterly earnings per share amounts presented for 1996 and 1995 do
not equal the annual 1996 and 1995 earnings per share amount due to issuance of
shares during the year.
F-54
<PAGE> 181
[This page intentionally left blank.]
F-55
<PAGE> 182
FIELDCREST CANNON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
CHANGES IN FINANCIAL CONDITION
Debt (including the current portion of long-term debt) decreased $3.5
million during the first nine months of 1997. Capital expenditures totaled
$46.2 million for the first nine months of 1997 compared to $21.0 million for
the first nine months of 1996. Capital expenditures for 1997 are expected to
be approximately $70 million. At September 30, 1997, approximately $87.5
million of the Company's $200 million revolving credit facility was available
and unused. It is anticipated that financing of future capital expenditures
will be provided by cash flows from operations and borrowings under the
Company's revolving credit facility.
On September 10, 1997, the Company entered into a merger agreement
with Pillowtex Corporation under which Pillowtex will acquire the Company for a
combination of cash and Pillowtex common stock. Under the agreement each share
of Company common stock would be exchanged for $27 in cash and $7 in Pillowtex
common stock and each share of preferred stock would be exchanged for $46.15 in
cash and $11.97 in Pillowtex common stock. The merger is conditioned upon,
among other things, approval of each company's shareholders and customary
regulatory clearances, and is expected to be completed by the end of 1997.
CHANGES IN RESULTS OF OPERATIONS
Quarter Ended September 30, 1997 vs. Quarter Ended September 30, 1996
Net sales for the third quarter of 1997 were $287.0 million compared
to $285.2 million in the third quarter of 1996, an increase of 1%. Excluding
the effects of the sales during 1996 of the Company's Blanket Division, sales
in the third quarter of 1997 increased 8%. The increase in revenues was due
primarily to volume increases.
Gross profit margins increased from 12.5% in the third quarter of 1996
to 15.3% in the third quarter of 1997. The increase reflects lower raw
material costs, the benefits of recently completed capital projects, and
continued emphasis on cost reduction programs. Operating income for the third
quarter of 1997 was adversely affected by $2.7 million of costs relating to
lower labor productivity, lower mill activity, and administrative costs in
connection with union organizing efforts at the Kannapolis, N.C. area plants
that occurred in August 1997 and $1.3 million for expenses related to stock
appreciation rights plans. Operating income for the third quarter of 1996 was
reduced $1.7 million by equipment relocation and employee training costs
related to the consolidation and closing of two towel facilities.
Selling, general, and administrative expenses increased as a
percentage of sales from 9.9% to 10.2% in the third quarter of 1997 compared to
the same quarter of 1996. The increase was due primarily to higher information
technology expenses associated with implementation of new enterprise
information systems and higher advertising expenses.
In the third quarter of 1996 operating income was reduced by pre-tax
restructuring charges of $4.5 million for employee termination benefits and
facility disposal costs related to the sale of certain Blanket Division assets
to Pillowtex Corporation.
Interest expense decreased $1.0 million in the third quarter of 1997
as compared to the third quarter of 1996 due primarily to a decrease in average
debt outstanding. Total debt declined $67.2 million from September 30, 1996 to
September 30, 1997, as a result of the sale of the Blanket Division and lower
inventory levels. Inventories at September 30, 1997 were $37.5 million lower
than September 30, 1996, after excluding blanket inventories.
The effective income tax rate was 33.1% for the third quarter of 1997
compared to 37.5% for the third quarter of 1996. Net income was $5.8 million,
or $.51 per share after preferred dividends, in the third quarter of 1997,
compared
F-56
<PAGE> 183
to a loss after the effect of the restructuring charges of $2.7 million, or
$.43 per share after preferred dividends, in the third quarter of 1996.
Nine Months Ended September 30, 1997 vs. Nine Months Ended September 30, 1996
Net sales for the first nine months of 1997 were $820.6 million
compared to $813.0 million in the first nine months of 1996. Excluding the
effects of the sales during 1996 of the Company's Blanket Division, sales in
1997 increased 6.5%. The increase in revenues was due primarily to volume
increases.
Gross profit margins increased from 13.1% in the first nine months of
1996 to 15.2% in the first nine months of 1997. The increase reflects lower
raw material costs, the benefits of recently completed capital projects, and
continued emphasis on cost reduction programs. Operating income for the nine
months ended September 30, 1996 was reduced $3.3 million by equipment
relocation and employee training costs related to the consolidation and closing
of two towel facilities. Selling, general, and administrative expenses
increased as a percentage of sales from 9.6% to 10.4% in the first nine months
of 1997 compared to the first nine months of 1996. The increase was due
primarily to higher information technology expenses associated with
implementation of new enterprise information systems and higher advertising
expenses.
Pre-tax restructuring charges of $8.1 million in the first nine months
of 1996 include $3.6 million for closing a towel weaving plant and a yarn
manufacturing plant as a part of the Company's ongoing consolidation effort to
utilize assets more effectively and $4.5 million for employee termination
benefits and disposal costs related to sale of certain Blanket Division assets.
Interest expense decreased $2.8 million the first nine months of 1997
as compared to the first nine months of 1996 due primarily to a decrease in
average debt outstanding. The decreased debt resulted from the sale of the
Blanket Division in 1996 and lower inventory levels.
The effective income tax rate was 35.5% for the first nine months of
1997 compared to 37.5% for the first nine months of 1996.
Net income for the first nine months of 1997 was $14.7 million, or
$1.23 per share after preferred dividends, compared to a loss after the effect
of the restructuring charges of $1.3 million, or a loss of $.52 per share after
preferred dividends, for the first nine months of 1996.
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of earnings per share for these quarters is
not expected to be material.
F-57
<PAGE> 184
[This page intentionally left blank.]
F-58
<PAGE> 185
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareowners and
Board of Directors of
Fieldcrest Cannon, Inc.:
We have audited the accompanying consolidated statement of
financial position of Fieldcrest Cannon, Inc. as of December 31, 1996 and 1995,
and the related consolidated statements of operations and retained earnings,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Fieldcrest Cannon, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Greensboro, North Carolina
January 31, 1997
F-59
<PAGE> 186
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ................................................ $ 1,092,496 $ 1,095,193 $ 1,063,731
Cost of sales (notes 2, 3) ............................... 956,522 966,642 898,437
Selling, general and administrative ...................... 105,405 108,194 94,756
Restructuring charges (note 2) ........................... 8,130 20,469 --
------------ ------------ ------------
Total operating costs and expenses ................... 1,070,057 1,095,305 993,193
------------ ------------ ------------
Operating income (loss) .................................. 22,439 (112) 70,538
------------ ------------ ------------
OTHER DEDUCTIONS (INCOME):
Interest expense ....................................... 26,869 27,630 23,268
Other, net ............................................. (5,604) 67 987
------------ ------------ ------------
Total other deductions ............................. 21,265 27,697 24,255
------------ ------------ ------------
Income (loss) before income taxes ...................... 1,174 (27,809) 46,283
Federal and state income taxes (benefits) (note 11) .... 114 (12,084) 15,538
------------ ------------ ------------
Net income (loss) ...................................... 1,060 (15,725) 30,745
Preferred dividends .................................... (4,500) (4,500) (4,500)
------------ ------------ ------------
Earnings (loss) on common .............................. $ (3,440) $ (20,225) $ 26,245
------------ ------------ ------------
Amount added to (subtracted from) retained earnings ...... (3,440) (20,225) 26,245
Retained earnings, January 1 ............................. 99,055 119,280 93,035
------------ ------------ ------------
Retained earnings, December 31 ........................... $ 95,615 $ 99,055 $ 119,280
============ ============ ============
Primary earnings (loss) per common share ................. $ (.38) $ (2.28) $ 3.02
Fully diluted earnings (loss) per common share ........... $ -- $ -- $ 2.51
Average primary shares outstanding ....................... 9,023,958 8,875,360 8,696,015
Average fully diluted shares outstanding ................. 14,413,901 14,264,504 14,085,905
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
the Consolidated Financial Statements.
F-60
<PAGE> 187
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash ............................................................ $ 4,647 $ 9,124
Accounts receivable less allowances of $7,693 in 1996 and ....... 154,511 168,112
$8,162 in 1995, principally trade
Inventories (note 3) ............................................ 216,165 228,167
Other prepaid expenses and current assets ....................... 2,489 3,446
--------- ---------
Total current assets .......................................... 377,812 408,849
Plant and equipment, net (notes 4, 7) ........................... 323,838 342,285
Deferred charges and other assets ............................... 66,843 61,812
--------- ---------
Total assets .............................................. $ 768,493 $ 812,946
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Accounts and drafts payable ..................................... $ 63,910 $ 54,274
Deferred income taxes ........................................... 18,212 17,593
Accrued liabilities (note 5) .................................... 61,172 67,725
Current portion of long-term debt ............................... 5,508 780
--------- ---------
Total current liabilities ..................................... 148,802 140,372
Senior long-term debt (note 6) .................................. 107,746 155,262
Subordinated long-term debt (note 6) ............................ 203,750 210,000
--------- ---------
Total long-term debt .......................................... 311,496 365,262
Deferred income taxes ........................................... 38,291 40,475
Other non-current liabilities ................................... 54,149 51,406
--------- ---------
Total non-current liabilities ................................. 403,936 457,143
Total liabilities ........................................... 552,738 597,515
Commitments (notes 7, 9, 10):
Preferred Stock, $.01 par value (note 8), 10,000,000 .......... 15 15
authorized, 1,500,000 issued and outstanding (aggregate
liquidation preference of $75,000)
Common Stock, $1.00 par value (note 8), 25,000,000 ............ 12,739 12,561
authorized, 12,738,894 issued and outstanding 1996;
12,560,826 shares issued and outstanding 1995
Additional paid-in capital .................................... 224,611 221,025
Retained earnings ............................................. 95,615 99,055
Excess purchase price for Common Stock acquired and held ...... (117,225) (117,225)
--------- ---------
in treasury - 3,606,400 shares
Total shareowners' equity ................................... 215,755 215,431
--------- ---------
Total liabilities and shareowners' equity ................. $ 768,493 $ 812,946
========= =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
the Consolidated Financial Statements.
F-61
<PAGE> 188
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) .................................................. $ 1,060 $(15,725) $ 30,745
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................... 36,678 31,746 29,828
Deferred income taxes ............................................ (2,184) (2,384) 7,677
Other ............................................................ (3,409) 1,597 (8,178)
Change in current assets and liabilities, excluding effects
of acquisition of Sure-Fit and sale of Blanket Division
inventories:
Accounts receivable .............................................. 13,601 10,579 (5,582)
Inventories ...................................................... (10,004) 3,125 (4,160)
Current deferred income taxes .................................... 619 (4,395) 7,189
Other prepaid expenses and current assets ........................ 957 582 (1,302)
Accounts payable and accrued liabilities ......................... 3,083 4,990 (17,870)
Federal and state income taxes ................................... -- (2,268) 2,006
-------- -------- --------
Net cash provided by operating activities ........................ 40,401 27,847 40,353
-------- -------- --------
Cash flows from investing activities:
Additions to plant and equipment ................................... (33,386) (64,153) (51,929)
Proceeds from disposal of plant and equipment ...................... 15,483 1,218 1,815
Proceeds from sale of Blanket Division inventories and equipment ... 26,189 -- --
Proceeds from sale of net assets held for sale ..................... -- 23,241 --
Purchase of Sure-Fit, net of cash acquired ......................... -- (27,300) --
-------- -------- --------
Net cash provided by (used in) investing activities .............. 8,286 (66,994) (50,114)
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in revolving debt .............................. (46,816) 48,298 17,798
Proceeds from issuance of other long-term debt ..................... 3,610 -- 10,000
Payments on long-term debt ......................................... (5,499) (1,469) (11,597)
Proceeds from issuance of common stock ............................. 41 57 80
Dividends paid on preferred stock .................................. (4,500) (4,500) (4,500)
-------- -------- --------
Net cash provided by (used in) financing activities .............. (53,164) 42,386 11,781
-------- -------- --------
Net increase (decrease) in cash ...................................... (4,477) 3,239 2,020
Cash at beginning of year ............................................ 9,124 5,885 3,865
-------- -------- --------
Cash at end of year .................................................. $ 4,647 $ 9,124 $ 5,885
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest expense ................................................. $ 26,150 $ 25,471 $ 23,871
======== ======== ========
Income tax payments (refunds) .................................... $ (5,958) $ 2,848 $ 5,381
======== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of the
Consolidated Financial Statements.
F-62
<PAGE> 189
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT PER SHARE)
(1) SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation-- The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year items have been reclassified to
conform to the 1996 presentation. The Company operates in the textile
industry and is principally involved in the manufacture and sale of
home furnishings products. These sales are primarily to domestic
department stores, mass retailers, specialty stores and large chain
stores. Sales to one customer (Wal-Mart Stores and its affiliates)
represented 21.2%, 16.6% and 18.3% of total sales of the Company in
1996, 1995 and 1994, respectively.
Use of Estimates-- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Inventories-- Inventories are valued at the lower of cost, determined
principally on a last-in, first-out basis, or market.
Depreciation-- Buildings, machinery and equipment are depreciated for
financial reporting purposes on the straight line method over the
estimated useful lives of these assets. Depreciation for tax purposes
is provided on an accelerated basis.
Revenue Recognition -- Revenue from product sales is recognized at the
time ownership of the goods transfers to the customer.
Deferred Financing Fees-- Debt financing fees are amortized over the
term of the related debt.
Income Per Common Share -- Primary earnings per common share is based
on net income after preferred dividend requirements and the weighted
average number of shares of Common Stock outstanding during the year
and common stock equivalents attributable to outstanding stock
options. Fully diluted earnings per common share are calculated
assuming conversion, when dilutive, of the 6% convertible subordinated
sinking fund debentures and the $3.00 Series A Convertible Preferred
Stock. Fully diluted income per common share for 1996 and 1995 are
not presented as effects are anti-dilutive.
Accounting for Stock-Based Compensation -- The Company accounts for
its stock-based compensation in accordance with Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Under APB 25, compensation expense is determined of the
measurement date and compensation expense, if any, is measured based
on the award's intrinsic value, the excess of the market price of the
stock over the exercise price on the measurement date.
F-63
<PAGE> 190
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(2) RESTRUCTURING CHARGES
In March 1996 the Company announced the closing of a towel weaving
facility and yarn manufacturing facility. In September 1996, the
Company sold certain Blanket Division inventories and equipment to
Pillowtex Corporation which resulted in closing the Blanket facilities
in Eden, N.C. As a result of these actions the Company incurred
restructuring charges of $8.1 million in 1996. The restructuring
charges include $3.6 million for employee termination benefits,
substantially all of which has been paid, and the write-down of
weaving and yarn equipment associated with closing the towel
facilities and $4.5 million for Blanket Division employee termination
benefits and the write-down of certain Blanket Division real estate
which the Company intends to dispose of during 1997.
During 1995 the Company reorganized its New York operations and
relocated sales, marketing and design personnel to Kannapolis, N.C.
In conjunction with the reorganization, the Company offered a
voluntary early retirement program to its salaried employees. In
December 1995 the Company announced the closing of two yarn mills and
agreed to sell a warehouse. As a result of these actions the Company
incurred restructuring charges of $20.5 million in 1995. The
restructuring charges include approximately $15.6 million primarily
for severance and termination benefits for 54 employees, the voluntary
early retirement program which was accepted by 87 employees and lease
costs in connection with the New York reorganization and $4.4 million
for the write-down of yarn equipment and $.5 million for termination
benefits associated with closing the yarn mills. These charges
increased the 1995 loss by $12.1 million, or $1.37 per share. At
December 31, 1996, substantially all charges have been incurred.
(3) INVENTORIES
Inventories are valued at the lower of cost or market and consisted of
the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Finished goods $104,092 $117,776
Work in progress 68,668 72,315
Raw materials and supplies 43,405 38,076
-------- --------
Total $216,165 $228,167
======== ========
</TABLE>
Approximately 69% of the inventories at year-end 1996 and 73% at
year-end 1995 were valued on the last-in, first-out method (LIFO). If
the first-in, first-out method of accounting had been used, inventories
would have been greater by approximately $45.0 million and $49.0
million at December 31, 1996 and 1995, respectively. The LIFO reserve
decreased $3.4 million in 1996 and increased $9.2 million in 1995. In
1996, reduction in LIFO inventory quantities had the effect of
increasing net income by approximately $0.6 million, of $0.07 per
share.
F-64
<PAGE> 191
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(4) PLANT AND EQUIPMENT
Plant and equipment is stated at cost and consisted of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land $ 2,794 $ 5,376
Buildings 207,909 213,205
Equipment 383,118 404,277
Plant additions in progress 16,467 24,903
--------- ---------
Total 610,288 647,761
Accumulated depreciation (286,450) (305,476)
--------- ---------
Net plant and equipment $ 323,838 $ 342,285
========= =========
</TABLE>
(5) ACCRUED LIABILITIES
Accrued liabilities were as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Salaries and other compensation $10,630 $ 9,749
Pension, medical and other 15,672 22,937
employee benefit plans
Advertising expense 3,579 4,301
Interest expense 3,629 4,267
Other 27,662 26,471
------- -------
Total $61,172 $67,725
======= =======
</TABLE>
F-65
<PAGE> 192
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(6) DEBT
Long-term debt at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
SENIOR LONG-TERM DEBT:
Revolving term debt $ 95,706 $142,522
Industrial development bonds, due 2021 10,000 10,000
Industrial revenue bonds, due in
installments through 2002 2,740 3,520
-------- --------
Total senior long-term debt 108,446 156,042
Less current portion 700 780
-------- --------
Net senior long-term debt 107,746 155,262
SUBORDINATED LONG-TERM DEBT:
6% convertible subordinated sinking fund
debentures due 1997 to 2012 123,558 125,000
11.25% senior subordinated debentures
due 2002 to 2004 85,000 85,000
-------- --------
Total subordinated long-term debt 208,558 210,000
Less current portion 4,808 --
-------- --------
Net subordinated long-term debt 203,750 210,000
Total long-term debt $311,496 $365,262
======== ========
</TABLE>
The Company's revolving credit facility allowed the Company to borrow
up to $195.0 million through January 3, 1998. Effective January 30,
1997, the Company replaced its existing revolving credit facility with
a new revolving credit facility which allows the Company to borrow up
to $200.0 million through January 30, 2002. Accordingly, borrowings
under the revolving credit facility are classified as long-term debt.
Interest rates on the replaced revolving term debt were, at the
Company's option, at the prime rate fixed by The First National Bank
of Boston, or at a Euromarket-based rate plus 2.25%. The borrowing
rate decreased to a Euromarket-based rate plus 2% on January 31, 1997
under the new facility. The average interest rate on the revolving
term debt was 7.8% on December 31, 1996.
The new revolving credit facility is secured by a first lien on
substantially all of the Company's accounts receivable, inventories
and general intangibles and requires, among other things, that the
Company maintain certain financial ratios with regard to interest
coverage and funded debt. It allows payment of $4.5 million of
preferred dividends annually, but does not allow dividends on Common
Stock. The revolving term debt agreement also places restrictions on
the Company's ability to incur debt or liens, to make certain
investments and to effect certain mergers, consolidations or sales of
assets or changes in control. The Company's 6% Convertible Sinking
Fund Debentures are convertible into shares of Common Stock of the
Company at a conversion price of $44.25 per share.
F-66
<PAGE> 193
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(6) DEBT (CONTINUED)
At December 31, 1996, the fair value of the Company's 6% Convertible
Subordinated Debentures was $93.6 million compared to a carrying value
of $123.6 million and the fair value of the 11.25% Subordinated
Debentures was $88.2 million compared to a carrying value of $85.0
million. The fair value of the debentures is based on quoted market
prices. Differences between fair value and carrying value of the
Company's other debt were not significant. The aggregate principal
and sinking fund payments required to be made on long-term debt during
each of the five years subsequent to December 31, 1996 are: 1997,
$5.5 million; 1998, $7.0 million; 1999, $6.6 million; 2000, $6.6
million; and 2001, $6.6 million.
(7) LEASE OBLIGATIONS
The Company leases certain real estate and equipment under various
operating leases. Listed below are the future minimum rental payments
required under these operating leases with noncancelable terms in
excess of one year at December 31, 1996.
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT TOTAL
----------- ---------- ----------
<S> <C> <C> <C>
1997 $ 5,596 $ 5,950 $ 11,546
1998 4,634 5,847 10,481
1999 3,547 5,077 8,624
2000 3,017 4,513 7,530
2001 2,919 3,393 6,312
Subsequent years 22,130 4,520 26,650
---------- ---------- ----------
Net minimum lease payments $ 41,843 $ 29,300 $ 71,143
========== ========== ==========
</TABLE>
Total rental expense for all operating leases was $20.6 million, $22.0
million, and $20.2 million for 1996, 1995 and 1994, respectively.
(8) SHAREOWNERS' EQUITY
In November 1993 the Company's shareowners authorized 10 million
shares of undesignated preferred stock and the issuance of up to 1.8
million shares of preferred stock. On November 24, 1993, the Company
sold 1.5 million shares of $3.00 Series A Convertible Preferred Stock
("$3.00 Preferred Stock") in a private offering and received net
proceeds of $72.4 million. Each $3.00 Preferred Stock share is
convertible into 1.7094 shares of Common Stock, equivalent to a
conversion price of $29.25 on the $50.00 offering price. Annual
dividends are $3.00 per share and are cumulative. The $3.00 Preferred
Stock may be redeemed at the Company's option on or after September 1,
2004, in whole or in part, at $50.00 per share plus accrued and unpaid
dividends. In the event the Company's 11.25% Senior Subordinated
Debentures are not outstanding or have been defeased the $3.00
Preferred Stock may be redeemed, in whole or in part, at the option of
the Company, at a redemption price of $51.50 per share beginning as of
September 10, 1998 and at premiums declining to the $50.00 liquidation
preference by September 2004.
F-67
<PAGE> 194
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(8) SHAREOWNERS' EQUITY (CONTINUED)
On November 24, 1993, the Board of Directors adopted a Stockholder
Rights Plan and declared a dividend of one preferred stock purchase
right ("right") for each outstanding share of the Company's Common
Stock. Similar rights have been, and generally will be, issued in
respect of Common Stock subsequently issued. Each right becomes
exercisable, upon the occurrence of certain events, for one
one-hundredth of a share of Series B Junior Participating Preferred
Stock, $0.01 par value, at a purchase price of $80.00 or, in certain
circumstances, Common Stock or other securities, cash or other assets
having a then current market price (as defined and subject to
adjustment) equal to twice such purchase price. Under the Stockholder
Rights Plan, 500,000 shares of Series B Junior Participating Preferred
Stock have been reserved. The rights currently are not exercisable
and will be exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's outstanding shares of Common
Stock. The rights, which expire on December 6, 2003, are redeemable
in whole, but not in part, at the Company's option at any time for a
price of $0.02 per right. At December 31, 1996, the Company has the
Employee Stock Option Plan and the Director Stock Option Plan. The
Employee Stock Option Plan was adopted by the Board of Directors and
approved by the shareowners in 1995. Under the Employee Plan, options
granted may be either incentive or nonqualified stock options and are
granted at not less than the fair market value of the Company's Common
Stock at the time of grant. Options generally become exercisable in
four equal annual installments commencing one year from the date of
grant and expire ten years from such date. Under the plan, 435,000
shares of Common Stock have been reserved for awards. Any shares
subject to an option which expires or is terminated unexercised as to
such shares may again be subject to an option granted under the plan.
During 1996 and 1995, respectively, options to purchase 37,500 and
400,400 shares of Common Stock were awarded at an average exercise
price of $18.75 and $22.17. At December 31, 1996, there are 36,075
shares available for future grants.
The Director Stock Option Plan was adopted by the Board of Directors
and approved by the shareowners. Under the Director's plan, an annual
grant of an option to purchase 2,000 shares of Common Stock is awarded
to each non-employee Director on the fifth business day after the
annual meeting of shareowners. Options to non-employee Directors are
nonqualified options. The price per share is the fair market value of
the Company's Common Stock on the grant date. Options vest when
awarded and expire seven years from the grant date, but no option may
be exercised during the six-month period following its grant except in
the case of death or disability. Under the plan, 500,000 shares of
Common Stock have been reserved for awards. During 1996 and 1995,
respectively, options to purchase 14,000 and 16,000 shares of Common
Stock were awarded at an exercise price of $20.625 and $22.125. At
December 31, 1996, there are 418,000 shares available for future
grants.
The Company accounts for these plans in accordance with APB Opinion
25, "Accounting for Stock Issued to Employees," and related
interpretations instead of the alternative fair value accounting
provided for under FASB No. 123, "Accounting for Stock-Based
Compensation." Because the exercise price of the stock options is not
less than the market price of the underlying stock on the date of
grant, no compensation expense is recognized under APB 25. Had
compensation costs for the Company's two Plans been determined based
on the fair value at the grant dates for awards under those Plans
consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
F-68
<PAGE> 195
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(8) SHAREOWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income (loss):
As reported $ 1,060 $ (15,725)
Pro forma 6 (16,553)
Earnings per share:
As reported (0.38) (2.28)
Pro forma (0.50) (2.37)
</TABLE>
The above pro forma amounts have been determined as if all grants after
December 31, 1994 have been accounted for on the fair value method. The
following schedule summarizes the Plans' stock option activity for the three
years ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding, January 1, 1994 27,000 $ 16.17
Awarded 8,000 25.63
Exercised (5,000) 16.05
Outstanding, January 1, 1995 30,000 18.70
Awarded 416,400 22.17
Exercised (4,000) 14.16
Cancelled (9,800) 22.67
Outstanding, January 1, 1996 432,600 22.16
Awarded 51,500 19.26
Exercised (2,000) 20.63
Cancelled (36,175) 22.36
Outstanding, December 31, 1996 445,925 21.74
Options exercisable:
December 31, 1994 30,000
December 31, 1995 40,000
December 31, 1996 149,750
</TABLE>
Weighted average fair value of options granted during the year:
1995 $12.43
1996 $ 9.12
F-69
<PAGE> 196
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(8) SHAREOWNERS' EQUITY (CONTINUED)
The Black-Scholes option pricing model was used to calculate the fair
value of each option based on the following assumptions for 1995 and
1996, respectively; risk-free interest rates 6.8 and 6.0 percent; no
dividend yield for both years; expected lives of 6 and 6 years; and
volatility of 48.0 and 40.0 percent. As of December 31, 1996, the
445,925 options outstanding under the Plans have exercise prices
between $13.00 and $25.63 and a weighted average remaining contractual
life of 7.5 years.
On September 11, 1991, the Board of Directors approved the grant of a
nonqualified stock option to purchase 20,000 shares of Common Stock to
the Company's chief executive officer. The per share price is
$14.875, the fair market value on that date. This option became
exercisable on January 1, 1992, and expires on September 10, 1998.
The Company has a Long-Term Incentive Plan (the Plan). Under the
Plan, employees who are senior executives of the Company may be
awarded shares of Common Stock without cost to the employee. The fair
market value of the shares at the date of award is accounted for as
deferred compensation and is amortized over the restricted period. At
December 31, 1996, unamortized deferred compensation of $0.2 million
is included in shareowners' equity as a reduction of additional
paid-in capital. Awards under the Plan are vested after the employee
completes four years of continuous employment beginning with the year
for which the award is made. Vesting occurs prior to completion of
four years of employment if the employee dies while employed, reaches
normal retirement or becomes disabled. Under the Plan, 650,000 shares
of Common Stock have been reserved for awards. The following is an
analysis of shares of restricted stock under the Long-Term Incentive
Plan:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Number of Shares:
Outstanding at beginning of year 141,146 151,111 111,674
Awarded -- 70,000 70,000
Cancelled (4,241) (5,460) --
Issued (52,030) (74,505) (30,563)
-------- -------- --------
Outstanding at end of year 84,875 141,146 151,111
Available for grant at end of year 194,249 190,008 254,548
Market value on date of grant for
shares granted during year -- $ 22.00 $ 28.625
</TABLE>
F-70
<PAGE> 197
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(8) SHAREOWNERS' EQUITY (CONTINUED)
Transactions with respect to common stock and additional paid-in
capital during the three years ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
COMMON STOCK CAPITAL
------------ -----------
SHARES AMOUNT AMOUNT
----------- ----------- -----------
<S> <C> <C> <C>
Balance 12/31/93 12,186,167 $ 12,186 $ 212,799
----------- ----------- -----------
Shares issued to employee
savings plans 99,085 99 2,571
Restricted shares award 70,000 70 (70)
Earned compensation,
restricted stock -- -- 1,431
Preferred stock issuance
expense -- -- (73)
Director stock options
exercised 5,000 5 114
----------- ----------- -----------
Balance 12/31/94 12,360,252 12,360 216,772
----------- ----------- -----------
Shares issued to employee
savings plans 132,034 132 2,563
Restricted shares awarded 70,000 70 (70)
Restricted shares cancelled (5,460) (5) 5
Earned compensation,
restricted stock -- -- 1,684
Director stock options
exercised 4,000 4 71
----------- ----------- -----------
Balance 12/31/95 12,560,826 12,561 221,025
----------- ----------- -----------
Shares issued to employee
savings plans 180,309 180 2,959
Restricted shares cancelled (4,241) (4) (104)
Earned compensation,
restricted stock -- -- 692
Director stock options
exercised 2,000 2 39
----------- ----------- -----------
Balance 12/31/96 12,738,894 $ 12,739 $ 224,611
=========== =========== ===========
</TABLE>
Total shares of Common Stock outstanding as of December 31, 1996 are
reduced to 9,132,494 shares by 3,606,400 shares of treasury stock
acquired with the acquisition of Amoskeag. The $117.2 million cost of
the treasury stock reduces total shareowners' equity.
F-71
<PAGE> 198
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(9) EMPLOYEE PENSION AND SAVINGS PLANS
The Company has trusteed pension plans covering essentially all
employees. The plans provide pension benefits that are based on the
employees' compensation and service. The Company's policy is to fund
amounts required by applicable regulations.
Pension expense amounted to $5.6 million in 1996, $8.2 million in 1995
and $6.9 million in 1994. Net pension expense for 1996, 1995 and 1994
consisted of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 8,103 $ 6,530 $ 8,076
Interest cost on projected benefit obligation 19,034 17,572 16,668
Actual return on assets (33,209) (52,465) 4,845
Net amortization and deferral 11,637 34,197 (22,703)
Special termination benefits -- 2,359 --
-------- -------- --------
Net pension cost $ 5,565 $ 8,193 $ 6,886
======== ======== ========
</TABLE>
The Company recognized special termination benefits from a voluntary
early retirement program in 1995. The table below sets forth the plans'
funded status at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Projected benefit obligation:
Vested benefits $ 250,242 $ 243,767
Non-vested benefits 7,075 6,265
--------- ---------
Accumulated benefit obligation 257,317 250,032
Additional amounts related to
projected compensation levels 7,507 8,121
--------- ---------
Total projected benefit obligation 264,824 258,153
Plan assets at fair value, primarily
publicly traded stocks and bonds 278,376 253,378
--------- ---------
Plan assets over (under) projected
benefit obligation 13,552 (4,775)
Unrecognized net loss 15,442 31,752
Unrecognized net transition assets (534) (1,556)
Unrecognized prior service cost 2,141 2,470
--------- ---------
Net pension asset recognized in
the Consolidated Statement of
Financial Position $ 30,601 $ 27,891
========= =========
</TABLE>
F-72
<PAGE> 199
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(9) EMPLOYEE PENSION AND SAVINGS PLANS (CONTINUED)
Assumptions used in determining the funded status of the pension plans
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Discount rate 7.75% 7.25% 8.6%
Increase in compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of return on assets 9% 9% 9%
</TABLE>
The Company also sponsors employee savings plans which cover
substantially all employees. The Company provides a match of 70% of
employee contributions up to 2 percent of compensation and a match of
20% of employee contributions for the next 2 percent of compensation.
The matching formula may be changed yearly at the discretion of the
Company. The match is contributed quarterly in Common Stock of the
Company. Expense of the Company match was $3.1 million in 1996, $2.7
million in 1995 and $2.7 million in 1994.
(10) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides medical insurance premium assistance and life
insurance benefits to retired employees. The medical premium
assistance payments are at a fixed dollar amount based on the
retiree's years of service. Essentially all of the Company's
employees become eligible for these benefits when they reach
retirement age while working for the Company. The Company's policy is
to fund the plans as benefits are paid.
The table below sets forth the plans' combined status at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated postretirement benefit
obligation -
Retirees $ 26,089 $ 25,057
Fully eligible active participants 7,441 8,892
Other active participants 4,802 5,838
-------- --------
Total 38,332 39,787
Unrecognized net gain (loss) 225 (1,422)
Accrued postretirement benefit cost
recognized in the Consolidated
Statement of Financial Position at
December 31 $ 38,557 $ 38,365
</TABLE>
F-73
<PAGE> 200
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(10) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% as of December 31, 1996 and 7.25% as of
December 31, 1995. Medical premium assistance payments are at a fixed
dollar amount based on the retiree's years of service and, therefore,
the plan is not affected by a health care cost trend rate assumption.
Net periodic postretirement benefit cost for 1996, 1995 and 1994
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost (benefits earned
during the period) $ 903 $ 818 $ 979
Interest cost on projected
obligation 2,748 2,945 2,820
Net amortization and deferral 109 (171) 206
------- ------- -------
Net periodic postretirement
benefit cost $ 3,760 $ 3,592 $ 4,005
</TABLE>
(11) INCOME TAXES
At December 31, 1996, the Company had $51.6 million of deferred tax
assets and $108.1 million of deferred income tax liabilities which
have been netted for presentation purposes. The significant
components of these amounts as shown on the balance sheet are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
CURRENT NONCURREN CURRENT NONCURRENT
LIABILITY LIABILITY LIABILITY LIABILITY
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Depreciation $ 576 $ 52,574 $ 636 $ 52,899
Inventory valuation 36,882 -- 35,924 --
Deferred compensation -- (5,400) (360) (5,031)
Accruals and allowances (16,264) (1,123) (16,401) (4,129)
Operating loss and credit
carryforwards (4,973) -- (2,155) --
Other 1,991 (7,760) (51) (3,264)
---------- ---------- ---------- ----------
Total deferred tax liabilities $ 18,212 $ 38,291 $ 17,593 $ 40,475
========== ========== ========== ==========
</TABLE>
F-74
<PAGE> 201
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(11) INCOME TAXES (CONTINUED)
The provision for income taxes included in the Consolidated Statement
of Income and Retained Earnings consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ (1,582) $ (5,611) $ 5,397
State 131 306 56
Deferred
Federal 2,055 (3,977) 8,327
State (490) (2,802) 1,758
-------- -------- --------
Total income taxes on income $ 114 $(12,084) $ 15,538
======== ======== ========
</TABLE>
The income tax effect of items which altered the Company's effective
income tax rate from the statutory federal rate were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 411 35.0% $ (9,733) 35.0% $ 16,199 35.0%
State taxes, net (233) (19.8) (1,623) 5.8 2,037 4.4
Tax credits (36) (3.1) (543) 2.0 (567) (1.2)
Prior years tax settlements -- -- -- -- (1,714) (3.7)
Other (28) (2.4) (185) 0.7 (417) (0.9)
-------- -------- -------- -------- -------- --------
Net taxes $ 114 9.7% $(12,084) 43.5% $ 15,538 33.6%
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards
of $51.2 million for state income tax purposes that expire in 2000
through 2011 and alternative minimum tax credit carryforwards of $2.7
million.
F-75
<PAGE> 202
[This page intentionally left blank.]
F-76
<PAGE> 203
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash ............................................................ $ 5,475 $ 4,647
Accounts receivable ............................................. 170,071 154,511
Inventories (note 3) ............................................ 202,064 216,165
Other prepaid expenses and current assets ....................... 2,218 2,489
------------ ------------
Total current assets ............................................ 379,828 377,812
------------ ------------
Plant and equipment, net ........................................ 342,392 323,838
Deferred charges and other assets ............................... 67,259 66,843
------------ ------------
Total assets .................................................. $ 789,479 $ 768,493
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Accounts and drafts payable ..................................... $ 63,893 $ 63,910
Deferred income taxes ........................................... 20,593 18,212
Accrued liabilities ............................................. 69,435 61,172
Current portion of long-term debt ............................... 4,697 5,508
------------ ------------
Total current liabilities ....................................... 158,618 148,802
------------ ------------
Senior long-term debt ........................................... 111,320 107,746
Subordinated long-term debt ..................................... 197,500 203,750
------------ ------------
Total long-term debt ............................................ 308,820 311,496
Deferred income taxes ........................................... 39,758 38,291
Other non-current liabilities ................................... 52,962 54,149
------------ ------------
Total liabilities ............................................. $ 560,158 $ 552,738
============ ============
Shareowners' equity:
Preferred Stock, $.01 par value, 10,000,000 authorized,
1,500,000 issued and outstanding September 30, 1997
and December 31, 1996 (aggregate liquidation
preference of $75,000) ...................................... 15 15
Common Stock, $1 par value, 25,000,000 authorized,
12,850,002 issued September 30, 1997 and 12,738,894
December 31, 1996 ........................................... 12,850 12,739
Additional paid in capital ...................................... 226,758 224,611
Retained earnings ............................................... 106,923 95,615
Excess purchase price for Common Stock
acquired and held in treasury -
3,606,400 shares .............................................. (117,225) (117,225)
------------ ------------
Total shareowners' equity ..................................... 229,321 215,755
------------ ------------
Total liabilities and shareowners' equity ................... $ 789,479 $ 768,493
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-77
<PAGE> 204
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED
EARNINGS (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .............................. $ 286,966 $ 285,221 $ 820,635 $ 812,995
------------ ------------ ------------ ------------
Cost of sales .......................... 243,060 249,568 695,615 706,482
Selling, general and administrative .... 29,395 28,253 85,563 78,406
Restructuring charges .................. -- 4,500 -- 8,130
------------ ------------ ------------ ------------
Total operating costs and
expenses ............................. 272,455 282,321 781,178 793,018
------------ ------------ ------------ ------------
Operating income ....................... 14,511 2,900 39,457 19,977
------------ ------------ ------------ ------------
Other deductions (income):
Interest expense ..................... 6,150 7,160 18,708 21,496
Other, net ........................... (347) 97 (2,021) 519
------------ ------------ ------------ ------------
Total other deductions ................. 5,803 7,257 16,687 22,015
------------ ------------ ------------ ------------
Income (loss) before income taxes ...... 8,708 (4,357) 22,770 (2,038)
Federal and state income
taxes (benefit) ...................... 2,884 (1,634) 8,087 (764)
------------ ------------ ------------ ------------
Net income (loss) ...................... 5,824 (2,723) 14,683 (1,274)
Preferred dividends .................... (1,125) (1,125) (3,375) (3,375)
------------ ------------ ------------ ------------
Earnings (loss) on common .............. 4,699 (3,848) 11,308 (4,649)
------------ ------------ ------------ ------------
Amount added to (subtracted from)
retained earnings .................... 4,699 (3,848) 11,308 (4,649)
Retained earnings, beginning of
period ............................... 102,224 98,254 95,615 99,055
------------ ------------ ------------ ------------
Retained earnings, end of period ....... $ 106,923 $ 94,406 $ 106,923 $ 94,406
============ ============ ============ ============
Net income (loss) per common share ..... $ 0.51 $ (0.43) $ 1.23 $ (0.52)
Fully diluted income (loss)
per common share ..................... $ 0.47 $ (0.43) $ 1.23 $ (0.52)
Average primary shares
outstanding ........................... 9,275,112 9,044,250 9,204,171 9,002,815
Average fully diluted shares
outstanding .......................... 14,595,551 9,044,250 9,247,477 9,003,562
</TABLE>
See accompanying notes to consolidated financial statements.
F-78
<PAGE> 205
FIELDCREST CANNON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
---------------------
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net income (loss) ........................................ $ 14,683 $ (1,274)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization .......................... 26,241 26,979
Deferred income taxes .................................. 1,467 (2,732)
Other .................................................. (2,319) 8,625
Change in current assets and liabilities:
Accounts receivable .................................... (15,560) 4,156
Inventories ............................................ 14,101 (36,219)
Other prepaid expenses and current assets .............. 271 2,369
Accounts payable and accrued liabilities ............... 8,246 7,210
Deferred income taxes .................................. 2,381 (616)
-------- --------
Net cash provided by operating activities ................ 49,511 8,498
-------- --------
Cash flows from investing activities:
Additions to plant and equipment ......................... (46,214) (21,035)
Proceeds from disposal of plant and equipment ............ 3,277 3,911
-------- --------
Net cash (used in) investing activities ................ (42,937) (17,124)
-------- --------
Cash flows from financing activities:
Increase in revolving debt ............................... 4,294 11,826
Proceeds from issuance of long-term debt ................. -- 3,610
Payments on long-term debt ............................... (6,665) (800)
Proceeds from sale of common stock ....................... -- 41
Dividends paid on preferred stock ........................ (3,375) (3,375)
-------- --------
Net cash provided by (used in) financing activities .... (5,746) 11,302
-------- --------
Increase in cash ........................................... 828 2,676
-------- --------
Cash at beginning of year .................................. 4,647 9,124
-------- --------
Cash at end of period ...................................... $ 5,475 $ 11,800
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-79
<PAGE> 206
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(TABLES IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION
The consolidated financial statements are unaudited. In the opinion
of management all adjustments, consisting only of normal recurring
items, have been made which are necessary to show a fair presentation
of the financial position of the Company at September 30, 1997 and the
related results of operations for the three and nine months ended
September 30, 1997 and 1996. The unaudited consolidated financial
statements should be read in conjunction with the Company's Form 10-K
for the year ended December 31, 1996.
2. INCOME PER COMMON SHARE
Reference is made to Exhibit 11 to this Form 10-Q for a computation of
primary and fully-diluted net income per Common share.
3. INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods ................. $ 92,655 $104,092
Work in process ................ 65,718 68,668
Raw materials and supplies ..... 43,691 43,405
-------- --------
$202,064 $216,165
======== ========
</TABLE>
At September 30, 1997 approximately 65% of the inventories were valued
on the last-in, first-out method (LIFO).
F-80
<PAGE> 207
[This page intentionally left blank.]
F-81
<PAGE> 208
Appendix A
================================================================================
AGREEMENT AND PLAN OF MERGER
among
PILLOWTEX CORPORATION
PEGASUS MERGER SUB, INC.
and
FIELDCREST CANNON, INC.
dated as of September 10, 1997
================================================================================
A-1
<PAGE> 209
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - THE MERGER........................................................................ A-4
SECTION 1. The Merger............................................................ A-4
SECTION 1.2 Closing............................................................... A-4
SECTION 1.3 Effective Time........................................................ A-4
SECTION 1.4 Effects of the Merger................................................. A-4
SECTION 1.5 Certificate of Incorporation; By-laws................................. A-4
SECTION 1.6 Directors; Officers................................................... A-5
ARTICLE II - EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS............................................ A-5
SECTION 2.1 Effect on Capital Stock............................................... A-5
SECTION 2.2 Stock Options......................................................... A-6
SECTION 2.3 Share Purchase Rights................................................. A-7
SECTION 2.4 Failure To Approve Share Issuance..................................... A-7
SECTION 2.5 Stock Appreciation Rights............................................. A-7
ARTICLE III - PAYMENT FOR SHARES.............................................................. A-7
SECTION 3.1 Payment For Shares.................................................... A-7
ARTICLE IV - REPRESENTATIONS AND WARRANTIES................................................... A-9
SECTION 4.1 Representations and Warranties of Company............................. A-9
SECTION 4.2 Representations and Warranties of Parent and
Purchaser............................................................. A-16
ARTICLE V - COVENANTS......................................................................... A-20
SECTION 5.1 Conduct of Business of Company and Parent............................. A-20
ARTICLE VI - ADDITIONAL AGREEMENTS............................................................ A-21
SECTION 6.1 Preparation of the Proxy Statement and the
Form S-4; Accountant's Letters........................................ A-21
SECTION 6.2 Stockholders Meetings................................................. A-22
SECTION 6.3 Access to Information; Confidentiality................................ A-22
SECTION 6.4 Reasonable Best Efforts............................................... A-22
SECTION 6.5 Indemnification; Directors' and Officers Insurance.................... A-22
SECTION 6.6 Public Announcements.................................................. A-23
SECTION 6.7 No Solicitation; Acquisition Proposals................................ A-24
SECTION 6.8 Consents, Approvals and Filings....................................... A-24
SECTION 6.9 Board Action Relating to Stock Option Plans........................... A-25
SECTION 6.10 Employment and Employee Benefit Matters............................... A-25
SECTION 6.11 Affiliates and Certain Stockholders................................... A-26
SECTION 6.12 NYSE Listing.......................................................... A-26
SECTION 6.13 Certain Company Indebtedness.......................................... A-26
</TABLE>
A-2
<PAGE> 210
<TABLE>
<S> <C>
ARTICLE VII - CONDITIONS PRECEDENT............................................................. A-26
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger............. A-26
SECTION 7.2. Conditions to Obligations of Parent and Purchaser..................... A-27
SECTION 7.3. Conditions to Obligation of Company.................................... A-27
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER............................................... A-28
SECTION 8.1 Termination............................................................ A-28
SECTION 8.2 Effect of Termination.................................................. A-29
SECTION 8.3 Amendment.............................................................. A-29
SECTION 8.4 Extension; Waiver...................................................... A-29
SECTION 8.5 Procedure for Termination, Amendment, Extension or Waiver.............. A-29
ARTICLE IX - GENERAL PROVISIONS................................................................ A-29
SECTION 9.1 Nonsurvival of Representations and Warranties.......................... A-29
SECTION 9.2 Fees and Expenses...................................................... A-29
SECTION 9.3 Definitions............................................................ A-30
SECTION 9.4 Notices................................................................ A-30
SECTION 9.5 Interpretation......................................................... A-31
SECTION 9.6 Counterparts........................................................... A-31
SECTION 9.7 Entire Agreement; Third-Party Beneficiaries............................ A-31
SECTION 9.8 Governing Law.......................................................... A-31
SECTION 9.9 Assignment............................................................. A-31
SECTION 9.10 Enforcement............................................................ A-31
SECTION 9.11 Severability........................................................... A-32
</TABLE>
A-3
<PAGE> 211
AGREEMENT AND PLAN OF MERGER, dated as of September 10, 1997, among
PILLOWTEX CORPORATION, a Texas corporation ("Parent"), PEGASUS MERGER SUB, INC.,
a Delaware corporation and wholly-owned subsidiary of Parent ("Purchaser"), and
FIELDCREST CANNON, INC., a Delaware corporation ("Company").
W I T N E S E T H :
WHEREAS, the respective Boards of Directors of Parent, Purchaser and
Company have determined that it would be advisable and in the best interests of
their respective stockholders for Parent to acquire Company, by means of a
merger of Purchaser with and into Company (the "Merger"), pursuant and subject
to the terms and conditions set forth in this Agreement; and
WHEREAS, Parent, Purchaser and Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accord ance with the General Corporation Law of
the State of Delaware (the "DGCL"), the Merger shall be effected and Purchaser
shall be merged with and into Company at the Effective Time (as hereinafter
defined in Section 1.3). At the Effective Time, the separate existence of
Purchaser shall cease and Company shall continue as the surviving corporation
(sometimes herein referred to as the "Surviving Corporation").
SECTION 1.2 Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Article VIII, and subject to the satisfaction or waiver (to the extent
permissible) of all of the conditions set forth in Article VII, the closing of
the Merger (the "Closing") will take place at 10:00 a.m. on the fifth business
day following satisfaction or waiver (to the extent permissible) of all of the
conditions set forth in Article VII, other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the fulfillment or
waiver of those conditions (the "Closing Date"), at the offices of Weil,
Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York, unless another
date, time or place is agreed to in writing by the parties hereto.
SECTION 1.3 Effective Time. The parties hereto will file with the
Secretary of State of the State ofDelaware (the "Delaware Secretary of State")
on the date of the Closing (or on such other date as Parent and Company
mayagree)a certificate of merger or other appropriate documents,executed in
accordance with the relevant provisions ofthe DGCL, and make all other filings
or recordings requiredunder the DGCL in connection with the Merger. The
Mergershall become effective upon the filing of the certificate of merger with
the Delaware Secretary of State, or at such later time as is specified in the
certificate of merger (the "Effective Time").
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
the properties, rights, privileges, powers and franchises of Company and
Purchaser shall vest in the Surviving Corporation, and all debts, liabilities
and duties of Company and Purchaser shall become the debts, liabilities and
duties of the Surviving Corporation.
SECTION 1.5 Certificate of Incorporation; By-laws. At the Effective Time,
the certificate of incorporation of Purchaser as in effect at the Effective
Time shall, from and after the Effective Time, be the certificate of
incorporation of the Surviving Corporation until thereafter changed or amended
in accordance with the provisions thereof and
A-4
<PAGE> 212
\applicable law. At the Effective Time, the by-laws of Purchaser as in effect
at the Effective Time shall, from and after the Effective Time, be the by-laws
of the Surviving Corporation until thereafter changed or amended in accordance
with the provisions thereof and applicable law.
SECTION 1.6 Directors; Officers. From and after the Effective Time, (a)
the directors of Purchaser shall be the directors of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be, and (b) the
officers of Company shall be the officers of the Surviving Corporation, until
the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
SECTION 2.1 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of shares of
Company's common stock, $1.00 par value per share (the "Shares"), or any other
capital stock of Company or any shares of capital stock of Purchaser:
(a) Common Stock of Purchaser. Each share of common stock, par value
$0.01 per share, of Purchaser issued and outstanding immediately prior to the
Effective Time shall be converted into and become one validly issued, fully
paid and nonassessable share of common stock, $0.01 par value per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Shares and Parent-Owned Shares. Each
Share and each share of Company's $3.00 Series A Convertible Preferred Stock
(individually, a "Preferred Share" and collectively the "Preferred Shares")
issued and outstanding immediately prior to the Effective Time that is owned by
Company or any Subsidiary of Company or by Parent, Purchaser or any other
Subsidiary of Parent (other than shares in trust accounts, managed accounts,
custodial accounts and the like that are beneficially owned by third parties)
shall automatically be canceled and retired and shall cease to exist, and no
cash or other consideration shall be delivered or deliverable in exchange
therefor.
(c) Conversion of Shares. Each Share issued and outstanding
immediately prior to the Effective Time (other than Shares to be canceled in
accordance with Section 2.1(b) and any Dissenting Shares (as hereinafter
defined)) shall be converted into the right to receive the Merger Consideration
(as defined below) upon surrender of the certificate formerly representing such
Share in accordance with this Agreement.
(d) Conversion of Preferred Shares. Each Preferred Share issued and
outstanding immediately prior to the Effective Time (other than Preferred
Shares to be canceled in accordance with Section 2.1(b) and any Dissenting
Shares) shall be converted into the right to receive the Preferred Merger
Consideration (as defined below) upon surrender of the certificate formerly
representing such Preferred Share in accordance with this Agreement.
(e) Merger Consideration; Preferred Merger Consideration. (i)
"Merger Consideration" shall mean, subject to Section 2.4 below, (A) a cash
payment in an amount equal to $27.00 and (B) a number of fully paid and
nonassessable shares of Parent's common stock, $0.01 par value per share
("Parent Common Stock"), equal to the Conversion Number, meaning the quotient,
rounded to the third decimal place, obtained by dividing $7.00 by the average
of the closing sales prices of Parent Common Stock as reported on the NYSE (as
hereinafter defined in Section 9.3) Composite Transactions List for each of the
20 consecutive trading days immediately preceding the fifth trading day prior
to the Closing Date (the "Determination Price"); provided, that if the actual
quotient obtained thereby is less than 0.269, the Conversion Number shall be
0.269 and if the actual quotient obtained thereby is more than 0.333, the
Conversion Number shall be 0.333; provided, further that if the Determination
Price is less than $21.00, Parent shall have the right to give written notice
to Company (a "Top-Up Intent Notice") that Parent elects to increase the cash
portion of the Merger Consideration and/or the Conversion Number such that the
sum of (i) the cash portion of the Merger Consideration and (ii) the product of
the Conversion Number and the Determination Price shall equal $34.00. Any
Top-Up Intent Notice shall be delivered to Company no later than 2:00 p.m. New
York City time on the third business day prior to the Closing Date. If, in
such case, Parent does not deliver a Top-Up Intent Notice, Company shall
A-5
<PAGE> 213
have the right to give written notice to Parent (a "Termination Notice") that
Company elects to terminate this Agreement. Any Termination Notice shall be
delivered to Parent no later than 2:00 p.m. New York City time on the business
day prior to the Closing Date.
(ii) "Preferred Merger Consideration" shall mean, subject to Section
2.4 below, (A) a cash payment equal to the product of (1) the cash portion of
the Merger Consideration and (2) 1.7094 and (B) a number of fully paid and
nonassessable shares of Parent Common Stock equal to the product of (1) the
Conversion Number and (2) 1.7094.
(f) Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, Shares or Preferred Shares issued and outstanding immediately
prior to the Effective Time held by a holder (if any) who has the right to
demand, and who properly demands, an appraisal of such Shares or Preferred
Shares in accordance with Section 262 of the DGCL (or any successor provision)
("Dissenting Shares") shall not be converted into a right to receive the Merger
Consideration or the Preferred Merger Consideration, as applicable, unless such
holder fails to perfect or otherwise loses such holder's right to such
appraisal, if any. If, after the Effective Time, such holder fails to perfect
or loses any such right to appraisal, each such Share or Preferred Share of
such holder shall be treated as a Share or Preferred Share that had been
converted as of the Effective Time into the right to receive the Merger
Consideration or the Preferred Merger Consideration, as applicable, in
accordance with this Section 2.1. At the Effective Time, any holder of
Dissenting Shares shall cease to have any rights with respect thereto, except
the rights provided in Section 262 of the DGCL (or any successor provision) and
as provided in the immediately preceding sentence. Company shall give prompt
notice to Parent of any demands received by Company for appraisal of Shares or
Preferred Shares, and Parent shall have the right to participate in and direct
all negotiations and proceedings with respect to such demands. Company shall
not, except with the prior written consent of Parent, make any payment with
respect to, or settle or offer to settle, any such demands.
SECTION 2.2 Stock Options. (a) Each holder of a then outstanding option
to purchase Shares (collectively, "Options") under Company's Director Stock
Option Plan, 1995 Employee Stock Option Plan or Stock Option Agreement, dated
as of September 11, 1991, with James M. Fitzgibbons (collectively, the "Stock
Option Plans"), whether or not then exercisable or fully vested, may elect,
prior to the Effective Time, in settlement thereof, to receive from Company
immediately prior to the Effective Time for each Share subject to such Option
an amount in cash equal to the difference between $34.00 and the per share
exercise price of such Option, to the extent $34.00 is greater than the per
share exercise price of such Option (such excess amount, the "Option
Consideration").
(b) At the Effective Time, each outstanding Option other than Options
for which an election to receive cash in settlement thereof has been made
pursuant to Section 2.2(a), shall be assumed by Parent and shall constitute an
option to acquire, on substantially the same terms and subject to substantially
the same conditions as were applicable under such Option, including, without
limitation, term, exercisability, status as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
termination provisions, the number of shares of Parent Common Stock, rounded up
to the nearest whole share, determined by multiplying the number of Shares
subject to such Option immediately prior to the Effective Time by the Option
Conversion Number at an exercise price per share of Parent Common Stock
(increased to the nearest whole cent) equal to the exercise price per share of
Shares subject to such Option divided by the Option Conversion Number;
provided, however, that in the case of any Option to which Section 421 of the
Code applies by reason of its qualification as an incentive stock option under
Section 422 of the Code, the conversion formula shall be adjusted if necessary
to comply with Section 424(a) of the Code. "Option Conversion Number" shall
mean the quotient, rounded to the third decimal place, obtained by dividing
$34.00 by the Determination Price; provided, that if the actual quotient
obtained thereby is less than 1.308, the Option Conversion Number shall be
1.308, and if the actual quotient obtained thereby is more than 1.619, the
Option Conversion Number shall be 1.619; provided, further, that if a Top-Up
Intent Notice has been delivered to Company pursuant to Section 2.1(e), the
Option Conversion Number shall be increased such that the product of the Option
Conversion Notice and the Determination Price shall equal $34.00.
(c) Not later than 30 days prior to the Effective Time, Company shall
provide each holder of an Option an election form pursuant to which each such
holder may make the election specified in Section 2.2(a). Company also shall
use its best efforts to obtain all necessary waivers, consents or releases from
holders of Options under the Stock Option
A-6
<PAGE> 214
Plans and take any such other action as may be reasonably necessary to give
effect to the transactions contemplated by this Section 2.2 and, with respect
to the Options for which an election to receive cash in settlement thereof has
been made, to cause each such Option to be surrendered to Company and canceled,
whether or not any Option Consideration is payable with respect thereto, at the
Effective Time. The surrender of an Option to Company shall be deemed a
release of any and all rights the holder had or may have had in such Option,
other than the right to receive the Option Consideration in respect thereof.
(d) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of substitute Options pursuant to the terms set forth in Section
2.2(b). As soon as practicable after the Effective Time, the shares of Parent
Common Stock subject to Options will be covered by an effective registration
statement on Form S-8 (or any successor form) or another appropriate form and
Parent shall use its reasonable best efforts to maintain the effectiveness of
such registration statements for so long as the substitute Options remain
outstanding. In addition, Parent shall use all reasonable efforts to cause the
shares of Parent Common stock subject to Options to be listed on the NYSE and
such other exchanges as Parent shall determine.
SECTION 2.3 Share Purchase Rights. Each reference in this Article II and
in Article III to a "Share" is a reference to such Share together with the
Right (as hereinafter defined in Section 4.1(b)), if any, associated with such
Share.
SECTION 2.4 Failure To Approve Share Issuance. If Parent's stockholders
fail to approve the Share Issuance (as hereinafter defined in Section 4.2(c))
at the Parent Stockholders Meeting (as hereinafter defined in Section 6.2(b)),
then, notwithstanding anything set forth herein to the contrary, (i) the Merger
Consideration shall be a cash payment in an amount equal to $34.00, (ii) the
Preferred Merger Consideration shall be a cash payment in an amount equal to
$58.12, (iii) the provisions of Section 2.2(a) shall apply to all Options
outstanding immediately prior to the Effective Time and the provisions of
Section 2.2(b) shall have no further force or effect, and (iv) Sections
7.1(a)(ii) and 7.1(c) hereof shall be deemed to be deleted.
SECTION 2.5 Stock Appreciation Rights. At or immediately prior to the
Effective Time, Company shall pay to each holder of a stock appreciation right
issued by Company pursuant to the Director Stock Option Plan or its salary
reduction plan a cash amount equal to the product of (i) the difference between
$34.00 and the grant price of such stock appreciation right and (ii) the number
of shares subject to such stock appreciation right.
ARTICLE III
PAYMENT FOR SHARES
SECTION 3.1 Payment For Shares. (a) Payment Fund. Concurrently with the
Effective Time, Parent shall deposit, or shall cause to be deposited, with or
for the account of a bank or trust company designated by Parent, which shall be
reasonably satisfactory to Company (the "Paying Agent"), for the benefit of the
holders of Shares and Preferred Shares, (i) certificates for the shares of
Parent Common Stock representing the aggregate stock portion of the Merger
Consideration and the Preferred Merger Consideration and (ii) cash in an
aggregate amount sufficient to pay the aggregate cash portion of the Merger
Consideration and the Preferred Merger Consideration (hereinafter collectively
referred to as the "Payment Fund").
(b) Letters of Transmittal; Surrender of Certificates. As soon as
reasonably practicable after the Effective Time, Parent shall instruct the
Paying Agent to mail to each holder of record (other than Company or any of its
Subsidiaries or Parent, Purchaser or any of their Subsidiaries) of a
certificate or certificates which, immediately prior to the Effective Time,
evidenced outstanding Shares or Preferred Shares (the "Certificates"), (i) a
form of letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Paying Agent, and shall be in such
form and have such other provisions as Parent may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for payment therefor. Upon surrender of a Certificate for cancellation to the
Paying Agent together with such letter of transmittal, duly executed, and such
other customary documents as may be required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in respect thereof (A)
a certificate representing that number of whole
A-7
<PAGE> 215
shares of Parent Common Stock (and cash in lieu of fractional shares of Parent
Common Stock as contemplated by this Section 3.1) which the aggregate number of
Shares or Preferred Shares, as applicable, previously represented by such
certificate or certificates surrendered shall have been converted into the right
to receive pursuant to Section 3.1 of this Agreement and (B) cash in an amount
equal to the product of (1) the number of Shares or Preferred Shares, as
applicable, theretofore represented by such Certificate and (2) the cash portion
of the Merger Consideration or the Preferred Merger Consideration, as
applicable, and, in either case, the Certificate so surrendered shall forthwith
be canceled. No interest shall be paid or accrued on the Merger Consideration
or the Preferred Merger Consideration payable upon the surrender of any
Certificate. If payment is to be made to a person other than the person in
whose name the surrendered Certificate is registered, it shall be a condition of
payment that the Certificate so surrendered shall be promptly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the payment
to a person other than the registered holder of the surrendered Certificate or
established to the satisfaction of Parent and the Surviving Corporation that
such tax has been paid or is not applicable.
(c) Cancellation and Retirement of Shares; No Further Rights. As of
the Effective Time, all Shares and Preferred Shares (other than Shares and
Preferred Shares to be canceled in accordance with Section 2.1(b) and any
Dissenting Shares if applicable) issued and outstanding immediately prior to
the Effective Time, shall cease to be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a Certificate
theretofore representing any such Shares or Preferred Shares shall cease to
have any rights with respect thereto (including, without limitation, the right
to vote), except the right to receive the Merger Consideration or the Preferred
Merger Consideration, as applicable, without interest, upon surrender of such
Certificate in accordance with this Article III, and until so surrendered, each
such Certificate shall represent for all purposes only the right, subject to
Section 2.1(f), if applicable, to receive the Merger Consideration or the
Preferred Merger Consideration, as applicable, without interest. The Merger
Consideration or the Preferred Merger Consideration, as applicable, paid upon
the surrender for exchange of Certificates in accordance with the terms of this
Article III shall be deemed to have been issued and paid in full satisfaction
of all rights pertaining to the Shares or Preferred Shares theretofore
represented by such Certificates.
(d) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of certificates that immediately prior to the Effective Time
represented Shares or Preferred Shares which have been converted pursuant to
Section 2.1, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of Parent.
(ii) In lieu of any such fractional shares, each holder of Shares or
Preferred Shares who would otherwise have been entitled to a fraction of a
Parent Common Stock upon surrender of Certificates for exchange pursuant to
this Section 3.1 will be paid an amount in cash (without interest), rounded to
the nearest cent, determined by multiplying (A) the per share closing price on
the NYSE of Parent Common Stock (as reported on the NYSE Composite Transactions
List) on the date on which the Effective Time occurs (or, if Parent Common
Stock does not trade on the NYSE on such date, the first date of trading of
Parent Common Stock on the NYSE after the Effective Time) by (B) the fractional
interest to which such holder otherwise would be entitled. Promptly upon
request from the Paying Agent, Parent will make available to the Paying Agent
the cash necessary for this purpose.
(e) Investment of Payment Fund. The Paying Agent shall invest the
cash portion of the Payment Fund, as directed by Parent, in (i) direct
obligations of the United States of America, (ii) obligations for which the
full faith and credit of the United States of America is pledged to provide for
the payment of principal and interest, (iii) commercial paper rated the highest
quality by either Moody's Investors Services, Inc. or Standard & Poor's
Corporation, or (iv) certificates of deposit, bank repurchase agreements or
bankers' acceptances of commercial banks with capital exceeding $500 million.
Any net earnings with respect to the Payment Fund shall be the property of and
paid over to Parent as and when requested by Parent; provided, however, that
any such investment or any such payment of earnings shall not delay the receipt
by holders of Certificates of the Merger Consideration or the Preferred Merger
Consideration, as applicable, or otherwise impair such holders' respective
rights hereunder.
A-8
<PAGE> 216
(f) Termination of Payment Fund. Any portion of the Payment Fund
which remains undistributed to the holders of Certificates for 180 days after
the Effective Time shall be delivered to Parent, upon demand, and any holders
of Certificates that have not theretofore complied with this Article III shall
thereafter look only to Parent, and only as general creditors thereof, for
payment of their claim for any Merger Consideration or Preferred Merger
Consideration, as applicable.
(g) No Liability. None of Parent, Purchaser, the Surviving
Corporation or the Paying Agent shall be liable to any person in respect of any
payments or distributions payable from the Payment Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Certificates shall not have been surrendered prior to five years after
the Effective Time (or immediately prior to such earlier date on which any
Merger Consideration or Preferred Merger Consideration, as applicable, in
respect of such Certificate would otherwise escheat to or become the property
of any Governmental Entity (as hereinafter defined), any amounts payable in
respect of such certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
(h) Withholding Rights. Parent shall be entitled to deduct and
withhold, or cause to be deducted or withheld, from the consideration otherwise
payable pursuant to this Agreement to any holder of Shares, Preferred Shares,
Options or Certificates such amounts as are required to be deducted and
withheld with respect to the making of such payment under the Code, or any
provision of applicable state, local or foreign tax law. To the extent that
amounts are so withheld, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to such holders in respect of
which such deduction and withholding was made.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of Company. Company represents
and warrants to Parent and Purchaser as follows:
(a) Organization, Standing and Corporate Power. Each of Company and
each Subsidiary of Company is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
incorporated and has the requisite corporate power and authority to carry on
its business as now being conducted. Each of Company and each Subsidiary of
Company is duly qualified or licensed to do business and is in good standing in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed would not, individually or in the aggregate, have a Material Adverse
Effect (as hereinafter defined in Section 9.3) on Company. Company has
delivered to Parent complete and correct copies of the certificate of
incorporation and by-laws or comparable governing documents of Company and each
of its Subsidiaries, in each case as amended to the date of this Agreement.
(b) Capital Structure. The authorized capital stock of Company
consists of (i) 25,000,000 shares of common stock, $1.00 par value per share
(the "Common Stock"), (ii) 15,000,000 shares of class B common stock, $1.00 par
value per share, and (iii) 10,000,000 shares of preferred stock, $.01 par value
per share. At the close of business on September 5, 1997: (i) 9,224,258
shares of Common Stock were issued and outstanding, (ii) 435,300 shares of
Common Stock were reserved for issuance pursuant to outstanding Options under
the Stock Option Plans, (iii) 2,564,100 shares of Common Stock were reserved
for issuance pursuant to conversion of Preferred Shares, (iv) 2,632,248 shares
of Common Stock were reserved for issuance pursuant to conversion of Company's
6% Convertible Subordinated Debentures due 2012 (the "Convertible Debentures"),
(v) 1,500,000 Preferred Shares were issued and outstanding and (vi) 500,000
shares of Company's Series B Junior Participating Preferred Stock were
authorized for issuance solely pursuant to the exercise of the preferred stock
purchase rights (the "Rights") issued pursuant to the Rights Agreement, dated
as of November 24, 1993, between Company and The First National Bank of Boston,
as rights agent (the "Company Rights Agreement"). Except as set forth in the
immediately preceding sentence, at the close of business on September 5, 1997,
no shares of capital stock (including, without limitation, class B common stock
or preferred
A-9
<PAGE> 217
stock) or other equity securities of Company were issued, reserved for issuance
or outstanding. All outstanding shares of capital stock of Company are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. Except as referred to above, no bonds, debentures, notes or
other indebtedness of Company or any Subsidiary of Company having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which the stockholders of Company or any Subsidiary of
Company may vote are issued or outstanding. No adjustment to the conversion
price at which Preferred Shares are convertible into Shares or the conversion
price at which Convertible Debentures are convertible into Shares has been made
since the respective date of the first issuance of such securities, and there
are no accrued and unpaid dividends, whether or not declared, on the Preferred
Shares. Except as disclosed in Section 4.1(b) of the disclosure schedule
delivered by each party to the other simultaneously with the execution of this
Agreement (the "Disclosure Schedule"), all the outstanding shares of capital
stock of each Subsidiary of Company have been validly issued and are fully paid
and nonassessable and are owned by Company, by one or more Subsidiaries of
Company or by Company and one or more such Subsidiaries, free and clear of
Liens (as hereinafter defined in Section 9.3). Except as set forth above or in
Section 4.1(b) of the Disclosure Schedule, neither Company nor any Subsidiary
of Company has or, at or after the Effective Time will have, any outstanding
option, warrant, call, subscription or other right, agreement or commitment
which (i) obligates Company or any Subsidiary of Company to issue, sell or
transfer, repurchase, redeem or otherwise acquire any shares, of the capital
stock of Company or any Subsidiary of Company, (ii) restricts the transfer of
any shares of capital stock of Company or any of its Subsidiaries or (iii)
relates to the voting of any shares of Company or any of its Subsidiaries.
(c) Authority; Noncontravention. Company has the requisite corporate
power and authority to enter into this Agreement. The execution and delivery
of this Agreement by Company and the consummation by Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Company, subject, in the case of the Merger, to
the approval of this Agreement by its stockholders as set forth in Section
6.2(a). This Agreement has been duly executed and delivered by Company and,
assuming this Agreement constitutes the valid and binding agreement of Parent
and Purchaser, constitutes a valid and binding obligation of Company,
enforceable against Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and to general
principles of equity. Except as disclosed in Section 4.1(c) of the Disclosure
Schedule, the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated by this Agreement and compliance
with the provisions hereof will not, (i) conflict with any of the provisions of
the restated certificate of incorporation (including the provisions of any
certificate of designations which constitute a part of such restated
certificate of incorporation) or by-laws of Company or the comparable documents
of any Subsidiary of Company, (ii) subject to the governmental filings and
other matters referred to in the following sentence, conflict with, result in a
breach of or default (with or without notice or lapse of time, or both) under,
or give rise to a material obligation, a right of termination, cancellation or
acceleration of any obligation or a loss of a material benefit under, or
require the consent of any person under, any indenture or other agreement,
permit, concession, franchise, license or similar instrument or undertaking to
which Company or any of its Subsidiaries is a party or by which Company or any
of its Subsidiaries or any of their assets is bound or affected, or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, contravene any domestic or foreign law, rule or regulation
or any order, writ, judgment, injunction, decree, determination or award
currently in effect, which, in the case of clauses (ii) and (iii) above, singly
or in the aggregate, would have a Material Adverse Effect on Company. No
consent, approval or authorization of, or declaration or filing with, or notice
to, any domestic or foreign governmental agency or regulatory authority (a
"Governmental Entity") which has not been received or made is required by or
with respect to Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by Company or the consummation by
Company of the transactions contemplated hereby, except for (i) the filing of
premerger notification and report forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), with respect to the
Merger, (ii) the filing with the SEC of (A) a joint proxy statement relating to
the approval and adoption by the stockholders of Company of this Agreement and
approval by the stockholders of Parent of the Share Issuance (as hereinafter
defined in Section 4.2(c)) (such joint proxy statement, as amended or
supplemented from time to time, the "Proxy Statement") and (B) such reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
may be required in connection with this Agreement and the transactions
contemplated by this Agreement, (iii) the filing of the certificate of merger
with the Delaware Secretary of State and appropriate documents with the
relevant authorities of other states in which Company is qualified to do
business, (iv) such other consents, approvals, authorizations, filings or
notices as are set forth in Section 4.1(c) of the Disclosure Schedule and (v)
any other
A-10
<PAGE> 218
filings, authorizations, consents or approvals the failure to make or obtain
which, individually or in the aggregate, would not have a Material Adverse
Effect on Company.
(d) SEC Documents. (i) Company has filed all required reports,
schedules, forms, statements and other documents with the Securities and
Exchange Commission (the "SEC") since January 1, 1994 (such reports, schedules,
forms, statements and other documents are hereinafter referred to as the "SEC
Documents"); (ii) as of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
SEC Documents, and none of the SEC Documents as of such dates contained any
untrue statements of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and (iii) the consolidated financial statements of Company included
in the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles (except, in the case of unaudited consolidated quarterly
statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
during the periods involved (except as may otherwise be indicated in the notes
thereto) and fairly present the consolidated financial position of Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited quarterly statements, to normal year-end audit
adjustments).
(e) Information Supplied. None of the information supplied or to be
supplied by Company specifically for inclusion or incorporation by reference in
(i) the registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance by Parent of shares of Parent Common Stock in the
Merger (the "Form S-4") will, at the time the Form S-4 is filed with the SEC, at
any time that it is amended or supplemented and at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii) the Proxy Statement will, at
the time it is filed with the SEC, at any time that it is amended or
supplemented, at the time it is mailed to the stockholders of Company and Parent
and at the time of the Company Stockholders Meeting referred to in Section
6.2(a) and the Parent Stockholders Meeting referred to in Section 6.2(b),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by Company with
respect to statements made or incorporated by reference therein based on
information supplied by Parent or Purchaser specifically for inclusion or
incorporation by reference in such documents.
(f) Absence of Certain Changes or Events; No Undisclosed Material
Liabilities.
(i) Except as disclosed in the SEC Documents filed and publicly
available prior to the date of this Agreement (the "Filed SEC Documents") or in
Section 4.1(f) of the Disclosure Schedule, since the date of the most recent
audited financial statements included in the Filed SEC Documents, Company and
its Subsidiaries have conducted their business only in the ordinary course, and
there has not been (A) any change, event or occurrence particular to Company
and its Subsidiaries (excluding industry, economic, financial and other matters
generally affecting businesses other than and in addition to Company and its
Subsidiaries) which has had or would have, individually or in the aggregate, a
Material Adverse Effect on Company; (B) any declaration, setting aside or
payment of any dividend or other distribution in respect of shares of Company's
capital stock, other than dividends on the Preferred Shares in accordance with
their terms, or any redemption or other acquisition by Company of any shares of
its capital stock; (C) any increase in the rate or terms of compensation
payable or to become payable by Company or its Subsidiaries to their directors,
officers or key employees, except increases occurring in the ordinary course of
business consistent with past practices; (D) any entry into, or increase in the
rate or terms of, any bonus, insurance, severance, pension or other employee or
retiree benefit plan, payment or arrangement made to, for or with any such
directors, officers or employees, except increases occurring in the ordinary
course of business consistent with past practices or as required by applicable
law; (E) any entry into any agreement, commitment or transaction by Company or
any of its Subsidiaries which is material to Company and its Subsidiaries taken
as a whole, except for agreements, commitments or transactions entered into in
A-11
<PAGE> 219
the ordinary course of business; (F) any change by Company in accounting
methods, principles or practices except as required or permitted by generally
accepted accounting principles; (G) any write-off or write-down of, or any
determination to write-off or write-down, any asset of Company or any of its
Subsidiaries or any portion thereof which write-off, write-down, or
determination exceeds $5 million individually or $15 million in the aggregate;
or (H) any agreements by Company or any of its Subsidiaries to do any of the
things described in the preceding clauses (A) through (G) other than as
expressly contemplated or provided for herein.
(ii) Except as set forth in or disclosed in the Filed SEC Documents
or Section 4.1(f) of the Disclosure Schedule and liabilities incurred in the
ordinary course of business since the date of the most recent financial
statements included in the Filed SEC Documents, as of the date hereof, there
are no liabilities of Company or any Subsidiary of any kind whatsoever, whether
accrued, contingent, absolute, due, to become due, determined, determinable or
otherwise, having or which would have, individually or in the aggregate, a
Material Adverse Effect on Company.
(g) Absence of Changes in Benefit Plans. Except as disclosed in the
Filed SEC Documents or in Section 4.1(g) of the Disclosure Schedule, since the
date of the most recent audited financial statements included in the Filed SEC
Documents, neither Company nor any of its Subsidiaries has adopted or amended
or agreed to adopt or amend in any material respect any collective bargaining
agreement or any Benefit Plan (as defined in Section 4.1(h)).
(h) Benefit Plans. With respect to all the employee benefit plans (as
that phrase is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) maintained for the benefit of any
current or former employee, officer or director of the Company or any of its
Subsidiaries ("Company ERISA Plans") and any other benefit or compensation
plan, program or arrangement maintained for the benefit of any current or
former employee, officer or director of the Company or any of its Subsidiaries
(the Company ERISA Plans and such plans being referred to as the "Company
Plans"), except as set forth in Section 4.1(h) of the Disclosure Schedule:
(i) none of the Company ERISA Plans is a "multiemployer plan"
within the meaning of ERISA;
(ii) none of the Company Plans promises or provides retiree life
insurance benefits to any person;
(iii) none of the Company Plans provides for payment of a benefit,
the increase of a benefit amount, the payment of a contingent benefit, or the
acceleration of the payment or vesting of a benefit by reason of the execution
of this Agreement or the consummation of the transactions contemplated by this
Agreement;
(iv) neither the Company nor any of its Subsidiaries has an
obligation to adopt, or is considering the adoption of, any new Company Plan
or, except as required by law, the amendment of an existing Company Plan;
(v) each Company ERISA Plan intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the IRS
that it is so qualified and, to the knowledge of the Company, nothing has
occurred since the date of such letter that could reasonably be expected to
affect the qualified status of such Company ERISA Plan;
(vi) each Company Plan has been operated in accordance with its
terms and the requirements of all applicable law;
(vii) neither the Company nor any of its Subsidiaries or members of
their "controlled group" has incurred any direct or indirect liability under,
arising out of or by operation of Title IV of ERISA in connection with the
termination of, or withdrawal from, any Company ERISA Plan or other retirement
plan or arrangement, and, to the knowledge of the Company, no fact or event
exists that could reasonably be expected to give rise to any such liability;
(viii) the aggregate accumulated benefit obligations of each Company
ERISA Plan subject to Title IV of ERISA (as of the date of the most recent
actuarial valuation prepared for such Company ERISA Plan and based on a
discount rate of 7.75%, the rate used in such valuation) do not exceed the fair
market value of the assets of such Company ERISA Plan (as of the date of such
valuation); and
A-12
<PAGE> 220
(ix) the Company is not aware of any claims relating to the Company
Plans;
provided, however, that the failure of the representations set forth in clauses
(v), (vi), (vii) and (ix) to be true and correct shall not be deemed to be a
breach of any such representation unless such failures, individually or in the
aggregate, would have a Material Adverse Effect on Company.
(i) Taxes. Except as set forth in Section 4.1(i) of the Disclosure
Schedule:
(A) Except where the failure to do so would not have a Material
Adverse Effect on Company, each of Company and each Subsidiary of Company (and
any affiliated or unitary group of which any such person was a member) has (1)
timely filed all federal, state, local and foreign returns, declarations,
reports, estimates, information returns and statements ("Returns") required to
be filed by or for it in respect of any Taxes (as defined below) and has caused
such Returns as so filed to be true, complete and correct, (2) established
reserves that are reflected in Company's most recent financial statements
included in the Filed SEC Documents and that as so reflected are adequate for
the payment of all Taxes not yet due and payable with respect to the results of
operations of Company and its Subsidiaries through the date hereof, and (3)
timely withheld and paid over to the proper governmental authorities all Taxes
and other amounts required to be so withheld and paid over. Each of Company
and each Subsidiary of Company (and any affiliated or unitary group of which
any such person was a member) has timely paid all Taxes that are shown as being
due on the Returns referred to in the immediately preceding sentence.
(B) (1) There has been no taxable period since 1991 for which a Return
of Company or any of its Subsidiaries has been examined by the Internal Revenue
Service ("IRS"), (2) all examinations described in clause (1) have been
completed without the assertion of material deficiencies, and (3) except for
alleged deficiencies which have been finally and irrevocably resolved, Company
has not received formal or informal notification that any deficiency for any
Taxes, the amount of which, individually or in the aggregate, could have a
Material Adverse Effect on Company, has been or will be proposed, asserted or
assessed against Company or any of its Subsidiaries by any federal, state,
local or foreign taxing authority or court with respect to any period.
(C) Neither Company nor any of its Subsidiaries has executed or
entered into with the IRS or any other taxing authority (1) any agreement or
other document that continues in force and effect beyond the Effective Time and
that extends or has the effect of extending the period for assessments or
collection of any federal, state, local or foreign Taxes, (2) any closing
agreement or other similar agreement (nor has Company or any of its
Subsidiaries received any ruling, technical advice memorandum or similar
determination) affecting the determination of Taxes required to be shown on any
Return not yet filed, or (3) requested any extension of time to be granted to
file after the Effective Date any return required by applicable law to be filed
by it.
(D) Neither Company nor any of its Subsidiaries has made an election
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by Company or any of its
Subsidiaries. None of the assets of Company or any of its Subsidiaries is
required to be treated as being owned by any other person pursuant to the "safe
harbor" leasing provisions of section 168(f)(8) of the Internal Revenue Code of
1954 as formerly in effect.
(E) Neither Company nor any of its Subsidiaries is a party to, is
bound by or has any obligation under any tax sharing agreement or similar
agreement or arrangement.
(F) Company has not agreed to make, nor is it required to make, any
material adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise.
(G) Neither Company nor any of its Subsidiaries is, or has been, a
United States Real Property Holding Corporation within the meaning of Code
Section 897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii).
A-13
<PAGE> 221
For purposes of this Agreement, "Taxes" shall mean all Federal, state,
local, foreign income, property, sales, excise, employment, payroll, franchise,
withholding and other taxes, tariffs, charges, fees, levies, imposts, duties,
licenses or other assessments of every kind and description, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
(j) Voting Requirements. Assuming Parent is not an interested
stockholder for purposes of Section 203 of the DGCL, the affirmative vote of
two-thirds of the votes entitled to be cast by the holders of Shares entitled
to vote thereon at the Company Stockholders Meeting described in Section 6.2(a)
with respect to the approval and adoption of this Agreement is the only vote of
the holders of any class or series of Company's capital stock or other
securities required in connection with the consummation by Company of the
Merger and the other transactions contemplated hereby to be consummated by
Company.
(k) Compliance with Applicable Laws. All federal, state, local and
foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Permits," including,
without limitation, Permits required under Environmental Laws) necessary for
each of Company and its Subsidiaries to own, lease or operate its properties
and assets and to carry on its business as now conducted have been obtained or
made, and there has occurred no default under any such Permit, except for the
lack of Permits and for defaults under Permits which lack or default
individually or in the aggregate would not have a Material Adverse Effect on
Company. Except as disclosed in the Filed SEC Documents or in Section 4.1(k)
of the Disclosure Schedule, Company and its Subsidiaries are in compliance with
all applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity, except for non-compliance which individually or in the
aggregate would not have a Material Adverse Effect on Company.
(l) Written Opinion of Financial Advisor. Company has received the
written opinion of Credit Suisse First Boston Corporation ("CSFB"), dated
September 10, 1997 (a true and complete copy of which has been delivered to
Parent by Company), to the effect that, based upon and subject to the matters
set forth therein and as of the date hereof, the consideration to be received
by the holders of Shares in the Merger was fair to such stockholders from a
financial point of view, and such opinion has not been withdrawn or modified.
(m) Brokers. No broker, investment banker, financial advisor or other
person, other than CSFB, the fees and expenses of which will be paid by Company,
is entitled to any broker's, finder's, financial advisor's or other similar fee
or commission <PAin connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Company.
(n) Litigation, etc. As of the date hereof, except as disclosed in
Section 4.1(n) of the Disclosure Schedule, (i) there is no suit, claim, action
or proceeding (at law or in equity) or investigation pending or, to the
knowledge of Company, threatened against Company or any of its Subsidiaries
(including, without limitation, any product liability claims) before any court
or governmental or regulatory authority or body, and (ii) neither Company nor
any of its Subsidiaries is subject to any outstanding order, writ, judgement,
injunction, decree or arbitration order or award that, in any such case
described in clauses (i) and (ii), has had or would have, individually or in
the aggregate, a Material Adverse Effect on Company. As of the date hereof,
there are no suits, actions, claims, proceedings or investigations pending or,
to the knowledge of Company, threatened, seeking to prevent, hinder, modify or
challenge the transactions contemplated by this Agreement.
(o) Environmental Laws. (i) For purposes of this Agreement, the
following terms shall have the following meanings: (A) "Hazardous Substances"
means (1) those substances defined in or regulated under the following federal
statutes and their state counterparts, as each may be amended from time to
time, and all regulations thereunder: the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Clean Water Act,
the Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide,
Fungicide, and Rodenticide Act and the Clean Air Act; (2) petroleum and
petroleum products including crude oil and any fractions thereof; (3) natural
gas, synthetic gas, and any mixtures thereof; (4) radon; (5) any other
contaminant; and (6) any substance with respect to which a federal, state or
local agency requires environmental investigation, monitoring, reporting or
remediation; and (B) "Environmental Laws" means any federal, state or local law
relating to (1) releases or threatened releases of Hazardous Substances or
materials containing
A-14
<PAGE> 222
Hazardous Substances; (2) the manufacture, handling, transport, use, treatment,
storage or disposal of Hazardous Substances or materials containing Hazardous
Substances; or (3) otherwise relating to pollution of the environment or the
protection of human health.
(ii) To the knowledge of Company, except as disclosed in Section
4.1(o) of the Disclosure Schedule and except as would not, individually or in
the aggregate, have a Material Adverse Effect on Company: (A) neither Company
nor any of its Subsidiaries has violated or is in violation of any Environmental
Law; (B) none of the properties owned or leased by Company or any of its
Subsidiaries (including, without limitation, soils and surface and ground
waters) are contaminated with any Hazardous Substance in quantities which
require investigation or remediation under Environmental Laws; (C) neither
Company nor any of its Subsidiaries is liable for any off-site contamination;
(D) neither Company nor any of its Subsidiaries has any liability or remediation
obligation under any Environmental Law; (E) no assets of Company or any of its
Subsidiaries are subject to pending or threatened Liens under any Environmental
Law; (F) Company and its Subsidiaries have all permits, licenses and other
authorizations required under any Environmental Law ("Environmental Permits");
and (G) Company and its Subsidiaries are in compliance with their respective
Environmental Permits.
(p) Material Contracts. There have been made available to Parent, its
affiliates and their representatives true and complete copies of all of the
following contracts to which Company or any of its Subsidiaries is a party or by
which any of them is bound (collectively, the "Material Contracts"): (i)
contracts with any current officer or director of Company or any of its
Subsidiaries; (ii) contracts for the sale of any of the assets of Company or any
of its Subsidiaries other than contracts relating to non-operating property or
entered into in the ordinary course of business or for the grant to any person
of any preferential rights to purchase any of its assets other than inventory in
the ordinary course of business; (iii) contracts containing covenants of Company
or any of its Subsidiaries not to compete in any line of business or with any
person in any geographical area or covenants of any other person not to compete
with Company or any of its Subsidiaries in any line of business or in any
geographical area; (iv) material indentures, credit agreements, mortgages,
promissory notes, and all contracts relating to the borrowing of money; and (v)
all other agreements, contracts or instruments entered into outside of the
ordinary course of business and which, in the reasonable opinion of Company, are
material to Company. The Company has discussed with Parent the Company's
purchase orders for raw materials (including cotton and polyester), supplies,
expense items, and equipment, and the purchase orders from the Company's
customers as well as the Company's acknowledgments of those orders, but the
Company has not provided copies of all of these documents to Parent. Except as
set forth on Schedule 4.1(p), all of the Material Contracts are in full force
and effect and are the legal, valid and binding obligation of Company and/or its
Subsidiaries, enforceable against them in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and subject,
as to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity). Except as set forth
on Section 4.1(p) of the Disclosure Schedule, neither Company nor any Subsidiary
is in default in any material respect under any Material Contract nor, to the
knowledge of Company, is any other party to any Material Contract in default
thereunder in any material respect.
(q) Labor Matters. (i) Except as set forth on Section 4.1(q)(i) of
the Disclosure Schedule, neither Company nor any of its Subsidiaries is a party
to any employment, labor or collective bargaining agreement (excluding
consulting agreements with independent contractors entered into in the ordinary
course of business), and there are no employment, labor or collective
bargaining agreements which pertain to employees of Company or any of its
Subsidiaries. Company has heretofore made available to Parent true, complete
and correct copies of the (A) employment agreements listed on Section 4.1(q)(i)
of the Disclosure Schedule and (B) labor or collective bargaining agreements
listed on such Schedule, together with all amendments, modifications,
supplements or side letters affecting the duties, rights and obligations of any
party thereunder.
(ii) Except as set forth in Section 4.1(q)(ii) of the Disclosure
Schedule, no employees of Company or any of its Subsidiaries are represented by
any labor organization; to the knowledge of Company, no labor organization or
group of employees of Company or any of its Subsidiaries has made a pending
demand for recognition or certification, and there are no representation or
certification proceedings or petitions seeking a representation proceeding
presently pending or threatened in writing to be brought or filed with the
National Labor Relations Board or any other labor relations tribunal or
authority and to the knowledge of Company, there are no organizing activities
involving Company
A-15
<PAGE> 223
or any of its Subsidiaries pending with any labor organization or group of
employees of Company or any of its Subsidiaries.
(iii) Except as set forth on Section 4.1(q)(iii) of the Disclosure
Schedule, there are no (A) unfair labor practice charges, grievances or
complaints pending or threatened in writing by or on behalf of any employee or
group of employees of Company or any of its Subsidiaries which, if resolved
against Company or any of its Subsidiaries, as the case may be, would,
individually or in the aggregate, have a Material Adverse Effect on Company, or
(B) complaints, charges or claims against Company or any of its Subsidiaries
pending, or threatened in writing to be brought or filed, with any Governmental
Entity or arbitrator based on, arising out of, in connection with, or otherwise
relating to the employment or termination of employment of any individual by
Company or any of its Subsidiaries which, if resolved against Company or any of
its Subsidiaries, as the case may be, would, individually or in the aggregate,
have a Material Adverse Effect on Company.
(r) Rights Plan Matters. The Company's Board of Directors has
approved and Company will enter into an amendment to the Company Rights
Agreement so that (i) the execution and delivery of this Agreement, the public
announcement or consummation of the transactions contemplated hereby and the
other matters provided for herein will not result in (A) Parent or Purchaser or
any of their respective Affiliates or Associates being an Acquiring Person, (B)
the occurrence of a Distribution Date, a Stock Acquisition Date or a Triggering
Event or (C) the Rights becoming exercisable (the terms "Acquiring Person,"
"Affiliate," "Associate," "Distribution Date," "Stock Acquisition Date," and
"Triggering Event" having the respective meanings ascribed thereto in the
Company Rights Agreement) and (ii) the common stock, $0.01 par value per share,
of the Surviving Corporation will not constitute "Common Stock" within the
meaning of Section 1(g) of the Company Rights Agreement. A true, correct and
complete copy of the Company Rights Agreement (including all amendments thereto)
is included in the Filed SEC Documents.
(s) Real Property; Other Assets. (i) Section 4.1(s)(i) of the
Disclosure Schedule sets forth all of the real property owned in fee by Company
and its Subsidiaries (the "Owned Real Property"). Each of Company and its
Subsidiaries has good and marketable title to each parcel of Owned Real
Property free and clear of all Liens except (A) those reflected or reserved
against in the latest balance sheet of Company included in the Filed SEC
Documents, (B) taxes and general and special assessments not in default and
payable without penalty and interest, and (C) Liens of record and other Liens
which individually or in the aggregate would not have a Material Adverse Effect
on Company (collectively "Permitted Liens").
(ii) Company has heretofore made available to Parent true, correct
and complete lists of all leases, subleases and other agreements (the "Real
Property Leases") under which Company or any of its Subsidiaries uses or
occupies or has the right to use or occupy, now or in the future, any real
property or facility (the "Leased Real Property") (including all modifications,
amendments and supplements thereto). Except in each case where the failure
individually or in the aggregate would not have a Material Adverse Effect on
Company (A) each Real Property Lease is valid and binding on Company and in
full force and effect, (B) all rent and other sums and charges payable by
Company and its Subsidiaries as tenants thereunder are current in all material
respects, and (C) no termination event or condition or uncured default of a
material nature on the part of Company or any such Subsidiary or, to Company's
knowledge, the landlord, exists under any Real Property Lease. Except as would
not individually or in the aggregate have a Material Adverse Effect on Company,
each of Company and its Subsidiaries has a good and valid leasehold interest in
each parcel of Leased Real Property free and clear of all Liens, except for
Permitted Liens.
SECTION 4.2 Representations and Warranties of Parent and Purchaser.
Parent and Purchaser represent and warrant to Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and
Purchaser and each other Subsidiary of Parent is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has the requisite corporate power and authority to
carry on its business as now being conducted. Each of Parent and Purchaser and
each other Subsidiary of Parent is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to
be so qualified or licensed would not, individually or in the aggregate, have a
Material Adverse Effect on Parent. Parent has delivered to Company
A-16
<PAGE> 224
true and complete copies of the restated articles of incorporation and by-laws
of Parent and certificate of incorporation and by-laws of Purchaser, as amended
to the date of this Agreement.
(b) Capital Structure. The authorized capital stock of Parent
consists of (i) 30,000,000 shares of Parent Common Stock, and (ii) 20,000,000
shares of preferred stock, par value $.01 per share. At the close of business
on September 5, 1997, (i) 10,751,497 shares of Parent Common Stock were issued
and outstanding and (ii) 613,390 shares of Parent Common Stock were reserved
for issuance pursuant to outstanding options to purchase shares of Parent
Common Stock granted under Parent's stock option plans. Except as set forth in
the immediately preceding sentence, at the close of business on September 5,
1997, no shares of capital stock or other equity securities of Parent were
issued, reserved for issuance or outstanding. All outstanding shares of
capital stock of Parent are, and all shares of Parent Common Stock which may be
issued pursuant to this Agreement will be, when issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. The authorized capital stock of Purchaser consists of 100 shares of
common stock, $0.01 par value per share, 100 of which have been validly issued,
are fully paid and nonassessable and are owned by Parent. No bonds,
debentures, notes or other indebtedness of Parent having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters on which the stockholders of Parent may vote are issued or
outstanding. Except as set forth above, Parent does not have any outstanding
option, warrant, subscription or other right, agreement or commitment which (i)
obligates Parent to issue, sell or transfer, repurchase, redeem or otherwise
acquire any shares of the capital stock of Parent, (ii) restricts the transfer
of Parent Common Stock or (iii) relates to the voting of Parent Common Stock.
(c) Authority; Noncontravention. Parent and Purchaser have the
requisite corporate power and authority to enter into this Agreement. The
execution and delivery of this Agreement by Parent and Purchaser and the
consummation by Parent and Purchaser of the transactions contemplated hereby
have been duly authorized by the boards of directors of Parent and Purchaser and
have been duly approved by Parent as sole stockholder of Purchaser, and no other
corporate proceedings on the part of Parent or Purchaser are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby,
other than, with respect to the issuance of Parent Common Stock as required by
the terms of this Agreement or upon conversion of the Company's 6% Convertible
Subordinated Debentures after the Effective Time and the issuances of equity
securities of Parent contemplated by Section 4.2(g) (collectively, the "Share
Issuance"), the approval and adoption of the Share Issuance by the affirmative
vote of the holders of a majority of the shares of Parent Common Stock entitled
to vote on the matter, present in person or represented by proxy at the meeting
of Parent's stockholders called for such purpose. This Agreement has been duly
executed and delivered by each of Parent and Purchaser and, assuming this
Agreement constitutes the valid and binding agreement of Company, constitutes a
valid and binding obligation of each of Parent and Purchaser, enforceable
against each such party in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and to general
principals of equity. Except as disclosed in Section 4.2(c) of the Disclosure
Schedule, the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated by this Agreement and compliance
with the provisions of this Agreement will not (i) conflict with any of the
provisions of the restated articles of incorporation or by-laws of Parent or
certificate of incorporation or by-laws of Purchaser, (ii) subject to the
governmental filings and other matters referred to in the following sentence,
conflict with, result in a breach of or default (with or without notice or lapse
of time, or both) under, or give rise to a material obligation, a right of
termination, cancellation or acceleration of any obligation or loss of a
material benefit under, or require the consent of any person under, any
indenture, or other agreement, permit, concession, franchise, license or similar
instrument or undertaking to which Parent or Purchaser is a party or by which
Parent or Purchaser or any of their assets is bound or affected, or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, contravene any law, rule or regulation, or any order, writ,
judgment, injunction, decree, determination or award currently in effect, which,
in the case of clauses (ii) and (iii) above, singly or in the aggregate, would
have a Material Adverse Effect on Parent. No consent, approval or authorization
of, or declaration or filing with, or notice to, any Governmental Entity which
has not been received or made is required by or with respect to Parent or
Purchaser in connection with the execution and delivery of this Agreement by
Parent or Purchaser or the consummation by Parent or Purchaser, as the case may
be, of any of the transactions contemplated by this Agreement, except for (i)
the filing of premerger notification and report forms under the HSR Act with
respect to the Merger, (ii) the filing with the SEC of (A) the Form S-4 and (B)
such other reports under the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this Agreement, (iii) the
filing of the certificate of merger with the Delaware Secretary of State, and
appropriate documents with the relevant authorities of other states in which
Company
A-17
<PAGE> 225
is qualified to do business, (iv) state "blue-sky" filings, (v) NYSE approvals,
(vi) such other consents, approvals, authorizations, filings or notices as are
set forth in Section 4.2(c) of the Disclosure Schedule and (vii) any other
applicable filings, authorizations, consents or approvals the failure to make or
obtain which, in the aggregate, would not have a Material Adverse Effect on
Parent.
(d) SEC Documents. Parent has filed all required reports, schedules,
forms, statements and other documents with the SEC since January 1, 1994 (the
"Parent SEC Documents"). As of their respective dates, the Parent SEC Documents
complied in all material respects with the requirements of the Securities Act
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such Parent SEC Documents, and none of
the Parent SEC Documents as of such dates contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Parent included in the Parent SEC Documents comply as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles (except, in the case
of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of Parent
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).
(e) Information Supplied. None of the information supplied or to be
supplied by Parent or Purchaser specific ally for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time the Form S-4 is filed with the
SEC, at any time it is amended or supplemented or at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) the Proxy
Statement will, at the time it is filed with the SEC, at any time that it is
amended or supplemented, mailed to the stockholders of Company and Parent and at
the time of the Company Stockholders Meeting referred to in Section 6.2(a) and
the Parent Stockholders Meeting referred to in Section 6.2(b), contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Form
S-4 and the Proxy Statement will comply as to form in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation or warranty is
made by Parent or Purchaser with respect to statements made or incorporated by
reference in such documents based on information supplied by or on behalf of
Company specifically for inclusion or incorporation by reference therein.
(f) Absence of Certain Changes of Events; No Undisclosed Material
Liabilities. (i) Except as disclosed in the Parent SEC Documents filed and
publicly available prior to the date of this Agreement (the "Filed Parent SEC
Documents") or in Section 4.2(f) of the Disclosure Schedule, since the date of
the most recent audited financial statements included in the Filed Parent SEC
Documents, Parent and its Subsidiaries have conducted their business only in the
ordinary course, and there has not been (A) any change, event or occurrence
particular to Parent and its Subsidiaries (excluding industry, economic,
financial and other matters generally affecting businesses other than and in
addition to Parent and its Subsidiaries) which has had or would have,
individually or in the aggregate, a Material Adverse Effect on Parent, (B) any
declaration, setting aside or payment of any dividend or distribution in respect
of any of Parent's outstanding capital stock (other than regular quarterly cash
dividends of $.05 per share on Parent Common Stock in accordance with usual
record and payment dates and in accordance with the Parent's present dividend
policy) or any redemption or other acquisition by Parent of any shares of its
capital stock, (C) any entry into any agreement, commitment or transaction by
Parent or any of its Subsidiaries which is material to Parent and its
Subsidiaries taken as a whole, except for agreements, commitments or
transactions entered into in the ordinary course of business, (D) any change by
Parent in accounting methods, principles or practices except as required or
permitted by generally accepted accounting principles or (E) any agreements by
Parent or any of its Subsidiaries to do any of the things described in the
preceding clauses (A) through (D) other than as expressly contemplated or
provided for herein.
(ii) Except as set forth in or disclosed in the Filed Parent SEC
Documents or Section 4.2(f) of the Disclosure Schedule and liabilities incurred
in the ordinary course of business since the date of the most recent financial
statements
A-18
<PAGE> 226
included in the Filed Parent SEC Documents, as of the date hereof, there are no
liabilities of Parent or any Subsidiary of any kind whatsoever, whether accrued,
contingent, absolute, due, to become due, determined, determinable or otherwise,
having or which would, individually or in the aggregate, have a Material Adverse
Effect on Parent.
(g) Purchaser; Financing. (i) Parent owns all of the outstanding
capital stock of Purchaser. At all times prior to the Effective Time, no
person other than Parent has owned, or will own, any of the outstanding capital
stock of Purchaser. Purchaser was formed by Parent solely for the purpose of
engaging in the transactions contemplated by this Agreement. Except as
contemplated by this Agreement, Purchaser has not incurred, and will not incur,
directly or through any Subsidiary, any liabilities or obligations for borrowed
money or otherwise, except incidental liabilities or obligations not for
borrowed money incurred in connection with its organization and except in
connection with obtaining financing in connection with the Merger. Except as
contemplated by this Agreement, Purchaser has not engaged, directly or through
any Subsidiary, in any business activities of any type or kind whatsoever.
(ii) Parent has received written commitments (collectively, the
"Financing Commitments") (copies of which are attached as Section 4.2(g) of the
Disclosure Schedule) from financial institutions and investors to provide,
subject to the terms and conditions of such commitments, debt and equity
financing sufficient, together with other funds available to Parent, to effect
the Merger and the other transactions contemplated hereby and to pay all
related fees and expenses.
(h) Brokers. No broker, investment banker, financial advisor or other
person, other than those identified in Section 4.2(h) of the Disclosure
Schedule, the fees and expenses of which will be paid by Parent, is entitled to
any broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent.
(i) Compliance with Applicable Laws. Each of Parent and its
Subsidiaries has in effect all Permits including, without limitation, Permits
required under Environmental Laws necessary for it to own, lease or operate its
properties and assets and to carry on its business as now conducted, and there
has occurred no default under any such Permit, except for the lack of Permits
and for defaults under Permits which lack or default individually or in the
aggregate would not have a Material Adverse Effect on Parent. Except as
disclosed in the Filed Parent SEC Documents or in Section 4.2(i) of the
Disclosure Schedule, Parent and its Subsidiaries are in compliance with all
applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity, except for non-compliance which individually or in the
aggregate would not have a Material Adverse Effect on Parent.
(j) Environmental Laws. To the knowledge of Parent, except as
disclosed in Section 4.2(j) of the Disclosure Schedule and except as would not
have a Material Adverse Effect on Parent: (i) neither Parent nor its
Subsidiaries has violated or is in violation of any Environmental Law; (ii)
none of the properties owned or leased by Parent or any of its Subsidiaries
(including, without limitation, soils and surface and ground waters) are
contaminated with any Hazardous Substance in quantities which require
investigation or remediation under Environmental Laws; (iii) neither Parent nor
its Subsidiaries is liable for any off-site contamination; (iv) neither Parent
nor its Subsidiaries has any liability or remedial obligation under any
Environmental Law; (v) no assets of Parent or its Subsidiaries are subject to
pending or threatened Liens; (vi) Parent and its Subsidiaries have all
Environmental Permits; and (vii) Parent and its Subsidiaries are in compliance
with their respective Environmental Permits.
(k) Litigation, etc. As of the date hereof, except as disclosed in
Section 4.2(k) of the Disclosure Schedule, (i) there is no suit, claim, action,
proceeding (at law or in equity) or investigation pending or, to the knowledge
of Parent, threatened against Parent or any of its Subsidiaries (including,
without limitation, any product liability claims) before any court or
governmental or regulatory authority or body, and (ii) neither Parent nor any of
its Subsidiaries is subject to any outstanding order, writ, judgement,
injunction, order, decree or arbitration award or order that, in any such case
described in clauses (i) and (ii), has had or would have, individually or in the
aggregate, a Material Adverse Effect on Parent. As of the date hereof, there are
no suits, actions, claims, proceedings or investigations pending or, to the
knowledge of Parent, threatened, seeking to prevent, hinder, modify or challenge
the transactions contemplated by this Agreement.
A-19
<PAGE> 227
ARTICLE V
COVENANTS
SECTION 5.1 Conduct of Business of Company and Parent. Except as
contemplated by this Agreement (or, in the case of Parent and its Subsidiaries,
as contemplated by the Financing Commitments), during the period from the date
of this Agreement to the Effective Time, Company and Parent shall, and shall
cause their respective Subsidiaries to, act and carry on their respective
businesses only in the ordinary course of business and, to the extent consistent
therewith, use reasonable efforts to preserve intact their current business
organizations, keep available the services of their current key officers and
employees and preserve the goodwill of those engaged in material business
relationships with them, and to that end, without limiting the generality of the
foregoing, Parent and Company shall not, and shall not permit their respective
Subsidiaries to, without the prior consent of the other:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions (whether in cash, stock or property) in respect of, any of
its outstanding capital stock (other than as provided in Section 4.1(f)(i)(B)
and 4.2(f)(i)(B) above and, with respect to a Subsidiary, to its corporate
parent), (B) split, combine or reclassify any of its outstanding capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its outstanding capital stock, or (C)
with respect to Company and its Subsidiaries only, purchase, redeem or otherwise
acquire any shares of outstanding capital stock or any rights, warrants or
options to acquire any such shares except, in the case of clause (C), for the
acquisition of shares from holders of options in full or partial payment of the
exercise price payable by such holder upon exercise of options;
(ii) with respect to Company and its Subsidiaries only, issue, sell,
grant, pledge or otherwise encumber any shares of its capital stock, any other
voting securities or any securities convertible into or exchangeable for, or
any rights, warrants or options to acquire, any such shares, voting securities
or convertible or exchangeable securities other than upon the exercise of
options issued pursuant to employee benefit plans or pursuant to Company's
"matching obligations" under and in accordance with its 401(k) savings plan or,
in respect of Company, conversion of Preferred Shares and Convertible
Debentures;
(iii) amend its articles or restated certificate of incorporation,
by-laws or other comparable charter or organizational documents;
(iv) with respect to Company and its Subsidiaries only, directly or
indirectly acquire, make any investment in, or make any capital contributions
to, any person (other than any direct or indirect wholly-owned Subsidiary)
other than in the ordinary course of business;
(v) with respect to the Company and its Subsidiaries only, directly
or indirectly sell or otherwise dispose of any of its properties or assets that
are material to its business, except for sales or dispositions in the ordinary
course of business;
(vi) with respect to Company and its Subsidiaries only, (A) incur
any indebtedness for borrowed money or guarantee any such indebtedness of
another person, other than indebtedness owing to or guarantees of indebtedness
owing to Company or any direct or indirect wholly-owned Subsidiary of Company
or (B) make any loans or advances to any other person, other than to Company or
to any direct or indirect wholly-owned Subsidiary of Company and other than
routine advances to employees, except, in the case of clause (A) for borrowings
under existing credit facilities described in the Filed SEC Documents in the
ordinary course of business;
(vii) with respect to Company and its Subsidiaries only, grant or
agree to grant to any employee any increase in wages or bonus, severance, profit
sharing, retirement, deferred compensation, insurance or other compensation or
benefits, or establish any new compensation or benefit plans or arrangements, or
amend or agree to amend any existing Employee Benefit Plans, except as may be
required under existing agreements (including collective bargaining agreements)
or normal, regularly scheduled increases in nonofficer employees consistent with
past practices or as required by law;
A-20
<PAGE> 228
(viii) with respect to Company and its Subsidiaries only, enter into
or amend any employment, consulting, severance or similar agreement with any
individual except with respect to new hires in the ordinary course of business
consistent with past practice;
(ix) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization or any agreement relating to an Acquisition Proposal (other than
as expressly permitted pursuant to this Agreement);
(x) with respect to Company and its Subsidiaries only, make any tax
election or settle or compromise any income tax liability of Company or of any
of its Subsidiaries involving on an individual basis more than $1 million;
(xi) with respect to Company and its Subsidiaries only, make any
change in any method of accounting or accounting practice or policy except as
required by any changes in generally accepted accounting principles;
(xii) with respect to Company and its Subsidiaries only, enter into
any agreement, understanding or commitment that restrains, limits or impedes
Company's ability to compete with or conduct any business or line of business,
except for any such agreement, understanding or commitment entered into in the
ordinary course of business consistent with past practice; or
(xiii) authorize any of, or commit or agree to take any of, the
foregoing actions in respect of which it is restricted by the provisions of
this Section 5.1.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 Preparation of the Proxy Statement and the Form S-4;
Accountant's Letters. (a) As soon as practic able following the date hereof:
(i) Company and Parent shall jointly prepare for inclusion in the
Form S-4, as soon as practicable after the date hereof, a proxy statement (the
"Proxy Statement") relating to the Merger and the Share Issuance in accordance
with the Exchange Act and the rules and regulations under the Exchange Act, with
respect to the transactions contemplated by this Agreement. Company, Parent and
Purchaser shall cooperate with each other in the preparation of the Proxy
Statement. Company and Parent shall use all reasonable efforts to respond
promptly to any comments made by the SEC with respect to the Proxy Statement,
and to cause the Proxy Statement to be mailed to the stockholders of Company and
Parent at the earliest practicable date after the Form S-4 is declared effective
by the SEC.
(ii) Parent shall prepare and file with the SEC, as soon as
practicable after the date hereof, the Form S-4. Each of Company and Parent
shall use all reasonable efforts to have the Form S-4 declared effective under
the Securities Act as promptly as practicable after such filing. Parent also
shall take any action (other than qualifying to do business in any jurisdiction
in which it is not now so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Parent Common Stock in
the Merger, and Company shall furnish all information concerning Company and
the holders of the Shares as may be reasonably requested in connection with any
such action.
(b) Company shall use its best efforts to cause to be delivered to
Parent a letter of Ernst & Young LLP, Company's independent public accountants,
dated a date within two business days before the date on which the Form S-4
shall become effective, and a letter of Ernst & Young LLP, dated a date within
two business days before the Closing Date, each addressed to Parent, in form
and substance reasonably satisfactory to Parent and customary in scope and
substance for letters delivered by independent accountants in connection with
registration statements similar to the Form S-4.
(c) Parent shall use its best efforts to cause to be delivered to
Company a letter of KPMG Peat Marwick LLP, Parent's independent public
accountants, dated a date within two business days before the date on which the
Form S-4
A-21
<PAGE> 229
shall become effective and a letter of KPMG Peat Marwick LLP, dated a date
within two business days before the Closing Date, each addressed to Company, in
form and substance reasonably satisfactory to Company and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
SECTION 6.2 Stockholders Meetings. (a) Subject to Company's right to
terminate this Agreement pursuant to Section 8.1(a)(v), Company shall take all
action necessary, in accordance with the DGCL, the Exchange Act and other
applicable law, the rules of the NYSE, and its certificate of incorporation and
by-laws, to convene a special meeting of the stockholders of Company (the
"Company Stockholders Meeting") as promptly as practicable after the
effectiveness of the Form S-4 for the purpose of considering and voting upon
this Agreement. Subject to Company's right to terminate this Agreement pursuant
to Section 8.1(a)(v), the Board of Directors of Company shall recommend that the
holders of the Shares vote in favor of the approval and adoption of this
Agreement at the Company Stockholders Meeting and such recommendation shall be
included in the Proxy Statement. At the Company Stockholders Meeting, Parent
and Purchaser shall vote all Shares beneficially owned by them in favor of the
adoption and approval of this Agreement.
(b) Parent shall take all action necessary in accordance with Exchange
Act and other applicable law, the rules of the NYSE, and its restated articles
of incorporation and by-laws, to convene a special meeting of the stockholders
of Parent (the "Parent Stockholders Meeting") as promptly as practicable after
the effectiveness of the Form S-4 for the purpose of considering and voting
upon the Share Issuance. The Board of Directors of Parent shall recommend that
the holders of the Parent Common Stock vote in favor of and approve the Share
Issuance at the Parent Stockholders Meeting.
SECTION 6.3 Access to Information; Confidentiality. Company shall, and
shall cause each of its Subsidiaries to, afford to Parent and to Parent's
officers, employees, counsel, financial advisors, financing providers (including
counsel of such financing providers) and other representatives reasonable access
during normal business hours during the period prior to the Effective Time to
all its owned and leased properties, books, contracts, commitments, tax returns,
personnel and records and, during such period, Company shall, and shall cause
each of its Subsidiaries to, furnish as promptly as practicable to Parent such
information concerning its business, properties, financial condition, operations
and personnel as Parent may from time to time reasonably request. Parent shall,
and shall cause each of its Subsidiaries to, afford to Company and to Company's
officers, employees, counsel, financial advisors and other representatives
reasonable access during normal business hours during the period prior to the
Effective Time to all its books, contracts, commitments, tax returns, personnel
and records and during such period, parent shall, and shall cause each of its
Subsidiaries to, furnish as promptly as practicable to Company such information
concerning its business, properties, financial condition, operations and
personnel as Company may from time to time reasonably request. Any such
investigation by Parent or Company shall not affect the representations or
warranties contained in this Agreement. Except as required by law, Parent and
Company will hold, and will cause their respective directors, officers,
partners, employees, accountants, counsel, financial advisors and other
representatives and affiliates to hold, any non-public information obtained from
the other party in confidence to the extent required by, and in accordance with
the provisions of the letter agreements between Parent and Company with respect
to confidentiality and other matters.
SECTION 6.4 Reasonable Best Efforts. Upon the terms and subject to the
conditions and other agreements set forth in this Agreement, each of the
parties agrees to use its reasonable best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement, including the
satisfaction of the respective conditions set forth in Article VII.
SECTION 6.5 Indemnification; Directors' and Officers Insurance. (a) The
certificate of incorporation and by-laws of the Surviving Corporation shall
contain the provisions with respect to indemnification set forth in the
restated certificate of incorporation and by-laws of Company on the date of
this Agreement, which provisions shall not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of Company in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement), unless
such modification is required by law.
A-22
<PAGE> 230
(b) Company shall, and from and after the Effective Time, Parent
shall, or shall cause the Surviving Corporation to, indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer or director of
Company (the "Indemnified Parties") against all losses, claims, damages, costs,
expenses (including reasonable attorneys' fees and expenses), liabilities or
judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be unreasonably withheld) of or in
connection with any threatened or actual claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director or officer of Company whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), including all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or pertaining to
this Agreement or the transactions contemplated hereby, in each case, to the
full extent a corporation is permitted under the DGCL to indemnify its own
directors or officers, as the case may be, and Parent or the Surviving
Corporation, as the case may be, will pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
full extent permitted by law).
(c) Without limiting the foregoing, in the event any such claim,
action, suit, proceeding or investigation is brought against any Indemnified
Parties (whether arising before or after the Effective Time), (i) the
Indemnified Parties may retain counsel reasonably satisfactory to Company (or
to Parent and the Surviving Corporation after the Effective Time) and Company
(or after the Effective Time, Parent and the Surviving Corporation) shall pay
all fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; and (ii) Company (or after the Effective
Time, Parent and the Surviving Corporation) shall use all reasonable efforts to
assist in the vigorous defense of any such matter, provided that neither
Company, Parent nor the Surviving Corporation shall be liable for any
settlement effected without its prior written consent, which shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 6.5, upon learning of any such claim, action, suit,
proceeding or investigation, shall notify Company (or after the Effective
Time, Parent and the Surviving Corporation) (but the failure so to notify shall
not relieve a party from any liability which it may have under this Section 6.5
except to the extent such failure prejudices such party), and shall deliver to
Company (or after the Effective Time, Parent and the Surviving Corporation) the
undertaking contemplated by Section 145(e) of the DGCL. The Indemnified
Parties as a group may retain only one law firm to represent them with respect
to each such matter unless there is, under applicable standards of professional
conduct, a conflict on any significant issue between the positions of any two
or more Indemnified Parties. Company, Parent and Purchaser agree that all
rights to indemnification, including provisions relating to advances of
expenses incurred in defense of any action or suit, existing in favor of the
Indemnified Parties with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect for
a period of not less than six years from the Effective Time; provided, however,
that all rights to indemnification in respect of any Indemnified Liabilities
asserted or made within such period shall continue until the disposition of
such Indemnified Liabilities.
(d) For a period of four years after the Effective Time, Parent shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by Company (provided that Parent may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions that are no less advantageous in any material
respect to the Indemnified Parties) with respect to matters arising before the
Effective Time, provided that Parent shall not be required to pay an annual
premium for such insurance in excess of 200% of the last annual premium paid by
Company prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount.
(e) The provisions of this Section 6.5 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of Parent, Purchaser, Company and the Surviving
Corporation.
SECTION 6.6 Public Announcements. Parent and Purchaser, on the one hand,
and Company, on the other hand, will consult with each other before issuing,
and provide each other the opportunity to review and comment upon, any press
release, SEC filing or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such
A-23
<PAGE> 231
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange.
SECTION 6.7 No Solicitation; Acquisition Proposals. (a) Until the
termination of this Agreement in accordance with Section 8.1, Company shall not,
and shall not authorize or permit any of its Subsidiaries, or any of its or
their affiliates, officers, directors, employees, agents or representatives
(including, without limitation, any investment banker, financial advisor,
attorney or accountant retained by Company or any of its Subsidiaries), to,
directly or indirectly, initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries, any expression of interest, or the making of any proposal that
constitutes, or may reasonably be expected to lead to, an Acquisition Proposal
(as defined below), or enter into or maintain or continue discussions or
negotiate with any person in furtherance of such inquiries or to obtain an
Acquisition Proposal or agree to or endorse any Acquisition Proposal; provided,
however, that nothing in this Agreement shall prohibit the Board of Directors of
Company from furnishing information to, or entering into, maintaining or
continuing discussions or negotiations with, any person that makes an
unsolicited Acquisition Proposal after the date hereof, if, and to the extent
that, the Board of Directors of Company, after consultation with and based upon
the advice of independent legal counsel, determines in good faith that (a) such
Acquisition Proposal would be more favorable to Company's stockholders than the
Merger and (b) the failure to take such action would result in a breach by the
Board of Directors of Company of its fiduciary duties to Company's stockholders
under applicable law, and, prior to furnishing any non-public information to
such person, Company receives from such person an executed confidentiality
agreement with provisions no less favorable to Company than the letter agreement
relating to the furnishing of confidential information of Company to Parent
referred to in the last sentence of Section 6.3. Company shall promptly notify
Parent if it is prepared to provide access to the properties, books or records
of Company or any of its Subsidiaries to any person who has made an Acquisition
Proposal, and Company shall at such time inform Parent of the material terms of
any such Acquisition Proposal.
(b) For purposes of this Agreement, "Acquisition Proposal" means an
inquiry, offer or proposal regarding any of the following (other than the
transactions contemplated by this Agreement with Parent or Purchaser) involving
Company: (i) any merger, consolidation, share exchange, recapitalization,
business combination or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of all or
substantially all the assets of Company and its Subsidiaries, taken as a whole,
in a single transaction or series of related transactions; (iii) any tender
offer or exchange offer for 33-1/3 percent or more of the outstanding shares of
capital stock of Company or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
(c) Nothing contained in this Section 6.7 shall prohibit Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to
Company's stockholders which, in the good faith judgment of the Board of
Directors of Company based on the advice of outside counsel, is required under
applicable law.
SECTION 6.8 Consents, Approvals and Filings.
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall (i) make promptly its respective filings, and thereafter
make any other required submissions, under the HSR Act, the Securities Act and
the Exchange Act, with respect to the Merger and the other transactions
contemplated herein (together, the "Transactions") and (b) use its reasonable
best efforts to take, or cause to be taken, all appropriate action, and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the Transactions,
including, without limitation, using its reasonable best efforts to obtain all
licenses, permits (including, without limitation, Environmental Permits),
consents, approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with Company and its Subsidiaries as are
necessary for the consummation of the Transactions and to fulfill the conditions
to the Merger. In case at any time after the Effective Time any further action
is necessary or desirable to carry out the purposes of this Agreement, the
proper officers and directors of each party to this Agreement shall use their
reasonable best efforts to take all such action.
(b) Parent hereby agrees to use its best efforts to obtain any
government clearances required for completion of the Merger (including through
compliance with the HSR Act), to respond to any government requests for
information,
A-24
<PAGE> 232
and to contest and resist any action, including any legislative, administrative
or judicial action, and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order (whether temporary, preliminary or
permanent) (an "Order") that restricts, prevents or prohibits the consummation
of the Merger, including, without limitation, by vigorously pursuing all
available avenues of administrative and judicial appeal and all available
legislative action. Parent also hereby agrees to take any and all of the
following actions to the extent necessary to obtain the approval of any
governmental entity with jurisdiction over the enforcement of any applicable
laws regarding the Merger: entering into negotiations; providing information;
substantially complying with any second request for information pursuant to the
HSR Act; entering into and performing agreements or submitting to judicial or
administrative orders and selling or otherwise disposing of, or holding separate
(through the establishment of a trust or otherwise) particular assets or
categories of assets, or businesses of Parent, Company or any of their
affiliates; provided, however, that notwithstanding the foregoing, Parent would
not be required hereby to take any such action that would have a Material
Adverse Effect on Parent and its Subsidiaries (including the Surviving
Corporation) taken as a whole following the Effective Time. The parties hereto
will consult and cooperate with one another, and consider in good faith the
views of one another, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or in behalf of any party hereto in connection with proceedings
under or relating to the HSR Act or any other federal, state or foreign
antitrust or fair trade law.
SECTION 6.9 Board Action Relating to Stock Option Plans. As soon as
practicable following the date of this Agreement, the Board of Directors of
Company (or, if appropriate, any committee administering a Stock Option Plan)
shall adopt such resolutions or take such actions as may be required to adjust
the terms of all outstanding Options in accordance with Section 2.2 and shall
make such other changes to Stock Option Plans as it deems appropriate to give
effect to the Merger (subject to the approval of Parent, which shall not be
unreasonably withheld).
SECTION 6.10 Employment and Employee Benefit Matters.
(a) Parent shall, and shall cause its Subsidiaries following the
Effective Time (including the Surviving Corporation) to:
(i) honor and provide for payment of all obligations and benefits
under all Company Plans in accordance with their terms;
(ii) provide employee benefits which are substantially comparable in
the aggregate to the level of employee benefits provided by the Company and its
Subsidiaries under the Company ERISA Plans in effect as of the Closing Date for
the benefit of employees or former employees who are or had been employees of
the Company or any of its Subsidiaries on or before the Closing Date ("Covered
Employees"), until the earlier of December 31, 1999 or the second anniversary
of the Closing Date (the "Benefits Maintenance Period");
(iii) honor and provide for the payment of all obligations and
benefits under all employment or severance agreements between the Company and
any Covered Employee in accordance with their terms; and
(iv) provide until the first anniversary of the Closing Date for the
benefit of Covered Employees who remain in the employ of the Surviving
Corporation or Parent or any of its affiliates employee compensation that is in
the aggregate at a level substantially comparable to the compensation
(including base pay and incentive-type compensation) provided by the Company
and its Subsidiaries under the compensation arrangements in effect as of the
Closing Date.
(b) Parent hereby agrees that the Surviving Corporation shall maintain
the Company's Short-Term Incentive Compensation Plan without adverse change
until the end of the 1997 calendar year.
(c) Parent hereby agrees that the Surviving Corporation shall continue
without adverse change the severance plan maintained by the Company and its
Subsidiaries as of the date hereof until the first anniversary of the Closing
Date.
(d) If Covered Employees are included in any benefit plan (including
without limitation, provision for vacation) of Parent or its Subsidiaries,
Parent agrees that the Covered Employees shall receive credit as employees of
the Company and its Subsidiaries for service prior to the Closing Date with the
Company
A-25
<PAGE> 233
and its Subsidiaries to the same extent such service was counted under similar
Company Plans for purposes of eligibility, vesting, eligibility for retirement
and, with respect to vacation, disability and severance, benefit accrual. If
Covered Employees are included in any medical, dental or health plan other than
the plan or plans they participated in on the Closing Date, Parent agrees that
any such plans shall not include pre-existing condition exclusions, except to
the extent such exclusions were applicable under the similar Company Plan on the
Closing Date, and shall provide credit for any deductibles and co-payments
applied or made with respect to each Covered Employee in the calendar year of
the change.
(e) The parties acknowledge that nothing herein shall be deemed to be
a commitment on the part of Parent or the Surviving Corporation to provide
employment to any person for any period of time and, except as otherwise
provided in this Section 6.10, nothing herein shall be deemed to prevent Parent
or the Surviving Corporation from amending or terminating any Company Plan in
accordance with its terms.
SECTION 6.11 Affiliates and Certain Stockholders. Prior to the Closing
Date, Company shall deliver to Parent a letter identifying all persons who are,
at the time the Merger is submitted for approval to the stockholders of
Company, "affiliates" of Company for purposes of Rule 145 under the Securities
Act. Company shall use its best efforts to cause each such person to deliver to
Parent on or prior to the Closing Date a written agreement substantially in the
form attached as Exhibit A hereto. Parent shall not be required to maintain
the effectiveness of the Form S-4 or any other registration statement under the
Securities Act for the purposes of resale of Parent Common Stock by such
affiliates, and the certificates representing Parent Common Stock received by
such affiliates in the Merger shall bear a customary legend regarding
applicable Securities Act restrictions.
SECTION 6.12 NYSE Listing. Parent shall use its reasonable best efforts to
cause the shares of Parent Common Stock to be issued in the Merger to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Closing Date.
SECTION 6.13 Certain Company Indebtedness. At the Closing, (i) Company
shall execute and deliver to the trustee under the Indenture pursuant to which
the Convertible Debentures were issued a supplemental indenture, to become
effective at the Effective Time, providing that the holder of each Convertible
Debenture outstanding immediately following the Effective Time shall have the
right thereafter, during the period such Convertible Debenture shall be
convertible as specified in such Indenture, to convert such Convertible
Debenture only into the amount of cash and Parent Common Stock receivable by
reason of the Merger by a holder of the number of Shares into which such
Convertible Debenture might have been converted immediately prior to the
Effective Time (subject to subsequent adjustment as provided in such Indenture)
and (ii) Parent shall execute and deliver to such trustee, as part of such
supplemental indenture, an undertaking (A) to reserve and keep available out of
its authorized but unissued capital stock, a number of shares of Parent Common
Stock sufficient to permit the conversion of all outstanding Convertible
Debentures and (B) to cause to be issued and delivered to Company for subsequent
delivery by Company in accordance with such supplemental indenture and Indenture
shares of Parent Common Stock upon the conversion of any Convertible Debenture.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to the
satisfaction or written waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approvals. (i) This Agreement shall have been
approved and adopted by the affirmative vote of the requisite number of
stockholders of Company in the manner required pursuant to Company's restated
certificate of incorporation and by-laws, the DGCL and other applicable law,
and the rules of the NYSE.
A-26
<PAGE> 234
(ii) The Share Issuance shall have been approved by the affirmative
vote of the requisite number of stockholders of Parent in the manner required
pursuant to Parent's restated articles of incorporation and by-laws, the Texas
Business Corporation Act and other applicable law and the rules of the NYSE.
(b) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the
party invoking this condition shall have complied with its obligations under
Section 6.8.
(c) NYSE Listing. The shares of Parent Common Stock issuable to
Company's stockholders pursuant to the Merger shall have been approved for
listing on the NYSE, subject to official notice of issuance.
(d) Form S-4. The Form S-4 shall have been declared effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(e) HSR Act. All necessary waiting periods under the HSR Act
applicable to the Merger shall have expired or been terminated.
SECTION 7.2. Conditions to Obligations of Parent and Purchaser. The
obligation of Parent and Purchaser to effect the Merger is further subject to
satisfaction or written waiver on or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Company contained in this Agreement, which representations and
warranties shall be deemed for purposes of this Section 7.2 not to include any
qualification or limitation with respect to materiality (whether by reference
to "Material Adverse Effect" or otherwise), shall be true and correct as of the
Closing Date, except where the matters in respect of which such representations
and warranties are not true and correct, in the aggregate, has not had or would
not have a Material Adverse Effect on Company, with the same effect as though
such representations and warranties were made as of the Closing Date, and
Parent and Purchaser shall have received a certificate signed on behalf of
Company by an authorized officer of Company to such effect.
(b) Performance of Obligations of Company. Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent and
Purchaser shall have received a certificate signed on behalf of Company by an
authorized officer of Company to such effect.
(c) No Material Adverse Change. Since the date of this Agreement,
Company and its Subsidiaries, taken as a whole, shall not have experienced any
change, event or occurrence particular to them (excluding industry, economic,
financial and other matters generally affecting businesses other than and in
addition to Company and its Subsidiaries) that has had or would have a Material
Adverse Effect on Company, other than resulting from any matter disclosed in
any Filed SEC Document or in Section 7.2(c) of the Disclosure Schedule.
SECTION 7.3. Conditions to Obligation of Company. The obligation of the
Company to effect the Merger is further subject to satisfaction or waiver of
the following conditions:
(a) Representations and Warranties. The representations and
warranties of each of Parent and Purchaser contained in this Agreement, which
representations and warranties shall be deemed for purposes of this Section 7.3
not to include any qualification or limitation with respect to materiality
(whether by reference to "Material Adverse Effect" or otherwise), shall be true
and correct as of the Closing Date (except where the matters in respect of which
such representations and warranties are not true and correct, in the aggregate,
has not had a Material Adverse Effect on Purchaser), with the same effect as
though such representations and warranties were made as of the Closing Date, and
Company shall have received a certificate signed on behalf of Parent and
Purchaser by an authorized officer of Parent to such effect.
(b) Performance of Obligations of Parent and Purchaser. Each of
Parent and Purchaser shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing
A-27
<PAGE> 235
Date, and the Company shall have received a certificate signed on behalf of
Parent by an authorized officer of Parent to such effect.
(c) No Material Adverse Change. Since the date of this Agreement,
Parent and its Subsidiaries, taken as a whole, shall not have experienced any
change or occurrence particular to them (excluding industry, economic,
financial and other matters generally affecting businesses other than and in
addition to Parent and its Subsidiaries), that has had or would have a Material
Adverse Effect on Parent, other than resulting from any matter disclosed in any
Parent SEC Document or in Section 7.3(c) of the Disclosure Schedule.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 Termination. (a) This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Effective Time, notwithstanding approval and adoption thereof by the
stockholders of Company, in any one of the following circumstances:
(i) By mutual written consent duly authorized by the Boards of
Directors of Parent and Company.
(ii) By Parent or Company, if, without any material breach by such
terminating party of its obligations under this Agreement, the Effective Time
shall not have occurred on or before December 31, 1997.
(iii) By Parent or Company, if any federal or state court of
competent jurisdiction or other Governmental Entity shall have issued an order,
decree or ruling, or taken any other action permanently restraining, enjoining
or otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and non-appealable, provided that neither party
may terminate this Agreement pursuant to this clause (iii) if it has not
complied with its obligations under Section 6.8.
(iv) By Parent or Company, if the Company Stockholders Meeting shall
have been held and this Agreement shall not have been approved and adopted by
the affirmative vote of the requisite number of stockholders of Company.
(v) By Company, if it shall have received an Acquisition Proposal
and shall have advised Parent in writing that Company's Board of Directors,
after consultation with and based upon the advice of independent legal counsel,
determined in good faith that failure to accept such Acquisition Proposal would
result in a breach by the Board of Directors of Company of its fiduciary duties
to Company's stockholders under applicable law; provided, however, that this
Agreement shall not be terminated pursuant to this Section 8.1(a)(v) unless
simultaneously with the termination Company shall have made the payment to
Parent of the Fee required to be paid pursuant to Section 8.1(b).
(vi) By Parent, if the Board of Directors of Company shall have (1)
withdrawn, modified or amended in any adverse respect its approval or
recommendation of this Agreement, the Merger or the other transactions
contemplated hereby, (2) approved, endorsed or recommended to its stockholders
an Acquisition Proposal or (3) resolved to do any of the foregoing.
(vii) By Parent or Company, if (A) the other party shall have failed
to comply in any material respect with any of the material covenants and
agreements contained in this Agreement to be complied with or performed by such
party at or prior to such date of termination, and such failure continues for 20
business days after the actual receipt by such party of a written notice from
the other party setting forth in detail the nature of such failure, or (B) a
representation or warranty of the other party contained in this Agreement shall
have been untrue in any respect on the date when made (or in the case of any
representations and warranties that are made as of a different date, as of such
different date) and the matters in respect of which such representation or
warranty shall have been untrue has had or would have a Material Adverse Effect
on such other party.
(viii) By Company pursuant to Section 2.1(e) hereof.
A-28
<PAGE> 236
(b) If this Agreement is terminated pursuant to:
(i) Section 8.1(a)(v), or
(ii) Section 8.1(a)(vi);
then, in such event, Company shall pay to Parent prior to such termination, if
such termination is pursuant to Section 8.1(a)(v), or promptly (but in no event
later than three business days after the first of such events shall have
occurred), if such termination is pursuant to Section 8.1(a)(vi), a fee of
Fifteen Million Dollars ($15,000,000) (the "Fee"), which amount shall be
payable in immediately available funds and upon payment of such Fee Company
shall be fully released and discharged from any liability or obligation
resulting from or under this Agreement.
SECTION 8.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.1(a) hereof, this Agreement
(except for the provisions of the last sentence of Section 6.3, and Sections
4.1(m), 4.2(h), 6.6, this Section 8.2, Article IX and paragraph (b) of Section
8.1) shall forthwith become void and have no effect, without any liability on
the part of any party hereto or its directors, officers or stockholders;
provided, however, that nothing in this Section 8.2 shall relieve any party to
this Agreement of liability for any willful or intentional breach of this
Agreement.
SECTION 8.3 Amendment. Subject to the applicable provisions of the DGCL,
at any time prior to the Effective Time, the parties hereto may modify or amend
this Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties; provided, however, that after approval and
adoption of this Agreement by the stockholders of Company, no amendment shall
be made which would reduce the amount or change the type of consideration into
which each Share or Preferred Share shall be converted upon consummation of the
Merger. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
SECTION 8.4 Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
subject to Section 8.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure
of any party to this Agreement to assert any of its rights under this Agreement
or otherwise shall not constitute a waiver of such rights.
SECTION 8.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of Parent, Purchaser
or Company, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 9.2 Fees and Expenses. Except as provided otherwise in Section
8.1(b), whether or not the Merger shall be consummated, each party hereto shall
pay its own expenses incident to preparing for, entering into and carrying out
this Agreement and the consummation of the transactions contemplated hereby,
other than the expenses incurred in connection with printing and mailing proxy
materials to stockholders, which shall be shared equally by Parent and
A-29
<PAGE> 237
Company. The Surviving Corporation shall pay any and all property or transfer
taxes imposed on the Surviving Corporation or the stockholders of the Company by
reason of the Merger.
SECTION 9.3 Definitions. For purposes of this Agreement: (a) an
"affiliate" of any person means another person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such first person;
(b) "business day" means any day other than Saturday, Sunday or any
other day on which banks in the City of New York are required or permitted to
close;
(c) "knowledge" means the actual knowledge of any executive officer of
Company or Parent, as the case may be;
(d) "Liens" means, collectively, all pledges, claims, liens, charges,
mortgages, conditional sale or title retention agreements, hypothecations,
collateral assignments, security interests, easements and other encumbrances of
any kind or nature whatsoever;
(e) a "Material Adverse Effect" with respect to any person means a
material adverse effect on (i) the ability of such person to perform its
obligations hereunder or consummate the transactions contemplated hereby or
(ii) the condition (financial or otherwise), assets, business, liabilities
(actual or contingent) or operations of such person and its Subsidiaries taken
as a whole;
(f) the "NYSE" means the New York Stock Exchange;
(g) a "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity; and
(h) a "Subsidiary" of any person means any other person of which (i)
the first mentioned person or any Subsidiary thereof is a general partner, (ii)
voting power to elect a majority of the board of directors or others performing
similar functions with respect to such other person is held by the first
mentioned person and/or by any one or more of its Subsidiaries, or (iii) at
least 50% of the equity interests of such other person is, directly or
indirectly, owned or controlled by such first mentioned person and/or by any
one or more of its Subsidiaries.
SECTION 9.4 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(i) if to Parent, to
Pillowtex Corporation
4111 Mint Way
Dallas, Texas 75237
Attention: John H. Karnes, Jr., Esq.
Telecopy: (214) 467-0823
with a copy (which shall not constitute notice) to:
Jones, Day, Reavis & Pogue
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: Mark E. Betzen, Esq.
Telecopy: (214) 969-5100
A-30
<PAGE> 238
(ii) if to Company, to
Fieldcrest Cannon, Inc.
One Lake Circle Drive
Kannapolis, North Carolina 28081
Attention: Mark R. Townsend, Esq.
Telecopy: (704) 939-4623
with a copy (which shall not constitute notice) to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Dennis J. Block, Esq.
Telecopy: (212) 310-8007
SECTION 9.5 Interpretation. When a reference is made in this Agreement to
a Section or Schedule, such reference shall be to a Section of, or a Schedule
to, this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation".
SECTION 9.6 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
SECTION 9.7 Entire Agreement; Third-Party Beneficiaries. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement (except for the letter agreements referenced in
the last sentence of Section 6.3). This Agreement is not intended to confer
upon any person (including, without limitation, any employees of Company), other
than the parties hereto and the third party beneficiaries referred to in the
following sentence, any rights or remedies. The parties hereto expressly intend
the provisions of Sections 6.5 and 6.10 to confer a benefit upon and be
enforceable by, as third party beneficiaries of this Agreement, the third
persons referred to in, or intended to be benefitted by, such provisions.
SECTION 9.8 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.
SECTION 9.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void, except that Parent and/or Purchaser may
assign this Agreement to any direct wholly-owned Subsidiary of Parent without
the prior consent of Company; provided that Parent shall remain liable for all
of its obligations and all obligations of any of its Subsidiaries or any of its
assignees under this Agreement. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
SECTION 9.10 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware, this being in addition to any other remedy to
which they are entitled at law or in equity.
A-31
<PAGE> 239
SECTION 9.11 Severability. Whenever possible, each provision or portion
of any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
[signature page follows]
A-32
<PAGE> 240
IN WITNESS WHEREOF, Parent, Purchaser and Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
PILLOWTEX CORPORATION
By: /s/ Charles M. Hansen, Jr.
-------------------------------------
Name: Charles M. Hansen, Jr.
Title: Chairman of the Board and
Chief Executive Officer
PEGASUS MERGER SUB, INC.
By: /s/ Charles M. Hansen, Jr.
--------------------------------------
Name: Charles M. Hansen, Jr.
Title: Chairman of the Board and
Chief Executive Officer
FIELDCREST CANNON, INC.
By: /s/ James M. Fitzgibbons
---------------------------------------
Name: James M. Fitzgibbons
Title: Chairman of the Board and
Chief Executive Officer
A-33
<PAGE> 241
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
AMENDMENT, dated as of September 23, 1997 (this "Amendment"), to the
Agreement and Plan of Merger, dated September 10, 1997 (the "Agreement"), among
PILLOWTEX CORPORATION, a Texas corporation ("Parent"), PEGASUS MERGER SUB,
INC., a Delaware corporation and a wholly-owned subsidiary of Parent
("Purchaser"), and FIELDCREST CANNON, INC., a Delaware corporation (the
"Company"). Capitalized terms used herein but not defined herein shall have
the meanings assigned such terms in the Agreement.
WHEREAS, Parent, Purchaser and the Company have entered into the Agreement;
and
WHEREAS, Parent, Purchaser and the Company desire to amend the Agreement as
set forth herein;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in the Agreement and this Amendment and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENT TO SECTION 4.2(F). The reference to $.05
contained in Section 4.2(f) of the Agreement is hereby amended, retroactive to
the time of the execution and delivery of the Agreement, to be a reference to
$.06.
SECTION 2. CONTINUED EFFECTIVENESS. Except as specifically amended
hereby, the Agreement shall continue in full force and effect and is hereby
ratified and confirmed in all respects.
SECTION 3. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.
SECTION 4. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, all of which shall be considered one and the same instrument
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties.
* * *
IN WITNESS WHEREOF, Parent, Purchaser and Company have caused this
Amendment to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
PILLOWTEX CORPORATION
By: /s/ John H. Karnes
----------------------------------
Name: John H. Karnes
Title: Vice President
PEGASUS MERGER SUB, INC.
By: /s/ John H. Karnes
---------------------------------
Name: John H. Karnes
Title: Vice President
FIELDCREST CANNON, INC.
By: /s/ James M. Fitzgibbons
Name: James M. Fitzgibbons
Title: Chairman and CEO
A-34
<PAGE> 242
Appendix B
[LETTERHEAD OF BEAR, STEARNS & CO. INC.]
September 10, 1997
Board of Directors
Pillowtex Corporation
4111 Mint Way
Dallas, Texas 75237
Dear Sirs:
We understand Pillowtex Corporation ("Pillowtex") and Fieldcrest Cannon,
Inc. ("Fieldcrest") intend to enter into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which a newly formed subsidiary of Pillowtex
will be merged with and into Fieldcrest (the "Merger"). You have provided us a
copy of the Merger Agreement together with the exhibits and schedules thereto in
substantially final form. As a result of the Merger, each outstanding share of
Common Stock, par value $1.00 per share, of Fieldcrest ("Fieldcrest Common
Stock") will be converted into a right to receive total consideration valued at
$34.00, consisting of (i) a cash payment in an amount equal to $27.00 and (ii) a
number (the "Conversion Number") of shares of Common Stock , par value $.01 per
share, of Pillowtex ("Pillowtex Common Stock") equal to the quotient obtained by
dividing $7.00 by the average of the closing sales prices per share of Pillowtex
Common Stock on the New York Stock Exchange for each of the 20 consecutive
trading days immediately preceding the fifth trading day prior to the closing
date for the Merger (the "Determination Price"), provided that the Conversion
Number will not be more than 0.333 or less than 0.269, and provided further
that, if the Determination Price is less than $21.00, Pillowtex will have the
right to elect to increase the cash portion of such consideration and/or the
Conversion Number such that the aggregate value of cash and Pillowtex Common
Stock (valued at the Determination Price) comprising such consideration equals
$34.00 and, if Pillowtex does not so elect, Fieldcrest will have the right to
terminate the Merger Agreement. Additionally, as a result of the Merger, each
outstanding share of $3.00 Series A Convertible Preferred Stock, par value $0.01
per share, of Fieldcrest ("Fieldcrest Preferred Stock"), other than shares
converted into Fieldcrest Common Stock prior to the Merger, will be converted
into a right to receive total consideration valued at $58.12, consisting of (i)
a cash payment equal to the product of (a) the amount of the cash payment to be
made on account of each share of Fieldcrest Common Stock converted in the Merger
and (b) 1.7094 and (ii) a number of shares of Pillowtex Common Stock equal to
the product of (a) the Conversion Number and (b) 1.7094. Total consideration to
be received by each outstanding share of Fieldcrest Common Stock and each
outstanding share of Fieldcrest Preferred Stock is herein defined as the
"Consideration".
You have asked us to render our opinion as to whether the Consideration is
fair, from a financial point of view, to the shareholders of Pillowtex.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Merger Agreement in substantially final form;
2. reviewed Pillowtex's Annual Reports on Form 10-K for the years ended
December 31, 1994 through December 28, 1996, and its Quarterly Reports on Form
10-Q for the quarters ended March 29 and June 28, 1997;
3. reviewed Fieldcrest's Annual Reports on Form 10-K for the years ended
December 31, 1994 through 1996, and its Quarterly Reports on Form 10-Q for the
quarters ended March 31 and June 30, 1997;
B-1
<PAGE> 243
4. reviewed certain operating and financial information of Pillowtex and
Fieldcrest, including projections and projected cost savings and operating
synergies, provided to us by Pillowtex's and Fieldcrest's management relating
to their respective businesses and prospects;
5. met with certain members of Pillowtex's and Fieldcrest's senior
management to discuss their respective operations, historical financial
statements and future prospects and their views of the business, operational
and strategic benefits, cost savings, potential synergies and other
implications of the Merger;
6. reviewed the historical prices and trading volumes of the Pillowtex
Common Stock and the Fieldcrest Common Stock;
7. reviewed publicly available financial data and stock market performance
data of other publicly held companies that we deemed generally comparable to
Pillowtex and Fieldcrest;
8. reviewed the financial terms of recent acquisitions of companies that
we deemed generally comparable to Fieldcrest; and
9. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
In the course of our review we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by Pillowtex and Fieldcrest. With respect to
Pillowtex's and Fieldcrest's projected financial results (including projected
cost savings and operating synergies resulting from the Merger), we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Pillowtex and
Fieldcrest as to the expected future performance of Pillowtex and Fieldcrest,
respectively. We have also assumed that the Merger and financing thereof will
not violate, result in a default under, or be in contravention of the terms of
any material agreement, including without limitation any agreements evidencing
indebtedness of Pillowtex to which any of Pillowtex, Fieldcrest, or their
respective subsidiaries is a party. We have not assumed any responsibility for
the independent verification of the information or the projections (including
projected cost savings and operating synergies resulting from the Merger)
provided to us and we have further relied upon the assurances of the
managements of Pillowtex and Fieldcrest that they are unaware of any facts that
would make the information or projections (including projected cost savings and
operating synergies resulting from the Merger) provided to us incomplete or
misleading. In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities of Pillowtex or Fieldcrest.
Our opinion is necessarily based on economic, market and other conditions, and
the information made available to us, as of the date hereof.
Our opinion does not constitute a recommendation of the Merger or the
related financing transaction or a recommendation to any shareholder of
Pillowtex as to how any such shareholder should vote with respect to the
approval of the issuance of the Pillowtex Common Stock and the Series A
Redeemable Convertible Preferred Stock, par value $0.01 per share, of Pillowtex
in connection with the Merger. Further, we are not expressing any opinion as
to what the value of Pillowtex or Fieldcrest common stock actually will be at
the time of the Merger or the prices at which the Pillowtex common stock will
trade during the period following announcement of the Merger or subsequent to
the consummation of the Merger. Finally, our opinion does not address
Pillowtex's underlying business decision to effect the Merger. We have not
reviewed any proxy statement or similar document that may be distributed in
connection with the Merger as such materials have not yet been completed.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration is fair, from a financial point of view, to the
shareholders of Pillowtex.
B-2
<PAGE> 244
We have acted as financial advisor to Pillowtex in connection with the
Merger and will receive a fee for such advisory services, including the
rendering of this opinion, payment of a significant portion of which is
contingent upon consummation of the Merger.
Very truly yours,
BEAR, STEARNS & CO. INC.
B-3
<PAGE> 245
Appendix C
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
The Board of Directors
Fieldcrest Cannon, Inc.
One Lake Circle Drive
Kannapolis, North Carolina 28081
September 10, 1997
To The Board of Directors:
You have asked us to advise you with respect to the fairness to the holders
of the common stock, par value $1.00 per share (the "Common Stock") of
Fieldcrest Cannon, Inc. (the "Company") from a financial point of view of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Merger (the "Merger Agreement") among the Company,
Pillowtex Corporation (the "Acquiror") and a wholly owned subsidiary of the
Acquiror (the "Sub"). The Merger Agreement provides for the merger (the
"Merger") of the Sub with and into the Company pursuant to which the Company
will become a wholly owned subsidiary of the Acquiror and each outstanding
share of Common Stock will be converted into the right to receive (i) $27.00 in
cash (the "Cash Consideration") and (ii) a number of fully paid and
nonassessable shares of Acquiror's common stock, par value $0.01 per share
("Acquiror Common Stock"), equal to the Conversion Number, meaning the
quotient, rounded to the third decimal place, obtained by dividing $7.00 by the
average closing sales price of Acquiror Common Stock as reported on the New
York Stock Exchange Composite Transactions List for each of the 20 consecutive
trading days immediately preceding the fifth trading day prior to the Effective
Time (as defined in the Merger Agreement); provided that, if the actual
quotient obtained thereby is less than 0.269, the Conversion Number will be
0.269, and if the actual quotient obtained thereby is more than 0.333, the
Conversion Number will be 0.333 (together with the Cash Consideration, the
"Consideration").
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Acquiror, as
well as a draft dated September 9, 1997 of the Merger Agreement. We have also
reviewed certain other information, including financial forecasts, provided to
us by the Company and the Acquiror, and have met with the Company's and the
Acquiror's managements to discuss the business and prospects of the Company and
the Acquiror.
We have also considered certain financial and stock market data of the
Company and the Acquiror, and we have compared that data with similar data for
other publicly held companies in businesses similar to those of the Company and
the Acquiror and we have considered the financial terms of certain other
business combinations and other transactions which have recently been effected.
We also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of the Company and the Acquiror as to the future financial
performance of the Company and the Acquiror. In addition, we have not made an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company or the Acquiror, nor have we been furnished with any
such evaluations or appraisals. Our opinion is necessarily based upon
financial, economic, market and other
C-1
<PAGE> 246
conditions as they exist and can be evaluated on the date hereof. We are not
expressing any opinion as to what the value of the Acquiror Common Stock
actually will be when issued to the Company's stockholders pursuant to the
Merger or the prices at which such Acquiror Common Stock will trade subsequent
to the Merger. In connection with our engagement, we approached third parties
to solicit indications of interest in a possible acquisition of the Company and
held preliminary discussions with certain of these parties prior to the date
hereof. For purposes of this opinion, we have not considered other strategic
alternatives to the sale of the Company that may be currently available to the
Company.
We have acted as financial advisor to the Special Committee in connection
with the Merger and will receive a fee for our services, a significant portion
of which is contingent upon the consummation of the Merger. In the past, we
have performed certain investment banking services for the Company and have
received customary fees for such services. In the ordinary course of our
business, we and our affiliates may actively trade the debt and equity
securities of both the Company and the Acquiror for our and their own accounts
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors in connection with its consideration of the Merger, does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger and is not to be quoted or referred to, in
whole or in part, in any registration statement, prospectus or proxy statement,
or in any other document used in connection with the offering or sale of
securities, nor shall this letter be used for any other purposes, without our
prior written consent, except that we hereby consent to the inclusion of this
letter in its entirety as an appendix in the joint proxy statement/prospectus
to be furnished to the holders of the Common Stock in connection with their
consideration of the Merger Agreement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the holders of the Common
Stock of the Company in the Merger is fair to such stockholders from a
financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
C-2
<PAGE> 247
Appendix D
DELAWARE GENERAL CORPORATION LAW Section 262
Section 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds such
shares throughout the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class
or series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock or
depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
D-1
<PAGE> 248
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title
is not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of any amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follow:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not less than 20
days prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a copy
of this section. Each stockholder electing to demand the appraisal of
his shares shall deliver to the corporation, before the taking of the
vote on the merger of consolidation, a written demand for appraisal of
his shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares. A proxy or vote
against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consent to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228, Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or
within ten days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent corporation,
and shall include in such notice a copy of this section; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights. Such
notice may, and, if given or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more
than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be
D-2
<PAGE> 249
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of
business on the day next preceding the date on which the notice is
given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the surviving
or resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery,
if so ordered by the Court, shall give notice of the time and place fixed for
the hearing of such petition by registered or certified mail to the surviving
or resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each
stockholder, in the case of holders of uncertified stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing
D-3
<PAGE> 250
such stock. The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation be a
corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including without limitation reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting corporation.
D-4
<PAGE> 251
[FORM OF PROXY]
PILLOWTEX CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PILLOWTEX
CORPORATION FOR USE AT THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
DECEMBER __, 1997
The undersigned holder of shares of common stock of Pillowtex Corporation
("Pillowtex") hereby appoints Charles M. Hansen, Jr., Jeffrey D. Cordes, and
John H. Karnes, Jr., and each of them, as proxies of the undersigned, with full
power of substitution and resubstitution, to represent and vote as set forth
herein all of the shares of common stock of Pillowtex held of record by the
undersigned on November 5, 1997 at the Pillowtex Special Meeting of
Shareholders to be held on __________, December __, 1997, at 9:00 a.m., Central
Time, at Pillowtex's corporate headquarters, 4111 Mint Way, Dallas, Texas, and
at any and all postponements and adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED "FOR" THE PROPOSAL TO APPROVE THE ISSUANCE OF UP TO 5,600,000 SHARES OF
COMMON STOCK OF PILLOWTEX AND OF 65,000 SHARES OF SERIES A REDEEMABLE
CONVERTIBLE PREFERRED STOCK OF PILLOWTEX, IN CONNECTION WITH THE ACQUISITION BY
PILLOWTEX OF FIELDCREST CANNON, INC. AND RELATED FINANCING TRANSACTIONS.
(Continued, and to be dated and signed, on the other side)
<PAGE> 252
[X] Please mark your
vote as in this example.
- --------------------------------------------------------------------------------
THE DIRECTORS OF PILLOWTEX RECOMMEND A VOTE FOR THE APPROVAL OF THE ISSUANCE OF
UP TO 5,600,000 SHARES OF COMMON STOCK OF PILLOWTEX AND OF 65,000 SHARES OF
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK OF PILLOWTEX, IN CONNECTION
WITH THE ACQUISITION BY PILLOWTEX OF FIELDCREST CANNON, INC. AND RELATED
FINANCING TRANSACTIONS.
================================================================================
Proposal to approve the issuance of up to 5,600,000 shares of Common Stock
of Pillowtex and of 65,000 shares of Series A Redeemable Convertible Preferred
Stock of Pillowtex, in connection with the acquisition by Pillowtex of
Fieldcrest Cannon, Inc. and related financing transactions.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
This proxy should be dated, signed
by the shareholder as his or her
name appears below, and returned
promptly in the enclosed envelope.
Joint owners should each sign
personally, and trustees and others
signing in a representative
capacity should indicate the
capacity in which they sign.
Dated:
------------------------------
------------------------------------
Signature of Shareholder
------------------------------------
Signature of Shareholder
USING BLUE OR BLACK INK, PLEASE MARK, SIGN, AND PROMPTLY RETURN
THIS PROXY CARD IN THE ENVELOPE PROVIDED
<PAGE> 253
[FORM OF PROXY]
FIELDCREST CANNON, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FIELDCREST
CANNON, INC. FOR USE AT THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON
DECEMBER __, 1997
The undersigned holder of shares of common stock of Fieldcrest Cannon, Inc.
("Fieldcrest"), hereby appoints James M. Fitzgibbons and Mark R. Townsend, and
each of them, as proxies of the undersigned, with full power of substitution
and resubstitution, to represent and vote as set forth herein all of the shares
of common stock of Fieldcrest held of record by the undersigned on November 5,
1997 at the Fieldcrest Special Meeting of Stockholders to be held on
__________, December __, 1997, at 10:00 a.m., Eastern Time, at 1271 Avenue of
the Americas, New York, New York, and at any and all postponements and
adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND
OTHERWISE IN THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER WHICH
MAY PROPERLY COME BEFORE THE FIELDCREST SPECIAL MEETING, INCLUDING A MOTION TO
ADJOURN OR POSTPONE THE FIELDCREST SPECIAL MEETING FOR THE PURPOSE OF
SOLICITING ADDITIONAL PROXIES OR OTHERWISE; EXCEPT THAT NO PROXY WHICH IS VOTED
AGAINST THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT WILL BE VOTED IN
FAVOR OF ANY SUCH ADJOURNMENT OR POSTPONEMENT.
(Continued, and to be dated and signed, on the other side)
<PAGE> 254
[ ] Please mark your
vote as in this example.
- --------------------------------------------------------------------------------
THE DIRECTORS OF FIELDCREST CANNON, INC. RECOMMEND A VOTE FOR THE
APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER.
================================================================================
Approval and adoption of an Agreement and Plan of Merger, dated as of
September 10, 1997, by and among Pillowtex Corporation, a Texas corporation
("Pillowtex"), Pegasus Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of Pillowtex ("Sub"), and Fieldcrest Cannon, Inc., a Delaware
corporation ("Fieldcrest"), pursuant to which Sub will be merged with and into
Fieldcrest, with Fieldcrest continuing as the surviving corporation and
becoming a wholly owned subsidiary of Pillowtex.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
This proxy should be dated, signed
by the stockholder as his or her
name appears below, and returned
promptly in the enclosed envelope.
Joint owners should each sign
personally, and trustees and others
signing in a representative
capacity should indicate the
capacity in which they sign.
Dated:
------------------------------
------------------------------------
Signature of Stockholder
------------------------------------
Signature of Stockholder
USING BLUE OR BLACK INK, PLEASE MARK, SIGN, AND PROMPTLY RETURN
THIS PROXY CARD IN THE ENVELOPE PROVIDED
<PAGE> 255
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information set forth under the captions "Certain Corporate Governance
Matters of Pillowtex--Indemnification" and "Comparison of Rights of Holders of
Fieldcrest Common Stock and Pillowtex Common Stock--Indemnification of Officers
and Directors--Pillowtex" in the Joint Proxy Statement/Prospectus forming a
part of this Registration Statement is incorporated herein by this reference.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
2.1 -- Agreement and Plan of Merger, dated as of September 10,
1997, by and among Pillowtex Corporation, Pegasus Merger
Sub, Inc., and Fieldcrest Cannon, Inc. (included as
Appendix A to the Joint Proxy Statement/Prospectus forming
a part of this Registration Statement)
2.2 -- Amendment to Agreement and Plan of Merger, dated as of
September 23, 1997, by and among Pillowtex Corporation,
Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc.
(included as Appendix A to the Joint Proxy
Statement/Prospectus forming a part of this Registration
Statement)
CERTIFICATE OF INCORPORATION AND BYLAWS OF PILLOWTEX CORPORATION
(EXHIBITS 3.1.1 THROUGH 3.1.2)
3.1.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Pillowtex
Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
3.1.2 -- Amended and Restated Bylaws, as amended (incorporated by
reference to Exhibit 3.2 to Pillowtex Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994)
ARTICLES OF INCORPORATION AND BYLAWS OF FIELDCREST CANNON, INC.
(EXHIBITS 3.2.1 THROUGH 3.2.2)
3.2.1 -- Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Fieldcrest
Cannon, Inc.'s Registration Statement on Form S-3 (No.
33-52325) filed on February 18, 1994)
3.2.2 -- Amended and Restated Bylaws, as amended (incorporated by
reference to Exhibit 3.1 of Fieldcrest Cannon, Inc.'s
Current Report on Form 8-K dated November 24, 1993)
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS OF PILLOWTEX
CORPORATION, INC. (EXHIBITS 4.1.1 THROUGH 4.1.2)
4.1.1 -- Specimen of Certificate evidencing Common Stock
(incorporated by reference to Exhibit 4.2 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993)
4.1.2 -- Indenture, dated November 12, 1996 (incorporated by
reference to Exhibit 4.1 to Pillowtex Corporation's
Registration Statement on Form S-4 (No. 333-17731) filed
on December 12, 1996)
II-1
<PAGE> 256
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS OF FIELDCREST
CANNON, INC. (EXHIBITS 4.2.1 THROUGH 4.2.5)
4.2.1 -- Rights Agreement, dated as of November 24, 1993
(incorporated by reference to Exhibit 1 to Fieldcrest
Cannon, Inc.'s Registration Statement on Form 8-A filed on
December 3, 1993)
4.2.2 -- First Amendment, dated February 6, 1997 (incorporated by
reference to Exhibit 4.2 to Fieldcrest Cannon's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996)
4.2.3 -- Indenture, dated as of March 15, 1987 (incorporated by
reference to Exhibit 4.9 to Fieldcrest Cannon, Inc.'s
Registration Statement on Form S-3 (No. 33-12436) filed on
March 6, 1987)
4.2.4 -- Indenture, dated as of June 1, 1992 (incorporated by
reference to Exhibit 4.7 of Amendment No. 1 to Fieldcrest
Cannon, Inc.'s Registration Statement on Form S-3 (No.
33-47348) filed on June 3, 1992)
4.2.5 -- Credit Agreement, dated as of January 30, 1997
(incorporated by reference to Exhibit 4.5 to Fieldcrest
Cannon's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996)
5.1 -- Opinion of Jones, Day, Reavis & Pogue regarding the
legality of securities to be issued*
8.1 -- Opinion of Jones, Day, Reavis & Pogue as to tax matters*
8.2 -- Opinion of Weil, Gotshal & Manges L.L.P. as to tax matters*
9.1 -- Voting Agreement, dated as of October 2, 1997, by and
between Pillowtex Corporation and Charles M. Hansen, Jr.
9.2 -- Voting Agreement, dated as of October 2, 1997, by and
between Pillowtex Corporation, on the one hand, and Mary
R. Silverthorne, the John H. Silverthorne Marital Trust B,
and the John H. Silverthorne Family Trust A, on the other
hand
CERTAIN CONTRACTS OF PILLOWTEX CORPORATION (EXHIBITS 10.1.1 THROUGH
10.1.45)
10.1.1 -- Commitment Letter, dated September 10, 1997, by and
between NationsBank of Texas, N.A. and Pillowtex
Corporation (incorporated by reference to Exhibit 10.1 to
Pillowtex Corporation's Current Report on Form 8-K dated
September 10, 1997, as amended by a Form 8-K/A (Amendment
No. 1) dated September 10, 1997)
10.1.2 -- Preferred Stock Purchase Agreement, dated as of September
10, 1997, by and among Pillowtex Corporation, Apollo
Investment Fund III, L.P., Apollo Overseas Partners III,
L.P., and Apollo (UK) Partners III, L.P. (incorporated by
reference to Exhibit 10.2 to Pillowtex Corporation's
Current Report on Form 8-K dated September 10, 1997, as
amended by a Form 8-K/A (Amendment No. 1) dated September
10, 1997)
10.1.3 -- Registration Rights Agreement, dated as of November 12,
1996, by and among Pillowtex Corporation, each domestic
subsidiary of Pillowtex Corporation, and NationsBanc
Capital Markets, Inc., and Merrill Lynch, Pierce, Fenner &
Smith, Incorporated (incorporated by reference to Exhibit
10.59 to Pillowtex Corporation's Form S-4 (No. 333-17731)
filed on December 12, 1996)
10.1.4 -- Restated Credit Agreement, dated as of November 12, 1996,
by and among Pillowtex Corporation and NationsBank of
Texas, N.A., as Agent for the Lenders specified therein
(excludes Schedules) (incorporated by reference to Exhibit
10.60 to Pillowtex Corporation's Form S-4 (No. 333-17731)
filed on December 12, 1996)
II-2
<PAGE> 257
10.1.5 -- Form of Swing-Line Note, dated as of November 12, 1996, by
and among Pillowtex Corporation and NationsBank of Texas,
N.A. (incorporated by reference to Exhibit 10.61 to
Pillowtex Corporation's Form S-4 (No. 333-17731) filed on
December 12, 1996)
10.1.6 -- Form of Revolving Note, by and among Pillowtex Corporation
and NationsBank of Texas, N.A. (incorporated by reference
to Exhibit 10.62 to Pillowtex Corporation's Form S-4 (No.
333-17731) filed on December 12, 1996)
10.1.7 -- Form of Restated Guaranty, by and among Beacon
Manufacturing Company, Manetta Home Fashions, Inc.,
Tennessee Woolen Mills, Inc., Pillowtex, Inc., PTEX
Holding Company, and Pillowtex Management Services Company
as guarantors, NationsBank of Texas, N.A. as Agent, and
Pillowtex Corporation as Borrower (incorporated by
reference to Exhibit 10.63 to Pillowtex Corporation's Form
S-4 (No. 333-17731) filed on December 12, 1996)
10.1.8 -- Form of Restated Security Agreement, by and among
Pillowtex Corporation as Debtor/Borrower, NationsBank of
Texas, N.A. as Secured Party, and Beacon Manufacturing
Company, Manetta Home Fashions, Inc., Tennessee Woolen
Mills, Inc., Pillowtex, Inc., PTEX Holding Company, and
Pillowtex Management Services Company as Subsidiary
Debtors (incorporated by reference to Exhibit 10.64 to
Pillowtex Corporation's Form S-4 (No. 333-17731) filed on
December 12, 1996)
10.1.9 -- Asset Purchase Agreement, dated as of October 3, 1996, by
and among Pillowtex Corporation and Fieldcrest Cannon,
Inc. (incorporated by reference to Exhibit 10.65 to
Pillowtex Corporation's Form S-4 (No. 333-17731) filed on
December 12, 1996)
10.1.10 -- Mississippi Business Finance Corporation Industrial
Development Variable Rate Demand Notes (Pillowtex
Corporation Project) Series 1992 Loan Agreement, Indenture
of Trust, Promissory Note, Remarketing and Interest
Services Agreement, Placement Agreement, Deed of Trust and
Security Agreement, Bond Fund Trustee Agreement,
Reimbursement Agreement, and Lease Agreement (including
First Amendment) (incorporated by reference to Exhibit
10.3 to Pillowtex Corporation's Registration Statement on
Form S-1 (No. 33-57314) filed on January 22, 1993)
10.1.11 -- Second through Fourth Amendment to Mississippi Business
Finance Corporation Industrial Development Variable Rate
Demand Notes (Pillowtex Corporation Project) Loan
Agreement (incorporated by reference to Exhibit 10.4 to
Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.1.12 -- Deed of Trust (with Security Agreement and Assignment of
Rents and Leases), dated as of July 15, 1988, between
Pillowtex Corporation and Principal Mutual Life Insurance
Company, as amended, Deed of Trust Note, and Loan
Modification and Amendment Agreement (incorporated by
reference to Exhibit 10.5 Pillowtex Corporation's
Registration Statement on Form S-1 (No. 33-57314) filed on
January 22, 1993)
10.1.13 -- Second Loan Agreement Modification and Amendment Agreement
dated as of January 19, 1993, between Pillowtex
Corporation and Principal Mutual Life Insurance Company
(incorporated by reference to Exhibit 10.6 to Pillowtex
Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.14 -- Deed of Trust Note dated as of July 15, 1988, from
Pillowtex Corporation to Principal Mutual Life Insurance
Company (incorporated by reference to Exhibit 10.7 to
Pillowtex Corporation's Registration Statement on Form S-1
(No. 33-57314) filed on January 22, 1993)
10.1.15 -- Loan and Security Agreement dated April 6, 1992, between
MetLife Capital Corporation and Pillowtex Corporation, as
amended, and including Term Note dated June 5, 1992
(incorporated
II-3
<PAGE> 258
by reference to Exhibit 10.8 to Pillowtex Corporation's
Registration Statement on Form S-1 (No. 33-57314) filed
on January 22, 1993)
10.1.16 -- Pennsylvania Economic Development Financing Authority
("PEDFA") Economic Development Revenue Bonds 1990 Series C
(Silversen-Hanover Corporation Project), dated April 1,
1990, Indenture of Trust between PEDFA and First
Pennsylvania Bank; Financing Agreement between PEDFA and
Silversen-Hanover Corporation; Bond Placement Agreement
among PEDFA, NCNB National Bank of North Carolina, and
Silversen-Hanover Corporation; Reimbursement Agreement
between Silversen-Hanover Corporation and NCNB National
Bank of North Carolina; and Form of Bond (incorporated by
reference to Exhibit 10.44 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
10.1.17 -- Distribution Agreement, dated February 1, 1995 by and
among Beacon Manufacturing Company, Manetta Home Fashions,
Inc.,Tennessee Woolen Mills, Inc., NEMCOR, Inc., Norm
McIntyre, Tim McIntyre, and Don McIntyre (incorporated by
reference to Exhibit 10.35 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994)
10.1.18 -- The Priorities Agreement, dated February 27, 1995, between
Toronto Dominion Bank, Manetta Home Fashions, Inc.,
Tennessee Woolen Mills, Beacon Manufacturing Company, and
NEMCOR, Inc. (incorporated by reference to Exhibit 10.36
to Pillowtex Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994)
10.1.19 -- A Guarantee, dated February 27, 1995, between Beacon
Manufacturing Company, Manetta Home Fashions, Inc.,
Tennessee Woolen Mills, Inc., and NEMCOR, Inc.
(incorporated by reference to Exhibit 10.37 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 30, 1994)
10.1.20 -- Security Agreement, dated February 16, 1995, between
NEMCOR, Inc. and Manetta Home Fashions, Inc.
(incorporated by reference to Exhibit 10.38 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994)
10.1.21 -- Security Agreement, dated February 16, 1995, between
NEMCOR, Inc. and Tennessee Woolen Mills, Inc.
(incorporated by reference to Exhibit 10.39 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994)
10.1.22 -- Security Agreement, dated February 16, 1995, between
NEMCOR, Inc. and Beacon Manufacturing Company
(incorporated by reference to Exhibit 10.40 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994)
10.1.23 -- Amended and Restated Acquisition Agreement, dated as of
November 30, 1994, by and among David H. Murdock, Beacon
Manufacturing Company, Wiscassett Mills Company, Pillowtex
Corporation, Be-Ac, Inc., Realmac, Inc., and Wiscat, Inc.
(incorporated by reference to Exhibit 10.41 to Pillowtex
Corporation's Current Report on Form 8-K dated December
14, 1994)
10.1.24 -- Purchase agreement between Coopers & Lybrand and Torfeaco
Industries Limited for certain assets, dated August 19,
1994 (incorporated by reference to Exhibit 10.42 to
Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
10.1.25 -- Indenture dated as of February 1, 1994, by and among
Torfeaco Industries Limited and Lodestone Investments
Limited, Lese Holdings Limited, Golden Elms Limited, M.
Swadron Limited, and Helsinor Investments Limited
(incorporated by reference to Exhibit 10.29 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993)
II-4
<PAGE> 259
10.1.26 -- Sublicense Agreement, dated as of July 1, 1995, between
Pillowtex Corporation and the Ralph Lauren Home Collection
(incorporated by reference to Exhibit 10 to Pillowtex
Corporation's Quarterly on Form 10-Q for the quarter ended
July 1, 1995)
10.1.27 -- Lease Agreement, dated as of September 18, 1995, between
Pillowtex Corporation and Sanwa Business Credit Corp.
(incorporated by reference to Exhibit 10.4 to Pillowtex
Corporation's Quarterly Report on Form 10-Q, as amended
for the quarter ended September 30, 1995)
10.1.28 -- Agreement of Lease, dated May 23, 1995, between Ten
Seventy One Joint Venture and Pillowtex Corporation
(incorporated by reference to Exhibit 10.66 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal
year ended December 30, 1995)
10.1.29 -- Lease, dated as of March 1, 1977, by and among Torfeaco
Industries Limited and Standa Investment Limited, and
Sharon Construction Limited (incorporated by reference to
Exhibit 10.43 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
10.1.30 -- Industrial Lease, dated as of November 23, 1992, between
Angel and Jean Echevarria and Pillowtex Corporation
(incorporated by reference to Exhibit 10.21 to Pillowtex
Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.31 -- Form of Lease, dated as of October 12, 1988, between
Jimmie D. Smith, Jr. and Pillowtex Corporation
(incorporated by reference to Exhibit 10.23 to Pillowtex
Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.32 -- Form of Equipment Leasing Agreement between BTM Financial
& Leasing Corporation B-4 and Beacon Manufacturing
Company, Manetta Home Fashions, Inc., and Tennessee Woolen
Mills, Inc., dated as of June 14, 1996 (without Exhibits)
(incorporated by reference to Exhibit 10 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)
10.1.33 -- Employment Agreement dated as of January 1, 1993, between
Pillowtex Corporation and Charles M. Hansen, Jr.
(incorporated by reference to Exhibit 10.2 to Pillowtex
Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.34 -- Amendment to Employment Agreement, dated as of July 26,
1993, between Pillowtex Corporation and Charles M. Hansen,
Jr. (incorporated by reference to Exhibit 10.26 to
Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.1.35 -- Forms of Employment Agreement dated as of September 1,
1995, between Pillowtex Corporation and each of
Christopher N. Baker, Jeffrey D. Cordes, and Scott E.
Shimizu (incorporated by reference to Exhibits 10.1, 10.2,
and 10.3 to Pillowtex Corporation's Quarterly Report on
Form 10-Q, as amended, for the quarter ended September 30,
1995)
10.1.36 -- Forms of Change of Control Agreement, dated as of
September 1, 1995, between Pillowtex Corporation and each
of Christopher N. Baker, Jeffrey D. Cordes, and Scott E.
Shimizu (incorporated by reference to Exhibits 10.5, 10.6,
and 10.7 to Pillowtex Corporation's Quarterly Report on
Form 10-Q, as amended, for the quarter ended September 30,
1995)
10.1.37 -- Form of Confidentiality and Noncompetition Agreement
(incorporated by reference to Exhibit 10.27 to Pillowtex
Corporation's Registration Statement on Form-S-1 (No.
33-57314) filed on January 22, 1993)
II-5
<PAGE> 260
10.1.38 -- Form of Director Indemnification Agreement (incorporated
by reference to Exhibit 10.36 to Pillowtex Corporation's
Registration Statement on Form S-1 (No. 33-57314) filed on
January 22, 1993)
10.1.39 -- Split Dollar Life Insurance Agreement between Pillowtex
Corporation and Charles M. Hansen, Jr. dated July 26,
1993 (incorporated by reference to Exhibit 10.32 to
Pillowtex Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.1.40 -- Pillowtex Corporation 1993 Stock Option Plan (incorporated
by reference to Appendix A to Pillowtex Corporation's
Proxy Statement relating to its Annual Meeting of
Shareholders held on May 8, 1997)
10.1.41 -- Form of Employment Agreement entered into between
Pillowtex Management Services Company and each of
Christopher N. Baker, Jeffrey D. Cordes, Scott E. Shimizu,
and John H. Karnes (incorporated by reference to Exhibit
10.1 to Pillowtex Corporation's Quarterly Report on Form
10-Q for the quarter ended June 28, 1997)
10.1.42 -- Form of Guaranty Agreement dated as of April 22, 1997,
between Pillowtex Corporation and each of Christopher N.
Baker, Jeffrey D. Cordes, Scott E. Shimizu, Kevin M.
Finlay, and John H. Karnes (incorporated by reference to
Exhibit 10.2 to Pillowtex Corporation's Quarterly Report
on Form 10-Q for the quarter ended June 28, 1997)
10.1.43 -- Form of Employment Agreement dated as of April 11, 1997,
between Pillowtex Management Services Company and Kevin M.
Finlay (incorporated by reference to Exhibit 10.3 to
Pillowtex Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 28, 1997)
10.1.44 -- Pillowtex Corporation Supplemental Executive Retirement
Plan, effective as of January 1, 1997
10.1.45 -- Pillowtex Corporation Management Incentive Plan
(incorporated by reference to Appendix B to Pillowtex
Corporation's Proxy Statement relating to its Annual
Meeting of Shareholders held on May 8, 1997)
CERTAIN CONTRACTS OF FIELDCREST CANNON, INC. (EXHIBITS 10.2.1 -
10.2.16)
10.2.1 -- Amended and Restated Director Stock Option Plan of the
Registrant approved by the stockholders of the Corporation
on April 28, 1992 (incorporated by reference to Exhibit A
to Fieldcrest Cannon, Inc.'s Proxy Statement relating to
its Annual Meeting of Stockholders held on April 28, 1992)
10.2.2 -- Stock Option Agreement between Fieldcrest Cannon, Inc. and
James M. Fitzgibbons, dated as of September 11, 1991
(incorporated by reference to Exhibit 4.1 to Fieldcrest
Cannon, Inc.'s Registration Statement on Form S-8 (No.
33-44703) filed on December 23, 1991)
10.2.3 -- Employee Retention Agreement between Fieldcrest Cannon,
Inc. and James M. Fitzgibbons, effective as of July 9,
1993 (incorporated by reference to Exhibit 10.2 to
Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993)
10.2.4 -- Instrument of Amendment, dated July 15, 1996 between
Fieldcrest Cannon, Inc. and James M. Fitzgibbons
(incorporated by reference to Exhibit 10.4 to Fieldcrest
Cannon, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1996)
10.2.5 -- Employee Retention Agreement between Fieldcrest Cannon,
Inc. and Robert E. Dellinger, effective as of July 9, 1993
(incorporated by reference to Exhibit 10.9 to Fieldcrest
Cannon, Inc.'s Annual Report on Form 10-K for the fiscal
year ending December 31, 1993)
II-6
<PAGE> 261
10.2.6 -- Instrument of Amendment, dated July 29, 1993 between
Fieldcrest Cannon, Inc. and Robert E. Dellinger
(incorporated by reference to Exhibit 10.10 to Fieldcrest
Cannon, Inc.'s Annual Report on Form 10-K for the fiscal
year ending December 31, 1993)
10.2.7 -- Instrument of Amendment, dated July 15, 1996 between
Fieldcrest Cannon, Inc. and Robert E. Dellinger
(incorporated by reference to Exhibit 10.7 Fieldcrest
Cannon, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1996)
10.2.8 -- Employee Retention Agreement between Fieldcrest Cannon,
Inc. and Thomas R. Staab, effective as of July 9, 1993
(incorporated by reference to Exhibit 10.8 to Fieldcrest
Cannon, Inc.'s Annual Report on Form 10-K for the fiscal
year ending December 31, 1995)
10.2.9 -- Instrument of Amendment, dated July 29, 1993 between
Fieldcrest Cannon, Inc. and Thomas R. Staab (incorporated
by reference to Exhibit 10.9 to Fieldcrest Cannon, Inc.'s
Annual Report on Form 10-K for the fiscal year ending
December 31, 1995)
10.2.10 -- Instrument of Amendment, dated July 15, 1996 between
Fieldcrest Cannon, Inc. and Thomas R. Staab (incorporated
by reference to Exhibit 10.10 to Fieldcrest Cannon, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
10.2.11 -- Employee Retention Agreement between Fieldcrest Cannon,
Inc. and John Nevin, effective as of October 3, 1996
(incorporated by reference to Exhibit 10.11 to Fieldcrest
Cannon, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1996)
10.2.12 -- Form of Employee Retention Agreement between Fieldcrest
Cannon, Inc. and other executive officers of Fieldcrest
Cannon, Inc., effective as of July 9, 1993 (incorporated
by reference to Exhibit 10.6 to Fieldcrest Cannon, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993)
10.2.13 -- Form of Instrument of Amendment, dated July 29, 1993
between Fieldcrest Cannon, Inc. and other executive
officers of Fieldcrest Cannon, Inc. (incorporated by
reference to Exhibit 10.7 to Fieldcrest Cannon, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993)
10.2.14 -- Form of Instrument of Amendment, dated July 15, 1996
between Fieldcrest Cannon, Inc. and other executive
officers of Fieldcrest Cannon, Inc. (incorporated by
reference to Exhibit 10.14 to Fieldcrest Cannon, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
10.2.15 -- 1995 Employee Stock Option Plan of Fieldcrest Cannon, Inc.
(incorporated by reference to Exhibit 4.1 of Fieldcrest
Cannon, Inc.'s Registration Statement of Form S-8 (No.
33-59145) filed on May 8, 1995)
10.2.16 -- Yarn Purchase Agreement between Parkdale Mills,
Incorporated and Fieldcrest Cannon, Inc. (incorporated by
reference to Exhibit 10 to Fieldcrest Cannon, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996)
11.1 -- Fieldcrest Cannon, Inc.'s Computation of Primary and Fully
Diluted Net Income Per Share (incorporated by reference to
Exhibit 11 to Fieldcrest Cannon, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1996)
11.2 -- Fieldcrest Cannon, Inc.'s Computation of Primary and Fully
Diluted Net Income Per Share (incorporated by reference to
Exhibit 11 to Fieldcrest Cannon, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997)
II-7
<PAGE> 262
21.1 -- List of Pillowtex Corporation's Principal Operating
Subsidiaries (incorporated by reference to Exhibit 21.1 to
Pillowtex Corporation's Form S-4 (No. 333-17731) filed on
December 12, 1996)
21.2 -- List of Fieldcrest Cannon, Inc.'s Principal Operating
Subsidiaries (incorporated by reference to Exhibit 21 to
Fieldcrest Cannon, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1996)
23.1 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Ernst & Young LLP
23.4 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit
8.1)
23.5 -- Consent of Weil, Gotshal & Manges L.L.P. (included in
Exhibit 8.2)
24.1 -- Powers of Attorney*
99.1 -- Consent of Credit Suisse First Boston Corporation
99.2 -- Consent of Bear, Stearns & Co. Inc.
- -------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts of Pillowtex
Corporation
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
II-8
<PAGE> 263
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment will be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time will be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) (1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The undersigned registrant hereby undertakes that every prospectus
(i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Securities Act and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to this Registration Statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Joint Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-9
<PAGE> 264
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 2 to Registration Statement No. 333-36663 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas on November 17, 1997.
PILLOWTEX CORPORATION
By /s/ CHARLES M. HANSEN, JR.
----------------------------
Charles M. Hansen, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement No. 333-36663 has been signed below by the
following persons in the capacities indicated on November 17, 1997.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ CHARLES M. HANSEN, JR. Chairman of the Board and Chief Executive Officer; Director
- -------------------------- (Principal Executive Officer)
Charles M. Hansen, Jr.
JEFFREY D. CORDES* President and Chief Operating Officer; Director
- -------------------------- (Principal Financial and Accounting Officer)
Jeffrey D. Cordes
CHRISTOPHER N. BAKER* Director
- --------------------------
Christopher N. Baker
KEVIN M. FINLAY* Director
- --------------------------
Kevin M. Finlay
SCOTT E. SHIMIZU* Director
- --------------------------
Scott E. Shimizu
MARY R. SILVERTHORNE* Director
- --------------------------
Mary R. Silverthorne
WILLIAM B. MADDEN* Director
- --------------------------
William B. Madden
M. JOSEPH MCHUGH* Director
- --------------------------
M. Joseph McHugh
PAUL G. GILLEASE* Director
- --------------------------
Paul G. Gillease
RALPH LA ROVERE* Director
- --------------------------
Ralph La Rovere
</TABLE>
*The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 2 to Registration Statement No. 333-36663 pursuant to the Powers
of Attorney executed on behalf of the above-named officers and directors and
filed herewith.
/s/ JOHN H. KARNES, JR.
----------------------------
John H. Karnes, Jr.
Attorney-in-Fact
<PAGE> 265
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of September 10, 1997, by and among Pillowtex
Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (included as Appendix A to
the Joint Proxy Statement/Prospectus forming a part of this Registration Statement)
2.2 Amendment to Agreement and Plan of Merger, dated as of September 23, 1997, by and among
Pillowtex Corporation, Pegasus Merger Sub, Inc., and Fieldcrest Cannon, Inc. (included as
Appendix A to the Joint Proxy Statement/Prospectus forming a part of this Registration
Statement)
CERTIFICATE OF INCORPORATION AND BYLAWS OF PILLOWTEX CORPORATION (EXHIBITS 3.1.1 THROUGH 3.1.2)
3.1.1 Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to
Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314) filed on January 22,
1993)
3.1.2 Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended December 30, 1994)
ARTICLES OF INCORPORATION AND BYLAWS OF FIELDCREST CANNON, INC. (EXHIBITS 3.2.1 THROUGH 3.2.2)
3.2.1 Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to
Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-52325) filed on February
18, 1994)
3.2.2 Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 of Fieldcrest
Cannon, Inc.'s Current Report on Form 8-K dated November 24, 1993)
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS OF PILLOWTEX CORPORATION (EXHIBITS 4.1.1 THROUGH 4.1.2)
4.1.1 Specimen of Certificate evidencing Common Stock (incorporated by reference to Exhibit 4.2 to
Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
4.1.2 Indenture, dated November 12, 1996 (incorporated by reference to Exhibit 4.1 to Pillowtex
Corporation's Registration Statement on Form S-4 (No. 333-17731) filed on December 12, 1996)
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS OF FIELDCREST CANNON, INC. (EXHIBITS 4.2.1 THROUGH 4.2.5)
4.2.1 Rights Agreement, dated as of November 24, 1993 (incorporated by reference to Exhibit 1 to
Fieldcrest Cannon, Inc.'s Registration Statement on Form 8-A filed on December 3, 1993)
4.2.2 First Amendment, dated February 6, 1997 (incorporated by reference to Exhibit 4.2 to Fieldcrest
Cannon's Annual Report on Form 10-K for the fiscal year ended December 31, 1996)
4.2.3 Indenture, dated as of March 15, 1987 (incorporated by reference to Exhibit 4.9 to Fieldcrest
Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-12436) filed on March 6, 1987)
</TABLE>
<PAGE> 266
<TABLE>
<S> <C>
4.2.4 Indenture, dated as of June 1, 1992 (incorporated by reference to Exhibit 4.7 of Amendment No.
1 to Fieldcrest Cannon, Inc.'s Registration Statement on Form S-3 (No. 33-47348) filed on June
3, 1992)
4.2.5 Credit Agreement, dated as of January 30, 1997 (incorporated by reference to Exhibit 4.5 to
Fieldcrest Cannon's Annual Report on Form 10-K for the fiscal year ended December 31, 1996)
5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of securities to be issued*
8.1 Opinion of Jones, Day, Reavis & Pogue as to tax matters*
8.2 Opinion of Weil, Gotshal & Manges L.L.P. as to tax matters*
9.1 Voting Agreement, dated as of October 2, 1997, by and between Pillowtex Corporation and Charles
M. Hansen, Jr.
9.2 Voting Agreement, dated as of October 2, 1997, by and between Pillowtex Corporation, on the one
hand, and Mary R. Silverthorne, the John H. Silverthorne Marital Trust B, and the John H.
Silverthorne Family Trust A, on the other hand
CERTAIN CONTRACTS OF PILLOWTEX CORPORATION (EXHIBITS 10.1.1 THROUGH 10.1.45)
10.1.1 Commitment Letter, dated September 10, 1997, by and between NationsBank of Texas, N.A. and
Pillowtex Corporation (incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's
Current Report on Form 8-K dated September 10, 1997, as amended by a Form 8-K/A (Amendment No.
1) dated September 10, 1997)
10.1.2 Preferred Stock Purchase Agreement, dated as of September 10, 1997, by and among Pillowtex
Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo
(UK) Partners III, L.P. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's
Current Report on Form 8-K dated September 10, 1997, as amended by a Form 8-K/A (Amendment No.
1) dated September 10, 1997)
10.1.3 Registration Rights Agreement, dated as of November 12, 1996, by and among Pillowtex
Corporation, each domestic subsidiary of Pillowtex Corporation, and NationsBanc Capital
Markets, Inc., and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (incorporated by
reference to Exhibit 10.59 to Pillowtex Corporation's Form S-4 (No. 333-17731) filed on
December 12, 1996)
10.1.4 Restated Credit Agreement, dated as of November 12, 1996, by and among Pillowtex Corporation
and NationsBank of Texas, N.A., as Agent for the Lenders specified therein (excludes Schedules)
(incorporated by reference to Exhibit 10.60 to Pillowtex Corporation's Form S-4 (No. 333-17731)
filed on December 12, 1996)
10.1.5 Form of Swing-Line Note, dated as of November 12, 1996, by and among Pillowtex Corporation and
NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.61 to Pillowtex
Corporation's Form S-4 (No. 333-17731) filed on December 12, 1996)
10.1.6 Form of Revolving Note, by and among Pillowtex Corporation and NationsBank of Texas, N.A.
(incorporated by reference to Exhibit 10.62 to Pillowtex Corporation's Form S-4 (No. 333-17731)
filed on December 12, 1996)
10.1.7 Form of Restated Guaranty, by and among Beacon Manufacturing Company, Manetta Home Fashions,
Inc., Tennessee Woolen Mills, Inc., Pillowtex, Inc., PTEX Holding Company, and Pillowtex
Management Services Company as guarantors, NationsBank of Texas, N.A. as Agent, and Pillowtex
Corporation as Borrower (incorporated by reference
</TABLE>
<PAGE> 267
<TABLE>
<S> <C>
to Exhibit 10.63 to Pillowtex Corporation's Form S-4 (No. 333-17731) filed on December 12,
1996)
10.1.8 Form of Restated Security Agreement, by and among Pillowtex Corporation as Debtor/Borrower,
NationsBank of Texas, N.A. as Secured Party, and Beacon Manufacturing Company, Manetta Home
Fashions, Inc., Tennessee Woolen Mills, Inc., Pillowtex, Inc., PTEX Holding Company, and
Pillowtex Management Services Company as Subsidiary Debtors (incorporated by reference to
Exhibit 10.64 to Pillowtex Corporation's Form S-4 (No. 333-17731) filed on December 12, 1996)
10.1.9 Asset Purchase Agreement, dated as of October 3, 1996, by and among Pillowtex Corporation and
Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10.65 to Pillowtex Corporation's
Form S-4 (No. 333-17731) filed on December 12, 1996)
10.1.10 Mississippi Business Finance Corporation Industrial Development Variable Rate Demand Notes
(Pillowtex Corporation Project) Series 1992 Loan Agreement, Indenture of Trust, Promissory
Note, Remarketing and Interest Services Agreement, Placement Agreement, Deed of Trust and
Security Agreement, Bond Fund Trustee Agreement, Reimbursement Agreement, and Lease Agreement
(including First Amendment) (incorporated by reference to Exhibit 10.3 to Pillowtex
Corporation's Registration Statement on Form S-1 (No. 33-57314) filed on January 22, 1993)
10.1.11 Second through Fourth Amendment to Mississippi Business Finance Corporation Industrial
Development Variable Rate Demand Notes (Pillowtex Corporation Project) Loan Agreement
(incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
10.1.12 Deed of Trust (with Security Agreement and Assignment of Rents and Leases), dated as of July
15, 1988, between Pillowtex Corporation and Principal Mutual Life Insurance Company, as
amended, Deed of Trust Note, and Loan Modification and Amendment Agreement (incorporated by
reference to Exhibit 10.5 Pillowtex Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.13 Second Loan Agreement Modification and Amendment Agreement dated as of January 19, 1993,
between Pillowtex Corporation and Principal Mutual Life Insurance Company (incorporated by
reference to Exhibit 10.6 to Pillowtex Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.14 Deed of Trust Note dated as of July 15, 1988, from Pillowtex Corporation to Principal Mutual
Life Insurance Company (incorporated by reference to Exhibit 10.7 to Pillowtex Corporation's
Registration Statement on Form S-1 (No. 33-57314) filed on January 22, 1993)
10.1.15 Loan and Security Agreement dated April 6, 1992, between MetLife Capital Corporation and
Pillowtex Corporation, as amended, and including Term Note dated June 5, 1992 (incorporated by
reference to Exhibit 10.8 to Pillowtex Corporation's Registration Statement on Form S-1 (No.
33-57314) filed on January 22, 1993)
10.1.16 Pennsylvania Economic Development Financing Authority ("PEDFA") Economic Development Revenue
Bonds 1990 Series C (Silversen-Hanover Corporation Project), dated April 1, 1990, Indenture of
Trust between PEDFA and First Pennsylvania Bank; Financing Agreement between PEDFA and
Silversen-Hanover Corporation; Bond Placement Agreement among PEDFA, NCNB National Bank of
North Carolina, and Silversen-Hanover Corporation; Reimbursement Agreement between
Silversen-Hanover Corporation and NCNB National Bank of North Carolina; and Form of Bond
(incorporated by reference to Exhibit 10.44 to Pillowtex Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
</TABLE>
<PAGE> 268
<TABLE>
<S> <C>
10.1.17 Distribution Agreement, dated February 1, 1995 by and among Beacon Manufacturing Company,
Manetta Home Fashions, Inc.,Tennessee Woolen Mills, Inc., NEMCOR, Inc., Norm McIntyre, Tim
McIntyre, and Don McIntyre (incorporated by reference to Exhibit 10.35 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994)
10.1.18 The Priorities Agreement, dated February 27, 1995, between Toronto Dominion Bank, Manetta Home
Fashions, Inc., Tennessee Woolen Mills, Inc., Beacon Manufacturing Company, and NEMCOR, Inc.
(incorporated by reference to Exhibit 10.36 to Pillowtex Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1994)
10.1.19 A Guarantee, dated February 27, 1995, between Beacon Manufacturing Company, Manetta Home
Fashions, Inc., Tennessee Woolen Mills, Inc., and NEMCOR, Inc. (incorporated by reference to
Exhibit 10.37 to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended
December 30, 1994)
10.1.20 Security Agreement, dated February 16, 1995, between NEMCOR, Inc. and Manetta Home Fashions,
Inc. (incorporated by reference to Exhibit 10.38 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994)
10.1.21 Security Agreement, dated February 16, 1995, between NEMCOR, Inc. and Tennessee Woolen Mills,
Inc. (incorporated by reference to Exhibit 10.39 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994)
10.1.22 Security Agreement, dated February 16, 1995, between NEMCOR, Inc. and Beacon Manufacturing
Company (incorporated by reference to Exhibit 10.40 to Pillowtex Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994)
10.1.23 Amended and Restated Acquisition Agreement, dated as of November 30, 1994, by and among David
H. Murdock, Beacon Manufacturing Company, Wiscassett Mills Company, Pillowtex Corporation,
Be-Ac, Inc., Realmac, Inc., and Wiscat, Inc. (incorporated by reference to Exhibit 10.41 to
Pillowtex Corporation's Current Report on Form 8-K dated December 14, 1994)
10.1.24 Purchase agreement between Coopers & Lybrand and Torfeaco Industries Limited for certain
assets, dated August 19, 1994 (incorporated by reference to Exhibit 10.42 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994)
10.1.25 Indenture dated as of February 1, 1994, by and among Torfeaco Industries Limited and Lodestone
Investments Limited, Lese Holdings Limited, Golden Elms Limited, M. Swadron Limited, and
Helsinor Investments Limited (incorporated by reference to Exhibit 10.29 to Pillowtex
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10.1.26 Sublicense Agreement, dated as of July 1, 1995, between Pillowtex Corporation and the Ralph
Lauren Home Collection (incorporated by reference to Exhibit 10 to Pillowtex Corporation's
Quarterly on Form 10-Q for the quarter ended July 1, 1995)
10.1.27 Lease Agreement, dated as of September 18, 1995, between Pillowtex Corporation and Sanwa
Business Credit Corp. (incorporated by reference to Exhibit 10.4 to Pillowtex Corporation's
Quarterly Report on Form 10-Q, as amended for the quarter ended September 30, 1995)
10.1.28 Agreement of Lease, dated May 23, 1995, between Ten Seventy One Joint Venture and Pillowtex
Corporation (incorporated by reference to Exhibit 10.66 to Pillowtex Corporation's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995)
</TABLE>
<PAGE> 269
<TABLE>
<S> <C>
10.1.29 Lease, dated as of March 1, 1977, by and among Torfeaco Industries Limited and Standa
Investment Limited, and Sharon Construction Limited (incorporated by reference to Exhibit 10.43
to Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1993)
10.1.30 Industrial Lease, dated as of November 23, 1992, between Angel and Jean Echevarria and
Pillowtex Corporation (incorporated by reference to Exhibit 10.21 to Pillowtex Corporation's
Registration Statement on Form S-1 (No. 33-57314) filed on January 22, 1993)
10.1.31 Form of Lease, dated as of October 12, 1988, between Jimmie D. Smith, Jr. and Pillowtex
Corporation (incorporated by reference to Exhibit 10.23 to Pillowtex Corporation's Registration
Statement on Form S-1 (No. 33-57314) filed on January 22, 1993)
10.1.32 Form of Equipment Leasing Agreement between BTM Financial & Leasing Corporation B-4 and Beacon
Manufacturing Company, Manetta Home Fashions, Inc., and Tennessee Woolen Mills, Inc., dated as
of June 14, 1996 (without Exhibits) (incorporated by reference to Exhibit 10 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
10.1.33 Employment Agreement dated as of January 1, 1993, between Pillowtex Corporation and Charles M.
Hansen, Jr. (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Registration
Statement on Form S-1 (No. 33-57314) filed on January 22, 1993)
10.1.34 Amendment to Employment Agreement, dated as of July 26, 1993, between Pillowtex Corporation and
Charles M. Hansen, Jr. (incorporated by reference to Exhibit 10.26 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10.1.35 Forms of Employment Agreement dated as of September 1, 1995, between Pillowtex Corporation and
each of Christopher N. Baker, Jeffrey D. Cordes, and Scott E. Shimizu (incorporated by
reference to Exhibits 10.1, 10.2, and 10.3 to Pillowtex Corporation's Quarterly Report on Form
10-Q, as amended, for the quarter ended September 30, 1995)
10.1.36 Forms of Change of Control Agreement, dated as of September 1, 1995, between Pillowtex
Corporation and each of Christopher N. Baker, Jeffrey D. Cordes, and Scott E. Shimizu
(incorporated by reference to Exhibits 10.5, 10.6, and 10.7 to Pillowtex Corporation's
Quarterly Report on Form 10-Q, as amended, for the quarter ended September 30, 1995)
10.1.37 Form of Confidentiality and Noncompetition Agreement (incorporated by reference to Exhibit
10.27 to Pillowtex Corporation's Registration Statement on Form-S-1 (No. 33-57314) filed on
January 22, 1993)
10.1.38 Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.36 to
Pillowtex Corporation's Registration Statement on Form S-1 (No. 33-57314) filed on January 22,
1993)
10.1.39 Split Dollar Life Insurance Agreement between Pillowtex Corporation and Charles M. Hansen, Jr.
dated July 26, 1993 (incorporated by reference to Exhibit 10.32 to Pillowtex Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10.1.40 Pillowtex Corporation 1993 Stock Option Plan (incorporated by reference to Appendix A to
Pillowtex Corporation's Proxy Statement relating to its Annual Meeting of Shareholders held on
May 8, 1997)
</TABLE>
<PAGE> 270
<TABLE>
<S> <C>
10.1.41 Form of Employment Agreement entered into between Pillowtex Management Services Company and
each of Christopher N. Baker, Jeffrey D. Cordes, Scott E. Shimizu, and John H. Karnes
(incorporated by reference to Exhibit 10.1 to Pillowtex Corporation's Quarterly Report on Form
10-Q for the quarter ended June 28, 1997)
10.1.42 Form of Guaranty Agreement dated as of April 22, 1997, between Pillowtex Corporation and each
of Christopher N. Baker, Jeffrey D. Cordes, Scott E. Shimizu, Kevin M. Finlay, and John H.
Karnes (incorporated by reference to Exhibit 10.2 to Pillowtex Corporation's Quarterly Report
on Form 10-Q for the quarter ended June 28, 1997)
10.1.43 Form of Employment Agreement dated as of April 11, 1997, between Pillowtex Management Services
Company and Kevin M. Finlay (incorporated by reference to Exhibit 10.3 to Pillowtex
Corporation's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997)
10.1.44 Pillowtex Corporation Supplemental Executive Retirement Plan, effective as of January 1, 1997
10.1.45 Pillowtex Corporation Management Incentive Plan (incorporated by reference to Appendix B to
Pillowtex Corporation's Proxy Statement relating to its Annual Meeting of Shareholders held on
May 8, 1997)
CERTAIN CONTRACTS OF FIELDCREST CANNON, INC. (EXHIBITS 10.2.1 - 10.2.16)
10.2.1 Amended and Restated Director Stock Option Plan of the Registrant approved by the stockholders
of the Corporation on April 28, 1992 (incorporated by reference to Exhibit A to Fieldcrest
Cannon, Inc.'s Proxy Statement relating to its Annual Meeting of Stockholders held on April 28,
1992)
10.2.2 Stock Option Agreement between Fieldcrest Cannon, Inc. and James M. Fitzgibbons, dated as of
September 11, 1991 (incorporated by reference to Exhibit 4.1 to Fieldcrest Cannon, Inc.'s
Registration Statement on Form S-8 (No. 33-44703) filed on December 23, 1991)
10.2.3 Employee Retention Agreement between Fieldcrest Cannon, Inc. and James M. Fitzgibbons,
effective as of July 9, 1993 (incorporated by reference to Exhibit 10.2 to Fieldcrest Cannon,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1993)
10.2.4 Instrument of Amendment, dated July 15, 1996 between Fieldcrest Cannon, Inc. and James M.
Fitzgibbons (incorporated by reference to Exhibit 10.4 to Fieldcrest Cannon, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996)
10.2.5 Employee Retention Agreement between Fieldcrest Cannon, Inc. and Robert E. Dellinger, effective
as of July 9, 1993 (incorporated by reference to Exhibit 10.9 to Fieldcrest Cannon, Inc.'s
Annual Report on Form 10-K for the fiscal year ending December 31, 1993)
10.2.6 Instrument of Amendment, dated July 29, 1993 between Fieldcrest Cannon, Inc. and Robert E.
Dellinger (incorporated by reference to Exhibit 10.10 to Fieldcrest Cannon, Inc.'s Annual
Report on Form 10-K for the fiscal year ending December 31, 1993)
10.2.7 Instrument of Amendment, dated July 15, 1996 between Fieldcrest Cannon, Inc. and Robert E.
Dellinger (incorporated by reference to Exhibit 10.7 Fieldcrest Cannon, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1996)
10.2.8 Employee Retention Agreement between Fieldcrest Cannon, Inc. and Thomas R. Staab, effective as
of July 9, 1993 (incorporated by reference to Exhibit 10.8 to Fieldcrest Cannon, Inc.'s Annual
Report on Form 10-K for the fiscal year ending December 31, 1995)
</TABLE>
<PAGE> 271
<TABLE>
<S> <C>
10.2.9 Instrument of Amendment, dated July 29, 1993 between Fieldcrest Cannon, Inc. and Thomas R.
Staab (incorporated by reference to Exhibit 10.9 to Fieldcrest Cannon, Inc.'s Annual Report on
Form 10-K for the fiscal year ending December 31, 1995)
10.2.10 Instrument of Amendment, dated July 15, 1996 between Fieldcrest Cannon, Inc. and Thomas R.
Staab (incorporated by reference to Exhibit 10.10 to Fieldcrest Cannon, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1996)
10.2.11 Employee Retention Agreement between Fieldcrest Cannon, Inc. and John Nevin, effective as of
October 3, 1996 (incorporated by reference to Exhibit 10.11 to Fieldcrest Cannon, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996)
10.2.12 Form of Employee Retention Agreement between Fieldcrest Cannon, Inc. and other executive
officers of Fieldcrest Cannon, Inc., effective as of July 9, 1993 (incorporated by reference to
Exhibit 10.6 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993)
10.2.13 Form of Instrument of Amendment, dated July 29, 1993 between Fieldcrest Cannon, Inc. and other
executive officers of Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10.7 to
Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
1993)
10.2.14 Form of Instrument of Amendment, dated July 15, 1996 between Fieldcrest Cannon, Inc. and other
executive officers of Fieldcrest Cannon, Inc. (incorporated by reference to Exhibit 10.14 to
Fieldcrest Cannon, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31,
1996)
10.2.15 1995 Employee Stock Option Plan of Fieldcrest Cannon, Inc. (incorporated by reference to
Exhibit 4.1 of Fieldcrest Cannon, Inc.'s Registration Statement of Form S-8 (No. 33-59145)
filed on May 8, 1995)
10.2.16 Yarn Purchase Agreement between Parkdale Mills, Incorporated and Fieldcrest Cannon, Inc.
(incorporated by reference to Exhibit 10 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1996)
11.1 Fieldcrest Cannon, Inc.'s Computation of Primary and Fully Diluted Net Income Per Share
(incorporated by reference to Exhibit 11 to Fieldcrest Cannon, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1996)
11.2 Fieldcrest Cannon, Inc.'s Computation of Primary and Fully Diluted Net Income Per Share
(incorporated by reference to Exhibit 11 to Fieldcrest Cannon, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1997)
21.1 List of Pillowtex Corporation's Principal Operating Subsidiaries (incorporated by reference to
Exhibit 21.1 to Pillowtex Corporation's Form S-4 (No. 333-17731) filed on December 12, 1996)
21.2 List of Fieldcrest Cannon, Inc.'s Principal Operating Subsidiaries (incorporated by reference
to Exhibit 21 to Fieldcrest Cannon, Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
23.1 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 272
<TABLE>
<S> <C>
23.4 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 8.1)
23.5 Consent of Weil, Gotshal & Manges L.L.P. (included in Exhibit 8.2)
24.1 Powers of Attorney*
99.1 Consent of Credit Suisse First Boston Corporation
99.2 Consent of Bear, Stearns & Co. Inc.
</TABLE>
- -----------
* Previously filed.
<PAGE> 1
EXHIBIT 10.1.45
PILLOWTEX CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective January 1, 1997)
<PAGE> 2
PILLOWTEX CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
1. Purpose. The purpose of the Supplemental Executive Retirement
Plan is to provide certain executive employees of Pillowtex Corporation and its
subsidiaries with a targeted level of retirement income upon retirement or
other termination of employment.
2. Definitions. The following definitions are used throughout
the Plan.
(a) "Annual Conventional Benefits" means the aggregate
projected annual employer-provided retirement benefit to be paid to the
Participant from the Pension Plan, plus the projected annual Primary Social
Security Benefit of the Participant, each payable as a straight life annuity,
on the assumption that the Participant will remain employed by the Company or a
subsidiary of the Company through the last day of the month in which the
Participant attains age 65.
(b) "Annual Supplemental Benefit Target" has the meaning
as defined in Section 5(a).
(c) "Board of Directors" means the Board of Directors of
the Company.
(d) "Change in Control" means the occurrence of one or
more of the following events, unless the Board has adopted a resolution prior
to or promptly following the occurrence of any such event stipulating,
conditionally, temporarily or otherwise, that any such event will not result in
a change in control of the Company:
(i) the Company is merged, consolidated or
reorganized into or with another corporation or other legal
person, and as a result of such merger, consolidation or
reorganization less than a majority of the combined voting
power of the then-outstanding securities entitled to vote
generally in the election of directors ("Voting Stock") of the
surviving corporation or person immediately after such
transaction is held in the aggregate by the holders of Voting
Stock of the Company immediately prior to such transaction;
(ii) the Company sells or otherwise transfers all
or substantially all of its assets to another corporation or
other legal person, and as a result of such sale or transfer
less than a majority of the combined voting power of the
then-outstanding Voting Stock of the acquiring corporation or
person immediately after such sale or transfer is held in the
aggregate by the holders of Voting Stock of the Company
immediately prior to such sale or transfer;
(iii) any person (as the term "person" is used in
Section 13(d) or Section 14(d) of the Exchange Act), other
than an Excluded Person (as hereafter defined), is or becomes
the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act), directly or indirectly,
of securities of the Company representing 35% or more of the
combined voting power of the Company's then outstanding
securities;
(iv) during any period of 24 consecutive months,
at least a majority of the Board ceases to consist of
individuals who have served continuously on the Board since
the beginning of such 24-month period, unless the election of
directors during such period, or nomination for election by
the Company's shareholders, was approved by a vote of at least
two-thirds of the directors then still in office who will at
that time have served continuously on the Board since the
beginning of such 24-month period; or
(v) the Company has entered into one or more
definitive agreements pursuant to which a transaction
described in paragraph (i) or paragraph (ii) above may occur
and the Board determines that all conditions required to
consummate such a transaction have been fulfilled.
<PAGE> 3
Notwithstanding the foregoing provisions, a "Change
in Control" will not be deemed to have occurred for purposes
of this Agreement solely because the Company, a Subsidiary or
any employee benefit plan of the Company either files or
becomes obligated to file a report or proxy statement under or
in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or
item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting securities of the Company,
whether in excess of 25% or otherwise, or because the Company
reports that a change in control of the Company has or may
have occurred or will or may occur in the future by reason of
such beneficial ownership.
For purposes of this definition, the term "Excluded
Person" means any of Charles M. Hansen, Jr., Mary R.
Silverthorne or the John H. Silverthorne Estate or any person
for which any of Charles M. Hansen, Jr., Mary R. Silverthorne
or the John H. Silverthorne Estate are deemed to hold
beneficial ownership of securities of the Company registered
in the mane of such person.
(e) "Code" means the Internal Revenue Code of 1986, as
amended and in effect from time to time.
(f) "Committee" means the Compensation Committee of the
Board of Directors or any successor committee appointed by the Board of
Directors to administer the Plan.
(g) "Common Stock" means the common stock of the Company,
$0.01 par value, or any security into which such Common Stock may be changed by
reason of any transaction described in Section 11.
(h) "Company" means Pillowtex Corporation, a Texas
corporation. The term "subsidiary of the Company" means any corporation of
which at least 50% of the total combined voting power of all outstanding shares
of stock is owned directly or indirectly by the Company.
(i) "Competitive Median" means the median compensation
for an employee holding a comparable position in firms with comparable sales
(including but not limited to firms within the Company's industry), as
determined by Committee.
(j) "Effective Date" means January 1, 1997.
(k) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
(l) "Final Average Compensation" means a Participant's
projected aggregate cash compensation for the five consecutive years of
employment ending with the month the Participant attains age 65, divided by
five, based on the assumption that the Participant will remain employed by the
Company or a subsidiary of the Company through the last day of the month in
which the Participant attains age 65 and such other assumptions as may be
adopted from time to time by the Committee. In no event, however, will a
Participant's compensation in excess of the Competitive Median be taken into
account for any purpose under the Plan. The Competitive Median will be applied
separately to each year's cash compensation, based on the Competitive Median in
effect at the time. The Final Average Compensation for each Participant will
be determined by the Committee from time to time, provided that no
Participant's Final Average Compensation will be reduced below that originally
determined by the Committee upon the Participant's first becoming eligible to
participate in the Plan.
(m) "Lifetime Supplemental Benefit Target" has the
meaning as defined in Section 5(a).
(n) "Market Value per Share" means, at any date, the
closing sale price of the Common Stock on that date (or, if there are no sales
on that date, the last preceding date on which there was a sale) in the
principal market in which the Common Stock is traded.
<PAGE> 4
(o) "Participant" means an employee who is eligible to
receive benefits under the Plan. The term "Participant" will include the
beneficiary of a deceased Participant, unless the context clearly requires a
different interpretation.
(p) "Pension Plan" means the Pension Plan for Qualified
Employees of Pillowtex Corporation, as amended from time to time, a defined
benefit pension plan that is sponsored by the Company and is intended to
qualify under Section 401(a) of the Code.
(q) "Phantom Share" means, solely for purposes of
determining the value of a Participant's Supplemental Retirement account, a
hypothetical measurement unit equivalent to one share of Common Stock, subject
to the adjustments described in Section 11.
(r) "Plan" means the Pillowtex Corporation Supplemental
Executive Retirement Plan as set forth herein and as amended from time to time.
(s) "Plan Year" means the calendar year.
(t) "Primary Social Security Benefit" means the primary
social security retirement benefit to which the Participant would be entitled
under the provisions of the Social Security Act.
(u) "Scheduled Annual Accrual" has the meaning as defined
in Section 5(a).
(v) "Subsidiary" means any corporation, partnership,
joint venture or other entity in which the Company owns or controls, directly
or indirectly, 50% or more of the total combined voting power or equity
interest represented by all classes of stock or equity issued by such
corporation, partnership, joint venture or other entity.
(w) "Supplemental Retirement Account" means the account
described in Sections 4 and 5.
3. Eligibility. Each key executive employee of the Company or
any Subsidiary who is designated by the Committee as eligible to participate in
the Plan will be a Participant.
4. Supplemental Retirement Benefit. Upon a Participant's
retirement or other termination of employment with the Company and its
Subsidiaries, the Participant will be entitled to receive a supplemental
retirement benefit equal to the vested balance in the Participant's
Supplemental Retirement Account. The balance of a Participant's Supplemental
Retirement Account as of any date will be equal to the value of the Phantom
Shares accrued to the account, as determined by reference to the Market Value
per Share for the Common Stock on such date (subject to the provisions of
Section 5).
5. Contribution Credits/Accounts. (a) The Supplemental
Retirement Account for each Participant will be credited annually with a
contribution equal to the Participant's Scheduled Annual Accrual. Except as
provided in Section 5(c) below, each Scheduled Annual Accrual will be expressed
as a number of Phantom Shares determined by dividing the amount of the
Scheduled Annual Accrual by the Market Value per Share on the date of such
contribution.
(i) The "Scheduled Annual Accrual" for each
Participant means a dollar amount which, when accrued annually
(compounding at the rate of 12% per year) in equal installments
through the last day of the month in which the Participant attains age
65, would produce a lump sum amount equal to the Participant's
Lifetime Supplemental Benefit Target. For any Plan Year after a
Participant attains age 65 and remains employed by the Company or any
Subsidiary, the Scheduled Annual Accrual will be a flat amount equal
to the weighted average of the Scheduled Annual Accruals credited with
respect to the Participant for the five Plan Years immediately prior
to attainment of age 65.
(ii) The "Lifetime Supplemental Benefit Target"
for each Participant means the net present value (discounted at a rate
of 8% per year), as of the last day of the month in which the
Participant attains age 65, of a stream of straight life annuity
payments equal to the Participant's Annual Supplemental Benefit
<PAGE> 5
Target paid annually to the Participant throughout the Participant's
lifetime, as determined by reference to the UP-1984 Unisex Mortality
Table.
(iii) The "Annual Supplemental Benefit Target" for
each Participant means (A) the difference between (1) 50% of the
Participant's Final Average Compensation, and (2) the Participant's
Annual Conventional Benefits, multiplied by (B) a fraction (not to
exceed one), the numerator of which is the number of years of vesting
service that the Participant will have earned under the Pension Plan
if the Participant remains continuously employed by the Company or a
subsidiary of the Company until reaching age 65 (disregarding any
period of service with Beacon Manufacturing Corp., whether or not
taken into account under the Pension Plan) and the denominator of
which is 30.
(b) Except as provided in Section 5(c) below or in
Section 8, each Participant's account will be deemed to be invested solely in
Phantom Shares, and the balance of a Participant's account as of any date will
be determined by multiplying the number of Phantom Shares credited to such
Participant's account at the time of determination by the Market Value per
Share on such date. In the event the Company pays any dividends (other than in
Common Stock) with respect to Common Stock, each Participant's account will be
credited with a number of additional Phantom Shares determined by calculating
the amount of an equivalent dividend on the number of Phantom Shares credited
to the Participant immediately prior to such dividend, and dividing such
hypothetical dividend by the Market Value per Share on the date the dividend
was paid.
(c) In the event of a Change in Control, the balance of
each Participant's account as of the date of the Change in Control will be
determined (based on the number of Phantom Shares credited to such
Participant's account as of such date), and each Participant's account will
thereupon be converted into a hypothetical fixed-income investment earning 12%
per annum (subject to reduction to 8% per annum upon commencement of
installment payments under Section 8), and will no longer be deemed to be
invested in Phantom Shares. In addition, in the event of a Change in Control,
a Participant's Scheduled Annual Accrual will be stated as a dollar amount, and
will no longer be expressed as a number of Phantom Shares.
(d) Scheduled Annual Accruals will be made to the
Participant's account as of a date selected by the Company (but not later than
90 days after the end of the Plan Year for which the contribution is to be
credited) beginning with the Plan Year in which the Participant first becomes
eligible to participate in the Plan and ending with the Plan Year in which the
Participant retires or otherwise terminates employment, whichever occurs first.
For purposes of the foregoing sentence, a Participant who becomes eligible for
benefits under any long term disability plan maintained by the Company or any
subsidiary of the Company will be regarded as having terminated employment nine
months after the onset of the disability that entitles the Participant to
benefits. If a Participant first becomes eligible to participate on a date
other than the first day of the Plan Year or attains age 65, retires or
otherwise terminates employment on a date other than the last day of the Plan
Year, contributions to be credited for such Plan Year will be prorated in the
manner specified by the Committee.
6. Vesting. Subject to the rights of general creditors as set
forth in Section 10 and the right of the Company to discontinue the Plan as
provided in Section 13, a Participant will be vested in his Supplemental
Retirement Account to the same extent that he has a vested interest in his
employer-provided benefit under the Pension Plan. If required under the terms
of a Participant's employment contract with the Company or any subsidiary of
the Company, the Participant will be given credit for additional years of
service for purposes of vesting under this Plan (but not for purposes of
calculating the amount of a Participant's supplemental retirement benefit under
the Plan). Notwithstanding the foregoing, a Participant will become fully
vested in his Supplemental Retirement Account upon a Change in Control. In
addition, a Participant will be fully vested if he becomes eligible for
benefits under any long term disability plan maintained by the Company or any
subsidiary of the Company.
<PAGE> 6
7. Commencement of Benefits. Payment of a Participant's vested
interest in his Supplemental Retirement Account will be made or will begin on
the first day of the month following the month in which the Participant retires
or otherwise terminates employment.
8. Form of Benefits. A Participant's vested Supplemental
Retirement Account balance will be paid in a single lump sum cash payment,
unless the Participant elects, at least six months prior to the date his
Supplemental Retirement Account is scheduled to be paid, in accordance with
procedures established by the Committee to receive his vested Supplemental
Retirement Account balance in annual, quarterly or monthly cash installments
over a period not greater than fifteen years (or in a combination of a lump sum
and such installments). The amount of each installment payment will be equal
to the quotient obtained by dividing the Participant's account balance as of
the date of such installment payment by the number of installment payments
remaining to be made to or on behalf of such Participant at the time of
calculation. If a Participant has elected an installment form of payment, the
Participant's Supplemental Retirement Account balance will be deemed to be
converted into a hypothetical fixed-income investment earning 8% per annum, and
will no longer be deemed to be invested in Phantom Shares.
9. Death Benefits. (a) Upon the death of a Participant who is
receiving a supplemental retirement benefit, the Participant's Supplemental
Retirement Account balance will continue to be paid in accordance with the form
of payment elected by the Participant under Section 8.
(b) If a Participant who is entitled to receive a
supplemental retirement benefit under the Plan dies before payment of such
benefit begins, the Supplemental Retirement Account balance will be paid as a
death benefit to the beneficiary designated by the Participant (who may or may
not be the Participant's spouse) in accordance with procedures established by
the Committee or, in the event the Participant has not designated any
beneficiary, to the Participant's surviving spouse, if any, and if none, to the
Participant's estate. The death benefit payable pursuant to this subsection
(b) will be paid on the first day of the month following the month in which the
Participant dies. The death benefit will be paid to the beneficiary in a
single lump sum payment unless the beneficiary elects, at least six months
prior to the date the benefit is scheduled to be paid, to receive the death
benefit in any other form permitted under Section 8.
10. Benefits are Unfunded. (a) The Plan will be unfunded. All
benefits payable to a Participant under the Plan will be paid from the general
assets of the Company or any subsidiary of the Company that employed the
Participant, and nothing contained in the Plan will require the Company or any
subsidiary of the Company to set aside or hold in trust any funds for the
benefit of a Participant, who will have the status of a general unsecured
creditor with respect to the obligation of the Company to make payments under
the Plan. Any funds of the Company or any subsidiary of the Company available
to pay benefits under the Plan will be subject to the claims of general
creditors of the Company or such subsidiary and may be used for any purpose by
the Company or such subsidiary.
(b) If the supplemental retirement benefit payable to a
Participant under the Plan is attributable to periods of employment with the
Company and/or one or more subsidiaries of the Company, the Committee may
allocate liability for the payment of the benefit among the Company and one or
more subsidiaries in any manner the Committee, in its sole discretion,
determines to be appropriate.
(c) Notwithstanding the provisions of Section 10(a), the
Company may, at the direction, and in the absolute discretion, of the
Committee, transfer to the trustee of one or more trusts established for the
benefit of one or more Participants assets from which all or a portion of the
benefits provided under the Plan will be satisfied, provided that such assets
held in trust will at all times be subject to the claims of general unsecured
creditors of the Company and the subsidiaries of the Company, and no
Participant will at any time have a prior claim to such assets. To the extent
that supplemental retirement benefits under the Plan are paid from any such
trust, the Company and each subsidiary of the Company will be relieved of all
liability for such benefits.
<PAGE> 7
11. Certain Adjustments. The Committee will make or provide for
such adjustments in the number of Phantom Shares credited to accounts under the
Plan, the kind of shares covered by Phantom Shares, and/or in the computations
based on Common Stock, the number of shares thereof, or the Market Value per
Share, as the Committee in its sole discretion, exercised in good faith, may
determine is equitably required to prevent dilution or enlargement of the
rights of Participants that otherwise would result from any stock dividend,
stock split, combination of shares, recapitalization or other change in the
capital structure of the Company, merger, consolidation, issuance of rights or
warrants to purchase securities or any other corporate transaction or event
having an effect similar to any of the foregoing.
12. Administration of the Plan. (a) The Committee will
administer the Plan and will have the full authority and discretion to
accomplish that purpose, including without limitation, the authority and
discretion to (i) interpret the Plan and correct any defect, supply any
omission or reconcile any inconsistency or ambiguity in the Plan in the manner
and to the extent that the Committee deems desirable to carry the purpose of
the Plan, (ii) resolve all questions relating to the eligibility of employees
to become Participants, (iii) determine the amount of benefits payable to
Participants and authorize and direct the Company with respect to the payment
of benefits under the Plan, (iv) make all other determinations and resolve all
questions of fact necessary or advisable for the administration of the Plan,
and (v) make, amend and rescind such rules as it deems necessary for the proper
administration of the Plan. The Committee will keep a written record of its
action and proceedings regarding the Plan and all dates, records and documents
relating to its administration of the Plan.
(b) In determining the amount of a Participant's
supplemental retirement benefit (including the amount of the Scheduled Annual
Accrual, Lifetime Supplemental Benefit Target, and Annual Supplemental Benefit
Target), the Committee will adopt, with the advice of actuaries or such other
consultants as it may select, such assumptions as in its sole discretion it
determines to be necessary, desirable or appropriate as to interest rates,
mortality, rates of inflation, increases in Participant compensation,
Competitive Median compensation, Primary Social Security Benefits, and any
other matter that the Committee deems relevant in making the calculations
required under the Plan. The Committee may revise any such assumptions from
time to time to the extent that the Committee deems necessary, desirable or
appropriate, and any such revised assumptions will be taken into account in
determining the amount of future Scheduled Annual Accruals required to provide
a Participant's supplement retirement benefit under the Plan.
(c) Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control the Committee may not adopt
or revise any assumption or other factor that would adversely affect the
existing or future benefit of any Participant without such Participant's
written consent (including but not limited to a reduction in the dollar value
of the Scheduled Annual Accrual to be credited with respect to such Participant
on or after the Change in Control, determined by reference to the most recent
Scheduled Annual Accrual credited prior to the Change in Control).
(d) Any action taken or determination made by the
Committee will, except as otherwise provided in Section 13 below, be conclusive
on all parties. No member of the Committee will vote on any matter relating
specifically to such member. In the event that a majority of the members of
the Committee will be specifically affected by any action proposed to be taken
(as opposed to being affected in the same manner as each other Participant in
the Plan), such action will be taken by the Board of Directors.
13. Claims Procedure. (a) If a Participant does not receive the
benefits which he believes he is entitled to receive under the Plan, he may
file a claim for benefits with the Committee. All claims will be made in
writing and will be signed by the claimant. If the claimant does not furnish
sufficient information to determine the validity of the claim, the Committee
will indicate to the claimant any additional information which is required.
(b) Each claim will be approved or disapproved by the
Committee within 90 days following the receipt of the information necessary to
process the claim. In the event the Committee denies a claim for benefits
<PAGE> 8
in whole or in part, the Committee will notify the claimant in writing of the
denial of the claim. Such notice by the Committee will also set forth, in a
manner calculated to be understood by the claimant, the specific reason for
such denial, the specific Plan provisions on which the denial is based, a
description of any additional material or information necessary to perfect the
claim with an explanation of why such material or information is necessary, and
an explanation of the Plan's claim review procedure as set forth below. If no
action is taken by the Committee on a claim within 90 days, the claim will be
deemed to be denied for purposes of the review procedure.
(c) A claimant may appeal a denial of his claim by
requesting a review of the decision by the Committee or a person designated by
the Committee, which person will be a named fiduciary under Section 402(a)(2)
of ERISA for purposes of this Section. An appeal must be submitted in writing
within six months after the denial and must (i) request a review of the claim
for benefits under the Plan, (ii) set forth all of the grounds upon which the
claimant's request for review is based and any facts in support thereof, and
(iii) set forth any issues or comments which the claimant deems pertinent to
the appeal. The Committee or the named fiduciary designated by the Committee
will make a full and fair review of each appeal and any written materials
submitted in connection with the appeal. The Committee or the named fiduciary
designated by the Committee will act upon each appeal within 60 days after
receipt thereof unless special circumstances require an extension of the time
for processing, in which case a decision will be rendered as soon as possible
but not later than 120 days after the appeal is received. The claimant will be
given the opportunity to review pertinent documents or materials upon
submission of a written request to the Committee or named fiduciary, provided
the Committee or named fiduciary finds the requested documents or materials are
pertinent to the appeal. On the basis of its review, the Committee or named
fiduciary will make an independent determination of the claimant's eligibility
for benefits under the Plan. The decision of the Committee or named fiduciary
on any claim for benefits will be final and conclusive upon all parties
thereto. In the event the Committee or named fiduciary denies an appeal in
whole or in part, it will give written notice of the decision to the claimant,
which notice will set forth in a manner calculated to be understood by the
claimant the specific reasons for such denial and which will make specific
reference to the pertinent Plan provisions on which the decision was based.
14. Amendment or Termination. (a) Except as provided in
paragraph (b) of this Section, the Plan may be amended at any time by the
Committee. The Plan may also be amended or terminated by the Board of
Directors at any time. Any amendment adopted by the Committee or the Board may
reduce prospectively the earnings factor to be applied to a Participant's
account established under the Plan, or may change the hypothetical investment
of account balances from Phantom Shares to any other hypothetical investment.
However, no action taken by the Committee or by the Board of Directors to amend
or terminate the Plan will have the effect of decreasing a Participant's
account balance as of the date of such action.
(b) Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control the Plan may not be amended
with respect to any Participant in any manner that would adversely affect such
Participant's existing or future benefit under the Plan without such
Participant's written consent, including but not limited to (i) an amendment to
the targeted benefit formula for any period on or after the Change in Control,
or (ii) an amendment that would cause a reduction in the dollar value of the
Scheduled Annual Accrual to be credited with respect to such Participant on or
after the Change in Control, determined by reference to the most recent
Scheduled Annual Accrual credited prior to the Change in Control.
15. Miscellaneous. (a) Nothing in the Plan will confer upon a
Participant the right to continue in the employ of the Company or any
subsidiary of the Company or will limit or restrict the right of the Company or
any subsidiary of the Company to terminate the employment of a Participant at
any time with or without cause.
(b) Notwithstanding any provision of the Plan which is
expressed in terms of targeted benefits, projected annual benefits or actuarial
calculations, each Participant's actual benefit under the Plan as of any date
will consist solely of the vested balance of the Participant's Supplemental
Retirement Account.
<PAGE> 9
(c) Except as otherwise provided in the Plan, no right or
benefit under the Plan will be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance or charge, and any attempt to anticipate,
alienate, sell, assign, pledge, encumber or charge such right or benefit will
be void. No such right or benefit will in any manner be liable for or subject
to the debts, liabilities or torts of a Participant.
(d) The Plan is intended to provide benefits for
"management or highly compensated" employees within the meaning of Sections
201, 301 and 401 of ERISA, and therefore to be exempt from the provisions of
Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan will terminate and
no further benefits will accrue hereunder in the event it is determined by a
court of competent jurisdiction or by an opinion of counsel that the Plan
constitutes an employee pension benefit plan within the meaning of Section 3(2)
of ERISA, which is not so exempt. In addition, in the absolute discretion of
the Committee, the benefit of each Participant accrued under such balance of
the Plan on the date of termination will be paid immediately to such
Participant in a single lump sum cash payment.
(e) If any provision in the Plan is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions will nevertheless continue in full force and effect without being
impaired or invalidated in any way.
(f) THE PLAN WILL BE CONSTRUED AND GOVERNED IN ALL
RESPECTS IN ACCORDANCE WITH APPLICABLE FEDERAL LAW AND, TO THE EXTENT NOT
PREEMPTED BY SUCH FEDERAL LAW, IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.
Executed at Dallas, Texas, this ___ day of _________, 1997.
PILLOWTEX CORPORATION
By
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pillowtex Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Dallas, Texas
November 17, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 31, 1997, with respect to the financial
statements of Fieldcrest Cannon, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-4) and related Prospectus of Pillowtex
Corporation for the registration of 5,600,000 shares of its common stock.
/s/ Ernst & Young LLP
Greensboro, North Carolina
November 17, 1997
<PAGE> 1
Exhibit 99.1
CONSENT
OF
CREDIT SUISSE FIRST BOSTON CORPORATION
Board of Directors
Fieldcrest Cannon, Inc.
One Lake Drive
Kannapolis, NC 28081
Members of the Board:
We hereby consent to the inclusion of our opinion letter, dated September 10,
1997, to the Board of Directors of Fieldcrest Cannon, Inc. (the "Company") as
Appendix C to the Registration Statement of the Company on Form S-4 (the
"Registration Statement") relating to the proposed merger involving the Company
and Pillowtex Corporation and references made to such opinion under the
headings "SUMMARY--Opinion of Fieldcrest's Financial Advisor", "THE
MERGER--Background of the Merger", "THE MERGER--Fieldcrest's Reasons for the
Merger" and "THE MERGER--Opinion of Fieldcrest's Financial Advisor" in the
Registration Statement. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under, nor do we admit
that we are "experts" for purposes of, the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
CREDIT SUISSE FIRST BOSTON CORPORATION
November 17, 1997
<PAGE> 1
Exhibit 99.2
[LETTERHEAD OF BEAR, STEARNS & CO. INC.]
November 17, 1997
We hereby consent to the inclusion in the Prospectus and Joint Proxy Statement
forming part of this Registration Statement on Form S-4 of Pillowtex
Corporation of our opinion attached as Appendix B thereto and to the reference
to such opinion and to our firm therein. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933 and the rules and regulations of
the Securities and Exchange Commission issued thereunder.
Bear, Stearns & Co. Inc.
By: /s/ Rick A. Lacher
----------------------------
Rick A. Lacher
Managing Director
