-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzygghXjf1SF6xQUGN1ixFm3yz/DL8ddWewqVdVJPwxe1is6nI+vceudXj6ymCns nnn9s3lvnenIqLLRfD74nQ== 0000950134-97-006714.txt : 19970929 0000950134-97-006714.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950134-97-006714 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970910 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19970911 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILLOWTEX CORP CENTRAL INDEX KEY: 0000896265 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 752147728 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11756 FILM NUMBER: 97678715 BUSINESS ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 BUSINESS PHONE: 2143333225 MAIL ADDRESS: STREET 1: 4111 MINT WAY CITY: DALLAS STATE: TX ZIP: 75237 FORMER COMPANY: FORMER CONFORMED NAME: PILLOWTEX CORP DATE OF NAME CHANGE: 19930125 8-K 1 FORM 8-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): SEPTEMBER 10, 1997 PILLOWTEX CORPORATION (Exact Name of Registrant as Specified in its Charter) TEXAS 1-11756 75-2147728 (State of (Commission (IRS Employer Incorporation) File Number) Identification No.) 4111 MINT WAY, DALLAS, TEXAS 75237 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 333-3225 ================================================================================ 2 ITEM 5. OTHER EVENTS. General. On September 10, 1997, Pillowtex Corporation (the "Company"), a wholly owned subsidiary of the Company ("Newco"), and Fieldcrest Cannon, Inc. ("Fieldcrest") entered into an agreement (the "Merger Agreement") pursuant to which, on the terms and subject to the conditions set forth therein, Newco will be merged with and into Fieldcrest (the "Merger"), and Fieldcrest will thereby become a wholly owned subsidiary of the Company. A copy of the Merger Agreement is filed as Exhibit 2.1 hereto and is incorporated herein by this reference. On September 11, 1997, the Company issued a press release announcing the Merger. A copy of the press release is filed as Exhibit 99.1 hereto and is incorporated herein by this reference. The Merger. At the effective time of the Merger (the "Effective Time"), (i) each outstanding share of Common Stock, par value $1.00 per share, of Fieldcrest ("Fieldcrest Common Stock") will be converted into a right to receive total consideration valued at $34.00, consisting of (a) $27.00 in cash and (b) a number of shares of Common Stock, par value $0.01 per share, of the Company ("Pillowtex Common Stock") equal to the quotient (the "Conversion Number") obtained by dividing $7.00 by the average of the closing sales prices per share of Pillowtex Common Stock on the New York Stock Exchange (the "NYSE") for each of the 20 consecutive trading days immediately preceding the fifth trading day prior to the date (the "Closing Date") on which the Merger is consummated (the "Determination Price"), provided that the Conversion Number will not be more than 0.333 or less than 0.269, and provided further that, if the Determination Price is less than $21.00, the Company will have the right to elect to increase the cash portion of such merger consideration and/or the Conversion Number such that the sum of (1) the cash portion of such merger consideration and (2) the product of (A) the Conversion Number and (B) the Determination Price equals $34.00 and, if the Company does not so elect, Fieldcrest will have the right to terminate the Merger Agreement, and (ii) each outstanding share of $3.00 Series A Convertible Preferred Stock, par value $0.01 per share, of Fieldcrest, other than shares converted into Fieldcrest Common Stock prior to the Merger, will be converted into a right to receive total consideration valued at $58.12, consisting of (a) a cash payment equal to the product of (1) the cash portion of the merger consideration to be paid for each share of Fieldcrest Common Stock and (2)1.7094 and (b) a number of shares of Pillowtex Common Stock equal to the product of (1) the Conversion Number and (2) 1.7094. Pursuant to the Merger Agreement, each holder of an outstanding option (an "Option") to purchase shares of Fieldcrest Common Stock may, prior to the Effective Time, elect to receive for each share of Fieldcrest Common Stock subject to such Option an amount in cash equal to the difference between $34.00 and the per share exercise price of such Option. At the Effective Time, each outstanding Option, other than Options in respect of which the above-described election was made, will be assumed by the Company and will constitute an option to purchase, in lieu of each share of Fieldcrest Common Stock previously subject thereto, a number of shares of Pillowtex Common Stock (increased to the nearest whole share) equal to the product of (i) the number of shares of Fieldcrest Common Stock subject to such Option immediately prior to the Effective Time and (ii) the quotient (the "Option Conversion Number") obtained by dividing $34.00 by the Determination Price, at an exercise price per share of Pillowtex Common Stock (increased to the nearest whole cent) equal to the exercise price per share of Fieldcrest Common Stock subject to such Option immediately prior to the Effective Time divided by the Option Conversion Number; provided that the Option Conversion Number will not be more than 1.619 or less than 1.308 and provided further that if the Company elects to increase the Conversion Number as described above, the -2- 3 Option Conversion Number will be increased such that the product of (a) the Option Conversion Number and (b) the Determination Price equals $34.00. Pursuant to the Merger Agreement, each holder of an outstanding stock appreciation right issued by Fieldcrest will be paid, at or immediately prior to the Effective Time, a cash amount equal to the product of (i) the difference between $34.00 and the grant price of such stock appreciation right and (ii) the number of shares subject to such stock appreciation right. Fieldcrest's 6.0% Convertible Debentures due 2012 (the "Fieldcrest Convertible Debentures"), which are presently convertible into shares of Fieldcrest Common Stock at a conversion price of $44.25 per share, will remain outstanding immediately after the Effective Time. As a result of the Merger, Fieldcrest Convertible Debentures will become convertible into the amount of cash and Pillowtex Common Stock receivable as a result of the Merger by the holder of the number of shares of Fieldcrest Common Stock into which such Fieldcrest Convertible Debentures might have been converted immediately prior to the Merger. For example, a Fieldcrest Convertible Debenture having an aggregate principal amount of $1,000 will become convertible into $677.97 in cash and a number of shares of Pillowtex Common Stock equal to the product of (i) 22.5989 and (ii) the Conversion Number. The Merger Agreement provides that, notwithstanding anything to the contrary set forth therein, if the Company's shareholders fail to approve the issuance of Pillowtex Common Stock and Pillowtex Preferred Stock (as hereinafter defined) in connection with the Merger and related financing transactions, (i) the merger consideration to be paid to holders of Fieldcrest Common Stock will be a cash payment in an amount equal to $34.00 per share, (ii) the merger consideration to be paid to holders of Fieldcrest Preferred Stock will be a cash payment in an amount equal to $58.12 per share, (iii) each holder of an Option will receive for each share of Fieldcrest Common Stock subject to such Option an amount in cash equal to the difference between $34.00 and the per share exercise price at such Option, and (iv) the conditions described in clauses (ii) and (iv) of the immediately following paragraph will be inapplicable. However, Charles M. Hansen, Jr., Chairman of the Board and Chief Executive Officer of the Company, and Mary R. Silverthorne, a director of the Company, beneficially own, in the aggregate, 52.9% of the currently outstanding shares of Pillowtex Common Stock and each of them has informed the Company that he or she intends to vote his or her shares of Pillowtex Common Stock for the approval of the issuance of shares of Pillowtex Common Stock and Pillowtex Preferred Stock in connection with the Merger and related financing transactions. Accordingly, the approval by the Company's shareholders of the issuance of shares of Pillowtex Common Stock and Pillowtex Preferred Stock in connection with the Merger and related financing transactions is expected to occur. Conditions to the Merger. The obligations of the Company and Fieldcrest to consummate the Merger are conditioned upon, among other things, (i) approval and adoption of the Merger Agreement by Fieldcrest's stockholders; (ii) approval by the Company's shareholders of the issuance of shares of Pillowtex Common Stock and Pillowtex Preferred Stock in connection with the Merger and related financing transactions; (iii) the absence of any order or injunction that prohibits the consummation of the Merger; (iv) the shares of Pillowtex Common Stock to be issued in connection with the Merger having been authorized for listing on the NYSE, subject to official notice of issuance; (v) a Registration Statement on Form S-4 having been declared effective by the Securities and Exchange Commission and not being subject to any stop order or proceeding seeking the same; and (vi) the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, having expired or been terminated. There can be no assurance that such conditions will be satisfied. -3- 4 Merger Financing. In order to finance the Merger and the repayment of certain indebtedness of Fieldcrest, to refinance the existing senior bank credit facility of the Company, and to provide working capital for the combined enterprise that will result from the Merger, the Company (i) has negotiated and entered into (a) a commitment letter with NationsBank of Texas, N.A. providing for new senior bank revolving credit and term loan facilities (the "New Pillowtex Bank Facilities Commitment") and (b) a preferred stock purchase agreement with Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P., providing for the issuance and sale of 65,000 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share ("Pillowtex Preferred Stock"), of the Company (the "Pillowtex Preferred Stock Commitment" and, together with the New Pillowtex Bank Facilities Commitment, the "Primary Financing Commitments"), and (ii) proposes to issue and sell new subordinated debt securities (the "New Pillowtex Subordinated Notes"). The terms of the financings contemplated by the Primary Financing Commitments and anticipated terms of the New Pillowtex Subordinated Notes are briefly summarized below. Such summaries of the Primary Financing Commitments are qualified in their entirety by reference to the full text thereof, copies of which are attached as Exhibits 10.1 and 10.2 hereto and are incorporated herein by this reference. New Pillowtex Bank Facilities . . . . . . . . . . . . The New Pillowtex Bank Facilities Commitment provides for, on the terms and subject to the conditions set forth therein, (i) a $350.0 million revolving credit facility (including $40.0 million for standby and commercial letters of credit and up to $15.0 million for swing line loans) and (ii) a $250.0 million term loan facility, consisting of a $125.0 million tranche A term loan and a $125.0 million tranche B term loan (such facilities being referred to herein collectively as the "New Pillowtex Bank Facilities"). A copy of the New Pillowtex Bank Facilities Commitment is filed as Exhibit 10.1 hereto and is incorporated herein by this reference. Sale of Pillowtex Preferred Stock . . . . . . . . . . . . . . . . . The Pillowtex Preferred Stock Commitment provides for, on the terms and subject to the conditions set forth therein, the issuance and sale to Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P. of 65,000 shares of Pillowtex Preferred Stock for approximately $65.0 million. A copy of the Pillowtex Preferred Stock Commitment is filed as Exhibit 10.2 hereto and is incorporated herein by this reference. Sale of New Pillowtex Subordinated Notes . . . . . . . . . . The Company intends to issue and sell, on or prior to the Closing Date, up to $150.0 million aggregate principal amount of New Pillowtex Subordinated Notes. Although the specific terms of the New Pillowtex Subordinated Notes have not yet been established, (i) for purposes of the pro forma financial information presented below, the principal thereof is assumed to bear interest at a rate of 10.0% per annum, payable semi-annually in arrears, -4- 5 (ii) the New Pillowtex Subordinated Notes are expected to be due and payable in full in 2010, and (iii) the indenture or other instrument under which the New Pillowtex Subordinated Notes are to be issued is expected to contain affirmative, restrictive, and financial covenants and to specify events of default generally comparable to the covenants and events of default contained and specified in the indenture under which the Company's existing 10% Senior Subordinated Notes Due 2006 (the "Existing Pillowtex Subordinated Notes") were issued. In addition to the Primary Financing Commitments, the Company has negotiated and entered into a commitment letter with NationsBridge L.L.C. providing for a standby bridge loan facility (the "Standby Bridge Loan Facility Commitment" and, together with the Primary Financing Commitments, the "Financing Commitments"). The Standby Bridge Loan Facility Commitment provides for, on the terms and subject to the conditions set forth therein, a standby bridge loan facility (the "Standby Bridge Loan Facility") pursuant to which up to $150.0 million will be available to the Company to finance the Merger and complete the related refinancings to the extent that less than $150.0 million aggregate principal amount of New Pillowtex Subordinated Notes remain unsold as of the Closing Date. The Company presently does not intend to utilize the Standby Bridge Loan Facility. In the event it becomes necessary to utilize the Standby Bridge Loan Facility, borrowings thereunder would initially be evidenced by senior subordinated bridge notes. The terms of such bridge notes would be less favorable to the Company than the anticipated terms of the New Pillowtex Subordinated Notes. Interest on such bridge notes would be payable at a floating rate higher than the fixed rate of interest expected to be borne by the New Pillowtex Subordinated Notes, which floating rate would increase at specified intervals as long as such notes were outstanding (subject to certain limitations). The bridge notes would mature one year from the date of issuance and, if not repaid in full, could, subject to certain conditions, be satisfied at that time through the issuance and delivery of senior subordinated rollover notes with a maturity of nine years. Interest on such rollover notes would also be payable at a floating rate which would increase at specified intervals (subject to certain limitations). The obligations of third parties under the Financing Commitments to extend loans or purchase Pillowtex Preferred Stock, as the case may be, are subject to various specified conditions. Because such conditions relate to matters beyond the Company's control, there can be no assurance that such conditions will be timely satisfied. Summary Pro Forma Financial Information. Giving effect to the Merger and the Financing Transactions as if such transactions had been consummated on June 28, 1997, at such date, on a pro forma combined basis, the Company would have had total assets of $1.403 billion, total long-term debt of $805.3 million, and total shareholders' equity of $184.6 million. Giving effect to the Merger and the Financing Transactions as if such transactions had been consummated on December 31, 1995, (a) for the fiscal year ended December 28, 1996, on a pro forma combined basis, the Company would have had earnings before income taxes and extraordinary items of $20.4 million, earnings before extraordinary items of $12.4 million, and earnings before extraordinary items per share of $0.74 and (b) for the six months ended June 28, 1997, on a pro forma combined basis, the Company would have had earnings before income taxes and extraordinary items of $12.8 million, earnings before extraordinary items of $7.7 million, and earnings before extraordinary items per share of $0.46. As used herein, the term "Financing Transactions" means (i) estimated initial borrowings under the New Pillowtex Bank Facilities of $427.2 million, (ii) the issuance and sale of $135.0 million aggregate principal amount of New Pillowtex Subordinated Notes resulting in estimated net -5- 6 proceeds of $131.7 million, (iii) the issuance and sale of 65,000 shares of Pillowtex Preferred Stock resulting in estimated net proceeds of $63.5 million, (iv) the repayment of all amounts outstanding under the Company's and Fieldcrest's existing bank credit facilities, and (v) the satisfaction and discharge of all indebtedness represented by Fieldcrest's 11.25% Senior Subordinated Debentures Due 2002 to 2004 pursuant to an irrevocable deposit of amounts sufficient to provide for the redemption thereof. Because the Standby Bridge Loan Facility is expected to be drawn upon only to the extent less than $135.0 million aggregate principal amount of New Pillowtex Subordinated Notes remains unsold as of the Closing Date, the foregoing pro forma information assumes that no amounts will be borrowed thereunder. If, in lieu of the issuance and sale of $135.0 million aggregate principal amount of New Pillowtex Subordinated Notes, the Company were assumed to have borrowed $135.0 million under the Standby Bridge Bank Facility, then (i) for the year ended December 28, 1996, on a pro forma combined basis, the Company would have had interest expense of $63.1 million, earnings before income taxes and extraordinary items of $17.0 million, earnings before extraordinary items of $10.3 million, and earnings before extraordinary items per share of $0.59 and (ii) for the six months ended June 28, 1997, on a pro forma combined basis, the Company would have had interest expense of $39.4 million, earnings before income taxes and extraordinary items of $8.9 million, earnings before extraordinary items of $5.4 million, and earnings before extraordinary items per share of $0.31. The pro forma combined financial information presented above is for illustrative purposes only and is not necessarily indicative of what the Company's actual financial position or results of operations would have been had the above-referenced transactions been consummated as of the above-referenced dates or of the financial position or results of operations that may be reported by the Company in the future. The pro forma combined financial information should be read in conjunction with the historical financial statements of the Company and Fieldcrest, the related notes, and the other information contained in the exhibits hereto. Certain historical financial statements of the Company and Fieldcrest are filed as Exhibits 99.2 and 99.3, respectively, hereto and are incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (c) Exhibits:
Exhibit Number Exhibit ------ ------- 2.1 Agreement and Plan of Merger, dated September 10, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc. and Fieldcrest Cannon, Inc. 10.1 Commitment Letter, dated September 10, 1997, by and between NationsBank of Texas, N.A. and Pillowtex Corporation, regarding the New Pillowtex Bank Facility 10.2 Preferred Stock Purchase Agreement, dated September 10, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P., providing for the issuance and sale of 65,000 shares of Preferred Stock of Pillowtex Corporation
-6- 7 99.1 Press release, dated September 11, 1997, issued by Pillowtex Corporation 99.2 Audited Financial Statements of Pillowtex Corporation as of and for the fiscal years ended December 30, 1995 and December 28, 1996 (incorporated by reference to pages F-1 through F-24 in Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 filed with the Securities and Exchange Commission) and Unaudited Financial Statements of Pillowtex Corporation as of June 28, 1997 and for the six months ended June 28, 1997 and June 29, 1996 (incorporated by reference to pages 3 through 14 in the Pillowtex Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 filed with the Securities and Exchange Commission) 99.3 Audited Financial Statements of Fieldcrest Cannon, Inc. as of and for the fiscal years ended December 31, 1995 and December 31, 1996 (incorporated by reference to pages 18 through 34 in Fieldcrest Cannon, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission) and Unaudited Financial Statements of Fieldcrest Cannon, Inc. as of June 30, 1997 and for the six months ended June 30, 1997 and June 30, 1996 (incorporated by reference to pages 1 through 8 in the Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 filed with the Securities and Exchange Commission)
-7- 8 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. PILLOWTEX CORPORATION By: /s/ John H. Karnes ---------------------------------- John H. Karnes Vice President and General Counsel Dated: September 11, 1997 -8- 9 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT ------- ------- 2.1 Agreement and Plan of Merger, dated September 10, 1997, by and among Pillowtex Corporation, Pegasus Merger Sub, Inc. and Fieldcrest Cannon, Inc. 10.1 Commitment Letter, dated September 10, 1997, by and between NationsBank of Texas, N.A. and Pillowtex Corporation, regarding the New Pillowtex Bank Facilities 10.2 Preferred Stock Purchase Agreement, dated September 10, 1997, by and among Pillowtex Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., and Apollo (UK) Partners III, L.P., providing for the issuance and sale of 65,000 shares of Preferred Stock of Pillowtex Corporation 99.1 Press release, dated September 11, 1997, issued by Pillowtex Corporation 99.2 Audited Financial Statements of Pillowtex Corporation as of and for the fiscal years ended December 30, 1995 and December 28, 1996 (incorporated by reference to pages F-1 through F-24 in Pillowtex Corporation's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 filed with the Securities and Exchange Commission) and Unaudited Financial Statements of Pillowtex Corporation as of June 28, 1997 and for the six months ended June 28, 1997 and June 29, 1996 (incorporated by reference to pages 3 through 14 in the Pillowtex Corporation's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 filed with the Securities and Exchange Commission) 99.3 Audited Financial Statements of Fieldcrest Cannon, Inc. as of and for the fiscal years ended December 31, 1995 and December 31, 1996 (incorporated by reference to pages 18 through 34 in Fieldcrest Cannon, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission) and Unaudited Financial Statements of Fieldcrest Cannon, Inc. as of June 30, 1997 and for the six months ended June 30, 1997 and June 30, 1996 (incorporated by reference to pages 1 through 8 in the Fieldcrest Cannon, Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 filed with the Securities and Exchange Commission)
EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 ------------------------------------------------------------ AGREEMENT AND PLAN OF MERGER among PILLOWTEX CORPORATION PEGASUS MERGER SUB, INC. and FIELDCREST CANNON, INC. dated as of September 10, 1997 ------------------------------------------------------------ 2 TABLE OF CONTENTS
Page ---- ARTICLE I - THE MERGER . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1 The Merger. . . . . . . . . . . . . . . . . 1 SECTION 1.2 Closing . . . . . . . . . . . . . . . . . . 1 SECTION 1.3 Effective Time . . . . . . . . . . . . . . 2 SECTION 1.4 Effects of the Merger . . . . . . . . . . . 2 SECTION 1.5 Certificate of Incorporation; By-laws . . . . . . . . . . . . . . . . . 2 SECTION 1.6 Directors; Officers . . . . . . . . . . . . 3 ARTICLE II - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS . . . . 3 SECTION 2.1 Effect on Capital Stock . . . . . . . . . . 3 SECTION 2.2 Stock Options . . . . . . . . . . . . . . . 5 SECTION 2.3 Share Purchase Rights . . . . . . . . . . . 7 SECTION 2.4 Failure To Approve Share Issuance . . . . . 7 SECTION 2.5 Stock Appreciation Rights . . . . . . . . . 7 ARTICLE III - PAYMENT FOR SHARES . . . . . . . . . . . . . . 8 SECTION 3.1 Payment For Shares . . . . . . . . . . . . 8 ARTICLE IV - REPRESENTATIONS AND WARRANTIES . . . . . . . . . 12 SECTION 4.1 Representations and Warranties of Company . . . . . . . . . . . . . . . . . 12 SECTION 4.2 Representations and Warranties of Parent and Purchaser . . . . . . . . . . 27 ARTICLE V - COVENANTS . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.1 Conduct of Business of Company and Parent . . . . . . . . . . . . . . . . . . 34 ARTICLE VI - ADDITIONAL AGREEMENTS . . . . . . . . . . . . . 36 SECTION 6.1 Preparation of the Proxy Statement and the Form S-4; Accountant's Letters . . . . . . . . . . . . . . . . . 36 SECTION 6.2 Stockholders Meetings . . . . . . . . . . . 38 SECTION 6.3 Access to Information; Confidentiality . . . . . . . . . . . . . 38 SECTION 6.4 Reasonable Best Efforts . . . . . . . . . . 39
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Page ---- SECTION 6.5 Indemnification; Directors' and Officers Insurance . . . . . . . . . . . 39 SECTION 6.6 Public Announcements . . . . . . . . . . . 42 SECTION 6.7 No Solicitation; Acquisition Proposals . . . . . . . . . . . . . . . 42 SECTION 6.8 Consents, Approvals and Filings . . . . . 43 SECTION 6.9 Board Action Relating to Stock Option Plans . . . . . . . . . . . . . . . . . 45 SECTION 6.10 Employment and Employee Benefit Matters . . . . . . . . . . . . . . . . 45 SECTION 6.11 Affiliates and Certain Stockholders . . . 46 SECTION 6.12 NYSE Listing . . . . . . . . . . . . . . . 47 SECTION 6.13 Certain Company Indebtedness . . . . . . . 47 ARTICLE VII - CONDITIONS PRECEDENT . . . . . . . . . . . . . 48 SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . 48 SECTION 7.2. Conditions to Obligations of Parent and Purchaser . . . . . . . . . . . . . . 48 SECTION 7.3. Conditions to Obligation of Company . . . 49 ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER . . . . . . 50 SECTION 8.1 Termination . . . . . . . . . . . . . . . 50 SECTION 8.2 Effect of Termination . . . . . . . . . . 52 SECTION 8.3 Amendment . . . . . . . . . . . . . . . . 52 SECTION 8.4 Extension; Waiver . . . . . . . . . . . . 53 SECTION 8.5 Procedure for Termination, Amendment, Extension or Waiver . . . . . . . . . . . 53 ARTICLE IX - GENERAL PROVISIONS . . . . . . . . . . . . . . . 53 SECTION 9.1 Nonsurvival of Representations and Warranties . . . . . . . . . . . . . . 53 SECTION 9.2 Fees and Expenses . . . . . . . . . . . . 53 SECTION 9.3 Definitions . . . . . . . . . . . . . . . 54 SECTION 9.4 Notices . . . . . . . . . . . . . . . . . 55 SECTION 9.5 Interpretation . . . . . . . . . . . . . . 56 SECTION 9.6 Counterparts . . . . . . . . . . . . . . . 56 SECTION 9.7 Entire Agreement; Third-Party Beneficiaries . . . . . . . . . . . . . . 56 SECTION 9.8 Governing Law . . . . . . . . . . . . . . 56 SECTION 9.9 Assignment . . . . . . . . . . . . . . . . 56 SECTION 9.10 Enforcement . . . . . . . . . . . . . . . 57 SECTION 9.11 Severability . . . . . . . . . . . . . . . 57
ii 4 AGREEMENT AND PLAN OF MERGER, dated as of September 10, 1997, among PILLOWTEX CORPORATION, a Texas corporation ("Parent"), PEGASUS MERGER SUB, INC., a Delaware corporation and wholly-owned subsidiary of Parent ("Purchaser"), and FIELDCREST CANNON, INC., a Delaware corporation ("Company"). W I T N E S S E T H : WHEREAS, the respective Boards of Directors of Parent, Purchaser and Company have determined that it would be advisable and in the best interests of their respective stockholders for Parent to acquire Company, by means of a merger of Purchaser with and into Company (the "Merger"), pursuant and subject to the terms and conditions set forth in this Agreement; and WHEREAS, Parent, Purchaser and Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties hereto hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), the Merger shall be effected and Purchaser shall be merged with and into Company at the Effective Time (as hereinafter defined in Section 1.3). At the Effective Time, the separate existence of Purchaser shall cease and Company shall continue as the surviving corporation (sometimes herein referred to as the "Surviving Corporation"). SECTION 1.2 Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Article VIII, and subject to the satisfaction or waiver (to the extent permissible) of all of the conditions set forth in Article VII, the closing of the Merger (the "Closing") will take place at 10:00 a.m. on the fifth business day following satisfaction or waiver (to the extent 5 permissible) of all of the conditions set forth in Article VII, other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions (the "Closing Date"), at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York, unless another date, time or place is agreed to in writing by the parties hereto. SECTION 1.3 Effective Time. The parties hereto will file with the Secretary of State of the State of Delaware (the "Delaware Secretary of State") on the date of the Closing (or on such other date as Parent and Company may agree) a certificate of merger or other appropriate documents, executed in accordance with the relevant provisions of the DGCL, and make all other filings or recordings required under the DGCL in connection with the Merger. The Merger shall become effective upon the filing of the certificate of merger with the Delaware Secretary of State, or at such later time as is specified in the certificate of merger (the "Effective Time"). SECTION 1.4 Effects of the Merger. The Merger shall have the effects set forth in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities and duties of Company and Purchaser shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.5 Certificate of Incorporation; By-laws. At the Effective Time, the certificate of incorporation of Purchaser as in effect at the Effective Time shall, from and after the Effective Time, be the certificate of incorporation of the Surviving Corporation until thereafter changed or amended in accordance with the provisions thereof and applicable law. At the Effective Time, the by-laws of Purchaser as in effect at the Effective Time shall, from and after the Effective Time, be the by-laws of the Surviving Corporation until thereafter changed or amended in accordance with the provisions thereof and applicable law. 2 6 SECTION 1.6 Directors; Officers. From and after the Effective Time, (a) the directors of Purchaser shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be, and (b) the officers of Company shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS SECTION 2.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of any holder of shares of Company's common stock, $1.00 par value per share (the "Shares"), or any other capital stock of Company or any shares of capital stock of Purchaser: (a) Common Stock of Purchaser. Each share of common stock, par value $0.01 per share, of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, $0.01 par value per share, of the Surviving Corporation. (b) Cancellation of Treasury Shares and Parent-Owned Shares. Each Share and each share of Company's $3.00 Series A Convertible Preferred Stock (individually, a "Preferred Share" and collectively the "Preferred Shares") issued and outstanding immediately prior to the Effective Time that is owned by Company or any Subsidiary of Company or by Parent, Purchaser or any other Subsidiary of Parent (other than shares in trust accounts, managed accounts, custodial accounts and the like that are beneficially owned by third parties) shall automatically be cancelled and retired and shall cease to exist, and no cash or other consideration shall be delivered or deliverable in exchange therefor. (c) Conversion of Shares. Each Share issued and outstanding immediately prior to the Effective Time (other than Shares to be cancelled in accordance with Section 2.1(b) and any Dissenting Shares (as hereinafter defined)) shall be converted into the right to receive the Merger 3 7 Consideration (as defined below) upon surrender of the certificate formerly representing such Share in accordance with this Agreement. (d) Conversion of Preferred Shares. Each Preferred Share issued and outstanding immediately prior to the Effective Time (other than Preferred Shares to be cancelled in accordance with Section 2.1(b) and any Dissenting Shares) shall be converted into the right to receive the Preferred Merger Consideration (as defined below) upon surrender of the certificate formerly representing such Preferred Share in accordance with this Agreement. (e) Merger Consideration; Preferred Merger Consideration. (i) "Merger Consideration" shall mean, subject to Section 2.4 below, (A) a cash payment in an amount equal to $27.00 and (B) a number of fully paid and nonassessable shares of Parent's common stock, $0.01 par value per share ("Parent Common Stock"), equal to the Conversion Number, meaning the quotient, rounded to the third decimal place, obtained by dividing $7.00 by the average of the closing sales prices of Parent Common Stock as reported on the NYSE (as hereinafter defined in Section 9.3) Composite Transactions List for each of the 20 consecutive trading days immediately preceding the fifth trading day prior to the Closing Date (the "Determination Price"); provided, that if the actual quotient obtained thereby is less than 0.269, the Conversion Number shall be 0.269 and if the actual quotient obtained thereby is more than 0.333, the Conversion Number shall be 0.333; provided, further that if the Determination Price is less than $21.00, Parent shall have the right to give written notice to Company (a "Top-Up Intent Notice") that Parent elects to increase the cash portion of the Merger Consideration and/or the Conversion Number such that the sum of (i) the cash portion of the Merger Consideration and (ii) the product of the Conversion Number and the Determination Price shall equal $34.00. Any Top-Up Intent Notice shall be delivered to Company no later than 2:00 p.m. New York City time on the third business day prior to the Closing Date. If, in such case, Parent does not deliver a Top-Up Intent Notice, Company shall have the right to give written notice to Parent (a "Termination Notice") that Company elects to terminate this Agreement. Any Termination Notice shall be delivered to Parent no later than 2:00 p.m. New York City time on the business day prior to the Closing Date. 4 8 (ii) "Preferred Merger Consideration" shall mean, subject to Section 2.4 below, (A) a cash payment equal to the product of (1) the cash portion of the Merger Consideration and (2) 1.7094 and (B) a number of fully paid and nonassessable shares of Parent Common Stock equal to the product of (1) the Conversion Number and (2) 1.7094. (f) Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, Shares or Preferred Shares issued and outstanding immediately prior to the Effective Time held by a holder (if any) who has the right to demand, and who properly demands, an appraisal of such Shares or Preferred Shares in accordance with Section 262 of the DGCL (or any successor provision) ("Dissenting Shares") shall not be converted into a right to receive the Merger Consideration or the Preferred Merger Consideration, as applicable, unless such holder fails to perfect or otherwise loses such holder's right to such appraisal, if any. If, after the Effective Time, such holder fails to perfect or loses any such right to appraisal, each such Share or Preferred Share of such holder shall be treated as a Share or Preferred Share that had been converted as of the Effective Time into the right to receive the Merger Consideration or the Preferred Merger Consideration, as applicable, in accordance with this Section 2.1. At the Effective Time, any holder of Dissenting Shares shall cease to have any rights with respect thereto, except the rights provided in Section 262 of the DGCL (or any successor provision) and as provided in the immediately preceding sentence. Company shall give prompt notice to Parent of any demands received by Company for appraisal of Shares or Preferred Shares, and Parent shall have the right to participate in and direct all negotiations and proceedings with respect to such demands. Company shall not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demands. SECTION 2.2 Stock Options. (a) Each holder of a then outstanding option to purchase Shares (collectively, "Options") under Company's Director Stock Option Plan, 1995 Employee Stock Option Plan or Stock Option Agreement, dated as of September 11, 1991, with James M. Fitzgibbons (collectively, the "Stock Option Plans"), whether or not then exercisable or fully vested, may elect, prior to the Effective Time, in settlement thereof, to receive from Company immediately prior to the Effective Time for each Share subject to such Option an amount in cash equal to the 5 9 difference between $34.00 and the per share exercise price of such Option, to the extent $34.00 is greater than the per share exercise price of such Option (such excess amount, the "Option Consideration"). (b) At the Effective Time, each outstanding Option other than Options for which an election to receive cash in settlement thereof has been made pursuant to Section 2.2(a), shall be assumed by Parent and shall constitute an option to acquire, on substantially the same terms and subject to substantially the same conditions as were applicable under such Option, including, without limitation, term, exercisability, status as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and termination provisions, the number of shares of Parent Common Stock, rounded up to the nearest whole share, determined by multiplying the number of Shares subject to such Option immediately prior to the Effective Time by the Option Conversion Number at an exercise price per share of Parent Common Stock (increased to the nearest whole cent) equal to the exercise price per share of Shares subject to such Option divided by the Option Conversion Number; provided, however, that in the case of any Option to which Section 421 of the Code applies by reason of its qualification as an incentive stock option under Section 422 of the Code, the conversion formula shall be adjusted if necessary to comply with Section 424(a) of the Code. "Option Conversion Number" shall mean the quotient, rounded to the third decimal place, obtained by dividing $34.00 by the Determination Price; provided, that if the actual quotient obtained thereby is less than 1.308, the Option Conversion Number shall be 1.308, and if the actual quotient obtained thereby is more than 1.619, the Option Conversion Number shall be 1.619; provided, further, that if a Top-Up Intent Notice has been delivered to Company pursuant to Section 2.1(e), the Option Conversion Number shall be increased such that the product of the Option Conversion Notice and the Determination Price shall equal $34.00. (c) Not later than 30 days prior to the Effective Time, Company shall provide each holder of an Option an election form pursuant to which each such holder may make the election specified in Section 2.2(a). Company also shall use its best efforts to obtain all necessary waivers, consents or releases from holders of Options under the Stock Option Plans and take any such other action as may be reasonably necessary to give effect to the transactions contemplated by this Section 2.2 and, with respect to the 6 10 Options for which an election to receive cash in settlement thereof has been made, to cause each such Option to be surrendered to Company and cancelled, whether or not any Option Consideration is payable with respect thereto, at the Effective Time. The surrender of an Option to Company shall be deemed a release of any and all rights the holder had or may have had in such Option, other than the right to receive the Option Consideration in respect thereof. (d) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of substitute Options pursuant to the terms set forth in Section 2.2(b). As soon as practicable after the Effective Time, the shares of Parent Common Stock subject to Options will be covered by an effective registration statement on Form S-8 (or any successor form) or another appropriate form and Parent shall use its reasonable best efforts to maintain the effectiveness of such registration statements for so long as the substitute Options remain outstanding. In addition, Parent shall use all reasonable efforts to cause the shares of Parent Common stock subject to Options to be listed on the NYSE and such other exchanges as Parent shall determine. SECTION 2.3 Share Purchase Rights. Each reference in this Article II and in Article III to a "Share" is a reference to such Share together with the Right (as hereinafter defined in Section 4.1(b)), if any, associated with such Share. SECTION 2.4 Failure To Approve Share Issuance. If Parent's stockholders fail to approve the Share Issuance (as hereinafter defined in Section 4.2(c)) at the Parent Stockholders Meeting (as hereinafter defined in Section 6.2(b)), then, notwithstanding anything set forth herein to the contrary, (i) the Merger Consideration shall be a cash payment in an amount equal to $34.00, (ii) the Preferred Merger Consideration shall be a cash payment in an amount equal to $58.12, (iii) the provisions of Section 2.2(a) shall apply to all Options outstanding immediately prior to the Effective Time and the provisions of Section 2.2(b) shall have no further force or effect, and (iv) Sections 7.1(a)(ii) and 7.1(c) hereof shall be deemed to be deleted. SECTION 2.5 Stock Appreciation Rights. At or immediately prior to the Effective Time, Company shall pay to each holder of a stock appreciation right issued by 7 11 Company pursuant to the Director Stock Option Plan or its salary reduction plan a cash amount equal to the product of (i) the difference between $34.00 and the grant price of such stock appreciation right and (ii) the number of shares subject to such stock appreciation right. ARTICLE III PAYMENT FOR SHARES SECTION 3.1 Payment For Shares. (a) Payment Fund. Concurrently with the Effective Time, Parent shall deposit, or shall cause to be deposited, with or for the account of a bank or trust company designated by Parent, which shall be reasonably satisfactory to Company (the "Paying Agent"), for the benefit of the holders of Shares and Preferred Shares, (i) certificates for the shares of Parent Common Stock representing the aggregate stock portion of the Merger Consideration and the Preferred Merger Consideration and (ii) cash in an aggregate amount sufficient to pay the aggregate cash portion of the Merger Consideration and the Preferred Merger Consideration (hereinafter collectively referred to as the "Payment Fund"). (b) Letters of Transmittal; Surrender of Certificates. As soon as reasonably practicable after the Effective Time, Parent shall instruct the Paying Agent to mail to each holder of record (other than Company or any of its Subsidiaries or Parent, Purchaser or any of their Subsidiaries) of a certificate or certificates which, immediately prior to the Effective Time, evidenced outstanding Shares or Preferred Shares (the "Certificates"), (i) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent, and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment therefor. Upon surrender of a Certificate for cancellation to the Paying Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in respect thereof (A) a certificate representing that number of whole shares of Parent Common Stock (and cash in lieu of fractional shares of Parent Common Stock as contemplated by 8 12 this Section 3.1) which the aggregate number of Shares or Preferred Shares, as applicable, previously represented by such certificate or certificates surrendered shall have been converted into the right to receive pursuant to Section 3.1 of this Agreement and (B) cash in an amount equal to the product of (1) the number of Shares or Preferred Shares, as applicable, theretofore represented by such Certificate and (2) the cash portion of the Merger Consideration or the Preferred Merger Consideration, as applicable, and, in either case, the Certificate so surrendered shall forthwith be canceled. No interest shall be paid or accrued on the Merger Consideration or the Preferred Merger Consideration payable upon the surrender of any Certificate. If payment is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be promptly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the surrendered Certificate or established to the satisfaction of Parent and the Surviving Corporation that such tax has been paid or is not applicable. (c) Cancellation and Retirement of Shares; No Further Rights. As of the Effective Time, all Shares and Preferred Shares (other than Shares and Preferred Shares to be cancelled in accordance with Section 2.1(b) and any Dissenting Shares if applicable) issued and outstanding immediately prior to the Effective Time, shall cease to be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a Certificate theretofore representing any such Shares or Preferred Shares shall cease to have any rights with respect thereto (including, without limitation, the right to vote), except the right to receive the Merger Consideration or the Preferred Merger Consideration, as applicable, without interest, upon surrender of such Certificate in accordance with this Article III, and until so surrendered, each such Certificate shall represent for all purposes only the right, subject to Section 2.1(f), if applicable, to receive the Merger Consideration or the Preferred Merger Consideration, as applicable, without interest. The Merger Consideration or the Preferred Merger Consideration, as applicable, paid upon the surrender for exchange of Certificates in accordance with the terms of this Article III shall be deemed to have been issued and paid in full satisfaction of 9 13 all rights pertaining to the Shares or Preferred Shares theretofore represented by such Certificates. (d) No Fractional Shares. (i) No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of certificates that immediately prior to the Effective Time represented Shares or Preferred Shares which have been converted pursuant to Section 2.1, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Parent. (ii) In lieu of any such fractional shares, each holder of Shares or Preferred Shares who would otherwise have been entitled to a fraction of a Parent Common Stock upon surrender of Certificates for exchange pursuant to this Section 3.1 will be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (A) the per share closing price on the NYSE of Parent Common Stock (as reported on the NYSE Composite Transactions List) on the date on which the Effective Time occurs (or, if Parent Common Stock does not trade on the NYSE on such date, the first date of trading of Parent Common Stock on the NYSE after the Effective Time) by (B) the fractional interest to which such holder otherwise would be entitled. Promptly upon request from the Paying Agent, Parent will make available to the Paying Agent the cash necessary for this purpose. (e) Investment of Payment Fund. The Paying Agent shall invest the cash portion of the Payment Fund, as directed by Parent, in (i) direct obligations of the United States of America, (ii) obligations for which the full faith and credit of the United States of America is pledged to provide for the payment of principal and interest, (iii) commercial paper rated the highest quality by either Moody's Investors Services, Inc. or Standard & Poor's Corporation, or (iv) certificates of deposit, bank repurchase agreements or bankers' acceptances of commercial banks with capital exceeding $500 million. Any net earnings with respect to the Payment Fund shall be the property of and paid over to Parent as and when requested by Parent; provided, however, that any such investment or any such payment of earnings shall not delay the receipt by holders of Certificates of the Merger Consideration or the Preferred Merger Consideration, as applicable, or otherwise impair such holders' respective rights hereunder. 10 14 (f) Termination of Payment Fund. Any portion of the Payment Fund which remains undistributed to the holders of Certificates for 180 days after the Effective Time shall be delivered to Parent, upon demand, and any holders of Certificates that have not theretofore complied with this Article III shall thereafter look only to Parent, and only as general creditors thereof, for payment of their claim for any Merger Consideration or Preferred Merger Consideration, as applicable. (g) No Liability. None of Parent, Purchaser, the Surviving Corporation or the Paying Agent shall be liable to any person in respect of any payments or distributions payable from the Payment Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificates shall not have been surrendered prior to five years after the Effective Time (or immediately prior to such earlier date on which any Merger Consideration or Preferred Merger Consideration, as applicable, in respect of such Certificate would otherwise escheat to or become the property of any Governmental Entity (as hereinafter defined), any amounts payable in respect of such certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto. (h) Withholding Rights. Parent shall be entitled to deduct and withhold, or cause to be deducted or withheld, from the consideration otherwise payable pursuant to this Agreement to any holder of Shares, Preferred Shares, Options or Certificates such amounts as are required to be deducted and withheld with respect to the making of such payment under the Code, or any provision of applicable state, local or foreign tax law. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to such holders in respect of which such deduction and withholding was made. 11 15 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.1 Representations and Warranties of Company. Company represents and warrants to Parent and Purchaser as follows: (a) Organization, Standing and Corporate Power. Each of Company and each Subsidiary of Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of Company and each Subsidiary of Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed would not, individually or in the aggregate, have a Material Adverse Effect (as hereinafter defined in Section 9.3) on Company. Company has delivered to Parent complete and correct copies of the certificate of incorporation and by-laws or comparable governing documents of Company and each of its Subsidiaries, in each case as amended to the date of this Agreement. (b) Capital Structure. The authorized capital stock of Company consists of (i) 25,000,000 shares of common stock, $1.00 par value per share (the "Common Stock"), (ii) 15,000,000 shares of class B common stock, $1.00 par value per share, and (iii) 10,000,000 shares of preferred stock, $.01 par value per share. At the close of business on September 5, 1997: (i) 9,224,258 shares of Common Stock were issued and outstanding, (ii) 435,300 shares of Common Stock were reserved for issuance pursuant to outstanding Options under the Stock Option Plans, (iii) 2,564,100 shares of Common Stock were reserved for issuance pursuant to conversion of Preferred Shares, (iv) 2,632,248 shares of Common Stock were reserved for issuance pursuant to conversion of Company's 6% Convertible Subordinated Debentures due 2012 (the "Convertible Debentures"), (v) 1,500,000 Preferred Shares were issued and outstanding and (vi) 500,000 shares of Company's Series B Junior Participating Preferred Stock were authorized for issuance solely pursuant to the exercise of the preferred stock purchase rights (the "Rights") issued pursuant to the Rights 12 16 Agreement, dated as of November 24, 1993, between Company and The First National Bank of Boston, as rights agent (the "Company Rights Agreement"). Except as set forth in the immediately preceding sentence, at the close of business on September 5, 1997, no shares of capital stock (including, without limitation, class B common stock or preferred stock) or other equity securities of Company were issued, reserved for issuance or outstanding. All outstanding shares of capital stock of Company are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. Except as referred to above, no bonds, debentures, notes or other indebtedness of Company or any Subsidiary of Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which the stockholders of Company or any Subsidiary of Company may vote are issued or outstanding. No adjustment to the conversion price at which Preferred Shares are convertible into Shares or the conversion price at which Convertible Debentures are convertible into Shares has been made since the respective date of the first issuance of such securities, and there are no accrued and unpaid dividends, whether or not declared, on the Preferred Shares. Except as disclosed in Section 4.1(b) of the disclosure schedule delivered by each party to the other simultaneously with the execution of this Agreement (the "Disclosure Schedule"), all the outstanding shares of capital stock of each Subsidiary of Company have been validly issued and are fully paid and nonassessable and are owned by Company, by one or more Subsidiaries of Company or by Company and one or more such Subsidiaries, free and clear of Liens (as hereinafter defined in Section 9.3). Except as set forth above or in Section 4.1(b) of the Disclosure Schedule, neither Company nor any Subsidiary of Company has or, at or after the Effective Time will have, any outstanding option, warrant, call, subscription or other right, agreement or commitment which (i) obligates Company or any Subsidiary of Company to issue, sell or transfer, repurchase, redeem or otherwise acquire any shares, of the capital stock of Company or any Subsidiary of Company, (ii) restricts the transfer of any shares of capital stock of Company or any of its Subsidiaries or (iii) relates to the voting of any shares of Company or any of its Subsidiaries. (c) Authority; Noncontravention. Company has the requisite corporate power and authority to enter into this Agreement. The execution and delivery of this Agreement by Company and the consummation by Company of the transactions 13 17 contemplated hereby have been duly authorized by all necessary corporate action on the part of Company, subject, in the case of the Merger, to the approval of this Agreement by its stockholders as set forth in Section 6.2(a). This Agreement has been duly executed and delivered by Company and, assuming this Agreement constitutes the valid and binding agreement of Parent and Purchaser, constitutes a valid and binding obligation of Company, enforceable against Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and to general principles of equity. Except as disclosed in Section 4.1(c) of the Disclosure Schedule, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not, (i) conflict with any of the provisions of the restated certificate of incorporation (including the provisions of any certificate of designations which constitute a part of such restated certificate of incorporation) or by-laws of Company or the comparable documents of any Subsidiary of Company, (ii) subject to the governmental filings and other matters referred to in the following sentence, conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a material obligation, a right of termination, cancellation or acceleration of any obligation or a loss of a material benefit under, or require the consent of any person under, any indenture or other agreement, permit, concession, franchise, license or similar instrument or undertaking to which Company or any of its Subsidiaries is a party or by which Company or any of its Subsidiaries or any of their assets is bound or affected, or (iii) subject to the governmental filings and other matters referred to in the following sentence, contravene any domestic or foreign law, rule or regulation or any order, writ, judgment, injunction, decree, determination or award currently in effect, which, in the case of clauses (ii) and (iii) above, singly or in the aggregate, would have a Material Adverse Effect on Company. No consent, approval or authorization of, or declaration or filing with, or notice to, any domestic or foreign governmental agency or regulatory authority (a "Governmental Entity") which has not been received or made is required by or with respect to Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Company or the consummation by Company of the transactions contemplated hereby, except for (i) the 14 18 filing of premerger notification and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the Merger, (ii) the filing with the SEC of (A) a joint proxy statement relating to the approval and adoption by the stockholders of Company of this Agreement and approval by the stockholders of Parent of the Share Issuance (as hereinafter defined in Section 4.2(c)) (such joint proxy statement, as amended or supplemented from time to time, the "Proxy Statement") and (B) such reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (iii) the filing of the certificate of merger with the Delaware Secretary of State and appropriate documents with the relevant authorities of other states in which Company is qualified to do business, (iv) such other consents, approvals, authorizations, filings or notices as are set forth in Section 4.1(c) of the Disclosure Schedule and (v) any other filings, authorizations, consents or approvals the failure to make or obtain which, individually or in the aggregate, would not have a Material Adverse Effect on Company. (d) SEC Documents. (i) Company has filed all required reports, schedules, forms, statements and other documents with the Securities and Exchange Commission (the "SEC") since January 1, 1994 (such reports, schedules, forms, statements and other documents are hereinafter referred to as the "SEC Documents"); (ii) as of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents as of such dates contained any untrue statements of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iii) the consolidated financial statements of Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited consolidated quarterly statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as 15 19 may otherwise be indicated in the notes thereto) and fairly present the consolidated financial position of Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments). (e) Information Supplied. None of the information supplied or to be supplied by Company specifically for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by Parent in connection with the issuance by Parent of shares of Parent Common Stock in the Merger (the "Form S-4") will, at the time the Form S-4 is filed with the SEC, at any time that it is amended or supplemented and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) the Proxy Statement will, at the time it is filed with the SEC, at any time that it is amended or supplemented, at the time it is mailed to the stockholders of Company and Parent and at the time of the Company Stockholders Meeting referred to in Section 6.2(a) and the Parent Stockholders Meeting referred to in Section 6.2(b), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, except that no representation or warranty is made by Company with respect to statements made or incorporated by reference therein based on information supplied by Parent or Purchaser specifically for inclusion or incorporation by reference in such documents. (f) Absence of Certain Changes or Events; No Undisclosed Material Liabilities. (i) Except as disclosed in the SEC Documents filed and publicly available prior to the date of this Agreement (the "Filed SEC Documents") or in Section 4.1(f) of the Disclosure Schedule, since the date of the most recent audited financial statements included in the Filed SEC Documents, Company and its Subsidiaries have conducted their business only in the ordinary course, and there has 16 20 not been (A) any change, event or occurrence particular to Company and its Subsidiaries (excluding industry, economic, financial and other matters generally affecting businesses other than and in addition to Company and its Subsidiaries) which has had or would have, individually or in the aggregate, a Material Adverse Effect on Company; (B) any declaration, setting aside or payment of any dividend or other distribution in respect of shares of Company's capital stock, other than dividends on the Preferred Shares in accordance with their terms, or any redemption or other acquisition by Company of any shares of its capital stock; (C) any increase in the rate or terms of compensation payable or to become payable by Company or its Subsidiaries to their directors, officers or key employees, except increases occurring in the ordinary course of business consistent with past practices; (D) any entry into, or increase in the rate or terms of, any bonus, insurance, severance, pension or other employee or retiree benefit plan, payment or arrangement made to, for or with any such directors, officers or employees, except increases occurring in the ordinary course of business consistent with past practices or as required by applicable law; (E) any entry into any agreement, commitment or transaction by Company or any of its Subsidiaries which is material to Company and its Subsidiaries taken as a whole, except for agreements, commitments or transactions entered into in the ordinary course of business; (F) any change by Company in accounting methods, principles or practices except as required or permitted by generally accepted accounting principles; (G) any write-off or write-down of, or any determination to write-off or write-down, any asset of Company or any of its Subsidiaries or any portion thereof which write-off, write-down, or determination exceeds $5 million individually or $15 million in the aggregate; or (H) any agreements by Company or any of its Subsidiaries to do any of the things described in the preceding clauses (A) through (G) other than as expressly contemplated or provided for herein. (ii) Except as set forth in or disclosed in the Filed SEC Documents or Section 4.1(f) of the Disclosure Schedule and liabilities incurred in the ordinary course of business since the date of the most recent financial statements included in the Filed SEC Documents, as of the date hereof, there are no liabilities of Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, due, to become due, determined, determinable or otherwise, having or which would have, 17 21 individually or in the aggregate, a Material Adverse Effect on Company. (g) Absence of Changes in Benefit Plans. Except as disclosed in the Filed SEC Documents or in Section 4.1(g) of the Disclosure Schedule, since the date of the most recent audited financial statements included in the Filed SEC Documents, neither Company nor any of its Subsidiaries has adopted or amended or agreed to adopt or amend in any material respect any collective bargaining agreement or any Benefit Plan (as defined in Section 4.1(h)). (h) Benefit Plans. With respect to all the employee benefit plans (as that phrase is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained for the benefit of any current or former employee, officer or director of the Company or any of its Subsidiaries ("Company ERISA Plans") and any other benefit or compensation plan, program or arrangement maintained for the benefit of any current or former employee, officer or director of the Company or any of its Subsidiaries (the Company ERISA Plans and such plans being referred to as the "Company Plans"), except as set forth in Section 4.1(h) of the Disclosure Schedule: (i) none of the Company ERISA Plans is a "multiemployer plan" within the meaning of ERISA; (ii) none of the Company Plans promises or provides retiree life insurance benefits to any person; (iii) none of the Company Plans provides for payment of a benefit, the increase of a benefit amount, the payment of a contingent benefit, or the acceleration of the payment or vesting of a benefit by reason of the execution of this Agreement or the consummation of the transactions contemplated by this Agreement; (iv) neither the Company nor any of its Subsidiaries has an obligation to adopt, or is considering the adoption of, any new Company Plan or, except as required by law, the amendment of an existing Company Plan; (v) each Company ERISA Plan intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS that it is so qualified and, to the knowledge of the Company, nothing has occurred since the date of such letter that could reasonably 18 22 be expected to affect the qualified status of such Company ERISA Plan; (vi) each Company Plan has been operated in accordance with its terms and the requirements of all applicable law; (vii) neither the Company nor any of its Subsidiaries or members of their "controlled group" has incurred any direct or indirect liability under, arising out of or by operation of Title IV of ERISA in connection with the termination of, or withdrawal from, any Company ERISA Plan or other retirement plan or arrangement, and, to the knowledge of the Company, no fact or event exists that could reasonably be expected to give rise to any such liability; (viii) the aggregate accumulated benefit obligations of each Company ERISA Plan subject to Title IV of ERISA (as of the date of the most recent actuarial valuation prepared for such Company ERISA Plan and based on a discount rate of 7.75%, the rate used in such valuation) do not exceed the fair market value of the assets of such Company ERISA Plan (as of the date of such valuation); and (ix) the Company is not aware of any claims relating to the Company Plans; provided, however, that the failure of the representations set forth in clauses (v), (vi), (vii) and (ix) to be true and correct shall not be deemed to be a breach of any such representation unless such failures, individually or in the aggregate, would have a Material Adverse Effect on Company. (i) Taxes. Except as set forth in Section 4.1(i) of the Disclosure Schedule: (A) Except where the failure to do so would not have a Material Adverse Effect on Company, each of Company and each Subsidiary of Company (and any affiliated or unitary group of which any such person was a member) has (1) timely filed all federal, state, local and foreign returns, declarations, reports, estimates, information returns and statements ("Returns") required to be filed by or for it in respect of any Taxes (as defined below) and has caused such Returns as so filed to be true, complete and correct, (2) established reserves that are reflected in Company's most recent financial statements included in the Filed SEC Documents and that as so reflected are adequate 19 23 for the payment of all Taxes not yet due and payable with respect to the results of operations of Company and its Subsidiaries through the date hereof, and (3) timely withheld and paid over to the proper governmental authorities all Taxes and other amounts required to be so withheld and paid over. Each of Company and each Subsidiary of Company (and any affiliated or unitary group of which any such person was a member) has timely paid all Taxes that are shown as being due on the Returns referred to in the immediately preceding sentence. (B) (1) There has been no taxable period since 1991 for which a Return of Company or any of its Subsidiaries has been examined by the Internal Revenue Service ("IRS"), (2) all examinations described in clause (1) have been completed without the assertion of material deficiencies, and (3) except for alleged deficiencies which have been finally and irrevocably resolved, Company has not received formal or informal notification that any deficiency for any Taxes, the amount of which, individually or in the aggregate, could have a Material Adverse Effect on Company, has been or will be proposed, asserted or assessed against Company or any of its Subsidiaries by any federal, state, local or foreign taxing authority or court with respect to any period. (C) Neither Company nor any of its Subsidiaries has executed or entered into with the IRS or any other taxing authority (1) any agreement or other document that continues in force and effect beyond the Effective Time and that extends or has the effect of extending the period for assessments or collection of any federal, state, local or foreign Taxes, (2) any closing agreement or other similar agreement (nor has Company or any of its Subsidiaries received any ruling, technical advice memorandum or similar determination) affecting the determination of Taxes required to be shown on any Return not yet filed, or (3) requested any extension of time to be granted to file after the Effective Date any return required by applicable law to be filed by it. (D) Neither Company nor any of its Subsidiaries has made an election under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by Company or any of its Subsidiaries. None of the assets of Company or any of its Subsidiaries is required to be treated 20 24 as being owned by any other person pursuant to the "safe harbor" leasing provisions of section 168(f)(8) of the Internal Revenue Code of 1954 as formerly in effect. (E) Neither Company nor any of its Subsidiaries is a party to, is bound by or has any obligation under any tax sharing agreement or similar agreement or arrangement. (F) Company has not agreed to make, nor is it required to make, any material adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise. (G) Neither Company nor any of its Subsidiaries is, or has been, a United States Real Property Holding Corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). For purposes of this Agreement, "Taxes" shall mean all Federal, state, local, foreign income, property, sales, excise, employment, payroll, franchise, withholding and other taxes, tariffs, charges, fees, levies, imposts, duties, licenses or other assessments of every kind and description, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority. (j) Voting Requirements. Assuming Parent is not an "interested stockholder" for purposes of Section 203 of the DGCL, the affirmative vote of two-thirds of the votes entitled to be cast by the holders of Shares entitled to vote thereon at the Company Stockholders Meeting described in Section 6.2(a) with respect to the approval and adoption of this Agreement is the only vote of the holders of any class or series of Company's capital stock or other securities required in connection with the consummation by Company of the Merger and the other transactions contemplated hereby to be consummated by Company. (k) Compliance with Applicable Laws. All federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, licenses, notices, permits and rights ("Permits," including, without limitation, Permits required under Environmental Laws) necessary for each of Company and its Subsidiaries to own, lease or operate its properties and assets and to carry on 21 25 its business as now conducted have been obtained or made, and there has occurred no default under any such Permit, except for the lack of Permits and for defaults under Permits which lack or default individually or in the aggregate would not have a Material Adverse Effect on Company. Except as disclosed in the Filed SEC Documents or in Section 4.1(k) of the Disclosure Schedule, Company and its Subsidiaries are in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Entity, except for non-compliance which individually or in the aggregate would not have a Material Adverse Effect on Company. (l) Written Opinion of Financial Advisor. Company has received the written opinion of Credit Suisse First Boston Corporation ("CSFB"), dated September 10, 1997 (a true and complete copy of which has been delivered to Parent by Company), to the effect that, based upon and subject to the matters set forth therein and as of the date hereof, the consideration to be received by the holders of Shares in the Merger was fair to such stockholders from a financial point of view, and such opinion has not been withdrawn or modified. (m) Brokers. No broker, investment banker, financial advisor or other person, other than CSFB, the fees and expenses of which will be paid by Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Company. (n) Litigation, etc. As of the date hereof, except as disclosed in Section 4.1(n) of the Disclosure Schedule, (i) there is no suit, claim, action or proceeding (at law or in equity) or investigation pending or, to the knowledge of Company, threatened against Company or any of its Subsidiaries (including, without limitation, any product liability claims) before any court or governmental or regulatory authority or body, and (ii) neither Company nor any of its Subsidiaries is subject to any outstanding order, writ, judgement, injunction, decree or arbitration order or award that, in any such case described in clauses (i) and (ii), has had or would have, individually or in the aggregate, a Material Adverse Effect on Company. As of the date hereof, there are no suits, actions, claims, proceedings or investigations pending or, to the knowledge of Company, threatened, seeking to prevent, hinder, modify 22 26 or challenge the transactions contemplated by this Agreement. (o) Environmental Laws. (i) For purposes of this Agreement, the following terms shall have the following meanings: (A) "Hazardous Substances" means (1) those substances defined in or regulated under the following federal statutes and their state counterparts, as each may be amended from time to time, and all regulations thereunder: the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide, and Rodenticide Act and the Clean Air Act; (2) petroleum and petroleum products including crude oil and any fractions thereof; (3) natural gas, synthetic gas, and any mixtures thereof; (4) radon; (5) any other contaminant; and (6) any substance with respect to which a federal, state or local agency requires environmental investigation, monitoring, reporting or remediation; and (B) "Environmental Laws" means any federal, state or local law relating to (1) releases or threatened releases of Hazardous Substances or materials containing Hazardous Substances; (2) the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Substances or materials containing Hazardous Substances; or (3) otherwise relating to pollution of the environment or the protection of human health. (ii) To the knowledge of Company, except as disclosed in Section 4.1(o) of the Disclosure Schedule and except as would not, individually or in the aggregate, have a Material Adverse Effect on Company: (A) neither Company nor any of its Subsidiaries has violated or is in violation of any Environmental Law; (B) none of the properties owned or leased by Company or any of its Subsidiaries (including, without limitation, soils and surface and ground waters) are contaminated with any Hazardous Substance in quantities which require investigation or remediation under Environmental Laws; (C) neither Company nor any of its Subsidiaries is liable for any off-site contamination; (D) neither Company nor any of its Subsidiaries has any liability or remediation obligation under any Environmental Law; (E) no assets of Company or any of its Subsidiaries are subject to pending or threatened Liens under any Environmental Law; (F) Company and its Subsidiaries have all permits, licenses and other authorizations required under any Environmental Law ("Environmental Permits"); and (G) 23 27 Company and its Subsidiaries are in compliance with their respective Environmental Permits. (p) Material Contracts. There have been made available to Parent, its affiliates and their representatives true and complete copies of all of the following contracts to which Company or any of its Subsidiaries is a party or by which any of them is bound (collectively, the "Material Contracts"): (i) contracts with any current officer or director of Company or any of its Subsidiaries; (ii) contracts for the sale of any of the assets of Company or any of its Subsidiaries other than contracts relating to non-operating property or entered into in the ordinary course of business or for the grant to any person of any preferential rights to purchase any of its assets other than inventory in the ordinary course of business; (iii) contracts containing covenants of Company or any of its Subsidiaries not to compete in any line of business or with any person in any geographical area or covenants of any other person not to compete with Company or any of its Subsidiaries in any line of business or in any geographical area; (iv) material indentures, credit agreements, mortgages, promissory notes, and all contracts relating to the borrowing of money; and (v) all other agreements, contracts or instruments entered into outside of the ordinary course of business and which, in the reasonable opinion of Company, are material to Company. The Company has discussed with Parent the Company's purchase orders for raw materials (including cotton and polyester), supplies, expense items, and equipment, and the purchase orders from the Company's customers as well as the Company's acknowledgments of those orders, but the Company has not provided copies of all of these documents to Parent. Except as set forth on Schedule 4.1(p), all of the Material Contracts are in full force and effect and are the legal, valid and binding obligation of Company and/or its Subsidiaries, enforceable against them in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). Except as set forth on Section 4.1(p) of the Disclosure Schedule, neither Company nor any Subsidiary is in default in any material respect under any Material Contract nor, to the knowledge of Company, is any other party to any Material Contract in default thereunder in any material respect. 24 28 (q) Labor Matters. (i) Except as set forth on Section 4.1(q)(i) of the Disclosure Schedule, neither Company nor any of its Subsidiaries is a party to any employment, labor or collective bargaining agreement (excluding consulting agreements with independent contractors entered into in the ordinary course of business), and there are no employment, labor or collective bargaining agreements which pertain to employees of Company or any of its Subsidiaries. Company has heretofore made available to Parent true, complete and correct copies of the (A) employment agreements listed on Section 4.1(q)(i) of the Disclosure Schedule and (B) labor or collective bargaining agreements listed on such Schedule, together with all amendments, modifications, supplements or side letters affecting the duties, rights and obligations of any party thereunder. (ii) Except as set forth in Section 4.1(q)(ii) of the Disclosure Schedule, no employees of Company or any of its Subsidiaries are represented by any labor organization; to the knowledge of Company, no labor organization or group of employees of Company or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened in writing to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority and to the knowledge of Company, there are no organizing activities involving Company or any of its Subsidiaries pending with any labor organization or group of employees of Company or any of its Subsidiaries. (iii) Except as set forth on Section 4.1(q)(iii) of the Disclosure Schedule, there are no (A) unfair labor practice charges, grievances or complaints pending or threatened in writing by or on behalf of any employee or group of employees of Company or any of its Subsidiaries which, if resolved against Company or any of its Subsidiaries, as the case may be, would, individually or in the aggregate, have a Material Adverse Effect on Company, or (B) complaints, charges or claims against Company or any of its Subsidiaries pending, or threatened in writing to be brought or filed, with any Governmental Entity or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment of any individual by Company or any of its Subsidiaries which, if resolved against Company or any of its Subsidiaries, as 25 29 the case may be, would, individually or in the aggregate, have a Material Adverse Effect on Company. (r) Rights Plan Matters. The Company's Board of Directors has approved and Company will enter into an amendment to the Company Rights Agreement so that (i) the execution and delivery of this Agreement, the public announcement or consummation of the transactions contemplated hereby and the other matters provided for herein will not result in (A) Parent or Purchaser or any of their respective Affiliates or Associates being an Acquiring Person, (B) the occurrence of a Distribution Date, a Stock Acquisition Date or a Triggering Event or (C) the Rights becoming exercisable (the terms "Acquiring Person," "Affiliate," "Associate," "Distribution Date," "Stock Acquisition Date," and "Triggering Event" having the respective meanings ascribed thereto in the Company Rights Agreement) and (ii) the common stock, $0.01 par value per share, of the Surviving Corporation will not constitute "Common Stock" within the meaning of Section 1(g) of the Company Rights Agreement. A true, correct and complete copy of the Company Rights Agreement (including all amendments thereto) is included in the Filed SEC Documents. (s) Real Property; Other Assets. (i) Section 4.1(s)(i) of the Disclosure Schedule sets forth all of the real property owned in fee by Company and its Subsidiaries (the "Owned Real Property"). Each of Company and its Subsidiaries has good and marketable title to each parcel of Owned Real Property free and clear of all Liens except (A) those reflected or reserved against in the latest balance sheet of Company included in the Filed SEC Documents, (B) taxes and general and special assessments not in default and payable without penalty and interest, and (C) Liens of record and other Liens which individually or in the aggregate would not have a Material Adverse Effect on Company (collectively "Permitted Liens"). (ii) Company has heretofore made available to Parent true, correct and complete lists of all leases, subleases and other agreements (the "Real Property Leases") under which Company or any of its Subsidiaries uses or occupies or has the right to use or occupy, now or in the future, any real property or facility (the "Leased Real Property") (including all modifications, amendments and supplements thereto). Except in each case where the failure individually or in the aggregate would not have a Material Adverse Effect on Company (A) each Real Property Lease is 26 30 valid and binding on Company and in full force and effect, (B) all rent and other sums and charges payable by Company and its Subsidiaries as tenants thereunder are current in all material respects, and (C) no termination event or condition or uncured default of a material nature on the part of Company or any such Subsidiary or, to Company's knowledge, the landlord, exists under any Real Property Lease. Except as would not individually or in the aggregate have a Material Adverse Effect on Company, each of Company and its Subsidiaries has a good and valid leasehold interest in each parcel of Leased Real Property free and clear of all Liens, except for Permitted Liens. SECTION 4.2 Representations and Warranties of Parent and Purchaser. Parent and Purchaser represent and warrant to Company as follows: (a) Organization, Standing and Corporate Power. Each of Parent and Purchaser and each other Subsidiary of Parent is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of Parent and Purchaser and each other Subsidiary of Parent is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed would not, individually or in the aggregate, have a Material Adverse Effect on Parent. Parent has delivered to Company true and complete copies of the restated articles of incorporation and by-laws of Parent and certificate of incorporation and by-laws of Purchaser, as amended to the date of this Agreement. (b) Capital Structure. The authorized capital stock of Parent consists of (i) 30,000,000 shares of Parent Common Stock, and (ii) 20,000,000 shares of preferred stock, par value $.01 per share. At the close of business on September 5, 1997, (i) 10,751,497 shares of Parent Common Stock were issued and outstanding and (ii) 613,390 shares of Parent Common Stock were reserved for issuance pursuant to outstanding options to purchase shares of Parent Common Stock granted under Parent's stock option plans. Except as set forth in the immediately preceding sentence, at the close of business on September 5, 1997, no shares of capital stock or other equity securities of Parent were issued, 27 31 reserved for issuance or outstanding. All outstanding shares of capital stock of Parent are, and all shares of Parent Common Stock which may be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. The authorized capital stock of Purchaser consists of 100 shares of common stock, $0.01 par value per share, 100 of which have been validly issued, are fully paid and nonassessable and are owned by Parent. No bonds, debentures, notes or other indebtedness of Parent having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which the stockholders of Parent may vote are issued or outstanding. Except as set forth above, Parent does not have any outstanding option, warrant, subscription or other right, agreement or commitment which (i) obligates Parent to issue, sell or transfer, repurchase, redeem or otherwise acquire any shares of the capital stock of Parent, (ii) restricts the transfer of Parent Common Stock or (iii) relates to the voting of Parent Common Stock. (c) Authority; Noncontravention. Parent and Purchaser have the requisite corporate power and authority to enter into this Agreement. The execution and delivery of this Agreement by Parent and Purchaser and the consummation by Parent and Purchaser of the transactions contemplated hereby have been duly authorized by the boards of directors of Parent and Purchaser and have been duly approved by Parent as sole stockholder of Purchaser, and no other corporate proceedings on the part of Parent or Purchaser are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, other than, with respect to the issuance of Parent Common Stock as required by the terms of this Agreement or upon conversion of the Company's 6% Convertible Subordinated Debentures after the Effective Time and the issuances of equity securities of Parent contemplated by Section 4.2(g) (collectively, the "Share Issuance"), the approval and adoption of the Share Issuance by the affirmative vote of the holders of a majority of the shares of Parent Common Stock entitled to vote on the matter, present in person or represented by proxy at the meeting of Parent's stockholders called for such purpose. This Agreement has been duly executed and delivered by each of Parent and Purchaser and, assuming this Agreement constitutes the valid and binding agreement of Company, constitutes a valid and binding obligation of each of Parent and Purchaser, enforceable against each such party in accordance with its terms, subject to applicable bankruptcy, 28 32 insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and to general principals of equity. Except as disclosed in Section 4.2(c) of the Disclosure Schedule, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not (i) conflict with any of the provisions of the restated articles of incorporation or by-laws of Parent or certificate of incorporation or by-laws of Purchaser, (ii) subject to the governmental filings and other matters referred to in the following sentence, conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a material obligation, a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or require the consent of any person under, any indenture, or other agreement, permit, concession, franchise, license or similar instrument or undertaking to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their assets is bound or affected, or (iii) subject to the governmental filings and other matters referred to in the following sentence, contravene any law, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award currently in effect, which, in the case of clauses (ii) and (iii) above, singly or in the aggregate, would have a Material Adverse Effect on Parent. No consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity which has not been received or made is required by or with respect to Parent or Purchaser in connection with the execution and delivery of this Agreement by Parent or Purchaser or the consummation by Parent or Purchaser, as the case may be, of any of the transactions contemplated by this Agreement, except for (i) the filing of premerger notification and report forms under the HSR Act with respect to the Merger, (ii) the filing with the SEC of (A) the Form S-4 and (B) such other reports under the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (iii) the filing of the certificate of merger with the Delaware Secretary of State, and appropriate documents with the relevant authorities of other states in which Company is qualified to do business, (iv) state "blue-sky" filings, (v) NYSE approvals, (vi) such other consents, approvals, authorizations, filings or notices as are set forth in Section 4.2(c) of the Disclosure Schedule and (vii) any other applicable filings, authorizations, consents or 29 33 approvals the failure to make or obtain which, in the aggregate, would not have a Material Adverse Effect on Parent. (d) SEC Documents. Parent has filed all required reports, schedules, forms, statements and other documents with the SEC since January 1, 1994 (the "Parent SEC Documents"). As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Parent SEC Documents, and none of the Parent SEC Documents as of such dates contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Parent included in the Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of Parent and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (e) Information Supplied. None of the information supplied or to be supplied by Parent or Purchaser specifically for inclusion or incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 is filed with the SEC, at any time it is amended or supplemented or at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) the Proxy Statement will, at the time it is filed with the SEC, at any time that it is amended or supplemented, mailed to the stockholders of Company and Parent and at the time of the Company Stockholders Meeting referred to in Section 6.2(a) and the Parent Stockholders Meeting referred to in Section 6.2(b), contain any untrue statement of a material fact or omit to state any material fact required to 30 34 be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Form S-4 and the Proxy Statement will comply as to form in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder, except that no representation or warranty is made by Parent or Purchaser with respect to statements made or incorporated by reference in such documents based on information supplied by or on behalf of Company specifically for inclusion or incorporation by reference therein. (f) Absence of Certain Changes of Events; No Undisclosed Material Liabilities. (i) Except as disclosed in the Parent SEC Documents filed and publicly available prior to the date of this Agreement (the "Filed Parent SEC Documents") or in Section 4.2(f) of the Disclosure Schedule, since the date of the most recent audited financial statements included in the Filed Parent SEC Documents, Parent and its Subsidiaries have conducted their business only in the ordinary course, and there has not been (A) any change, event or occurrence particular to Parent and its Subsidiaries (excluding industry, economic, financial and other matters generally affecting businesses other than and in addition to Parent and its Subsidiaries) which has had or would have, individually or in the aggregate, a Material Adverse Effect on Parent, (B) any declaration, setting aside or payment of any dividend or distribution in respect of any of Parent's outstanding capital stock (other than regular quarterly cash dividends of $.05 per share on Parent Common Stock in accordance with usual record and payment dates and in accordance with the Parent's present dividend policy) or any redemption or other acquisition by Parent of any shares of its capital stock, (C) any entry into any agreement, commitment or transaction by Parent or any of its Subsidiaries which is material to Parent and its Subsidiaries taken as a whole, except for agreements, commitments or transactions entered into in the ordinary course of business, (D) any change by Parent in accounting methods, principles or practices except as required or permitted by generally accepted accounting principles or (E) any agreements by Parent or any of its Subsidiaries to do any of the things described in the preceding clauses (A) through (D) other than as expressly contemplated or provided for herein. (ii) Except as set forth in or disclosed in the Filed Parent SEC Documents or Section 4.2(f) of the 31 35 Disclosure Schedule and liabilities incurred in the ordinary course of business since the date of the most recent financial statements included in the Filed Parent SEC Documents, as of the date hereof, there are no liabilities of Parent or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, due, to become due, determined, determinable or otherwise, having or which would, individually or in the aggregate, have a Material Adverse Effect on Parent. (g) Purchaser; Financing. (i) Parent owns all of the outstanding capital stock of Purchaser. At all times prior to the Effective Time, no person other than Parent has owned, or will own, any of the outstanding capital stock of Purchaser. Purchaser was formed by Parent solely for the purpose of engaging in the transactions contemplated by this Agreement. Except as contemplated by this Agreement, Purchaser has not incurred, and will not incur, directly or through any Subsidiary, any liabilities or obligations for borrowed money or otherwise, except incidental liabilities or obligations not for borrowed money incurred in connection with its organization and except in connection with obtaining financing in connection with the Merger. Except as contemplated by this Agreement, Purchaser has not engaged, directly or through any Subsidiary, in any business activities of any type or kind whatsoever. (ii) Parent has received written commitments (collectively, the "Financing Commitments") (copies of which are attached as Section 4.2(g) of the Disclosure Schedule) from financial institutions and investors to provide, subject to the terms and conditions of such commitments, debt and equity financing sufficient, together with other funds available to Parent, to effect the Merger and the other transactions contemplated hereby and to pay all related fees and expenses. (h) Brokers. No broker, investment banker, financial advisor or other person, other than those identified in Section 4.2(h) of the Disclosure Schedule, the fees and expenses of which will be paid by Parent, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent. (i) Compliance with Applicable Laws. Each of Parent and its Subsidiaries has in effect all Permits 32 36 including, without limitation, Permits required under Environmental Laws necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, and there has occurred no default under any such Permit, except for the lack of Permits and for defaults under Permits which lack or default individually or in the aggregate would not have a Material Adverse Effect on Parent. Except as disclosed in the Filed Parent SEC Documents or in Section 4.2(i) of the Disclosure Schedule, Parent and its Subsidiaries are in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Entity, except for non-compliance which individually or in the aggregate would not have a Material Adverse Effect on Parent. (j) Environmental Laws. To the knowledge of Parent, except as disclosed in Section 4.2(j) of the Disclosure Schedule and except as would not have a Material Adverse Effect on Parent: (i) neither Parent nor its Subsidiaries has violated or is in violation of any Environmental Law; (ii) none of the properties owned or leased by Parent or any of its Subsidiaries (including, without limitation, soils and surface and ground waters) are contaminated with any Hazardous Substance in quantities which require investigation or remediation under Environmental Laws; (iii) neither Parent nor its Subsidiaries is liable for any off-site contamination; (iv) neither Parent nor its Subsidiaries has any liability or remedial obligation under any Environmental Law; (v) no assets of Parent or its Subsidiaries are subject to pending or threatened Liens; (vi) Parent and its Subsidiaries have all Environmental Permits; and (vii) Parent and its Subsidiaries are in compliance with their respective Environmental Permits. (k) Litigation, etc. As of the date hereof, except as disclosed in Section 4.2(k) of the Disclosure Schedule, (i) there is no suit, claim, action, proceeding (at law or in equity) or investigation pending or, to the knowledge of Parent, threatened against Parent or any of its Subsidiaries (including, without limitation, any product liability claims) before any court or governmental or regulatory authority or body, and (ii) neither Parent nor any of its Subsidiaries is subject to any outstanding order, writ, judgement, injunction, order, decree or arbitration award or order that, in any such case described in clauses (i) and (ii), has had or would have, individually or in the aggregate, a Material Adverse Effect on Parent. As of the 33 37 date hereof, there are no suits, actions, claims, proceedings or investigations pending or, to the knowledge of Parent, threatened, seeking to prevent, hinder, modify or challenge the transactions contemplated by this Agreement. ARTICLE V COVENANTS SECTION 5.1 Conduct of Business of Company and Parent. Except as contemplated by this Agreement (or, in the case of Parent and its Subsidiaries, as contemplated by the Financing Commitments), during the period from the date of this Agreement to the Effective Time, Company and Parent shall, and shall cause their respective Subsidiaries to, act and carry on their respective businesses only in the ordinary course of business and, to the extent consistent therewith, use reasonable efforts to preserve intact their current business organizations, keep available the services of their current key officers and employees and preserve the goodwill of those engaged in material business relationships with them, and to that end, without limiting the generality of the foregoing, Parent and Company shall not, and shall not permit their respective Subsidiaries to, without the prior consent of the other: (i) (A) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any of its outstanding capital stock (other than as provided in Section 4.1(f)(i)(B) and 4.2(f)(i)(B) above and, with respect to a Subsidiary, to its corporate parent), (B) split, combine or reclassify any of its outstanding capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its outstanding capital stock, or (C) with respect to Company and its Subsidiaries only, purchase, redeem or otherwise acquire any shares of outstanding capital stock or any rights, warrants or options to acquire any such shares except, in the case of clause (C), for the acquisition of shares from holders of options in full or partial payment of the exercise price payable by such holder upon exercise of options; (ii) with respect to Company and its Subsidiaries only, issue, sell, grant, pledge or otherwise encumber any shares of its capital stock, any other voting 34 38 securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares, voting securities or convertible or exchangeable securities other than upon the exercise of options issued pursuant to employee benefit plans or pursuant to Company's "matching obligations" under and in accordance with its 401(k) savings plan or, in respect of Company, conversion of Preferred Shares and Convertible Debentures; (iii) amend its articles or restated certificate of incorporation, by-laws or other comparable charter or organizational documents; (iv) with respect to Company and its Subsidiaries only, directly or indirectly acquire, make any investment in, or make any capital contributions to, any person (other than any direct or indirect wholly-owned Subsidiary) other than in the ordinary course of business; (v) with respect to the Company and its Subsidiaries only, directly or indirectly sell or otherwise dispose of any of its properties or assets that are material to its business, except for sales or dispositions in the ordinary course of business; (vi) with respect to Company and its Subsidiaries only, (A) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, other than indebtedness owing to or guarantees of indebtedness owing to Company or any direct or indirect wholly-owned Subsidiary of Company or (B) make any loans or advances to any other person, other than to Company or to any direct or indirect wholly-owned Subsidiary of Company and other than routine advances to employees, except, in the case of clause (A) for borrowings under existing credit facilities described in the Filed SEC Documents in the ordinary course of business; (vii) with respect to Company and its Subsidiaries only, grant or agree to grant to any employee any increase in wages or bonus, severance, profit sharing, retirement, deferred compensation, insurance or other compensation or benefits, or establish any new compensation or benefit plans or arrangements, or amend or agree to amend any existing Employee Benefit Plans, except as may be required under existing agreements (including collective bargaining agreements) or normal, regularly scheduled 35 39 increases in nonofficer employees consistent with past practices or as required by law; (viii) with respect to Company and its Subsidiaries only, enter into or amend any employment, consulting, severance or similar agreement with any individual except with respect to new hires in the ordinary course of business consistent with past practice; (ix) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization or any agreement relating to an Acquisition Proposal (other than as expressly permitted pursuant to this Agreement); (x) with respect to Company and its Subsidiaries only, make any tax election or settle or compromise any income tax liability of Company or of any of its Subsidiaries involving on an individual basis more than $1 million; (xi) with respect to Company and its Subsidiaries only, make any change in any method of accounting or accounting practice or policy except as required by any changes in generally accepted accounting principles; (xii) with respect to Company and its Subsidiaries only, enter into any agreement, understanding or commitment that restrains, limits or impedes Company's ability to compete with or conduct any business or line of business, except for any such agreement, understanding or commitment entered into in the ordinary course of business consistent with past practice; or (xiii) authorize any of, or commit or agree to take any of, the foregoing actions in respect of which it is restricted by the provisions of this Section 5.1. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.1 Preparation of the Proxy Statement and the Form S-4; Accountant's Letters. (a) As soon as practicable following the date hereof: 36 40 (i) Company and Parent shall jointly prepare for inclusion in the Form S-4, as soon as practicable after the date hereof, a proxy statement (the "Proxy Statement") relating to the Merger and the Share Issuance in accordance with the Exchange Act and the rules and regulations under the Exchange Act, with respect to the transactions contemplated by this Agreement. Company, Parent and Purchaser shall cooperate with each other in the preparation of the Proxy Statement. Company and Parent shall use all reasonable efforts to respond promptly to any comments made by the SEC with respect to the Proxy Statement, and to cause the Proxy Statement to be mailed to the stockholders of Company and Parent at the earliest practicable date after the Form S-4 is declared effective by the SEC. (ii) Parent shall prepare and file with the SEC, as soon as practicable after the date hereof, the Form S-4. Each of Company and Parent shall use all reasonable efforts to have the Form S-4 declared effective under the Securities Act as promptly as practicable after such filing. Parent also shall take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified) required to be taken under any applicable state securities laws in connection with the issuance of Parent Common Stock in the Merger, and Company shall furnish all information concerning Company and the holders of the Shares as may be reasonably requested in connection with any such action. (b) Company shall use its best efforts to cause to be delivered to Parent a letter of Ernst & Young LLP, Company's independent public accountants, dated a date within two business days before the date on which the Form S-4 shall become effective, and a letter of Ernst & Young LLP, dated a date within two business days before the Closing Date, each addressed to Parent, in form and substance reasonably satisfactory to Parent and customary in scope and substance for letters delivered by independent accountants in connection with registration statements similar to the Form S-4. (c) Parent shall use its best efforts to cause to be delivered to Company a letter of KPMG Peat Marwick LLP, Parent's independent public accountants, dated a date within two business days before the date on which the Form S-4 shall become effective and a letter of KPMG Peat Marwick LLP, dated a date within two business days before the Closing Date, each addressed to Company, in form and 37 41 substance reasonably satisfactory to Company and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Form S-4. SECTION 6.2 Stockholders Meetings. (a) Subject to Company's right to terminate this Agreement pursuant to Section 8.1(a)(v), Company shall take all action necessary, in accordance with the DGCL, the Exchange Act and other applicable law, the rules of the NYSE, and its certificate of incorporation and by-laws, to convene a special meeting of the stockholders of Company (the "Company Stockholders Meeting") as promptly as practicable after the effectiveness of the Form S-4 for the purpose of considering and voting upon this Agreement. Subject to Company's right to terminate this Agreement pursuant to Section 8.1(a)(v), the Board of Directors of Company shall recommend that the holders of the Shares vote in favor of the approval and adoption of this Agreement at the Company Stockholders Meeting and such recommendation shall be included in the Proxy Statement. At the Company Stockholders Meeting, Parent and Purchaser shall vote all Shares beneficially owned by them in favor of the adoption and approval of this Agreement. (b) Parent shall take all action necessary in accordance with Exchange Act and other applicable law, the rules of the NYSE, and its restated articles of incorporation and by-laws, to convene a special meeting of the stockholders of Parent (the "Parent Stockholders Meeting") as promptly as practicable after the effectiveness of the Form S-4 for the purpose of considering and voting upon the Share Issuance. The Board of Directors of Parent shall recommend that the holders of the Parent Common Stock vote in favor of and approve the Share Issuance at the Parent Stockholders Meeting. SECTION 6.3 Access to Information; Confidentiality. Company shall, and shall cause each of its Subsidiaries to, afford to Parent and to Parent's officers, employees, counsel, financial advisors, financing providers (including counsel of such financing providers) and other representatives reasonable access during normal business hours during the period prior to the Effective Time to all its owned and leased properties, books, contracts, commitments, tax returns, personnel and records and, during such period, Company shall, and shall cause each of its Subsidiaries to, furnish as promptly as practicable to 38 42 Parent such information concerning its business, properties, financial condition, operations and personnel as Parent may from time to time reasonably request. Parent shall, and shall cause each of its Subsidiaries to, afford to Company and to Company's officers, employees, counsel, financial advisors and other representatives reasonable access during normal business hours during the period prior to the Effective Time to all its books, contracts, commitments, tax returns, personnel and records and during such period, parent shall, and shall cause each of its Subsidiaries to, furnish as promptly as practicable to Company such information concerning its business, properties, financial condition, operations and personnel as Company may from time to time reasonably request. Any such investigation by Parent or Company shall not affect the representations or warranties contained in this Agreement. Except as required by law, Parent and Company will hold, and will cause their respective directors, officers, partners, employees, accountants, counsel, financial advisors and other representatives and affiliates to hold, any non-public information obtained from the other party in confidence to the extent required by, and in accordance with the provisions of the letter agreements between Parent and Company with respect to confidentiality and other matters. SECTION 6.4 Reasonable Best Efforts. Upon the terms and subject to the conditions and other agreements set forth in this Agreement, each of the parties agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including the satisfaction of the respective conditions set forth in Article VII. SECTION 6.5 Indemnification; Directors' and Officers Insurance. (a) The certificate of incorporation and by- laws of the Surviving Corporation shall contain the provisions with respect to indemnification set forth in the restated certificate of incorporation and by-laws of Company on the date of this Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors or officers of Company in respect of actions or omissions 39 43 occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement), unless such modification is required by law. (b) Company shall, and from and after the Effective Time, Parent shall, or shall cause the Surviving Corporation to, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer or director of Company (the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including reasonable attorneys' fees and expenses), liabilities or judgments or amounts that are paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) of or in connection with any threatened or actual claim, action, suit, proceeding or investigation based in whole or in part on or arising in whole or in part out of the fact that such person is or was a director or officer of Company whether pertaining to any matter existing or occurring at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities"), including all Indemnified Liabilities based in whole or in part on, or arising in whole or in part out of, or pertaining to this Agreement or the transactions contemplated hereby, in each case, to the full extent a corporation is permitted under the DGCL to indemnify its own directors or officers, as the case may be, and Parent or the Surviving Corporation, as the case may be, will pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by law). (c) Without limiting the foregoing, in the event any such claim, action, suit, proceeding or investigation is brought against any Indemnified Parties (whether arising before or after the Effective Time), (i) the Indemnified Parties may retain counsel reasonably satisfactory to Company (or to Parent and the Surviving Corporation after the Effective Time) and Company (or after the Effective Time, Parent and the Surviving Corporation) shall pay all fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; and (ii) Company (or after the Effective Time, Parent and the Surviving Corporation) shall use all reasonable efforts to assist in the vigorous defense of any such matter, provided that neither Company, Parent nor the Surviving Corporation shall be liable for any settlement effected without its 40 44 prior written consent, which shall not be unreasonably withheld. Any Indemnified Party wishing to claim indemnification under this Section 6.5, upon learning of any such claim, action, suit, proceeding or investigation, shall notify Company (or after the Effective Time, Parent and the Surviving Corporation) (but the failure so to notify shall not relieve a party from any liability which it may have under this Section 6.5 except to the extent such failure prejudices such party), and shall deliver to Company (or after the Effective Time, Parent and the Surviving Corporation) the undertaking contemplated by Section 145(e) of the DGCL. The Indemnified Parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. Company, Parent and Purchaser agree that all rights to indemnification, including provisions relating to advances of expenses incurred in defense of any action or suit, existing in favor of the Indemnified Parties with respect to matters occurring through the Effective Time, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Indemnified Liabilities asserted or made within such period shall continue until the disposition of such Indemnified Liabilities. (d) For a period of four years after the Effective Time, Parent shall cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by Company (provided that Parent may substitute therefor policies of at least the same coverage and amounts containing terms and conditions that are no less advantageous in any material respect to the Indemnified Parties) with respect to matters arising before the Effective Time, provided that Parent shall not be required to pay an annual premium for such insurance in excess of 200% of the last annual premium paid by Company prior to the date hereof, but in such case shall purchase as much coverage as possible for such amount. (e) The provisions of this Section 6.5 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and his or her personal representatives and shall be binding on all successors and assigns of Parent, Purchaser, Company and the Surviving Corporation. 41 45 SECTION 6.6 Public Announcements. Parent and Purchaser, on the one hand, and Company, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release, SEC filing or other public statements with respect to the transactions contemplated by this Agreement, including the Merger, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange. SECTION 6.7 No Solicitation; Acquisition Proposals. (a) Until the termination of this Agreement in accordance with Section 8.1, Company shall not, and shall not authorize or permit any of its Subsidiaries, or any of its or their affiliates, officers, directors, employees, agents or representatives (including, without limitation, any investment banker, financial advisor, attorney or accountant retained by Company or any of its Subsidiaries), to, directly or indirectly, initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries, any expression of interest, or the making of any proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal (as defined below), or enter into or maintain or continue discussions or negotiate with any person in furtherance of such inquiries or to obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal; provided, however, that nothing in this Agreement shall prohibit the Board of Directors of Company from furnishing information to, or entering into, maintaining or continuing discussions or negotiations with, any person that makes an unsolicited Acquisition Proposal after the date hereof, if, and to the extent that, the Board of Directors of Company, after consultation with and based upon the advice of independent legal counsel, determines in good faith that (a) such Acquisition Proposal would be more favorable to Company's stockholders than the Merger and (b) the failure to take such action would result in a breach by the Board of Directors of Company of its fiduciary duties to Company's stockholders under applicable law, and, prior to furnishing any non-public information to such person, Company receives from such person an executed confidentiality agreement with provisions no less favorable to Company than the letter agreement relating to the furnishing of confidential information of Company to Parent referred to in the last sentence of Section 6.3. Company 42 46 shall promptly notify Parent if it is prepared to provide access to the properties, books or records of Company or any of its Subsidiaries to any person who has made an Acquisition Proposal, and Company shall at such time inform Parent of the material terms of any such Acquisition Proposal. (b) For purposes of this Agreement, "Acquisition Proposal" means an inquiry, offer or proposal regarding any of the following (other than the transactions contemplated by this Agreement with Parent or Purchaser) involving Company: (i) any merger, consolidation, share exchange, recapitalization, business combination or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or substantially all the assets of Company and its Subsidiaries, taken as a whole, in a single transaction or series of related transactions; (iii) any tender offer or exchange offer for 33-1/3 percent or more of the outstanding shares of capital stock of Company or the filing of a registration statement under the Securities Act in connection therewith; or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (c) Nothing contained in this Section 6.7 shall prohibit Company from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to Company's stockholders which, in the good faith judgment of the Board of Directors of Company based on the advice of outside counsel, is required under applicable law. SECTION 6.8 Consents, Approvals and Filings. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions, under the HSR Act, the Securities Act and the Exchange Act, with respect to the Merger and the other transactions contemplated herein (together, the "Transactions") and (b) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the Transactions, including, without limitation, using its reasonable best efforts to 43 47 obtain all licenses, permits (including, without limitation, Environmental Permits), consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with Company and its Subsidiaries as are necessary for the consummation of the Transactions and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such action. (b) Parent hereby agrees to use its best efforts to obtain any government clearances required for completion of the Merger (including through compliance with the HSR Act), to respond to any government requests for information, and to contest and resist any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) (an "Order") that restricts, prevents or prohibits the consummation of the Merger, including, without limitation, by vigorously pursuing all available avenues of administrative and judicial appeal and all available legislative action. Parent also hereby agrees to take any and all of the following actions to the extent necessary to obtain the approval of any governmental entity with jurisdiction over the enforcement of any applicable laws regarding the Merger: entering into negotiations; providing information; substantially complying with any second request for information pursuant to the HSR Act; entering into and performing agreements or submitting to judicial or administrative orders and selling or otherwise disposing of, or holding separate (through the establishment of a trust or otherwise) particular assets or categories of assets, or businesses of Parent, Company or any of their affiliates; provided, however, that notwithstanding the foregoing, Parent would not be required hereby to take any such action that would have a Material Adverse Effect on Parent and its Subsidiaries (including the Surviving Corporation) taken as a whole following the Effective Time. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or in behalf of any party hereto in connection with proceedings under or relating to 44 48 the HSR Act or any other federal, state or foreign antitrust or fair trade law. SECTION 6.9 Board Action Relating to Stock Option Plans. As soon as practicable following the date of this Agreement, the Board of Directors of Company (or, if appropriate, any committee administering a Stock Option Plan) shall adopt such resolutions or take such actions as may be required to adjust the terms of all outstanding Options in accordance with Section 2.2 and shall make such other changes to Stock Option Plans as it deems appropriate to give effect to the Merger (subject to the approval of Parent, which shall not be unreasonably withheld). SECTION 6.10 Employment and Employee Benefit Matters. (a) Parent shall, and shall cause its Subsidiaries following the Effective Time (including the Surviving Corporation) to: (i) honor and provide for payment of all obligations and benefits under all Company Plans in accordance with their terms; (ii) provide employee benefits which are substantially comparable in the aggregate to the level of employee benefits provided by the Company and its Subsidiaries under the Company ERISA Plans in effect as of the Closing Date for the benefit of employees or former employees who are or had been employees of the Company or any of its Subsidiaries on or before the Closing Date ("Covered Employees"), until the earlier of December 31, 1999 or the second anniversary of the Closing Date (the "Benefits Maintenance Period"); (iii) honor and provide for the payment of all obligations and benefits under all employment or severance agreements between the Company and any Covered Employee in accordance with their terms; and (iv) provide until the first anniversary of the Closing Date for the benefit of Covered Employees who remain in the employ of the Surviving Corporation or Parent or any of its affiliates employee compensation that is in the aggregate at a level substantially comparable to the compensation (including base pay and incentive-type compensation) provided by the Company and its Subsidiaries 45 49 under the compensation arrangements in effect as of the Closing Date. (b) Parent hereby agrees that the Surviving Corporation shall maintain the Company's Short-Term Incentive Compensation Plan without adverse change until the end of the 1997 calendar year. (c) Parent hereby agrees that the Surviving Corporation shall continue without adverse change the severance plan maintained by the Company and its Subsidiaries as of the date hereof until the first anniversary of the Closing Date. (d) If Covered Employees are included in any benefit plan (including without limitation, provision for vacation) of Parent or its Subsidiaries, Parent agrees that the Covered Employees shall receive credit as employees of the Company and its Subsidiaries for service prior to the Closing Date with the Company and its Subsidiaries to the same extent such service was counted under similar Company Plans for purposes of eligibility, vesting, eligibility for retirement and, with respect to vacation, disability and severance, benefit accrual. If Covered Employees are included in any medical, dental or health plan other than the plan or plans they participated in on the Closing Date, Parent agrees that any such plans shall not include pre-existing condition exclusions, except to the extent such exclusions were applicable under the similar Company Plan on the Closing Date, and shall provide credit for any deductibles and co- payments applied or made with respect to each Covered Employee in the calendar year of the change. (e) The parties acknowledge that nothing herein shall be deemed to be a commitment on the part of Parent or the Surviving Corporation to provide employment to any person for any period of time and, except as otherwise provided in this Section 6.10, nothing herein shall be deemed to prevent Parent or the Surviving Corporation from amending or terminating any Company Plan in accordance with its terms. SECTION 6.11 Affiliates and Certain Stockholders. Prior to the Closing Date, Company shall deliver to Parent a letter identifying all persons who are, at the time the Merger is submitted for approval to the stockholders of Company, "affiliates" of Company for purposes of Rule 145 under the Securities Act. Company shall use its best efforts 46 50 to cause each such person to deliver to Parent on or prior to the Closing Date a written agreement substantially in the form attached as Exhibit A hereto. Parent shall not be required to maintain the effectiveness of the Form S-4 or any other registration statement under the Securities Act for the purposes of resale of Parent Common Stock by such affiliates, and the certificates representing Parent Common Stock received by such affiliates in the Merger shall bear a customary legend regarding applicable Securities Act restrictions. SECTION 6.12 NYSE Listing. Parent shall use its reasonable best efforts to cause the shares of Parent Common Stock to be issued in the Merger to be approved for listing on the NYSE, subject to official notice of issuance, prior to the Closing Date. SECTION 6.13 Certain Company Indebtedness. At the Closing, (i) Company shall execute and deliver to the trustee under the Indenture pursuant to which the Convertible Debentures were issued a supplemental indenture, to become effective at the Effective Time, providing that the holder of each Convertible Debenture outstanding immediately following the Effective Time shall have the right thereafter, during the period such Convertible Debenture shall be convertible as specified in such Indenture, to convert such Convertible Debenture only into the amount of cash and Parent Common Stock receivable by reason of the Merger by a holder of the number of Shares into which such Convertible Debenture might have been converted immediately prior to the Effective Time (subject to subsequent adjustment as provided in such Indenture) and (ii) Parent shall execute and deliver to such trustee, as part of such supplemental indenture, an undertaking (A) to reserve and keep available out of its authorized but unissued capital stock, a number of shares of Parent Common Stock sufficient to permit the conversion of all outstanding Convertible Debentures and (B) to cause to be issued and delivered to Company for subsequent delivery by Company in accordance with such supplemental indenture and Indenture shares of Parent Common Stock upon the conversion of any Convertible Debenture. 47 51 ARTICLE VII CONDITIONS PRECEDENT SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Stockholder Approvals. (i) This Agreement shall have been approved and adopted by the affirmative vote of the requisite number of stockholders of Company in the manner required pursuant to Company's restated certificate of incorporation and by-laws, the DGCL and other applicable law, and the rules of the NYSE. (ii) The Share Issuance shall have been approved by the affirmative vote of the requisite number of stockholders of Parent in the manner required pursuant to Parent's restated articles of incorporation and by- laws, the Texas Business Corporation Act and other applicable law and the rules of the NYSE. (b) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that the party invoking this condition shall have complied with its obligations under Section 6.8. (c) NYSE Listing. The shares of Parent Common Stock issuable to Company's stockholders pursuant to the Merger shall have been approved for listing on the NYSE, subject to official notice of issuance. (d) Form S-4. The Form S-4 shall have been declared effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order. (e) HSR Act. All necessary waiting periods under the HSR Act applicable to the Merger shall have expired or been terminated. SECTION 7.2. Conditions to Obligations of Parent and Purchaser. The obligation of Parent and Purchaser to 48 52 effect the Merger is further subject to satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of Company contained in this Agreement, which representations and warranties shall be deemed for purposes of this Section 7.2 not to include any qualification or limitation with respect to materiality (whether by reference to "Material Adverse Effect" or otherwise), shall be true and correct as of the Closing Date, except where the matters in respect of which such representations and warranties are not true and correct, in the aggregate, has not had or would not have a Material Adverse Effect on Company, with the same effect as though such representations and warranties were made as of the Closing Date, and Parent and Purchaser shall have received a certificate signed on behalf of Company by an authorized officer of Company to such effect. (b) Performance of Obligations of Company. Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent and Purchaser shall have received a certificate signed on behalf of Company by an authorized officer of Company to such effect. (c) No Material Adverse Change. Since the date of this Agreement, Company and its Subsidiaries, taken as a whole, shall not have experienced any change, event or occurrence particular to them (excluding industry, economic, financial and other matters generally affecting businesses other than and in addition to Company and its Subsidiaries) that has had or would have a Material Adverse Effect on Company, other than resulting from any matter disclosed in any Filed SEC Document or in Section 7.2(c) of the Disclosure Schedule. SECTION 7.3. Conditions to Obligation of Company. The obligation of the Company to effect the Merger is further subject to satisfaction or waiver of the following conditions: (a) Representations and Warranties. The representations and warranties of each of Parent and Purchaser contained in this Agreement, which representations and warranties shall be deemed for purposes of this 49 53 Section 7.3 not to include any qualification or limitation with respect to materiality (whether by reference to "Material Adverse Effect" or otherwise), shall be true and correct as of the Closing Date (except where the matters in respect of which such representations and warranties are not true and correct, in the aggregate, has not had a Material Adverse Effect on Purchaser), with the same effect as though such representations and warranties were made as of the Closing Date, and Company shall have received a certificate signed on behalf of Parent and Purchaser by an authorized officer of Parent to such effect. (b) Performance of Obligations of Parent and Purchaser. Each of Parent and Purchaser shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent by an authorized officer of Parent to such effect. (c) No Material Adverse Change. Since the date of this Agreement, Parent and its Subsidiaries, taken as a whole, shall not have experienced any change or occurrence particular to them (excluding industry, economic, financial and other matters generally affecting businesses other than and in addition to Parent and its Subsidiaries), that has had or would have a Material Adverse Effect on Parent, other than resulting from any matter disclosed in any Parent SEC Document or in Section 7.3(c) of the Disclosure Schedule. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.1 Termination. (a) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Effective Time, notwithstanding approval and adoption thereof by the stockholders of Company, in any one of the following circumstances: (i) By mutual written consent duly authorized by the Boards of Directors of Parent and Company. (ii) By Parent or Company, if, without any material breach by such terminating party of its obligations 50 54 under this Agreement, the Effective Time shall not have occurred on or before December 31, 1997. (iii) By Parent or Company, if any federal or state court of competent jurisdiction or other Governmental Entity shall have issued an order, decree or ruling, or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable, provided that neither party may terminate this Agreement pursuant to this clause (iii) if it has not complied with its obligations under Section 6.8. (iv) By Parent or Company, if the Company Stockholders Meeting shall have been held and this Agreement shall not have been approved and adopted by the affirmative vote of the requisite number of stockholders of Company. (v) By Company, if it shall have received an Acquisition Proposal and shall have advised Parent in writing that Company's Board of Directors, after consultation with and based upon the advice of independent legal counsel, determined in good faith that failure to accept such Acquisition Proposal would result in a breach by the Board of Directors of Company of its fiduciary duties to Company's stockholders under applicable law; provided, however, that this Agreement shall not be terminated pursuant to this Section 8.1(a)(v) unless simultaneously with the termination Company shall have made the payment to Parent of the Fee required to be paid pursuant to Section 8.1(b). (vi) By Parent, if the Board of Directors of Company shall have (1) withdrawn, modified or amended in any adverse respect its approval or recommendation of this Agreement, the Merger or the other transactions contemplated hereby, (2) approved, endorsed or recommended to its stockholders an Acquisition Proposal or (3) resolved to do any of the foregoing. (vii) By Parent or Company, if (A) the other party shall have failed to comply in any material respect with any of the material covenants and agreements contained in this Agreement to be complied with or performed by such party at or prior to such date of termination, and such failure continues for 20 business days after the actual receipt by such party of a written notice from the other party setting forth in detail the nature of such failure, or 51 55 (B) a representation or warranty of the other party contained in this Agreement shall have been untrue in any respect on the date when made (or in the case of any representations and warranties that are made as of a different date, as of such different date) and the matters in respect of which such representation or warranty shall have been untrue has had or would have a Material Adverse Effect on such other party. (viii) By Company pursuant to Section 2.1(e) hereof. (b) If this Agreement is terminated pursuant to: (i) Section 8.1(a)(v), or (ii) Section 8.1(a)(vi); then, in such event, Company shall pay to Parent prior to such termination, if such termination is pursuant to Section 8.1(a)(v), or promptly (but in no event later than three business days after the first of such events shall have occurred), if such termination is pursuant to Section 8.1(a)(vi), a fee of Fifteen Million Dollars ($15,000,000) (the "Fee"), which amount shall be payable in immediately available funds and upon payment of such Fee Company shall be fully released and discharged from any liability or obligation resulting from or under this Agreement. SECTION 8.2 Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to Section 8.1(a) hereof, this Agreement (except for the provisions of the last sentence of Section 6.3, and Sections 4.1(m), 4.2(h), 6.6, this Section 8.2, Article IX and paragraph (b) of Section 8.1) shall forthwith become void and have no effect, without any liability on the part of any party hereto or its directors, officers or stockholders; provided, however, that nothing in this Section 8.2 shall relieve any party to this Agreement of liability for any willful or intentional breach of this Agreement. SECTION 8.3 Amendment. Subject to the applicable provisions of the DGCL, at any time prior to the Effective Time, the parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties; provided, however, that after approval and adoption of this Agreement by the stockholders of Company, no amendment shall be made 52 56 which would reduce the amount or change the type of consideration into which each Share or Preferred Share shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. SECTION 8.4 Extension; Waiver. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to Section 8.3, waive compliance with any of the agreements or conditions of the other parties contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. SECTION 8.5 Procedure for Termination, Amendment, Extension or Waiver. A termination of this Agreement pursuant to Section 8.1, an amendment of this Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section 8.4 shall, in order to be effective, require in the case of Parent, Purchaser or Company, action by its Board of Directors or the duly authorized designee of its Board of Directors. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 9.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 9.2 Fees and Expenses. Except as provided otherwise in Section 8.1(b), whether or not the Merger shall be consummated, each party hereto shall pay its own expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the transactions 53 57 contemplated hereby, other than the expenses incurred in connection with printing and mailing proxy materials to stockholders, which shall be shared equally by Parent and Company. The Surviving Corporation shall pay any and all property or transfer taxes imposed on the Surviving Corporation or the stockholders of the Company by reason of the Merger. SECTION 9.3 Definitions. For purposes of this Agreement: (a) an "affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; (b) "business day" means any day other than Saturday, Sunday or any other day on which banks in the City of New York are required or permitted to close; (c) "knowledge" means the actual knowledge of any executive officer of Company or Parent, as the case may be; (d) "Liens" means, collectively, all pledges, claims, liens, charges, mortgages, conditional sale or title retention agreements, hypothecations, collateral assignments, security interests, easements and other encumbrances of any kind or nature whatsoever; (e) a "Material Adverse Effect" with respect to any person means a material adverse effect on (i) the ability of such person to perform its obligations hereunder or consummate the transactions contemplated hereby or (ii) the condition (financial or otherwise), assets, business, liabilities (actual or contingent) or operations of such person and its Subsidiaries taken as a whole; (f) the "NYSE" means the New York Stock Exchange; (g) a "person" means an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity; and (h) a "Subsidiary" of any person means any other person of which (i) the first mentioned person or any Subsidiary thereof is a general partner, (ii) voting power to elect a majority of the board of directors or others performing similar functions with respect to such other person is held by the first mentioned person and/or by any one or more of its Subsidiaries, or (iii) at least 50% of 54 58 the equity interests of such other person is, directly or indirectly, owned or controlled by such first mentioned person and/or by any one or more of its Subsidiaries. SECTION 9.4 Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Parent, to Pillowtex Corporation 4111 Mint Way Dallas, Texas 75237 Attention: John H. Karnes, Jr., Esq. Telecopy: (214) 467-0823 with a copy (which shall not constitute notice) to: Jones, Day, Reavis & Pogue 2300 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201 Attention: Mark E. Betzen, Esq. Telecopy: (214) 969-5100 (ii) if to Company, to Fieldcrest Cannon, Inc. One Lake Circle Drive Kannapolis, North Carolina 28081 Attention: Mark R. Townsend, Esq. Telecopy: (704) 939-4623 with a copy (which shall not constitute notice) to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Dennis J. Block, Esq. Telecopy: (212) 310-8007 55 59 SECTION 9.5 Interpretation. When a reference is made in this Agreement to a Section or Schedule, such reference shall be to a Section of, or a Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". SECTION 9.6 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. SECTION 9.7 Entire Agreement; Third-Party Beneficiaries. This Agreement constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement (except for the letter agreements referenced in the last sentence of Section 6.3). This Agreement is not intended to confer upon any person (including, without limitation, any employees of Company), other than the parties hereto and the third party beneficiaries referred to in the following sentence, any rights or remedies. The parties hereto expressly intend the provisions of Sections 6.5 and 6.10 to confer a benefit upon and be enforceable by, as third party beneficiaries of this Agreement, the third persons referred to in, or intended to be benefitted by, such provisions. SECTION 9.8 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 9.9 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties, and any such assignment that is not consented to shall be null and void, except that Parent and/or Purchaser may assign this Agreement to any direct wholly-owned Subsidiary of Parent without the prior consent of Company; provided that Parent 56 60 shall remain liable for all of its obligations and all obligations of any of its Subsidiaries or any of its assignees under this Agreement. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. SECTION 9.10 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Delaware, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 9.11 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. [signature page follows] 57 61 IN WITNESS WHEREOF, Parent, Purchaser and Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. PILLOWTEX CORPORATION By: /s/ CHARLES M. HANSEN, JR. ----------------------------------- Name: Charles M. Hansen, Jr. Title: Chairman of the Board and Chief Executive Officer PEGASUS MERGER SUB, INC. By: /s/ CHARLES M. HANSEN, JR. ----------------------------------- Name: Charles M. Hansen, Jr. Title: Chairman of the Board and Chief Executive Officer FIELDCREST CANNON, INC. By: /s/ JAMES M. FITZGIBBONS ----------------------------------- Name: James M. Fitzgibbons Title: Chairman of the Board and Chief Executive Officer 58 EX-10.1 3 COMMITMENT LETTER 1 Exhibit 10.1 September 10, 1997 Pillowtex Corporation 4111 Mint Way Dallas, TX 75237 Attn: Mr. Jeffrey D. Cordes RE: Merger Financing Gentlemen: You have advised us that Pillowtex Corporation (the "Borrower") intends to acquire all of the capital stock of Fieldcrest Cannon Inc. (the "Acquired Company") for approximately $415 million through the merger of the Acquired Company with or into the Borrower or a wholly owned subsidiary thereof (hereinafter the acquisition of Acquired Company may be referred to as the "Merger"). You have advised us that in connection with the Merger approximately $13 million of the Acquired Company's existing industrial revenue bond obligations will remain outstanding and that the Acquired Company's existing $118 million 6% convertible subordinated debentures will either remain outstanding, or be converted at the option of the holders into approximately $72 million in cash and $19 million of Pillowtex common stock. All other existing debt of the Acquired Company (consisting of approximately $115 million of senior secured bank debt and approximately $85 million of senior subordinated debentures) will be repaid or called for redemption simultaneously with the completion of the Merger. You have also advised us that the Borrower intends to refinance its existing bank senior debt (approximately $94 million) simultaneously with the completion of the Merger, and keep outstanding its existing its senior subordinated debentures (approximately $125 million) and certain other existing senior secured debt (approximately $9 million). In order to complete the Merger and refinancings described above, and to pay the costs and expenses related to the Merger and related financings, you have advised us that the Borrower intends (i) to pay not less than 20.58% of the total consideration paid to holders of the Acquired Company's capital stock in the form of newly issued common stock of the Borrower, (ii) to pay not less than 20.58% of any conversion consideration requested by holders of the Acquired Company's 6% convertible subordinated debentures in the form of newly issued common stock of the Borrower, (iii) to privately place not less than $65 million of its newly issued preferred stock, (iv) to raise not less than $150 million from its issuance of new senior subordinated debt (the "Subordinated Debt") either through the issuance of subordinated bridge notes under the commitment letter with NationsBridge L.L.C. dated as the date hereof (together with any extensions thereof being the "Bridge Notes") or through its issuance of other Subordinated Debt, and (v) to borrow not more than $455 million (with such amount being increased by 79.42% of any conversion consideration requested by holders of the Acquired Company's 6% convertible subordinated debentures) under newly arranged senior credit facilities. 2 Pillowtex Corporation September 10, 1997 Page 2 In connection with the foregoing, NationsBank of Texas, N.A. ("NationsBank" or the "Agent") is pleased to advise you of its commitment (this letter agreement being the "Commitment Letter") to provide the full principal amount of the Senior Credit Facilities described in the Summary of Indicative Terms and Conditions attached to this Commitment Letter as Exhibit A (the "Term Sheet"). NationsBanc Capital Markets, Inc. ("NCMI") is pleased to advise you of its commitment, as Arranger and Syndication Agent for the Senior Credit Facilities, to form a syndicate of financial institutions (the "Lenders") reasonably acceptable to you for the Senior Credit Facilities. If NationsBank and NCMI shall determine in their sole discretion that it will not adversely affect syndication of the Senior Credit Facilities, the Revolving Credit Facility described in the Term Sheet may be documented as a renewal and extension of the Borrower's existing revolving credit agreement and the Term Loan Facility described in the Term Sheet may be documented under a separate new credit agreement. In such event, the separate credit agreements will contain identical provisions as outlined in the Term Sheet and will subject to an inter-creditor agreement providing for cross collateralization, cross approval of amendments and waivers, and such other matters as are necessary to accomplish the intent of the Term Sheet. All capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Term Sheet, and this letter agreement. The commitments of NationsBank and NCMI hereunder are subject to each of the terms and conditions set forth herein and in the Term Sheet, and to the satisfaction of each of the following conditions precedent in a manner acceptable to NationsBank and NCMI: (a) execution by the Borrower, the Acquired Company and/or other appropriate parties of the definitive merger agreement and other related documentation relating to the Merger (the "Merger Agreement"), substantially in the form of the September 5, 1997 draft thereof previously provided to NationsBank and NCMI; (b) the negotiation, execution and delivery of definitive documentation with respect to the Senior Credit Facilities consistent with the Term Sheet and otherwise reasonably satisfactory to NationsBank and NCMI; and (c) there not having occurred and being continuing since the date hereof a material adverse change in the market for syndicated bank credit facilities or a material disruption of, or a material adverse change in, financial, banking or capital market conditions, in each case as determined by NationsBank and NCMI in their reasonable discretion. NationsBank will act as Agent for the Senior Credit Facilities and NCMI will act as Arranger and Syndication Agent for the Senior Credit Facilities. No additional agents will be appointed without the prior approval of the Borrower, NationsBank and NCMI. Furthermore, the commitments of NationsBank and NCMI hereunder are based upon the financial and other information regarding the Borrower, the Acquired Company and their respective subsidiaries previously provided to NationsBank and NCMI and are subject to the condition, among others, that there shall not have occurred after the date of such information, in the reasonable opinion of NationsBank and NCMI, any material adverse change in the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of the Borrower, the Acquired Company and their 3 Pillowtex Corporation September 10, 1997 Page 3 subsidiaries taken as a whole. If the continuing review by NationsBank and NCMI of the Borrower and the Acquired Company discloses information relating to conditions or events not previously disclosed to NationsBank and NCMI or relating to new information or additional developments concerning conditions or events previously disclosed to NationsBank and NCMI which NationsBank and NCMI in their reasonable discretion believe may have a material adverse effect on the condition (financial or otherwise), assets, properties, business, operations or prospects of the Borrower, the Acquired Company, and their subsidiaries taken as a whole, NationsBank and NCMI may, in their reasonable discretion, suggest alternative financing amounts or structures that ensure adequate protection for the Lenders or decline to participate in the proposed financing. You agree to actively assist NationsBank and NCMI in achieving syndication of the Senior Credit Facilities in a manner reasonably satisfactory to NationsBank, NCMI and you. In the event that such syndication cannot be achieved in a manner reasonably satisfactory to NationsBank, NCMI and you under the structure outlined in the Term Sheet you agree to cooperate with NationsBank and NCMI in developing an alternative structure that will permit syndication of the Senior Credit Facilities in a manner reasonably satisfactory to NationsBank, NCMI and you. Syndication of the Senior Credit Facilities will be accomplished by a variety of means, including direct contact during the syndication between senior management and advisors of the Borrower and the proposed Lenders. To assist NationsBank and NCMI in the syndication efforts, you hereby agree to (a) provide and cause your advisors to provide NationsBank and NCMI and the other Lenders upon request with all information reasonably deemed necessary by NationsBank and NCMI to complete syndication, including but not limited to information and evaluations prepared by the Borrower and its advisors, or on their behalf, relating to the Merger, (b) assist NationsBank and NCMI upon their reasonable request in the preparation of an Information Memorandum to be used in connection with the syndication of the Senior Credit Facilities and (c) otherwise assist NationsBank and NCMI in their syndication efforts, including making available officers and advisors of the Borrower and its subsidiaries from time to time to attend and make presentations regarding the business and prospects of the Borrower and the Acquired Company and their subsidiaries, as appropriate, at a meeting or meetings of prospective Lenders. You further agree to refrain from engaging in any additional debt financings for the Acquired Company (except as described in this letter and except for the Subordinated Debt) during such syndication process unless otherwise agreed to by NationsBank and NCMI. It is understood and agreed that NationsBank and NCMI, after consultation with you, will manage and control all aspects of the syndication, including decisions as to the selection of proposed Lenders and any titles offered to proposed Lenders, when commitments will be accepted and the final allocations of the commitments among the Lenders. NationsBank agrees to use its reasonable efforts to satisfy the Borrower's preferences with respect to the selection of proposed Lenders and the final allocation of the commitments among the Lenders. It is understood that no Lender participating in the Senior Credit Facilities will receive compensation from you outside the terms contained herein and in the Term Sheet in order to obtain its commitment. It is also understood and agreed that the amount and distribution of the fees among the Lenders will be at the sole discretion of NationsBank and NCMI and that any syndication prior to execution of definitive documentation will reduce the commitment of NationsBank. You hereby represent, warrant and covenant that to the best of your knowledge (a) all information, other than Projections (as defined below), which has been or is hereafter made 4 Pillowtex Corporation September 10, 1997 Page 4 available to NationsBank and NCMI or the Lenders by you or any of your representatives in connection with the transactions contemplated hereby ("Information") is and will be complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading, and (b) all financial projections concerning the Borrower and the Acquired Company that have been or are hereafter made available to NationsBank and NCMI or the Lenders by you or any of your representatives (the "Projections") have been or will be prepared in good faith based upon reasonable assumptions. You agree to furnish us with such Information and Projections as we may reasonably request and to supplement the Information and the Projections from time to time until the closing date for the Senior Credit Facilities so that the representation and warranty in the preceding sentence is correct on the such date. In arranging and syndicating the Senior Credit Facilities, NationsBank and NCMI will be using and relying on the Information and the Projections without independent verification thereof. By executing this Commitment Letter you also agree to reimburse NationsBank and NCMI from time to time on demand for all reasonable out-of-pocket fees and expenses (including, but not limited to, the reasonable fees, disbursements and other charges of legal counsel to NationsBank) incurred in connection with the Senior Credit Facilities and the preparation of the definitive documentation for the Senior Credit Facilities and the other transactions contemplated hereby. IN THE EVENT THAT NATIONSBANK OR NCMI BECOMES INVOLVED IN ANY CAPACITY IN ANY ACTION, PROCEEDING OR INVESTIGATION IN CONNECTION WITH ANY MATTER CONTEMPLATED BY THIS LETTER, THE BORROWER WILL REIMBURSE NATIONSBANK AND NCMI FOR THEIR REASONABLE LEGAL AND OTHER EXPENSES (INCLUDING THE COST OF ANY INVESTIGATION AND PREPARATION) AS THEY ARE INCURRED BY NATIONSBANK OR NCMI. THE BORROWER ALSO AGREES TO INDEMNIFY AND HOLD HARMLESS NATIONSBANK, NCMI AND THEIR AFFILIATES AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (THE "INDEMNIFIED PARTIES") FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, DAMAGES AND LIABILITIES, JOINT OR SEVERAL, RELATED TO OR ARISING OUT OF ANY MATTERS CONTEMPLATED BY THIS LETTER (INCLUDING ANY ARISING OUT OF THE NEGLIGENCE OF ANY INDEMNIFIED PARTY), UNLESS AND ONLY TO THE EXTENT THAT IT SHALL BE FINALLY JUDICIALLY DETERMINED THAT SUCH LOSSES, CLAIMS, DAMAGES OR LIABILITIES RESULTED PRIMARILY FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF NATIONSBANK, NCMI OR SUCH OTHER INDEMNIFIED PARTY. The provisions of the immediately preceding two paragraphs shall remain in full force and effect regardless of whether definitive financing documentation shall be executed and delivered and notwithstanding the termination of this letter agreement or the commitment of NationsBank and NCMI hereunder, provided, however, that the provisions of the immediately preceding two paragraphs shall be superseded by the provisions of the definitive financing documentation. As described herein and in the Term Sheet, NCMI will act as Arranger and Syndication Agent for the Senior Credit Facilities. NationsBank reserves the right to allocate, in whole or in part, to NCMI certain fees payable to NationsBank in such manner as NationsBank 5 Pillowtex Corporation September 10, 1997 Page 5 and NCMI agree in their sole discretion. You acknowledge and agree that NationsBank may share with any of its affiliates (including specifically NCMI) any information relating to the Senior Credit Facilities, the Borrower, the Acquired Company and their subsidiaries and affiliates, subject to a confidentiality agreement reasonably acceptable to you. This Commitment Letter may not be assigned without the prior written consent of NationsBank and NCMI. If you are in agreement with the foregoing, please execute and return the enclosed copy of this letter agreement no later than 5:00 p.m. Dallas, Texas time on September 11, 1997. This letter agreement will become effective upon your delivery to us of executed counterparts of this letter agreement and the fee letter of even date herewith (the "Fee Letter") and, without limiting the more specific terms hereof and of the Term Sheet, you agree upon acceptance of this commitment to pay the fees set forth in the Term Sheet and in the Fee Letter. This commitment shall terminate if not so accepted by you prior to that time. Following acceptance by you, this commitment will terminate on December 31, 1997 , unless the Senior Credit Facilities are closed by such time. Except as required by applicable law, this Commitment Letter, the Term Sheet, and the Fee Letter and the contents hereof and thereof shall not be disclosed by you to any third party without the prior consent of NationsBank and NCMI, other than to your attorneys, financial advisors and accountants, in each case to the extent necessary in your reasonable judgment; provided, however, it is understood and agreed that after your acceptance of this Commitment Letter, the Term Sheet and the Fee Letter you may disclose the terms of this letter and the Term Sheet (but not the Fee Letter) to the Acquired Company and its attorneys and financial advisors and accountants in connection with the Merger, in filings with the SEC and other applicable regulatory authorities and stock exchanges, and in proxy and other materials disseminated to stockholders and other purchasers of securities of the Borrower. Without limiting the foregoing, in the event that you disclose the contents of this letter or the Fee Letter in contravention of the preceding sentence, you shall be deemed to have accepted the terms of this Commitment Letter and Term Sheet, and the Fee Letter. THIS COMMITMENT LETTER (INCLUDING THE TERM SHEET), THE FEE LETTER AND ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE MATTERS COVERED HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW. {Remainder of page intentionally left blank} 6 Pillowtex Corporation September 10, 1997 Page 6 This letter may be executed in counterparts which, taken together, shall constitute an original. Very truly yours, NATIONSBANK OF TEXAS, N.A. By: /s/ DOUGLAS E. HUTT ------------------------------ Title: Senior Vice President NATIONSBANC CAPITAL MARKETS, INC. By: /s/ HAROLD R. BATTIE ------------------------------ Title: Managing Director ACCEPTED AND AGREED TO: PILLOWTEX CORPORATION By: /s/ JEFFREY D. CORDES ------------------------------ Title: President and COO Date: 9/10/97 7 EXHIBIT A PILLOWTEX CORPORATION SUMMARY OF INDICATIVE TERMS AND CONDITIONS SEPTEMBER 10, 1997 =============================================================================== BORROWER: Pillowtex Corporation. GUARANTORS: The Senior Credit Facilities shall be guaranteed by all existing and hereafter acquired domestic subsidiaries of the Borrower (the "Guarantors") upon consummation of the Merger. All guarantees shall be guarantees of payment and not of collection. AGENT: NationsBank of Texas, N.A. (the "Agent" or "NationsBank") will act as sole and exclusive administrative and collateral agent. As such, NationsBank will negotiate with the Borrower, act as the primary contact for the Borrower and perform all other duties associated with the role of exclusive administrative agent. No other agents or co-agents may be appointed without the prior written consent of the Borrower, NationsBank and NCMI. ARRANGER & SYNDICATION AGENT: NationsBanc Capital Markets, Inc. ("NCMI"). LENDERS: A syndicate of financial institutions (including NationsBank) arranged by NCMI, which institutions shall be reasonably acceptable to the Borrower and the Agent (collectively, the "Lenders"). SENIOR CREDIT FACILITIES: An aggregate principal amount of up to $600 million will be available under the conditions hereinafter set forth: Revolving Credit Facility: $350 million revolving credit facility, which will include a $40 million sublimit for the issuance of standby and commercial letters of credit (each a "Letter of Credit"). Letters of Credit will be issued by NationsBank (in such capacity, the "Fronting Bank"), and each Lender will purchase an irrevocable and unconditional participation in each Letter of Credit. Up to $15 million of the Revolving Credit Facility will be available for swing line advances to be funded solely by the Agent ("Swing Line Loans"). Swing Line Loans will constitute usage under the Revolving Credit Facility (except for purposes of computing the Commitment Fee), and will reduce availability for Revolving Credit Loans and Letters of Credit. At any time (including during the continuance of an event of default) the Agent may require that its Swing Line Loans be refinanced with new Revolving Credit Loans which will be made pro-rata by all Lenders. A-1 8 Term Loan Facility: $250 million term loan facility comprised of two separate term loan tranches: (i) $125 million Tranche A Term Loan. (ii) $125 million Tranche B Term Loan. PURPOSE: The proceeds of the Senior Credit Facilities shall be used: (i) to refinance certain existing indebtedness of the Borrower and the Acquired Company (ii) to purchase the capital stock of the Acquired Company pursuant to the Merger Agreement (as defined below) and to pay any conversion consideration requested by holders of the Acquired Company's 6% convertible subordinated debentures; (iii) to pay fees and expenses incurred in connection with the Merger, and (iv) to provide for working capital and general corporate purposes of the Borrower. INTEREST RATES: The Senior Credit Facilities (except for Swing Line Loans) shall bear interest, at the option of the Borrower, at a rates per annum equal to either (i) the LIBOR interbank rate, adjusted for reserves, or (ii) the Base Rate (defined as the higher of (a) the NationsBank prime rate and (b) the Federal Funds rate plus 1/2%), in each case plus the "Applicable Margins" set forth below.
x = Ratio of Debt/EBITDA LIBOR + * Base Rate + * ------------------------ --------- ------------- x < or = to 5.50 225 bps 75 bps 5.00 < or = to x < 5.50 200 bps 50 bps 4.50 < or = to x < 5.00 175 bps 25 bps 4.00 < or = to x < 4.50 150 bps 0 bps 3.50 < or = to x < 4.00 125 bps 0 bps 3.00 < or = to x < 3.50 100 bps 0 bps x < 3.00 75 bps 0 bps
* The Applicable Margins shown above are applicable only to the Revolving Credit Loans and Tranche A Term Loan. The Applicable Margins with respect to the Tranche B Term Loan shall be equal to the Applicable Margins shown above, plus 50 bps. Nothwithstanding the foregoing, the Applicable Margins with respect to the Tranche B Term Loan shall never be reduced below Libor + 200bps and Base Rate + 50 bps. Swing Line Loans shall bear interest at the Base Rate plus the Applicable Margins shown above, less the Commitment Fee. The Borrower's initial Applicable Margins shall be based upon the Borrower's ratio of Debt/EBITDA at Closing using the most recent combined LTM EBITDA of the Borrower and the Acquired Company adjusted to include those pro-forma cost savings permitted by the Borrower's independent accountants in accordance with Regulation S-X. Notwithstanding the foregoing, the Borrower's initial Applicable Margins shall not assume a ratio of Debt/EBITDA of less than 5.00 to 1.00. Changes in the Borrower's Applicable Margin will be effective two business days following the Agent's receipt of financial statements indicating a change, commencing with the receipt of the Borrower's 3-31-98 financial statements. A-2 9 If during the 180 day period following the Closing, any breakage costs, charges or fees are incurred with respect to LIBOR loans on account of the syndication of the Senior Credit Facilities, the Borrower shall immediately reimburse the Agent for any such costs, charges or fees. Such right of reimbursement to be in addition to and not in limitation of customary cost and yield protection. The Borrower may select interest periods of 1, 2, 3 or 6 months for LIBOR loans, subject to availability. A penalty rate shall apply on all loans in the event of default at a rate per annum of 2% above the applicable interest rate. The loan documentation shall include cost and yield protection customary for transaction and facilities of this type, including without limitation changes in capital adequacy and capital requirements or their interpretation, illegality, unavailability, and reserves, all without proration or offset. LETTER OF CREDIT FEES: Letter of Credit fees are due quarterly in arrears to be shared proportionately by the Lenders. Fees will be equal to (i) for standby Letters of Credit 100%, and (ii) for commercial Letters of Credit 50%, of the Libor Applicable Margin for Revolving Credit Loans in effect from time to time on a per annum basis, plus a fronting fee of 12.5 bps per annum to be paid to Fronting Bank for its own account. Fees will be calculated on the aggregate stated amount for each letter of credit for the stated duration thereof. COMMITMENT FEE A 50 basis points per annum (calculated on the basis of actual number of days elapsed in a year of 360 days) Commitment Fee calculated on the unused portion of the Senior Credit Facilities shall commence to accrue upon the closing of a definitive credit agreement, and shall thereafter be payable quarterly in arrears. The Commitment Fee shall be reduced (i) to 37.5 basis points per annum for any period where the Borrower's ratio of Debt/EBITDA < 4.00, and (ii) to 25 basis points during any period where the Borrower's ratio of Debt/EBITDA < 3.50. For purposes of determining the Commitment Fee, Revolving Credit Loans and Letters of Credit, but not Swing Line Loans, constitute usage. MATURITY: The Revolving Credit Facility shall terminate and all amounts outstanding thereunder shall be due and payable in full six years from 12/31/97. The Term Loan Facility shall be subject to repayment according to the Scheduled Amortization, with the final payment of all amounts outstanding, plus accrued interest, being due six years from 12/31/97 for the Tranche A Term Loan and seven years from 12/31/97 for the Tranche B Term Loan. AVAILABILITY/SCHEDULED AMORTIZATION: Revolving Credit Facility: Loans under the Revolving Credit Facility ("Revolving Credit Loans" and "Swing Line Loans", and A-3 10 together with the Term Loans, the "Loans") may be made, and Letters of Credit may be issued subject to availability. Term Loan Facility: Loans under the Term Loan Facility ("Term Loans") will be available in a single borrowing at Closing and be subject to quarterly amortization of principal, based upon the annual amounts shown below (the "Scheduled Amortization").
Tranche A Tranche B Year Ending Term Loan Term Loan ----------- --------- --------- 12/31/98 $0 $1,250,000 12/31/99 $5,000,000 $1,250,000 12/31/00 $15,000,000 $1,250,000 12/31/01 $25,000,000 $1,250,000 12/31/02 $35,000,000 $1,250,000 12/31/03 $45,000,000 $1,250,000 12/31/04 $0 $117,500,000
SECURITY: Concurrently with the Merger, the Agent (on behalf of the Lenders) shall receive a first priority perfected security interest in all of the capital stock of each of the domestic subsidiaries (direct or indirect) of the Borrower and 65% of the capital stock of each foreign subsidiary (direct or indirect) of the Borrower, which capital stock shall not be subject to any other lien or encumbrance. The Agent (on behalf of the Lenders) shall also receive a first priority perfected security interest in all other presently unencumbered and future domestic assets and properties of the Borrower and its subsidiaries (including, without limitation, accounts receivable, inventory, material real property, machinery, equipment, contracts, trademarks, copyrights, patents, license agreements, and general intangibles). The foregoing security shall ratably secure the Senior Credit Facilities and any interest rate swap/foreign currency swap or similar agreements with a Lender under the Senior Credit Facilities. MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS: Until the Borrower's ratio of Debt/EBITDA less than 4.00, in addition to the amortization set forth above, the Term Loan Facility will be prepaid by an amount equal to (a) 100% of the net cash proceeds of all asset sales by the Borrower or any subsidiary of the Borrower (including stock of subsidiaries), subject to de minimus baskets and reinvestment provisions to be agreed upon and net of selling expenses and taxes to the extent such taxes are paid; (b) 75% of Excess Cash Flow (to be defined) pursuant to an annual cash sweep arrangement; (c) 100% of the net cash proceeds from the issuance of any debt after the Closing by the Borrower or any subsidiary (excluding certain permitted debt and Subordinated Debt issued to refinance the Bridge Notes); and (d) 50% of the net cash proceeds from the issuance of equity by the Borrower or any subsidiary after the Closing (excluding equity proceeds that are applied to repay the Bridge Notes). Prepayments shall be applied pro rata to reduce A-4 11 the Tranche A Term Loan and the Tranche B Term Loan, and within each tranche, pro rata with respect to each remaining installment of principal. OPTIONAL PREPAYMENTS AND COMMITMENT REDUCTIONS: The Borrower may prepay the Senior Credit Facilities in whole or in part at any time without premium or penalty, subject to reimbursement of the Lenders' breakage and re-deployment costs in the case of prepayment of LIBOR borrowings. Optional Prepayments of the Term Loans shall be applied pro rata to reduce the Tranche A Term Loan and the Tranche B Term Loan, and within each tranche, pro rata with respect to each remaining installment of principal. CONDITIONS PRECEDENT TO CLOSING: The initial funding of the Senior Credit Facilities will be subject to the satisfaction of conditions precedent usual and customary for leveraged financings generally and for this transaction in particular, including but not limited to the following: (i) The negotiation, execution and delivery of definitive documentation with respect to the Senior Credit Facilities reasonably satisfactory to NCMI, the Agent and the Lenders. (ii) The Merger shall have been consummated in accordance with the terms of the Merger Agreement and in compliance with applicable law and regulatory approvals. The Merger Agreement shall not have been altered, amended or otherwise changed or supplemented in any material respect or any material condition therein waived, without the prior written consent of the Agent, which shall not be unreasonably withheld. (iii) The Agent shall be satisfied that after giving affect to transactions contemplated hereby, at the Closing (a) the Borrower will have not less than $40 million of availability under the Revolving Credit Facility immediately after the initial funding of the Senior Credit Facilities (with such amount being increased by 79.42% of any conversion consideration which may be requested by holders of the Acquired Company's 6% convertible subordinated debentures after the initial funding of the Senior Credit Facilities), (b) the Borrower shall have issued the Bridge Notes in accordance with the commitment letter of NationsBridge, L.L.C. of even date herewith, or other Subordinated Debt on terms satisfactory to the Agent, in an amount of not less than $150 million, (c) the Borrower shall have received net proceeds of not less than $64 million from its issuance of new preferred stock of the Borrower on substantially the terms set forth in the September 9, 1997 draft of the Preferred Stock Purchase Agreement of even date herewith, and (d) the Borrower shall have issued its common stock as partial consideration for not less than A-5 12 20.58% of the aggregate value of all capital stock of the Acquired Company acquired by the Borrower and any conversion consideration requested by holders of the Acquired Company's 6% convertible subordinated debentures at the Closing. (iv) There shall not have occurred, in the Agent's reasonable estimation, a material adverse change since December 31, 1996 in the business, assets, operations, condition (financial or otherwise) or prospects of the Borrower and its subsidiaries and the Acquired Company and its subsidiaries taken as a whole, or in the facts and information regarding such entities as represented to date. (v) The Agent shall have received (a) satisfactory opinions of counsel to the Borrower (which shall cover, among other things, authority, legality, validity, binding effect and enforceability of the documents for the Senior Credit Facilities) and such corporate resolutions, certificates and other documents as the Agent shall reasonably require and (b) satisfactory evidence that the Agent (on behalf of the Lenders) holds a perfected, first priority lien in all collateral for the Senior Credit Facilities, subject to no other liens except for permitted liens to be determined. (vi) Receipt of all governmental, shareholder and third party consents (including Hart-Scott Rodino clearance) and approvals necessary, in the reasonable opinion of the Agent, in connection with the purchase of the Acquired Company and the related financings and other transactions contemplated hereby and expiration of all applicable waiting periods without any action being taken by any authority that could restrain, prevent or impose any material adverse conditions on the Borrower and its subsidiaries (including the Acquired Company and its subsidiaries), or such other transactions, or that could seek or threaten any of the foregoing, and no law or regulation shall be applicable which in the judgment of the Agent could have such effect. (vii) The Borrower and its subsidiaries (including the Acquired Company and its subsidiaries) shall be in compliance with all existing financial obligations (after giving effect to the Merger). REPRESENTATIONS & WARRANTIES: Usual and customary for transactions of this type, to include without limitation: (i) corporate status; (ii) corporate power and authority/enforceability; (iii) no violation of law or contracts or organizational documents; (iv) no material litigation; (v) correctness of specified financial statements and no material adverse change; (vi) no required governmental or third party approvals; (vii) use of proceeds/compliance with margin regulations; (viii) status under Investment Company Act; (ix) ERISA; (x) environmental matters; (xi) perfected liens and A-6 13 security interests; (xii) payment of taxes, and (xiii) consummation of the Merger. COVENANTS: Usual and customary for transactions of this type, to include without limitation: (i) delivery of financial statements and other reports; (ii) delivery of compliance certificates: (iii) notices of default, material litigation and material governmental and environmental proceedings; (iv) compliance with laws; (v) payment of taxes; (vi) maintenance of insurance; (vii) limitation on liens; (viii) limitations on mergers, consolidations and sales of assets; (ix) limitations on incurrence of debt; (x) limitations on dividends and stock redemptions and the redemption and/or prepayment of other debt; (xi) limitations on investments; (xii) ERISA; (xiii) limitation on transactions with affiliates; and (xiv) limitation on capital expenditures. Financial covenants to include (but not limited to): o Maintenance at all times of a Minimum Net Worth, with step-up provisions to be agreed upon, o Maintenance on a rolling four quarter basis of a Maximum Leverage Ratio (total funded debt/EBITDA), and o Maintenance on a rolling four quarter basis of a Minimum Fixed Charge Coverage Ratio (EBITDA less capital expenditures)/(interest expense + scheduled principal repayments). EVENTS OF DEFAULT: Usual and customary in transactions of this nature, and to include, without limitation, (i) nonpayment of principal, interest, fees or other amounts, (ii) violation of covenants, (iii) inaccuracy of representations and warranties, (iv) cross-default to other material agreements and indebtedness, (v) bankruptcy, (vi) material judgments, (vii) ERISA, (viii) actual or asserted invalidity of any loan documents or security interests, or (ix) Change in Control of the Borrower. ASSIGNMENTS/ PARTICIPATIONS: Each Lender will be permitted to make assignments to other financial institutions approved by the Borrower and the Agent, which approval shall not be unreasonably withheld. Lenders will be permitted to sell participations with voting rights limited to significant matters such as changes in amount, rate, and maturity date. An assignment fee of $3,500 is payable by the Lender to the Agent upon any such assignment occurring (including, but not limited to an assignment by a Lender to another Lender). WAIVERS & AMENDMENTS: Amendments and waivers of the provisions of the loan agreement and other definitive credit documentation will require the approval of Lenders holding loans and commitments representing more than 50% of the aggregate amount of loans and commitments under the Senior Credit Facilities, except that (a) the consent of all the Lenders affected thereby shall be required with respect to (i) increases in commitment amounts, (ii) reductions of principal, interest, or fees, (iii) extensions of A-7 14 scheduled maturities or times for payment, (iv) releases of all or substantially all collateral and (v) releases of all or substantially all guarantors and (b) the consent of the Lenders holding at least 50% of the Tranche A Term Loan Facility and at least 50% of the Tranche B Term Loan Facility shall be required with respect to any amendment that changes the allocation of any payment between the Tranche A and Tranche B Term Loan Facilities. INDEMNIFICATION: The Borrower shall indemnify the Lenders from and against all losses, liabilities, claims, damages or expenses relating to their loans, the Borrower's use of loan proceeds or the commitments, including but not limited to reasonable attorneys' fees and settlements costs. This indemnification shall survive and continue for the benefit of the Lenders at all times after the Borrower's acceptance of the Lenders' commitment for the Senior Credit Facilities, notwithstanding any failure of the Senior Credit Facilities to close. CLOSING: On or before December 31, 1997. GOVERNING LAW: Texas EXPENSES: Borrower will pay all reasonable out-of-pocket costs and expenses associated with the preparation, due diligence, administration, syndication and enforcement of all documents executed in connection with the Senior Credit Facilities, including without limitation, the reasonable legal fees of the Agent's counsel regardless of whether or not the Senior Credit Facilities are closed. OTHER: This term sheet is intended as an outline only and does not purport to summarize all the conditions, covenants, representations, warranties and other provisions which would be contained in definitive legal documentation for the Senior Credit Facilities contemplated hereby. The Borrower shall waive its right to a trial by jury. A-8 EX-10.2 4 PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.2 ________________________________________________________________________ PREFERRED STOCK PURCHASE AGREEMENT dated as of September 10, 1997 between PILLOWTEX CORPORATION and THE PURCHASERS SET FORTH HEREIN ________________________________________________________________________ 2 TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS: CERTAIN REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 CLOSING AND PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.1 Time and Place of the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.2 Transactions at the Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.1 Organization, Power, Authority, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.2 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.3 Validity, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.4 Capitalization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.6 SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.7 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.8 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.9 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.10 No Existing Violation, Default, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.11 Licenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.12 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 3.15 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.16 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.17 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.18 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.19 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.20 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.21 Absence of Certain Developments; No Material Adverse Change . . . . . . . . . . . . . . . . . . . . 17 Section 3.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.23 Securities Law Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.24 Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.25 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.26 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 3.27 Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 4.1 Organization, Good Standing, Power, Authority, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 4.2 No Conflicts; No Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
i 3 Section 4.3 Acquisition for Own Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.4 Ownership of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.5 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.6 Investor Suitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.7 Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.8 Investment Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 4.9 Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 4.10 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 5 COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.1 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.3 Pre-Closing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.4 No Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.5 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 5.6 Hart-Scott-Rodino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 5.7 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 5.8 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 5.9 Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 5.10 Licenses; Other Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 5.11 Material Changes and Other Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.12 Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.13 Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.14 Operational Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 6 SURVIVAL AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 6.1 Survival Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 6.2 Indemnification by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 6.3 Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 6.4 Registration Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE 7 REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 7.1 Demand Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 7.2 Piggyback Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 7.3 Indemnification by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 7.4 Indemnification by the Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 7.5 Notices of Claims, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 7.6 Other Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 7.7 Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 7.8 Registration Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 7.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.10 Assignment of Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.11 Other Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.12 Rule 144; Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 7.13 Limitation on Requirement to File or Amend Registration Statement . . . . . . . . . . . . . . . . . 38
ii 4 ARTICLE 8 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE 9 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 9.1 Compliance by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 9.2 No Injunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.3 Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.4 Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.5 Lauren Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.6 Articles of Incorporation and By-laws; Ownership Structure . . . . . . . . . . . . . . . . . . . . . 40 Section 9.7 Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.8 Company Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 9.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.10 Condition and Status of the Company and the Target . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.11 Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.12 No Shareholders or Voting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.13 Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.14 Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 10 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.1 Purchaser Representation and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.2 Target Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.3 No Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 11 MISCELLAENOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 11.2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 11.3 Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.4 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.5 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.9 Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.11 Submission to Jurisdiction; Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.12 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
iii 5 PREFERRED STOCK PURCHASE AGREEMENT dated as of September 10, 1997, between PILLOWTEX CORPORATION, a Texas corporation (the "Company"), and the purchasers set forth on Exhibit A hereto (each, including their respective successors and permitted assigns, a "Purchaser" and, collectively, the "Purchasers"). WHEREAS, as of September 5, 1997, the Company has issued and outstanding 10,751,497 shares of common stock, par value $0.01 per share (the "Common Stock"), being 100% of the outstanding Common Stock of the Company as of such date and 20,000,000 shares of authorized preferred stock, par value $0.01 per share (the "Preferred Stock"), being 100% of the authorized Preferred Stock of the Company (none of which has been designated or is outstanding); and WHEREAS, subject to the terms and conditions set forth herein, the Purchasers will pay an aggregate of $65,000,000 as the purchase price (the "Purchase Price") for 65,000 shares of Preferred Stock to be designated Series A Redeemable Convertible Preferred Stock having the rights and preferences set forth in Exhibit B hereto. NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants, agreements and conditions contained herein and in the other Investment Agreements, the Company and the Purchaser agrees as follows: ARTICLE 1 DEFINITIONS: CERTAIN REFERENCES Section 1.1 Definitions. The terms defined in this Article 1, whenever used in this Agreement, shall have the following meanings for all purposes of this Agreement: "Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time. "Affiliate" of any specified Person means: (a) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person; or (b) any other Person which beneficially owns or holds ten percent or more of any class of the share capital normally entitled to vote in the election of directors of such specified Person; or (c) any other Person of which ten percent or more of the share capital normally entitled to vote in the election of directors of such Person is 1 6 beneficially owned or held by such specified Person or a subsidiary of such specified Person; or (d) any other Person who is a director or officer (i) of such specified Person; (ii) of any Subsidiary of such specified Person or (iii) of any Person described in paragraph (a) above; and for purposes of this definition, "control" of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Preferred Stock Purchase Agreement, including all exhibits and schedules attached hereto. "Annual Report" means the Company's Annual Report on Form 10-K for the 1996 Fiscal Year, as filed with the SEC. "Apollo Purchasers" shall mean each of Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. "Approval" means each and every authorization, approval, consent, license, filing and registration by, with or from any nation or state or other political subdivision thereof or by or with any regulatory or governmental authority of any nation or state or other political subdivision thereof, self-regulatory organization or stock exchange, necessary to authorize or permit the execution, delivery or performance of this Agreement or any other Transaction Document or for the validity, enforceability or admissibility into evidence hereof or thereof. "Articles of Incorporation" shall mean the Restated Articles of Incorporation of the Company dated January 18, 1993, as amended by articles of amendment dated March 12, 1993, in effect as of the date hereof, and as amended, supplemented or restated from time to time. A "Bankruptcy Event" shall be deemed to have occurred with respect to a Person if such Person shall: (i) generally fail to pay, or admit in writing its inability to pay, its debts as they become due; (ii) apply for, consent to or acquiesce in, the appointment of a liquidator, trustee, receiver, sequestrator or other custodian for itself or any of its Material Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; 2 7 (iii) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a liquidator, trustee, receiver, sequestrator or other custodian for itself or any of its Material Subsidiaries or for a substantial part of the property of any thereof and such appointment shall not be discharged within 30 days; (iv) commence, or permit or suffer to exist the commencement of, any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of such Person or any of its Material Subsidiaries, and, if such case or proceeding is not commenced by such Person or any such Subsidiaries, such case or proceeding shall be consented to or acquiesced in by such Person or any of its Material Subsidiaries or shall result in the entry of any order for relief or shall remain for 30 days undismissed; or (v) take any action to authorize any of the foregoing. "Bankruptcy Law" means Title 11, United States Code, or any similar federal, state or foreign law for the relief of debtors. "Benefits Plan" shall have the meaning set forth in Section 3.20. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York. "By-laws" shall mean the By-laws of the Company as in effect on the date hereof and as amended, supplemented or restated from time to time. A "Change of Control" shall have the meaning set forth in the Convertible Preferred Stock Statement of Resolution. "Closing" shall have the meaning assigned to it in Section 2.1. "Closing Date" shall have the meaning assigned to it in Section 2.1. "Code" means the United States Internal Revenue Code of 1986, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of the Code also refer to any successor sections. 3 8 "Convertible Preferred Stock Statement of Resolution" means the provisions setting forth the designations of the Preferred Shares as set forth in Exhibit B hereto. "Conversion Shares" means the shares of Common Stock issuable or issued upon conversion of the Preferred Shares pursuant to the terms of the Convertible Preferred Stock Statement of Resolution. "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. "Disclosure Schedule" means, prior to the date of delivery of the Final Disclosure Schedule as described in Section 5.13, the Disclosure Schedule attached hereto as Schedule I and, from and after such date, the Final Disclosure Schedule provided pursuant to Section 5.13, as it may be amended, supplemented or otherwise modified from time to time by the Company with the written consent of the Purchaser. "Dollars" and the sign "$" mean lawful money of the United States. "Environmental Laws" shall have the meaning set forth in Section 3.13. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "Event of Noncompliance" shall have the meaning assigned to it in the Convertible Preferred Stock Statement of Resolution. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Fiscal Quarter" means any quarter of a Fiscal Year. "Fiscal Year" means any period of 12 consecutive calendar months ending on the Saturday closest to December 31; references to a Fiscal Year with a number corresponding to any calendar year (e.g. the "1991 Fiscal Year") refer to the Fiscal Year ending on the Saturday closest to December 31 occurring during such calendar year (or the preceding fiscal year in the event that the Saturday closest to December 31 of such Fiscal Year is in January). "GAAP" means generally accepted accounting principles consistently applied in the United States, unless any other jurisdiction is specified, in which case it shall be the equivalent set of accounting principles for such jurisdiction. 4 9 "Group" means two or more persons acting in concert or as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding, voting or disposing of securities of an issuer. "Indebtedness" shall mean (i) any obligation of the Company or any Subsidiary, contingent or otherwise, which under GAAP is required to be shown on the balance sheet of the Company or such Subsidiary as a liability and (ii) any guaranty or similar obligation by the Company or any Subsidiary of the indebtedness of any Person. Any obligation secured by a Lien on, or payable out of the proceeds of or production from, property of the Company or any Subsidiary shall be deemed to be indebtedness even though such obligation is not assumed by the Company or Subsidiary. "Indebtedness for Borrowed Money" shall mean (a) all Indebtedness in respect of money borrowed including, without limitation, Indebtedness which represents the unpaid amount of the purchase price of any property and is incurred in lieu of borrowing money or using available funds to pay such amounts and not constituting an account payable or expense accrual incurred or assumed in the ordinary course of business of the Company or any Subsidiary, (b) all Indebtedness evidenced by a promissory note, bond or similar written obligation to pay money, and (c) all such Indebtedness guaranteed by the Company or any Subsidiary or for which the Company or any Subsidiary is otherwise contingently liable by contract. "Indenture" means the Indenture dated as of November 12, 1996, between the Company, certain guarantors described therein and Bank One, Columbus, N.A., as trustee, relating to the Series A and Series B 10% Senior Subordinated Notes due 2006 of the Company as in effect on the Closing Date. "Instrument" means any contract, agreement, indenture, mortgage, security, document or writing under which any obligation is evidenced, assumed or undertaken, or any Security Interest is granted or perfected. "Intellectual Property Rights" shall have the meaning set forth in Section 3.25. "Investment Agreements" means this Agreement and each Instrument to be executed or delivered pursuant hereto including, without limitation, the Convertible Preferred Stock Statement of Resolution, and the letter agreement dated August 19, 1997 relating to transaction expenses between the Company and Apollo Management, L.P. "Lauren Agreement" shall have the meaning assigned to it in Section 3.25. "Licenses" shall have the meaning set forth in Section 3.11. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including, without limitation, any conditional sale or other title 5 10 retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction and including any lien or charge arising by statute or other law. "Loan Documents" means, collectively, (i) those certain letter agreements dated September 10, 1997 between NationsBank of Texas, N.A., NationsBank Capital Markets, Inc. and the Company relating to the provision to the Company of a senior revolving credit facility in the aggregate amount up to $350,000,000 and a senior term loan facility in an aggregate principal amount of $250,000,000 and the payment by the Company of related fees; (ii) that certain letter agreement, dated September 10, 1997, between NationsBridge, L.L.C. and the Company relating to the provision to the Company of standby credit facilities in an aggregate principal amount of up to $150,000,000 and the payment by the Company of related fees (the "Bridge Facility"); and (iii) that certain letter agreement dated September 10, 1997 between NationsBank Capital Markets, Inc. and the Company relating to the engagement by the Company of NationsBank Capital Markets, Inc. to act as lead placement agent or underwriter in connection with the proposed issuance and sale of senior subordinated debt securities in an aggregate principal amount of approximately $150,000,000. "Material Adverse Effect" means a material adverse effect on the assets, results of operations, business, prospects or condition (financial or otherwise) of the specified entity and its Subsidiaries, if any, taken as a whole. "Material Subsidiaries" means those Subsidiaries of the specified entity that are material to such entity's results of operations, business prospects or condition (financial or otherwise). "Merger Agreement" means the Merger Agreement dated September 10, 1997 among the Company, the Target and Merger Sub set forth in Exhibit C hereto. "Merger Sub" means Pegasus Merger Sub, Inc., a Delaware corporation. "Person" means any natural person, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Preferred Shares" means shares of Series A Redeemable Convertible Preferred Stock. "Purchase Price" means the cash amount of $65,000,000 payable by the Purchaser to the Company at Closing for the purchase of the Preferred Shares. "Quarterly Reports" means the Company's Quarterly Reports for the Fiscal Quarters ended on the Saturday closest to March 31, 1997 and June 30, 1997 each as filed with the SEC under cover of Form 10-Q, and any amendments thereto. 6 11 "Representatives" shall have the meaning set forth in Section 5.7. "Sale-Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Subsidiary of the Company transfers such property to a person and leases it back from such person in a transaction accounted for as a capital lease under GAAP. "SEC" means the U.S. Securities and Exchange Commission. "SEC Documents" means all documents filed by the Company with the SEC since January 1, 1994. "Security Interest" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other) or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement), or any financing lease involving substantially the same economic effect as any of the foregoing. "Subsidiary" means, as to any Person, (a) any corporation 51% or more of the outstanding shares of capital stock of which having ordinary voting power for the election of directors is owned directly or indirectly by such Person and (b) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has 51% or more of an equity interest at the time. The Target shall not be deemed a Subsidiary of the Company prior to the closing of the transactions contemplated by the Merger Agreement. "Target" shall mean Fieldcrest Cannon Inc., a Delaware corporation. "Target Acquisition" means the Company's proposed acquisition of the Target pursuant to the terms of the Merger Agreement. "Transaction Documents" means the Investment Agreements, the Merger Agreement and the Loan Documents. "Transaction Expenses" means the reasonable out of pocket expenses of the Purchasers or any of their respective Affiliates (whether or not incurred prior to the date hereof), including without limitation, the fees, disbursements and other reasonable expenses of lawyers, accountants, actuaries, appraisers, consultants and any other advisors thereto, arising out of or relating to the discussion, evaluation, negotiation, documentation and closing or potential closing of the transactions contemplated by the Investment Agreements, without regard to whether or not such transactions are consummated. 7 12 "United States" or "U.S." means the United States of America, its 50 states and the District of Columbia. Section 1.2 Terms Generally. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP. ARTICLE 2 CLOSING AND PAYMENT Section 2.1 Time and Place of the Closing. The closing for the transactions contemplated to occur herein (the "Closing") shall take place at the office of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison Avenue, New York, New York 10022, on the date, and simultaneously with the time of closing, contemplated by the Merger Agreement (provided that solely for purposes of determining the temporal order of the Closing and the closing contemplated by the Merger Agreement the Closing shall be deemed to have occurred immediately prior to the closing contemplated by the Merger Agreement), or on such other date and/or at such other place as the parties shall mutually agree (the "Closing Date"). Section 2.2 Transactions at the Closing. At the Closing, subject to the terms and conditions of this Agreement, the Company shall issue and sell to the Purchasers, and the Purchasers shall purchase from the Company, an aggregate of 65,000 Preferred Shares in the amounts set forth beside their respective names on Exhibit A hereto. The aggregate Purchase Price for all the Preferred Shares shall be $65,000,000, payable by wire transfer of immediately available funds to an account or accounts previously designated in writing by the Company at least two Business Days prior to the Closing Date. At the Closing, the Company shall deliver to the Purchasers certificates representing an aggregate of 65,000 Preferred Shares, each registered in the name of the respective Purchaser or its nominee against payment to the Company of the portion of the Purchase Price with respect thereto payable by such Purchaser. The obligations of the Apollo Purchasers contained in this Section 2.2 shall be joint and several. 8 13 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchasers that: Section 3.1 Organization, Power, Authority, Etc. The Company is a company validly organized and existing and in good standing under the laws of Texas; each Subsidiary of the Company is validly organized and existing and in good standing under the laws of its jurisdiction of incorporation; each of the Company and each Subsidiary of the Company is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary except for such failures to be so qualified as would not individually or in the aggregate have a Material Adverse Effect on the Company; and the Company and each of its Subsidiaries has full power and authority to own and hold under lease its property and to conduct its business substantially as presently conducted by it except for such failures to have power and authority as would not individually or in the aggregate have a Material Adverse Effect on the Company. The Company has full power and authority to enter into and perform its obligations under this Agreement and each other Transaction Document executed or to be executed by it. Section 3.2 Due Authorization. Except as set forth in Item 3.2 of the Disclosure Schedule, the execution and delivery by the Company of this Agreement, each other Transaction Document and each other certificate or document executed or to be executed by it, the performance by the Company of its obligations hereunder and thereunder and the issuance of the Preferred Shares, including the issuance of Common Stock upon the conversion thereof, by the Company have been duly authorized by all necessary corporate proceedings on the part of the Company (and no other corporate proceedings or actions on the part of the Company or its board of directors or stockholders are necessary therefor except for the approval in accordance with applicable law by holders of a majority of the Company's Common Stock present at a meeting at which a quorum is present and entitled to vote of the issuance of the Common Stock and Preferred Shares to be issued in connection with the Target Acquisition, this Agreement and the Convertible Preferred Stock Statement of Resolution), do not require any Approval which has not been obtained and will not be obtained prior to the Closing Date, do not and will not conflict with, result in any violation of, or constitute any default under, any provision of the Articles of Incorporation or By-laws of the Company, conflict with any provision of any material Instrument of the Company or any Subsidiary or any present law or governmental regulation applicable to the Company, any Subsidiary or any of its or their assets, properties or operations or any court decree or order applicable to the Company, any Subsidiary of the Company or its or their assets, properties or operations and will not result in or require the creation or imposition of any Security Interest on any of the properties of the Company or any Subsidiary of the Company pursuant to any material Instrument or result in the acceleration of any Indebtedness of the Company or any of its Subsidiaries, other than pursuant to any Transaction Document. 9 14 Section 3.3 Validity, Etc. This Agreement constitutes, and each other Transaction Document executed by the Company will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Company enforceable in accordance with their respective terms. Section 3.4 Capitalization of the Company. The authorized capital stock of the Company will at the Closing consist of: (A) 30,000,000 shares of Common Stock (subject to increase to 40,000,000 shares, subject to shareholder approval), 10,752,492 of which shares are outstanding on the date hereof and 613,390 of which shares are reserved for issuance pursuant to outstanding options to purchase shares of Common Stock granted under the Company's stock option plans, and (B) 20,000,000 shares of Preferred Stock, of which 200,000 will be designated Preferred Shares, 65,000 of which Preferred Shares will be issued and outstanding and owned by the Purchasers, at the Closing. No other capital stock of the Company is, or at the Closing will be, authorized and no other capital stock is, or at the Closing will be, issued. At the Closing, all of the Preferred Shares will be duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable and entitled to the benefits of, and have the terms and conditions set forth in, the Articles of Incorporation. Except as set forth in Item 3.4 of the Disclosure Schedule and except as contemplated by this Agreement, there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of the Company to issue such shares, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. No person has preemptive or similar rights with respect to the securities of the Company. Except as set forth in Item 3.4 of the Disclosure Schedule, the consummation of the transactions contemplated by the Merger Agreement will not permit any holders of Indebtedness of the Company or the Target to convert such Indebtedness to capital stock of the Company or the Target. Section 3.5 Financial Statements. The audited consolidated financial statements and related schedules and notes included in the SEC Documents comply in all material respects with the requirements of the Exchange Act and the Act, were prepared in accordance with GAAP consistently applied throughout the periods involved (except as may be indicated in the notes thereto) and fairly present, in all material respects, the consolidated financial condition, results of operations, cash flows and changes in stockholders' equity of the Company and its consolidated Subsidiaries at the dates and for the periods presented. The unaudited quarterly consolidated financial statements and the related notes included in the SEC Documents fairly present, in all material respects, the consolidated financial condition, results of operations, cash flows and changes in stockholders' equity of the Company and its Subsidiaries at the dates and for the periods to which they relate, subject to year-end audit adjustments (consisting only of normal recurring accruals), have been prepared in accordance with GAAP applied on a consistent basis except as otherwise stated therein and have been prepared on a basis consistent with 10 15 that of the audited financial statements referred to above except as otherwise stated therein. Section 3.6 SEC Documents. (a) The Company has delivered or made available to the Purchasers true and complete copies of: (i) the Annual Report, (ii) its Quarterly Reports and any other reports filed under cover of Form 8-K filed with the SEC since December 31, 1996, and (iii) all other SEC Documents. (b) As of its filing date, each SEC Document (including all exhibits and schedules thereto and documents incorporated by reference therein) referred to in (a) above, and each SEC Document (including all exhibits and schedules thereto and documents incorporated by reference therein) that will be filed by the Company prior to the Closing Date, as amended or supplemented, if applicable, pursuant to the Exchange Act (i) complied or will comply in all material respects with the applicable requirements of the Exchange Act and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (c) Each registration statement (including all exhibits and schedules thereto and documents incorporated by reference therein) referred to in clause (a)(iii) filed, and any registration statement (including all exhibits and schedules thereto and documents incorporated by reference therein) that will be filed by the Company prior to the Closing Date (including, without limitation, the Joint Proxy Statement/Prospectus contemplated by the Merger Agreement), as amended or supplemented, if applicable, pursuant to the Act, as of the date such statement or amendment became or will become effective (i) complied or will comply in all material respects with the applicable requirements of the Act and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any prospectus, in light of the circumstances under which they were made). (d) The Company has delivered or made available to the Purchasers true and complete copies of all correspondence between the SEC and the Company or its legal counsel, accountants or other advisors since January 1, 1996. The Company is not aware of any issues raised by the SEC with respect to any of the SEC Documents, other than those disclosed to the Purchaser pursuant to this Section 3.6(d). 11 16 Section 3.7 Subsidiaries. Exhibit 21 to the Annual Report is a true, accurate and correct statement of all of the information required to be set forth therein by the rules and regulations of the SEC. Except as set forth in Item 3.7 of the Disclosure Schedule, all of the outstanding capital stock of each Material Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through other Subsidiaries of the Company, free and clear of any Security Interest, restrictions upon voting or transfer, claim or encumbrance of any kind (other than such transfer restrictions as may exist under federal and state securities laws or any encumbrances between or among the Company and/or any Subsidiary of the Company), and there are no rights granted to or in favor of any third party, other than the Company or any Subsidiary of the Company, to acquire any such capital stock, any additional capital stock or any other securities of any such Subsidiary. Except as set forth in Item 3.7 of the Disclosure Schedule, there exists no restriction on the payment of cash dividends by any Subsidiary of the Company. Section 3.8 Contingent Liabilities. Except as set forth in Item 3.8 of the Disclosure Schedule or as fully reflected or reserved against in the financial statements included in the Annual Report or the Company's report for the Fiscal Year ended December 28, 1996, filed under cover of Form 10-K, or disclosed in the footnotes contained in such financial statements, the Company and its Subsidiaries have no liabilities (including tax liabilities), absolute or contingent, having or which either individually or in the aggregate are reasonably likely to have a Material Adverse Effect on the Company. Section 3.9 Approvals. Except as set forth on Item 3.9 of the Disclosure Schedule, no Approval is required to be obtained by the Company or any Subsidiary of the Company for the consummation of the transactions contemplated by this Agreement or by any of the Transaction Documents. Section 3.10 No Existing Violation, Default, Etc. None of the Company or any of the Company's Subsidiaries is in violation of (A) its Articles of Incorporation, By-laws or other organization documents or (B) except as set forth in Item 3.10 of the Disclosure Schedule, any applicable law, ordinance, administrative, governmental or stock exchange rule or regulation, which violation has or could reasonably be expected to have a Material Adverse Effect on the Company, or (C) except as set forth in Item 3.10 of the Disclosure Schedule, any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any such Subsidiary, which violation has or could reasonably be expected to have a Material Adverse Effect on the Company. Except as disclosed in Item 3.10 of the Disclosure Schedule, no event of default or event that, but for the giving of notice or the lapse of time or both, would constitute an event of default exists or, upon the consummation by the Company of the transactions contemplated by this Agreement or any of the Transaction Documents, will exist under any Instrument to which the Company or any of the Company's Subsidiaries is a party or by which the Company or any such Subsidiary is bound or to which any of the properties, assets or operations of the Company or any such Subsidiary is subject, which event of default, or 12 17 event that, but for the giving of notice or the lapse of time or both, would constitute an event of default, has or could reasonably be expected to have a Material Adverse Effect on the Company. The Preferred Shares will not be deemed Disqualified Stock as such term is defined in the Indenture. Section 3.11 Licenses, Etc. The Company and its Subsidiaries hold, own or possess all such governmental, regulatory and other filings, licenses, approvals, registrations, consents, franchises, concessions, patents, patent licenses or rights, trademarks, trade names, service marks, permits and copyrights (collectively, "Licenses") as are necessary for the ownership of the property and conduct of the business of the Company and its Subsidiaries, as now conducted without, individually or in the aggregate, any infringement upon rights of other Persons, any violation of law or regulation or any breach of a contractual obligation, except to the extent that the failure to hold, own or possess such Licenses would not have a Material Adverse Effect on the Company. To the best of the Company's knowledge, none of such Licenses has been challenged or revoked and no statement of intention to challenge, revoke or fail to renew any such License has been received by the Company or any Subsidiary. To the best of the Company's knowledge, after due inquiry, the Company and its Subsidiaries are in compliance with their respective obligations under such Licenses, with such exceptions as individually or in the aggregate do not have, and are not reasonably expected to have, a Material Adverse Effect on the Company, and no event has occurred that allows, or after notice or lapse of time would allow, revocation, suspension, limitation or termination of such Licenses, except such events as would not have, or could not reasonably be expected to have, a Material Adverse Effect on the Company. Section 3.12 Title to Properties. The Company and its Subsidiaries have good and marketable title to all material properties (real and personal) owned by the Company and any such Subsidiary that are necessary for the conduct of the business of the Company and such Subsidiaries as currently conducted, free and clear of any Security Interest that may materially interfere with the conduct of the business of the Company and such Subsidiaries, taken as a whole, and all material properties held under lease by the Company or the Subsidiaries are held under valid, subsisting and enforceable leases. Section 3.13 Environmental Matters. To the best of its knowledge, none of the Company or any of its Subsidiaries is the subject of any current federal, state or local investigation under Environmental Laws (as defined below). None of the Company or any of its Subsidiaries has received any notice or claim (or is aware of any facts that would form a reasonable basis for a claim), nor entered into any negotiations or agreements with any third party, relating to any liability or remedial action or potential material liability or remedial action under Environmental Laws, nor are there any pending or, to the best knowledge of the Company, threatened actions, suits or proceedings against or materially affecting the Company, any of its Subsidiaries or their properties, assets or operations in connection with any such Environmental Laws. The properties, assets and operations of the Company and its Subsidiaries are in compliance in all material respects with all applicable federal, state and local laws, rules and regulations, 13 18 and such orders, decrees, judgments, permits and licenses to which the Company is a party or pursuant to which the Company is bound relating to public and worker health and safety and to the protection and clean-up of the natural environment and the generation, handling, disposal, transportation or release of hazardous materials (collectively, "Environmental Laws"). The term "hazardous materials" shall mean those substances that are regulated by or form the basis for liability under any applicable Environmental Laws. With respect to the properties, assets and operations, including any previously owned, leased or operated properties of the Company and its Subsidiaries, assets or operations, except as disclosed in Item 3.13 and except as would not have a Material Adverse Effect on the Company to the best knowledge of the Company, there are no past or present events, conditions, circumstances, activities, practices, incidents, actions or plans of the Company or any of its Subsidiaries that may substantially interfere with or prevent compliance or continued compliance in all material respects with applicable Environmental Laws. Except as set forth in Item 3.13 of the Disclosure Schedule, the consummation of any or all of the transactions contemplated by the Transaction Documents will not require any application for issuance, renewal, transfer or extension of, or any other administrative action regarding, any permit or license required under any Environmental Law. Except as disclosed in Item 3.13 and except as would not have a Material Adverse Effect on the Company (i) there are no consent decrees, judgments, judicial or administrative orders or agreements with, or Security Interests by, any governmental authority or quasi-governmental entity relating to any Environmental Law which regulates, obligates or binds the Company, any Subsidiary of the Company or any of their respective assets and (ii) there is no present or past release or threatened release of any hazardous substance as a result of which the Company has or reasonably may become liable to any Person. True, complete and correct copies of the written reports, of all environmental audits or assessments which have been conducted at any facility currently owned or leased by the Company or any facility owned or leased by the Company within the past five years, have been made available to the Purchasers and a list of all such reports, audits and assessments is included in Item 3.13 of the Disclosure Schedule. Section 3.14 Taxes. The Company and all of its Subsidiaries have each timely filed all tax returns and reports required by law to have been filed by it and paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. Each tax return filed by the Company or any Subsidiary of the Company correctly and accurately reflects the amount of its liability for taxes thereunder in all material respects and makes all material disclosures required by applicable provisions of law. The Company has no knowledge of any material adverse change in the rate or basis of assessment of any Tax. Neither the Company nor any Subsidiary has received any written notification from any taxing authority asserting any material unassessed liability for any tax. The Company and each of its Subsidiaries has taken all reasonable and customary steps to ensure that it has complied with all applicable tax laws and tax regulations of 14 19 foreign, U.S. federal, state and local governments and all agencies thereof which affect the operation, properties, financial condition, operating results or business prospects of the Company or such Subsidiary to which the Company or such subsidiary may otherwise be subject. Section 3.15 Litigation. Except as set forth in Item 3.15 of the Disclosure Schedule, there is no pending action, suit, proceeding, arbitration or investigation against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets or operations, or with respect to which the Company or any such Subsidiaries is responsible by way of indemnity or otherwise, (A) that is required under the Exchange Act to be described in the SEC Documents and was not so described, (B) that questions the validity of this Agreement or any of the other Transaction Documents or any action to be taken pursuant to this Agreement or any of the other Transaction Documents, or (C) that would individually, or in the aggregate with all such other actions, suits, investigations or proceedings, reasonably be expected to have, a Material Adverse Effect on the Company or a material adverse effect on the ability of the Company to perform its obligations under this Agreement or any of the Transaction Documents; and, to the best knowledge of the Company, except as set forth in Item 3.15 of the Disclosure Schedule, no such actions, suits, proceedings or investigations are threatened or contemplated. Section 3.16 Labor Matters. No labor organization or group of employees of the Company has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed, with the National Labor Relations Board or any other U.S. or foreign labor relations tribunal or authority. There are no strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances, or other material labor disputes or, to the knowledge of the Company, organizing activities pending or threatened against or involving the Company. Section 3.17 Indebtedness. Item 3.17 of the Disclosure Schedule contains a true and complete list, including the names of the parties thereto, of all debt instruments, loan agreements, indentures, guaranties or other obligations, whether written or oral, relating to (i) Indebtedness for Borrowed Money in excess of $100,000 or (ii) money loaned to others by the Company or its Subsidiaries in excess of $100,000. All of the aforesaid items were entered into in the ordinary course of business, are valid and binding, in full force and effect and are enforceable in accordance with their respective terms and there exists no breach or default, or any event which with notice or lapse of time or both, would constitute a breach or default by any party thereto. All of the Company's and each Subsidiary's Indebtedness for Borrowed Money is disclosed on the balance sheet contained in the Company's most recent Quarterly Report. Section 3.18 Contracts. All of the material contracts of the Company or any of its Subsidiaries that are required to be described in the SEC Documents or to be filed as exhibits thereto are described in the SEC Documents or filed as exhibits thereto and are in full force and effect. True and complete copies of all such material contracts have been 15 20 made available by the Company to the Purchaser. Neither the Company nor any of its Subsidiaries is in breach of or in default under any such contract, nor, to the best knowledge of the Company, is any other party in material breach of or in default under any such contract. Except as disclosed in the SEC Documents or in Item 3.18 of the Disclosure Schedule, the Company is not a party to, nor are any assets, properties or operations of the Company bound by, any (i) employment, consulting or severance agreement, (ii) lease of real property, or lease of personal property with an annual base rental obligation of more than $100,000 or a total remaining rental obligation of more than $250,000, (iii) joint venture or partnership agreement, (iv) agreement which is over one year in length of obligation and not terminable without penalty or damages within one year and involves an obligation of the Company of more than $100,000, (v) agreement containing covenants limiting the ability of the Company or any of its Subsidiaries to compete in any line of business with any Person in any area or territory, (vi) contract, agreement or arrangement between the Company and any Affiliate of the Company in excess of $60,000, or (vii) agreement relating to any acquisition or disposition of securities or material amounts of assets (other than in the ordinary course of business) and, in any event, containing any indemnification obligations of the Company or any of its Subsidiaries. No party to a material contract with the Company or any Subsidiary has terminated or failed to renew, or demanded security or assurances of performance under, or stated in writing its intention to terminate, to fail to renew on terms substantially similar to those currently in effect or to demand such security or assurances under such contract or agreement. Section 3.19 Finder's Fees. Other than as set forth in Item 3.19 of the Disclosure Schedule, no broker, finder or other party is entitled to receive from the Company, any of its Subsidiaries or any other person any brokerage or finder's fee or any other fee, commission or payment as a result of the transactions contemplated by this Agreement for which the Purchaser could have any liability or responsibility. Section 3.20 Employee Benefits. Except for the plans set forth in Item 3.20 of the Disclosure Schedule (the "Benefits Plan"), there are no employee benefit plans or arrangements of any type (including, without limitation, plans described in Section 3(3) of ERISA), under which the Company or any of its Subsidiaries has or in the future could have directly, or indirectly through a Commonly Controlled Entity (within the meaning of Sections 414(b), (c), (m) and (o) of the Code), any liability with respect to any current or former employee of the Company, any of its Subsidiaries, or any Commonly Controlled Entity. Except as set forth in Item 3.20 of the Disclosure Schedule, no Benefit Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code or any corresponding provision of applicable law. No Benefit Plan is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a "Multi-Employer Plan") or a plan that has two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA (a "Multiple Employer Plan"), nor has the Company or any ERISA Affiliate of the Company, at any time since January 1, 1993, contributed to or been obligated to contribute to any Multiemployer Plan or Multiple Employer Plan. With respect to each Benefit Plan the Company has made 16 21 available to the Purchaser complete and accurate copies of (A) all plan texts and agreements, (B) all material employee communications (including summary plan descriptions), (C) the most recent annual report, (D) the most recent annual and periodic accounting of plan assets, (E) the most recent determination letter received from the Internal Revenue Service and (F) the most recent actuarial valuation. With respect to each Benefit Plan: (i) such Benefit Plan has been maintained and administered at all times in material compliance with its terms and applicable law and regulation; (ii) no event has occurred and there exists no circumstance under which the Company or any of its Subsidiaries could directly, or indirectly through a Commonly Controlled Entity, incur any material liability under ERISA, the Code or otherwise (other than routine claims for benefits and other liabilities arising in the ordinary course pursuant to the normal operation of such Benefit Plan); (iii) there are no actions, suits or claims (other than routine claims for benefits) pending or, to the knowledge of the Company, threatened, with respect to any Benefit Plan or against the assets of any Benefit Plan; (iv) all contributions and premiums due and owing have been made or paid on a timely basis; and (v) all contributions made under any Benefit Plan have met the requirements for deductibility under the Code, and all contributions that have not been made have been properly recorded on the books of the Company or a Commonly Controlled Entity thereof in accordance with GAAP. The Company has no liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA and at no expense to the Company. Section 3.21 Absence of Certain Developments; No Material Adverse Change. Since the end of the 1996 Fiscal Year, except as contemplated by this Agreement: (A) the Company and its Subsidiaries have not incurred any material liability, guarantee or obligation (indirect, direct or contingent), or entered into any material oral or written agreement or other transaction, that is not in the ordinary course of business (other than the Transaction Documents) or that could reasonably be expected to result in a Material Adverse Effect on the Company; (B) the Company and its Subsidiaries have not sustained any loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity (whether or not covered by insurance) that has had or that could reasonably be expected to have a Material Adverse Effect on the Company; (C) there has been no material change in the indebtedness of the Company and its Subsidiaries (except for changes relating to intercompany indebtedness of the Company and/or its Subsidiaries and changes contemplated by the Loan Documents), no change in the stock of the Company, and no dividend or distribution of any kind declared, paid or made by the Company or any of its Subsidiaries (other than dividends or distributions declared, paid or made by a wholly owned Subsidiary of the Company on any class of its stock); (D) neither the Company nor any of its Subsidiaries has made (nor does it propose to make) (i) any material change in its accounting methods or practices or (ii) any material change in the depreciation or amortization policies or rates adopted by it, in either case, except as may be required by law or applicable accounting standards; and (E) there has been no event causing a Material Adverse Effect on the Company, nor any 17 22 developments that could, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect on the Company. Section 3.22 Insurance. All of the Company's and each Subsidiary's currently effective policies of fire, liability, product liability, workmen's compensation, health and other forms of insurance are valid, outstanding and enforceable policies and provide insurance coverage for the properties, assets and operations of the Company and each Subsidiary of the kinds, in the amounts and against the risks required to comply with laws. No notice of cancellation or termination has been received with respect to any such policy in the last year. The activities and operations of the Company and each Subsidiary have been conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies. Section 3.23 Securities Law Matters. Neither the Company nor any person acting on its behalf has, in connection with the sale of the Preferred Shares, engaged in (A) any form of general solicitation or general advertising (as those terms are used within the meaning of Rule 502(c) under the Act), (B) (assuming the accuracy of the Purchaser's representations in Section 4.3) any action involving a public offering within the meaning of Section 4(2) of the Act, or (C) (assuming the accuracy of the Purchaser's representations in Section 4.3) any action that would require the registration under the Act of the offering and sale of the Preferred Shares pursuant to this Agreement, or that would violate applicable state securities or "blue sky" laws. The Company has not made and will not make, directly or indirectly, any offer or sale of Preferred Shares or of securities of the same or a similar class as the Preferred Shares if as a result the offer and sale of the Preferred Shares contemplated hereby could fail to be entitled to exemption from the registration requirements of the Act. As used herein, the terms "offer" and "sale" have the meanings specified in Section 2(3) of the Act. Section 3.24 Accuracy of Information. The financial projections provided by the Company to the Purchasers were prepared in good faith using the best information reasonably available to management of the Company and represent said management's best estimates of the future performance of the Company for the periods referred to therein provided that the Company does not warrant that such projections will in fact be met. Section 3.25 Intellectual Property Rights. Item 3.25 of the Disclosure Schedule lists all material patents, patent registrations and applications therefor, all material trademarks, trademark registrations and applications therefor and all trade names and service marks owned or licensed by the Company or any Subsidiary (the "Intellectual Property Rights"). All of the Intellectual Property Rights are vested in or validly granted to the Company or a Subsidiary and are not restricted in any material way. No act has been done by the Company or any Subsidiary or omission permitted by the Company or a Subsidiary whereby any of the Intellectual Property Rights has ceased, or could reasonably be expected to cease, to be valid and enforceable. Neither the Company nor any Subsidiary has granted nor is obligated to grant any license, sub-license or 18 23 assignment in respect of any of the Intellectual Property Rights (other than intercompany licenses). Neither the Company nor any Subsidiary is in breach of any license, sub-license or assignment granted to it in respect of any Intellectual Property Rights. To the best of the Company's knowledge, the operation of the Company's and each Subsidiary's business does not infringe upon the intellectual property rights of any other person. The consummation of the Target Acquisition will not result in the termination of, or give rise to a right of termination on the part of any party to, any of the Company's or any of its Subsidiaries' material licenses or Intellectual Property Rights (including the Sublicense Agreement (the "Lauren Agreement") made as of July 1, 1995 between The Ralph Lauren Home Collection and the Company). Section 3.26 Disclosure. No representation or warranty contained in this Agreement or information appearing in any writing furnished by the Company to the Purchasers or their representatives pursuant hereto or in connection herewith (including, without limitation, information with respect to the Target) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. To the best of the Company's knowledge, there is no fact which the Company has not disclosed to the Purchasers in writing which is reasonably likely to have a Material Adverse Effect or is reasonably likely to materially and adversely affect the ability of the Company to perform this Agreement or observe the terms of the Convertible Preferred Stock Statement of Resolution. Section 3.27 Certain Agreements. The Company has, prior to the date of this Agreement, provided the Purchasers with true and correct copies of all written agreements and understandings (or a written summary of all unwritten agreements and understandings) with any lenders, advisors, or financing sources relating to the transactions contemplated by the Transaction Documents. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser hereby represents and warrants to the Company that: Section 4.1 Organization, Good Standing, Power, Authority, Etc. Each Purchaser is validly organized and existing and in good standing under the laws of its jurisdiction of organization and has the full power and authority to execute and deliver this Agreement and each of the other Transaction Documents and to perform its obligations under this Agreement. Each Purchaser has taken all action required by law, its organizational documents or otherwise required to be taken by it to authorize the execution and delivery of this Agreement and the other Investment Agreements to which it is a party and the consummation of the transactions contemplated to be performed by it hereby and thereby. This Agreement is a valid and binding agreement of each Purchaser, enforceable against each Purchaser in accordance with its terms. 19 24 Section 4.2 No Conflicts; No Consents. Neither the execution and delivery of this Agreement nor the consummation by each Purchaser of the purchase contemplated hereby will (A) conflict with, or result in any violation of, or constitute any default under, any provision of its organizational documents, (B) violate any statute or law or any judgment, order, writ, injunction, decree, rule or regulation applicable to such Purchaser or (C) violate, conflict with, or result in a breach of any material Instrument of such Purchaser. Section 4.3 Acquisition for Own Account. The Preferred Shares are being acquired by each Purchaser for its own account and not with a view to or for sale or other disposition in connection with, any distribution of all of the Preferred Shares, or any part thereof in any transaction that would be in violation of the Act or the securities laws of any state, without prejudice, however, to the rights of each Purchaser at all times to sell or otherwise dispose of all or any part of the Preferred Shares under an effective registration statement under the Act or under an exemption from such registration available under the Act, or to pledge all or any part of the Preferred Shares to secure any obligation of such Purchaser. Section 4.4 Ownership of Securities. As of the date hereof, no Purchaser owns any debt or equity securities issued by the Company or the Target. Section 4.5 Approvals. Except as set forth on Item 4.5 of the Disclosure Schedule, no Approval is required to be obtained by any Purchaser or any Subsidiary of any Purchaser as a result of the identity or nature of such Purchaser for the consummation of the transactions contemplated by this Agreement or by any of the Transaction Documents. Section 4.6 Investor Suitability. Each Purchaser is an "accredited investor" as such term is defined in Rule 501 under the Act. Section 4.7 Disclosure of Information. Each Purchaser acknowledges that it or its representatives have been furnished with all information regarding the Company and its business, assets, results of operations and financial condition that such Purchaser has requested. Each Purchaser further represents that it has had an opportunity to ask questions of and receive answers from the Company regarding the Company and its business, assets, results of operations, and financial condition and the terms and conditions of the issuance of the Preferred Shares; however, no representations or warranties have been made by the Company except as are set forth in this Agreement. Nothing contained in this Section 4.7 and no investigation by Purchasers shall in any way affect the Purchasers' right to rely upon the Company's representations and covenants contained in this Agreement. Section 4.8 Investment Experience. Purchasers each represent that they have such knowledge, experience and skill in evaluating and investing in common and 20 25 preferred stocks and other securities, based on actual participation in financial, investment and business matters, so that they are each capable of evaluating the merits and risks of an investment in the Preferred Shares and have such knowledge, experience and skill in financial and business matters that they are each capable of evaluating the merits and risks of the investment in the Company and the suitability of the Preferred Shares as an investment and can bear the economic risk of an investment in the Preferred Shares. No guarantees have been made or can be made with respect to the future value, if any, of the Preferred Shares, or the profitability or success of the business of the Company. Section 4.9 Restricted Securities. Purchasers understand that the Preferred Shares will not have been registered pursuant to the Act or any applicable state securities laws, that the Preferred Shares will be characterized as "restricted securities" under federal securities laws, and that under such laws and applicable regulations the Preferred Shares cannot be sold or otherwise disposed of without registration under the Act or an exemption therefrom. In this connection, Purchasers each represent that they are familiar with Rules 144 and 144A promulgated under the Act, as currently in effect, and understand the resale limitations imposed thereby and by the Act. Stop transfer instructions may be issued to the transfer agent for securities of the Company (or a notation may be made in the appropriate records of the Company) in connection with the Preferred Shares, but only to the extent customary for securities which are "restricted securities." The Company shall also be entitled to request an opinion of counsel to the Purchaser, reasonably acceptable in form and substance to the Company, that a transfer of Preferred Shares other than pursuant to an effective registration statement does not require registration under the Act. Section 4.10 Finder's Fees. No broker, finder or other party is entitled to receive from any Purchaser, any brokerage or finder's fee or any other fee, commission or payment as a result of the transactions contemplated by this Agreement for which the Company could have any liability or responsibility. ARTICLE 5 COVENANTS OF THE PARTIES Section 5.1 Legends. (a) So long as the Conversion Shares are Registrable Securities and unless they shall have been previously issued pursuant to an effective registration statement under the Act, the certificates for the Preferred Shares shall bear the following legend by which each holder thereof shall be bound: THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND ANY SECURITIES ISSUABLE UPON CONVERSION OR EXCHANGE HEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 21 26 1933, AS AMENDED, AND UNDER ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS OR AN APPLICABLE EXEMPTION FROM REGISTRATION THEREUNDER. THE COMPANY WILL FURNISH THE HOLDER OF THIS CERTIFICATE INFORMATION CONCERNING THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS APPLICABLE TO EACH CLASS OF SHARES INCLUDING THE LIQUIDATION AND DIVIDEND PREFERENCES AND THE VOTING AND CONVERSION RIGHTS OF THE REDEEMABLE CONVERTIBLE PREFERRED STOCK, ON REQUEST IN WRITING AND WITHOUT CHARGE. (b) After termination of the requirement that a legend be placed upon a certificate representing Preferred Shares, the Company shall, upon receipt by the Company of evidence reasonably satisfactory to it that such requirement has terminated and upon the written request of any holder of Preferred Shares, issue certificates for such Preferred Shares that do not bear such legend. Section 5.2 Use of Proceeds. The Purchase Price will be used by the Company to pay a portion of the cost of the Target Acquisition. Section 5.3 Pre-Closing Activities. From and after the date of this Agreement until the Closing, each of the Company and each Purchaser shall act with good faith towards, and shall use its reasonable efforts to consummate, the transactions contemplated by this Agreement, and neither the Company nor any Purchaser will take any action (other than as permitted under Section 8.1) that would prohibit or impair its ability to consummate the transactions contemplated by this Agreement. From the date hereof until the Closing, the Company shall conduct the business of its and its Subsidiaries, in the ordinary course consistent with past practice and shall use all reasonable efforts to preserve intact their respective business organizations and relationships with third parties and, except as otherwise provided herein, to keep available the services of the present directors, officers and key employees. Furthermore, the Company agrees to perform its obligations, and enforce the obligations of the Target and its Affiliates, under the Merger Agreement. Without limiting the generality of the foregoing, from the date hereof until the Closing, except as contemplated by this Agreement and except in the ordinary course of business and consistent with past practice, without Purchasers' prior written consent granted pursuant to Section 11.3 the Company shall not, and shall ensure that each of its Subsidiaries does not: (1) adopt or propose (or agree to commit to) any change in its articles of incorporation or by-laws, except as contemplated hereby or by the Merger Agreement or as required to effect the transactions hereunder or to increase the authorized Common Stock to 40,000,000 shares; 22 27 (2) take any action that would make any representation or warranty of the Company hereunder required to be true at and as of the Closing as a condition to the Purchasers' obligations to consummate the transactions contemplated hereby inaccurate at the Closing; (3) issue any additional capital stock or other securities, except pursuant to options outstanding on the date hereof, which are described in Item 3.4 of the Disclosure Schedule; (4) make any material change in its accounting methods, principles or practices except as may be required by law or applicable accounting standards; (5) (i) grant to any employee any material increase in salary or other remuneration or any increase in severance or termination pay; (ii) grant or approve any general increase in salaries of all or any class of, or a substantial portion of, its employees; (iii) pay or award any material bonus, incentive, compensation, service award or other like benefit for or to the credit of any employee except in accordance with written policy; (iv) enter into any material employment contract or severance arrangement with any employee or adopt or amend in any material respect any of its employee benefit plans; or (v) change in any material respect the compensation (whether in respect of terms or method) of its agents; (6) except for the Target Acquisition, make, incur or assume any investment in any other Person; (7) declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of its capital stock (now or hereafter outstanding) other than regularly scheduled cash dividends, or apply any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of any shares of any class of its capital stock (now or hereafter outstanding); (8) except for the Target Acquisition, liquidate or dissolve, consolidate with or merge into or with any other corporation, purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof); (9) enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its Affiliates 23 28 (other than a wholly-owned Subsidiary of the Company), involving an amount in excess of $100,000; (10) materially change or alter the nature of its business as conducted as of the date of this Agreement; (11) agree or commit to do any of the foregoing. Section 5.4 No Inconsistent Agreements. Except for agreements to be entered into as contemplated by the Loan Documents, which shall not contain restrictions on the Company's activities that are more restrictive than the corresponding Instruments to which the Company currently is a party, neither the Company nor any of its Subsidiaries shall enter into any Instrument, or enter into any amendment or other modification to any currently existing Instrument, (i) that by its terms restricts or prohibits the ability of the Company to issue Conversion Shares upon the conversion of the Preferred Shares or pursuant to which the Company's ability to make any distributions with respect to, or to redeem or repurchase any of, the Preferred Shares is prohibited or (ii) restricting the Company's ability to perform any of its obligations under this Agreement or any of the Investment Agreements, including its obligations relating to registration rights. Section 5.5 Information. (a) So long as any of the Preferred Shares are outstanding, the Company shall file with the SEC and with any U.S. or foreign stock exchange on which any securities of the Company are listed the annual reports and quarterly reports and the information, documents and other reports that are required to be filed with the SEC pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company has or is required to have a class of securities registered under the Exchange Act and whether or not the Company is then subject to the reporting requirements of the Exchange Act, at the time the Company is or would be required to file the same with the SEC and, promptly after the Company is or would be required to file such reports, information or documents with the SEC, to mail copies of such reports, information and documents (including any registration statements filed with the SEC (without exhibits)) to the holders of the Preferred Shares at their addresses set froth in the register maintained by the transfer agent of the Company therefor. (b) Upon request of any holder of at least 20% of the then outstanding Preferred Shares (or an equivalent amount of Conversion Shares) (a "20% Holder"), the Company shall furnish to such 20% Holder, as soon as practicable and in any event within 30 days after the end of each calendar month, a monthly report of the Company consisting of an unaudited balance sheet as of the end of such month and the related unaudited statements of operations and cash flows for such month and for the Fiscal Year to date, setting forth in each case in comparative form the corresponding figures for the budget for the current Fiscal Year. All such reports shall be certified by the chief financial officer of the Company to fairly present, in all material respects, the financial 24 29 condition of the Company as of the dates shown and the results of its operations for the periods then ended and to have been prepared in conformity with GAAP except for normal, recurring, year-end audit adjustments and the absence of footnotes. (c) The Company shall furnish to each 20% Holder, as soon as practicable and in any event not less than 20 Business Days prior to the commencement of each Fiscal Year of the Company, (i) an annual operating budget for the Company, approved by the Board of Directors of the Company, for the succeeding Fiscal Year, containing projections of profit and loss, cash flow and ending balance sheets for each month of such Fiscal Year and (ii) a business plan for the Company relating to the succeeding Fiscal Year setting forth in reasonable detail a development plan, financial plan and marketing plan, budgeted and projected figures and other detailed information. Promptly upon preparation thereof, the Company shall furnish to such 20% Holder any other operating budgets or business plans that the Company may prepare and any revisions of such previously furnished budgets or business plans. (d) The Company shall furnish promptly to each 20% Holder copies of any financial statements or financial or other material reports prepared by the Company for or otherwise furnished to or filed with its shareholders or any lender to the Company subject to restrictions imposed by the attorney-client privilege and the attorney work product privilege. Without limiting the generality of the foregoing, the Company will furnish to each 20% Holder copies of any material filings to be made with governmental authorities in connection with transactions contemplated by the Transaction Documents and shall give Representatives (defined below) of Apollo Capital Management II, Inc. a reasonable opportunity to comment on such filings prior to the time that such filings are made. For purposes of this Section 5.5, the Purchasers shall be deemed a 20% Holder prior to Closing. Section 5.6 Hart-Scott-Rodino. To the extent that, before or after the Closing, any Purchaser is required to make a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the acquisition, disposition or conversion of the Preferred Shares, the Company agrees to cooperate with such Purchaser in connection with such filing and to provide all information and to make any filings that are reasonably required in connection therewith and shall use reasonable efforts to obtain the early termination of the waiting period under the HSR Act. Section 5.7 Access. Upon reasonable notice both prior to the Closing and after the Closing, the Company shall (and shall cause each of its Subsidiaries to) afford the officers, employees, counsel, accountants and other authorized representatives (collectively, "Representatives") of each 20% Holder or any of their Affiliates reasonable access during normal business hours to its properties, books, contracts and records and personnel and advisors (who will be instructed by the Company to cooperate) and the Company shall (and shall cause each of the Subsidiaries to) furnish promptly to any 20% Holder all information concerning its business, properties, tax matters and personnel as such 20% Holder may reasonably request, provided that (i) any review will be conducted 25 30 in a way that will not interfere unreasonably with the conduct of the Company's business, (ii) no review pursuant to this Section 5.7 shall affect or be deemed to modify, any representation or warranty made by the Company and (iii) after the Closing, in-person visits by Representatives of the 20% Holder will be limited to four per year in the aggregate, such in-person visits must be requested by holders of at least a majority of the then outstanding Preferred Shares (and/or an equivalent number of Conversion Shares), only Representatives of 20% Holder may participate in such in-person visits and the Purchasers will use reasonable efforts to coordinate such visits so as to minimize interference with the Company's business. Each Purchaser will keep, and will cause their respective Representatives to keep, all information and documents obtained pursuant to Section 5.5(b) and (c) and this Section 5.7 confidential except to the extent otherwise publicly disclosed by the Company. Each Purchaser will promptly inform the Company in the event, in the course of its due diligence investigation of the Company or the Target, it learns of any representation or warranty or covenant of the Company under this Agreement that is incorrect in any material respect; provided that the failure by a Purchaser to comply with such obligation shall not affect any rights or obligations of any party hereto. Prior to consummation of the Target Acquisition, the Purchasers will be entitled to the benefits of the access rights of the Company to the personnel and properties of the Target and its Subsidiaries contained in the Merger Agreement and the Company agrees to assist any Purchaser that wishes to exercise such access rights. For purposes of this Section 5.7, the Purchasers shall be deemed a 20% Holder prior to Closing. Section 5.8 Publicity. Prior to Closing, each Purchaser, on the one hand, and the Company, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by the Transaction Documents and the Target Acquisition and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law. Section 5.9 Reservation of Shares. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized and unissued stock, solely for the purpose of effecting the conversion of the Preferred Shares, such number of shares of Common Stock as shall be sufficient to effect the conversion of all of the Preferred Shares. Section 5.10 Licenses; Other Property. The Company shall, through the Closing Date, preserve, renew and keep in full force and effect all rights, licenses, permits, patents, copyrights, trademarks, service marks, trade names and other authorizations, from governmental authorities or any other person, utilized by the Company or any of its Subsidiaries, which shall be necessary in any material respect to the conduct of its business. The Company shall, through the Closing Date, maintain and preserve all property material to the conduct of its business and the businesses of its Subsidiaries consistent with past practice and keep such property in good repair, working order and condition consistent with past practice and from time to time make, and cause to be made, 26 31 all needful and proper repairs, renewals, additions, improvements and replacements thereto consistent with past practice and necessary in order that the business carried on in connection therewith may be properly conducted at all times. Section 5.11 Material Changes and Other Notices. The Company shall, through the Closing Date, promptly notify the Purchaser of (a) any Material Adverse Effect on the Company or the Target and (b) any lawsuit, claims, proceeding or investigation pending or, to the best knowledge of the Company, threatened, or any judgment, order or decree involving the Company or any other development, which could reasonably be expected to have a Material Adverse Effect on the Company or Target. Section 5.12 Compliance with Applicable Laws. The Company shall, and the Company shall cause its Subsidiaries to, through the Closing Date, comply in all material respects with all applicable statutes, laws, ordinances, rules and regulations of any governmental authority (whether now in effect or hereinafter enacted) and any filing requirements relating thereto. The Company shall do, and shall cause its Subsidiaries to do, all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and authority necessary to continue its business. Section 5.13 Disclosure Schedule. No less that five nor more than ten days prior to the Closing Date the Company shall provide to the Purchasers the final Disclosure Schedule (the "Final Disclosure Schedule"). All matters disclosed in the Final Disclosure Schedule shall be appropriately responsive to the representation or warranty corresponding thereto in this Agreement. The representations and warranties made herein shall be true and correct on the date hereof and shall be true and correct in all material respects (without duplication of any materiality standard contained therein) as of the Closing Date and the information contained in the Final Disclosure Schedule shall not cure any inaccuracies in such representations and warranties. Section 5.14 Operational Changes. No later than 30 days after the Closing Date, the Company will put into effect the operational and other changes upon which the Company based its assumptions in the pro forma financials prepared in connection with the Target Acquisition indicating that cost savings of approximately $21,600,000 could be realized by the Company after Closing; provided, however, that nothing contained in this Section shall require the Company to violate any law or breach any contractual obligation. 27 32 ARTICLE 6 SURVIVAL AND INDEMNIFICATION Section 6.1 Survival Periods. All representations and warranties contained in this Agreement shall survive until the third anniversary of the Closing Date. The covenants and agreements contained in this Agreement, other than those which by their terms only apply until the Closing Date, shall survive the Closing Date without limit, except the obligations set forth in Sections 5.5 and 5.7 and the second sentence of Section 11.12 shall survive the Closing Date until both (x) no more than 50% of the initially issued Preferred Stock shall remain outstanding and (y) the Company's registration obligations terminate pursuant to Section 7.8(f). The representations and warranties and the survival periods set forth above shall apply regardless of any investigation made by or on behalf of any Person. Section 6.2 Indemnification by the Company. In addition to all other sums due hereunder or provided for in this Agreement, the Company agrees to indemnify and hold harmless each Purchaser and its Affiliates and their respective officers, directors, agents, employees, subsidiaries, partners and controlling persons (each, an "indemnified party") to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses (including reasonable fees and disbursements of counsel) or other liabilities ("Liabilities") resulting from any breach of any covenant, agreement, representation or warranty of the Company in this Agreement or any legal, administrative or other actions brought by any person or entity, proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of such Purchaser entering into this Agreement or any Transaction Document; provided, however, that the Company shall not be liable under this Section 6.2; (i) for any amount paid in settlement of claims without its consent (which consent shall not be unreasonably withheld), or (ii) to the extent that it is finally judicially determined that such Liabilities resulted primarily from a breach by such Purchaser of any representation, warranty, covenant or agreement of such Purchaser contained in this Agreement or the gross negligence or willful misconduct of such Purchaser; provided, further, that, if and to the extent that such indemnification is unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of such indemnified liability that shall be permissible under applicable laws. In connection with the obligations of the Company to indemnify for Liabilities as set forth above, the Company further agrees to reimburse each indemnified party for all such expenses (including reasonable fees, disbursements and other charges of counsel) as they are incurred by such indemnified party. Section 6.3 Notification. Each indemnified party under this Article 6 will, promptly after the receipt of notice of the commencement of any action or other proceeding against such indemnified party in respect of which indemnity may be sought from the Company under this Article 6, notify the Company in writing of the 28 33 commencement thereof. The omission of any indemnified party so to notify the Company of any such action shall not relieve the Company from any liability that it may have to such indemnified party except to the extent that the Company is actually and materially prejudiced by such failure to give notice. In case any such action or other proceeding shall be brought against any indemnified party and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate therein and, to the extent that either may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which the Company and an indemnified party are, or are reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the expense of the Company and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (i) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (ii) any conflict or potential conflict of interest exists between the Company and such indemnified party that would make such separate representation advisable in the view of the indemnified party; provided, however, that (1) any such separate counsel employed by the indemnified party at the expense of the Company shall be reasonably satisfactory to the Company, (2) the indemnified party will not, without the prior written consent of the Company settle, compromise or consent to the entry of any judgment in such action or proceeding unless such settlement, compromise or consent includes an unconditional release of the Company from all liability arising or that may arise out of such action or proceeding relating to any matter subject to indemnification hereunder and (3) in no event shall the Company be required to pay fees and expenses under this Article 6 for more than one firm of attorneys representing the indemnified parties in any jurisdiction in any one legal action or group of related legal actions. The Company agrees that it will not, without the prior written consent of the Purchasers, and the Purchasers agree that they will not, without the prior written consent of the Company, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to any matter subject to indemnification hereunder unless such settlement, compromise or consent includes an unconditional release of the Purchasers or the Company, as the case may be, and each other indemnified party from all liability arising or that may arise out of such claims, action or proceeding. The rights accorded to indemnified parties hereunder shall be in addition to any rights that any indemnified party may have at common law, by separate agreement or otherwise. Section 6.4 Registration Statements. Notwithstanding anything to the contrary in this Article 6, the indemnification and contribution provisions of Article 7 shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. 29 34 ARTICLE 7 REGISTRATION RIGHTS Section 7.1 Demand Registrations. (a) At any time and from time to time after the expiration of 270 days from the Closing, the Company shall upon the written demand (the "Registration Demand") of the Purchasers (and persons or entities to whom rights under this Article 7 have been transferred as contemplated by Section 7.10) holding directly or beneficially an aggregate of at least 20% of the Preferred Shares (or an equivalent amount of Conversion Shares), use its reasonable best efforts to effect the registration (a "Demand Registration") under the Act (by means of a "shelf" registration statement pursuant to Rule 415 under the Act, if so requested by the Purchasers and if the Company is eligible therefor at such time) of such number of Registrable Securities (as defined below) as shall be indicated in the Registration Demand (which Registrable Securities may include distributions to be made in the future on Preferred Shares and Conversion Shares thereon). Such Registration Demand shall specify the intended method or methods of disposition of such Registrable Securities (subject to modification as otherwise contemplated by this Article 7). Upon receipt of a Registration Demand, the Company will promptly, but in any event within 5 Business Days of receipt, provide notice of the Registration Demand to each Purchaser of which it has knowledge at such Purchaser's record address or other address on file with the Company, and such Purchaser shall, upon giving written notice to the Company within 15 business days of receipt of such notice, be permitted to participate as a selling holder in the Demand Registration. (b) If a Demand Registration is initiated, and the Company then wishes to offer any of its securities in connection with the registration, no such securities may be offered by the Company without the consent of Purchasers participating in the Demand Registration holding a majority of the securities of the Purchasers to be covered by such Demand Registration (a "Majority of Participating Purchasers") (such consent not to be unreasonably withheld). (c) Upon receipt of the Registration Demand, the Company shall expeditiously effect the registration under the Act of the Registrable Securities and use its reasonable best efforts to have such registration become and remain effective as provided in Section 7.8. (d) A Majority of Participating Purchasers shall have the right to select the underwriters for any underwritten offering pursuant to this Section 7.1 as long as such underwriters are reasonably acceptable to the Company and any demand registration pursuant to this Section 7.1 may, at the election of a Majority of Participating Purchasers, be in the form of a "firm commitment" underwritten offering; provided, however, that no such offering may be in the form of "best efforts" or similar type offering. In this regard, if the Company has established a "shelf" registration statement pursuant to Section 7.1(a), upon the request of a Majority of Participating Purchasers, the Company shall amend the shelf registration to provide for an underwritten offering otherwise consistent with the 30 35 provisions of Article 7, the provisions of such underwritten offering to be in effect for at least 120 days (or such lesser time as such Majority of Participating Purchasers shall request) whereupon, at the request of such Majority of Participating Purchasers or the election of the Company, such "shelf" registration shall be amended to no longer reference an underwritten offering; provided, that the Purchasers shall not be entitled to request such an underwritten "shelf" offering (or any other underwritten offering) more than once every 365 days. (e) As used in this Agreement, "Registrable Securities" shall mean (i) any Preferred Shares, (ii) any Conversion Shares, (iii) any securities issued or issuable with respect to any Preferred Shares or Conversion Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise (including distributions on Preferred Shares), and (iv) any other Preferred Shares or shares of Common Stock acquired by the Purchasers. Section 7.2 Piggyback Registration. (a) If the Company proposes to register any of its securities under the Act for sale pursuant to an underwritten public offering for cash (otherwise than in connection with the registration of securities issuable pursuant to an employee stock option, stock purchase or similar plan or pursuant to a merger, exchange offer or a transaction of the type specified in Rule 145(a) under the Act and other than the Company's first proposed registration after the Closing, but only to the extent prepared and filed with the SEC within 270 days thereafter), the Company shall give each Purchaser notice of such proposed registration at least 30 days prior to the filing of a registration statement. At the written request of any of the Purchasers within 15 Business Days after the receipt of the notice from the Company, any such request stating the number of Registrable Securities that the Purchasers wish to sell or distribute publicly under the registration statement proposed to be filed by the Company, the Company shall use its reasonable best efforts to register under the Securities Act the sale of such Registrable Securities, and to cause such registration (a "Piggyback Registration") to become and remain effective as provided in Section 7.8. The Company may at any time withdraw or cease proceeding with the Piggyback Registration if it shall at the same time withdraw or cease proceeding with the registration of all the securities originally proposed to be registered. Notwithstanding anything to the contrary set forth in this Agreement, no Purchaser may participate in a Piggyback Registration under this Section 7.2 unless, at the time thereof, such Purchaser owns at least 5% of the then- outstanding Preferred Shares (or an equivalent number of Conversion Shares). (b) If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters thereof advise the Company and the Purchasers in writing that in their opinion the number of securities requested to be included in the registration exceeds the number which can be sold in the offering without adversely affecting the offering, the Company shall include in the registration (i) first, the securities that the Company proposes to sell for its own account and (ii) second, the 31 36 Registrable Securities that the Purchasers propose to sell in proportion to the number of shares each proposes to sell pursuant to this clause (ii). Section 7.3 Indemnification by the Company. In the event of any registration of any Registrable Securities under the Act, the Company shall and hereby does, indemnify and hold harmless each Purchaser, each of its directors, officers, each other Person who participates as an underwriter in the offering or sale of such Registrable Securities and each other Person, if any, who controls such Purchaser or any such underwriter within the meaning of Section 15 and Section 20 of the Act against any losses, claims, damages or liabilities, joint or several, to which the Purchaser or any such director or officer or underwriter or controlling Person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which the Registrable Securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company shall reimburse such Purchaser, and each such director, officer, underwriter and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Purchaser, as the case may be, specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of a Purchaser or any such director, officer or controlling Person and shall survive the transfer of the Registrable Securities by a Purchaser. Section 7.4 Indemnification by the Purchasers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 7.1 or 7.2, that the Company shall have received an undertaking satisfactory to it from a Purchaser to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 7.3) the Company, each director of the Company, each officer of the Company signing such registration statement, each other Person who participates as an underwriter in the offering or sale of such Registrable Securities and each other Person, if any, who controls the Company within the meaning of Section 15 and Section 20 of the Act with respect to any untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein or any 32 37 amendment or supplement thereto, if such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Purchaser, specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer by the seller of the securities of the Company being registered. Section 7.5 Notices of Claims, Etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 7.3 or 7.4, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 7.3 or 7.4, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist that would make such separate representation advisable or the indemnified party may have defenses not available to the indemnifying party in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. The indemnification required by this Article 7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. Section 7.6 Other Indemnification. Indemnification similar to that specified in this Article 7 (with appropriate modifications) shall be given by the Company and the Purchasers with respect to any required registration or other qualification of Registrable Securities under any federal or state law or regulation of any governmental authority other than the Act. Section 7.7 Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Article 7 is for 33 38 any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms in respect of any losses, claims, damages or liabilities suffered by an indemnified party referred to therein, each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the liable selling shareholders on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the liable selling shareholders (including, in each case, that of their respective officers, directors, employees, agents and controlling Persons) on the other shall he determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or by or on behalf of the selling shareholders, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Section 7.8 Registration Covenants of the Company. In the event that any Registrable Securities of a Purchaser are to be registered pursuant to Section 7.1 or 7.2, the Company covenants and agrees that it shall use its reasonable best efforts to effect the registration and cooperate in the sale of the Registrable Securities to be registered and shall as expeditiously as possible: (a) (i) prepare and file with the SEC a registration statement with respect to the Registrable Securities (as well as any necessary amendments or supplements thereto) (a "Registration Statement") and (ii) use its reasonable best efforts to cause the Registration Statement to become effective as promptly as practicable and in any event within 90 days of receipt of the Registration Demand (subject, however, to the provisions of Section 7.13); (b) prior to the filing described above in Section 7.8(a), furnish to such Purchaser copies of the Registration Statement and any amendments or supplements thereto and any prospectus forming a part thereof with respect to which (i) the Purchasers shall be afforded a reasonable opportunity to review and comment thereon prior to filing and (ii) the Company will not unreasonably decline to make such changes thereto required by the Act; (c) notify such Purchaser, promptly after the Company shall receive notice thereof, of the time when the Registration Statement becomes effective or when any amendment or supplement or any prospectus forming a part of the Registration Statement has been filed; (d) notify such Purchaser promptly of any request by the SEC for the amending or supplementing of the Registration Statement or prospectus or for additional 34 39 information and promptly deliver to the Purchaser copies of any comments received from the SEC; (e) (i) advise such Purchaser after the Company shall receive notice or otherwise obtain knowledge of the issuance of any order by the SEC suspending the effectiveness of the Registration Statement or any amendment thereto or of the initiation or threatening of any proceeding for that purpose and (ii) promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal promptly if a stop order should be issued; (f) (i) subject to Section 7.13 prepare and file with the SEC such amendments and supplements to the Registration Statement and each prospectus forming a part thereof as may be necessary to keep the Registration Statement continuously effective for the period of time necessary to permit the Purchaser to dispose of all its Registrable Securities; provided, however, that the Company shall not be required to keep the Registration Statement effective if all of the Registrable Securities held by the Purchasers could be sold without restriction pursuant to the provision of Rule 144(k) under the Act and (ii) comply with the provisions of the Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during such period in accordance with the intended methods of disposition by such Purchaser set forth in the Registration Statement; (g) furnish to such Purchaser such number of copies of the Registration Statement, each amendment and supplement thereto, the prospectus included in the Registration Statement (including each preliminary prospectus) and such other documents as such Purchaser may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Purchaser; (h) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as determined by the underwriters after consultation with the Company and such Purchaser and do any and all other acts and things which may be reasonably necessary or advisable to enable such Purchaser to consummate the disposition in such jurisdictions of the Registrable Securities (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction in which it would not otherwise be required to qualify but for this Section 7.8 (h), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction); (i) notify such Purchaser, at any time when a prospectus relating thereto is required to be delivered under the Act, of the happening of any event as a result of which the Registration Statement would contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 35 40 (j) if the Common Stock is not then listed on a securities exchange, use its reasonable best efforts, consistent with the then-current corporate structure of the Company, to facilitate the listing of the Common Stock on the New York Stock Exchange; (k) provide a transfer agent and registrar, which may be a single entity, for all the Registrable Securities not later than the effective date of the Registration Statement; it being hereby agreed that the Purchasers shall furnish to the Company such information regarding the Purchasers and the plan and method of distribution of Registrable Securities intended by the Purchasers as the Company may from time to time reasonably request in writing and as shall be required by law or by the SEC in connection therewith; (l) with respect to a firm commitment underwritten offering, enter into such customary agreements (including, as appropriate, an underwriting agreement in customary form) and take all such other action, if any, as the Purchaser or the underwriters shall reasonably request in order to expedite or facilitate the disposition of the Registrable Securities pursuant to this Article 7; (m) (i) make available for inspection by such Purchaser, any underwriter participating in any disposition pursuant to the Registration Statement and any attorney, accountant or other agent retained by such Purchaser or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by such Purchaser or any such underwriter, attorney, accountant or agent in connection with the Registration Statement; (n) use its reasonable best efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental authorities as may be necessary to enable such Purchaser to consummate the disposition of such Registrable Securities; (o) cause the Company's independent public accountants to provide to the underwriters, if any, and the selling holders, if permissible, a comfort letter in customary form and covering such matters of the type customarily covered by comfort letters; (p) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter in an underwritten offering; and (q) use all reasonable efforts to facilitate the distribution and sale of any Registrable Securities to be offered pursuant to this Agreement, including without limitation by making road show presentations, holding meetings with potential investors 36 41 and taking such other actions as shall be appropriate or as shall be requested by the lead managing underwriter of an underwritten offering; provided, that the Company shall not be required to make a road show presentation unless requested by a Majority of Participating Purchasers, which request may only be made once every 365 days. Section 7.9 Expenses. In connection with any Demand Registration pursuant to Section 7.1 or any Piggyback Registration pursuant to Section 7.2, the Company shall pay all registration, filing and NASD fees, all fees and expenses of complying with securities or "blue sky" laws and any commissions, fees and disbursements of underwriters customarily paid by sellers of securities (based upon offering proceeds to be received by it). In any Demand Registration or Piggyback Registration, the Company shall be responsible for the fees and disbursements of counsel for the Company and of its independent public accountants and premiums and other costs of policies of insurance, if any, against liabilities arising out of the public offering of the Registrable Securities; provided, that the Company shall not be required to obtain such insurance. The Purchasers shall pay for underwriting discounts and commissions customarily paid by sellers of securities (based upon offering proceeds to be received by each such Purchaser). Section 7.10 Assignment of Registration Rights. A Purchaser or any Subsequent Purchaser (as defined) may assign its rights under this Article 7 to anyone (a "Subsequent Purchaser") to whom the Purchaser or any Subsequent Purchaser sells, transfers or assigns any of the Registrable Securities (other than in sales pursuant to Rule 144 under the Act, a Demand Registration or a Piggyback Registration effected pursuant to this Article 7), in which case such Person shall, for purposes of this Article 7, be considered a Purchaser; provided that such Person shall not be considered a Purchaser under this Article 7 until such time as written notice is provided by the assigning Purchaser or Subsequent Purchaser to the Company of such assignment. Notwithstanding the above, only Subsequent Purchasers holding at least 10% of the Preferred Shares (or an equivalent amount of Conversion Shares) shall be entitled to the rights of a Purchaser under Section 7.8 (m) and (o). Section 7.11 Other Registration Rights. Notwithstanding any other provision of this Agreement, if the Company at any time grants registration rights to any other Person on terms which any Purchaser considers preferential to the terms in this Article 7, then the Purchasers shall be entitled to registration rights with such preferential terms; provided that such provision shall not apply with respect to any registration rights granted to register the debt securities to be issued by the company under the Bridge Facility or any debt securities issued in lieu thereof or for the refinancing thereof. The Company shall not grant any right of registration under the Act relating to any of its securities to any Person other than the Purchasers unless the Purchasers shall be entitled to have included in any Piggyback Registration effected a number of Registrable Securities requested by the Purchaser to be so included representing at least 25% of such offering prior to the inclusion of any securities requested to be registered by the Persons entitled to any such other registration rights. 37 42 Section 7.12 Rule 144; Rule 144A. So long as the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall take all actions reasonably necessary to enable the Purchasers to sell the Registrable Securities without registration under the Act within the limitation of the exemptions provided by Rule 144 and Rule 144A under the Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC, including filing on a timely basis all reports required to be filed by the Exchange Act. Section 7.13 Limitation on Requirement to File or Amend Registration Statement. Anything in this Agreement to the contrary notwithstanding, it is understood and agreed that the Company shall not be required to file a Registration Statement, amendment or post-effective amendment thereto or prospectus supplement or to supplement or amend any Registration Statement if the Company is then involved in discussions concerning, or otherwise engaged in, an acquisition, disposition, financing or other material transaction and the Company determines in good faith that the making of such a filing, supplement or amendment at such time would materially adversely affect or interfere with such transaction so long as the Company shall, as soon as practicable thereafter, make such filing, supplement or amendment, to the extent then practicable; provided, however, that in no event shall any delay in filing pursuant to this Section 7.13 be for a period in excess of 60 days or be exercised by the Company more than twice during any 365 day period (and, at least 70 days must pass after the end of any such delay period prior to the date the Company may exercise its second delay period in any 365 day period) without a waiver as permitted by Section 11.3. The Company shall promptly give each Purchaser written notice of any such postponement, containing a general statement of the reasons for such postponement and an approximation of the anticipated delay; provided, however, that nothing herein shall require the Company to disclose any terms of any such transaction or the identity of any party thereto. Upon receipt by a Purchaser of notice of an event of the kind described in this Section 7.13, such Purchaser shall forthwith discontinue any disposition of Registrable Securities until receipt of notice from the Company that such disposition may continue and of any supplemented or amended prospectus indicated in such notice. ARTICLE 8 TERMINATION Section 8.1 Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written consent of the Company and the Purchasers; (b) by the Purchasers, if the Closing shall not have occurred on or before December 31, 1997; provided, however, that the right to terminate this Agreement 38 43 under this clause (b) shall not be available to any Purchaser whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date and the Apollo Purchasers shall be deemed to be one Purchaser for purposes of this proviso; (c) by the Purchasers or the Company, if any judgment, injunction, order or decree enjoining the Purchasers, or the Company from consummating this Agreement is entered and such judgment, injunction, order or decree shall become final and non-appealable; provided, however, that the Purchasers and the Company shall have used all reasonable efforts to remove such judgment, injunction, order or decree; or (d) by the Company, in the event the Merger Agreement has been terminated in accordance with its terms and a period of at least six months has elapsed since such termination of the Merger Agreement, and at least six months has elapsed since the Purchaser and the Target engaged in substantive discussions regarding a merger, consolidation, business combination, stock or asset acquisition, joint venture or other similar investment by the Company in the Target. Section 8.2 Effect of Termination. If this Agreement is terminated pursuant to Section 8.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except (A) to the extent such termination results from the breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement and (B) that the representation contained in Sections 3.18 (Finder's Fee), 4.7 (Finder's Fee) and the covenants and agreements contained in Section 5.8 (Publicity), Article 6 (Survival and Indemnification), Section 11.1 (Notices), Section 11.2 (Fees and Expenses) and Section 11.11 (Submission to Jurisdiction; Waiver of Jury Trial) shall survive the termination hereof. ARTICLE 9 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASERS The obligations of the Purchasers to be discharged under this Agreement at the Closing are subject to satisfaction of the following conditions at or prior to the Closing (unless expressly waived in writing by the Purchasers at or prior to the Closing): Section 9.1 Compliance by the Company. Each of the terms, covenants and conditions of this Agreement to be complied with and performed by the Company at or prior to the Closing shall have been complied with and performed by it in all material respects, and the representations and warranties made by the Company in this Agreement shall be true and correct (i) as of the date hereof and (ii) as of the Closing except to the extent that the circumstances or events resulting in the failure of such representations and warranties to be true and correct as of the Closing would not have a Material Adverse 39 44 Effect (without duplication of any materiality standard contained therein) on the Company after giving effect to the Target Acquisition. Section 9.2 No Injunction. At the Closing Date, there shall be no injunction, restraining order or decree of any nature of any court or government authority of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby or the Target Acquisition. Section 9.3 Regulatory Matters. There shall have been received, and shall be in full force and effect, all requisite Approvals with respect to the purchase and holding by the Purchasers of the Preferred Shares. The purchase of and payment for the Preferred Shares on the Closing Date on the terms and conditions herein provided shall not violate any applicable law or governmental regulation and shall not subject the Purchasers to any material tax, penalty or liability, or require the Purchasers to register or qualify under or pursuant to any applicable law or governmental regulation. In the reasonable opinion of the Purchasers, there shall not have occurred, and there shall not be pending or threatened, any change in law or regulation that has or could reasonably be expected to have a Material Adverse Effect on the Company after giving effect to the Target Acquisition. Section 9.4 Legal Opinions. The Company shall have furnished to the Purchasers on the Closing Date the opinion of Jones, Day, Reavis & Pogue, counsel to the Company, dated the Closing Date, in customary form and substance for transactions of this nature and in form and substance reasonably satisfactory to the Purchasers and the Company. Section 9.5 Lauren Agreement. The change of control provisions contained in the Lauren Agreement shall have been modified in a manner reasonably acceptable to the Purchasers. Section 9.6 Articles of Incorporation and By-laws; Ownership Structure. The Articles of Incorporation and By- laws shall not have been amended, modified or supplemented in any respect, and no material change shall have occurred in the ownership structure of the Company, except as contemplated hereby or by the Merger Agreement. Section 9.7 Closing Documents. The Company shall have delivered to the Purchasers the following: (a) a certificate of the chief executive officer and the chief financial officer of the Company, dated the Closing Date, to the effect that the conditions specified in Section 9.1 have been satisfied and that the Target Acquisition has been consummated; (b) incumbency certificates dated the Closing Date for the officers of the Company executing this Agreement or any of the other Transaction Documents and 40 45 any certificates or documents delivered in connection with this Agreement, the other Transaction Documents or the Closing; (c) a certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date, certifying attached copies of the By-laws of the Company and the resolutions adopted by the Board of Directors of the Company authorizing the execution and delivery by the Company of this Agreement and the other Transaction Documents and the consummation by the Company of the transactions contemplated hereby and thereby; (d) a copy of the Articles of Incorporation as filed with and certified by the Secretary of the Sate of Texas; (e) a certificate of the Secretary of the State of Texas, dated a recent date, certifying that the Company is in good standing in Texas and that all reports, if any, have been filed as required and that all fees in connection therewith and all franchise taxes have been paid; and (f) such other certificates or documents as the Purchaser or its counsel may reasonably request relating to the transactions contemplated hereby. Section 9.8 Company Indebtedness. The Purchasers shall be satisfied that, after giving effect to the transactions contemplated hereby and by the other Transaction Documents, at the Closing (a) the Company will have not less than $40 million of availability under its revolving credit facility (based upon the pro forma consolidated 9/30/97 balance sheet) immediately after the initial funding of the Company's senior credit facilities (such amount to be increased by 61.02% of the principal amount of any 6% Convertible Subordinated Debentures due 2012 ("6% Notes") of the Target outstanding immediately prior to the merger contemplated by the Merger Agreement, (b) the Company shall have entered into the senior credit facilities on the explicit terms set forth in the commitment letter attached hereto, with such additional terms (including but not limited to detailed provisions contemplated by such explicit terms) satisfactory to the Purchasers with not less than $600 million of availability and all conditions to the initial funding thereunder shall have been satisfied; (c) the Company shall have issued subordinated debt on the explicit terms set forth in the commitment letter attached hereto, with such additional terms (including but not limited to detailed provisions contemplated by such explicit terms) satisfactory to the Purchasers in an amount not less than $135 million; and (d) the Company and the Target shall have no other outstanding (i) Indebtedness for Borrowed Money or preferred stock other than (w) approximately $22 million of Company's and the Target's industrial revenue bonds, (x) approximately $125 million of the Company's 10% Senior Subordinated Notes due 2006 under the Indenture, (y) approximately $117.8 million principal amount of the Target's 6% Notes (to the extent such 6% Notes have not theretofore been converted in accordance with their terms) and (z) other Indebtedness for Borrowed Money not exceeding $1 million. The terms of 41 46 any of the above outstanding Indebtedness shall not have been amended without the Purchasers' consent. Section 9.9 Expenses. The Company shall have paid or reimbursed all Transaction Expenses theretofore incurred by the Purchasers in connection with the Transaction Documents (or made provision satisfactory to the Purchasers for payment or reimbursement of such expenses in the case of expenses incurred but not yet billed to Purchasers) in accordance with the letter agreement dated August 19, 1997 between the Company and Apollo Management, L.P. Section 9.10 Condition and Status of the Company and the Target. Since December 31, 1996 and after giving effect to the transactions contemplated by the Transaction Documents, there shall have been no Bankruptcy Event, no Change of Control, no default or event of default under any material Instrument to which the Company or any Subsidiary of the Company is a party and no event or events causing a Material Adverse Effect on the Company after giving effect to the Target Acquisition, nor any developments that could, individually or in the aggregate, in the reasonable opinion of the Purchasers, be expected to result in a Material Adverse Effect on the Company after giving effect to the Target Acquisition. No information relating to (i) events or conditions not disclosed to the Purchasers prior to the date hereof or (ii) new information or additional developments concerning conditions or events previously disclosed to the Purchasers, shall have come to the attention of the Purchasers as a result of their continuing review of the Company and the Target that the Purchasers reasonably believe is likely to have a Material Adverse Effect on the Company after giving effect to the Target Acquisition. Section 9.11 Merger Agreement. The Merger Agreement in the form attached hereto shall not have been altered, amended or otherwise changed or supplemented or any condition therein waived, without the prior written consent of the Purchasers. The transactions contemplated by the Merger Agreement (including the issuance of shares of Company Common Stock as contemplated by Section 2.1(e)(i)(B) thereof, without the application of Section 2.4 thereof) shall be closed simultaneously with the Closing, and the Company's shareholders shall have approved, by the required vote, the issuance of Common Stock and Preferred Stock as contemplated hereby and by the Merger Agreement. Section 9.12 No Shareholders or Voting Agreements. No shareholders or voting agreements relating to the Company shall be in effect except as may be approved in writing by the Purchasers. Section 9.13 Financial Markets. There shall not have occurred after the date hereof a material adverse change in the market for equity financings or a material disruption of, or a material adverse change in, financial, banking or capital market conditions, in each case as determined by the Purchasers in their reasonable discretion. 42 47 Section 9.14 Certain Agreements. The Company shall have provided to the Purchasers true and correct copies of all written agreements and understandings (or a written summary of all unwritten agreements and understandings) with any lenders, advisors, or financing sources relating to the transactions contemplated by the Transaction Documents. ARTICLE 10 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY The obligations of the Company to be discharged under this Agreement at the Closing are subject to satisfaction of the following conditions at or prior to the Closing (unless waived by the Company at or prior to the Closing): Section 10.1 Purchaser Representation and Warranties. The representations and warranties made by the Purchasers in this Agreement shall be true and correct as of the Closing except to the extent that the circumstances or events resulting in the failure of such representations and warranties to be true and correct as of the Closing would not have a Material Adverse Effect on the Company, the Target and their respective Subsidiaries, taken as a whole, after giving effect to the Target Acquisition. Section 10.2 Target Investment. Simultaneously with the Closing either (i) the Target Acquisition, (ii) a merger, consolidation or other business combination between the Company and the Target or an investment in, or acquisition of the stock or assets of, the Target by the Company, shall have been consummated. Section 10.3 No Legal Action. At the Closing Date, there shall be no injunction, restraining order or decree of any nature of any court or government authority of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby. ARTICLE 11 MISCELLANEOUS Section 11.1 Notices. All notices or other communications given or made hereunder shall be validly given or made if in writing and delivered by facsimile transmission or in person at, mailed by registered or certified mail, return receipt requested, postage prepaid, or sent by a reputable overnight courier to, the following addresses (and shall be deemed effective at the time of receipt thereof). 43 48 If to the Company: Pillowtex Corporation 4111 Mint Way Dallas, Texas 75237 Attention: John H. Karnes, Esquire, Vice President and General Counsel with copies to: Jones, Day, Reavis & Pogue 2001 Ross Avenue, Suite 2300 Dallas, Texas 75201 Telecopy: (214) 969-5100 Attention: Henry L. Gompf, Esquire If to the Purchasers: At their respective addresses set forth on Exhibit A hereto with a copy to: Apollo Management, L.P. 1999 Avenue of the Stars 19th Floor Los Angeles, CA 90067 Telecopy: (310) 201-4166 Attention: Michael Weiner, Esquire Akin, Gump, Strauss, Hauer & Feld, L.L.P. 590 Madison Avenue New York, New York 10022-4616 Telecopy: (212) 872-1002 Attention: Patrick J. Dooley, Esquire and Eliot Raffkind, Esquire or to such other address as the party to whom notice is to be given may have previously furnished notice in writing to the other in the manner set forth above. Section 11.2 Fees and Expenses. The Company agrees to pay to the Purchasers the Transaction Expenses in accordance with the letter agreement dated August 19, 1997 between the Company and Apollo Management L.P. Furthermore, upon termination of this Agreement, the Company shall promptly pay to the Purchasers or an Affiliate of the Purchasers any unpaid Transaction Expenses up to and including the date of such termination. The Company further agrees that if the Target Acquisition is not completed for any reason whatsoever and the Company or any Affiliates, directly or indirectly, receives any advisory, topping, break-up, commitment, funding or similar fee (the "Fee") 44 49 as a result thereof, the Company hereby covenants to pay the Purchasers, promptly following receipt thereof by the Company or such Affiliates, in the aggregate, the lesser of (i) $2.4 million and (ii) 20% of the amount of the net Fee remaining after payment by the Company of actual out-of-pocket expenses, provided that such expenses shall not include any Fees payable to any advisers or financing sources (but shall include amounts paid by the Company in respect of any expense reimbursement obligations for out-of-pocket expenses payable to any of such parties). The Company hereby warrants that it does not, as of the date hereof, directly or indirectly own any stock or other security of the Target. Section 11.3 Amendment; Waiver. The provisions of this Agreement may be modified or amended, and waivers and consents to the performance and observance of the terms hereof may be given, only by written instrument executed and delivered by the Company and holders of a majority of the Preferred Shares. The failure at any time to require performance of any provision hereof shall in no way affect the full right to require such performance at any time thereafter. The waiver by any party to this Agreement of a breach of any provision hereof shall not be taken or held to be a waiver of any succeeding breach of such provision or any other provision or as a waiver of the provision itself. Section 11.4 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the provision held to be invalid, illegal or unenforceable. Section 11.5 Headings. The index and article and section headings herein are for convenience only and shall not affect the construction hereof. Section 11.6 Entire Agreement. This Agreement and the other Investment Agreements embody the entire agreement between the parties relating to the subject matter hereof and any and all prior oral or written agreements, representations or warranties, contracts, understandings, correspondence, conversations, and memoranda, whether written or oral, between the Company and the Purchasers, or between or among any of their agents, representatives, parents, Subsidiaries, Affiliates, predecessors in interest or successors in interest, with respect to the subject matter hereof are of no further force and effect. Section 11.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and both of which together shall be deemed to be one and the same instrument. Section 11.8 Assignment. All covenants and agreements contained in this Agreement by or on behalf of the parties hereto shall bind, and inure to the benefit of, the 45 50 respective successors and assigns of the parties hereto. Subject to Section 7.10, the rights and obligations of either party hereto may not be assigned without the prior written consent of the other parties; provided, however that prior to the Closing, each Purchaser may assign all or any portion of its rights hereunder (along with the corresponding obligations), provided that such Purchaser shall continue to be bound hereby. Section 11.9 Third-Party Beneficiaries. Except for Article 6 and Sections 7.3, 7.4, 7.6 and 7.7, 11.2 and 11.11, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein expressed or implied shall give or be construed to give to any Person, other than the parties hereto and such assigns, any legal or equitable rights hereunder. Section 11.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE. Section 11.11 Submission to Jurisdiction; Waiver of Jury Trial. Each of the Company and the Purchasers hereby submits to the exclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State Court sitting in the City of New York for purposes of all legal proceedings which may arise hereunder or under any other Transaction Documents. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company hereby consents to process being served in any such proceeding by the mailing of a copy thereof by registered certified mail, postage prepaid, to its address specified in Section 11.1 or in any other manner permitted by law. THE COMPANY AND THE PURCHASERS (AND ANY PERSON CLAIMING THROUGH THEM OR PURSUANT TO THIS AGREEMENT) HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OF THE PURCHASER OR THE COMPANY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PURCHASER'S ENTERING INTO THIS AGREEMENT. The Company hereby irrevocably designates CT Corporation, 1633 Broadway, New York, NY 10019, as the designee, appointee and agent of the Company to receive, for and on behalf of the Company, service of process in such jurisdiction in any legal action or proceeding with respect to this Agreement or any other Investment Agreement. It is expected that a copy of such process served on such agent will be promptly forwarded by mail to the Company at its address set forth in Section 11.1, but the failure of the Company to receive such copy shall not affect in any way the service of such process. The Company further irrevocably consents to the service of process of any 46 51 of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered certified mail, postage prepaid, to the Company at such address. Nothing herein shall affect the right of the Purchasers to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction. Section 11.12 Further Assurances. The parties agree to use their reasonable efforts to take, or cause to be taken, all further actions as shall be necessary to make effective and consummate the transactions contemplated by this Agreement and the Transaction Documents. The Company shall, on the last day of each month prior to the Closing Date, and on the last day of each Fiscal Quarter after the Closing Date furnish to the Purchasers a certificate signed by an authorized executive officer as to the compliance with its obligations under this Agreement and the other Investment Agreements. At any time that any party hereto is in breach of any representation, warranty, covenant or agreement in this Agreement or any of the other Transaction Documents, such party shall inform the other parties of such breach, and shall take all actions necessary to mitigate the adverse effects of such breach; provided that in no event will disclosure of a breach relieve the breaching party from any of its obligations or affect the rights of any other party hereto. 47 52 IN WITNESS WHEREOF, the parties hereto have executed this Agreement. PILLOWTEX CORPORATION By: /s/ JEFFREY D. CORDES -------------------------------------- Name: Jeffrey D. Cordes Title: President & COO APOLLO INVESTMENT FUND III, L.P. By: Apollo Advisors II, L.P., Its General Partner By: Apollo Capital Management II, Inc., Its General Partner By: /s/ ROBERT A. KATZ -------------------------------------- Name: Robert A. Katz Title: Vice President APOLLO OVERSEAS PARTNERS III, L.P. By: Apollo Advisors II, L.P., Its Managing Partner By: Apollo Capital Management II, Inc., Its General Partner By: /s/ ROBERT A. KATZ -------------------------------------- Name: Robert A. Katz Title: Vice President APOLLO (UK) PARTNERS III, L.P. By: Apollo Advisors II, L.P., Its Managing Partner By: Apollo Capital Management II, Inc., Its General Partner By: /s/ ROBERT A. KATZ -------------------------------------- Name: Robert A. Katz Title: Vice President 48 53 EXHIBIT A PURCHASERS
Name and address Shares of Preferred Purchase Price for of Purchaser Stock to be Acquired Preferred Stock Acquired ------------ -------------------- ------------------------ Apollo Investment Fund III, L.P. 59,268 $59,268,000 c/o Apollo Capital Management II, Inc. 1301 Avenue of the Americas New York, New York 10019 Attention: Robert Katz Facsimile: (212) 261-4102 Apollo Overseas Partners III, L.P. 3,542 $3,542,000 c/o Apollo Capital Management II, Inc. 1301 Avenue of the Americas New York, New York 10019 Attention: Robert Katz Facsimile: (212) 261-4102 Apollo (UK) Partners III, L.P. 2,190 $2,190,000 c/o Apollo Capital Management II, Inc. 1301 Avenue of the Americas New York, New York 10019 Attention: Robert Katz Facsimile: (212) 261-4102
49 54 EXHIBIT B STATEMENT OF RESOLUTION FOR SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK OF PILLOWTEX CORPORATION PURSUANT TO ARTICLE 2.13 OF THE TEXAS BUSINESS CORPORATION ACT I, _______________, ___________ of Pillowtex Corporation, a corporation organized and existing under the Texas Business Corporation Act (the "Company"), DO HEREBY CERTIFY that at a meeting of the Board of Directors on ___________, 1997, at which meeting a quorum was present, the following resolution was adopted: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of Article V of the Company's Restated Articles of Incorporation, as amended, a series of Preferred Stock, par value $0.01 per share, of the Company be, and hereby is, created, and the designations, preferences, and relative rights of the shares of such series, and the qualifications, limitations or restrictions thereof, be, and hereby are, as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Redeemable Convertible Preferred Stock" (the "Preferred Stock") and the number of shares constituting such series initially shall be 200,000. Section 2. Definitions. For purposes of this Statement of Resolution, the following definitions shall apply: "1999 EPS" shall mean EPS for the twelve month fiscal year ending December 25, 1999 and shall be calculated on a pro forma basis, assuming the dividend rate on the Preferred Stock for calendar 1997 (if applicable) and calendar 1998 was the Adjusted 1998 Dividend Rate (as defined below) and the dividend rate on the Preferred Stock for calendar 1999 was the Applicable Dividend Rate, and assuming any additional dividends included in such pro forma calculation were paid in additional shares of Preferred Stock (including the effect of all dividends earned on unpaid dividends). "Adjusted 1998 Dividend Rate" shall mean (i) if 1999 EPS is equal to, or greater than, $2.35 (as adjusted pursuant to Section 3), 3% per annum, or (ii) if 1999 EPS is less than $2.35 (as adjusted pursuant to Section 3), 10% per annum. "Affiliate" of any specified Person shall mean: (a) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person; or 55 (b) any other Person which beneficially owns or holds ten percent or more of any class of the share capital normally entitled to vote in the election of directors of such specified Person; or (c) any other Person of which ten percent or more of the share capital normally entitled to vote in the election of directors of such Person is beneficially owned or held by such specified Person or a subsidiary of such specified Person; or (d) any other Person who is a director or officer (i) of such specified Person; (ii) of any Subsidiary of such specified Person or (iii) of any Person described in paragraph (a) above; and for purposes of this definition, "control" of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Dividend Rate" shall have the meaning assigned to it in Section 3. "Asset Sales" shall mean the sale or conveyance of assets in one or a series of related transactions (other than inventory sold in the ordinary course of business) having a fair market value in excess of $1,000,000. A "Bankruptcy Event" shall be deemed to have occurred with respect to a Person if such Person shall: (i) generally fail to pay, or admit in writing its inability to pay, its debts as they become due; (ii) apply for, consent to or acquiesce in, the appointment of a liquidator, trustee, receiver, sequestrator or other custodian for itself or any of its material Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; (iii) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a liquidator, trustee, receiver, sequestrator or other custodian for itself or any of its material Subsidiaries or for a substantial part of the property of any thereof and such appointment shall not be discharged within 30 days; (iv) commence, or permit or suffer to exist the commencement of, any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of such Person or any of its material Subsidiaries, and, if such case or proceeding is not commenced by such Person or any such Subsidiaries, such case or proceeding shall be consented to or acquiesced in by such Person or any of its material Subsidiaries or shall result in the entry of any order for relief or shall remain for 30 days undismissed; or 2 56 (v) take any action to authorize any of the foregoing. "Board" shall mean the Board of Directors of the Company. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York. "Capital Stock" shall mean any class or series of capital stock of the Company. "Catch Up Dividend" shall have the meaning set forth in Section 3. "Catch Up Dividend Amount" shall mean an amount of additional shares of Preferred Stock, such that, following the Catch Up Dividend, the holders of the Preferred Stock will have received the aggregate amount of dividends which should have been paid on the Preferred Stock from the Issue Date through and including the last Dividend Payment Date prior to the Final Determination Date, assuming (i) the dividend rate for calendar 1997 (if applicable) and calendar 1998 was the Adjusted 1998 Dividend Rate, (ii) the dividend rate for calendar 1999 was the Applicable Dividend Rate, and (iii) all such additional dividends were paid in additional shares of Preferred Stock when due (including the effect of all dividends earned on unpaid dividends). "Change of Control" shall have the meaning assigned to it in the Indenture except that any transaction or series of transactions in which the Apollo Purchasers (as defined in the Purchase Agreement) or their Affiliates or any transferees of any of the foregoing (either individually or as part of a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) acquire 50% or more of the Company's capital stock shall not be deemed a Change of Control. "Company" shall mean Pillowtex Corporation, a Texas corporation. "Common Stock" shall mean the Common Stock, par value $0.01, of the Company. "Common Stock's Fair Market Value" shall mean (i) if the Common Stock is listed on a national securities exchange, the closing sale price per share on the principal exchange on which the Common Stock is listed as reported by such exchange, (ii) if the Common Stock is quoted in the National Market System, the closing sale price per share as reported by NASDAQ or (iii) if the Common Stock is traded in the over-the-counter market but not quoted in the National Market System, the average of the closing bid and asked quotations per share as reported by NASDAQ, or any other nationally accepted reporting medium if NASDAQ quotations shall be unavailable. "Control Notice" shall have the meaning assigned to it in Section 6(c)(ii). "Conversion Date" shall have the meaning assigned to it in Section 7(c). 3 57 "Conversion Price" shall mean $24.00 per share; provided that if the Determination Price is less than $23.00 then the Conversion Price shall equal the Determination Price plus $1.00; provided further, that the Conversion Price shall, in any event, be subject to adjustment from time to time as provided in Section 7. "Determination Price" shall mean the average of the closing sales prices of the Company's Common Stock as reported on the New York Stock Exchange Composite Transactions List for each of the 20 consecutive trading days immediately preceding the fifth trading day prior to the Closing Date (as defined in the Agreement and Plan of Merger dated September 10, 1997 among the Company, a Company Subsidiary and the Target). "Dividend Increase" shall have the meaning assigned to it in Section 3. "Dividend Payment Date" means each of March 31, June 30, September 30 and December 31 upon which quarterly dividend payments are due. "EPS" for any fiscal year shall mean the Company's diluted earnings per share (as calculated based on Financial Accounting Standard Board Statement No. 128) as included in the Company's audited financial statements for such fiscal year, as adjusted to exclude the following items set forth, included or reflected in such audited statements (a) the after-tax effect of any changes in GAAP from September 5, 1997, other than the effects of Financial Accounting Standards Board Statement No. 128, (b) the after-tax effect of any extraordinary gains or losses, and (c) the after-tax effect of gains on Asset Sales. "Event of Noncompliance" shall have the meaning assigned to it in Section 10. "Final Determination Date" shall have the meaning assigned to it in Section 3. "GAAP" shall mean generally acceptable accounting principles consistently applied in the United States, unless any other jurisdiction is specified, in which case it shall be the equivalent set of accounting principles for such jurisdiction. "Indenture" means the Indenture dated as of November 12, 1996, between the Company, certain guarantors described therein and Bank One, Columbus, N.A., as trustee, relating to the Series A and Series B 10% Senior Subordinated Notes of the Company. "Issue Date" shall mean the date of original issuance of the Preferred Stock. "Junior Securities" shall mean Capital Stock of the Company that, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank junior to the Preferred Stock. "Liquidation Preference" shall have the meaning assigned to it in Section 4. "Majority of the Preferred Stock" shall mean more than 50% of the outstanding shares of Preferred Stock. 4 58 "Mandatory Redemption Date" shall have the meaning assigned to it in Section 5(b). "Mandatory Redemption Price" shall have the meaning assigned to it in Section 5(b). "Optional Redemption Date" shall have the meaning assigned to it in Section 5(a)(i). "Optional Redemption Price" shall have the meaning assigned to it in Section 5(a)(i). "Parity Securities" shall mean Capital Stock of the Company that, with respect to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company, ranks on a parity with the Preferred Stock and has a mandatory redemption date on or after the Mandatory Redemption Date. "Participating Holder" shall have the meaning assigned to it in Section 6(c)(ii). "Permitted Indebtedness" shall mean (i) term loans issued pursuant to the Company's senior credit facilities contemplated in Section 9.8(b) of the Purchase Agreement, (ii) the subordinated debt contemplated in Section 9.8(c) of the Purchase Agreement, (iii) $22 million of the Company's and the Target's industrial revenue bonds, (iv) approximately $125 of the Company's 10% Senior Subordinated Notes due 2006 under the Indenture and (v) approximately $117.8 million principal amount of the Target's 6% Convertible Subordinated Debentures due 2012 ("6% Notes") (reduced to the extent such 6% Notes have theretofore been converted in accordance with their terms). "Person" shall include all natural persons, corporations, business trusts, associations, companies, partnerships, joint ventures and other entities and governments and agencies and political subdivisions. "Preferred Stock" shall mean the Series A Redeemable Convertible Preferred Stock of the Company. "Purchase Agreement" shall mean the Purchase Agreement dated as of September 10, 1997 among the Company and the purchasers named therein pursuant to which 65,000 shares of Preferred Stock are to be issued, including all schedules and exhibits thereto, as such Purchase Agreement may be from time to time amended, modified or supplemented. "Reclassification" shall mean any capital reorganization of the Company, any reclassification of the Common Stock, the consolidation of the Company with or the merger of the Company with or into any other Person, a statutory share exchange having an effect similar to a merger or consolidation, the sale, lease or other transfer of all or substantially all of the assets of the Company to any other Person or any similar transaction. The subdivision or combination of shares of Common Stock issuable upon conversion of shares of Preferred Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a "Reclassification" of the Common Stock for the purposes of Section 7(d)(iv). 5 59 "Senior Securities" shall mean Capital Stock of the Company that, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, ranks senior to the Preferred Stock or Capital Stock that, with respect to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company ranks on a parity with the Preferred Stock and has a mandatory redemption date prior to the Mandatory Redemption Date. "Special Redemption Date" shall have the meaning assigned to it in Section 5(a)(ii). "Special Redemption Price" shall have the meaning assigned to it in Section 5(a)(ii). "Subsidiary" means, as to any Person, (a) any corporation 51% or more of the outstanding shares of capital stock of which having ordinary voting power for the election of directors is owned directly or indirectly by such Person and (b) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has 51% or more of an equity interest at the time. "Target" shall mean Fieldcrest Cannon, Inc., a Delaware corporation. "Target Acquisition" shall have the meaning assigned to it in the Purchase Agreement. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. Section 3. Dividends. The holders of the outstanding shares of Preferred Stock shall be entitled to receive, when, as and if declared by the Board, out of funds legally available therefor, distributions in the form of dividends on each share of Preferred Stock as set forth below: (a) Right to Dividends. (i) Subject to the following provisions, beginning on the Issue Date through and including December 31, 1999, at a rate per annum of 3%; (ii) Beginning on January 1, 2000 through and including the Mandatory Redemption Date, at a rate (the "Applicable Dividend Rate") per annum based upon 1999 EPS as follows: (i) if 1999 EPS is less than $2.35, then the dividend rate shall be 10.0% per annum; (ii) if 1999 EPS is greater than, or equal to, $2.35 but less than $2.70, then the dividend rate shall be 7.0% per annum; and (iii) if 1999 EPS is greater than or equal to $2.70, then the dividend rate shall be 3.0% per annum; in each case subject to increase as set forth herein. Each of the $2.35 and $2.70 targets for 1999 EPS set forth above shall be (A) appropriately adjusted for (x) subdivisions and combinations of shares of Common Stock, (y) 6 60 Reclassifications and (z) dividends on Common Stock payable in shares of Common Stock subsequent to the Issue Date and (B) reduced by an amount equal to (rounded to the nearest hundredth) (x) 0.065 multiplied by (y)(i) $23.00 minus (ii) the Determination Price, but the provisions of this clause (B) shall only be applicable if the Determination Price is less than $23.00. The Company will promptly (and in any event within 5 Business Days) after determination of the 1999 EPS (which date of determination shall be no later than March 31, 2000), send to each record holder of Preferred Stock at its record address a written statement of its calculation of 1999 EPS (including each adjustment thereto for the items described in clauses (a) through (c) of the definition of EPS in Section 2 hereof and any adjustments pursuant to the definition of 1999 EPS in Section 2 hereof), and a negative assurance letter from the Company's auditors to the effect that they have reviewed such 1999 EPS calculation and that nothing has come to the auditors' attention that would cause them to believe that 1999 EPS was not calculated as required by this Statement of Resolution. In the event that the holders of a Majority of the Preferred Stock disagree with the calculation of 1999 EPS ("Disagreeing Holders"), such Disagreeing Holders (or their duly appointed representative) shall notify the Company in writing of such disagreement within 30 days after the applicable notice of such 1999 EPS figure has been sent by the Company. Failure to send such notice of disagreement within such time period shall be deemed acceptance of the Company's 1999 EPS figure absent fraud. Upon receipt of such notice of disagreement, the Company shall provide to the Disagreeing Holders and their representatives (including accountants) access to the books and records of the Company used to calculate such 1999 EPS figure during reasonable business hours, as well as the auditors that reviewed such calculation and the work papers relating to the audit of the Company's financial statements and the review of the 1999 EPS calculation. If, within 30 days of the Company's receipt of such notice of disagreement, agreement as to the proper 1999 EPS calculation cannot be reached, the calculation of such 1999 EPS figure shall be promptly determined by a "big-six" accounting firm, which does not audit the Company and which is mutually acceptable to holders of a majority of the shares held by the Disagreeing Holders and the Company. The Company and such Disagreeing Holders shall promptly (and in any event within 30 days after the expiration of the 30-day period described in the preceding sentence) appoint such accounting firm, and such accounting firm shall use its reasonable best efforts to calculate such 1999 EPS figure within 30 days after its appointment and produce such calculation in writing. The scope of such accounting firm's review of the 1999 EPS calculation shall be limited to the items included in clauses (a) through (c) of the definition of EPS in Section 2 hereof and any adjustments pursuant to the definition of 1999 EPS in Section 2 hereof. Absent fraud, such accounting firm's calculation of the 1999 EPS figure shall be binding on the Company and all holders of Preferred Stock for all purposes of this Statement of Resolution. If such accounting firm's calculation of the 1999 EPS figure is lower than that calculated by the Company, the Company shall bear the fees and expenses of such accounting firm. If such accounting firm's calculation of the 1999 EPS figure is equal to or higher than that calculated by the Company, the Disagreeing Holders shall bear the fees and expenses of such accounting firm. If 1999 EPS is less than $2.70 (as adjusted pursuant to this Section 3), then following the date on which the final determination of the 1999 EPS is made ("Final Determination Date"), as contemplated by the preceding paragraph, the Company will, no later than 5 days thereafter, pay to the holders of Preferred Stock the number of additional shares of Preferred Stock (the "Catch Up Dividend") equal to the Catch Up Dividend Amount. In determining dividends payable on 7 61 the next succeeding Dividend Payment Date following the Final Determination Date, the Company shall assume that the shares of Preferred Stock outstanding on the prior Dividend Payment Date included all additional shares issued in the Catch Up Dividend. All dividends shall be cumulative, whether or not declared, on a daily basis from the Issue Date and shall be payable quarterly, in arrears, on each Dividend Payment Date commencing ____________, 199_.* Dividends (in the form of additional dividends due) will compound quarterly on all unpaid dividends from the Dividend Payment Date with respect thereto until the date of payment at the applicable Annual Dividend Rate (as adjusted in accordance with this Section 3). From the Issue Date through the fifth anniversary of the Issue Date, dividends declared may be paid, at the Company's option, either in cash or in additional shares of Preferred Stock (other than the Catch Up Dividend, which shall be paid in additional shares of Preferred Stock). Fractional shares of Preferred Stock shall not be issued in certificated form, but shall be deemed outstanding on the books of the Company and held of record by the appropriate stockholder for all purposes, including the payment of dividends. Uncertificated fractional shares held of record by a stockholder, when aggregating a whole share, shall be issued in whole share increments. After the fifth anniversary of the Issue Date, dividends are payable only in cash. In the event that after the fifth anniversary of the Issue Date, the Company shall fail to pay dividends in cash on the Dividend Payment Date when due, the Applicable Dividend Rate applicable to any period in which any such dividends remain unpaid shall be increased by 0.5% per quarter for each quarter in which any such dividends remain unpaid (such rate increase, the "Dividend Increase"). The Applicable Dividend Rate plus the Dividend Increase applicable to any period shall not exceed the lesser of (i) 18.0% per annum and (ii) the maximum rate permitted by applicable law. After a Dividend Increase, when the Company pays all accrued and unpaid dividends, and upon the payment of dividends on the next Dividend Payment Date at the rate in effect prior to giving effect to any Dividend Increase, the annual dividend rate shall be decreased to the otherwise Applicable Dividend Rate. All dividends shall be paid pro rata to the holders entitled thereto. Section 4. Liquidation Rights of Preferred. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its shareholders, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made in respect of any other class of Capital Stock of the Company (other than Parity Securities) whether currently authorized or hereafter created, an amount equal to $1,000 per share plus an amount equal to all accrued and unpaid dividends thereon, whether or not earnings are available in respect of such dividends or such dividends have been declared, to and including the date full payment shall be tendered to the holders of the Preferred Stock with respect to such liquidation, dissolution or winding up, and no more (the "Liquidation Preference"). If upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, the assets to be distributed to the holders of the Preferred Stock, along with the holders of Parity Securities, if any, shall be __________________________________ * The first Dividend Payment Date after the Issue Date. 8 62 insufficient to permit the payment to such shareholders of the full preferential amounts aforesaid, then all of the assets of the Company shall be distributed ratably to the holders of the Preferred Stock and such Parity Securities on the basis of the amount due on such liquidation if there were sufficient assets held by each such shareholder. Neither a consolidation or merger of the Company with or into any other company nor a merger of any other company with or into the Company, nor a sale or transfer of all or any part of the Company's assets for cash, securities or other property, will be considered a liquidation, dissolution or winding up of the Company. Section 5. Redemptions. (a) Optional Redemption. (i) The Company may, at the option of the Board of Directors, redeem, to the extent of funds legally available therefor, at any time on or after the fourth anniversary of the Issue Date, in whole or in part, in the manner provided for in Section 5(c) hereof, any or all of the shares of the Preferred Stock, at a redemption price per share equal to (x) the Liquidation Preference plus (y) (A) the Redemption Premium (as defined below) multiplied by (B) the Liquidation Preference (minus any accrued and unpaid dividends from the Dividend Payment Date prior to the Optional Redemption Date). The "Redemption Premium" shall equal the Applicable Dividend Rate on the Preferred Stock on the fourth anniversary of the Issue Date and shall decline ratably (pursuant to the table attached hereto as Annex I) from the fourth anniversary of the Issue Date to the Mandatory Redemption Date so that at the Mandatory Redemption Date the Redemption Premium of the Preferred Stock under this Section 5(a)(i) (y) shall be equal to zero. The redemption price per share determined under this Section 5(a)(i) is referred to herein as the "Optional Redemption Price" and the date fixed for redemption in accordance with Section 5(c) below is the "Optional Redemption Date." In the event of a redemption pursuant to this Section 5(a)(i) of only a portion of the then outstanding shares of the Preferred Stock, the Company shall effect such redemption on a pro rata basis according to the number of shares held by each record holder of the Preferred Stock, except that the Company may redeem such shares held by holders of fewer than 10 shares (or shares held by holders who would hold less than 10 shares as a result of such pro rata redemption), without regard to the pro rata requirements of this sentence. (ii) To the extent a Change of Control has occurred and the Company has received a Control Notice from Participating Holders, the Company may, at the option of the Board, redeem, to the extent of funds legally available therefor all, but not less than all, of the Preferred Stock held by such Participating Holders on a date fixed by the Company, which date shall be no less than 20 days nor more than 90 days after receipt of the Control Notice or if the Control Notice is received more than 20 days prior to the date of the Change of Control no later than the date of the Change of Control (the "Special Redemption Date") in the manner provided for in Section 5(c) below at a redemption price per share equal to 101% of the Liquidation Preference (including, without limitation, an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Special Redemption Date to the Special Redemption Date) (the "Special Redemption Price"). 9 63 (b) Mandatory Redemption. On ________, 200_* (the "Mandatory Redemption Date") the Company shall redeem, to the extent of funds legally available therefor, in the manner provided for in Section 5(c) hereof, all of the shares of the Preferred Stock then outstanding at a redemption price per share equal to the Liquidation Preference (including, without limitation, an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the Mandatory Redemption Date to the Mandatory Redemption Date) (the "Mandatory Redemption Price"). (c) Procedures for Redemption. (i) At least thirty (30) days and not more than sixty (60) days prior to the date fixed for any redemption of the Preferred Stock in accordance with Section 5(a)(i) or Section 5(b) and at least five days prior to the Special Redemption Date for any redemption of the Preferred Stock in accordance with Section 5(a)(ii), written notice (the "Redemption Notice") shall be given by first class mail, postage prepaid, to each holder of record on the mailing date of such notice at such holder's address as it appears on the stock books of the Company (and by facsimile, if a record holder has provided a facsimile contact); provided that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Preferred Stock to be redeemed except as to the holder or holders to whom the Company has failed to give said notice or to whom such notice was defective. Any holder of Preferred Stock may exercise its conversion rights under Section 7(a) at any time up until 5:00 p.m. New York City time on the Business Day prior to the date fixed for redemption in accordance with this Section 5 (the "Redemption Date") and if not exercised prior to such time, such redemption right shall expire unless the Company defaults in making the payment due on redemption. The Redemption Notice shall state: (A) whether the redemption is pursuant to Section 5(a)(i), 5(a)(ii) or 5(b) hereof; (B) the Optional Redemption Price, the Special Redemption Price or Mandatory Redemption Price, as the case may be; (C) whether all or less than all the outstanding shares of the Preferred Stock are to be redeemed and the total number of shares of the Preferred Stock being redeemed; (D) the Redemption Date; (E) that the holder is to surrender to the Company or its transfer agent, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Preferred Stock to be redeemed; and (F) that dividends on the shares of the Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price, the Special Redemption Price or the Mandatory Redemption Price, as the case may be. __________________________________ * Date is 10# years after the Issue Date. 10 64 (ii) Each holder of Preferred Stock shall surrender the certificate or certificates representing such shares of Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price, Special Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) On and after the Redemption Date, unless the Company defaults in the payment of the applicable redemption price, dividends on the Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and all rights of the holders of redeemed shares shall terminate with respect thereto on the Redemption Date, other than the right to receive the Optional Redemption Price, Special Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. Section 6. Voting Rights. (a) General. The holders of Preferred Stock, except as otherwise required under Texas law or as set forth in Sections 6(b) and 6(c) below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the shareholders of the Company. (b) Amendments to Articles of Incorporation; Mergers and Similar Transactions. So long as any shares of the Preferred Stock are outstanding, the Company shall not (i) amend its Restated Articles of Incorporation (including this Statement of Resolution) so as to: (A) affect adversely the specified rights, preferences, privileges or voting rights of holders of shares of Preferred Stock or (B) authorize the issuance of additional shares of any class of Senior Securities (or amend the provisions of any existing class of Capital Stock to make such class of Capital Stock Senior Securities) or (ii) merge, consolidate or enter into any other Reclassification that would (A) materially affect adversely the special or relative rights, preferences, privileges or voting rights of the Preferred Stock, or (B) result in a breach of any of the Company's obligations under this Statement of Resolution, without, in any such case, the affirmative vote or consent of holders of at least a Majority of the Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing (to the extent permitted under the Company's Restated Articles of Incorporation) or by resolution adopted at an annual or special meeting of shareholders. Notwithstanding the foregoing, any amendment to the Restated Articles of Incorporation (including this Statement of Resolution) that would alter in any material respect the dividend rates, liquidation preference, redemption rights or conversion rights of the Preferred Stock shall require the affirmative vote or consent of each holder of Preferred Stock. (c) Election of Directors. (i) The foregoing notwithstanding, in the event of the Company's failure to pay dividends in accordance with Section 3, or the occurrence of one or more Events of Noncompliance, within 10 Business Days of such failure or such event, as the case may be, the Company shall notify each holder of Preferred Stock thereof in writing, and the number of directors constituting the Board shall thereupon be automatically increased so that the number of new 11 65 directorships of the Board so created will constitute at least 25.0% (rounded up to the nearest whole number) of the entire Board, after giving effect to such increase, and the holders of the Preferred Stock shall have, in addition to the other voting rights provided herein, the exclusive and special right, voting separately as a class, to elect directors to fill such newly created directorships (and to fill any vacancy in such directorships until such time as the special voting rights provided by this Section 6(c)(i) shall terminate as set forth below). If the event giving rise to the special voting rights was a failure to pay dividends or an Event of Noncompliance described in Section 10(a)(iii), the special voting rights will continue until all accrued and unpaid dividends have been paid in full or all Events of Noncompliance have been cured, as the case may be, subject to revesting in the event of any future failure to pay dividends in accordance with the terms hereof or a subsequent Event of Noncompliance. Except as provided in the prior sentence, the special voting rights provided by this Section 6(c)(i) shall continue as long as any Preferred Stock is outstanding. If the special voting rights provided by this Section 6(c)(i) terminate, the terms of the additional directors elected by the holders of Preferred Stock pursuant to this Section 6(c)(i) shall terminate and the number of directors constituting the Board shall then be decreased to such number as constituted the whole Board immediately prior to the occurrence of the event giving rise to such special voting rights. The special voting rights provided in this Section 6(c)(i) shall not preclude or affect the exercise of any other rights or remedies provided hereby or by agreement, by law or otherwise upon the occurrence of any event giving rise to such special rights. (ii) The foregoing notwithstanding, the Company will give notice to each holder of Preferred Stock within five days after the Company becomes aware of any Change of Control that has occurred or is reasonably likely to occur and, if a Change of Control occurs, the holders of a Majority of the Preferred Stock shall, by written notice to the Company and the other holders of Preferred Stock delivered before or 15 days after the Change of Control (a "Control Notice") have the right to elect a majority of the Board in accordance with this Section 6(c)(ii), unless the Company has theretofore redeemed shares of any holder of Preferred Stock participating in a Control Notice (each, a "Participating Holder") in accordance with Section 5(a)(ii). Any holder of Preferred Stock may, at any time within ten days after receipt of the Control Notice, elect to become a Participating Holder by delivery of written notice of such election to the Company and the other Participating Holders. If a Control Notice is received by the Company and the Company has not redeemed the shares of Preferred Stock held by all Participating Holders, upon the later to occur of (i) the occurrence of such Change of Control and (ii) the date that the Company's redemption rights under Section 5(a)(ii) shall have expired, the number of directors constituting the Board shall thereupon be automatically increased by such number as will be necessary to constitute a majority of the total number of the members, after giving effect to such increase, of such Board, and the holders of the Preferred Stock shall have, in addition to the other voting rights provided herein, the exclusive, special and continuing right, voting separately as a class, to elect directors to fill such newly created directorships (and to fill any vacancy in such directorships) and to continually elect at least a majority of the Board as long as any Preferred Stock is outstanding. (iii) The directors to be elected (or if such directors have been previously elected and any vacancy shall exist, such vacancy to be filled) by the holders of Preferred Stock (voting as a class) shall be elected (or filled) at (i) annual meetings of the shareholders of the Company, or (ii) a special meeting of the holders of Preferred Stock for the purpose of electing such directors (or filling any such vacancy), to be called by the Secretary of the Company upon the written request of the holders of record of 10% or more of the number of shares of Preferred Stock then outstanding; provided, however, that if the Secretary of the Company shall fail to call any such meeting within 12 66 10 days after any such request, such meeting may be called by any holder of Preferred Stock designated for that purpose by the holders of record of 10% or more of the number of shares of Preferred Stock then outstanding. At any meeting or at any adjournment thereof held for the purpose of electing directors at which the holders of shares of Preferred Stock shall have the special voting right provided by this Section 6(c), the presence, in person or by proxy, of the holders of the equivalent of a Majority of the Preferred Stock shall be required to constitute a quorum for the election of any director by the holders of the Preferred Stock exercising such special right. The special right of holders of shares of Preferred Stock under this Section 6(c) may be exercised by the written consent of the holders of shares of Preferred Stock then outstanding in accordance with the law of the Company's jurisdiction of incorporation at such time to the extent permitted by the Company's Restated Articles of Incorporation. (i) The foregoing notwithstanding, in the case of any vacancy in the office of a director occurring among the directors elected by the holders of the Preferred Stock pursuant to Section 6(c), the remaining director or directors so elected by the holders of the Preferred Stock may, by affirmative vote of a majority thereof (or the remaining director so elected if there is only one such director), elect a successor or successors to hold the office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of the Preferred Stock, or any director so elected as provided in the next preceding sentence hereof, shall be removed during the aforesaid term of office, whether with or without cause, only by the affirmative vote of the holders of a Majority of the Preferred Stock. (ii) The Company shall promptly take all necessary action to facilitate the implementation of the rights of the holders of Preferred Stock to appoint directors that are provided for under this Section 6. Section 7. Conversion Rights. The Preferred Stock shall be convertible into Common Stock as follows: (a) Optional Conversion. Subject to and upon compliance with the provisions of this Section 7, the holder of any shares of Preferred Stock shall have the right at such holder's option, at any time or from time to time, to convert any shares of Preferred Stock into the number of fully paid and nonassessable shares of Common Stock set forth in Section 7(b). (b) Conversion Price. Each share of Preferred Stock converted pursuant to Section 7(a) shall be converted into such number of shares of Common Stock as is determined by dividing (i) the sum of (A) $1,000 plus (B) any dividends on such share of Preferred Stock which such holder is entitled to receive, but has not yet received (including, without limitation, an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Conversion Date to the Conversion Date), by (ii) the Conversion Price in effect on the Conversion Date. The Conversion Price shall be subject to adjustment as set forth in Section 7(d). (c) Mechanics of Conversion. The holder of any shares of Preferred Stock may exercise the conversion right specified in Section 7(a) as to any part thereof by surrendering to the Company or any transfer agent of the Company the certificate or certificates for the shares to be converted, accompanied by written notice stating that the holder elects to convert all or a 13 67 specified portion of the shares represented thereby. Conversion shall be considered to have been effected on the date when a holder of Preferred Stock delivers notice of an election to convert shares of Preferred Stock to the Company accompanied by certificates representing such shares, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 7(d), as promptly as practicable thereafter (and after surrender of the certificate or certificates evidencing the shares of Preferred Stock or delivery to the Company of an affidavit and indemnity with respect to such certificates), the Company shall issue and deliver to or upon the written order of such holder a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash with respect to any fractional interest in a share of Common Stock as provided in Section 7(h) hereof. Subject to the provisions of Section 7(d), the Person in whose name the certificate or certificates for Common Stock are to be issued shall be considered to have become a holder of record of such Common Stock on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate evidencing shares of Preferred Stock surrendered for conversion, the Company shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Company, a new certificate covering the number of shares of Preferred Stock representing the unconverted portion of the certificate so surrendered. The Company will use its best efforts to deliver all stock certificates required by this Section 7(c) within three business days after the Conversion Date. (d) Conversion Price Adjustments. The Conversion Price shall be subject to adjustment from time to time as follows: (i) Stock Dividends. If the number of shares of Common Stock outstanding at any time after the date of issuance of Preferred Stock is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then immediately after the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend or the effective date of such subdivision or split-up, as the case may be, the Conversion Price shall be appropriately reduced so that the holder of any shares of Preferred Stock thereafter converted shall be entitled to receive the number of shares of Common Stock of the Company which he would have received immediately following such action had such shares of Preferred Stock been converted immediately prior thereto. (ii) Combination of Stock. If the number of shares of Common Stock outstanding at any time after the date of issuance of Preferred Stock is decreased by a combination of the outstanding shares of Common Stock, then immediately after the effective date of such combination, the Conversion Price shall be appropriately increased so that the holder of any shares of Preferred Stock thereafter converted shall be entitled to receive the number of shares of Common Stock which he would have received immediately following such action had such shares of Preferred Stock been converted immediately prior thereto. (iii) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Issue Date makes or issues, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities or other 14 68 rights of the Company other than a dividend or other distribution payable solely in shares of Common Stock, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities or other rights of the Company which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities or other rights receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 7 with respect to the rights of the holders of the Preferred Stock. (iv) Reclassification, etc. In case of any Reclassification, each share of Preferred Stock shall, after such Reclassification, be convertible into the number of shares of stock or other securities or property to which the holder of the Common Stock issuable (at the time of such Reclassification) upon conversion of such share of Preferred Stock would have been entitled upon such Reclassification; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interests thereafter of the holders of the shares of Preferred Stock shall be appropriately adjusted so as to be applicable, as nearly as possible, to any shares of stock or other securities or property thereafter deliverable on the conversion of the shares of Preferred Stock. If the holders of Common Stock have an election with respect to the stock, securities or other property to be received upon a Reclassification, the same election shall be afforded to the holders of Preferred Stock. (v) Rounding of Calculations. All calculations under this Section 7(d) shall be made to the nearest cent or to the nearest one hundredth (1/100th) of a share, as the case may be. (vi) Timing of Issuance of Additional Common Stock Upon Certain Adjustments. In any case in which the provisions of this Section 7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event by (A) issuing to the holder of any shares of Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such conversion before giving effect to such adjustment, and (B) paying to such holder any amount of cash in lieu of a fractional share of Common Stock pursuant to Section 7(h) hereof; provided, however, that the Company upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares and such cash upon the occurrence of the event requiring such adjustment. (e) Statement Regarding Adjustments. Whenever the Conversion Price shall be adjusted as provided in Section 7(d), the Company shall forthwith file, at the office of any transfer agent for such Preferred Stock and at the principal office of the Company, a statement 15 69 showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each holder of shares of Preferred Stock at the address appearing on the Company's records. Each such statement shall be signed by the Company's independent public accountants. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section 7(f). (f) Notice to Holders. In the event the Company shall propose to take any action of the type described in Section 7(d)(i), (ii), (iii), or (iv) the Company shall give notice to each holder of shares of Preferred Stock affected by such action in the manner set forth in this Section 7(f), which notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten days prior to the date so fixed, and in the case of any other action, such notice shall be given at least 15 days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. (g) Costs. The Company shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of shares of Common Stock of the Company upon conversion of any shares of Preferred Stock; provided, however, that the Company shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Preferred Stock in respect of which such shares are being issued. (h) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. In lieu of any fractional share to which the holder would otherwise be entitled, the Company shall pay cash equal to the product of such fraction multiplied by the Common Stock's Fair Market Value on the date of conversion. (i) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. 16 70 (j) Notices. All notices and other communications required by the provisions of this Section 7 shall be in writing and shall be deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight delivery service, cable, telegram, facsimile transmission or telex to each holder of record at the address of such holder appearing on the books of the Company. Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the fourth calendar day after posting, in the case of overnight delivery service, on the date of actual delivery and, in the case of notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the case may be, personal delivery. (k) No Dilution or Impairment. The Company shall not amend its Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against dilution or other impairment. Section 8. Restrictions and Limitations. (a) So long as any shares of Preferred Stock remain outstanding and except as set forth below, the Company shall not, and shall not permit any Subsidiary to, without the vote or written consent by the holders of a Majority of the Preferred Stock: (i) (A) Declare or pay any dividend or make any other payment or distribution on account of the Equity Interests of the Company (other than in respect of the Preferred Stock) 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 Senior Securities or Parity Securities (except that dividends payable on Parity Securities issued in accordance with the provisions hereof solely in Parity Securities of the same class or series, as the case may be, shall be permitted) 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)); and (B) Make any payment on or in respect of, or purchase, redeem, defease or otherwise acquire or retire for value any Equity Interests (other than the Preferred Stock in accordance with Section 5 or any Equity Interests owned by the Company or any Subsidiary of the Company) except at Stated Maturity. All such payments and other actions set forth in clauses (A) and (B) above shall be collectively referred to as "Restricted Payments". Notwithstanding the foregoing, the Company shall be permitted to make Restricted Payments if, at the time of and after giving effect to such Restricted Payment: 17 71 (I) No Event of Noncompliance shall have occurred and be continuing or would occur as a consequence thereof; and (II) 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 occur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 8 (a)(v); and (III) Such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Issue Date (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 on the Issue Date 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 Issue Date 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 or conversion of the 6% Notes) subject to the provisions of Section 8(a)(vii), plus (iii) $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 this Section 8(a)(i); (v) 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 Parity Securities); 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 (ii) of paragraph (III) above; (w) the defeasance, redemption or repurchase of Junior Securities or Parity Securities with the net cash proceeds from the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Parity Securities); 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 (ii) of paragraph (III) above; (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 Issue Date ; 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 Event of Noncompliance shall have occurred and be continuing immediately after such transaction; and (y) so long as no Event of Noncompliance 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 Issue Date. 18 72 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 each holder of Preferred Stock) 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 each holder of Preferred Stock an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 8(a)(i) were computed, which calculations may be based upon the Company's latest available financial statements. For purposes of this Section 8(a)(i), capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture as in effect on the Issue Date. (ii) Authorize or issue, or obligate itself to issue, any Senior Securities; (iii) Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Preferred Stock; (iv) Enter any agreement, contract or understanding or otherwise incur any obligation which by its terms would violate, be in conflict with, restrict or burden the rights of the holders of Preferred Stock, or the Company's ability to perform its obligations hereunder; (v) 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) or issue any Parity Securities (other than as contemplated by Section 3) unless 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 Parity Securities are issued would have been at least 1.75 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 Parity Securities had been issued, as the case may be, at the beginning of such four-quarter period. The foregoing provisions will not apply to: (A) 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) $175.01 million and (y) the sum of (A) 80%* of the Eligible Accounts Receivable and (B) 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 __________________________________ * These figures shall be adjusted at the Issue Date to the extent any less restrictive amounts or percentages are contained in the comparable provisions of each of the applicable Loan Documents (as defined in the Purchase Agreement). 19 73 Sales applied to permanently reduce the commitments with respect to such Indebtedness pursuant to Section 4.10 of the Indenture as in effect on the Issue Date; (B) the incurrence by the Company of Permitted Indebtedness; (C) 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; (D) the incurrence by the Company or any of its Subsidiaries of Indebtedness ("Refinancing Indebtedness") in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Permitted Indebtedness or Indebtedness that was permitted to be incurred hereunder, provided that the principal amount (or accreted value, if applicable) of such Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness extended, refinanced, renewed, replaced, defeased or refunded; (E) 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; (F) the incurrence by the Company of Hedging Obligations that are incurred in the ordinary course of business for the purpose of fixing or hedging interest rate risk; (G) the incurrence by the Company of Hedging Obligation 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; (H) the incurrence of Indebtedness of a guarantor represented by guarantees of Indebtedness of the Company that has been incurred in accordance with the terms hereof; and (I) the incurrence by the Company of Indebtedness or the issuance by the Company of Junior Securities or Parity Securities (in addition to Indebtedness, Junior Securities or Parity Securities permitted by any other clause of this Section 8(a)(v) in an aggregate principal amount (or accreted value, as applicable) at any time outstanding not to exceed $10.0* million. __________________________________ * These figures shall be adjusted at the Issue Date to the extent any less restrictive amounts or percentages are contained in the comparable provisions of each of the applicable Loan Documents (as defined in the Purchase Agreement). 20 74 For purposes of this Section 8(a)(v), capitalized terms used and not defined herein shall the meanings assigned to them in the Indenture as in effect on the Issue Date. (vi) 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 (A) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person and (B) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving the aggregate consideration in excess of $2.0 million, the Company delivers to each holder of Preferred Stock a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (A) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (C) with respect to an Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, the Company delivers to each holder of Preferred Stock an opinion as to the fairness to the holders of Preferred Stock 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 practices 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 that are permitted by the provisions of Section 8(a)(i), in each case, shall not be deemed Affiliate Transactions. For purposes of this Section 8(a)(vi), capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture as in effect on the Issue Date. (vii) Make any Restricted Investment (as such term is defined in the Indenture as in effect on the Issue Date) unless the Company could borrow an additional $1.00 of Indebtedness under the Fixed Charge Coverage Ratio in Section 8(a)(v) above; except that, notwithstanding the foregoing, the Company shall be permitted to make a Restricted Investment if (x) such Restricted Investment is made after the Issue Date and is sold for cash or otherwise liquidated or repaid for cash, in an amount equal to the lesser of (a) the cash return of capital with respect to such Restricted Investment (less the cost of disposition) and (b) the initial amount of such Restricted Investment or (y) such Restricted Investment is in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of 21 75 the Company) of Equity Interests of the Company (other than any Senior Securities and Parity Securities); provided that the amount of any such net cash proceeds that are utilized for any such Restricted Investment made under (x) and (y) above shall be excluded from Section 8(a)(i)(III)(ii). Section 9. No Reissuance of Preferred Stock. No share or shares of Preferred Stock acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Company shall be authorized to issue. Section 10. Events of Noncompliance. (a) Definition. An Event of Noncompliance will be deemed to have occurred if: (i) the Company fails to make any redemption payment with respect to the Preferred Stock which it is obligated to make hereunder, whether or not such payment is legally permissible; (ii) the Company breaches or otherwise fails to perform or observe the provisions of Section 8; (iii) the Company breaches or otherwise fails to perform or observe any other covenant or agreement set forth herein or any covenant or agreement set forth in the Purchase Agreement (other than a covenant or agreement set forth in Section 5.14 (the breach of which Section 5.14 shall not be considered an Event of Noncompliance under this Section 10(a)(iii)) or in Article 7 of the Purchase Agreement) and such breach or failure to perform or observe continues for a period of 60 days after notice thereof from any holder of Preferred Stock; or the Company breaches or otherwise fails to perform or observe any covenant or agreement set forth in Article 7 of the Purchase Agreement and such breach or failure to perform or observe continues for a period of 30 days after notice thereof from any holder of Preferred Stock; or (iv) a Bankruptcy Event occurs with respect to the Company or any Subsidiary. The Company shall promptly (and in any event within five days) after learning of (x) any failure by the Company to observe any covenant or agreement contained herein or in the Purchase Agreement or (y) any Event of Noncompliance, give notice thereof to each holder of Preferred Stock. (b) Consequences of Certain Events of Noncompliance. (i) If an Event of Noncompliance (other than the failure to pay timely dividends, which affects the dividend rate of the Preferred Stock as provided in Section 3) has occurred, the dividend rate on the Preferred Stock shall increase immediately to the lesser of (A) 18% per annum and (B) the maximum rate permitted by applicable law, and shall remain at such rate as long as any Preferred Stock is outstanding; provided, however, that if the Event of Noncompliance is one under Section 10(a)(iii), upon the cure of such Event of Noncompliance, the 22 76 dividend rate shall be that which would otherwise be applicable but for the application of this Section 10(b)(i). (ii) If any Event of Noncompliance has occurred, each holder of Preferred Stock will also have (A) rights pursuant to Section 6(c)(i), (B) any other rights which such holder may have been afforded under any contract or agreement at any time and (C) any other rights which such holder may have pursuant to applicable law. Section 11. Waivers. With the written consent of holders of a Majority of the Preferred Stock (or each holder of Preferred Stock to the extent required pursuant to the last sentence of Section 6(b)), the obligations of the Company and the rights of the holders of the Preferred Stock under this Statement of Resolution may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely). Upon the effectuation of each such waiver, the Company shall promptly give written notice thereof to the holders of Preferred Stock who have not previously consented thereto in writing. 23 77 ANNEX I
APPLICABLE DIVIDEND RATE -------------------------------------------------------- REDEMPTION PREMIUM APPLICABLE DURING THE 3% 7% 10% FOLLOWING YEARS AFTER THE ISSUE DATE: -- -- --- 1 Non-Call Non-Call Non-Call 2 Non-Call Non-Call Non-Call 3 Non-Call Non-Call Non-Call 4 Non-Call Non-Call Non-Call 5 3.000% 7.000% 10.000% 6 2.400% 5.600% 8.000% 7 1.800% 4.200% 6.000% 8 1.200% 2.800% 4.000% 9 0.600% 1.400% 2.000% 10 0.000% 0.000% 0.000%
To the extent a different Applicable Dividend Rate applies, a similar ratable decline shall apply. 24 78 I, THE UNDERSIGNED, being the _______________ of Pillowtex Corporation, do hereby execute this Statement of Resolution, declaring and certifying under penalties of perjury that the facts herein stated are true, and accordingly have hereunto set my hand this _____ day of __________, 1997. __________________________________ __________________________________ __________________________________ ATTEST: __________________________________ __________________________________ __________________________________ 25 EX-99.1 5 PRESS RELEASE 1 EXHIBIT 99.1 [PILLOWTEX CORPORATION LETTERHEAD] FOR PILLOWTEX CORPORATION FOR FIELDCREST CANNON, INC. Investor Contact: T. R. Staab Mark Kirkpatrick Vice President and Treasurer Chief Financial Officer (214) 333-3225 Ext. 618 (704) 939-4600 Media Contact: R. E. Reece Joele Frank / Dan Katcher Vice President Human Resources Abernathy/MacGregor Group (704) 939-2290 (212) 371-5999
PILLOWTEX TO ACQUIRE FIELDCREST CANNON IN TRANSACTION VALUED IN EXCESS OF $700 MILLION COMBINATION CREATES ONE OF INDUSTRY'S LARGEST HOME TEXTILE MANUFACTURERS Dallas, Texas, and Kannapolis, North Carolina, September 11, 1997 -- Pillowtex Corporation (NYSE: PTX) and Fieldcrest Cannon, Inc. (NYSE: FLD) announced today that they have entered into a merger agreement under which Pillowtex will acquire Fieldcrest Cannon for a combination of cash and Pillowtex stock. The total transaction value is in excess of $700 million, including the refinancing of approximately $200 million of Fieldcrest Cannon debt. This combination creates one of the industry's largest home textile manufacturers with annual sales in excess of $1.5 billion and a portfolio of many of the best recognized brands in the industry. Under the agreement, each common share of Fieldcrest Cannon would be exchanged for $27.00 in cash and $7.00 in Pillowtex common stock and each preferred share of Fieldcrest Cannon would be exchanged for $46.15 in cash and $11.97 in Pillowtex common stock, for a total equity value of about $400 million. This represents a premium of 55% over the $21.89 average closing price of Fieldcrest Cannon common stock for the 90-trading days through September 9, 1997. The acquisition will be accounted for as a purchase and is anticipated to be accretive to Pillowtex's earnings per share in 1998. Charles M. Hansen, Jr., Chairman and Chief Executive Officer of Pillowtex, said, "The combination of Pillowtex and Fieldcrest Cannon creates a true one-stop shop for home textiles that will bring together Fieldcrest Cannon's pre- eminent bed and bath product lines with Pillowtex's premiere 'top-of-the-bed' products. United, we will be able to use our extensive distribution networks to offer retailers a broad array of products available at all price points. By combining Fieldcrest Cannon's industry-leading brands such as Royal Velvet(R), Cannon(R), Touch of Class(R), and Charisma(R) with Pillowtex's Ralph Lauren, Disney and Martha Stewart products, we will strengthen our ability to cross merchandise all bed and bath product offerings. We believe the market opportunities of this combination are significant, as are the benefits to shareholders of both companies." - more - 2 - 2 - Jeffrey D. Cordes, President and Chief Operating Officer of Pillowtex, said, "Pillowtex has consistently delivered results to its shareholders. The combination with Fieldcrest Cannon produces the opportunity for significant market, operating and financial synergies which should result in enhanced cash flows and net income. This will allow us to service our debt while continuing to make capital investments designed to improve our operating efficiencies and add to our profitability. Moreover, the additional shares issued in connection with the transaction will increase our market capitalization and improve liquidity for our shareholders. The combination is expected to result in substantial annual cost savings which would be realized from the elimination of duplicate corporate and administrative programs, greater efficiencies in operations and business processes, and lower material costs through combined purchasing programs. "Pillowtex and Fieldcrest Cannon have established practices of reinvestment in plant and equipment to modernize their operations," Mr. Cordes commented. "Fieldcrest Cannon has several outstanding facilities including a brand-new, state- of-the-art towel production facility which will complement Pillowtex's modern pillow operations and newly upgraded blanket weaving facilities. We plan on continuing Fieldcrest Cannon's capital investment plan which we believe should significantly increase profitability in our industry-leading position." "Pillowtex is no stranger to the Carolinas where we operate seven facilities and have almost 2,000 employees. Pillowtex has historically had among the highest rates of sales per employee in the industry. Fieldcrest Cannon employees have a solid reputation in our industry and we welcome them to the Pillowtex family," said Mr. Hansen. "This combination will allow us to review both companies' operations and institute the best practices of each company across the combined entity. All union contracts will be honored. Fieldcrest Cannon will become a subsidiary of Pillowtex. Pillowtex's headquarters will remain in Dallas with a significant operating presence in Kannapolis." James M. Fitzgibbons, Chairman and Chief Executive Officer of Fieldcrest Cannon, said, "The efforts of our management and employees to enhance the performance of Fieldcrest Cannon has created exceptional value for our shareholders. By joining with Pillowtex, our shareholders will receive a premium price for their shares and will also be able to participate in the upside potential of a newly created industry leader. The breadth and quality of our combined product lines, backed by the expertise of both companies' talented managers will serve our customers, employees and shareholders well." Pillowtex intends to finance the acquisition, in part, with borrowings under a new senior bank facility to be provided by NationsBank of Texas N.A., the incurrence of additional debt, as well as a $65 million convertible preferred stock investment provided by certain affiliates of Apollo Management L.P. Leon D. Black, founding partner of Apollo Management L.P., stated, "The Pillowtex/Fieldcrest Cannon transaction creates a unique franchise in home textiles. The merger combines the best management teams in the industry with the best brand names in the home fashion textile market. We are very pleased with our investment in Pillowtex." - more - 3 - 3 - Under the agreement, for each Fieldcrest Cannon common share, the number of Pillowtex common shares will not be more than 0.333 or less than 0.269 and, for each Fieldcrest Cannon preferred share, the number of Pillowtex common shares will not be more than 0.569 or less than 0.460, unless the average closing price of Pillowtex common stock is less than $21.00, in which case Pillowtex may elect to increase the amount of cash and/or Pillowtex common shares, such that the value of the consideration to be paid for each Fieldcrest Cannon common share is $34.00 and the value of the consideration to be paid for each Fieldcrest Cannon preferred share is $58.12. If an election is not made, Fieldcrest Cannon may terminate the agreement. The actual number of Pillowtex common shares to be paid as merger consideration will be determined by the average closing price of Pillowtex common stock for the 20 consecutive trading days immediately preceding the 5th day prior to the close of the merger. The merger is conditioned upon, among other things, the approval of each company's shareholders and customary regulatory clearances, and is expected to be completed by the end of 1997. Bear, Stearns & Co. Inc. acted as financial advisor and provided a fairness opinion to Pillowtex. Credit Suisse First Boston Corporation acted as financial advisor and provided a fairness opinion to Fieldcrest Cannon. Pillowtex Corporation, with annual sales in excess of $500 million, markets and manufactures top-of-the-bed home textile furnishings. The Company operates a network of manufacturing, purchasing and distribution facilities in the U.S. and Canada, with approximately 4,000 employees. Fieldcrest Cannon, Inc., with annual sales in excess of $1 billion, is headquartered in Kannapolis, North Carolina, markets and manufacturers bath and bedding home textile products. Fieldcrest Cannon operates a network of manufacturing, purchasing and distribution facilities, with approximately 11,000 employees. Apollo is a private investment partnership which has invested in excess of $7 billion since 1990 in a variety of real estate and corporate transactions. # # # Information contained in this release with respect to the expected financial impact of the proposed merger is forward- looking. These statements represent the companies' reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially. Such factors include, but are not limited to, material adverse changes in economic and competitive conditions in the markets served by the companies, material adverse changes in the business and financial condition of either or both companies and their respective customers, uncertainties concerning technological changes and future product performance, and substantial delay in the expected closing of the merger. -----END PRIVACY-ENHANCED MESSAGE-----