<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997
REGISTRATION NO. 333-17731
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________________________________
PILLOWTEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
TEXAS 2392 75-2147728
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
4111 MINT WAY
DALLAS, TEXAS 75237
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_____________________
JEFFREY D. CORDES
CHIEF FINANCIAL OFFICER
PILLOWTEX CORPORATION
4111 MINT WAY
DALLAS, TEXAS 75237
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
RONALD J. FRAPPIER
JENKENS & GILCHRIST,
A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If 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. [ ]
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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 THAT SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 1997
PILLOWTEX CORPORATION
OFFER TO EXCHANGE
ALL OUTSTANDING
10% SENIOR SUBORDINATED NOTES DUE 2006
($125,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 10% SENIOR SUBORDINATED NOTES DUE 2006
The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York
City time, on March 19, 1997 (as such date may be extended, but shall not be
later than March 24, 1997, the "Expiration Date").
Pillowtex Corporation, a Texas corporation ("Pillowtex" or the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal
amount of its 10% Senior Subordinated Notes due 2006 (the "New Notes") for each
$1,000 in principal amount of its outstanding 10% Senior Subordinated Notes due
2006 (the "Old Notes") (the Old Notes and the New Notes are collectively
referred to herein as the "Notes"). An aggregate principal amount of
$125,000,000 of Old Notes is outstanding. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as
it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for Notes
where such Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed that,
starting on the Expiration Date and ending on the close of business one year
after the Expiration Date, it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. See "Plan of Distribution."
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date.
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange Offer is not conditioned upon
any minimum principal amount of the Old Notes being tendered for exchange.
However, the Exchange Offer is subject to the terms and provisions of the
Registration Rights Agreement, dated as of November 12, 1996 (the "Registration
Rights Agreement"), among the Company, each domestic subsidiary of the Company
and NationsBanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Initial Purchasers"). The Old Notes may be tendered only in
multiples of $1,000. See "The Exchange Offer."
(continued on next page)
_____________________
SEE "RISK FACTORS" BEGINNING ON PAGE 9 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_____________________
THE DATE OF THIS PROSPECTUS IS FEBRUARY 10, 1997
<PAGE>
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $125,000,000 principal amount of the
Old Notes to the Initial Purchasers on November 12, 1996 pursuant to a Purchase
Agreement, dated November 6, 1996 (the "Purchase Agreement"), among the Company,
the Company's domestic subsidiaries and the Initial Purchasers. The Initial
Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act. The Company and the Initial Purchasers also entered into the
Registration Rights Agreement, pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer--Purpose and Effect."
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of November 12, 1996 (the "Indenture"), among the Company and Bank One,
Columbus, N.A., as trustee (in such capacity, the "Trustee"). The form and
terms of the New Notes will be identical in all material respects to the form
and terms of the Old Notes, except that (i) the New Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, (ii) holders of New Notes will not be entitled to liquidated
damages equal to $.05 per week per $1,000 principal amount of Old Notes held by
such holders (up to a maximum amount of $0.30 per week per $1,000 principal
amount) otherwise payable under the terms of the Registration Rights Agreement
in respect of the Old Notes held by such holders during any period in which a
Registration Default (as defined under "The Exchange Offer--Terms of Certain
Rights") is continuing (the "Liquidated Damages") and (iii) holders of New Notes
will not be, and upon the consummation of the Exchange Offer, holders of Old
Notes will no longer be, entitled to certain rights under the Registration
Rights Agreement intended for the holders of unregistered securities. The
Exchange Offer shall be deemed consummated upon the occurrence of the delivery
by the Company to Bank One, Columbus, N.A., as registrar of the Old Notes (in
such capacity, the "Registrar") under the Indenture of New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are validly tendered by holders thereof pursuant to the Exchange Offer. See
"The Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering
Old Notes" and "Description of Notes."
The New Notes will bear interest at a rate equal to 10% per annum.
Interest on the New Notes is payable semiannually, commencing May 15, 1997, on
May 15 and November 15 of each year (each, an "Interest Payment Date") and shall
accrue from November 12, 1996 or from the most recent Interest Payment Date with
respect to the Old Notes to which interest was paid or duly provided for. The
New Notes will mature on November 15, 2006. See "Description of Notes."
The New Notes will not be redeemable at the Company's option prior to
November 15, 2001. Thereafter, the New Notes will be redeemable by the Company
at the redemption prices and subject to the conditions set forth in "Description
of Notes--Optional Redemption." Upon the occurrence of a Change of Control (as
defined under "Description of Notes--Certain Definitions"), the Company will be
required to make an offer to repurchase all outstanding New Notes at 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of purchase. There is no assurance that the Company will have
adequate funds to repurchase the New Notes upon a Change in Control. See
"Description of Notes--Repurchase at the Option of Holders--Change of Control."
The New Notes will be general unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined under "Description of Notes--Certain Definitions") of the Company,
including borrowings under the Restated Credit Agreement, as amended, dated
November 12, 1996 (the "Credit Agreement"). The New Notes will also be
effectively subordinated to all of the indebtedness of the Subsidiaries. As of
January 15, 1997, the Notes were subordinate to approximately $76.1 million of
Senior Indebtedness. Under the Credit Agreement, the Company had an unfunded
commitment of $98.7 million at January 15, 1997 which, if funded, would be
Senior Indebtedness. See "Description of Notes." See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Indenture permits the Company and its
Subsidiaries to incur additional indebtedness, including additional Senior
Indebtedness, subject to certain financial covenants.
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in "no-action"
letters issued to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such holder
(other than a broker-dealer who purchased Old Notes directly from the Company
for resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act)
(i) (continued on next page)
<PAGE>
without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such holder is not an affiliate of the
Company, is acquiring the New Notes in the ordinary course of business and is
not participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders wishing to accept
the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. In
addition, if such holder is not a broker-dealer, it must represent that it is
not engaged in, and does not intend to engage in, a distribution of the New
Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "The
Exchange Offer--Resales of the New Notes." This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of
market-making or other trading activities.
As of February 3, 1997, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the sole registered holder of the
Old Notes and held the Old Notes for 33 of its participants. The Company
believes that no such participant is an affiliate (as such term is defined in
Rule 405 of the Securities Act) of the Company. There has previously been only
a limited secondary market, and no public market, for the Old Notes. The Old
Notes are eligible for trading in the Private Offering, Resales and Trading
through Automatic Linkages ("PORTAL") market. In addition, the Initial
Purchasers have advised the Company that they currently intend to make a market
in the New Notes; however, the Initial Purchasers are not obligated to do so and
any market making activities may be discontinued by the Initial Purchasers at
any time. Therefore, there can be no assurance that an active market for the
New Notes will develop. If such a trading market develops for the New Notes,
future trading prices will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on such factors, the New Notes may
trade at a discount from their face value. See "Risk Factors--Absence of Public
Market."
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, the DTC, as
the initial depository with respect to the Old Notes (in such capacity, the
"Depository"). The Global Old Note is registered in the name of Cede & Co., as
nominee of DTC, and beneficial interests in the Global Old Note are shown on,
and transfers thereof are effected only through, records maintained by the
Depository and its participants. The use of the Global Old Note to represent
certain of the Old Notes permits the Depository's participants, and anyone
holding a beneficial interest in an Old Note registered in the name of such a
participant, to transfer interests in the Old Notes electronically in accordance
with the Depository's established procedures without the need to transfer a
physical certificate. New Notes issued in exchange for the Global Old Note will
also be issued initially as a note in global form (the "Global New Note," and,
together with the Global Old Note, the "Global Notes") and deposited with, or on
behalf of, the Depository. After the initial issuance of the Global New Note,
New Notes in certificated form will be issued in exchange for a holder's
proportionate interest in the Global New Note only as set forth in the
Indenture.
(ii)
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION................................................... (iv)
NOTE REGARDING FORWARD-LOOKING INFORMATION.............................. (iv)
PROSPECTUS SUMMARY...................................................... 1
RISK FACTORS............................................................ 9
THE EXCHANGE OFFER...................................................... 15
CAPITALIZATION.......................................................... 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA........................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 25
BUSINESS................................................................ 29
MANAGEMENT.............................................................. 37
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.................... 43
PRINCIPAL SHAREHOLDERS.................................................. 44
DESCRIPTION OF NOTES.................................................... 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................. 65
DESCRIPTION OF CREDIT AGREEMENT......................................... 66
PLAN OF DISTRIBUTION.................................................... 67
LEGAL MATTERS........................................................... 67
EXPERTS................................................................. 68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
(iii)
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, is required to file periodic reports, proxy statements and other
information with the Commission relating to its business, financial condition
and other matters. Such information is available for inspection at the public
reference facilities of the Commission at 450 Fifth Street, NW, Washington, DC
20549, and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. Copies of such information are
obtainable, by mail, upon payment of the Commission's customary charges, by
writing to the Commission's principal office at 450 Fifth Street, NW,
Washington, DC 20549. Such material is also available for inspection at the
library of the New York Stock Exchange (the "NYSE"), 20 Broad Street, New York,
New York 10005. The Commission maintains a web site (http://www.sec.gov) that
contains reports proxy and information statements and other information
regarding registrants that file documents electronically with the Commission.
The Common Stock of the Company is listed and traded on the NYSE under the
symbol "PTX."
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish to the holders of Notes and submit to the
Commission (unless the Commission will not accept such materials) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's independent
accountants, and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of Notes in connection
with any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act.
NOTE REGARDING FORWARD-LOOKING INFORMATION
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
(iv)
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
DATA, INCLUDING FINANCIAL STATEMENTS AND RELATED NOTES THERETO, APPEARING
ELSEWHERE HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" OR
"PILLOWTEX" INCLUDES PILLOWTEX CORPORATION AND ITS SUBSIDIARIES. FOR A
DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK FACTORS."
THE COMPANY
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 the
Company 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 bedroom textile furnishings (other than sheets), offering a broad
assortment of products across multiple price points.
The Company 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. The
Company believes it is one of the principal suppliers of bedroom textile
products to several of the largest retailers in the United States, including
Wal-Mart Stores, Inc. (including Wal-Mart and Sam's Club) ("Wal-Mart"), Dayton
Hudson Corporation (including Dayton's, Hudson's, Mervyn's, Marshall Field's and
Target) ("Dayton Hudson") and Federated Allied Department Stores (including
Macy's, Bloomingdale's and Burdine's) ("Federated"). See "Business--Marketing,
Sales and Distribution."
Pillowtex markets its products under numerous Company-owned trademarks and
trade names and customer-owned private labels, as well as certain licensed
trademarks. 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 holds an exclusive license for the highly regarded Ralph Lauren Home
Collection for pillows, down comforters and blankets, and a non-exclusive
license for a variety of other bedroom textile products. The Company has also
entered into various trademark license agreements under which it markets
pillows, down comforters, blankets and related products. Such licenses include
Cannon-Registered Trademark-, Royal Velvet-Registered Trademark-, Charisma-
Registered Trademark-, Touch of Class-Registered Trademark-, Comforel-Registered
Trademark-, Martex-Registered Trademark-, Mickey & Co.-Registered Trademark- and
Dacron-Registered Trademark-.
Pillowtex operates an extensive network of manufacturing and distribution
facilities in Texas, California, Illinois, Mississippi, Pennsylvania, North
Carolina, South Carolina, Tennessee and Toronto, Canada. The Company's
nationwide manufacturing and distribution network enables Pillowtex to ship
pillows, mattress pads and down comforters cost effectively to all major cities
in the United States and Canada. The hub of the network for pillows and down
comforters is located in Dallas, Texas, where the Company operates what it
believes to be the largest feather and down processing facility in North
America, as well as an automated, high speed pillow shell manufacturing
facility. Raw materials for bed pillows and down comforters undergo initial
processing at the Dallas locations, which yields significant economies of scale,
and are shipped to the Company's regional facilities for final assembly and
distribution to customers. The Company produces blankets at manufacturing
facilities in North Carolina, South Carolina and Tennessee. These plants
provide full vertical production capability, including spinning, weaving, dying
and finishing.
BUSINESS STRATEGY
Pillowtex's business strategy is to capitalize on the strengths that have
distinguished the Company as a preferred supplier of high quality bedroom
textile products in North America. These strengths include the ability to:
- - provide customers with a "one-stop shop" for a broad array of
top-of-the-bed product lines (excluding sheets) across multiple price
points, with an emphasis on higher margin products;
- - maintain strong customer relationships by offering comprehensive
merchandising programs and promotional support tools, and by maximizing the
Company's product assortments and array of licensed and Company-owned
1
<PAGE>
trademarks, trade names and brands, with a focus on encouraging consumers
to "trade up" to higher margin products;
- - leverage its nationwide production and distribution network, which provides
comprehensive capability in electronic data interchange ("EDI") and "quick
response" shipments to major retailers;
- - enhance the Company's position as a low cost producer, both operationally
and in selling, general and administrative expenses, through increased
automation, process improvements, system controls and expansion of cost
effective international supply sources; and
- - identify acquisitions that will complement the Company's current product
lines and provide business synergies.
Pillowtex was incorporated in 1954 as an Illinois corporation and was
reincorporated in 1986 as a Texas corporation. The Company's common stock is
traded on the New York Stock Exchange under the symbol "PTX." The Company's
corporate offices are located at 4111 Mint Way, Dallas, Texas 75237 and its
telephone number is (214) 333-3225.
RECENT DEVELOPMENT
On November 18, 1996, the Company purchased (the "Acquisition") certain
assets from the blanket division of Fieldcrest Cannon, Inc. ("Fieldcrest")
pursuant to the terms of an Asset Purchase Agreement, dated as of October 3,
1996. The Acquisition involved the purchase by the Company of the following
assets for an aggregate purchase price of approximately $28.3 million: (i) an
exclusive worldwide trademark and related intellectual property license (the
"License Agreement") with respect to blankets, throws, pillows, mattress pads,
down comforters, featherbeds and related items; (ii) blanket inventory;
(iii) equipment and machinery used in connection with the manufacture of
blankets and throws; (iv) certain personal property leases for equipment; and
(v) the assumption of certain contracts relating to the business of Fieldcrest's
blanket division. The Company has allocated the purchase price among the
classes of assets as follows: $18.0 million for the blanket inventory; $6.3
million for machinery and equipment; and $4.0 million for intangibles. The
Company intends to integrate substantially all of the acquired equipment and
machinery into its existing blanket manufacturing operations on or before
April 1, 1997.
The License Agreement provides for a 25-year worldwide exclusive right to
market certain products under the Fieldcrest family of trademarks, which include
Fieldcrest-Registered Trademark-, Cannon-Registered Trademark-, Royal Velvet-
Registered Trademark-, Charisma-Registered Trademark- and Touch of Class-
Registered Trademark- (the "Licensed Marks"). These products include all types
of blankets and throws (the "Blanket Products"), as well as bed pillows,
mattress pads and down comforters (the "Pillow Products"). The Company formerly
marketed and sold the Pillow Products under a trademark license with Fieldcrest.
The royalty rate applicable to the sale of Pillow Products under the License
Agreement is lower than the average royalty rate on the sale of such products
under the former license agreement. If the reduced royalty rate applicable to
the sale of the Pillow Products under the License Agreement had been in effect
for the year ended December 30, 1995 and the nine months ended September 28,
1996, the royalty payments under the existing license agreement for such periods
would have been reduced by $295,000 and $192,000, respectively.
THE PRIOR OFFERING
The outstanding $125.0 million principal amount of Old Notes were sold by
the Company to the Initial Purchasers on November 12, 1996, pursuant to the
Purchase Agreement. The Initial Purchasers subsequently resold the Old Notes in
reliance on Rule 144A under the Securities Act. The Company and the Initial
Purchasers also entered into the Registration Rights Agreement pursuant to which
the Company granted certain registration rights for the benefit of the holders
of the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer--Purpose and Effect."
2
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer..... The Company is offering upon the terms and subject to
the conditions set forth herein and in the Letter of
Transmittal to exchange the New Notes for the
outstanding Old Notes. As of the date of this
Prospectus, $125.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum
amount authorized by the Indenture for all Notes. As
of January 15, 1997, there was one registered holder of
the Old Notes, Cede & Co., which held the Old Notes for
33 of its participants. See "The Exchange Offer--Terms
of the Exchange Offer."
Expiration Date........ 5:00 p.m., New York City time, on March 19, 1997 as the
same may be extended. See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Conditions of the
Exchange Offer...... The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for
exchange. The only condition to the Exchange Offer is
the declaration by the Commission of the effectiveness
of the Registration Statement of which this Prospectus
constitutes a part (the "Exchange Offer Registration
Statement"). See "The Exchange Offer--Conditions of
the Exchange Offer."
Termination of Certain
Rights............... Pursuant to the Registration Rights Agreement and the
Old Notes, holders of Old Notes (i) have rights to
receive Liquidated Damages and (ii) have certain rights
intended for the holders of unregistered securities.
"Liquidated Damages" means damages of $0.05 per week
per $1,000 principal amount of Old Notes (up to a
maximum of $0.30 per week per $1,000 principal amount)
during the period in which a Registration Default is
continuing pursuant to the terms of the Registration
Rights Agreement. Holders of New Notes will not be
and, upon consummation of the Exchange Offer, holders
of Old Notes will no longer be, entitled to (i) the
right to receive the Liquidated Damages or (ii) certain
other rights under the Registration Rights Agreement
intended for holders of unregistered securities. See
"The Exchange Offer--Termination of Certain Rights" and
"Procedures for Tendering Old Notes."
Accrued Interest....... The New Notes will bear interest at a rate equal to 10%
per annum. Interest shall accrue from November 12,
1996 or from the most recent Interest Payment Date with
respect to the Old Notes to which interest was paid or
duly provided for. See "Description of Notes--
Principal, Maturity and Interest."
Procedures for
Tendering Old Notes.. Each holder desiring to accept the Exchange Offer must
complete and sign the Letter of Transmittal, have the
signature thereon guaranteed if required by the Letter
of Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a Notice of
Guaranteed Delivery (as defined in the Letter of
Transmittal) and any other required documents (such as
evidence of authority to act, if the Letter of
Transmittal is signed by someone acting in a fiduciary
or representative capacity), to the Exchange Agent (as
defined under "The Exchange Offer--The Exchange Agent;
Assistance") at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. Any Beneficial
Owner (as defined under "The Exchange Offer--Procedures
for Tendering Old Notes") of the Old Notes whose Old
Notes are registered in the name of a nominee, such as
a broker, dealer, commercial bank or trust company and
who wishes to tender Old Notes in the Exchange Offer,
should instruct such entity or person to promptly
tender on such Beneficial Owner's behalf. See "The
Exchange Offer--Procedures for Tendering Old Notes."
3
<PAGE>
Guaranteed Delivery
Procedures........... Holders of Old Notes who wish to tender their Old Notes
and (i) whose Old Notes are not immediately available
or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date, may tender
their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. See
"The Exchange Offer--Guaranteed Delivery Procedures."
Acceptance of Old Notes
and Delivery of
New Notes............ Upon effectiveness of the Exchange Offer Registration
Statement of which this Prospectus constitutes a part
and consummation of the Exchange Offer, the Company
will accept any and all Old Notes that are properly
tendered in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. See "The
Exchange Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Withdrawal Rights...... Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. See "The Exchange Offer--Withdrawal Rights."
Certain Federal Income
Tax Considerations... There will not be any U.S. federal income tax
consequences to holders exchanging Old Notes for New
Notes pursuant to the Exchange Offer. See "Certain
Federal Income Tax Consequences."
The Exchange Agent..... Bank One, Columbus, N.A. is the exchange agent (in such
capacity, the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set forth in
"The Exchange Offer--The Exchange Agent; Assistance."
Fees and Expenses...... All expenses incident to the Company's consummation of
the Exchange Offer and compliance with the Registration
Rights Agreement will be borne by the Company. The
Company will also pay certain transfer taxes applicable
to the Exchange Offer. See "The Exchange Offer--Fees
and Expenses."
Resales of the New
Notes................ Based on existing interpretations by the staff of the
Commission set forth in "no-action" letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer to a holder in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder (other
than (i) a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant to Rule
144A under the Securities Act or any other available
exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the meaning
of Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Holder is acquiring the New Notes in the
ordinary course of business and is not participating,
and has no arrangement or understanding with any person
to participate, in a distribution of the New Notes.
Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes
were acquired by such broker as a result of market-
making or other trading activities, must acknowledge
that it will deliver a prospectus in connection with
any resale of such New Notes. See "The Exchange Offer--
Resales of the New Notes" and "Plan of Distribution."
Effect of Not Tendering
Old Notes
for Exchange......... Old Notes that are not tendered or that are not
properly tendered will, following the expiration of the
Exchange Offer, continue to be subject to the existing
restrictions upon
4
<PAGE>
transfer thereof. The Company will have no further
obligations to provide for the registration under the
Securities Act of such Old Notes and such Old Notes
will, following the expiration of the Exchange Offer,
bear interest at the same rate as the New Notes.
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Liquidated Damages and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, holders of the Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in limited
circumstances. See "Exchange Offer--Termination of Certain Rights." The
Exchange Offer shall be deemed consummated upon the occurrence of the delivery
by the Company to the Registrar under the Indenture of the New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering Old
Notes" and "Description of Notes."
Securities Offered..... $125.0 million aggregate principal amount of 10% Senior
Subordinated Notes due 2006.
Maturity Date.......... November 15, 2006.
Interest Payment Dates. May 15 and November 15, commencing May 15, 1997.
Optional Redemption.... On or after November 15, 1997, the Company may redeem
the Notes, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption.
Mandatory Redemption... None.
Ranking................ The Notes will be general unsecured obligations of the
Company, subordinated in right of payment to all
existing and future Senior Indebtedness, which will
include borrowings under the Credit Agreement. As of
September 28, 1996, on a pro forma basis after giving
effect to the Prior Offering and application of the net
proceeds therefrom, the Company would have had
approximately $96.5 million of outstanding Senior
Indebtedness, which would rank senior in right of
payment to the Notes. The Notes also will be
effectively subordinated to all indebtedness and other
liabilities of the Company's Subsidiaries. The
Indenture, pursuant to which the New Notes will be
issued, permits the Company and its Subsidiaries to
incur additional indebtedness, including additional
Senior Indebtedness, subject to certain limitations.
See "Description of Notes--Subordination."
Guarantees............. The New Notes will be, and the Old Notes are,
unconditionally guaranteed (the "Guarantees") 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 Agreement (each
a "Guarantor" and, collectively, the "Guarantors").
The Guarantees will be subordinated in right of payment
to all existing and future Guarantor Senior
Indebtedness (as defined under "Description of Notes--
Certain Definitions") of the relevant Guarantor. See
"Description of Notes--Subsidiary Guarantees."
Change of Control...... Upon a Change of 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 to the date of repurchase.
5
<PAGE>
Covenants.............. The Indenture restricts, among other things, the
Company's ability to incur additional indebtedness and
issue preferred stock, incur liens to secure PARI PASSU
or 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
Company. See "Description of Notes--Certain
Covenants."
Absence of a Public
Market for the
New Notes............ The New Notes are a new issue of securities with no
established market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the New Notes. The Initial Purchasers have
advised the Company that it currently intends to make a
market in the New Notes. However, the Initial
Purchasers are not obligated to do so, and any market
making with respect to the New Notes may be
discontinued at any time without notice. The Company
does not intend to apply for listing of the New Notes
on a securities exchange.
RECENT FINANCIAL RESULTS
Pillowtex reported an increase in both sales and earnings for the fourth
quarter and year ended December 28, 1996. Earnings before extraordinary loss
for the fourth quarter of 1996 increased 37.9% to $6,179,000, or $.58 per
share, compared to $4,481,000, or $.42 per share, in the fourth quarter of
1995. Sales increased by 8.7% to $154,885,000 in the fourth quarter of 1996
from $142,547,000 in the comparable period in 1995. The Company reported
that operations and sales in the Pillowtex Division were very strong, but
blanket sales were lower in 1996 and blanket margins came under some pressure
due to a highly competitive pricing environment.
Earnings before extraordinary loss for the year ended December 28, 1996
increased by 28.5% to $14,732,000, or $1.39 per share, in 1996 from
$11,469,00, or $1.08 per share, in 1995. Net sales for 1996 grew by 3.3%,
from $474,899,000 to $490,655,000.
Pillowtex reported an extraordinary loss of $609,000, or $.06 per share,
related to the write-off of deferred finance costs for its previously
existing term loan facility under the Credit Agreement (the "Term Loan"),
which was retired with a portion of the proceeds from the Prior Offering.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Exchange Offer.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
FISCAL YEAR (1) NINE MONTHS ENDED
---------------------------------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Net sales..................... $258,966 $273,462 $291,624 $349,520 $474,899 $332,352 $335,770
Cost of goods sold............ 206,626 222,611 238,155 294,714 395,922 275,407 280,272
-------- -------- -------- -------- -------- -------- --------
Gross profit.................. 52,340 50,851 53,469 54,806 78,977 56,945 55,498
Selling, general and
administrative expenses..... 33,227 33,376 29,227 36,399 42,508 32,315 31,170
-------- -------- -------- -------- -------- -------- --------
Earnings from operations...... 19,113 17,475 24,242 18,407 36,469 24,630 24,328
Interest expense.............. 5,283 4,997 3,042 6,361 17,491 12,964 10,279
Other expense (income), net... -- 1,049 -- (379) -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes.. 13,830 11,429 21,200 12,425 18,978 11,666 14,049
Income taxes.................. 626 529 8,420 4,736 7,509 4,678 5,495
-------- -------- -------- -------- -------- -------- --------
Net earnings.................. $ 13,204 $ 10,900 $ 12,780 $ 7,689 $ 11,469 $ 6,988 $ 8,554
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
OTHER DATA:
Depreciation and
amortization................ $ 2,888 $ 3,104 $ 3,868 $ 6,365 $ 11,994 $ 8,767 $ 9,440
Capital expenditures.......... 3,742 5,869 7,135 10,538 12,448 8,630 2,981
SG&A margin (2)............... 12.8% 12.2% 10.0% 10.4% 9.0% 9.7% 9.3%
EBITDA (3).................... $ 22,001 $ 19,530 $ 28,110 $ 25,151 $ 48,463 $ 33,397 $ 33,768
EBITDA margin (3)(4).......... 8.5% 7.1% 9.6% 7.2% 10.2% 10.0% 10.1%
Ratio of EBITDA to interest
expense (3)................. 4.2x 3.9x 9.2x 4.0x 2.8x 2.6x 3.3x
Ratio of earnings to fixed
charges (5)................. 3.4x 3.0x 6.8x 2.8x 2.0x 1.8x 2.2x
PRO FORMA FINANCIAL DATA (6):
Interest expense.............. $ 19,936 $ 15,110 $ 13,879
EBITDA (3).................... 48,758 33,605 33,960
Ratio of EBITDA to interest
expense (3)................. 2.4x 2.2x 2.4x
Ratio of earnings to fixed
charges (5)................. 1.8x 1.6x 1.6x
</TABLE>
<TABLE>
PRO
AT FORMA (7)
---------------------------------------------- -------------
DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 28,
1995 1995 1996 1996
------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $110,128 $149,933 $152,787 $178,287
Total assets.................. 324,710 373,528 370,670 400,470
Total debt.................... 165,388 212,231 191,676 221,476
Shareholders' equity.......... 87,990 84,438 95,042 95,042
</TABLE>
- -------------------
(1) Amounts set forth for the year ended December 31, 1993 reflect the
inclusion of Manetta Home Fashions, Inc. ("Manetta") from August 30, 1993,
Tennessee Woolen Mills, Inc. ("TWM") from September 7, 1993 and Torfeaco
Industries Limited ("Torfeaco") from December 1, 1993. Amounts set forth
for the year ended December 31, 1994 reflect the inclusion of Imperial
Feather Company ("Imperial") from August 19, 1994 and Beacon Manufacturing
Company ("Beacon") from December 1, 1994. The financial information for
years 1993 and 1994 has been reclassified for certain advertising and
royalty fees so as to be comparable with the 1995 presentation.
Advertising fees are now reported as a reduction of gross sales rather than
selling, general and administrative ("SG&A") expenses and the royalty fees
have been reclassified from SG&A expenses to cost of goods sold.
(2) Represents SG&A expenses as a percentage of net sales.
(3) EBITDA consists of earnings before interest, income taxes, extraordinary
items and depreciation and amortization expense. While EBITDA should not
be construed as an alternative to operating income or net income, or as an
indicator of operating performance or liquidity, it is a measure that the
Company believes is used commonly to evaluate a company's ability to
service debt.
(4) Represents EBITDA as a percentage of net sales.
7
<PAGE>
(5) For purposes of calculating these ratios, earnings represents earnings
before income taxes plus fixed charges, as defined. Fixed charges consists
of interest expense, amortization of debt issuance costs, and the portion
(approximately one-third) of rental and lease expense, which Management
believes is representative of the interest component of rental and lease
expense.
(6) The pro forma financial data has been calculated giving effect to the Prior
Offering and the application of the net proceeds therefrom, the amendment
of the Company's existing Credit Agreement as described in "Description of
Credit Agreement" and certain cost savings associated with the License
Agreement entered into in connection with the Acquisition as if each such
transaction occurred on January 1, 1995. However, no other pro forma
adjustments have been made with respect to the Acquisition, including any
revenue and attributable EBITDA effects. Fieldcrest generated
approximately $37.0 million of revenues from the sale of Blanket Products
under the Licensed Marks during the year ended December 31, 1995. However,
the Acquisition did not involve the purchase of Fieldcrest's Blanket
Products business, including but not limited to its sales and marketing
personnel, its product distribution channels or its customer service
department. While the Company believes that its existing sales,
distribution and customer service capabilities will support the Company's
sales of Blanket Products under the Licensed Marks, there can be no
assurance that the Company will be able to generate revenues from such
assets at the levels previously achieved by Fieldcrest. Moreover, the pro
forma financial data does not purport to represent what the Company's
results actually would have been if such events had occurred at the dates
indicated, nor does such information purport to project the results of the
Company for any future period. See "-- Recent Development" and "Use of
Proceeds."
(7) The pro forma balance sheet data has been calculated giving effect to the
Prior Offering and the application of the net proceeds therefrom as if each
occurred on September 28, 1996.
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SPECIFIC FACTORS SET
FORTH BELOW, AS WELL AS THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, IN
EVALUATING THE EXCHANGE OFFER.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
Upon consummation of the Prior Offering, the Company became highly
leveraged. At September 28, 1996, on a pro forma basis, after giving effect to
the Prior Offering and the application of the net proceeds therefrom, the
Company would have had total consolidated outstanding debt of approximately
$221.5 million. In addition, subject to the restrictions in the Credit Agreement
and the Indenture, the Company and its subsidiaries may incur additional
indebtedness (including additional Senior Indebtedness) from time-to-time to
finance acquisitions or capital expenditures or for general corporate purposes.
Upon the closing of the Prior Offering, the Company had unused borrowing
capacity of up to approximately $89.0 million under a $175.0 million revolving
credit facility (the "Revolver") provided for in the Credit Agreement.
The level of the Company's indebtedness could have important consequences
to holders of the Notes, including: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company'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) the Company's
level of indebtedness could limit its flexibility in reacting to changes in its
industry or economic conditions generally.
The Company's ability to pay interest on the Notes and to satisfy its other
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
borrowing under the Credit Agreement or any successor credit agreement. The
Company 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 the Company 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 Credit Agreement or other debt instruments. In the absence of such
financing, the Company'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 may be adversely
affected. If the Company does not generate sufficient increases in cash flow
from operations to repay the Notes at maturity, it could attempt to refinance
the Notes; however, no assurance can be given that such a refinancing would be
available on terms acceptable to the Company, if at all. Any failure by the
Company to satisfy its obligations with respect to the Notes at maturity (with
respect to payments of principal) or prior thereto (with respect to payments of
interest or required repurchases) would constitute a default under the Indenture
and could cause a default under agreements governing other indebtedness, if any,
of the Company. In addition, there can be no assurance that the Company will
have available the financial resources necessary to repurchase any or all Notes
tendered upon a Change of Control.
SUBORDINATION OF NOTES AND GUARANTEES
The Old Notes are, and the New Notes will be, subordinated in right of
payment to all existing and future Senior Indebtedness of the Company, including
borrowings under the Credit Agreement. In the event of bankruptcy, liquidation
or reorganization of the Company, the assets of the Company will be available to
pay obligations on the Notes only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes then outstanding. Each Guarantee will be similarly
subordinated in right of payment to all existing and future Guarantor Senior
Indebtedness of the relevant Guarantor, including such Guarantor's guaranty of
the Company's indebtedness under the Credit Agreement. In addition, under
certain circumstances the Company will not be permitted to pay its obligations
under the Notes in the event of a default under certain Senior Indebtedness.
The aggregate principal amount of Senior Indebtedness of the Company, as of
September 28, 1996 would have been approximately $96.5 million on a pro forma
basis after giving effect to the Acquisition, the Prior Offering and the
application of the net proceeds therefrom. Additional Senior Indebtedness may be
incurred by the Company from time-to-time, subject to certain restrictions. See
"Description of Notes--Subordination."
9
<PAGE>
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the ability of the Company and
its subsidiaries to incur additional indebtedness, pay dividends or make certain
other restricted payments, incur liens to secure PARI PASSU or subordinated
indebtedness, sell stock of subsidiaries, apply net proceeds from certain asset
sales, merge or consolidate with any other person, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of the assets of the
Company, enter into certain transactions with affiliates, or incur substantially
all of the assets of the Company, enter into certain transactions with
affiliates, or encumber indebtedness that is subordinate in right of payment to
any Senior Indebtedness and senior in right of payment to the Notes.
The Credit Agreement contains more extensive and restrictive covenants and
restrictions than the Indenture and requires the Company to maintain specified
financial ratios and satisfy certain financial condition tests. The Company's
ability to meet those financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those tests. In addition, the Company's operating and financial flexibility will
be limited by covenants that limit the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends or make
distributions to its stockholders or make certain other restricted payments,
create certain liens upon assets, apply the proceeds from the dispositions of
certain assets or enter into certain transactions with affiliates. There can be
no assurance that such covenants will not adversely affect the Company's ability
to finance its future operations or capital needs or to engage in other business
activities which may be in the interests of the Company. The Credit Agreement
also prohibits the Company from prepaying other indebtedness (including the
Notes) before indebtedness under the Credit Agreement. A breach of any of these
covenants could result in a default under the Credit Agreement. Upon the
occurrence of an event of default under the Credit Agreement, the lenders
thereunder could elect to declare all amounts outstanding under the Credit
Agreement, including accrued interest or other obligations, to be immediately
due and payable or proceed against the collateral granted to them to secure that
indebtedness. If any Senior Indebtedness were to be accelerated, there can be
no assurance that the assets of the Company would be sufficient to repay in full
that indebtedness and the other indebtedness of the Company, including the
Notes.
As a result of these covenants, the ability of the Company to respond to
changing business and economic conditions and to secure additional financing, if
needed, may be significantly restricted, and the Company may be prevented from
engaging in transactions that might otherwise be considered beneficial to the
Company. See "Description of Notes--Certain Covenants" and "Description of
Credit Agreement."
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Guarantors, at the time it incurred the indebtedness evidenced by the
Notes or its Guarantee, as the case may be, (i)(a) was or is insolvent or
rendered insolvent by reason of such occurrence or (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or such
Guarantor constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability to
pay such debts as they mature, and (ii) the Company or such Guarantor received
or receives less than reasonably equivalent value or fair consideration for the
incurrence of such indebtedness, the Notes and the Guarantee could be voided, or
claims in respect of the Notes or the Guarantees could be subordinated to all
other debts of the Company or such Guarantor, as the case may be. The voiding
or subordination of any of such pledges or other security interests or of any of
such indebtedness could result in an Event of Default (as defined in the
Indenture) with respect to such indebtedness, which could result in acceleration
thereof. In addition, the payment of interest and principal by the Company
pursuant to the Notes or the payment of amounts by a Guarantor pursuant to a
Guarantee could be voided and required to be returned to the person making such
payment, or to a fund for the benefit of the creditors of the Company or such
Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities were
greater than the fair saleable value of all of its assets at a fair valuation or
if the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
10
<PAGE>
To the extent any Guarantees were voided as a fraudulent conveyance or held
unenforceable for any other reason, holders of Notes would cease to have any
claim in respect of such Guarantor and would-be creditors solely of the Company
and any Guarantor whose Guarantee was not avoided or held unenforceable. In
such event, the claims of the holders of Notes against the issuer of an invalid
Guarantee would be subject to the prior payment of all liabilities and preferred
stock claims of such Guarantor. There can be no assurance that, after providing
for all prior claims and preferred stock interests, if any, there would be
sufficient assets to satisfy the claims of the holders of Notes relating to any
voided portions of any of the Guarantees.
The Company is a holding company whose material assets consist primarily of
the capital stock of the Guarantors and the Company's intellectual property
assets. Consequently, the Company is dependent upon dividends paid by the
Guarantors to pay its operating expenses, service its debt obligations,
including the Notes, and satisfy any mandatory repurchase obligations relating
to the Notes, as a result of Change of Control or a sale or other disposition of
certain assets. See "Description of Notes" and "Description of Credit
Agreement."
FUTURE ACQUISITIONS
The Company expects to continue a strategy of identifying and acquiring
companies with complementary products or services that may be expected to
enhance the Company's operations and profitability. There can be no assurances
that the Company will be able to integrate acquisitions successfully into the
Company's operations or that any of such acquisitions will prove profitable.
DEPENDENCE ON SUPPLY SOURCES IN CHINA
CONCENTRATION OF SUPPLY SOURCES. In 1995 and the nine months ended
September 28, 1996, approximately 80% of the raw feather and down that Pillowtex
uses to produce natural fill pillows and down comforters was imported from the
People's Republic of China ("China"). In 1995, the Company opened an office in
Hong Kong to source purchases from China and other far eastern countries of raw
feather and down (some of which is also obtained through an independent supplier
in the United States), comforter shells and comforter covers.
POSSIBLE DISRUPTION OF SUPPLY SOURCES. The Company'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 the Company's
supply sources in China were disrupted for any reason, the Company 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, the Company is unable to predict whether
such relationships would be on terms satisfactory to the Company. Accordingly,
any significant disruption in the Company's relationships with its suppliers in
China could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Manufacturing, Raw
Materials, and Imports."
IMPORT REGULATIONS. The Company'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 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. Most favored nation status was accordingly
renewed in June 1996 despite legislation pursued by Congress that demanded 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 1997 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. See "Business--Manufacturing, Raw Materials and Imports."
11
<PAGE>
ADVERSE RETAIL INDUSTRY CONDITIONS
The Company 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 the retailers to which the Company sells its products
are currently operating under the protection of federal bankruptcy laws or state
insolvency laws or may file for relief under such laws in the future. As a
result of these financial difficulties and bankruptcy and insolvency
proceedings, the Company may be unable to collect some or all amounts owed by
these retailers. Additionally, all or part of the operations of a retailer that
seeks bankruptcy or other debtor protection may be discontinued or sales of the
Company's products to such a retailer may be curtailed or terminated as a result
of bankruptcy or insolvency proceedings. During 1995 and the nine months ended
September 28, 1996, sales to retailers currently operating under the protection
of such laws accounted for approximately 1.6% and 1.3% of Pillowtex's net sales,
respectively.
DEPENDENCE ON KEY LICENSES
The Company holds licenses with organizations such as Ralph Lauren, Disney,
Fieldcrest, DuPont, the U.S. Postal Service, WestPoint Stevens, Inc., and
others, using such well-known trademarks and trade names as the Ralph Lauren
Home Collection, Mickey & Co.-Registered Trademark-, Cannon-Registered
Trademark-, Royal Velvet-Registered Trademark-, Charisma-Registered Trademark-,
Touch of Class-Registered Trademark-, Martex-Registered Trademark- and Dacron-
Registered Trademark-. Although the significance of specific licenses varies
from year-to-year, a substantial portion of Pillowtex's net sales for 1995 and
the nine months ended September 28, 1996, 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 from 1996 to 1999. No assurance can be
given that Pillowtex will be able to renew these licenses on terms acceptable to
Pillowtex upon their expiration or will be able to acquire new licenses to use
other popular trademarks. In addition, if Mr. Charles M. Hansen, Jr., the
Company's Chairman of the Board, President and Chief Executive Officer, ceases
to be actively involved in the management of the Company or if Mr. Hansen and/or
John H. Silverthorne, or their immediate families, in the aggregate, cease to
beneficially own at least 40% of the Company's common stock (the "Common
Stock"), the Company's license to market products under the Ralph Lauren Home
Collection will become subject to termination at the option of the licensor.
The loss of a significant license could have a material adverse effect on the
financial condition or results of operations of the Company.
RISK OF LOSS OF MATERIAL CUSTOMERS
In 1995, sales to Wal-Mart and Dayton Hudson accounted for 13.7% and 12.7%
of the Company's total sales, respectively. For the nine months ended
September 28, 1996, sales to Wal-Mart and Dayton Hudson accounted for 14.7% and
12.5% of total sales, respectively. Consistent with industry practice,
Pillowtex does not operate under a long-term written supply contract with
Wal-Mart, Dayton Hudson or any other of its customers. The Company's business
could be materially adversely affected by the loss of Dayton Hudson or Wal-Mart
as continuing major customers.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control (as defined in the Indenture), the Company will be
required to offer to repurchase all outstanding Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase and
Liquidated Damages. However, there can be no assurance that sufficient funds
will be available at the time of any Change of Control to make any required
repurchases of Notes tendered. Moreover, restrictions in the Credit Agreement
prohibit the Company from making such required repurchases; consequently, any
such repurchases would constitute an event of default under the Credit
Agreement. There can be no assurance that the Company will be able to obtain
appropriate consents under the Credit Agreement to enable it to fulfill such
repurchase obligations. Notwithstanding these provisions, the Company could
enter into certain transactions, including certain recapitalizations, that would
not constitute a Change of Control but would increase the amount of debt
outstanding at such time. See "Description of Notes--Repurchase at the Option
of Holders."
INDUSTRY COMPETITION AND COMPETITIVE FACTORS
The Company participates in a highly competitive industry. The Company
competes with a number of established manufacturers, importers and distributors
of home textile furnishings, some of which have greater financial distribution
and marketing resources. The Company's current competitors consist primarily of
domestic suppliers of bed
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pillows, blankets, mattress pads, down comforters and other bedroom textile
furnishings. The home fashion products industry also includes companies that
produce bed sheets, towels and other commodity-type items. A number of these
companies do not currently offer the Company's principal products. There can
be no assurance, however, that these companies will not compete with the
Company in the future.
The Company competes on the basis of price, quality, brand names and
service. The Company believes that the principal competitive factors affecting
its business 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.
CONTROL BY PRINCIPAL SHAREHOLDERS
Charles M. Hansen, Jr., Mary R. Silverthorne and the John H. Silverthorne
Marital Trust B (collectively, the "Principal Shareholders"), own an aggregate
of 5,887,159 shares of the Common Stock, representing approximately 55.4% of the
outstanding shares of Common Stock as of December 28, 1996. As a result, the
Principal Shareholders are in a position to control the Company through their
ability to determine the outcome of elections of the Company's directors. See
"Principal Shareholders."
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by or under the direction of Charles M.
Hansen, Jr., who serves as Chairman of the Board, President and Chief Executive
Officer. The Company 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 the Company. See "--Dependence on Key Licenses."
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 62% and 69%, respectively, of
the Company's total sales and earnings from operations. The Company's needs for
working capital accelerate 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 the Company'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 the
Company's control. The Company's results of operations would be adversely and
disproportionately affected if the Company's sales were substantially lower than
those normally expected during the second half of the year.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The New Notes are a new issue of securities, have no established trading
market and may not be widely distributed. The Company does not intend to list
the New Notes on any national securities exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automation
Quotation System. The Company has been advised by the Initial Purchasers that
they presently intend to make a market in the New Notes. However, the Initial
Purchasers are not obligated to do so and any market making activities with
respect to the New Notes may be discontinued at any time without notice. In
addition, such market making activity will be subject to the limitations imposed
by the Exchange Act and may be limited during the Exchange Offer and at certain
other times. No assurance can be given that an active public or other market
will develop for the New Notes or as to the liquidity of or the trading market
for the New Notes. If a trading market does not develop or is not maintained,
holders of the New Notes may experience difficulty in reselling the New Notes or
may be unable to sell them at all. If a market for the New Notes develops, any
such market may be discontinued at any time. If a public trading market
develops for the New Notes, future trading prices of the New Notes will depend
on many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities.
Depending on prevailing interest rates,
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the market for similar securities and other facts, including the financial
condition of the Company, the New Notes may trade at a discount from their
principal amount.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on
November 12, 1996, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act. The Company, each domestic Subsidiary of the Company and the Initial
Purchasers also entered into the Registration Rights Agreement, pursuant to
which the Company agreed, with respect to the Old Notes and subject to the
Company's determination that the Exchange Offer is permitted under applicable
law, to (i) cause to be filed, on or prior to December 12, 1996, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its best efforts (a) to cause such registration statement to be
declared effective by the Commission on or prior to February 10, 1997 and (b) to
cause the Exchange Offer to be consummated on or prior to 20 business days after
the date such registration statement is declared effective by the Commission.
The Company will keep the Exchange Offer open for a period of not less than 20
business days and not more than 30 business days. This Exchange Offer is
intended to satisfy the Company's exchange offer obligations under the
Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered will not have any further registration rights
and such Old Notes will continue to be subject to the existing restrictions on
transfer thereof. Accordingly, the liquidity of the market for a holder's Old
Notes could be adversely affected upon expiration of the Exchange Offer if such
holder elects to not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange
Offer is not conditioned upon any minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to the terms and
provisions of the Registration Rights Agreement. See "--Conditions of the
Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes.
As of the date of this Prospectus, $125.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of February 3, 1997, there was one registered
holder of the Old Notes, Cede & Co., which held the Old Notes for 33 of its
participants. Solely for reasons of administration, the Company has fixed the
close of business on February 3, 1997, as the record date (the "Record Date")
for purposes of determining the persons to whom this Prospectus and the Letter
of Transmittal will be mailed initially. Only a holder of the Old Notes (or
such holder's legal representative or attorney-in-fact) may participate in the
Exchange Offer. There will be no fixed record date for determining holders of
the Old Notes entitled to participate in the Exchange Offer. The Company
believes that, as of the date of this Prospectus, no such holder is an affiliate
(as defined in Rule 405 under the Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be March 19, 1997 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended, but shall not be later than March 24, 1997.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "--Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer
is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendments by means of a
prospectus supplement that will be distributed to the registered holders of the
Old Notes. Modification of the Exchange Offer, including, but not limited to,
(i) extension of the period during which the Exchange Offer is open and (ii)
satisfaction of the conditions set forth below under "--Conditions of the
Exchange Offer" may require that at least five business days remain in the
Exchange Offer.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Exchange Offer Registration Statement of which this Prospectus constitutes a
part.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default, holders of Old Notes are
entitled to receive Liquidated Damages of $0.05 per week per $1,000 principal
amount of Old Notes held by such holders (up to a maximum of $0.30 per week per
$1,000 principal amount of Old Notes). A "Registration Default" with respect to
the Exchange Offer shall occur if: (i) the Exchange Offer Registration
Statement has not been filed with the Commission on or prior to December 12,
1996; (ii) the Exchange Offer Registration Statement is not declared effective
on or prior to February 10, 1997 (the "Effectiveness Target Date"), (iii) the
Company fails to consummate the Exchange Offer within 30 business days after the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Exchange Offer Registration Statement is declared
effective but thereafter ceases to be effective during the period specified in
the Registration Rights Agreement. Holders of New Notes will not be and, upon
consummation of the Exchange Offer, holders of Old Notes will no longer be,
entitled to (i) the right to receive the Liquidated Damages or (ii) certain
other rights under the Registration Rights Agreement intended for holders of Old
Notes. The Exchange Offer shall be deemed consummated upon the occurrence of
the delivery by the Company to the Registrar under the Indenture of New Notes in
the same aggregate principal amount as the aggregate principal amount of Old
Notes that are tendered by holders thereof pursuant to the Exchange Offer.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 10% per annum, which
interest shall accrue from November 12, 1996 or from the most recent Interest
Payment Date with respect to the Old Notes to which interest was paid or duly
provided for. See "Description of Notes--Principal, Maturity and Interest."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit such Old Notes, together with a properly
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completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS
OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined under "The Exchange Offer--Procedures for
Tendering Old Notes"). In the event that a signature on a Letter of Transmittal
or a notice of withdrawal, as the case may be, is required to be guaranteed,
such guarantee must be by a firm which is a member of a registered national
securities exchange or the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or otherwise be an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If
the Letter of Transmittal is signed by a person other than the registered holder
of the Old Notes, the Old Notes surrendered for exchange must either (i) be
endorsed by the registered holder, with the signature thereon guaranteed by an
Eligible Institution, or (ii) be accompanied by a bond power, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution. The term "registered holder" as used herein with respect to the
Old Notes means any person in whose name the Old Notes are registered on the
books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial
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Owner, (ii) the holder and each Beneficial Owner are not participating, do
not intend to participate, and have no arrangement or understanding with any
person to participate, in the distribution of the New Notes, (iii) the holder
and each Beneficial Owner acknowledge and agree that any person participating
in the Exchange Offer for the purpose of distributing the New Notes must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the New
Notes acquired by such person and cannot rely on the position of the staff of
the Commission set forth in "no-action" letters that are discussed herein
under "--Resales of the New Notes," (iv) that if the holder is a broker-dealer
that acquired Old Notes as a result of market making or other trading
activities, it will deliver a prospectus in connection with any resale of New
Notes acquired in the Exchange Offer, (v) the holder and each Beneficial
Owner understand that a secondary resale transaction described in clause
(iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Securities Act, and (vi) neither the holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company except as otherwise disclosed to the Company
in writing.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of Transmittal. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal)
must be signed by such holder, (ii) on or prior to the Expiration Date, the
Exchange Agent must have received from the holder and the Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number or numbers of the tendered Old Notes, and the
principal amount of tendered Old Notes, stating that the tender is being made
thereby and guaranteeing that, within four (4) business days after the date of
delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly
executed Letter of Transmittal and any other required documents will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) such
properly completed and executed documents required by the Letter of Transmittal
and the tendered Old Notes in proper form for transfer must be received by the
Exchange Agent within four (4) business days after the Expiration Date. Any
Holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents; provided, however, that
the Company reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offer. If any tendered Old Notes
are not accepted for any reason, such unaccepted Old Notes will be returned
without expense to the tendering holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature
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guarantees) or be accompanied by a bond power in the name of the person
withdrawing the tender, in satisfactory form as determined by the Company in
its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the
other documents required upon transfer by the Indenture, and (iv) specify the
name in which such Old Notes are to be re-registered, if different from the
Depositor, pursuant to such documents of transfer. Any questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, in its sole discretion. The Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are withdrawn will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal.
Properly withdrawn Old Notes may be rendered by following one of the
procedures described under "The Exchange Offer--Procedures for Tendering Old
Notes" at any time on or prior to the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
Bank One, Columbus, N.A. is the Exchange Agent. All tendered Old Notes,
executed Letters of Transmittal and other related documents should be directed
to the Exchange Agent. Questions and requests for assistance and requests for
additional copies of this Prospectus, the Letter of Transmittal and other
related documents should be addressed to the Exchange Agent as follows:
BY REGISTERED OR CERTIFIED MAIL:
Ted Kravitz
Bank One, Columbus, N.A.
235 West Schrock Road
Attention: Corporate Trust Operation
Columbus, Ohio 43271-0184
or
Bank One, Columbus, N.A.
c/o First Chicago Trust
Company of New York
Attention: Corporate Trust Department
14 Wall Street
8th Floor, Window 2
New York, New York 10005
BY HAND OR OVERNIGHT COURIER:
Ted Kravitz
Bank One, Columbus, N.A.
235 West Schrock Road
Attention: Corporate Trust Operation
Westerville, Ohio 43081
or
Bank One, Columbus, N.A.
c/o First Chicago Trust
Company of New York
Attention: Corporate Trust Department
14 Wall Street
8th Floor Window 2
New York, New York 10005
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BY FACSIMILE:
(614) 248-5088 (OH)
or
(212) 240-8988 (NY)
Confirm by Telephone: (212) 240-8862 (NY)
1-800-346-5153
FEES AND EXPENSES
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including fees and expenses of compliance with state securities or Blue Sky
laws), (ii) printing expenses (including expenses of printing certificates for
the New Notes in a form eligible for deposit with DTC and of printing
Prospectuses), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company, (v) fees and disbursements of
independent certified public accountants, (vi) rating agency fees, (vii)
internal expenses of the Company (including all salaries and expenses of
officers and employees of the Company performing legal or accounting duties),
and (ix) fees and expenses incurred in connection with the listing of the New
Notes on a securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in "no-
action" letters issued to third parties, the Company believes that the New Notes
issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by such holder (other
than (i) a broker-dealer who purchased Old Notes directly from the Company for
resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act, or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such holder is acquiring the New Notes in the
ordinary course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes. The Company has not requested or obtained an interpretive letter from
the Commission staff with respect to this Exchange Offer, and the Company and
the holders are not entitled to rely on interpretive advice provided by the
staff to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Exchange Offer is being conducted in
a manner intended to be consistent with the facts and conditions represented in
such letters. If any holder acquires New Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the New Notes,
such holder cannot rely on the position of the staff of the Commission
enunciated in Morgan Stanley & Co., Incorporated (available
20
<PAGE>
June 5, 1991) and Exxon Capital Holdings Corporation (available April 13,
1989), or interpreted in the Commission's letter to Shearman & Sterling
(available July 2, 1993), or similar "no-action" or interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a result of market making or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes. See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph. Sales of New Notes acquired in the Exchange Offer by
holders who are "affiliates" of the Company within the meaning of the Securities
Act will be subject to certain limitations on resale under Rule 144 of the
Securities Act. Such persons will only be entitled to sell New Notes in
compliance with the volume limitations set forth in Rule 144, and sales of New
Notes by affiliates will be subject to certain Rule 144 requirements as to the
manner of sale, notice and the availability of current public information
regarding the Company. The foregoing is a summary only of Rule 144 as it may
apply to affiliates of the Company. Any such persons must consult their own
legal counsel for advice as to any restrictions that might apply to the resale
of their Notes.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis as of September 28, 1996, and on a pro forma basis after giving
effect to the Prior Offering and the application of the net proceeds therefrom.
This table should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
SEPTEMBER 28, 1996
---------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
Total debt(1):
Term Loan.......................................... $ 70,400 $ -
Revolver........................................... 110,800 86,000
10% Senior Subordinated Notes...................... - 125,000
Other.............................................. 10,476 10,476
-------- --------
Total debt....................................... 191,676 221,476
-------- --------
Shareholders' equity:
Preferred stock, par value $0.01 per share;
20,000,000 shares authorized; no shares issued
and outstanding................................... - -
Common Stock, par value $0.01 per share;
30,000,000 shares authorized; 10,617,722 shares
issued and outstanding(2)......................... 106 106
Additional paid-in capital......................... 58,427 58,427
Retained earnings.................................. 36,628 36,628
Currency translation adjustment.................... (119) (119)
-------- --------
Total shareholders' equity....................... 95,042 95,042
-------- --------
Total capitalization........................... $286,718 $316,518
-------- --------
-------- --------
_____________
(1) For information concerning the Company's long-term debt, see Note 6 to
Consolidated Financial Statements. Total debt as of September 28, 1996
includes the current portion of long-term debt of $10.0 million under the
Term Loan and $1.5 million under Other.
(2) Excludes 1,200,000 shares of Common Stock reserved for issuance pursuant to
the Company's Stock Option Plan (the "Stock Option Plan"), of which 510,865
shares were issuable upon exercise of stock options outstanding as of
September 28, 1996. See "Management--Stock Option Plan."
22
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents selected historical consolidated and unaudited
pro forma consolidated data for the Company. The historical consolidated
financial information under the captions "Statements of Earnings Data" for each
of the years in the five-year period ended December 30, 1995 and under the
caption "Balance Sheet Data" as of December 30, 1995 has been derived from the
Company's consolidated financial statements, which financial statements have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements as of December 31, 1994 and December 30,
1995 and for each of the years in the three-year period ended December 30, 1995,
and the auditors' report thereon, are included elsewhere herein. The historical
consolidated financial information under the captions "Statements of Earnings
Data" and "Balance Sheet Data" as of September 30, 1995 and September 28, 1996
and for the nine months then ended has been derived from the unaudited
consolidated financial statements which, except for the consolidated balance
sheet as of September 30, 1995, are included elsewhere herein. The selected
financial information should be read in conjunction with "Prospectus Summary--
Recent Development," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Credit Agreement" and the
Company's Consolidated Financial Statements (including related notes thereto)
included elsewhere in this Prospectus.
<TABLE>
FISCAL YEAR (1) NINE MONTHS ENDED
---------------------------------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Net sales................................ $258,966 $273,462 $291,624 $349,520 $474,899 $332,352 $335,770
Cost of goods sold....................... 206,626 222,611 238,155 294,714 395,922 275,407 280,272
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 52,340 50,851 53,469 54,806 78,977 56,945 55,498
Selling, general and administrative
expenses................................ 33,227 33,376 29,227 36,399 42,508 32,315 31,170
-------- -------- -------- -------- -------- -------- --------
Earnings from operations................. 19,113 17,475 24,242 18,407 36,469 24,630 24,328
Interest expense......................... 5,283 4,997 3,042 6,361 17,491 12,964 10,279
Other expense (income), net.............. -- 1,049 -- (379) -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes.............. 13,830 11,429 21,200 12,425 18,978 11,666 14,049
Income taxes.............................. 626 529 8,420 4,736 7,509 4,678 5,495
-------- -------- -------- -------- -------- -------- --------
Net earnings............................. $ 13,204 $ 10,900 $ 12,780 $ 7,689 $ 11,469 $ 6,988 $ 8,554
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
OTHER DATA:
Depreciation and amortization............ $ 2,888 $ 3,104 $ 3,868 $ 6,365 $ 11,994 $ 8,767 $ 9,440
Capital expenditures..................... 3,742 5,869 7,135 10,538 12,448 8,630 2,981
SG&A margin (2).......................... 12.8% 12.2% 10.0% 10.4% 9.0% 9.7% 9.3%
EBITDA (3)............................... $ 22,001 $ 19,530 $ 28,110 $ 25,151 $ 48,463 $ 33,397 $ 33,768
EBITDA margin (3)(4)..................... 8.5% 7.1% 9.6% 7.2% 10.2% 10.0% 10.1%
Ratio of EBITDA to interest expense (3).. 4.2x 3.9x 9.2x 4.0x 2.8x 2.6x 3.3x
Ratio of earnings to fixed charges (5)... 3.4x 3.0x 6.8x 2.8x 2.0x 1.8x 2.2x
PRO FORMA FINANCIAL DATA (6):
Interest expense......................... $ 19,936 $ 15,110 $ 13,879
EBITDA (3)............................... 48,758 33,605 33,960
Ratio of EBITDA to interest expense (3).. 2.4x 2.2x 2.4x
Ratio of earnings to fixed charges (5)... 1.8x 1.6x 1.6x
PRO
AT FORMA (7)
------------------------------------------ -------------
DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 28,
1995 1995 1996 1996
------------ ------------- ------------- -------------
(in thousands)
BALANCE SHEET DATA:
Working capital................................................... $110,128 $149,933 $152,787 $178,287
Total assets...................................................... 324,710 373,528 370,670 400,470
Total debt........................................................ 165,388 212,231 191,676 221,476
Shareholders' equity.............................................. 87,990 84,438 95,042 95,042
</TABLE>
23
<PAGE>
_____________
(1) Amounts set forth in the year ended December 31, 1993 reflect the inclusion
of Manetta from August 30, 1993, TWM from September 7, 1993 and Torfeaco
from December 1, 1993. Amounts set forth in the year ended December 31,
1994 reflect the inclusion of Imperial from August 19, 1994 and Beacon from
December 1, 1994. The financial information for years 1993 and 1994 has
been reclassified for certain advertising and royalty fees so as to be
comparable with the 1995 presentation. Advertising fees are now reported
as a reduction of gross sales rather than SG&A expenses and the royalty
fees have been reclassified from SG&A expenses to cost of goods sold.
(2) Represents SG&A expenses as a percentage of net sales.
(3) EBITDA consists of earnings before interest, income taxes, extraordinary
items and depreciation and amortization expense. While EBITDA should not
be construed as an alternative to operating income or net income or as an
indicator of operating performance or liquidity, it is a measure that the
Company believes is used commonly to evaluate a company's ability to
service debt.
(4) Represents EBITDA as a percentage of net sales.
(5) For purposes of calculating these ratios, earnings represents earnings
before income taxes plus fixed charges, as defined. Fixed charges consists
of interest expense, amortization of debt issuance costs, and the portion
(approximately one-third) of rental and lease expense, which management
believes is representative of the interest component of rental and lease
expense.
(6) The pro forma financial data has been calculated giving effect to the Prior
Offering and the application of the net proceeds therefrom, the amendment
of the Company's existing Credit Agreement as described in "Description of
Credit Agreement" and certain cost savings associated with the License
Agreement entered into in connection with the Acquisition. However, no
other pro forma adjustments have been made with respect to the Acquisition,
including any revenue and attributable EBITDA effects. Fieldcrest
generated approximately $37.0 million of revenues from the sale of Blanket
Products under the Licensed Marks during the year ended December 31, 1995.
However, the Acquisition did not involve the purchase of Fieldcrest's
Blanket Products business, including but not limited to its sales and
marketing personnel, its product distribution channels or its customer
service department. While the Company believes that its existing sales,
distribution and customer service capabilities will support the Company's
sale of Blanket Products under the Licensed Marks, there can be no
assurance that the Company will be able to generate revenues from such
assets at the levels previously achieved by Fieldcrest. Moreover, the pro
forma financial data does not purport to represent what the Company's
results actually would have been if such events had occurred at the dates
indicated, nor does such information purport to project the results of the
Company for any future period. See "Recent Development."
(7) The pro forma balance sheet data has been calculated giving effect to the
Prior Offering and the application of the net proceeds therefrom as if each
occurred on September 28, 1996.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND
FINANCIAL DATA, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES THERETO, APPEARING ELSEWHERE HEREIN.
GENERAL
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.
The Company, originally founded as a pillow manufacturer in 1954, has
historically expanded its product lines through acquisitions into other
categories of top of the bed products 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 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 92-year old manufacturer of cotton
and synthetic blankets and throws, jacquard throws and woven corded bedspreads.
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 basis or
quarter-to-quarter basis.
OVERVIEW OF 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 foregoing section entitled "Selected Historical and Pro Forma Financial
Data."
<TABLE>
YEAR ENDED NINE MONTHS ENDED
---------------------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............... 81.7 84.3 83.4 82.9 83.5
Gross profit..................... 18.3 15.7 16.6 17.1 16.5
Selling, general and
administrative expenses......... 10.0 10.4 9.0 9.7 9.3
Earnings from operations......... 8.3 5.3 7.6 7.4 7.2
Interest expense................. 1.0 1.8 3.7 3.9 3.1
Other income..................... - 0.1 - - -
Earnings before income taxes..... 7.3 3.6 3.9 3.5 4.1
Net earnings..................... 4.4% 2.2% 2.4% 2.1% 2.5%
</TABLE>
25
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996
VERSUS THE NINE MONTHS ENDED SEPTEMBER 30, 1995
NET SALES. Net sales were $335.8 million for the nine months ended
September 28, 1996, representing an increase of $3.4 million or 1.0% as compared
to $332.4 million for the same period in 1995. The year to date increase
reflected strong bed pillow, mattress pad and fashion bedding sales, partially
offset by lower blanket sales, in the third quarter and first half of 1996.
Management believes the shortfall in blanket sales was due primarily to
retailers' decisions to place orders for blankets closer to the normal late fall
selling season.
GROSS PROFIT. Gross profit margins decreased to 16.5% in the nine months
ended September 28, 1996, from 17.1% in the nine months ended September 30,
1995. The decline was due to several factors including (i) a shift in blanket
sales mix towards lower average margin products, which Management believes
occurred primarily due to the decision of retailers of higher margin products to
defer orders as described above, as well as an increase in sales of lower margin
products and (ii) one-time costs incurred on the start-up of the Company's new
cotton spinning facility, most of which occurred in the first six months of
1996. Management believes that the process of upgrading the yarn spinning
facility is largely complete.
SG&A. Selling, general and administrative ("SG&A") expenses fell by $1.1
million to $31.2 million in the nine months ended September 28, 1996, from
$32.3 million in the nine months ended September 30, 1995, while, as a
percentage of sales, SG&A expenses decreased to 9.3% from 9.7% in the respective
periods. These decreases reflected the continuing focus of the Company on
containing these expenses.
INTEREST. Interest expense decreased to $10.3 million in the nine months
ended September 28, 1996, from $13.0 million in the nine months ended
September 30, 1995. Interest expense fell due to lower borrowings and decreased
average interest rates.
TAXES. The effective tax rate for the nine months ended September 28, 1996
decreased to 39.1% compared to 40.1% for the nine months ended September 30,
1995, primarily due to lower state taxes.
NET EARNINGS. Net earnings increased to $8.6 million in the nine months
ended September 28, 1996, from $7.0 million in the nine months ended
September 30, 1995. As a percentage of sales, net earnings increased to 2.5% in
the nine months ended September 28, 1996 from 2.1% in 1995.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 30, 1995
VERSUS THE YEAR ENDED DECEMBER 31, 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 from Beacon
during 1995. Despite generally weak retail buying conditions, sales of the
Company's core product lines were largely flat.
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, increases in raw materials 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 comprehensive
cost cutting 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.
26
<PAGE>
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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
VERSUS THE YEAR ENDED DECEMBER 31, 1993
NET SALES. Net sales were $349.5 million in 1994, representing an increase
of $57.9 million or 19.9%, as compared to sales of $291.6 million in 1993. This
increase resulted largely from the acquisitions made in late 1993 and 1994.
Sales of some of the Company's core product lines, including mattress pads and
Ralph Lauren bedding textiles, increased as well. Especially in the fourth
quarter of 1994, however, sales of core products were negatively impacted by
unseasonably warm winter weather, retailers' overstocked inventory and the
Company's inability to meet demand in certain product lines traditionally
imported from China, which were subject to new quota restrictions. See "Risk
Factors--Dependence on Supply Sources in China."
GROSS PROFIT. Gross profit margins decreased to 15.7% in 1994 from 18.3%
in 1993, principally as a result of production inefficiencies experienced at the
blanket-producing facilities acquired in late 1993, as well as production
inefficiencies at one of the Company's existing plants. Margin decreases were
also due to integration costs related to the Canadian facilities, and increases
in the prices of cotton, polyester and other raw materials.
SG&A. SG&A expenses grew by $7.2 million to $36.4 million in 1994 from
$29.2 million in 1993, and as a percentage of sales, to 10.4% in 1994 from 10.0%
in 1993. This increase resulted from expenses related to the integration of the
blanket operations acquired in 1993, and the acquisition of the two Canadian
facilities.
INTEREST. Interest expense increased to $6.4 million in 1994 from
$3.0 million in 1993, due to higher average interest rates and debt levels. The
increased borrowings related to certain acquisitions in 1993, as well as higher
working capital requirements associated with the earlier purchases of certain
imported products in expectation of closure of quota categories applicable to
certain goods imported from China, and higher than expected fourth quarter
inventory levels. See "Business--Manufacturing, Raw Materials and Imports."
TAXES. The effective tax rate in 1994 was 38.1% as compared to an
effective tax rate of 39.7% in 1993. The decreased effective tax rate in 1994
was principally due to lower net earnings, higher tax-exempt income and
increased state tax credits.
NET EARNINGS. Net earnings in 1994 decreased to $7.7 million from pro
forma net earnings of $12.8 million in 1993, principally as a result of
decreased gross profit margins, increased SG&A expenses and increased interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical capital resources have included funds from
operations, the initial public offering of Common Stock and the Prior Offering,
bank lines of credit, industrial revenue bonds and other borrowings. The
primary uses of cash by the Company have 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.
The Company's working capital needs have generally been met through cash
flow generated by operations and borrowings under the Credit Agreement.
27
<PAGE>
The Company consummated the Prior Offering in November 1996, resulting in
net proceeds to the Company 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 facility under the Credit Agreement (the
"Term Loan") with a syndicate of banks led by NationsBank of Texas, N.A.
("NationsBank") (approximately $70.4 million), (ii) to finance the Acquisition
(approximately $28.3 million), (iii) to purchase a warehouse and distribution
facility in Mauldin, South Carolina (approximately $8.4 million), and (iv) to
temporarily reduce indebtedness under the Revolver (approximately $14.6
million).
Concurrently with the Prior Offering, 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.
Amounts outstanding under the Credit Agreement 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 EBITDA. On a pro forma basis as of
September 28, 1996, the interest rate on outstanding borrowings under the Credit
Agreement would have been 6.305%.
The Company from time to time enters into interest rate swap agreements in
order to minimize the risk to the Company of fluctuations in interest rates.
Pillowtex currently has interest rate swap agreements in place covering
approximately $90.0 million of indebtedness that extend through August 1997,
with an average interest rate of 5.565%.
The Company expects to incur approximately $6.2 million in capital
expenditures for 1996, including approximately $4.0 million at the blanket
facilities in North Carolina, South Carolina and Tennessee, in order to upgrade
the physical plants and purchase machinery and equipment. For the nine months
ended September 28, 1996, the Company's capital expenditures were $3.0 million.
The balance of the capital expenditures for 1996 will be used for regular
maintenance and improvements at the Company's other manufacturing facilities and
to upgrade the Company's computer system. In addition, the Company in November
1996 purchased a warehouse in South Carolina for approximately $8.4 million to
replace certain warehouse facilities leased by Beacon. For 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. In 1994, the
Company's capital expenditures were $10.5 million, including a total of
$5.4 million attributable to the blanket production facilities, and
approximately $0.7 million related to Torfeaco.
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 have 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 62% and 69%, 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 the net proceeds received from the Prior
Offering, in combination with cash flow generated from operations and funds
available under the Revolver, are adequate to meet its working capital and
related financing needs for the foreseeable future. See "Risk Factors -
Significant Leverage and Debt Service."
28
<PAGE>
BUSINESS
GENERAL
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 the
Company 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 bedroom textile furnishings (other than sheets), offering a broad
assortment of products across multiple price points.
The Company markets its products primarily to department stores, mass
merchants, wholesale clubs, specialty retail stores, catalogs and institutional
suppliers. The Company believes that it is one of the principal suppliers of
bedroom textile furnishings to virtually all of the largest department stores in
the United States.
BUSINESS STRATEGY
Pillowtex's business strategy is to capitalize on the strengths that have
distinguished the Company as a preferred supplier of high quality bedroom
textile products in North America.
OFFER EXTENSIVE PRODUCT LINES EMPHASIZING HIGHER MARGIN GOODS. The Company
offers more top-of-the-bed product lines than any other major North American
competitor. With the exception of sheets, the Company's strategy is to provide
a "one-stop shop" for top-of-the-bed products, customized to each retailer's
specific consumer profile. Therefore, the Company offers broad product
assortments of high quality products at multiple price points. The Company
emphasizes higher end, premium lines to encourage the consumer to trade up to
better products with generally higher margins for the retailer and the Company.
MAINTAIN STRONG CUSTOMER RELATIONSHIPS THROUGH COMPREHENSIVE MERCHANDISING
PROGRAMS. The Company offers extensive merchandising programs to retailers in
order to maximize product line sales and profitability. Merchandising programs,
developed in meetings between the Company and the retailer, address product line
assortments, branding strategies and point-of-sale displays, as well as
promotional and advertising plans and layouts. In many cases, the Company
oversees the creation of promotional and advertising supplements for its
customers. Merchandising programs focus on motivating the retail consumer to
"trade up" to better goods that offer higher margins.
Pillowtex manufactures and markets goods utilizing established and well
recognized licensed trademarks, Company-owned trademarks and trade names,
customer-owned private labels and manufacturers' brand names including the Ralph
Lauren Home Collection, Mickey & Co.-Registered Trademark-, Royal Velvet-
Registered Trademark-, Touch of Class-Registered Trademark-, Cannon-Registered
Trademark-, Nettle Creek-Registered Trademark-, Martex-Registered Trademark-,
Regency by Globe-Registered Trademark-, Blue Heaven-TM-, Comforel-Registered
Trademark- and Dacron-Registered Trademark-. These names provide the Company
with the ability to differentiate its product offerings from its competitors for
different channels of retail distribution and between different price points.
The Company also provides extensive private label production for major retailers
such as JCPenney Company, Inc., May Merchandising Corporation and Sears Roebuck
and Co.
CAPITALIZE ON NATIONWIDE PRODUCTION AND DISTRIBUTION CAPABILITIES.
Capitalizing on its initial reputation as a key supplier to department stores,
the Company has become a nationwide supplier for virtually all channels of
retail and institutional distribution. The Company is a supplier to 47 of the
top 50 retailers in the United States and the top five retailers in Canada. In
order to most cost effectively ship bed pillows, mattress pads and down
comforters and minimize delivery times, the Company developed regional
production facilities. Pillowtex is the only supplier of these products with
the capability to produce and ship from coast-to-coast regional production
facilities. The Company was one of the industry pioneers in the development of
extensive "quick response" capability, including an EDI system for nationwide,
24-hour acceptance of electronically transmitted customer orders. Through a
single transmission, customers may place orders for multiple product lines for
distribution from the Company's production facilities. These systems, in
combination with the Company's manufacturing capabilities, enable the Company to
produce and ship products to retailers with lead times as short as three to
five days from receipt of order.
ENHANCE THE COMPANY'S POSITION AS A LOW COST PRODUCER. The Company
continually focuses on increasing automation, process improvements and system
controls within the plants and throughout the business that result in
29
<PAGE>
improved operational efficiencies. These efforts have enabled the Company to
achieve what it believes are the highest sales per employee of any major
textile firm in the United States. The Company also believes that significant
opportunities still exist to improve production efficiency within the blanket
facilities. During the past 18 months, the Company added a new cotton yarn
spinning plant which enabled it to consolidate two smaller facilities and
resulted in the elimination of significant outside yarn purchases. The
Company pursues worldwide procurement of both finished products and raw
materials to reduce costs and locate new sources of production. The Company
further emphasizes continual cost monitoring and the ongoing containment of
SG&A expenses, through consolidation of these functions at acquired companies,
better systems, the retention and training of well qualified staff. As a
result, the Company was able to record one of the lowest SG&A percentages in
the industry during 1995.
MAKE SELECTIVE STRATEGIC ACQUISITIONS. Pillowtex continues to selectively
acquire companies that offer products it believes will complement its existing
lines and will provide product, marketing, channel of distribution or
operational synergies. Since the early 1980s, Pillowtex has made a number of
acquisitions in order to enter new product lines and markets. The Company
follows a strategy of consolidating plant and SG&A functions and leveraging its
strong retail relationships to expand sales and profitability. Through this
strategy, Pillowtex has achieved a compound annual growth rate for net sales of
15.7% and EBITDA of 22.6% over the past five years.
PRODUCTS
The Company has built 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).
The Company 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. Management believes that the Company is currently a leading
manufacturer and marketer of bed pillows in the United States and Canada. The
Company produces and markets a broad line of traditional bed pillows, as well as
specially designed bed pillows such as the BodyMate-Registered Trademark- body
pillow and Great Shapes-Registered Trademark- pillows, including Euro Square,
U-Neck and Neck Roll. The Company offers products at various levels of quality
and price, from synthetic pillows sold at retail prices as low as $5 to fine
white goose down pillows sold at a retail price of up to approximately $185.
The Company believes that it is a leading feather and down pillow
manufacturer in North America, offering products filled with quality goose and
duck down, or blends of feather and down, in a range of grades. These
materials, known as "natural fill," are noted for their loft and resiliency.
The Company also manufactures and markets a full line of bed pillows
featuring staple (cut and crimped), tow (continuous filament) and cluster
(individual ball) synthetic fiber fills. The Company believes that it is a
leading supplier of premium synthetic and latex bed pillows in the United States
and Canada.
BLANKETS. Management believes that the Company is a leading producer of
blankets in the United States, as well as a leading marketer of blankets in
Canada. The Company manufactures woven and nonwoven conventional and thermal
weave blankets and throws in a wide assortment of fibers, including cotton, wool
blend, acrylic and polyester. The Company is the exclusive supplier in North
America of blankets for the Ralph Lauren Home Collection. The Company has a
strong presence in the infant blanket market with products ranging from nonwoven
receiving blankets, to jacquard throws, to the finest Supima-Registered
Trademark- cotton crib blanket. The Company also designs and manufactures a
full line of decorative cotton and acrylic jacquard throws.
DOWN COMFORTERS. The Company was a pioneer in marketing down comforters in
the United States and management believes that the Company 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 may offer more down fill, sport higher thread
count shells and feature more appealing "surface interest," such as damask dots,
stripes and checks.
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<PAGE>
MATTRESS PADS. Management believes that the Company is a leading
manufacturer and marketer of mattress pads in the United States and Canada. The
Company produces and markets a complete line of mattress pads, including sizes
for adults and children, natural and synthetic filled, flat, fitted, and
skirted, as well as its Adjust-A-Fit-Registered Trademark- mattress pad, an
adjustable fit mattress pad made with Lycra-Registered Trademark-, a
multidirectional stretch material produced by E.I. DuPont de Nemours & Company
("DuPont"). The Adjust-A-Fit-Registered Trademark- mattress pad correctly fits
a broad range of mattress thicknesses, including pillow top mattresses. The
DuPont Comforel Ultra pillow top mattress pad is a new high end product
introduced in 1995 and exclusively marketed by Pillowtex.
OTHER BEDROOM TEXTILES. The Company offers a variety of other
complementary bedroom textile products including comforter covers, featherbeds,
pillow protectors, synthetic fill comforters, decorative pillows, pillow shams,
dust ruffles and window treatments. These products represent a source of
additional profitability as "add-on" sales for retailers.
MARKETING, SALES AND DISTRIBUTION
The Company 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. The
Company believes that it is one of the principal suppliers of bedroom textile
products to several of the largest retailers in the United States. The
Company's top 10 customers accounted for approximately 62.0% of total sales in
1995. Wal-Mart and Dayton Hudson accounted for 13.7% and 12.7% of the Company's
total sales in 1995, respectively. No other customer accounted for more than
10% of total sales in 1995. For the nine months ended September 28, 1996, sales
to Wal-Mart and Dayton Hudson accounted for 14.7% and 12.5% of the Company's
total sales, respectively. Consistent with industry practice, the Company does
not generally operate under long-term written supply contracts with its
customers. See "Risk Factors--Risk of Loss of Material Customers."
The Company's current international business is concentrated in Canada,
although it also sells in Mexico, Latin America and overseas. The Company's
acquisition of Torfeaco in 1993, and of Imperial and Beacon in 1994, greatly
enhanced the Company's market position in Canada and its relationships with
important Canadian retailers.
The Company markets its products under numerous Company-owned trademarks
and trade names and customer-owned private labels, as well as certain licensed
trademarks and trade names. The Company uses trademarks, trade names and
private labels as merchandising tools to assist its customers in coordinating
their product offerings and differentiating their products from those of their
competitors.
The Company's relationship with Ralph Lauren began in 1987 and the Ralph
Lauren Home Collection is among its most important licensed trademarks. The
Company holds an exclusive license for pillows, down comforters, mattress pads
and blankets, and a non-exclusive license for fashion bedding to manufacture,
and in certain cases to sell, a variety of home textile products sold in North
America. The Ralph Lauren Home Collection products are sold worldwide to fine
department and specialty stores.
In an effort to maximize the Company's product exposure and increase sales,
Pillowtex works closely with its major customers to assist them in merchandising
and promoting the Company's products to the consumer. In addition to frequent
personal consultation with the employees of these customers, the Company meets
with its customers' senior management periodically to jointly develop
merchandise assortments and plan promotional events specifically tailored to
that customer. The Company provides merchandising assistance with store
layouts, fixture designs, advertising and point of sale displays. The Company
also provides customers with preprinted, customized advertising materials
designed to increase sales.
The Company's EDI system allows customers to place, and allows the Company
to fill, track and bill, orders by computer. This system enables the Company to
ship products on a "quick response" basis.
The Company generally employs salespeople who have many years of industry
experience. Most sales people are compensated with a combination of salary and
discretionary bonus. Certain Ralph Lauren Home Collection products are sold by
the Ralph Lauren sales force.
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<PAGE>
PATENTS, TRADEMARKS AND LICENSE AGREEMENTS
The Company holds a patent that utilizes a fabric with multi-directional
stretch for the production of the skirting material for its
Adjust-a-Fit-Registered Trademark- mattress pads. Beacon also holds both
process and article patents for completely reversible woven printed blankets.
These patents each expire in 2011, subject to timely payment of all future
maintenance fees. In the opinion of management, the loss of these patents
would not have a material adverse effect on the Company's overall business.
The Company owns various trademarks and trade names, including Blue
Heaven-TM-, Softie-Registered Trademark-, Regency by Globe-Registered
Trademark-, and BodyMate-Registered Trademark-. The Company 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
Home Collection for pillows, down comforters, mattress pads and blankets, and a
non-exclusive license for fashion bedding to manufacture, and in certain cases
sell, a variety of home textile products in North America. The Company also has
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 Cannon-Registered Trademark-, Royal Velvet-Registered
Trademark-, Charisma-Registered Trademark-, and Touch of Class-Registered
Trademark- trademarks. In addition, the Company 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 Lion King. The Company also markets
products under trademark license agreements with various other organizations
including DuPont, WestPoint Stevens, Inc. and the U.S. Postal Service. These
license agreements generally require royalty payments based upon product sales,
including payments of minimum annual royalties, and expire at various future
dates from 1996 to 1999. See "Risk Factors--Dependence on Key Licenses."
Upon consummation of the Acquisition, the Company will enter into the
License Agreement, which will provide for a 25-year worldwide exclusive right to
market Blanket Products and Pillow Products under the Licensed Marks. The
royalty rate applicable to the sale of Pillow Products under the License
Agreement is lower than the average royalty rate on the sale of such products
under the Company's existing license agreement with Fieldcrest. However, there
can be no assurance that the Acquisition will be consummated. See "Risk Factors
- --Risk of Failure to Consummate the Acquisition."
PRODUCT DEVELOPMENT
The Company's product development staff creates and develops products with
new or superior performance characteristics in cooperation with various outside
sources, including its suppliers and customers. The Company believes that this
ability is an important competitive advantage. As a result, the Company commits
time and resources to identifying new materials, designs and products from a
variety of domestic and international vendors.
In addition to internal product development, the Company's acquisitions
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, California, Illinois, Mississippi, Pennsylvania, North
Carolina, South Carolina, Tennessee and Toronto, Canada. The Company'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 the Company operates what it believes to be
the largest feather and down processing facility in North America, as well as an
automated, high speed pillow shell manufacturing facility. Raw materials for
bed pillows and down comforters undergo initial processing at the Dallas
locations, which yields significant economies of scale, and are shipped along
with imported products to the Company's regional facilities for final assembly
and distribution to customers.
Feather and down are processed by state-of-the-art computerized washing and
sorting equipment. Through this process, washed feathers and down are sorted
into a variety of mixtures and grades used in manufacturing natural fill
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<PAGE>
pillows and comforters. The Company also operates an automated sewing
facility in Dallas, Texas, where high speed, computerized machines cut and sew
fabric into pillow shells.
Many of the Company's regional manufacturing facilities produce natural
fill and synthetic fill pillows. Natural fill pillows are assembled by blowing
processed feather and down into the pillow shell and sewing the open seam
closed. Synthetic fill pillows are produced on machines known as garnets that
pull, comb and expand compressed polyester fibers. Once expanded, the fibers are
inserted into a pillow shell and the open seam is sewn shut.
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.
The Company's line of natural fill comforters in 1995 consisted of some
finished products imported from China and products manufactured by the Company
at its California, Illinois, Pennsylvania, Mississippi and Toronto, Canada
locations using processed down from the Dallas facility. In 1996, the Company
began manufacturing virtually all its down comforters. The Company imports the
majority of its comforter shells from China, Hong Kong and India.
The Company produces blankets at manufacturing facilities in North
Carolina, South Carolina and Tennessee. These plants provide full vertical
production capability, including spinning, weaving, dying and finishing. During
1995, the Company acquired a facility in Newton, North Carolina, for the
spinning of cotton yarn. The acquisition of this facility enabled the Company
to consolidate two smaller spinning operations and replace the Company's
external cotton yarn purchases, which represented nearly one-third of the
Company's requirements, with internal production.
As with its other lines of business, the Company plans the continuation of
equipment and plant upgrades over the next several years in order to facilitate
full integration of these Subsidiaries, increase production efficiency and add
capacity.
The Company's quality control program is designed to assure that its
products meet predetermined quality standards established both internally and by
its customers. The Company 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. The Company
attempts to maintain close contact with customer quality control or other
appropriate personnel to assure the Company understands the customer's
requirements.
The Company analyzes feather and down and other raw materials, as well as
finished products of both the Company and its competitors, at its facilities in
Dallas, Texas. The Company 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. The Company 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 the Company's complaints.
The principal raw materials that the Company uses in manufacturing its
products are: feather and down; synthetic (polyester and acrylic), cotton and
wool fibers; and cotton and poly/cotton blend fabrics. The Company 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. The Company believes that it is currently the
largest United States importer of feather and down from China, the world's
largest producing country. The Company is generally able to purchase feather
and down from its suppliers in China on open credit terms without letters of
credit.
In 1994, certain goods imported from China, including down-filled
comforters, comforter shells and comforter covers, were assigned to a new import
group. The 1994 quota for that group closed in July and, in 1995, the quota
closed in March. As a consequence, the Company made the strategic decision to
markedly accelerate its import schedule in both years in order to purchase the
required goods prior to the closing of the quota. In 1995, the Company
diminished its reliance on imported finished goods from China by manufacturing
more of these products in the United States and Canada and by continuing to
develop relationships with suppliers in other countries, including India. The
Company also opened an office in Hong Kong to facilitate more direct purchases
in China and alternative sources of supply. In 1996, virtually all down
comforters sold by the Company will be manufactured in the United States and
Canada. A majority
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<PAGE>
of the comforter shells and comforter covers will be purchased directly, as
well as a significant percentage of raw feather and down, some of which is
also obtained through an independent supplier in the United States. In
addition, in 1995 the Company was successful in achieving a change in the
import regulations regarding down comforter shells, which are not generally
manufactured in the United States. Since July 1, 1996, no import quota
restrictions for shells remain, which has allowed the Company to import shells
as needed and thereby reduce inventory carrying costs.
The Company purchases the Lycra-Registered Trademark- used in its
Adjust-A-Fit-Registered Trademark- mattress pads from DuPont. Because of
DuPont's patent on Lycra-Registered Trademark-, it is the exclusive supplier for
this material. The Company believes that the risk that DuPont will cease to
manufacture and sell Lycra-Registered Trademark- to the Company is minimal. The
Company purchases synthetic fiber from, among others, DuPont, Wellman, Inc.,
Monsanto Company, Cytec Industries Inc., Hoechst Celanese Corporation and
Kanematsu U.S.A. Inc. To reduce the effect of potential price fluctuations, the
Company makes commitments from time to time for future purchases of synthetic
and natural fibers. In recent years, these suppliers experienced significant
increases in costs due to a worldwide shortage of cotton and synthetic raw
materials and a simultaneous increase in demand. Consequently, the Company
continued to experience higher than expected price increases in all its raw
materials, including cotton, polyester and wool fiber. The Company was able to
pass on to its customers only a portion of these increases.
The Company uses fabric purchased from third parties in the production of
pillow shells, comforter covers and various other products. Although the
Company believes that fabric is a commodity-type product that is available from
numerous sources, the Company currently purchases large quantities of pillow
ticking fabric from a single supplier to control costs and quality.
Management of the Company believes that its relationships with its
suppliers are good.
COMPETITION
The Company participates in a highly competitive industry. The Company
competes with a number of established manufacturers, importers and distributors
of home textile furnishings, some of which have greater financial, distribution
and marketing resources. The Company's current competitors consist primarily of
domestic suppliers of bed pillows, blankets, mattress pads, down comforters and
other bedroom textile furnishings. The home fashion products industry also
includes companies that produce bed sheets, towels and other commodity-type
items. A number of these companies do not currently offer the Company's
principal products. There can be no assurance, however, that these companies
will not compete with Pillowtex in the future.
The Company competes on the basis of price, quality, brand names and
service. The Company believes that the principal competitive factors affecting
its business 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
The Company is subject to various federal, state and local environmental
laws and regulations governing the discharge, storage, handling and disposal of
various substances, including provisions of the California Health and Safety
Code pertaining to air quality management. The Company is also subject to
federal and state laws and regulations that 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, the Company's
operations are governed by a variety of federal, state, local and foreign laws
and regulations relating to worker safety and health, advertising, importing and
exporting, and other matters applicable to businesses in general. In 1995, the
Company achieved a change in the import regulations regarding down comforter
shells which are not generally manufactured in the United States. As a result
of this regulatory change, the Company has been able to import comforter shells
on an unlimited and as-needed basis since July 1, 1996. All laws and
regulations are subject to change and the Company cannot predict what effect, if
any, changes in laws and regulations might have on its business.
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<PAGE>
BACKLOG
The amount of the Company's backlog orders at any particular time is
affected by a number of factors, including seasonality and scheduling of the
manufacturing and shipment of products. In general, the Company's EDI and
"quick response" capabilities have resulted in shortened lead times between
submission of purchase orders and delivery and lowered the level of backlog
orders. Consequently, the Company believes that the amount of its backlog is
not an appropriate indicator of levels of future production.
EMPLOYEES
As of December 28, 1996, the Company had approximately 3,900 employees.
The Company is subject to the following collective bargaining agreements:
<TABLE>
NUMBER OF
UNION LOCATION COVERED EXPIRATION EMPLOYEES
- ----- ------------------- ---------- ---------
<S> <C> <C> <C>
United Auto Workers Tunica, Mississippi 08/01/99 225
Warehouse, Mail Order, Office, Technical and
Professional Employees (Teamsters) Chicago, Illinois 01/31/97 124
Amalgamated Clothing and Textile Workers Union Lebanon, Tennessee 03/28/97 141
Amalgamated Clothing and Textile Workers Union (1) Toronto, Canada 02/28/97 230
Union of Needletrades, Industrial and Textile Workers (2) Eden, North Carolina 49
</TABLE>
___________
(1) The two previously separate union locals in the Company's Canadian
facilities merged contracts in 1995.
(2) This Union existed at the Eden facility prior to its acquisition by the
Company; however, a formal union contract has not yet been negotiated.
To date, none of these unions have engaged in strikes or work stoppages
against the Company. The Company believes that its relationships with both its
union and nonunion employees are good.
FACILITIES
The following table summarizes certain information concerning certain of
the Company's facilities:
<TABLE>
APPROX. OWNED/
LOCATION PRINCIPAL USE SQUARE FEET LEASED (1)
- -------- ------------------------------------- ----------- ----------
<S> <C> <C> <C>
Dallas, Texas Headquarters and feather and down 104,000 Owned
processing
Dallas, Texas General administration, manufacturing 150,000 Owned
and distribution
Dallas, Texas Warehouse 163,000 Leased
Los Angeles, California Manufacturing and distribution 320,000 Leased
Tunica, Mississippi Manufacturing and distribution 288,000 Owned
Hanover, Pennsylvania Manufacturing and distribution 227,000 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 and distribution 822,000 Owned
Swannanoa, North Carolina Office 30,000 Owned
Swannanoa, North Carolina Outlet Store 5,000 Owned
Swannanoa, North Carolina Warehouse and distribution 573,000 Owned
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
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 and distribution 308,000 Owned
Westminster, South Carolina Office 6,000 Owned
Westminster, South Carolina Warehouse and distribution 284,000 Owned
Westminster, South Carolina Warehouse 29,000 Leased
Westminster, South Carolina Warehouse 54,000 Owned
Newton, North Carolina Manufacturing and distribution 297,000 Leased
</TABLE>
_____________
(1) For additional information concerning the Company's leases, see note 13 of
Notes to Consolidated Financial Statements.
Pillowtex also maintains small sales offices for its sales staff in
Massachusetts, Washington, North Carolina, Minnesota, California, Arkansas.
On September 18, 1995, the Company entered into a five-year operating lease
for the use of a cotton yarn production facility in Newton, North Carolina. The
yarn mill, which is fully staffed and operational, is being utilized to
consolidate the Company's cotton yarn spinning and significantly reduce the need
for outside purchases. This transaction was financed through the use of an $8.5
million lease agreement between Sanwa General Equipment Leasing and the Company.
On November 19, 1996, the Company purchased a warehouse and distribution
facility in Mauldin, South Carolina, for approximately $8.4 million. The
transaction was financed from the proceeds of the Notes. The warehouse is
expected to replace four smaller warehouses that are currently leased and
consolidate operations for the Swannanoa, North Carolina and Westminster, South
Carolina plants.
The Company believes that its facilities are generally well maintained, in
good operating condition and adequate for its current needs. The Company will
continue to emphasize improvements at its blanket facilities in North Carolina,
South Carolina and Tennessee, 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 the Company in the United States District Court for the
Western District of Kentucky, Louisville Division, on December 21, 1994.
Louisville alleges in its complaint that Pillowtex is manufacturing and selling
mattress pads that infringe patents owned by Louisville. Louisville is seeking
a preliminary and permanent injunction enjoining Pillowtex from continued
infringement on the Louisville patents, an accounting of profits and an
unspecified amount of general damages against Pillowtex for alleged
infringement. In addition Louisville requests that such unspecified damages be
trebled and seeks costs, interest and reasonable attorneys' fees. The Company
has denied the allegations and is vigorously defending the suit.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of January 15, 1997:
DIRECTOR'S
NAME AGE POSITION WITH THE COMPANY TERM EXPIRES
- ---- --- ------------------------- ------------
Charles M. Hansen, Jr... 56 Chairman of the Board, President 1997
and Chief Executive Officer
Christopher N. Baker.... 36 President--Pillowtex Division and 1998
a Director
Jeffrey D. Cordes....... 39 Executive Vice President, Chief 1998
Financial Officer, Assistant
Secretary and a Director
Scott E. Shimizu........ 43 Executive Vice President--Sales and 1999
Marketing and a Director
Ronald M. Wehtje........ 35 Vice President--Corporate Controller -
Paul G. Gillease........ 64 Director 1999
William B. Madden....... 58 Director 1997
M. Joseph McHugh........ 59 Director 1997
Mary R. Silverthorne.... 61 Director 1998
CHARLES M. HANSEN, JR. has been a director of the Company since September
1970 and President since 1973. He has been Chief Executive Officer and Chairman
of the Board of Directors since December 1992. He is also a director of
Triangle Pacific Corp. and the Southern Methodist University Cox School of
Business.
CHRISTOPHER N. BAKER has been a director of the Company since May 1995 and
has been President--Pillowtex Division since February 1995. From January 1993
until February 1995, he served as Senior Vice President--Sales and Marketing of
the Company. 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 the Company, including Executive Vice President--
Manufacturing from 1988 to 1991.
JEFFREY D. CORDES has been a director of the Company since May 1995 and has
been Executive Vice President, Chief Financial Officer and Assistant Secretary
of the Company since May 1994. From 1985 until May 1994 he served as Vice
President--Administration and Planning of the Company.
SCOTT E. SHIMIZU served as a member of the Board of Directors from May 1994
to May 1995, and was appointed in February 1996 to fill a vacancy thereon. He
has been Executive Vice President--Sales and Marketing since December 1992, and
has served as Executive Vice President since 1988.
RONALD M. WEHTJE has been Vice President--Corporate Controller since March
1996 and has served as Division Controller since December 1994. Prior to that
time, he served in various positions of increasing responsibility since joining
the Company in 1986 as an internal auditor.
PAUL G. GILLEASE became a director of the Company in October 1993. From
1989 until retiring in late 1993, Mr. Gillease was Vice President and General
Manager of DuPont Textiles, a division of E.I. DuPont de Nemours & Company.
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.
WILLIAM B. MADDEN became a director of the Company in February 1993.
Mr. Madden has been the President of Madden Securities Corporation, a general
securities and investment banking firm located in Dallas, Texas, since 1986. He
is also Chairman of the Board of Mercantile Bank and Trust, and is a director of
E. W. Blanch Holdings Inc.
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<PAGE>
M. JOSEPH MCHUGH became a director of the Company in February 1993.
Mr. McHugh has served as President and Chief Operating Officer of Triangle
Pacific Corp., a manufacturer and distributor of wood flooring and kitchen and
bathroom cabinets, since November 1994 and is a director of such company. From
1981 until November 1994, he served as Senior Executive Vice President and Chief
Financial Officer of Triangle Pacific Corp.
MARY R. SILVERTHORNE has been a director of the Company since December
1992. Mrs. Silverthorne has for many years been actively involved in charitable
and civic activities 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.
The Board of Directors currently consists of eight 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 the Company are appointed by and serve at
the discretion of the Board of Directors.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Hansen, effective
January 1, 1993, pursuant to which the Company 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 Board of
Directors may determine. In addition, Mr. Hansen is entitled to bonuses at the
discretion of the Compensation Committee, 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 the
Company.
The employment agreement permits the Company to terminate Mr. Hansen
without further compensation for, among other things, courses of conduct that
demonstrably affect the Company'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
the Company at any time. The employment agreement, nevertheless, contains a
provision prohibiting Mr. Hansen from competing with the Company 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 the Company and
Mr. Hansen, dated July 26, 1993, the Company agreed to maintain the premium
payments that would have been payable by the Company had the term life insurance
remained in effect, and to loan to 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 the Company, 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 the Company could borrow funds under its bank loan
agreements. As of December 28, 1996, the amount outstanding under the
promissory note was $176,973. 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 the Company as security for payment of
amounts loaned to Mr. Hansen in connection therewith.
The Company also entered into employment agreements with three executive
officers. The Company agreed, effective September 1, 1995 to employ: Scott E.
Shimizu as Executive Vice President--Sales; Jeffrey D. Cordes as Executive Vice
President and Chief Financial Officer; and Christopher N. Baker as President--
Pillowtex Division. Each agreement extends through September 1, 1998, and
thereafter automatically extends for consecutive one-year periods. Under each
agreement, the officer receives a base salary of $275,000 per year, and is
entitled to bonuses of not more than 50% of his annual base salary as determined
solely at the discretion of the Compensation Committee. Each of these
agreements permits the Company to terminate the officer without further
compensation for, among other things, willful and continued failure to perform
his duties or the willful engagement in conduct which is demonstrably and
materially
38
<PAGE>
injurious to the Company, provided he first has the opportunity to terminate
the conduct after receiving notice. In addition, each agreement also contains
provisions prohibiting the executive officer from competing with the Company
during the term of his agreement and for an additional period of up to 18
months. In connection with each such employment agreement, the Company has
granted each of these executive officers stock appreciation rights relating to
all options granted under the Stock Option Plan that are held by such officers
in the event of a change of control.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an annual fee of $30,000 and
$1,000 for each committee meeting attended. The Company also reimburses each
director for ordinary and necessary travel expenses related to such director's
attendance at Board of Directors and committee meetings. For a discussion of
the Stock Option Plan and the grant of certain nonqualified stock options to the
nonemployee directors of the Company under the Stock Option Plan, see "--Stock
Option Plan."
39
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the
compensation paid or accrued for services rendered to the Company for the last
three fiscal years to the Company's Chief Executive Officer and the highest
compensated executive officers who served as executive officers during 1996 and
whose individual total cash compensation exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- --------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION (1) OPTIONS/SARS COMPENSATION (2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
------------------------------ ------- -------- ------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Hansen, Jr. 1996 750,000 -- 107,389 -- 2,250
Chairman of the Board of 1995 750,000 -- 71,331 -- 450
Directors, President and 1994 750,000 -- 97,254 -- 288
Chief Executive Officer
Christopher N. Baker 1996 275,000 27,500 -- 10,000 330
President-- 1995 265,000 -- -- 5,000 66
Pillowtex Division 1994 180,417 -- -- 5,000 54
Jeffrey D. Cordes 1996 275,000 27,500 -- 10,000 330
Executive Vice President, 1995 265,000 -- -- 5,000 66
Chief Financial Officer and 1994 203,208 -- -- 5,000 66
Assistant Secretary
Scott E. Shimizu 1996 275,000 27,500 -- 10,000 510
Executive Vice President-- 1995 245,000 -- -- 5,000 102
Sales and Marketing 1994 209,750 -- -- -- 102
Ronald M. Wehtje 1996 111,042 8,000 -- 12,000 251
Vice President-- 1995 70,875 3,000 -- -- 54
Controller 1994 60,000 -- -- -- 54
</TABLE>
- -------------------
(1) Certain of the Company's executive officers receive personal benefits in
addition to salary and cash bonuses. Amounts that do not exceed the lesser
of $50,000 or 10% of the total of the annual salary and bonus reported for
the named executive officer have been omitted. Detail regarding individual
amounts paid that do not exceed 25% of the total of all Other Annual
Compensation has not been provided. In 1996, the amount paid to Mr. Hansen
included $28,339 and $24,071 for reimbursement of income taxes incurred by
Mr. Hansen as a result of certain benefits received in 1994 and 1996,
respectively. In 1995, the amount paid to Mr. Hansen included $20,972 for
reimbursement of estimated income taxes that will be paid by Mr. Hansen due
as a result of certain benefits received in 1995. In 1994, the amount paid
to Mr. Hansen included $28,794 for reimbursement of income taxes paid by
Mr. Hansen due as a result of certain benefits paid in 1993.
(2) For Messrs. Hansen, Shimizu, Cordes, Baker and Wehtje, these amounts were
paid for the years indicated for group term life insurance.
40
<PAGE>
GRANTS OF STOCK OPTIONS. The following table sets forth information
concerning stock options granted during 1996 by the Company to the named
executive officers. The present values of stock options granted in 1996 are
calculated under a Black-Scholes options pricing model, a mathematical formula
used to value options. The actual amount, if any, realized upon the exercise of
stock options will depend upon the amount by which the market price of the
Company's common stock (NYSE) on the date of exercise exceeds the exercise
price. There is no assurance that the present values of stock options reflected
in this table will actually be realized.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
PRESENT VALUE AT
INDIVIDUAL GRANTS DATE OF GRANT (2)
----------------------------------------------------------------------- -----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE
---- -------------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Charles M. Hansen, Jr. - - - -
Christopher N. Baker 10,000 4.4 12.00 03/24/06 47,100
Jeffrey D. Cordes 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 Company's 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 - 38.822%, 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 person named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUES AT DECEMBER 28, 1996
<TABLE>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
SHARES DECEMBER 28, 1996 (#) AT DECEMBER 28, 1996 ($)
ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Hansen, Jr. - - - - - -
Christopher N. Baker - - 21,429 22,143 89,291 124,947
Jeffrey D. Cordes - - 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>
41
<PAGE>
PENSION PLAN. The Company maintains a defined benefit pension plan (the
"Pension Plan") covering substantially all of its employees, other than
employees of the Company's Canadian subsidiary, Torfeaco, and other employees
subject to collective bargaining agreements. The Company 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:
PENSION PLAN TABLE
YEARS OF SERVICE (1)
---------------------------------------------------
REMUNERATION (2) 15 20 25 30 35
---------------- ------- ------- ------- ------- -------
$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
- -------------------
(1) Estimated credited years of service as of December 28, 1996 for the
executive officers named in the Summary Compensation Table are as follows:
Charles M. Hansen, Jr.--32 years; Scott E. Shimizu--15 years; Jeffrey D.
Cordes--13 years; Christopher N. Baker--10 years; and Ronald M. Wehtje-10
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 Company benefits or by Social Security.
STOCK OPTION PLAN
Pursuant to the Stock Option Plan, options may be granted to eligible
employees and non-employee Directors for the purchase of an aggregate of up to
1,200,000 shares of Common Stock. Employees eligible under the Stock Option
Plan are those whose performance and responsibilities are determined to be
influential to the Company's success. The Stock Option Plan is currently
administered by the Compensation Committee of the Board of Directors, which
determines, in its discretion, the number of shares subject to each option
granted and the related purchase price and option period. Both nonqualified
stock options and incentive stock options, as defined by the Internal Revenue
Code, may be granted under the Stock Option Plan.
The Stock Option Plan requires that the exercise price for each stock
option must be not less than 100% of the fair market value of the Common Stock
at the time the option is granted. No incentive stock option, however, may be
granted to an employee who owns more than 10% of the total combined voting power
of all classes of outstanding stock of Pillowtex unless the option price is at
least 110% of the fair market value of the Common Stock at the date of grant.
The fair market value of stock options that may be granted to an employee in any
calendar year is not limited, but no employee may be granted incentive stock
options that first come exercisable during a calendar year to purchase Common
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 counts against
the annual limitation only in the year it first becomes exercisable. Incentive
stock options may not be granted to non-employee directors.
The option period may not be more than 10 years from the date the options
granted. Options may be exercised in annual installments as specified by the
Board of Directors. All installments that become exercisable are cumulative and
may be exercised at any time after they become exercisable until the option
expires. Options are not assignable.
42
<PAGE>
Full payment for shares purchased upon exercise of an option must be made
at the time of exercise. No shares may be issued until full payment is made.
The Stock Option Plan provides that an option agreement may permit an optionee
to tender previously owned shares of Common Stock in partial or full payment for
shares to be purchased on exercising an option. Unless sooner terminated by
action of the Board, the Stock Option Plan will terminate in February 2003.
Subject to certain exceptions, the Stock Option Plan may be amended, altered, or
discontinued by the Board of Directors without shareholder approval.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists entirely of non-employee directors.
The members of the Board of Directors 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 Corp. since 1992 and currently serves on its compensation committee. M.
Joseph McHugh is a director and executive officer of Triangle Pacific Corp. and
was elected as a director of the Company in February 1993. Except as described
above, no executive officer of the Company serves as a member of the
compensation committee or other board committee performing similar functions of
any other entity.
In February 1996, the Company entered into an agreement with Paul G.
Gillease, a director of the Company, to provide management consulting services
to the Company. The agreement provides for a monthly consulting fee of $9,000
and reimbursement of travel expenses, and is cancellable by the Company or
Mr. Gillease upon 90 days' notice.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In February 1996, the Company entered into an agreement with Paul G.
Gillease, a director of the Company, to provide management consulting services
to the Company. The agreement provides for a monthly consulting fee of $9,000
and reimbursement of travel expenses, and is cancellable by the Company or
Mr. Gillease upon 90 days' notice.
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock, as of January 15, 1997, by
each person known by the Company to own beneficially more than 5% of the
outstanding Common Stock, certain executive officers and each director of the
Company, and all executive officers and directors as a group. Except as
otherwise indicated, the Company believes that the owners named below have sole
voting and investment power with respect to all shares of Common Stock
indicated.
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT
NAME OWNED OF CLASS
---- ------------ --------
Charles M. Hansen, Jr. (1)......................... 2,855,455 26.9%
John H. Silverthorne Marital Trust B (2)........... 2,368,893 22.3
Mary R. Silverthorne (2)........................... 662,811 6.2
Paul G. Gillease (3)............................... 7,710 *
William B. Madden (3).............................. 6,679 *
M. Joseph McHugh (3)............................... 7,679 *
Scott E. Shimizu (3)............................... 25,103 *
Jeffrey D. Cordes (3).............................. 24,624 *
Christopher N. Baker (3)........................... 31,725 *
Ronald M. Wehtje (3)............................... 87 *
Pioneering Management Corporation (4).............. 549,900 5.2
All executive officers and directors as a group
(10 persons) (3)................................. 5,990,766 61.3%
- -------------------
* 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 which are currently exercisable, or become exercisable
within 60 days of the date hereof, to purchase the number of shares of
Common Stock indicated for the following persons: Mr. Gillease (1,786),
Mr. Madden (2,679), Mr. McHugh (2,679), Mr. Shimizu (22,679), Mr. Cordes
(20,179) and Mr. Baker (20,179).
(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.
44
<PAGE>
DESCRIPTION OF NOTES
EXCEPT AS OTHERWISE INDICATED BELOW, THE FOLLOWING SUMMARY APPLIES TO BOTH
THE OLD NOTES AND THE NEW NOTES. AS USED HEREIN, THE TERM "NOTES" SHALL MEAN
THE OLD NOTES AND THE NEW NOTES, UNLESS OTHERWISE INDICATED.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that (i) the exchange of the New Notes
pursuant to the Exchange Offer will be registered under the Securities Act, (ii)
the New Notes will not provide for payment of penalty interest as Liquidated
Damages, which terminate upon consummation of the Exchange Offer, and (iii) the
New Notes will not bear any legends restricting transfer thereof. The New Notes
will be issued solely in exchange for an equal principal amount of Old Notes.
As of the date hereof, $125.0 million aggregate principal amount of Old Notes is
outstanding. See "The Exchange Offer."
GENERAL
The Old Notes are, and the New Notes will be, issued pursuant to the
Indenture among the Company, the Guarantors and Bank One, Columbus, N.A., as
trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the Indenture is filed as an exhibit to the
Exchange Offer Registration Statement and is available as set forth under "--
Available Information." The definitions of certain terms used in the following
summary are set forth below under "-- Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $125.0 million
and will mature on November 15, 2006. Interest on the Notes will accrue at the
rate of 10% per annum and will be payable semiannually in arrears on May 15 and
November 15, commencing on May 15, 1997, to holders of record on the immediately
preceding May 1 and November 1. Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest and Liquidated Damages on the Notes will be payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest and Liquidated
Damages may be made by check mailed to the holders of Notes at their respective
addresses set forth in the register of holders of Notes; provided that all
payments with respect to Notes that the holders of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed by the Guarantors. The Guarantee of each Guarantor is subordinated to
the prior payment in full of all Guarantor Senior Indebtedness of such
Guarantor, which would include the guarantees of the Company's obligations under
the Credit Agreement issued by the Guarantors. The obligations of each
Guarantor under its Guarantee is limited so as not to constitute a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance
Statutes."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor under the Notes and the
Indenture pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, and (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists.
45
<PAGE>
The Indenture provides that (i) upon the release by all holders of Senior
Indebtedness and Guarantor Senior Indebtedness of all Guarantees issued by a
Guarantor relating to such Senior Indebtedness and Guarantor Senior Indebtedness
and all Liens on the property and assets of such Guarantor relating to Senior
Indebtedness and Guarantor Senior Indebtedness or (ii) in the event of a sale or
other disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Guarantor, then such Guarantor (in the event of clause (i) above or
a sale or other disposition, by way of such a merger, consolidation or
otherwise, of all of the capital stock of such Guarantor) or the corporation
acquiring the property (in the event of a sale or other disposition of all of
the assets of such Guarantor) will be released and relieved of any obligations
under its Guarantee; provided that the Net Proceeds of any such sale or other
disposition described in clause (ii) above are applied in accordance with the
applicable provisions of the Indenture. See "--Repurchase at the Option of
Holders--Asset Sales."
SUBORDINATION
The payment of principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes is subordinated in right of payment, as set forth
in the Indenture, to the prior payment in full of all Senior Indebtedness,
whether outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full of all obligations due in respect of such Senior
Indebtedness (including, in the case of Senior Indebtedness under the Credit
Agreement, interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Indebtedness) before the holders of Notes
will be entitled to receive any payment with respect to the Notes, and until all
Obligations with respect to Senior Indebtedness are paid in full, any
distribution to which the holders of Notes would be entitled shall be made to
the holders of Senior Indebtedness (except that holders of Notes may receive
common equity securities or debt securities that are subordinated at least to
the same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness (collectively, "Permitted Junior Securities")
and payments made from the trust described under "--Legal Defeasance and
Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of, premium, if any, or interest on Designated Senior Indebtedness
occurs and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Indebtedness
that permits holders of the Designated Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or the holders of
any Designated Senior Indebtedness. Payments on the Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Indebtedness has been accelerated.
No new period of payment blockage may be commenced unless and until (i) 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any, and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been waived
for a period of not less than 90 days.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. On a pro forma
basis, after giving effect to the Prior Offering and the application of the
proceeds therefrom, the principal amount of Senior Indebtedness outstanding at
September 28, 1996 would have been approximately $96.5 million. The Indenture
limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness, that the
46
<PAGE>
Company and its Subsidiaries may incur. See "Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to November 15,
2001. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages thereon
to the applicable redemption date, if redeemed during the 12-month period
beginning on November 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2001......................... 105.000%
2002......................... 103.333%
2003......................... 101.667%
2004......................... 100.000%
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that Notes redeemed with the proceeds of an offering of Common Stock as
described below shall be made on a pro rata basis; provided further, that no
Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon to the date of purchase (the "Change of
Control Payment"). Within ten days following any Change of Control, the Company
will mail a notice to each holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Notes pursuant
to the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes as
a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail
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to each holder of Notes so tendered the Change of Control Payment for such
Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided
that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Indenture provides that, prior to complying
with the provisions of this covenant, but in any event within 90 days
following a Change of Control, the Company will either repay all outstanding
Senior Indebtedness or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Indebtedness to permit the repurchase
of Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit holders of Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Credit Agreement provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute as default under
the Credit Agreement. In such circumstances, the subordination provisions in
the Indenture would likely restrict payments to holders of Notes.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors or a committee of the Board of Directors, having at least one
Independent director, set forth in an Officers' Certificate delivered to the
Trustee, or by an independent appraisal by an accounting, appraisal or
investment banking firm of national standing) of the assets or Equity Interests
issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Subsidiary is in the form
of cash.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently
reduce Senior Indebtedness (and correspondingly reduce commitments with respect
thereto in the case of any reduction of borrowings under the Credit Agreement,
(b) to the acquisition of a controlling interest in another business, the making
of a capital expenditure or the acquisition of other long-term assets
("Productive Assets"), in each case, in the same or a similar line of business
as the Company was engaged in on the date of the Indenture or (c) to reimburse
the Company or its Subsidiaries for expenditures made, and costs incurred, to
repair, rebuild, replace or restore property subject to loss, damage or taking
to the extent that the net proceeds consist of insurance proceeds received on
account of such loss, damage or taking. Pending the final application of any
such Net Proceeds, the Company may temporarily reduce Senior Indebtedness or
otherwise invest such Net Proceeds in any manner
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that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales
that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $5.0 million, the Company will be required
to make an offer to all holders of Notes (an "Asset Sale Offer") to purchase
the maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon to the date of purchase, in accordance with the procedures
set forth in the Indenture. To the extent that the aggregate amount of Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds,
the Company may use any remaining Excess Proceeds for general corporate
purposes. If the aggregate principal amount of Notes surrendered by holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to an Asset Sale Offer.
Notwithstanding the foregoing, the Company and its Subsidiaries will be
permitted to consummate one or more Asset Sales with respect to assets or
properties with an aggregate fair market value not in excess of $5.0 million in
the aggregate since the date of the Indenture without complying with clause
(ii) of the first paragraph of this covenant; provided that (a) at least 75% of
the consideration for such Asset Sale constitutes either Productive Assets or
cash, and (b) any Net Proceeds received by the Company or any of its
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall be subject to the provisions of the second paragraph of
this covenant.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Equity Interests of
the Company or any of its Subsidiaries (including, without limitation, any
payment in connection with any merger or consolidation involving the Company or
any of its Subsidiaries) or to the direct or indirect holders of the Equity
Interests of the Company or any of its Subsidiaries in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company, dividends or distributions payable to the
Company or any Subsidiary of the Company or dividends or distributions made by a
Subsidiary of the Company to all holders of its Common Stock on a pro rata
basis); (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company, any Subsidiary of the Company or any direct or
indirect parent of the Company, (other than any such Equity Interests owned by
the Company or any Subsidiary of the Company); (iii) make any payment on or in
respect of, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is pari passu with or subordinated to the Notes,
except at Stated Maturity or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clauses (v) and (w) of the next succeeding paragraph), is less than the
sum of (i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) commencing September 29, 1996
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to the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company or of debt securities of
the Company that have been converted into such Equity Interests (other
than Equity Interests (or convertible debt securities) sold to a Subsidiary
of the Company and other than Disqualified Stock or debt securities that
have been converted into Disqualified Stock), plus (iii) to the extent that
any Restricted Investment that was made after the date of the Indenture is
sold for cash or otherwise liquidated or repaid for cash, the lesser of (A)
the cash return of capital with respect to such Restricted Investment (less
the cost of disposition, if any) and (B) the initial amount of such
Restricted Investment, plus (iv) $7.5 million.
The foregoing provisions will not prohibit (u) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (v) the making of any Restricted Investment, or the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company, in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such Restricted
Investment, redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (w) the defeasance,
redemption or repurchase of PARI PASSU or subordinated Indebtedness with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness or the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (x) the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
or any Subsidiary of the Company held by any member of the Company's (or any of
its Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the Indenture;
provided that (A) the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $250,000 in any 12-month
period plus the aggregate cash proceeds received by the Company during such
12-month period from any reissuance of Equity Interests by the Company to
members of management of the Company and its Subsidiaries, and (B) no Default or
Event of Default shall have occurred and be continuing immediately after such
transaction; (y) so long as no Default or Event of Default shall have occurred
and be continuing, Investments in the same or similar lines of business as the
Company was engaged in on the date of the Indenture in an aggregate amount not
to exceed $7.5 million since the date of the Indenture (measured as of the date
made and without giving effect to subsequent changes in value); and (z) so long
as no Default or Event of Default shall have occurred and be continuing,
ordinary dividends paid by the Company in respect of its Common Stock in an
aggregate amount not to exceed $2.5 million since the date of the Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors or a committee
of the Board of Directors having at least one Independent director set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "--Restricted Payments" were computed, which calculations may be
based upon the Company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; provided, however, that (x) the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock and (y)
a Guarantor may incur Acquired Indebtedness, in each case if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock is issued
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would have been at least 2.0 to 1, determined on a pro forma basis (including
a pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the Credit
Agreement (and guarantees thereof by the Guarantors) in an aggregate principal
amount at any time outstanding (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company and its
Subsidiaries thereunder) not to exceed the greater of (x) $175.0 million and (y)
the sum of (A) 80% of Eligible Accounts Receivable and 65% of Eligible
Inventory, less, in the case of each of clause (x) and clause (y), the aggregate
amount of all Net Proceeds of Asset Sales applied to permanently reduce the
commitments with respect to such Indebtedness pursuant to the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset Sales";
(ii) the incurrence by the Company of Indebtedness represented by the Notes
and the incurrence by the Guarantors of Indebtedness represented by the
Guarantees;
(iii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations (whether or not incurred
pursuant to sale and leaseback transactions), mortgage financing or purchase
money obligations, in each case incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of property,
plant or equipment used in the business of the Company or such Subsidiary, in an
aggregate principal amount not to exceed $5.0 million at any time outstanding;
(iv) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are used
to extend, refinance, renew, replace, defease or refund, Existing Indebtedness
or Indebtedness that was permitted by the Indenture to be incurred (other than
any such Indebtedness incurred pursuant to clause (i), (ii), (iii), (v), (vi),
(vii) (viii) or (ix) of this paragraph);
(v) the incurrence by the Company or any of its Wholly Owned Subsidiaries
of intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries; provided, however, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinate to the payment in
full of all Obligations with respect to the Notes and (ii)(A) any subsequent
issuance or transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than the Company or a Wholly Owned Subsidiary and
(B) any sale or other transfer of any such Indebtedness to a Person that is not
either the Company or a Wholly Owned Subsidiary shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
(vi) the incurrence by the Company of Hedging Obligations that are incurred
for the purpose of fixing or hedging interest rate risk that is permitted by the
terms of the Indenture to be incurred;
(vii) the incurrence by the Company of Hedging Obligations under commodity
hedging and currency exchange agreements; provided that, such agreements were
entered into in the ordinary course of business for the purpose of limiting
risks that arise in the ordinary course of business;
(viii) the incurrence of Indebtedness of a Guarantor represented by
guarantees of Indebtedness of the Company that has been incurred in accordance
with the terms of the Indenture; and
(ix) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an aggregate
principal amount (or accreted value, as applicable) at any time outstanding not
to exceed $10.0 million.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien securing Indebtedness on any asset now owned or hereafter
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acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens unless all payments due under
the Indenture and the Notes are secured on an equal and ratable basis with the
Indebtedness so secured until such time as such is no longer secured by a Lien;
provided that if such Indebtedness is by its terms expressly subordinated to the
Notes or any Guarantee the Lien securing such Indebtedness shall be subordinate
and junior to the Lien securing the Notes and the Guarantees with the same
relative priority as such subordinate or junior Indebtedness shall have with
respect to the Notes and the Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) applicable law, (b) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, (c) customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (d) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, or
(e) Permitted Refinancing Indebtedness, provided that, the restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than 95% of the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Subsidiary than those that would have been obtained
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in a comparable transaction by the Company or such Subsidiary with an
unrelated Person, (ii) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$2.0 million the Company delivers to the Trustee, (a) a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (iii) with respect to any Affiliate Transaction or
series of Related Affiliate transactions involving aggregate consideration in
excess of $5.0 million, (b) an opinion as to the fairness to the holders of
Notes of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national standing;
provided that (w) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by
the Board of Directors or the payment of fees and indemnities to directors of
the Company and its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Subsidiary, (x) loans or advances to employees in the ordinary course of
business, (y) transactions between or among the Company and/or its Wholly
Owned Subsidiaries and (z) Restricted Payments (other than Investments) that
are permitted by the provisions of the Indenture described above under the
caption "--Restricted Payments," in each case, shall not be deemed Affiliate
Transactions.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, enter into any sale and leaseback transaction; provided
that the Company may enter into a sale and leaseback transaction if (i) the
Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Indebtedness relating to such sale and leaseback transaction
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence of
Additional Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien
to secure such Indebtedness pursuant to the covenant described above under the
caption "--Liens," (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors or a committee of the Board of Directors having
at least one Independent director and set forth in an Officers' Certificate
delivered to the Trustee or an independent appraisal by an accounting, appraisal
or investment banking firm of national standing) of the property that is the
subject of such sale and leaseback transaction and (iii) the transfer of assets
in such sale and leaseback transaction is permitted by, and the Company applies
the proceeds of such transaction in compliance with, the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset Sales."
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
SUBSIDIARIES
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Wholly Owned Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Subsidiary of
the Company), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of such Wholly Owned Subsidiary and
(b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the covenant described above under
the caption "--Asset Sales," and (ii) will not permit any Wholly Owned
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Subsidiary of
the Company.
GUARANTEES OF CERTAIN INDEBTEDNESS
The Indenture provides that (a) the Company will not permit any of its
Subsidiaries that is not a Guarantor to incur, guarantee or secure through the
granting of Liens the payment of any Senior Indebtedness and (b) the Company
will not and will not permit any of its Subsidiaries to pledge any intercompany
notes representing obligations of any of its Subsidiaries, to secure the payment
of any Senior Indebtedness, in each case unless such Subsidiary, the Company and
the Trustee execute and deliver a supplemental indenture evidencing such
Subsidiary's Guarantee (providing for the unconditional guarantee by such
Subsidiary, on a senior subordinated basis, of the Notes).
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LIMITATION ON LAYERING
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Indebtedness of the Company and
senior in any respect in right of payment to the Notes, and (ii) no Guarantor
will incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness of such Guarantor that is subordinate or junior in right of payment
to any Indebtedness of such Guarantor and senior in any respect in right of
payment to the Guarantee of such Guarantor.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and the Guarantors have agreed
that, for so long as any Notes remain outstanding, they will furnish to the
holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the provisions described under the captions "Repurchase at the
Option of Holders--Change of Control," "Repurchase at the Option of Holders--
Asset Sales," "--Restricted Payments" or "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; (iv) failure by the Company for 60 days after
notice to comply with any of its other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness
or guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness at its final stated maturity or (b) results in the
acceleration of such Indebtedness prior to its maturity and, in each case, the
principal amount of which Indebtedness, together with the principal amount of
any other such Indebtedness described in clauses (a) and (b) above, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days; (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Subsidiaries;
or (ix) the Guarantee of any Guarantor is held in judicial proceedings to be
unenforceable or invalid or ceases for any reason to be in full force and effect
(other than in accordance with the terms of the Indenture) or any Guarantor or
any Person acting on behalf of any Guarantor denies or disaffirm such
Guarantor's obligations under its Guarantee (other than by reason of a release
of such Guarantor from its Guarantee in accordance with the terms of the
Indenture.
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If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, however, that
if any Senior Indebtedness is outstanding under the Credit Agreement, upon a
declaration of acceleration, the Notes shall be payable upon the earlier of (x)
the day which is five Business Days after the provision to the Company and the
agent under the Credit Agreement of written notice of such declaration and (y)
the date of acceleration of any Indebtedness under the Credit Agreement.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from holders of Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
November 15, 2001, by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to November 15, 2001, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or any Guarantor under the Notes, the Guarantees, the Indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of the
obligations of the Company and the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (i) the rights of holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages on such Notes when such payments are
due from the trust referred to below, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being deceased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of Notes over the other creditors of the Company or
any Guarantor with the intent of defeating, hindering, delaying or defrauding
creditors, any Guarantor of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraphs, the Indenture, the
Guarantees or the Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture, the Guarantees or the Notes may
be waived with the consent of the holders of a majority in principal amount of
the then outstanding Notes (including consents obtained in connection with a
purchase of, or a tender offer or exchange offer for, Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (i) reduce the
principal amount of Notes whose holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption or repurchase of the
Notes (other than provisions relating to the covenant described above under
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the caption "--Repurchase at the Option of Holders"), (iii) reduce the rate
of or change the time for payment of interest on any Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if
any, or interest on the Notes (except a rescission of acceleration of the
Notes by the holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in
the Notes, (vi) make any change in the provisions of the Indenture relating
to waivers of past Defaults or the rights of holders of Notes to receive
payments of principal of or premium, if any, or interest on the Notes, (vii)
waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders") (viii) release any Guarantor from
any of its obligations under its Guarantee or the Indenture, except in
accordance with the terms of the Indenture, or (ix) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) or
the related definitions will require the consent of the holders of at least
75% in aggregate principal amount of the Notes then outstanding if such
amendment would adversely affect the rights of holders of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Guarantees or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's or a
Guarantor's obligations to holders of Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Notes, unless such holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Pillowtex
Corporation, 4111 Mint Way, Dallas, Texas 75237, Attention: Katharine Kenny,
Assistant Vice President--Investor Relations.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the date of consummation
of the Exchange Offer (the "Closing Date") with, or on behalf of, the DTC (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
Notes that are issued as described below under "--Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
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The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only thorough the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants exchanging Old Notes for New Notes with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Holders are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer Notes
evidenced by the Global Note will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the policy
of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). "In addition, if (i) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of Notes in the form of Certificated Securities
under the Indenture, then, upon surrender by the Global Note Holder of its
Global Note, Notes in such form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
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SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Certificated
Securities, the Company will make all payments of principal, premium, if any,
interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person that was not
incurred in connection with, or in contemplation of, such other Person merging
with or into or becoming a Subsidiary of such specified Person, and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that,
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than sales of inventory in the ordinary course of business consistent with past
practices; provided that, the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries taken
as a whole will be governed by the provisions of the Indenture described above
under the caption "--Repurchase at the Option of Holders--Change of Control"
and/or the provisions described above under the caption "--Certain Covenants--
Merger, Consolidation or Sale of Assets" and shall not be deemed to be "Asset
Sales", and (ii) the issue or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $500,000 or (b) for
net proceeds in excess of $500,000. Notwithstanding the foregoing: (i) a
transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly
Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, (ii) an
issuance of Equity Interests by a Wholly Owned Subsidiary to the Company or to
another Wholly Owned Subsidiary, and (iii) a Restricted Payment that is
permitted by the covenant described above under the caption "--Restricted
Payments" will not be deemed to be Asset Sales.
"ATTRIBUTABLE INDEBTEDNESS" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or
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participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than
12 months from the date of acquisition, (iii) U.S. dollar or Canadian dollar
denominated (or foreign currency fully hedged) time deposits, certificates of
deposit, Eurodollar time deposits or Eurodollar certificates of deposit of
(a) any domestic commercial bank of recognized standing having capital and
surplus in excess of $500 million or (b) any bank whose short term commercial
paper rating from Standard & Poor's is at least A-1 or the equivalent thereof or
from Moody's is at least P-1 or the equivalent thereof (any such bank being an
"Approved Lender"), in each case with maturities of not more than 12 months from
the date of acquisition; and (iv) commercial paper issued by any Approved Lender
(or by the parent company thereof) or any variable rate notes issued by, or
guaranteed by, any domestic corporation rated A-2 (or the equivalent thereof) or
better by Standard & Poor's or P-2 (or the equivalent thereof) or better by
Moody's and maturing within 12 months of the date of acquisition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties, (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals and their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly, of more than 50% of the Voting Stock of the
Company or (iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Indebtedness, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
charges (excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash charges were deducted in computing such Consolidated Net
Income minus (v) non-cash items of such Person and its Subsidiaries increasing
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Subsidiary of the referent Person
shall be added to Consolidated Net Income to compute Consolidated Cash Flow only
to the extent (and in same proportion) that the Net Income of such Subsidiary
was included in calculating the Consolidated Net Income of such Person and only
if a corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Subsidiary without prior governmental approval
(that has not been obtained), and without direct or indirect restriction
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its shareholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity
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method of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a Wholly
Owned Subsidiary thereof shall be excluded, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is
not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its shareholders, shall be excluded (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded and (iv) the cumulative effect
of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"CREDIT AGREEMENT" means that certain Restated Credit Agreement, dated as
of November 12, 1996, by and among the Company and NationsBank of Texas, N.A.,
as agent, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, extended, replaced or refinanced from time
to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as Senior Indebtedness
is outstanding under the Credit Agreement, all Senior Indebtedness outstanding
under the Credit Agreement and (ii) thereafter, any other Senior Indebtedness
permitted under the Indenture the principal amount of which is $25.0 million or
more and that has been designated by the Company as "Designated Senior
Indebtedness."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"ELIGIBLE INVENTORY" means, as of any date, all inventory of the Company
and any of its Subsidiaries, wherever located, valued in accordance with GAAP
and shown on the balance sheet of the Company for the quarterly period most
recently ended prior to such date for which financial statements of the Company
are available.
"ELIGIBLE RECEIVABLES" means, as of any date, all accounts receivable of
the Company and any of its Subsidiaries arising out of the sale of inventory in
the ordinary course of business, valued in accordance with GAAP and shown on the
balance sheet of the Company for the quarterly period most recently ended prior
to such date for which financial statements of the Company are available.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries in existence on the date of the Indenture.
"FIXED CHARGES" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Indebtedness, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations) and
(ii) the consolidated interest expense of such Person and its Subsidiaries that
was capitalized during such period, and (iii) any interest expense on
Indebtedness of another Person that is guaranteed by such Person or one of its
Subsidiaries or secured by a Lien on assets of such Person or one of its
Subsidiaries (whether or not such guarantee or Lien is called upon) and (iv) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) on any series of preferred stock of such
Person, times (b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession which are in effect on the date of the Indenture.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR SENIOR INDEBTEDNESS" means, with respect to any Guarantor,
(i) the guarantee of such Guarantor of the Company's Obligations under the
Credit Agreement and (ii) any other Indebtedness permitted to be incurred by
such Guarantor under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Guarantee of such Guarantor.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include (u) any Indebtedness of such Guarantor
representing a guarantee of Indebtedness of the Company or any other Guarantor
which is subordinate or junior to, or pari passu with, the Notes or the
Guarantee of such other Guarantor, as the case may be, (v) any Indebtedness that
is expressly subordinate or junior in right of payment to any other Indebtedness
of such Guarantor, (w) any liability for federal, state, local or other taxes
owed or owing by such Guarantor, (x) any Indebtedness
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of such Guarantor to any of its Subsidiaries or other Affiliates, (y) any
trade payables or (z) that portion of any Indebtedness that is incurred in
violation of the Indenture.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, the value of foreign currencies and the value of commodities purchased by
the Company or any of its Subsidiaries in the ordinary course of business.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
guarantee by such Person of any indebtedness of any other Person.
"INDEPENDENT" means, with respect to the Company and its Subsidiaries, any
person who (i) is in fact independent, (ii) does not have any direct financial
interest or any material indirect financial interest in the Company or any of
its Subsidiaries, or in any Affiliate of the Company or any of its Subsidiaries
(other than as a result of holding securities of the Company) and (iii) is not
an officer, employee, promoter, underwriter, trustee, partner or person
performing similar functions for the Company or any of its Subsidiaries.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions), any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
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"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Subsidiary of the Company in a Person,
if as a result of such Investment (i) such Person becomes a Wholly Owned
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Subsidiary of
the Company, and (d) any Restricted Investment made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales."
"PERMITTED LIENS" means (i) Liens on assets of the Company securing Senior
Indebtedness, Liens on assets of a Guarantor securing Guarantor Senior
Indebtedness of such Guarantor and Liens of a Subsidiary of the Company that is
not a Guarantor, which secure unsubordinated Indebtedness of such Subsidiary if
the Notes are secured by such assets on a subordinated basis to the Lien
securing such unsubordinated Indebtedness; provided that such Senior
Indebtedness, Guarantor Senior Indebtedness or Unsubordinated Indebtedness, as
the case may be was permitted by the terms of the Indenture to be incurred;
(ii) Liens in favor of the Company; (iii) Liens on property of a Person existing
at the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; and (vi) Liens existing on the date of the Indenture.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PRINCIPALS" means Charles M. Hansen, Jr., his spouse and any of his lineal
descendants.
"RELATED PARTY" means any controlled Affiliate of any Principal.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SENIOR INDEBTEDNESS" means (i) Indebtedness under the Credit Agreement
(including interest in respect thereof accruing after the commencement of any
bankruptcy or similar proceeding to the extent that such interest is allowable
as a bankruptcy claim in such proceeding) and (ii) any other Indebtedness
permitted to be incurred by the Company under the terms of the Indenture, unless
the instrument under which such Indebtedness is incurred expressly provides that
it is on a parity with or subordinated in right of payment to the Notes.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (v) any Indebtedness that is expressly subordinate or junior in
right of payment to any other Indebtedness of the Company, (w) any liability for
federal, state, local or other taxes owed or owing by the Company (x) any
Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y)
any trade payables or (z) that portion of Indebtedness that is incurred in
violation of the Indenture.
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"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation was in effect on the date of the
Indenture.
"STATED MATURITY" means, with respect to any payment of interest on or
principal of any Indebtedness, the date on which such payment was scheduled to
be made in the documentation governing such Indebtedness, without regard to the
occurrence of any subsequent event or contingency.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"VOTING STOCK" means, with respect to any Person as of any date, the
Capital Stock of such Person that is at the time entitled to vote in the
election of the Board of Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Jenkens & Gilchrist, a Professional Corporation, the
following are the material U.S. federal income tax consequences of
exchanging Old Notes for New Notes pursuant to the Exchange Offer. The
following opinion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, Internal
Revenue Service ("IRS") rulings and pronouncements, reports of congressional
committees, judicial decisions and current administrative rulings and
practice, all as in effect on the date hereof, all of which are subject to
change at any time, and any such change may be applied retroactively in a
manner that could adversely affect the tax consequences described below.
This opinion applies only to Notes held as "capital assets" within the
meaning of section 1221 of the Code (generally property held for investment
and not for sale to customers in the ordinary course of a trade or business)
by holders who or which are (i) citizens or residents of the United States,
(ii) domestic corporations, partnerships or other entities or (iii) otherwise
subject to U.S. federal income taxation on a net income basis in respect of
income and gain from the Notes. This opinion does not address aspects of
U.S. federal income taxation that may be applicable to holders that are
subject to special tax rules, such as certain financial institutions,
tax-exempt organizations, insurance companies, dealers in securities, foreign
corporations and nonresident alien individuals. Moreover, this summary does
not address any of the U.S. federal income tax consequences of holders that
do not acquire New Notes pursuant to the Exchange Offer, nor does it address
the applicability or effect of any state, local or foreign tax laws.
The Company has not sought and will not seek any rulings from the IRS with
respect to the position of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of exchanging Old Notes for New Notes.
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EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an "exchange" for U.S. federal income tax purposes because the
New Notes will not be considered to differ materially in kind or extent from the
Old Notes. New Notes received by a holder of Old Notes will be treated as a
continuation of the Old Notes in the hands of such holder. Accordingly, there
will not be any U.S. federal income tax consequences to holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer. A holder's holding period of
New Notes will include the holding period of the Old Notes exchanged therefor.
POTENTIAL CONTINGENT PAYMENTS
Holders of New Notes should be aware that it is possible that the IRS could
assert that the Liquidated Damages which the Company would have been obligated
to pay if the Exchange Offer registration statement had not been filed or is not
declared effective within the time periods set forth herein (or certain other
actions are not taken) (as described above under "Termination of Certain
Rights") are "contingent payments" for U.S. federal income tax purposes. If so
treated, the New Notes would be treated as contingent payment debt instruments
and a holder of a New Note would be required to accrue interest income over the
term of such New Note under the "noncontingent bond method" set forth in the
U.S. Treasury Regulations issued by the IRS (the "Contingent Debt Regulations").
Under the Contingent Debt Regulations, any gain recognized by a holder on the
sale, exchange or retirement of a New Note could be treated as interest income.
However, the Contingent Debt Regulations provide that, for purposes of
determining whether a debt instrument is a contingent payment debt instrument,
remote or incidental contingencies are ignored.
On the date of issue, the Company believed, and has represented that to
the best knowledge of the Company, prior to and on the date the New Notes are
issued, the possibility of the payment of Liquidated Damages on the Old Notes
is remote. Assuming this representation, counsel is of the opinion that the
Old Notes will not be treated as contingent payment debt instruments.
Accordingly, based on this representation, the Old Notes should not be
treated as contingent payment debt instruments.
EACH HOLDER SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED ABOVE TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER
TAX LAWS.
DESCRIPTION OF CREDIT AGREEMENT
Concurrently with the Prior Offering, 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 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.
Amounts outstanding under the Credit Agreement 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 EBITDA. On a pro forma basis as of
September 28, 1996, the interest rate on outstanding borrowings under the Credit
Agreement would have been 6.305%.
The Credit Agreement contains a number of financial, affirmative and
negative covenants that regulate the Company's operations. Financial covenants
require maintenance of ratios of certain current assets to certain current
liabilities, funded debt to EBITDA, and minimum interest coverage, and require
the Company to maintain a minimum net worth. Negative covenants restrict, among
other things, the incurrence of debt, the existence of liens, transactions
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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.
PLAN OF DISTRIBUTION
Any broker-dealer who holds Old Notes that were acquired for its own
account as a result of market-making activities or other trading activities
(other than directly from the Company), may exchange such Old Notes pursuant to
the Exchange Offer. However, each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for old
Notes where such Old Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, starting on the
Expiration Date and ending on the close of business one year after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until February 10, 1998, all dealers effecting transactions in the New
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The legality of the New Notes will be passed upon for the Company by
Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas.
67
<PAGE>
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1994 and December 30, 1995, and for each of the years in the three-
year period ended December 30, 1995, have been included herein and in the
Exchange Offer Registration Statement in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
68
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report ......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994, December 30,
1995 and September 28, 1996 (unaudited)............................. F-3
Consolidated Statements of Earnings for the years ended December 31,
1993 and 1994, December 30, 1995 and the nine months ended
September 30, 1995 and September 28, 1996 (unaudited)............... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993 and 1994 and December 30, 1995 and the nine months
ended September 28, 1996 (unaudited)................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993 and 1994, December 30, 1995 and the nine months ended
September 30, 1995 and September 28, 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements............................ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Pillowtex Corporation:
We have audited the accompanying consolidated balance sheets of Pillowtex
Corporation and subsidiaries as of December 31, 1994 and December 30, 1995 and
the related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 30, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pillowtex
Corporation and subsidiaries as of December 31, 1994 and December 30, 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 30, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 6, 1996
F-2
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
DECEMBER 31, DECEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 571 411 15
Receivables:
Trade, less allowance for doubtful accounts
of $2,933 in 1994, $2,195 in 1995 and
$2,055 in 1996............................ 72,381 71,684 93,048
Other....................................... 1,202 2,284 5,309
Inventories (note 4)........................ 107,516 107,404 135,487
Deferred income taxes (note 9).............. 2,184 2,419 2,831
Prepaid expenses............................ 1,154 1,644 2,134
-------- -------- --------
Total current assets...................... 185,008 185,846 238,824
Property, plant and equipment, net
(notes 5 and 8)............................. 81,187 84,567 79,006
Intangible assets, at cost less accumulated
amortization of $1,129 in 1994, $2,500 in
1995 and $3,478 in 1996..................... 50,645 51,779 50,338
Other assets.................................. 2,704 2,518 2,502
-------- -------- --------
$319,544 324,710 370,670
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (note 6)................... $37,917 42,090 50,476
Accrued expenses (note 6)................... 16,768 21,137 21,067
Current portion of long-term debt (note 8).. 6,907 11,916 11,476
Income taxes payable........................ 678 575 3,018
-------- -------- --------
Total current liabilities................. 62,270 75,718 86,037
Long-term debt, net of current portion
(note 8).................................... 177,149 153,472 180,200
Deferred income taxes (note 9)................ 3,647 7,530 9,391
Shareholders' equity (notes 8, 10 and 11):
Preferred stock, $0.01 par value; authorized
20,000,000 shares; none issued............ - - -
Common stock, $0.01 par value; authorized
30,000,000 shares; 10,617,722 shares
issued and outstanding.................... 106 106 106
Additional paid-in capital.................. 58,396 58,427 58,427
Retained earnings........................... 18,728 29,666 36,628
Currency translation adjustment............. (752) (209) (119)
-------- -------- --------
Total shareholders' equity................ 76,478 87,990 95,042
Commitments and contingencies (note 13)
-------- -------- --------
$319,544 324,710 370,670
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
YEARS ENDED NINE MONTHS ENDED
---------------------------------- -----------------------------
DECEMBER 31,
------------------- DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
-------- -------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $291,624 $349,520 $474,899 $332,352 $335,770
Cost of goods sold.............. 238,155 294,714 395,922 275,407 280,272
-------- -------- -------- -------- --------
Gross profit................ 53,469 54,806 78,977 56,945 55,498
Selling, general and
administrative expenses....... 29,227 36,399 42,508 32,315 31,170
-------- -------- -------- -------- --------
Earnings from operations.... 24,242 18,407 36,469 24,630 24,328
Interest expense................ 3,042 6,361 17,491 12,964 10,279
Other income, net............... - (379) - - -
-------- -------- -------- -------- --------
3,042 5,982 17,491 12,964 10,279
-------- -------- -------- -------- --------
Earnings before income
taxes..................... 21,200 12,425 18,978 11,666 14,049
Income taxes (note 9)........... 8,420 4,736 7,509 4,678 5,495
-------- -------- -------- -------- --------
Net earnings................ $ 12,780 $ 7,689 $ 11,469 $ 6,988 $ 8,554
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per common share....... .73 1.08 .66 .81
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma income data (unaudited):
Net earnings as reported...... 12,780
Pro forma adjustment to
provision for income taxes.. (97)
--------
Pro forma earnings............ $ 12,877
--------
--------
Pro forma earnings
available to common
stock shareholders.......... $ 12,877
--------
--------
Pro forma earnings per common
share....................... $ 1.32
--------
--------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995, AND
NINE MONTHS ENDED SEPTEMBER 28, 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
COMMON STOCK
------------------- ADDITIONAL CURRENCY TOTAL
NUMBER OF PAR PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
---------- ----- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992........... 6,505,224 $ 65 1,007 6,000 -- 7,072
Issuance of common stock (note 10)...... 4,085,000 41 52,063 -- -- 52,104
Reclassification of S corporation's
retained earnings .................... -- -- 4,974 (4,974) -- --
Repurchase of common stock.............. -- -- -- (17) -- (17)
Dividends declared (note 12)............ -- -- -- (2,610) -- (2,610)
Net earnings............................ -- -- -- 12,780 -- 12,780
---------- ---- ------- ------- ----- -------
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 12)............ -- -- -- (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 ($.05 per share)..... -- -- -- (531) -- (531)
Currency translation changes............ -- -- -- -- 543 543
Net earnings............................ -- -- -- 11,469 -- 11,469
---------- ---- ------- ------- ----- -------
Balances at December 30, 1995........... 10,617,722 106 58,427 29,666 (209) 87,990
Currency translation changes............ -- -- -- -- 90 90
Dividends declared ($.15 per share)..... -- -- -- (1,592) -- (1,592)
Net earnings............................ -- -- -- 8,554 -- 8,554
---------- ---- ------- ------- ----- -------
Balances at September 28, 1996
(unaudited)........................... 10,617,722 $106 58,427 36,628 (119) 95,042
---------- ---- ------- ------- ----- -------
---------- ---- ------- ------- ----- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
YEARS ENDED NINE MONTHS ENDED
---------------------------------- -----------------------------
DECEMBER 31,
------------------- DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
-------- -------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................. $12,780 7,689 11,469 6,988 8,554
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization.......... 3,868 6,365 11,994 8,767 9,440
Deferred income taxes.................. 776 (174) 3,635 1,484 1,447
Loss (gain) on disposal of property,
plant and equipment.................. 143 (39) 74 15 5
Changes in assets and liabilities, net
of effects of businesses acquired:
Trade receivables.................... (1,055) 11,362 714 (20,540) (21,382)
Inventories.......................... 874 (13,526) (172) (28,390) (28,075)
Accounts payable..................... 3,138 4,585 (3,698) 2,011 2,666
Other assets and liabilities......... (1,832) (198) 1,869 2,879 (1,088)
-------- -------- ------- ------- -------
Net cash provided by (used in)
operating activities............. 18,692 16,064 25,885 (26,786) (28,433)
-------- -------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment.......................... 416 156 119 48 17
Purchases of property, plant and
equipment.............................. (7,135) (10,538) (12,448) (8,630) (2,981)
Purchase of other assets................. (1,000) (951) -- -- --
Proceeds on payment of note by
shareholder............................ 2,250 -- -- -- --
Payments for businesses purchased, net
of cash acquired of $216 in 1993....... (23,563) (116,253) -- (1,454) (112)
Decrease in restricted investments....... 2,421 -- -- -- --
Other.................................... -- (42) (2,235) -- --
-------- -------- ------- ------- -------
Net cash used in investing
activities ........................ (26,611) (127,628) (14,564) (10,036) (3,076)
-------- -------- ------- ------- -------
Cash flows from financing activities:
Increase in checks not yet presented
for payment............................ -- 853 8,155 8,763 6,068
Net borrowings (repayments) on
revolving credit loans................. (13,990) 53,840 (14,350) 29,150 45,200
Proceeds from long-term debt............. 30,000 64,750 645 645 --
Principal payments on long-term debt..... (28,873) (6,884) (5,056) (1,514) (18,566)
Debt issuance costs...................... -- (3,107) (350) (319) --
Proceeds from sale of common stock....... 52,104 352 -- --
Repurchases of common stock.............. (27,517) -- -- --
Dividends paid........................... (2,506) (244) (531) -- (1,592)
-------- -------- ------- ------- -------
Net cash provided by (used in)
financing activities............... 9,218 109,560 (11,487) 36,725 31,110
-------- -------- ------- ------- -------
Effect of exchange rates on cash and
cash equivalents......................... -- (11) 6 20 3
-------- -------- ------- ------- -------
Net change in cash and cash equivalents.... 1,299 (2,015) (160) (77) (396)
Cash and cash equivalents at beginning
of year.................................. 1,287 2,586 571 571 411
-------- -------- ------- ------- -------
Cash and cash equivalents at end of year... $ 2,586 571 411 494 15
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
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") operates 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 institutional suppliers.
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.
(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) CHANGE IN FISCAL YEAR
The Company has changed its fiscal year-end from December 31 for 1993 and
1994 to the Saturday closest to December 31 for 1995. The effect of the change
was not material to the Company's consolidated financial statements for 1995.
The fiscal year-ends for the consolidated financial statements presented are
December 31, 1993 and 1994 and December 30, 1995.
(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 follow:
1993 1994 1995
------ ------ -------
Interest paid........................ $2,880 $5,134 $15,632
------ ------ -------
------ ------ -------
Income taxes paid.................... $7,563 $5,451 $ 3,793
------ ------ -------
------ ------ -------
(d) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
F-7
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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:
ESTIMATED USEFUL LIFE
---------------------
Buildings and improvements........ 10-32 years
Machinery and equipment........... 5-12 years
Leasehold improvements are amortized over the lesser of the estimated useful
lives of the assets or the remaining term of the lease using the straight-line
method. All interest cost incurred has been expensed in the accompanying
consolidated financial statements. Renewals and betterments are capitalized and
depreciated over the remaining life of the specific property unit.
(f) INTANGIBLES
Intangible assets consist primarily of goodwill ($46,750,000 and
$48,079,000 as of December 31, 1994 and December 30, 1995, respectively)
recorded in connection with the Company's acquisitions (see note 3). 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 intangibles principally consists 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) INCOME TAXES
Effective March 1, 1987, the Company elected to be taxed under Subchapter S
of the Internal Revenue Code. Pursuant to such election, federal and certain
state income taxes were the responsibility of the Company's shareholders. On
March 24, 1993, upon the consummation of the initial public offering of the
Company's common stock, the S corporation election was terminated when the
Company's shareholders exceeded the maximum number allowed for an S corporation.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109").
As of January 1, 1993, the Company was an S corporation and all federal and
certain state tax liabilities were at the shareholder level. Accordingly, the
cumulative effect of adopting Statement 109 was immaterial. As a result of the
change in tax status from S corporation to C corporation, a net deferred federal
income tax liability of $972,000, computed in accordance with Statement 109, was
reinstated and reflected as a charge to income tax expense in 1993 (see note 9).
F-8
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) 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.
(i) ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising expense
was approximately $575,000, $3,899,000 and $3,004,000 during the years ended
December 31, 1993 and 1994 and December 30, 1995, respectively.
(j) EARNINGS PER SHARE
Earnings per share for 1994 and 1995 are based on 10,603,660 and 10,617,722
weighted average shares of common stock outstanding, respectively. Pro forma
net earnings per share for 1993 is based on 9,750,840 weighted average shares of
common stock outstanding, and does not include the 12,343,296 shares of common
stock subject to repurchase discussed in note 10. Common share equivalents in
the form of stock options are excluded from the earnings per share calculations
since they have no material dilutive effect.
(k) INTERIM FINANCIAL DATA (UNAUDITED)
The accompanying consolidated balance sheet as of September 28, 1996 and
the related consolidated statements of earnings, shareholders' equity and cash
flows for the nine months ended September 28, 1996 and the consolidated
statements of earnings and cash flows for the nine months ended September 30,
1995 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation for such periods have been made.
Results for interim periods should not be considered as indicative of results
for a full year.
Footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted herein with respect to the interim consolidated financial
data. The interim information herein should be read in conjunction with the
annual consolidated financial statements and notes presented herein.
(l) RECLASSIFICATIONS
Certain amounts in the prior year's consolidated financial statements have
been reclassified to conform with the current year's presentation.
(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. Other foreign currency transaction gains and losses are included in net
income and were not material in any of the years presented.
F-9
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(3) ACQUISITIONS
On August 30, 1993, the Company completed its acquisition of substantially
all of the assets and assumption of certain liabilities of Manetta Mills, Inc.
("Manetta"), a blanket manufacturer, for approximately $7,700,000 through a
newly formed and wholly owned subsidiary, Manetta Home Fashions, Inc. The funds
for the acquisitions were provided by the Company's revolving credit facility.
Effective September 7, 1993, the Company acquired all of the issued and
outstanding capital stock of Tennessee Woolen Mills, Inc. ("TWM"), a blanket
manufacturer, for approximately $13,200,000. The funds for the acquisition were
provided by the Company's revolving credit facility as well as a $1,500,000 note
(the "TWM Note") payable bearing interest at a prime rate (as defined in the TWM
Note) issued to the sellers of TWM.
Effective December 1, 1993, the Company acquired all of the issued and
outstanding capital stock of Torfeaco Industries, Ltd. ("Torfeaco"), a Canadian
manufacturer of fashion and synthetic bedding products, through a newly formed
and wholly owned Canadian subsidiary for approximately $4,500,000. The funds
for the acquisition were provided by the Company's revolving credit facility.
Additionally, a $403,500 note payable bearing interest at 6% per annum and a
$346,500 noninterest bearing note payable were issued to the sellers of
Torfeaco.
On August 19, 1994, the Company, through its subsidiary 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, through its newly formed and wholly-owned
Subsidiaries Be-Ac, Inc. and Realmac, Inc., 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 91-year
old manufacturer of cotton and synthetic blankets and throws, jacquard throws
and woven corded bedspreads 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. ("NationsBank"), as
agent, 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 follows:
1993 1994
-------- --------
Current assets......................... $ 26,609 $ 60,746
Property, plant and equipment.......... 7,683 36,566
Intangible assets...................... 13,229 32,372
Other assets........................... 214 28
Current liabilities.................... (8,504) (13,459)
Long-term debt......................... (13,444) --
Deferred income taxes.................. (387) --
-------- --------
$ 25,400 $116,253
-------- --------
-------- --------
F-10
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(3) ACQUISITIONS (CONTINUED)
Unaudited consolidated condensed pro forma results of operations for the
years ended December 31, 1993 and 1994, as if the acquisitions of TWM and Beacon
occurred on January 1, 1993 follow:
PRO FORMA YEARS ENDED
DECEMBER 31
---------------------
1993 1994
-------- --------
Net sales.................................. $417,939 $470,970
Net earnings............................... 13,602 8,238
Pro forma earnings per common share........ 1.39 .78
The pro forma results of operations are presented pursuant to applicable
accounting rules relating to business combinations and are not necessarily
indicative of the actual results that would have been achieved had these
transactions occurred as of January 1, 1993, nor are they indicative of future
results of operations. The Manetta, Torfeaco and Imperial acquisitions were not
significant and, accordingly, pro forma results of operations are not presented.
(4) INVENTORIES
Inventories consist of the following at December 31, 1994 and December 30,
1995:
1994 1995
-------- --------
Finished goods............................. $ 26,762 $ 37,670
Work-in-process............................ 39,409 35,980
Raw materials.............................. 39,385 31,851
Supplies................................... 1,960 1,903
-------- --------
$107,516 $107,404
-------- --------
-------- --------
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following at December 31, 1994 and December 30, 1995:
1994 1995
-------- --------
Land....................................... $ 1,233 $ 1,504
Buildings and improvements................. 34,668 35,676
Machinery and equipment.................... 61,792 76,712
Leasehold improvements..................... 1,439 1,205
Projects in progress....................... 7,387 2,881
-------- --------
106,519 117,978
Less accumulated depreciation and
amortization.............................. 25,332 33,411
-------- --------
$ 81,187 $ 84,567
-------- --------
-------- --------
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable includes $3.6 million at December 31, 1994 and $11.8
million at December 30, 1995 of checks not yet presented for payment on zero
balance disbursement accounts.
F-11
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES (CONTINUED)
Accrued expenses consist of the following at December 31, 1994 and
December 30, 1995:
1994 1995
------- -------
Accrued customer rebates..................... $ 3,512 $ 3,477
Employee-related compensation and benefits... 3,331 5,166
Accrued advertising.......................... 2,625 2,875
Accrued royalties and commissions............ 2,751 3,560
Accrued insurance and worker's compensation
reserves.................................... 2,014 1,095
Accrued interest and commitment fees......... 1,466 3,085
Other accrued expenses....................... 1,069 1,879
------- -------
$16,768 $21,137
------- -------
------- -------
(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:
1993 1994 1995
----- ----- -------
Service cost............................. $ 343 $ 339 $ 585
Interest cost on projected benefit
obligation.............................. 378 381 402
Actual return (loss) on plan assets...... (467) 163 (1,041)
Net amortization and deferral............ 216 (518) 684
----- ----- -------
Net pension expense.................... $ 470 $ 365 $ 630
----- ----- -------
----- ----- -------
A reconciliation of the funded status of the pension plan at December 31,
1994 and December 30, 1995 follows:
1994 1995
------- -------
Actuarial present value of accumulated
benefit obligations:
Vested benefit obligation................ $ 3,197 $ 5,032
Nonvested benefit obligation............. 184 226
------- -------
Accumulated benefit obligation......... 3,381 5,258
------- -------
------- -------
Projected benefit obligation for services
rendered to date.......................... (4,384) (6,441)
Pension plan assets at fair value.......... 4,401 5,338
------- -------
Pension plan assets in excess of (less
than) projected benefit obligation........ 17 (1,103)
Unrecognized net asset at March 1, 1987
being recognized over 17 years............ (76) (68)
Unrecognized prior service costs........... 235 278
Amortization and deferral of net losses.... (210) 293
------- -------
Net pension liability included in
accrued expenses...................... $ (34) $ (600)
------- -------
------- -------
F-12
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(7) PENSION PLAN (CONTINUED)
The following assumptions were used in determining the actuarial present
value of the projected benefit obligation and net pension expense:
1993 1994 1995
---- ---- ----
Discount rate................................ 7.5% 8.75% 7.25%
Rate of increase in future compensation...... 5.0 5.0 4.0
Expected long-term rate of return on assets.. 8.5 8.5 8.5
(8) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1994 and December
30, 1995:
1994 1995
-------- --------
Revolver................................................... $ 79,950 $ 65,600
Term loan.................................................. 90,000 87,500
Deed of trust note, collateralized by land and buildings,
with interest at 10.5% per annum, payable in monthly
installments of approximately $49, maturing on July 1,
1998...................................................... 3,288 3,039
Industrial revenue bonds--Pennsylvania Economic Development
Financing Authority (PEDFA), collateralized by land and
building with interest rates ranging from 7.35% to 7.85%
per annum, maturing serially in amounts ranging from $355
to $640 through April 1, 2002............................. 4,025 3,645
Industrial revenue bonds--Mississippi Business Finance
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.. 4,600 4,140
Notes payable to insurance company, collateralized by
certain equipment, with variable rate interest (5.15%
to 5.94% per annum) payable in 84 monthly installments
of $15 plus interest, maturing on June 1, 1999............ 836 635
Other...................................................... 1,357 829
-------- --------
184,056 165,388
Less current portion....................................... (6,907) (11,916)
-------- --------
$177,149 $153,472
-------- --------
-------- --------
On December 1, 1994, the Company entered into the Credit Agreement with
NationsBank. The Credit Agreement replaced a prior credit agreement with
NationsBank and a syndicate of banks. Subsequent to December 1, 1994, the
credit facilities available under the new Credit Agreement were also syndicated
among a group of banks for which NationsBank acts as Agent. The new Credit
Agreement provided for the Revolver and the Term Loan. The Company may also
obtain letters of credit under the Credit Agreement. Such letters of credit
reduce availability under the Revolver.
F-13
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(8) LONG-TERM DEBT (CONTINUED)
The Revolver has a term of five years expiring December 1, 1999.
Availability under the Revolver is regulated by a borrowing base determined
by reference to the Company's accounts receivable and inventory. As of
December 30, 1995, the outstanding principal balance of the Revolver was
$65.6 million. Letters of credit were outstanding under the Revolver with an
aggregate undrawn face amount of $10.5 million and unused availability under
the Revolver was $73.9 million.
The Term Loan has a term of seven years and a final maturity date of
December 1, 2001. Graduated quarterly principal payments beginning with $2.5
million are required on the Term Loan on the last day of each calendar quarter
commencing September 30, 1995. As of December 30, 1995, the outstanding
principal balance of the Term Loan was $87.5 million.
The interest rates for borrowings under the Credit Agreement are, at the
Company's option, the administrative agent bank's prime rate or certain
alternate rates, plus an additional margin of between .50% and 2.625%, depending
on the Company's funded debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA") ratio. Additionally, the Company pays a commitment
fee for the unused portion of the Revolver, according to each lender's
commitment percentage. The weighted average annual interest rate under the
Company's primary bank credit facility during 1995 was 8.36% and the aggregate
rate in effect at December 30, 1995 was 8.37%.
The Credit Agreement is guaranteed by all of the Company's Subsidiaries
other than the Company's Canadian subsidiaries. All collateral for the Credit
Agreement, which includes all the assets of the Company other than the stock of
the Company's Canadian subsidiaries, is to be released when certain financial
ratios are achieved by the Company.
The Credit Agreement contains a number of financial, affirmative and
negative covenants which regulate the Company's operations. Financial covenants
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, capital expenditures, contingent liabilities,
changes in business and acquisitions. As of December 30, 1995, the Company was
in compliance with all covenants under the Credit Agreement.
The interest rates of 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 $11,602,000 and $9,654,000 at December 31,
1994 and December 30, 1995, respectively. Other debt is at current market
rates; therefore, the fair value approximates book value.
F-14
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(8) LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt for each of the five years following
December 30, 1995 and thereafter, assuming the unpaid principal balance at
December 30, 1995 under the Revolver remains unchanged, are as follows:
YEAR ENDING DECEMBER 30 AMOUNT
----------------------- -------
1996..................................... $11,916
1997..................................... 11,537
1998..................................... 18,672
1999..................................... 81,668
2000..................................... 15,975
Thereafter............................... 25,620
(9) INCOME TAXES
In addition to the reinstatement of deferred tax described in note 2(g),
total 1993 income tax expense includes current federal tax expense and a
deferred tax benefit for the period from March 24, 1993 through December 31,
1993, as well as applicable foreign and state income taxes.
The components of income tax expense are as follows:
1993 1994 1995
------ ------ ------
U.S. federal--current................... $6,454 $4,159 $2,632
U.S. federal--deferred.................. 776 (40) 3,412
State and foreign taxes--current........ 1,190 751 1,242
State and foreign taxes--deferred....... -- (134) 223
------ ------ ------
$8,420 $4,736 $7,509
------ ------ ------
------ ------ ------
A reconciliation of income tax expense computed using the U.S. federal
statutory income tax rate of 35% to the actual provision for income taxes
follows:
1993 1994 1995
------ ------ ------
Expected tax at U.S. statutory rate..... $7,420 $4,349 $6,642
Effect of S corporation status
(terminated on March 23, 1993)......... (875) -- --
Effect of reinstatement of deferred
taxes upon change in tax status as
of March 24, 1993...................... 972 -- --
State and foreign taxes, net of
federal benefit........................ 830 414 652
Other................................... 73 (27) 215
------ ------ ------
$8,420 $4,736 $7,509
------ ------ ------
------ ------ ------
F-15
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1994 and
December 30, 1995 are presented below:
1994 1995
------- -------
Net deferred tax assets (current):
Inventory costs and reserves............. $ 1,064 $ 760
Accrued employee benefits................ 241 287
Allowance for doubtful income accounts... 209 266
State deferred taxes..................... 627 1,106
Other.................................... 43 --
------- -------
Current deferred tax asset............. 2,184 2,419
------- -------
Net deferred tax liabilities (noncurrent):
Package design costs..................... 125 141
Depreciable assets....................... (3,355) (5,830)
State deferred income taxes.............. (487) (1,008)
Goodwill................................. -- (633)
Other.................................... 70 (200)
------- -------
Noncurrent deferred tax liability...... (3,647) (7,530)
------- -------
Net deferred tax liability............. $(1,463) $(5,111)
------- -------
------- -------
(10) COMMON STOCK
The Company, under a 1990 stock repurchase agreement with its former
majority shareholder, now deceased, and subject to meeting certain conditions,
including the availability of funds and lender approval, was committed to
repurchase 12,343,296 shares of common stock from the former majority
shareholder on or before December 31, 1993 at a purchase price of $27,500,000 at
that date. On January 19, 1993, the Company repurchased the 12,343,296 shares
under the stock purchase agreement from the former majority shareholder's estate
for $27,500,000, consisting of $2,000,000 in cash and a subordinated note in the
amount of $25,500,000. The note bore no interest and was fully repaid in 1993
from the proceeds of the initial public offering.
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 $52,104,000 after deducting offering costs.
The net proceeds were used to (i) retire the $25,500,000 outstanding balance of
a note payable issued in connection with the repurchase of 12,343,296 shares of
common stock as discussed above, and (ii) reduce the Company's bank
indebtedness.
(11) STOCK OPTIONS
Effective February 17, 1993, the Company established the 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.
F-16
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(11) STOCK OPTIONS (CONTINUED)
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 1993, 1994 and 1995 follows:
NUMBER EXERCISE PRICE
-------- ---------------
Granted.................................. 521,444 $14.00 - 14.875
Canceled................................. (73,573) $14.00
--------
Outstanding at December 31, 1993 (no
shares were exercisable).................. 447,871 $14.00 - 14.875
Granted.................................. 86,431 $15.125 - 19.00
Canceled................................. (142,863) $14.00 - 14.875
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
--------
--------
(12) RELATED PARTY TRANSACTIONS
Dividends payable to the former Subchapter S shareholders were declared and
paid in 1993 and 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.
(13) 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 $1,872,000, $1,928,000 and
$3,061,000, during 1993, 1994 and 1995, 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 2002 are as follows:
YEAR ENDING DECEMBER 30, AMOUNT
------------------------ ------
1996......................................... $4,584
1997......................................... 3,384
1998......................................... 2,804
1999......................................... 1,916
Thereafter................................... 3,119
Additionally, the Company has entered into a five year lease agreement for
computer equipment which commences in January 1996. The future minimum lease
payments are included in the table above.
F-17
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(13) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
(14) 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.
Sales to the Company's individual major customers, including their
affiliated entities, accounted for approximately 15% in 1993, 13% in 1994 and
14% and 13% of net sales in 1995. Sales to foreign customers were approximately
3% of net sales in 1993, 9% in 1994 and 8% in 1995.
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 outstanding trade receivables are presented at net realizable
value.
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited financial data of the Company for
each quarter of 1994 and 1995:
1994 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Net sales..................... $71,316 $66,005 $101,415 $110,784
------- ------- -------- --------
------- ------- -------- --------
Gross profit.................. 12,385 11,393 16,766 14,262
------- ------- -------- --------
------- ------- -------- --------
Net earnings.................. 2,127 1,236 3,345 981
------- ------- -------- --------
------- ------- -------- --------
Earnings per common share..... .20 .12 .32 .09
------- ------- -------- --------
------- ------- -------- --------
1995 QUARTER ENDED
-----------------------------------------------
APRIL 1 JULY 1 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ -----------
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..... .11 .10 .45 .42
------- ------- -------- --------
------- ------- -------- --------
(16) 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. Statements of earnings and cash flows are not
presented for the year ended December 31, 1993,
F-18
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(16) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
as Torfeaco (the principal nonguarantor subsidiary) was acquired on December
1, 1993 (see note 3) and management believes that the difference between such
financial information for the Parent and guarantor subsidiaries and the
related consolidated information is inconsequential.
F-19
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(16) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
DECEMBER 31, 1994 DECEMBER 30, 1995
------------------------------------------ ------------------------------------------
PARENT AND NON- PARENT AND NON-
GUARANTOR GUARANTOR GUARANTOR GUARANTOR
FINANCIAL POSITION SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
- ------------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Receivables:
Trade................................... $ 68,103 $ 4,278 $72,381 $ 66,854 $ 4,830 $ 71,684
Affiliates.............................. 7,486 -- -- 8,795 -- --
Inventories............................... 94,555 12,961 107,516 95,710 11,694 107,404
Other current assets...................... 4,686 425 5,111 5,699 1,059 6,758
-------- ------- -------- -------- ------- --------
Total current assets.................. 174,830 17,664 185,008 177,058 17,583 185,846
Property, plant and equipment, net........ 77,729 3,458 81,187 81,574 2,993 84,567
Intangible assets......................... 48,334 2,311 50,645 49,042 2,737 51,779
Other assets.............................. 2,704 -- 2,704 2,518 -- 2,518
-------- ------- -------- -------- ------- --------
Total assets.......................... $303,597 $23,433 $319,544 $310,192 $23,313 $324,710
-------- ------- -------- -------- ------- --------
-------- ------- -------- -------- ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.. $ 51,652 $ 3,033 $ 54,685 $ 59,305 $ 3,922 $ 63,227
Accounts payable affiliates............... -- 7,486 -- -- 8,795 --
Other current liabilities................. 7,568 17 7,585 12,452 39 12,491
-------- ------- -------- -------- ------- --------
Total current liabilities............. 59,220 10,536 62,270 71,757 12,756 75,718
Noncurrent liabilities.................... 180,084 712 180,796 160,370 632 161,002
-------- ------- -------- -------- ------- --------
Total liabilities..................... 239,304 11,248 243,066 232,127 13,388 236,720
Shareholders' equity...................... 64,293 12,185 76,478 78,065 9,925 87,990
-------- ------- -------- -------- ------- --------
Total liabilities and shareholders'
equity............................... $303,597 $23,433 $319,544 $310,192 $23,313 $324,710
-------- ------- -------- -------- ------- --------
-------- ------- -------- -------- ------- --------
<CAPTION>
SEPTEMBER 28, 1996 (UNAUDITED)
------------------------------------------
PARENT AND NON-
GUARANTOR GUARANTOR
FINANCIAL POSITION SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
- ------------------ ------------ ------------ ------------
ASSETS
Receivables:
Trade................................... $ 88,158 $ 4,890 $ 93,048
Affiliates.............................. 3,805 -- --
Inventories............................... 126,721 8,766 135,487
Other current assets...................... 9,154 1,135 10,289
-------- ------- --------
Total current assets.................. 229,838 14,791 238,824
Property, plant and equipment, net........ 76,481 2,525 79,006
Intangible assets......................... 47,650 2,688 50,338
Other assets.............................. 2,502 -- 2,502
-------- ------- --------
Total assets.......................... $356,471 $20,004 $370,670
-------- ------- --------
-------- ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.. $68,402 $3,141 $71,543
Accounts payable-affiliates............... -- 5,805 --
Other current liabilities................. 14,493 1 14,494
-------- ------- --------
Total current liabilities............. 82,895 8,947 86,037
Noncurrent liabilities.................... 188,766 825 189,591
-------- ------- --------
Total liabilities..................... 271,661 9,772 275,628
Shareholders' equity...................... 84,810 10,232 95,042
-------- ------- --------
Total liabilities and shareholders'
equity............................... $356,471 $20,004 $370,670
-------- ------- --------
-------- ------- --------
</TABLE>
F-20
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(16) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
YEARS ENDED
----------------------------------------------------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995
-------------------------------------------- ---------------------------------------------
PARENT AND NON- PARENT AND NON-
GUARANTOR GUARANTOR GUARANTOR GUARANTOR
RESULTS OF OPERATIONS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
- --------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $322,124 $27,396 $349,520 $437,658 $37,241 $474,899
Cost of goods sold............... 269,008 25,706 294,714 361,749 34,173 395,922
-------- ------- -------- -------- ------ --------
Gross profit................ 53,116 1,690 54,806 75,909 3,068 78,977
Selling, general and
administrative.................. 35,128 1,271 36,399 40,771 1,737 42,508
-------- ------- -------- -------- ------ --------
Earnings from operations.... 17,988 419 18,407 35,138 1,331 36,469
Interest expense and other,
net............................. 6,369 (387) 5,982 17,482 9 17,491
-------- ------- -------- -------- ------ --------
Earnings before income
taxes...................... 11,619 806 12,425 17,656 1,322 18,978
Income taxes..................... 4,694 42 4,736 7,101 408 7,509
-------- ------- -------- -------- ------ --------
Net earnings................ $ 6,925 $ 764 $ 7,689 $ 10,555 $ 914 $ 11,469
-------- ------- -------- -------- ------ --------
-------- ------- -------- -------- ------ --------
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 28, 1996
---------------------------------------------- ----------------------------------------------
PARENT AND NON- PARENT AND NON-
GUARANTOR GUARANTOR GUARANTOR GUARANTOR
RESULTS OF OPERATIONS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
- --------------------- ------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Net sales........................ $307,944 $24,408 $332,352 $312,639 $23,131 $335,770
Cost of goods sold............... 252,782 22,625 275,407 258,554 21,718 280,272
-------- ------- -------- -------- ------ --------
Gross profit................ 55,162 1,783 56,945 54,085 1,413 55,498
Selling, general and
administrative.................. 30,982 1,333 32,315 29,987 1,183 31,170
-------- ------- -------- -------- ------ --------
Earnings from operations.... 24,180 450 24,630 24,098 230 24,328
Interest expense and other,
net............................. 12,959 5 12,964 10,296 (17) 10,279
-------- ------- -------- -------- ------ --------
Earnings before income
taxes...................... 11,221 445 11,666 13,802 247 14,049
Income taxes..................... 4,680 (2) 4,678 5,538 (43) 5,495
-------- ------- -------- -------- ------ --------
Net earnings................ $ 6,541 $ 447 $ 6,988 $ 8,264 $ 290 $ 8,554
-------- ------- -------- -------- ------ --------
-------- ------- -------- -------- ------ --------
</TABLE>
F-21
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(16) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
YEARS ENDED
-----------------------------------------------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995
------------------------------------------- ------------------------------------------
PARENT AND NON- PARENT AND NON-
GUARANTOR GUARANTOR GUARANTOR GUARANTOR
CASH FLOWS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
- ---------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash provided by (used in)
operating activities.................. $ 24,400 $(8,336) $ 16,064 $ 23,852 $ 2,033 $ 25,885
Cash used in investing activities...... (125,414) (2,214) (127,628) (13,883) (681) (14,564)
Cash provided by (used in) financing
activities............................ 99,590 9,959 109,549 (10,132) (1,349) (11,481)
--------- ------- --------- -------- ------- --------
Increase in cash and cash equivalents.. (1,424) (591) (2,015) (163) 3 (160)
Cash and cash equivalents at
beginning of period................... 1,993 593 2,586 569 2 571
--------- ------- --------- -------- ------- --------
Cash and cash equivalents at end of
period................................ $ 569 $ 2 $ 571 $ 406 $ 5 $ 411
--------- ------- --------- -------- ------- --------
--------- ------- --------- -------- ------- --------
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 28, 1996
----------------------------------------- --------------------------------------------
PARENT AND NON- PARENT AND NON-
GUARANTOR GUARANTOR GUARANTOR GUARANTOR
CASH FLOWS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
- ---------- ------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Cash provided by (used in)
operating activities.................. $ (22,337) $(4,768) $ (27,105) $(31,946) $ 3,513 $(28,433)
Cash used in investing activities...... (9,262) (774) (10,036) (3,057) (19) (3,076)
Cash provided by (used in) financing
activities............................ 31,409 5,655 37,064 34,604 (3,491) 31,113
--------- ------- --------- -------- ------- --------
Increase in cash and cash equivalents.. (190) 113 (77) (399) 3 (396)
Cash and cash equivalents at
beginning of period................... 569 2 571 406 5 411
--------- ------- --------- -------- ------- --------
Cash and cash equivalents at end of
period................................ $ 379 $ 115 $ 494 $ 7 $ 8 $ 15
--------- ------- --------- -------- ------- --------
--------- ------- --------- -------- ------- --------
</TABLE>
F-22
<PAGE>
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS
FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE
LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE
EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
Ted Kravitz
Bank One, Columbus, N.A.
235 West Schrock Road
Attention: Corporate Trust Operation
Columbus, Ohio 43271-0184
or
Bank One, Columbus, N.A.
c/o First Chicago Trust
Company of New York
Attention: Corporate Trust Department
14 Wall Street
8th Floor, Window 2
New York, New York 10005
BY HAND OR OVERNIGHT COURIER:
Ted Kravitz
Bank One, Columbus, N.A.
235 West Schrock Road
Attention: Corporate Trust Operation
Westerville, Ohio 43081
or
Bank One, Columbus, N.A.
c/o First Chicago Trust
Company of New York
Attention: Corporate Trust Department
14 Wall Street
8th Floor Window 2
New York, New York 10005
BY FACSIMILE:
(614) 248-5088 (OH)
or
(212) 240-8988 (NY)
Confirm by Telephone: (212) 240-8862 (NY)
1-800-346-5153
(Originals of all documents submitted by facsimile should be sent
promptly by hand, overnight courier, or registered or certified mail)
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH
ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
OFFER TO EXCHANGE ALL OUTSTANDING 10%
SENIOR SUBORDINATED NOTES DUE 2006
($125,000,000 PRINCIPAL AMOUNT) FOR 10%
SENIOR SUBORDINATED NOTES DUE 2006
PILLOWTEX CORPORATION
----------------------
PROSPECTUS
----------------------
FEBRUARY 10, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATION OF LIABILITY FOR
MONETARY DAMAGES
(a) The Articles of Incorporation, as amended to date (the "Articles of
Incorporation"), of Pillowtex Corporation (the "Company"), together with its
Bylaws, provide that the Company shall indemnify officers and directors, and
may indemnify its other employees and agents, to the fullest extent permitted
by law. The laws of the State of Texas permit, and in some cases require,
corporations to indemnify officers, directors, agents and employees who are
or have been a party to or are threatened to be made a party to litigation
against judgements, fines, settlements and reasonable expenses under certain
circumstances.
(b) The Company has also adopted provisions in its Articles of
Incorporation that limit the liability of its directors to the fullest extent
permitted by the laws of the State of Texas. Under the Company's Articles of
Incorporation, and as permitted by the laws of the State of Texas, a director
is not liable to the Company or its shareholders for breach of fiduciary
duty. Such limitation does not affect liability for: (i) a breach of the
director's duty of loyalty to the Company or its shareholders or members;
(ii) an act or omission not in good faith that constitutes a breach of duty
of the director to the Company 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.
II-1
<PAGE>
ITEM 21. EXHIBITS.
(a) Exhibits.
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Articles of Incorporation of Pillowtex, as amended
3.2(5) Amendment to Bylaws and Amended and Restated Bylaws as currently
in effect for Pillowtex Corporation
4.1(9) Indenture, dated November 12, 1996
4.2(9) Form of Note (included in Exhibit 4.1)
5.1(8) Opinion of Jenkens & Gilchrist, a Professional Corporation, as to
the legality of the Notes
8.1(8) Opinion of Jenkens & Gilchrist, a Professional Corporation, as to
certain federal income tax matters
10.1(1) Employment Agreement dated as of January 1, 1993, between
Pillowtex and Charles M. Hansen, Jr. ("Hansen") Amendment to
Employment Agreement dated as of July 26, 1993, between Pillowtex
and Hansen
10.3(1) 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)
10.4(2) Second through Fourth Amendment to Mississippi Business Finance
Corporation Industrial Development Variable Rate Demand Notes
(Pillowtex Corporation Project) Loan Agreement
10.5(1) Deed of Trust (with Security Agreement and Assignment of Rents
and Leases), dated as of July 15, 1988, between Pillowtex and
Principal Mutual Life Insurance Company, as amended, Deed of
Trust Note, and Loan Modification and Amendment Agreement
10.6(1) Second Loan Agreement Modification and Amendment Agreement dated
as of January 19, 1993, between Pillowtex and Principal Mutual
Life Insurance Company
10.7(1) Deed of Trust Note dated as of July 15, 1988, from Pillowtex to
Principal Mutual Life Insurance Company
10.8(1) Loan and Security Agreement dated April 6, 1992, between MetLife
Capital Corporation and Pillowtex, as amended, and including Term
Note dated June 5, 1992
10.9(1) Sublicense Agreement dated July 1, 1992, between The Ralph Lauren
Home Collection and Pillowtex (Confidential portions of this
exhibit have been omitted and filed separately with the
Commission)
10.10(1) Commercial Lease Agreement dated as of August 4, 1992, between
Estate of David Greenberg and Pillowtex
10.11(1) Industrial Lease dated as of November 23, 1992, between Angel and
Jean Echevarria and Pillowtex
10.12(1) Form of Lease dated as of October 12, 1988, between Jimmie D.
Smith, Jr. and Pillowtex
10.13(1) Agreement of Lease dated as of September 18, 1985, between Ten
Seventy One Joint Venture and Pillowtex
II-2
<PAGE>
Exhibit No. Description
- ----------- -----------
10.14(1) Pillowtex Corporation 1993 Stock Option Plan
10.15(1) Form of Confidentiality and Noncompetition Agreement
10.16(1) Guaranty dated as of April 1, 1990, made by Pillowtex in favor of
NCNB National Bank of North Carolina
10.17(1) Letter Agreement dated February 15, 1993, between Pillowtex and
Silversen-Hanover Corporation regarding the acquisition by
Pillowtex of the Hanover, Pennsylvania facility
10.18(1) Form of Director Indemnification Agreement
10.19(2) Split Dollar Life Agreement between Pillowtex Corporation and
Charles M. Hansen, Jr. dated July 26, 1993
10.20(3) Stock Purchase Agreement dated as of August 31, 1993, by and
among Pillowtex Corporation, Spencer Hays, Michael V. Black,
James R. Brubaker, Michael N. Cotten, Charles R. Wooden, James W.
Crawford, Joseph F. Tavares, Steven M. Davidson, Texas Christian
University, and General Trust Company, Trustee Custodian
10.21(2) Sublicense Agreement dated June 29, 1988, between The Ralph
Lauren Home Collection and Tennessee Woolen Mills, Inc.
(Confidential portions of this exhibit have been omitted and file
separately with the Commission)
10.22(2) Lease Agreement dated September 26, 1991, between Tennessee
Woolen Mills, Inc. and Carolyn W. Stone
10.23(2) Sublease Agreement dated April 2, 1992, between Tennessee Woolen
Mills, Inc. and Robertshaw Controls Company
10.24(2) Asset Purchase Agreement entered into in August 1993, by and
between Man-Mill Acquisition, Inc. and Manetta Mills, Inc.
10.25(2) First Amendment to Lease and Assignment and Assumption of Lease
with Landlord's Consent dated August 30, 1993, among Manetta
Mills, Inc., Man-Mill Acquisition, Inc., and Lando Land Company
10.26(2) First Amendment to Lease and Assignment and Assumption of Lease
and Purchase Option with Landlord's Consent dated August 30,
1993, among Manetta Mills, Inc., Man-Mill Acquisition, Inc., and
Lando Land Company
10.27(2) Share Purchase Agreement dated as of November 4, 1993, by and
between TFC Acquisition, Inc., Leon Cornofsky, Diane Cornofsky,
Ron Flusk, Paula Flusk, Harold Hafner, Priscilla Hafner, Allen
Wellman, June Wellman, LA-JJ's Inc., L. and D.C. Investments
Inc., Harold Hafner Holdings Limited, and 835159 Ontario Limited
10.28(2) Share Purchase Agreement Amendment dated as of November 30, 1993
and effective as of November 4, 1993 by and between TFC
Acquisition, Inc., Leon Cornofsky, Diane Cornofsky, Ron Flusk,
Paula Flusk, Harold Hafner, Priscilla Hafner, Allen Wellman, June
Wellman, LA-JJ's Inc., L. and D.C. Investments Inc., Harold
Hafner Holdings Limited, and 835159 Ontario Limited
10.29(2) 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
II-3
<PAGE>
Exhibit No. Description
- ----------- -----------
10.30(2) Lease dated as of March 1, 1977, by and among Torfeaco Industries
Limited and Standa Investment Limited, and Sharon Construction
Limited
10.31(2) 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
10.32(5) Credit Agreement, dated as of December 1, 1994, among Pillowtex
Corporation, NationsBank of Texas, N.A. and certain lenders
10.33(5) Waiver under Credit Agreement, dated January 30, 1995
10.34(5) First Amendment to Credit Agreement, dated February 10, 1995
10.35(5) 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
10.36(5) The Priorities Agreement, dated February 27, 1995, between
Toronto Dominion Bank, Manetta Home Fashions, Inc., Tennessee
Woolen Mills, Inc. and Beacon Manufacturing Company and NEMCOR,
Inc.
10.37(5) A Guarantee, dated February 27, 1995, between Beacon Manufacturing
Company, Manetta Home Fashions, Inc., Tennessee Woolen Mills, Inc.
and NEMCOR, Inc.
10.38(5) Security Agreement, dated February 16, 1995, between NEMCOR, Inc.
and Manetta Home Fashions, Inc.
10.39(5) Security Agreement, dated February 16, 1995, between NEMCOR, Inc.
and Tennessee Woolen Mills, Inc.
10.40(5) Security Agreement, dated February 16, 1995, between NEMCOR, Inc.
and Beacon Manufacturing Company
10.41(4) 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.
10.42(5) Purchase agreement between Coopers & Lybrand and Torfeaco
Industries Limited for certain assets, dated 8/19/94
10.43(5) Agreement, dated January 1, 1995, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "Aladdin"
10.44(5) Agreement, dated August 27, 1993, and amended February 8, 1994,
between The Walt Disney Company and Beacon Manufacturing Company
for the license for "Classic Winnie the Pooh"
10.45(5) Agreement, dated July 11, 1994, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "Home
Improvement"
10.46(5) Agreement, dated November 1, 1994, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "The Lion
King"
II-4
<PAGE>
Exhibit No. Description
- ----------- -----------
10.47(5) Agreement, dated September 1, 1994, between The Walt Disney
Company and Beacon Manufacturing Company for the license for
"Disney's Pocahontas"
10.48(5) Agreement, dated January 1, 1994, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "Mickey &
Co., Baby Mickey & Co., Mickey's Stuff for Kids and Mickey
Unlimited"
10.49(5) Agreement, dated August 26, 1993, and as amended February 18,
1994, between The Walt Disney Company and Beacon Manufacturing
Company for the license for "Disney Winnie the Pooh"
10.50(5) Agreement by and between the U.S. Postal Service and Pillowtex
Corporation
10.51(5) Agreement, dated August 4, 1994, between the Columbus Museum of
Art and Pillowtex Corporation
10.52(5) Lease Agreement, dated as of April 22, 1994, by and between The
Lincoln National Life Insurance Company and Pillowtex Corporation
10.53(5) Lease, dated as of August 17, 1994, between 469299 Ontario
Limited and Torfeaco Industries Limited
10.54(5) Lease, dated as of August 31, 1990, by and between Jantzen, Inc.
and Beacon Manufacturing Company
10.55(5) Lease (with Option to Purchase), dated as of April 19, 1993, by
and between J.L. de Ball Girmes of America, Inc. and Beacon
Manufacturing Company
10.56(5) First Amendment to Lease, dated as of April 12, 1994, by and
between Asheville Property Administration and Leasing, Inc. and
Beacon Manufacturing Company
10.57(6) Second Amendment to Credit Agreement, dated as of March 30, 1996,
between Pillowtex Corporation and NationsBank of Texas, N.A.
10.58(7) 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)
10.59(9) Registration Rights Agreement, dated as of November 12, 1996, by
and among Pillowtex Corporation, each domestic subsidiary of
Pillowtex Corporation and NationsBanc Capital Markets, Inc., and
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
10.60(9) 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)
10.61(9) Form of Swing-Line Note, dated as of November 12, 1996, by and
among Pillowtex Corporation and NationsBank of Texas, N.A. (see
Exhibit A-1 to Exhibit 10.60)
10.62(9) Form of Revolving Note, by and among Pillowtex Corporation and
NationsBank of Texas, N.A. (see Exhibit A-2 to Exhibit 10.61)
10.63(9) Form of Restated Guaranty, by and among Beacon Manufacturing
Company, Mannetta 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 (see Exhibit
B to Exhibit 10.61)
II-5
<PAGE>
Exhibit No. Description
- ----------- -----------
10.64(9) 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, Mannetta Home
Fashions, Inc., Tennessee Woolen Mills, Inc., Pillowtex, Inc.,
PTEX Holding Company, and Pillowtex Management Services Company
as Subsidiary Debtors (see Exhibit C-1 to Exhibit 10.61)
10.65(9) Asset Purchase Agreement, dated as of October 3, 1996, by and
among Pillowtex Corporation and Fieldcrest Cannon, Inc.
10.66(9) Trademark Licensing Agreement, dated as of November 18, 1996, by
and among Pillowtex Corporation and Fieldcrest Cannon, Inc.
12.1(9) Statement re: Computation of Ratios
21.2(5) List of Subsidiaries
23.1(8) Consent of Independent Auditors and report on financial statement
schedule
23.2(8) Consent of Jenkens & Gilchrist, a Professional Corporation,
(included in its opinion contained in Exhibit 5.1)
23.3(8) Consent of Jenkens & Gilchrist, a Professional Corporation
(included in its opinion contained in Exhibit 8.1)
24.1(9) Power of Attorney
25.1(9) Statement of Eligibility under the Trust Indenture Act of 1939 on
Form T-1
- -------------------
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (33-57314) filed January 22, 1993 and
amended on February 19, 1993, March 4, 1993, March 15, 1993, and March 17,
1993, which Registration Statement became effective March 17, 1993.
(2) Incorporated by reference to the exhibits filed with Registrant's Form 10-K
filed on March 31, 1994.
(3) Incorporated by reference to the Registrant's Form 8-K filed September 23,
1993.
(4) Incorporated by reference to the Registrant's Form 8-K filed December 14,
1994.
(5) Incorporated by reference to the exhibits filed with Registrant's Form 10-K
filed on March 31, 1995.
(6) Incorporated by reference to the exhibits filed with Registrant's Form 10-Q
filed on March 30, 1996.
(7) Incorporated by reference to the exhibits filed with Registrant's Form 10-Q
filed on June 29, 1996.
(8) Filed herewith.
(9) Previously filed.
(b) Financial Schedules.
Schedule No. Description
------------ -----------
Schedule II Valuation and Qualifying Accounts
II-6
<PAGE>
All other financial schedules have been omitted because of the absence of
conditions under which they are required or because the information required is
set forth in the financial statements of the notes thereto.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers, and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the Company 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.
(b) The undersigned Company hereby undertakes to respond to requests for
information that is incorporated by reference into the 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 Exchange Offer Registration
Statement through the date of responding to the request.
(c) The undersigned Company 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 Exchange Offer Registration Statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the County of Dallas, State of
Texas, on February 5, 1997.
PILLOWTEX CORPORATION
By: /s/ JEFFREY D. CORDES
-----------------------------------
Jeffrey D. Cordes, Executive
Vice President
Each individual whose signature appears below hereby designates and
appoints Charles M. Hansen, Jr., Jeffrey D. Cordes and Ronald M. Wehtje, and
each of them, any one of whom may act without the joinder of the other, as such
person's true and lawful attorney-in-fact and agents (the "Attorneys-in-Fact")
with full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
which amendments may make such changes in this Registration Statement as either
Attorney-in-Fact deems appropriate, and any registration statement relating to
the same offering filed pursuant to Rule 462(b) under the Securities Act of 1933
and requests to accelerate the effectiveness of such registration statements,
and to file each such amendment with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such Attorneys-in-Fact and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as such person might or
could do in person, hereby ratifying and confirming all that such Attorneys-in-
Fact or either of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ * Chairman of the Board, President February 5, 1997
- -------------------------- and Chief Executive Officer
(Principal Executive Officer)
/s/ * President - Pillowtex Division February 5, 1997
- -------------------------- and a Director
/s/ Jeffrey D. Cordes Executive Vice President, Chief February 5, 1997
- -------------------------- Financial Officer, Assistant
Jeffrey D. Cordes Secretary and a Director
(Principal Financial and
Accounting Officer)
/s/ * Executive Vice President - Sales February 5, 1997
- -------------------------- and Marketing and a Director
/s/ * Director February 5, 1997
- --------------------------
/s/ * Director February 5, 1997
- --------------------------
/s/ * Director February 5, 1997
- --------------------------
/s/ * Director February 5, 1997
- --------------------------
*By: /s/ JEFFREY D. CORDES
----------------------
Jeffrey D. Cordes,
Attorney-in-Fact
II-8
<PAGE>
SCHEDULE II
PILLOWTEX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 30, 1995 and December 31, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
--------------------
Balance at Charged to Charged Balance
beginning costs and to other Deductions at end of
Description of period expenses accounts (write-offs)(1) period
----------- ---------- ---------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 30, 1995 $2,993 685 176(2) 1,599 2,195
------ --- --- ----- -----
------ --- --- ----- -----
Year ended December 31, 1994 $1,773 390 962(3) 192 2,993
------ --- --- ----- -----
------ --- --- ----- -----
Year ended December 31, 1993 $2,202 92 162(3) 683 1,773
------ --- --- ----- -----
------ --- --- ----- -----
</TABLE>
(1) Accounts written off, less recoveries of accounts previously written off.
(2) Adjustments to the allowance for doubtful accounts for acquired companies
after the date of acquisition.
(3) Allowance for doubtful accounts for acquired companies as of the date of
acquisition.
S-1
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Articles of Incorporation of Pillowtex, as amended
3.2(5) Amendment to Bylaws and Amended and Restated Bylaws as currently
in effect for Pillowtex Corporation
4.1(9) Indenture, dated November 12, 1996
4.2(9) Form of Note (included in Exhibit 4.1)
5.1(8) Opinion of Jenkens & Gilchrist, a Professional Corporation, as to
the legality of the Notes
8.1(8) Opinion of Jenkens & Gilchrist, a Professional Corporation, as to
certain federal income tax matters
10.1(1) Employment Agreement dated as of January 1, 1993, between
Pillowtex and Charles M. Hansen, Jr. ("Hansen") Amendment to
Employment Agreement dated as of July 26, 1993, between Pillowtex
and Hansen
10.3(1) 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)
10.4(2) Second through Fourth Amendment to Mississippi Business Finance
Corporation Industrial Development Variable Rate Demand Notes
(Pillowtex Corporation Project) Loan Agreement
10.5(1) Deed of Trust (with Security Agreement and Assignment of Rents
and Leases), dated as of July 15, 1988, between Pillowtex and
Principal Mutual Life Insurance Company, as amended, Deed of
Trust Note, and Loan Modification and Amendment Agreement
10.6(1) Second Loan Agreement Modification and Amendment Agreement dated
as of January 19, 1993, between Pillowtex and Principal Mutual
Life Insurance Company
10.7(1) Deed of Trust Note dated as of July 15, 1988, from Pillowtex to
Principal Mutual Life Insurance Company
10.8(1) Loan and Security Agreement dated April 6, 1992, between MetLife
Capital Corporation and Pillowtex, as amended, and including Term
Note dated June 5, 1992
10.9(1) Sublicense Agreement dated July 1, 1992, between The Ralph Lauren
Home Collection and Pillowtex (Confidential portions of this
exhibit have been omitted and filed separately with the
Commission)
10.10(1) Commercial Lease Agreement dated as of August 4, 1992, between
Estate of David Greenberg and Pillowtex
10.11(1) Industrial Lease dated as of November 23, 1992, between Angel and
Jean Echevarria and Pillowtex
10.12(1) Form of Lease dated as of October 12, 1988, between Jimmie D.
Smith, Jr. and Pillowtex
10.13(1) Agreement of Lease dated as of September 18, 1985, between Ten
Seventy One Joint Venture and Pillowtex
<PAGE>
Exhibit No. Description
- ----------- -----------
10.14(1) Pillowtex Corporation 1993 Stock Option Plan
10.15(1) Form of Confidentiality and Noncompetition Agreement
10.16(1) Guaranty dated as of April 1, 1990, made by Pillowtex in favor of
NCNB National Bank of North Carolina
10.17(1) Letter Agreement dated February 15, 1993, between Pillowtex and
Silversen-Hanover Corporation regarding the acquisition by
Pillowtex of the Hanover, Pennsylvania facility
10.18(1) Form of Director Indemnification Agreement
10.19(2) Split Dollar Life Agreement between Pillowtex Corporation and
Charles M. Hansen, Jr. dated July 26, 1993
10.20(3) Stock Purchase Agreement dated as of August 31, 1993, by and
among Pillowtex Corporation, Spencer Hays, Michael V. Black,
James R. Brubaker, Michael N. Cotten, Charles R. Wooden, James W.
Crawford, Joseph F. Tavares, Steven M. Davidson, Texas Christian
University, and General Trust Company, Trustee Custodian
10.21(2) Sublicense Agreement dated June 29, 1988, between The Ralph
Lauren Home Collection and Tennessee Woolen Mills, Inc.
(Confidential portions of this exhibit have been omitted and file
separately with the Commission)
10.22(2) Lease Agreement dated September 26, 1991, between Tennessee
Woolen Mills, Inc. and Carolyn W. Stone
10.23(2) Sublease Agreement dated April 2, 1992, between Tennessee Woolen
Mills, Inc. and Robertshaw Controls Company
10.24(2) Asset Purchase Agreement entered into in August 1993, by and
between Man-Mill Acquisition, Inc. and Manetta Mills, Inc.
10.25(2) First Amendment to Lease and Assignment and Assumption of Lease
with Landlord's Consent dated August 30, 1993, among Manetta
Mills, Inc., Man-Mill Acquisition, Inc., and Lando Land Company
10.26(2) First Amendment to Lease and Assignment and Assumption of Lease
and Purchase Option with Landlord's Consent dated August 30,
1993, among Manetta Mills, Inc., Man-Mill Acquisition, Inc., and
Lando Land Company
10.27(2) Share Purchase Agreement dated as of November 4, 1993, by and
between TFC Acquisition, Inc., Leon Cornofsky, Diane Cornofsky,
Ron Flusk, Paula Flusk, Harold Hafner, Priscilla Hafner, Allen
Wellman, June Wellman, LA-JJ's Inc., L. and D.C. Investments
Inc., Harold Hafner Holdings Limited, and 835159 Ontario Limited
10.28(2) Share Purchase Agreement Amendment dated as of November 30, 1993
and effective as of November 4, 1993 by and between TFC
Acquisition, Inc., Leon Cornofsky, Diane Cornofsky, Ron Flusk,
Paula Flusk, Harold Hafner, Priscilla Hafner, Allen Wellman, June
Wellman, LA-JJ's Inc., L. and D.C. Investments Inc., Harold
Hafner Holdings Limited, and 835159 Ontario Limited
10.29(2) 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
<PAGE>
Exhibit No. Description
- ----------- -----------
10.30(2) Lease dated as of March 1, 1977, by and among Torfeaco Industries
Limited and Standa Investment Limited, and Sharon Construction
Limited
10.31(2) 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
10.32(5) Credit Agreement, dated as of December 1, 1994, among Pillowtex
Corporation, NationsBank of Texas, N.A. and certain lenders
10.33(5) Waiver under Credit Agreement, dated January 30, 1995
10.34(5) First Amendment to Credit Agreement, dated February 10, 1995
10.35(5) 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
10.36(5) The Priorities Agreement, dated February 27, 1995, between
Toronto Dominion Bank, Manetta Home Fashions, Inc., Tennessee
Woolen Mills, Inc. and Beacon Manufacturing Company and NEMCOR,
Inc.
10.37(5) A Guarantee, dated February 27, 1995, between Beacon Manufacturing
Company, Manetta Home Fashions, Inc., Tennessee Woolen Mills, Inc.
and NEMCOR, Inc.
10.38(5) Security Agreement, dated February 16, 1995, between NEMCOR, Inc.
and Manetta Home Fashions, Inc.
10.39(5) Security Agreement, dated February 16, 1995, between NEMCOR, Inc.
and Tennessee Woolen Mills, Inc.
10.40(5) Security Agreement, dated February 16, 1995, between NEMCOR, Inc.
and Beacon Manufacturing Company
10.41(4) 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.
10.42(5) Purchase agreement between Coopers & Lybrand and Torfeaco
Industries Limited for certain assets, dated 8/19/94
10.43(5) Agreement, dated January 1, 1995, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "Aladdin"
10.44(5) Agreement, dated August 27, 1993, and amended February 8, 1994,
between The Walt Disney Company and Beacon Manufacturing Company
for the license for "Classic Winnie the Pooh"
10.45(5) Agreement, dated July 11, 1994, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "Home
Improvement"
10.46(5) Agreement, dated November 1, 1994, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "The Lion
King"
<PAGE>
Exhibit No. Description
- ----------- -----------
10.47(5) Agreement, dated September 1, 1994, between The Walt Disney
Company and Beacon Manufacturing Company for the license for
"Disney's Pocahontas"
10.48(5) Agreement, dated January 1, 1994, between The Walt Disney Company
and Beacon Manufacturing Company for the license for "Mickey &
Co., Baby Mickey & Co., Mickey's Stuff for Kids and Mickey
Unlimited"
10.49(5) Agreement, dated August 26, 1993, and as amended February 18,
1994, between The Walt Disney Company and Beacon Manufacturing
Company for the license for "Disney Winnie the Pooh"
10.50(5) Agreement by and between the U.S. Postal Service and Pillowtex
Corporation
10.51(5) Agreement, dated August 4, 1994, between the Columbus Museum of
Art and Pillowtex Corporation
10.52(5) Lease Agreement, dated as of April 22, 1994, by and between The
Lincoln National Life Insurance Company and Pillowtex Corporation
10.53(5) Lease, dated as of August 17, 1994, between 469299 Ontario
Limited and Torfeaco Industries Limited
10.54(5) Lease, dated as of August 31, 1990, by and between Jantzen, Inc.
and Beacon Manufacturing Company
10.55(5) Lease (with Option to Purchase), dated as of April 19, 1993, by
and between J.L. de Ball Girmes of America, Inc. and Beacon
Manufacturing Company
10.56(5) First Amendment to Lease, dated as of April 12, 1994, by and
between Asheville Property Administration and Leasing, Inc. and
Beacon Manufacturing Company
10.57(6) Second Amendment to Credit Agreement, dated as of March 30, 1996,
between Pillowtex Corporation and NationsBank of Texas, N.A.
10.58(7) 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)
10.59(9) Registration Rights Agreement, dated as of November 12, 1996, by
and among Pillowtex Corporation, each domestic subsidiary of
Pillowtex Corporation and NationsBanc Capital Markets, Inc., and
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
10.60(9) 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)
10.61(9) Form of Swing-Line Note, dated as of November 12, 1996, by and
among Pillowtex Corporation and NationsBank of Texas, N.A. (see
Exhibit A-1 to Exhibit 10.60)
10.62(9) Form of Revolving Note, by and among Pillowtex Corporation and
NationsBank of Texas, N.A. (see Exhibit A-2 to Exhibit 10.61)
10.63(9) Form of Restated Guaranty, by and among Beacon Manufacturing
Company, Mannetta 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 (see Exhibit
B to Exhibit 10.61)
<PAGE>
Exhibit No. Description
- ----------- -----------
10.64(9) 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, Mannetta Home
Fashions, Inc., Tennessee Woolen Mills, Inc., Pillowtex, Inc.,
PTEX Holding Company, and Pillowtex Management Services Company
as Subsidiary Debtors (see Exhibit C-1 to Exhibit 10.61)
10.65(9) Asset Purchase Agreement, dated as of October 3, 1996, by and
among Pillowtex Corporation and Fieldcrest Cannon, Inc.
10.66(9) Trademark Licensing Agreement, dated as of November 18, 1996, by
and among Pillowtex Corporation and Fieldcrest Cannon, Inc.
12.1(9) Statement re: Computation of Ratios
21.2(5) List of Subsidiaries
23.1(8) Consent of Independent Auditors and report on financial statement
schedule
23.2(8) Consent of Jenkens & Gilchrist, a Professional Corporation,
(included in its opinion contained in Exhibit 5.1)
23.3(8) Consent of Jenkens & Gilchrist, a Professional Corporation
(included in its opinion contained in Exhibit 8.1)
24.1(9) Power of Attorney
25.1(9) Statement of Eligibility under the Trust Indenture Act of 1939 on
Form T-1
- -------------------
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (33-57314) filed January 22, 1993 and
amended on February 19, 1993, March 4, 1993, March 15, 1993, and March 17,
1993, which Registration Statement became effective March 17, 1993.
(2) Incorporated by reference to the exhibits filed with Registrant's Form 10-K
filed on March 31, 1994.
(3) Incorporated by reference to the Registrant's Form 8-K filed September 23,
1993.
(4) Incorporated by reference to the Registrant's Form 8-K filed December 14,
1994.
(5) Incorporated by reference to the exhibits filed with Registrant's Form 10-K
filed on March 31, 1995.
(6) Incorporated by reference to the exhibits filed with Registrant's Form 10-Q
filed on March 30, 1996.
(7) Incorporated by reference to the exhibits filed with Registrant's Form 10-Q
filed on June 29, 1996.
(8) Filed herewith.
(9) Previously filed.
<PAGE>
February 7, 1997
Pillowtex Corporation
4111 Mint Way
Dallas, Texas 75237
Ladies and Gentlemen:
This opinion is being delivered in connection with the proposed offer to
exchange (the "Exchange Offer") by Pillowtex Corporation (the "Issuer") its 10%
Senior Subordinated Notes Due 2006 (the "Exchange Notes") for any and all of its
10% Senior Subordinated Notes Due 2006 (the "Old Notes"). The Exchange Notes
are to be issued pursuant to a Registration Statement on Form S-4 (the
"Registration Statement"), Registration No. 333-17731, filed by the Issuer on
December 12, 1996 with the Securities and Exchange Commission under the
Securities Act of 1933, as amended by Amendment No. 1. The Exchange Notes will
be issued under an Indenture, dated as of November 12, 1996 (the "Indenture"),
among the Issuer, certain of its subsidiaries and Bank One, Columbus, N.A. as
Trustee (the "Trustee"), in substantially the form filed as Exhibit 4.1.
We are of the opinion that, when (a) the Indenture, under which the
Exchange Notes will be issued has been qualified under the Trust Indenture Act
of 1939, as amended, (b) the Exchange Notes have been executed by the Issuer and
(c) the Exchange Notes have been delivered in exchange for the Old Notes in the
manner and for the consideration stated in the Registration Statement and the
Indenture, the Exchange Notes will be legally issued and binding obligations of
the Issuer.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the registration Statement and in the Prospectus included therein.
In giving such consent, we do not admit that we come within the category of
persons whose consent is required by Section 7 of the Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ Linda D. Sartin
JENKENS & GILCHRIST,
A Professional Corporation
<PAGE>
JENKENS & GILCHRIST
A PROFESSIONAL CORPORATION
FOUNTAIN PLACE
1445 ROSS AVENUE, SUITE 3200 AUSTIN, TEXAS
DALLAS, TX 75202 (512) 499-3800
(214) 855-4500 HOUSTON, TEXAS
TELECOPIER (214) 855-4300 (713) 951-3300
SAN ANTONIO, TEXAS
(210) 246-5000
WASHINGTON, D.C.
(202) 326-1500
WRITER'S DIRECT DIAL NUMBER
February 7, 1997
Pillowtex Corporation
4111 Mint Way
Dallas, Texas 75237
RE: MATERIAL FEDERAL INCOME TAX CONSEQUENCES ANTICIPATED TO RESULT FROM
CERTAIN TRANSACTIONS BETWEEN PILLOWTEX CORPORATION ("REGISTRANT")
AND HOLDERS OF ITS 10% SENIOR SUBORDINATED NOTES DUE 2006.
Gentlemen:
Registrant filed with the Securities and Exchange Commission (the
"COMMISSION") a Registration Statement (the "REGISTRATION STATEMENT") on
December 12, 1996, on Form S-4 under the Securities Act of 1933, as amended
(the "SECURITIES ACT"). Such Registration Statement has been subsequently
amended. The Registration Statement was filed in connection with the issuance
of $125,000,000 of 10% Senior Subordinated Notes Due 2006 of Registrant ("NEW
NOTES") pursuant to an offer to exchange (the "EXCHANGE OFFER") the New Notes
for $125,000,000 of 10% Senior Subordinated Notes Due 2006 of the Registrant
("OLD NOTES"). Except as otherwise indicated, capitalized terms used herein
shall have the meanings assigned to them in the Registration Statement.
Jenkens & Gilchrist, a Professional Corporation (the "FIRM"), has acted
as counsel to Registrant in connection with the Exchange Offer. You have
requested our opinion set forth below regarding the material federal income
tax consequences of the Exchnge Offer. Section I of this letter (the "OPINION
LETTER") contains the Firm's opinion. Section II of this Opinion Letter
contains limitations on the opinion.
I. OPINION
We have reviewed all authorities as of the date hereof relevant to the
material federal income tax consequences of the Exchange Offer. Based upon
our analysis of the
<PAGE>
JENKENS & GILCHRIST
A PROFESSIONAL CORPORATION
Pillowtex Corporation
February 7, 1997
Page 2
foregoing authorities and subject to the limitations set forth in Section II,
the Firm is of the opinion that its opinion contained in the section of the
Registration Statement entitled "Certain Federal Income Tax Consequences" are
the material federal income tax consequences of the Exchange Offer. The
disclosures contained in the section of the Registration Statement entitled
"Certain Federal Income Tax Consequences" address fairly the material federal
income tax considerations of the Exchange Offer discussed therein.
II. LIMITATIONS
1. Except as otherwise indicated, the opinion set forth in Section I is
based upon the Internal Revenue Code of 1986, as amended, and its legislative
history, the regulations promulgated thereunder, judicial decisions and
current administrative rulings and practices of the Internal Revenue Service
("IRS"), all as in effect on the date of this Opinion Letter. These
authorities may be amended or revoked at any time. Any such changes may or
may not be retroactive with respect to transactions entered into or
contemplated prior to the effective date thereof and could significantly
alter the conclusions reached in this Opinion Letter. There is no assurance
that legislative history, judicial or administrative changes will not occur
to reflect any developments that may occur after the date of this Opinion
Letter.
2. The opinion set forth in Section I is not binding on the IRS or the
courts and is dependent upon and specifically conditioned on the accuracy of
the representations contained in the Certificates signed by an officer of
Registrant and attached hereto as Exhibit "A". The Firm has relied upon
these representations and any inaccuracy in the representations could
adversely affect the opinion stated in Section I.
3. In connection with this opinion, the Firm has examined and is
familiar with originals or copies, certified or otherwise identified, of such
documents and records and such statutes, regulations and other instruments as
it deemed necessary or advisable for the purposes of this opinion, including
the Registration Statement. The Firm has assumed that all signatures on all
documents presented to it are genuine, that all documents submitted to it as
originals are originals thereof, that all information submitted to it
was accurate and complete, and that all persons executing and delivering
original or copies of documents examined by it were competent to execute and
deliver such documents. Additionally, we have assumed that all transactions
detailed in the Registration Statement will be completed in the manner
described therein.
4. The Firm is expressing its opinion only as to those matters
expressly set forth in Section I. No opinion should be inferred as to any
other matters.
5. We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement. In giving
such consent, we do not admit that we come within the category
<PAGE>
JENKENS & GILCHRIST
A PROFESSIONAL CORPORATION
Pillowtex Corporation
February 7, 1997
Page 3
of persons whose consent is required by Section 7 of the Securities Act or
the rules and regulations of the Commission promulgated thereunder.
Respectfully submitted,
Jenkens & Gilchrist,
A Professional Corporation
By: /s/ Patrick E. Mitchell
-------------------------------
Patrick E. Mitchell, for the Firm
<PAGE>
EXHIBIT A
PILLOWTEX CORPORATION
CERTIFICATE
PILLOWTEX CORPORATION, a Texas corporation (the "Company") hereby
certifies that the statements set forth below to be true and correct as of
the date hereof. The undersigned understand that Jenkens & Gilchrist, a
Professional Corporation, is relying upon the validity of the statements set
forth below as a factual basis for rendering certain tax opinions (the "Tax
Opinion") regarding the material federal income tax consequences of
exchanging the Company's issued and outstanding 10% Senior Subordinated Noted
Due 2006 ("Old Notes") for the Company's newly issued 10% Senior Subordinated
Notes Due 2006 ("New Notes") pursuant to the Exchange Offer, as defined in
the Registration Statement. All capitalized terms herein shall have the same
meaning given to them in the Tax Opinion.
1. To the best knowledge of the Company, prior to and on the date the
New Notes are issued, the possibility of the payment of Liquidated Damages,
as defined in the Registration Statement, on the Old Notes is remote.
IN WITNESS WHEREOF, Pillowtex Corporation has executed this Certificate
as of this 6th day of February, 1997.
PILLOWTEX CORPORATION
By: /s/ Jeffrey D. Cordes
------------------------------
Name: Jeffrey D. Cordes
------------------------------
Title: Executive Vice President
------------------------------
Date: February 6, 1997
------------------------------
<PAGE>
CONSENT OF INDEPENDENT AUDITORS AND REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Pillowtex Corporation:
The audits referred to in our report dated February 6, 1996, included the
related financial statement schedule for each of the years in the three-year
period ended December 30, 1995, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, represents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 6, 1997
