Exhibit 99.3
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE: : Jointly Administered
PILLOWTEX, INC., : Case No. 00-4211 (SLR)
a Delaware corporation, et al., : Chapter 11
Debtors. :
:
--------------------------------------
:
:
DISCLOSURE STATEMENT PURSUANT
TO SECTION 1125 OF THE BANKRUPTCY CODE
FOR THE JOINT PLAN OF REORGANIZATION OF
PILLOWTEX CORPORATION AND ITS DEBTOR SUBSIDIARIES
-------------------------------------------------
WILLIAM H. SUDELL, JR. (DE 463)
ERIC D. SCHWARTZ (DE 3134)
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899-1347
(302) 658-9200
- and -
DAVID G. HEIMAN (OH 0038271)
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
HENRY L. GOMPF (TX 08116400)
GREGORY M.GORDON (TX 08435300)
SHARON A. ALEXANDER(TX 00998580)
DANIEL P. WINIKKA (TX 00794873)
JONES, DAY, REAVIS & POGUE
2727 North Harwood Street
Dallas, Texas 75201
(214) 220-3939
ATTORNEYS FOR DEBTORS AND
December 28, 2001 DEBTORS IN POSSESSION
DISCLOSURE STATEMENT, DATED DECEMBER 28, 2001
SOLICITATION OF VOTES
WITH RESPECT TO THE
JOINT PLAN OF REORGANIZATION
OF
PILLOWTEX CORPORATION AND ITS DEBTOR SUBSIDIARIES
-----------------
THE BOARDS OF DIRECTORS OF PILLOWTEX CORPORATION ("PILLOWTEX") AND EACH
OF ITS DEBTOR SUBSIDIARIES LISTED ON EXHIBIT I (COLLECTIVELY WITH PILLOWTEX, THE
"DEBTORS") BELIEVE THAT THE JOINT PLAN OF REORGANIZATION OF PILLOWTEX
CORPORATION AND ITS DEBTOR SUBSIDIARIES, DATED DECEMBER 28, 2001 AND ATTACHED AS
EXHIBIT II (THE "PLAN"), IS IN THE BEST INTERESTS OF CREDITORS. ALL CREDITORS
ENTITLED TO VOTE THEREON ARE URGED TO VOTE IN FAVOR OF THE PLAN. A SUMMARY OF
THE VOTING INSTRUCTIONS ARE SET FORTH BEGINNING ON PAGE 71 OF THIS DISCLOSURE
STATEMENT. MORE DETAILED INSTRUCTIONS ARE CONTAINED ON THE BALLOTS DISTRIBUTED
TO CREDITORS ENTITLED TO VOTE ON THE PLAN. TO BE COUNTED, YOUR BALLOT MUST BE
DULY COMPLETED, EXECUTED AND RECEIVED BY 5:00 P.M., EASTERN TIME, ON
_____________, 2002 OR SUCH OTHER DATE IDENTIFIED ON YOUR BALLOT (THE "VOTING
DEADLINE"), UNLESS EXTENDED.
-----------------
THE CONFIRMATION AND EFFECTIVENESS OF THE PROPOSED PLAN ARE SUBJECT TO
MATERIAL CONDITIONS PRECEDENT, SOME OF WHICH MAY NOT BE SATISFIED. SEE "OVERVIEW
OF THE PLAN -- CONDITIONS TO CONFIRMATION AND THE EFFECTIVE DATE OF THE PLAN"
AND "VOTING AND CONFIRMATION OF THE PLAN -- ACCEPTANCE OR CRAMDOWN." THERE IS NO
ASSURANCE THAT THESE CONDITIONS WILL BE SATISFIED OR WAIVED.
-----------------
No person is authorized by any of the Debtors in connection with the
Plan or the solicitation of acceptances of the Plan to give any information or
to make any representation other than as contained in this Disclosure Statement
and the exhibits and schedules attached hereto or incorporated by reference or
referred to herein, and, if given or made, such information or representation
may not be relied upon as having been authorized by any of the Debtors. Although
the Debtors will make available to creditors entitled to vote on acceptance of
the Plan such additional information as may be required by applicable law prior
to the Voting Deadline, the delivery of this Disclosure Statement will not under
any circumstances imply that the information herein is correct as of any time
subsequent to the date hereof.
-----------------
ALL CREDITORS ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THIS ENTIRE
DISCLOSURE STATEMENT, INCLUDING THE PLAN ATTACHED AS EXHIBIT II AND THE MATTERS
DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 55, PRIOR TO SUBMITTING BALLOTS
PURSUANT TO THIS SOLICITATION.
-----------------
The summaries of the Plan and the other documents contained in this
Disclosure Statement are qualified by reference to the Plan itself, the exhibits
thereto and documents described therein as being filed prior to approval of the
Disclosure Statement.
The information contained in this Disclosure Statement, including the
information regarding the history, businesses and operations of the Debtors, the
historical, projected and budgeted financial information regarding the Debtors
and the Liquidation Analyses relating to the Debtors, is included for purposes
of soliciting acceptances of the Plan, but, as to contested matters and
adversary proceedings, is not to be construed as admissions or stipulations, but
rather as statements made in settlement negotiations.
-----------------
FORWARD-LOOKING STATEMENTS: THIS DISCLOSURE STATEMENT INCLUDES
FORWARD-LOOKING STATEMENTS BASED LARGELY ON THE CURRENT EXPECTATION OF THE
DEBTORS AND PROJECTIONS ABOUT FUTURE EVENTS AND FINANCIAL TRENDS AFFECTING THE
FINANCIAL CONDITION OF THE DEBTORS' OR THE REORGANIZED DEBTORS' BUSINESSES. THE
WORDS "BELIEVE," "MAY," "WILL," "ESTIMATE," "CONTINUE," "ANTICIPATE," "INTEND,"
"EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY THESE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES
AND ASSUMPTIONS, INCLUDING THOSE DESCRIBED BELOW UNDER THE CAPTION "RISK
FACTORS." IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THE FORWARD-LOOKING EVENTS
AND CIRCUMSTANCES DISCUSSED IN THIS DISCLOSURE STATEMENT MAY NOT OCCUR AND
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. NEITHER THE DEBTORS NOR THE REORGANIZED DEBTORS
UNDERTAKE ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
-----------------
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY STOCK EXCHANGE, NOR HAS
THE SEC OR ANY STOCK EXCHANGE PASSED UPON THE ACCURACY OR ADEQUACY OF THE
STATEMENTS CONTAINED HEREIN.
-----------------
All capitalized terms in this Disclosure Statement not otherwise
defined herein have the meanings given to them in the Plan.
TABLE OF CONTENTS
-----------------
Page
----
OVERVIEW OF THE PLAN ...................................................... 2
Introduction ............................................................ 2
Changes to Corporate Structure .......................................... 2
General Information Concerning Treatment of Claims and Interests ........ 2
Summary of Classes and Treatment of Claims and Interests ................ 3
Sources and Uses of Cash ................................................ 8
Additional Information Regarding Assertion and Treatment of
Administrative Claims, Priority Tax Claims and Designated
Post-Petition Loan Claims ............................................. 8
Administrative Claims .............................................. 8
Priority Tax Claims ................................................ 10
Designated Post-Petition Loan Claims ............................... 10
Special Provisions Regarding the Treatment of Allowed
Secondary Liability Claims ............................................ 10
Summary of Terms of Certain Securities to Be Issued Pursuant
to the Plan ........................................................... 10
Equity Securities .................................................. 11
Exit Financing Revolver Facility and Other Post-Reorganization
Indebtedness .......................................................... 12
Conditions to Confirmation and the Effective Date of the Plan ...... 12
Conditions to Confirmation ......................................... 12
Conditions to the Effective Date ................................... 12
Waiver of Conditions to Confirmation or to the Effective Date ...... 13
Effect of Nonoccurrence of Conditions to the Effective Date ........ 13
Modification or Revocation of the Plan .................................. 13
CERTAIN EVENTS PRECEDING THE DEBTORS' CHAPTER 11 FILINGS .................. 14
Historical Overview ..................................................... 14
Introduction ....................................................... 14
Blanket Manufacturing Acquisitions ................................. 14
Fieldcrest Cannon Acquisition ...................................... 14
Leshner Acquisition ................................................ 14
Overleverage ............................................................ 14
Overview ........................................................... 14
Negotiations with Prepetition Lenders .............................. 15
Attempted Restructuring of Old 6% Debentures ....................... 15
Industry and Competitive Pressures ...................................... 15
Integration and Operational Difficulties ................................ 16
Installation of New Management .......................................... 16
Implementation of Operational Initiatives ............................... 16
Determination to File the Reorganization Cases .......................... 16
CAPITAL STRUCTURE AS OF THE PETITION DATE ................................. 17
Introduction ............................................................ 17
Prepetition Credit Facility ............................................. 17
Overline Facility ....................................................... 17
Industrial Revenue Bonds ................................................ 18
Old 10% Notes ........................................................... 18
Old 9% Notes ............................................................ 18
Old 6% Debentures ....................................................... 19
Old Preferred Stock of Pillowtex ........................................ 19
Old Common Stock of Pillowtex ........................................... 19
OPERATIONS DURING THE REORGANIZATION CASES ................................ 20
First Day Relief ........................................................ 20
Introduction ....................................................... 20
Employee Wages and Benefits ........................................ 20
Trust Fund Taxes ................................................... 20
Customer Claims .................................................... 20
i
TABLE OF CONTENTS
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(continued)
Page
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Critical Vendor and Service Provider Claims ......................... 20
Workers' Compensation ............................................... 21
Debtor-in-Possession Financing .......................................... 22
Retention Plan .......................................................... 23
Case Administration and Related Activities .............................. 24
Appointment of the Creditors' Committee ............................. 24
Retention of Financial Advisors and Other Consultants ............... 25
Executory Contracts and Unexpired Leases ............................ 25
Rejection of Aircraft Lease ......................................... 25
Assumption and Rejection of Certain Contracts to Purchase Cotton .... 25
Assumption of Parkdale 2000 Agreement ............................... 26
Assumption of Wellman Agreement ..................................... 26
Rejection of Technology Agreement ................................... 27
Assumption of Ralph Lauren License Agreement and Related Dispute .... 27
Exclusivity ......................................................... 28
Claims Process and Bar Dates ........................................ 28
Postpetition Operations .................................................. 29
Operational and Cost Reduction Initiatives .......................... 29
Blanket Division and Other Dispositions ............................. 29
Fieldcrest Cannon Employee Restructuring ............................ 30
REORGANIZED PILLOWTEX ...................................................... 30
Pillowtex Merger ........................................................ 30
Restructuring Transactions .............................................. 30
Business of Reorganized Pillowtex ....................................... 31
Business Plan and Strategy for Reorganized Pillowtex .................... 31
Branding and Marketing .............................................. 31
Capacity Rationalization ............................................ 32
Strategic Sourcing .................................................. 32
Total Quality Management ............................................ 32
Selected Historical Financial Information ............................... 33
Projected Financial Information ......................................... 34
Introduction ........................................................ 34
Projections ......................................................... 34
Management .............................................................. 40
Reorganized Pillowtex Executive Officers ............................ 40
Executive Compensation .............................................. 41
Reorganized Pillowtex Board of Directors ............................ 42
Voting Power and Terms of Directors ................................. 42
Board Committees .................................................... 43
Director Nomination Procedures ...................................... 43
Director Compensation ............................................... 44
Employee Benefit Matters ............................................... 44
Existing Benefit Plans and Agreements ............................... 44
New Benefit Programs; Continuation or Termination of
Existing Plans and Agreements ..................................... 45
Certain Corporate Governance Matters .................................... 45
Introduction ........................................................ 45
Removal of Directors and Filling Vacancies in Directorships ......... 46
Stockholder Action and Special Meetings of Stockholders ............. 46
Advance Notice Requirements for Stockholder Proposals
and Director Nominations .......................................... 46
Authorized But Unissued Shares ...................................... 47
Supermajority Vote Requirements ..................................... 47
Delaware Section 203 ................................................ 47
Indemnity Arrangements .................................................. 48
Existing Indemnification Obligations ................................ 48
ii
TABLE OF CONTENTS
-----------------
(continued)
Page
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Treatment of Existing Indemnification Obligations Under the Plan ..... 48
New Indemnification Arrangements ..................................... 48
SECURITIES TO BE ISSUED PURSUANT TO THE PLAN; POST-REORGANIZATION
INDEBTEDNESS .............................................................. 49
Reorganization Value ..................................................... 49
New Common Stock ......................................................... 51
New Warrants ............................................................. 51
New Preferred Stock ...................................................... 53
New Share Purchase Rights Agreement ...................................... 53
Exit Financing Revolver Facility ......................................... 54
Exit Term Loan ........................................................... 55
Industrial Revenue Bonds ................................................. 55
RISK FACTORS ................................................................ 55
Projections Are Inherently Uncertain ..................................... 55
Substantial Leverage Will Continue ....................................... 55
Substantially All of the Debtors' Assets Will Be Subject To
Security Interests ..................................................... 56
Dividends Are Not Anticipated; Payment of Dividends Is Subject
to Restriction ......................................................... 56
There Is No Established Market for New Common Stock or New
Warrants; Volatility Is Possible ....................................... 56
Historical Financial Information Will Not Be Comparable .................. 57
Disputed Claims May Adversely Affect Distribution Amounts ................ 57
Enforcement of Contractual Subordination Rights May Adversely
Affect Distribution Amounts to Certain Creditors ....................... 57
Dependence on Specific Raw Materials ..................................... 57
Relationships With Suppliers and Vendors ................................. 58
Dependence on Supply Sources in China .................................... 58
Industry Competition ..................................................... 58
Adverse Retail Industry Conditions ....................................... 58
Dependence on Specific Brand Names ....................................... 59
Risk of Loss of Material Customers ....................................... 59
Labor Relations .......................................................... 59
Seasonality of Business .................................................. 59
Certain Provisions Will Have Anti-Takeover Effects ....................... 60
GENERAL INFORMATION CONCERNING THE PLAN ..................................... 60
Discharge of Claims and Termination of Interests; Related
Injunction ............................................................. 60
Preservation of Rights of Action Held by the Debtors or
the Reorganized Debtors ................................................ 61
Releases and Related Injunction .......................................... 61
Continuation of Certain Employee and Retiree Benefits .................... 62
Executory Contracts and Unexpired Leases ................................. 62
DISTRIBUTIONS UNDER THE PLAN ................................................ 64
General .................................................................. 64
Methods of Distributions ................................................. 64
Distributions to Holders of Allowed Claims ........................... 64
Compensation and Reimbursement for Services Related to
Distributions ...................................................... 64
Delivery of Distributions in General ................................. 65
Special Provisions for Distributions to Holders of Old
Senior Subordinated Notes Claims or Old 6% Debenture Claims ........ 65
Undeliverable or Unclaimed Distributions ................................. 65
Distribution Record Date ................................................. 66
Means of Cash Payments ................................................... 66
Timing and Calculation of Amounts to Be Distributed ...................... 66
Distributions of New Common Stock and New Warrants ................... 67
De Minimis Distributions ............................................. 67
iii
TABLE OF CONTENTS
-----------------
(continued)
Page
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Compliance with Tax Requirements .................................... 67
Surrender of Canceled Securities or Other Instruments ................... 68
Setoffs ................................................................. 69
Disputed Claims; Reserve and Estimations ................................ 69
Funding of Unsecured Claims Reserve ................................. 69
Distributions on Account of Disputed Claims Once They
Are Allowed ....................................................... 69
Payment of Post-Effective Date Interest from Cash Investment
Yield ................................................................ 69
Objections to Claims and Authority to Prosecute Objections .............. 70
Dissolution of the Creditors' Committees ................................ 70
VOTING AND CONFIRMATION OF THE PLAN ........................................ 70
General ................................................................. 70
Voting Procedures and Requirements ...................................... 71
Confirmation Hearing .................................................... 72
Confirmation ............................................................ 72
Acceptance or Cramdown .................................................. 72
Best Interests Test; Liquidation Analysis ............................... 73
Feasibility ............................................................. 74
Compliance with Applicable Provisions of the Bankruptcy Code ............ 75
Alternatives to Confirmation and Consummation of the Plan ............... 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF CONSUMMATION OF THE PLAN ........ 75
General ................................................................. 75
Federal Income Tax Consequences to the Debtors; Reduction of
the Debtors' Indebtedness ............................................. 76
Federal Income Tax Consequences to Holders of Claims .................... 76
Definition of Securities ............................................ 76
Holders of Claims Constituting Tax Securities ....................... 76
Holders of Claims Not Constituting Tax Securities ................... 77
Dividend and Interest Income Earned by the Unsecured Claims
Reserve ........................................................... 77
Certain Other Tax Considerations for Holders of Claims .................. 78
Receipt of Pre-Effective Date Interest .............................. 78
Receipt of Dividend and Interest Income Earned by the
Unsecured Claims Reserve ......................................... 78
Reinstatement of Claims ............................................. 78
Bad Debt Deduction .................................................. 78
Information Reporting and Backup Withholding ........................ 78
APPLICABILITY OF CERTAIN FEDERAL AND STATE SECURITIES LAWS ................. 79
General ................................................................. 79
Bankruptcy Code Exemptions from Registration Requirements ............... 79
Initial Offer and Sale of Securities ................................ 79
Subsequent Transfers of Securities .................................. 79
Subsequent Transfers Under State Law ................................ 80
Certain Transactions by Stockbrokers .................................... 81
Registration Rights ..................................................... 81
RECOMMENDATION AND CONCLUSION .............................................. 82
iv
TABLE OF EXHIBITS
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Exhibit I - Debtor Subsidiaries
Exhibit II - Joint Plan of Reorganization of Pillowtex Corporation and Its
Debtor Subsidiaries
Exhibit III - Liquidation Analysis
v
ADDITIONAL INFORMATION
Any statements in this Disclosure Statement concerning the provisions
of any document are not necessarily complete, and in each instance reference is
made to that document for the full text thereof. Certain documents described or
referred to in this Disclosure Statement have not been attached as exhibits
because of the impracticability of furnishing copies of these documents to all
recipients of this Disclosure Statement. All of the exhibits and schedules to
the Plan and this Disclosure Statement and certain additional documents and
information described or referred to in this Disclosure Statement are (or, once
Filed with the Bankruptcy Court, will be) available to the public over the
Internet on the Document Website at www.pillowtex.com.
In addition, Pillowtex files reports and other documents with the SEC
in accordance with the requirements of the Securities Exchange Act of 1934, as
amended. Pillowtex's filings with the SEC, including its Annual Report on Form
10-K for the year ended December 30, 2000 (the "Pillowtex 2000 Form 10-K") and
its Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 (the
"Pillowtex Third Quarter 2001 Form 10-Q"), are available to the public over the
Internet on the SEC's web site at www.sec.gov. Such filings may also be
inspected at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The
Pillowtex 2000 Form 10-K and the Pillowtex Third Quarter 2001 Form 10-Q are also
available on the Document Website.
vi
INTRODUCTION
The Debtors are seeking approval of the Plan, a copy of which is
attached hereto as Exhibit II. This Disclosure Statement is submitted by the
Debtors in connection with the solicitation of acceptances of the Plan.
The confirmation of a plan of reorganization, which is the vehicle for
satisfying the rights of holders of claims against and equity interests in a
debtor, is the overriding purpose of a chapter 11 case. The primary objectives
of the Plan are to: (a) alter the Debtors' debt and equity structures to permit
the Debtors to emerge from their chapter 11 cases with viable capital
structures; (b) maximize the value of the ultimate recoveries to all creditor
groups on a fair and equitable basis; and (c) settle, compromise or otherwise
dispose of certain claims and interests on terms that the Debtors believe to be
fair and reasonable and in the best interests of their respective Estates,
creditors and equity holders.
The Plan provides for, among other things:
o the cancellation of certain indebtedness in exchange for cash, New
Common Stock or New Warrants;
o the cancellation of indebtedness under the Designated Post-Petition
Loans in exchange for Exit Term Loan Notes;
o the discharge of prepetition Intercompany Claims among the Debtors;
o the cancellation of the Old Common Stock of Pillowtex and Old
Preferred Stock of Pillowtex;
o the assumption, assumption and assignment, or rejection of
Executory Contracts and Unexpired Leases to which any Debtor is a
party;
o the selection of boards of directors (or similar governance bodies)
of the Reorganized Debtors;
o the merger of Pillowtex with and into New Pillowtex, a Delaware
corporation, with New Pillowtex as the surviving corporation (the
"Pillowtex Merger"); and
o the corporate restructuring of certain Pillowtex Subsidiary Debtors
designed to simplify the Debtors' corporate structure.
By an order of the Bankruptcy Court dated _____________, 2002, this
Disclosure Statement has been approved as containing "adequate information" for
creditors and equity security holders of the Debtors in accordance with section
1125 of the Bankruptcy Code. The Bankruptcy Code defines "adequate information"
as "information of a kind, and in sufficient detail, as far as is reasonably
practicable in light of the nature and the history of the debtor and the
condition of the debtor's books and records, that would enable a hypothetical
reasonable investor typical of holders of claims or interests of the relevant
class to make an informed judgment about the plan . . . ." 11 U.S.C. ss.
1125(a)(1).
THE DEBTORS' BOARDS OF DIRECTORS (OR SIMILAR GOVERNANCE BODIES) BELIEVE
THAT THE PLAN IS IN THE BEST INTERESTS OF CREDITORS. ALL CREDITORS ENTITLED TO
VOTE ARE URGED TO VOTE IN FAVOR OF THE PLAN BY NO LATER THAN 5:00 P.M., EASTERN
TIME, ON THE VOTING DEADLINE.
The requirements for Confirmation, including the vote of creditors to
accept the Plan and certain of the statutory findings that must be made by the
Bankruptcy Court, are set forth in "Voting and Confirmation of the Plan."
Confirmation of the Plan and the occurrence of the Effective Date are subject to
a number of significant conditions, which are summarized in "Overview of the
Plan -- Conditions to Confirmation and the Effective Date of the Plan." There is
no assurance that these conditions will be satisfied or waived.
OVERVIEW OF THE PLAN
Introduction
The following is a brief overview of certain material provisions of the
Plan. This overview is qualified in its entirety by reference to the provisions
of the Plan, which is attached hereto as Exhibit II, and the exhibits thereto,
as amended from time to time, which are available over the Internet on the
Document Website. See "Additional Information." For a description of certain
other significant terms and provisions of the Plan, see "General Information
Concerning the Plan" and "Distributions Under the Plan."
Changes to Corporate Structure
Pillowtex is incorporated under the laws of the State of Texas and
conducts its business through 29 United States and foreign subsidiaries. Certain
changes in the corporate structure of Pillowtex and its subsidiaries will be
effected pursuant to or in connection with the Plan, including: (a) the
Pillowtex Merger, (b) the cancellation of each share of Old Common Stock of
Pillowtex and Old Preferred Stock of Pillowtex and the issuance of New Common
Stock to holders of certain Allowed Claims, and (c) the liquidation or
consolidation of certain of Pillowtex's subsidiaries to simplify its corporate
structure. See "-- Summary of Classes and Treatment of Claims and Interests" and
"Reorganized Pillowtex -- Pillowtex Merger " and "-- Restructuring
Transactions."
General Information Concerning Treatment of Claims and Interests
The Plan provides that holders of Allowed Claims in certain Classes
will be entitled to distributions of New Common Stock and New Warrants of
Reorganized Pillowtex in respect of their Allowed Claims. See "Securities to Be
Issued Pursuant to the Plan; Post-Reorganization Indebtedness" for a description
of the New Common Stock and New Warrants. The Plan also provides that the
holders of certain Allowed Secured Claims will (a) have their Claims paid in
full or Reinstated, (b) will receive cash equal to the value of the collateral
securing their Claims and an Unsecured Claim for the deficiency or (c) will
receive new secured debt obligations in respect of their Claims. Shares of Old
Common Stock of Pillowtex and Old Preferred Stock of Pillowtex will be canceled
on the Effective Date and holders of those Interests will receive no
distributions under the Plan.
For purposes of computations of Claim amounts, administrative and other
expenses and similar computational purposes, the Effective Date is assumed to
occur on June 29, 2002. There is no assurance, however, as to if or when the
Effective Date will actually occur. Procedures for the distribution of cash and
securities pursuant to the Plan, including matters that are expected to affect
the timing of the receipt of distributions by holders of Claims in certain
Classes and that could affect the amount of distributions ultimately received by
such holders, are described in "Distributions Under the Plan."
The determination of the relative distributions to be received under
the Plan by the holders of Allowed Claims in various Classes was based upon,
among other factors, estimates of the amounts of Allowed Claims in those Classes
and the relative priorities of the Allowed Claims. Class 4, which consists of
other Secured Claims against the Debtors, has been subdivided into six
Divisions, each of which, for purposes of section 1129 of the Bankruptcy Code,
will be treated as a separate class of Claims for each relevant Debtor. The
estimates of the amounts of Allowed Claims in each Class are set forth in "--
Summary of Classes and Treatment of Claims and Interests." All creditors in
Class 6 are presumed to share in the distributions to Class 6 on a pro rata
basis for purposes of estimating the percentage recovery for creditors in Class
6. Certain potential contractual subordination rights among creditors in Class
6, however, are expressly preserved under the Plan. The percentage recovery for
creditors in Class 6 could differ from the estimate based on enforcement of
potential contractual subordination rights or if the estimate of the Allowed
Claims in Class 6, despite the Debtors' reasonable best efforts, proves to be
inaccurate.
The Plan constitutes a separate plan of reorganization for each Debtor.
The "cramdown" provisions of section 1129(b) of the Bankruptcy Code permit
confirmation of a chapter 11 plan of reorganization in certain circumstances
even if the plan is not accepted by all impaired Classes of Claims and
Interests. See "Voting and Confirmation of the Plan -- Acceptance or Cramdown."
The Debtors have reserved the right to request Confirmation pursuant to the
cramdown provisions of the Bankruptcy Code and to amend the Plan if any Class of
2
Claims fails to accept the Plan. If the Bankruptcy Court grants such a request,
the dissenting Classes may, in certain cases, receive alternative treatment
under the Plan. For purposes of this Disclosure Statement, however, it has been
assumed that the Debtors will not be required to seek Confirmation under the
cramdown provisions of the Bankruptcy Code with respect to any Class of Claims.
Although the Debtors believe that, if necessary, the Plan could be confirmed
under the cramdown provisions of the Bankruptcy Code, there is no assurance that
the requirements of those provisions would be satisfied.
Summary of Classes and Treatment of Claims and Interests
The classification of Claims and Interests, the estimated aggregate
amount of Claims in each Class and the amount and nature of distributions to
holders of Claims or Interests in each Class are summarized in the table below.
In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative
Claims, Priority Tax Claims and Claims in respect of Designated Post-Petition
Loans under the Final DIP Order have not been classified. For a discussion of
certain additional matters related to Administrative Claims, Priority Tax Claims
and Designated Post-Petition Loan Claims, see "-- Additional Information
Regarding Assertion and Treatment of Administrative Claims, Priority Tax Claims
and Designated Post-Petition Loan Claims."
The information set forth in the table below with respect to each Class
of Claims is presented on a combined basis for all the Debtors to which that
information is applicable. The estimated aggregate amounts of Claims are based
on the Debtors' estimates of the aggregate amounts of the Claims that the
Debtors believe will be asserted upon resolution of all Claims that the Debtors
believe will be Disputed Claims. Certain of these Disputed Claims are likely to
be material, and the total amount of all Claims, including Disputed Claims, may
be materially in excess of the total amount of Allowed Claims assumed in the
development of the Plan.
The amounts shown in the table below as "Estimated Aggregate Claims
Amounts" are based upon the Debtors' review of Claims Filed on or before the Bar
Date and the Debtors' books and records and may be substantially revised in the
course of the ongoing Claims reconciliation process. See "Operations During the
Reorganization Cases." Further, the amount of any Disputed Claim that ultimately
is allowed by the Bankruptcy Court may be significantly more or less than the
estimated amount of the Claim. As a consequence, the actual ultimate aggregate
amount of Allowed Unsecured Claims in Class 6 may differ significantly from the
estimate set forth below. Accordingly, the amount of the Pro Rata distributions
of New Common Stock and New Warrants that ultimately will be received by a
particular holder of an Allowed Unsecured Claim in Class 6 may be adversely or
favorably affected by the aggregate amount of Claims ultimately allowed in Class
6. See "Risk Factors -- Disputed Claims May Adversely Affect Distribution
Amounts." Distributions of New Common Stock and New Warrants to holders of
Allowed Unsecured Claims in Class 6 will be made on an incremental basis until
all Disputed Claims in Class 6 have been resolved. See "Distributions Under the
Plan -- Timing and Calculation of Amounts to Be Distributed" and "-- Disputed
Claims; Reserve and Estimations."
Each amount designated in the table below as "Estimated Percentage
Recovery" for each Class is the quotient of the cash or the assumed value of the
New Common Stock or New Warrants to be distributed to all holders of Allowed
Claims in that Class, divided by the estimated aggregate amount of Allowed
Claims in that Class. For purposes of this calculation, it is assumed that: (a)
the New Common Stock to be distributed to the holders of Claims under the Plan
will have an estimated aggregate value of approximately $199.7 million, or
$21.59 per share, as of the Effective Date, based upon the midpoint of the range
for assumed reorganization value of the Reorganized Debtors. As of the date of
filing of this Disclosure Statement, the New Warrants to be distributed to
certain holders of Allowed Claims under the Plan have not been valued and
therefore the "Estimated Percentage Recovery" does not include value related to
the New Warrants. The New Warrants will be valued at a later date, when
additional information regarding their terms and conditions is determined. See
"Securities to Be Issued Pursuant to the Plan; Post-Reorganization Indebtedness
- -- Reorganization Value" for a description of the manner in which the New Common
Stock was valued for purposes of the Plan, the assumptions used in connection
with the foregoing and the limitations thereon, and "Risk Factors" for a
discussion of various other factors that could materially affect the value of
the New Common Stock and New Warrants to be distributed pursuant to the Plan.
Although the Debtors' management believes that these valuation
assumptions are reasonable, there is no assurance that the New Common Stock will
have the value assumed herein. See "Risk Factors." The foregoing valuation
assumptions are not a prediction or reflection of post-Effective Date trading
prices of the New Common Stock and such securities may trade at substantially
higher or lower prices because of a number of other factors,
3
including those discussed in "Risk Factors." The trading price of securities
issued under a plan of reorganization, such as the New Common Stock, is subject
to many unforeseeable circumstances and therefore cannot be predicted. In
addition, the calculation of the "Estimated Percentage Recovery" for Class 6
assumes that all creditors in Class 6 share in the distributions to Class 6 on a
pro rata basis. The Plan, however, expressly preserves certain contractual
subordination rights among creditors in Class 6, and the recovery of any
creditors in Class 6 subject to subordination could be adversely affected by
enforcement of subordination rights against them. See "Risk Factors --
Enforcement of Contractual Subordination Rights May Adversely Affect
Distribution Amounts to Certain Creditors." Moreover, as discussed above, there
is no assurance that the actual amounts of Allowed Unsecured Claims in Class 6
will not materially exceed the estimated aggregate amounts shown in the table
below. Accordingly, no representation can be or is being made with respect to
whether the percentage recoveries shown in the table below actually will be
realized.
- ------------------------------------------------------------ --------------------------------------------------------
Class/Description Proposed Treatment
- ------------------------------------------------------------ --------------------------------------------------------
Class 1 (Unsecured Priority Claims): Unimpaired; on the Effective Date, each holder of an
Allowed Claim in Class 1 will receive cash equal to
the amount of the Allowed Claim.
Priority Claims against any Debtor entitled to priority
under Sections 507(a)(3), 507(a)(4), 507(a)(5) or
507(a)(6) of the Bankruptcy Code.
Estimated Aggregate Claims Amount: $100,000 Estimated Percentage Recovery: 100%
- ------------------------------------------------------------ --------------------------------------------------------
Class 2 (Convenience Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 2 will receive cash equal to
10% of the amount of the Allowed Claim.
Unsecured Claims against any Debtor that otherwise
would be classified in Class 6, except that each
applicable Claim is equal to or less than $2,500. For
purposes of treatment under Class 2, multiple Claims of
a holder against a particular Debtor arising in a series of
similar or related transactions between the Debtor and
the original holder of the Claims will be treated as a
single Claim and no splitting of Claims will be
recognized for purposes of this distribution.
Estimated Aggregate Claims Amount: $1,500,000 Estimated Percentage Recovery: 10%
- ------------------------------------------------------------ --------------------------------------------------------
Class 3 (Industrial Revenue Bond Claims): Unimpaired; on the Effective Date, Allowed Industrial
Revenue Bond Claims will be Reinstated.
Industrial Revenue Bond Claims against any Debtor.
Industrial Revenue Bond Claims include Claims arising
under or in respect of any of the documents or
agreements pertaining to the Alabama Revenue Bonds,
MBFC Revenue Bonds, PEDFA Revenue Bonds or a
loan of proceeds from any of those bonds to any of the
Debtors.
Estimated Aggregate Claims Amount: $11,959,000 Estimated Percentage Recovery: 100%
- ------------------------------------------------------------ --------------------------------------------------------
4
- ------------------------------------------------------------ --------------------------------------------------------
Class/Description Proposed Treatment
- ------------------------------------------------------------ --------------------------------------------------------
Class 4 - Divisions 4A, 4B, 4C and 4D (Other Secured Unimpaired; on the Effective Date, each holder of an
Claims): Allowed Claim in Division 4A, 4B, 4C or 4D will
receive cash equal to the amount of the Allowed Claim.
Secured Claims against any Debtor that are not
otherwise classified in Class 3 or 5 are included in
Class 4, which is divided into six separate Divisions (4A
through 4F). Divisions 4A through 4D consist of
Secured Claims against any Debtor pertaining to
mechanics' liens asserted by the following:
o 4A - R. Phillips Construction
o 4B - Smith Gray Electric
o 4C - Southern Mechanical Services
o 4D - Adams Electric.
Estimated Aggregate Claims Amount: $485,559 Estimated Percentage Recovery: 100%
- ------------------------------------------------------------ --------------------------------------------------------
Class 4 - Division 4E (Other Secured Claims): Unimpaired; on the Effective Date, each holder of an
Allowed Claim in Division 4E will receive, in full
satisfaction of the Allowed Claim, the treatment
Secured Claims against any Debtor that are not provided for in the Stipulation and Agreed Order
otherwise classified in Class 3 or 5 are included in Regarding Secured Claim of General Electric Capital
Class 4, which is divided into six separate Divisions (4A Corporation signed by the Bankruptcy Court on
through 4F). Division 4E consists of Secured Claims November 16, 2001.
arising under or evidenced by Debtor Opelika
Industries, Inc.'s Promissory Note dated December 29,
1995 payable to General Electric Capital Corporation.
Estimated Aggregate Claims Amount: $125,000 Estimated Percentage Recovery: 100%
- ------------------------------------------------------------ --------------------------------------------------------
5
- ------------------------------------------------------------ --------------------------------------------------------
Class/Description Proposed Treatment
- ------------------------------------------------------------ --------------------------------------------------------
Class 4 - Division 4F (Other Secured Claims): Impaired; on the Effective Date, unless otherwise
agreed by a Claim holder and each applicable Debtor,
Secured Claims against any Debtor that are not each holder of an Allowed Claim in Division 4F will
otherwise classified in Class 3 or 5 are included in receive, in full satisfaction of its Allowed Claim,
Class 4, which is divided into six separate Divisions (4A treatment on account of the Allowed Claim in the
through 4F). Division 4F consists of Secured Claims manner set forth in Option A or B below, at the
arising under the Master Energy Services Agreement, election of the applicable Debtor to be exercised by
dated as of June 3, 1998 between Pillowtex and written notice to the applicable creditor not later than
DukeSolutions, Inc. 10 days before the deadline to object to the
Confirmation of Plan.
Option A: Each holder of an Allowed Claim in
Division 4F with respect to which the applicable
Debtor or Debtors elect Option A will receive cash
equal to the value of the collateral securing the
Allowed Claim and an Unsecured Claim (to be
included in Class 6) for the difference between the
value and the Allowed Claim amount.
Option B: Each holder of an Allowed Claim in
Division 4F with respect to which the applicable
Debtor or Debtors elect Option B will receive new
secured debt obligations in an aggregate principal
amount equal to the value of the collateral securing the
Allowed Claim and an Unsecured Claim (to be
included in Class 6) for the difference between the
value and the Allowed Claim amount.
Estimated Aggregate Claims Amount: $17,190 Estimated Percentage Recovery: 100%
- ------------------------------------------------------------ --------------------------------------------------------
Class 5 (Bank Loan Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 5 will receive, in full
Secured and Unsecured Claims arising under the satisfaction of all of its Bank Loan Claims, a Pro Rata
Prepetition Credit Facility. share of 9,015,000 shares of New Common Stock.
Estimated Aggregate Claims Amount: $425,948,194 Estimated Percentage Recovery: 46.8%
- ------------------------------------------------------------ --------------------------------------------------------
Class 6 (Unsecured Claims): Impaired; if Class 6 accepts the Plan, on the Effective
Date, each holder of an Allowed Claim in Class 6 will
Overline Facility Claims, Aircraft Lease Claims, Old receive, in full satisfaction of its Allowed Claim,
Senior Subordinated Notes Claims, Old 6% Debenture subject to any enforceable subordination rights
Claims and Old 6% Debenture Promissory Note Claims expressly preserved pursuant to Section XI.C.3 of the
against any Debtor and Unsecured Claims against any Plan, a Pro Rata share of (a)234,500 shares of New
Debtor that are not otherwise classified under Article II Common Stock and (b) New Warrants to purchase
of the Plan, including Trade Claims and Tort Claims. 1,764,706 shares of New Common Stock. If Class 6
does not accept the Plan, no property will be
distributed to or retained by the holders of Allowed
Claims in Class 6.
Estimated Aggregate Claims Amount: $532,326,907
Estimated Percentage Recovery: 1.0% (excludes the
value of New Warrants)
- ------------------------------------------------------------ --------------------------------------------------------
6
- ------------------------------------------------------------ --------------------------------------------------------
Class/Description Proposed Treatment
- ------------------------------------------------------------ --------------------------------------------------------
Class 7 (Intercompany Claims): Impaired; no property will be distributed to or retained
by the Pillowtex Entities on account of Claims in
Intercompany Claims that are not Administrative Class 7, and the Claims will be discharged as of the
Claims. Effective Date. Notwithstanding this treatment of
Class 7 Claims, each of the Pillowtex Entities holding
an Intercompany Claim in Class 7 will be deemed to
have accepted the Plan.
Estimated Percentage Recovery: 0%
- ------------------------------------------------------------ --------------------------------------------------------
Class 8 (Pillowtex Old Preferred Stock Interests): Impaired; no property will be distributed to or retained
by the holders of Interests in Class 8, and the Interests
Interests in Pillowtex on account of the Old Preferred will be canceled on the Effective Date.
Stock of Pillowtex.
Estimated Percentage Recovery: 0%
- ------------------------------------------------------------ --------------------------------------------------------
Class 9 (Pillowtex Old Common Stock Interests): Impaired; no property will be distributed to or retained
by the holders of Interests in Class 9, and the Interests
Interests in Pillowtex on account of the Old Common will be canceled on the Effective Date.
Stock of Pillowtex.
Estimated Percentage Recovery: 0%
- ------------------------------------------------------------ --------------------------------------------------------
Class 10 (Pillowtex Subsidiary Debtors Old Common Unimpaired; on the Effective Date, Interests in Class
Stock Interests): 10 will be Reinstated.
Interests on account of the Old Common Stock of the Estimated Percentage Recovery: 100%
Pillowtex Subsidiary Debtors.
- ------------------------------------------------------------ --------------------------------------------------------
7
Sources and Uses of Cash
The following table sets forth a summary of the principal sources and
uses of cash expected to be available to the Reorganized Debtors on the
Effective Date. All amounts shown are estimates. There can be no assurances that
there will not be material variances between the estimates and the actual
amounts of cash required to consummate the Plan.
Sources of Cash:
Cash available under Exit Financing Revolver Facility............... $ 32,245,000
Cash generated from operations...................................... --
Total Sources................................................ $ 32,245,000
=============
Uses of Cash:
Cashdistributions with respect to Classes 1 and 2 and Divisions
4A, 4B, 4C and 4D of Class 4; Administrative Claims; cure
payments;(1) financing fees and
reorganization expenses(2)..................................... $ 23,329,000
Repayment of DIP Financing Facility................................. $ 8,916,000
-------------
Total Uses................................................... $ 32,245,000
=============
- ------------
(1) Cure payments relating to assumptions of Executory Contracts and
Unexpired Leases.
(2) Among other things, reorganization expenses include: legal,
accounting, financial advisory and other professional fees; costs and
expenses associated with printing and mailing this Disclosure
Statement; compensation costs associated with the effectiveness of the
Plan; and expenses arising in connection with the Pillowtex Merger and
other Restructuring Transactions.
Additional Information Regarding Assertion and Treatment of Administrative
Claims, Priority Tax Claims and Designated Post-Petition Loan Claims
Administrative Claims
Unless otherwise agreed by the holder of an Administrative Claim and
the applicable Debtor or Reorganized Debtor, each holder of an Allowed
Administrative Claim will receive, in full satisfaction of its Administrative
Claim, cash equal to the allowed amount of the Administrative Claim either (a)
on the Effective Date or (b) if the Administrative Claim is not allowed as of
the Effective Date, 30 days after the date on which (i) an order allowing the
Administrative Claim becomes a Final Order or (ii) a Stipulation of Amount and
Nature of Claim is executed by the applicable Reorganized Debtor and the holder
of the Administrative Claim. Administrative Claims include Claims for costs and
expenses of administration allowed under sections 503(b), 507(b) or 1114(e)(2)
of the Bankruptcy Code, including: (a) the actual and necessary costs and
expenses incurred after the Petition Date of preserving the respective Estates
and operating the businesses of the Debtors (such as wages, salaries,
commissions for services and payments for inventories, leased equipment and
premises), including Claims under the DIP Financing Facility; (b) compensation
for legal, financial advisory, accounting and other services and reimbursement
of expenses awarded or allowed under sections 330(a) or 331 of the Bankruptcy
Code, including Fee Claims; and (c) all fees and charges assessed against the
Estates under chapter 123 of title 28, United States Code, 28 U.S.C. ss.ss.
1911-1930. In addition to the types of Administrative Claims described above,
section 503(b) of the Bankruptcy Code provides for payment of compensation or
reimbursement of expenses to creditors and other entities making a "substantial
contribution" to a chapter 11 case and to attorneys for and other professional
advisors to such entities. The amounts, if any, that such entities may seek for
such compensation or reimbursement are not known by the Debtors at this time.
Requests for such compensation or reimbursement must be approved by the
Bankruptcy Court after notice and a hearing at which the Debtors or Reorganized
Debtors and other parties in interest may participate and, if appropriate,
object to the allowance of any such compensation or reimbursement. The Debtors
estimate that the Administrative Claims will aggregate approximately $10 million
as of the Effective Date, excluding accounts payable and other accrued expenses
as of the Effective Date.
8
Except as otherwise provided below, unless previously Filed, requests
for payment of Administrative Claims must be Filed and served on the Reorganized
Debtors, pursuant to the procedures specified in the Confirmation Order and the
notice of entry of the Confirmation Order, no later than 30 days after the
Effective Date. Holders of Administrative Claims that are required to File and
serve a request for payment of Administrative Claims and that do not File and
serve a request by the applicable bar date will be forever barred from asserting
any Administrative Claims against the Debtors, the Reorganized Debtors or their
respective property, and such Administrative Claims will be deemed discharged as
of the Effective Date. Objections to requests must be Filed and served on the
Reorganized Debtors and the requesting party by the later of (a) 120 days after
the Effective Date or (b) 60 days after the Filing of the applicable request for
payment of Administrative Claims.
Professionals or other entities asserting a Fee Claim for services
rendered before the Effective Date must File and serve on the Reorganized
Debtors and any other entities who are designated by the Bankruptcy Rules, the
Confirmation Order, the Fee Order or other order of the Bankruptcy Court an
application for final allowance of Fee Claim no later than 60 days after the
Effective Date; provided, however, that any professional who may receive
compensation or reimbursement of expenses pursuant to the Ordinary Course
Professionals Order may continue to receive such compensation and reimbursement
of expenses for services rendered before the Effective Date, without further
Bankruptcy Court review or approval, pursuant to the Ordinary Course
Professionals Order. Objections to any Fee Claim must be Filed and served on the
Reorganized Debtors and the requesting party by the later of (a) 90 days after
the Effective Date or (b) 30 days after the Filing of the applicable request for
payment of the Fee Claim. To the extent necessary, entry of the Confirmation
Order will amend and supersede any previously entered order of the Bankruptcy
Court, including the Fee Order, regarding the payment of Fee Claims.
The following holders will not be required to File or serve any request
for payment of Administrative Claims: (a) holders of Administrative Claims based
on liabilities incurred by a Debtor in the ordinary course of its business,
including Administrative Trade Claims, Administrative Claims of governmental
units for Taxes (including Tax audit Claims arising after the Petition Date) and
Administrative Claims arising from or under those contracts and leases entered
into or assumed after the Petition Date; and (b) holders of Administrative
Claims under the DIP Financing Facility.
In full satisfaction of each Indenture Trustee's Claims, including
Claims secured by the Indenture Trustee's charging liens under the Prepetition
Indentures, each Indenture Trustee will receive from the Reorganized Debtors
cash equal to the amount of the Claims in accordance with the procedures
described in Section III.E of the Plan, and any charging lien held by the
Indenture Trustee will be released as of the Effective Date. Distributions
received by holders of Allowed Claims in respect of Old Senior Subordinated
Notes or Old 6% Debentures pursuant to the Plan will not be reduced on account
of the payment of the Indenture Trustee's Claims.
Within 30 days after the Effective Date, each Indenture Trustee will
submit to the Reorganized Debtors appropriate documentation in support of the
fees and expenses incurred by that Indenture Trustee in connection with the
Reorganization Cases through the Effective Date, whether incurred prior to or
subsequent to the Petition Date, together with a detailed, reasonable estimate
of any fees and expenses to be incurred following the Effective Date. Within 10
Business Days after receiving this documentation, the Reorganized Debtors will
place the amount of each of the Indenture Trustee's identified fees and expenses
(including any reasonable estimated fees and expenses) in a segregated, interest
bearing money market account (each a "Segregated Account"). Each Indenture
Trustee's fees and expenses will be paid from the applicable Segregated Account
solely in accordance with the procedures described below. The Confirmation Order
will provide that each Indenture Trustee's charging lien will attach solely to
the cash placed in the applicable Segregated Account until the funds in that
account are distributed in accordance with Section III.E of the Plan.
No later than 30 days after the Reorganized Debtors fund the Segregated
Accounts, each Indenture Trustee will (a) File a motion with the Bankruptcy
Court seeking approval of its fees and expenses incurred through the Effective
Date under the terms of the applicable Prepetition Indenture and (b) serve the
motion on the Reorganized Debtors and the United States Trustee. The Bankruptcy
Court will approve the fees and expenses requested in the motion to the extent
that the amounts are reasonable and appropriate under the terms of the
applicable Prepetition Indenture, which, notwithstanding the cancellation of the
Prepetition Indentures pursuant to Section IV.H of the Plan, will govern this
determination. Each Indenture Trustee's request for approval of its fees and
expenses will not be subject to the additional standards contained in section
503(b) of the Bankruptcy Code. Promptly upon approval by the Bankruptcy Court,
each Indenture Trustee's approved fees and expenses for the period prior to the
Effective
9
Date will be treated as Allowed Claims and will be paid from the applicable
Segregated Account, plus any interest earned thereon.
Any amounts remaining in the Segregated Accounts after all of the
respective Indenture Trustee's fees and expenses have been paid, will become the
sole property of, and immediately be returned to, the Reorganized Debtors.
Priority Tax Claims
Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless
otherwise agreed by the holder thereof and the applicable Debtor or Reorganized
Debtor, each holder of an Allowed Priority Tax Claim will receive, in full
satisfaction of its Priority Tax Claim, deferred cash payments over a period not
exceeding six years from the date of assessment of the Priority Tax Claim.
Payments will be made in equal annual installments of principal, plus simple
interest accruing from the Effective Date at 5% per annum on the unpaid portion
of each Allowed Priority Tax Claim (or upon any other terms determined by the
Bankruptcy Court to provide the holders of Priority Tax Claims with deferred
cash payments having a value, as of the Effective Date, equal to the allowed
amount of such Priority Tax Claims). Unless otherwise agreed by the holder of a
Priority Tax Claim and the applicable Debtor or Reorganized Debtor, the first
payment on account of an Allowed Priority Tax Claim will be payable one year
after the Effective Date or, if the Priority Tax Claim is not allowed within one
year after the Effective Date, the first Quarterly Distribution Date after the
date on which (a) an order allowing that Priority Tax Claim becomes a Final
Order or (b) a Stipulation of Amount and Nature of Claim is executed by the
applicable Reorganized Debtor and the holder of the Priority Tax Claim;
provided, however, that the Reorganized Debtors will have the right to pay any
Allowed Priority Tax Claim, or any remaining balance of the Priority Tax Claim,
in full at any time on or after the Effective Date, without premium or penalty.
The Debtors estimate that the Priority Tax Claims will aggregate approximately
$3.3 million as of the Effective Date.
Notwithstanding the foregoing, a holder of an Allowed Priority Tax
Claim will not be entitled to receive any payment on account of any penalty
arising with respect to or in connection with the Allowed Priority Tax Claim.
Any Claim or demand for any penalty (a) will be subject to treatment in Class 6
and (b) the holder of an Allowed Priority Tax Claim will not be entitled to
assess or attempt to collect that penalty from the Reorganized Debtors or their
property.
Designated Post-Petition Loan Claims
Each holder of an Allowed Administrative Claim with respect to the
Designated Post-Petition Loans deemed to have been made under the Final DIP
Order will receive an Exit Term Loan Note in an amount equal to the amount of
such Allowed Administrative Claim. Holders of Allowed Administrative Claims in
respect of the Designated Post-Petition Loans will not be required to File or
serve any request for payment of those Administrative Claims.
Special Provisions Regarding the Treatment of Allowed Secondary Liability Claims
The classification and treatment of Allowed Claims under the Plan take
into consideration all Allowed Secondary Liability Claims. On the Effective
Date, Allowed Secondary Liability Claims will be treated as follows: (a) the
Allowed Secondary Liability Claims arising from or related to any Debtor's joint
or several liability for obligations under any (i) Allowed Claim that is being
Reinstated under the Plan or (ii) Executory Contract or Unexpired Lease that is
being assumed or deemed assumed by another Debtor or under any Executory
Contract or Unexpired Lease that is being assumed by and assigned to another
Debtor or any other entity, will be Reinstated; and (b) holders of all other
Allowed Secondary Liability Claims will be entitled to only one distribution in
respect of such underlying Allowed Claim. No multiple recovery on account of any
Allowed Secondary Liability Claim will be provided or permitted.
Summary of Terms of Certain Securities to Be Issued Pursuant to the Plan
The following sets forth a summary of the securities to be issued
pursuant to the Plan. This summary is qualified by reference to the description
of such securities under "Securities to Be Issued Pursuant to the Plan;
Post-Reorganization Indebtedness."
10
Equity Securities
The Plan provides that, as of the Effective Date, Reorganized Pillowtex
will be authorized to issue 50 million shares of New Common Stock, par value
$0.01 per share. See "Securities To Be Issued Pursuant to the Plan;
Post-Reorganization Indebtedness -- New Common Stock." Reorganized Pillowtex
will, on the Effective Date, issue an aggregate of approximately 9,249,500
shares of New Common Stock to holders of Allowed Claims in Classes 5 and 6.
Holders of New Common Stock will be entitled to receive ratably such
dividends as declared by Reorganized Pillowtex's Board of Directors and will
have no preemptive, subscription, redemption or conversion rights. The
declaration of dividends and other payments on the New Common Stock will be
restricted, and may be prohibited, pursuant to certain provisions of the
documents governing the Exit Financing Revolver Facility. See "Securities To Be
Issued Pursuant to the Plan; Post-Reorganization Indebtedness -- Exit Financing
Revolver Facility." Reorganized Pillowtex is not expected to pay any dividends
on the New Common Stock in the foreseeable future. Subject to the terms and
conditions set forth in the New Share Purchase Rights Agreement, each share of
New Common Stock issued pursuant to the Plan will be accompanied by a New Share
Purchase Right. See "Securities To Be Issued Pursuant to the Plan;
Post-Reorganization Indebtedness -- New Share Purchase Rights Agreement."
On the Effective Date, Reorganized Pillowtex will issue to holders of
Allowed Claims in Class 6 New Warrants exercisable to purchase up to an
aggregate of 1,764,706 shares of New Common Stock, which is equal to 15% of the
Reorganized Debtors' equity on a fully diluted basis. Initially, each New
Warrant, when exercised, will entitle the holder thereof to acquire one share of
New Common Stock at an exercise price of approximately $61.00 per share. The New
Warrants will expire on the seven and one-half year (90 month) anniversary of
the Effective Date. The New Warrants will be issued under a warrant agreement
between Reorganized Pillowtex and a warrant agent to be selected by Reorganized
Pillowtex (the "New Warrant Agreement"). See "Securities to Be Issued Pursuant
to the Plan; Post-Reorganization Indebtedness -- New Warrants."
On the Effective Date, (a) holders of Allowed Bank Loan Claims will
receive their Pro Rata share of 9,015,000 shares of New Common Stock, which
represent approximately 96.1% of the aggregate shares of New Common Stock to be
issued pursuant to the Plan (or 76.6% on a fully diluted basis); and (b) subject
to any enforceable subordination rights expressly preserved pursuant to Section
XI.C.3 of the Plan, holders of Allowed Claims in Class 6 will receive (i) their
Pro Rata share of 234,500 shares of New Common Stock, which represent
approximately 2.5% of the aggregate shares of New Common Stock to be issued
pursuant to the Plan (or 2.0% on a fully diluted basis), and (ii) their Pro Rata
share of New Warrants exercisable to purchase up to 1,764,706 shares of New
Common Stock, which represent 15% of the aggregate shares of New Common Stock
pursuant to the Plan. The percentages calculated above are based on the assumed
issuance on the Effective Date of (a) 9,249,500 shares of New Common Stock and
New Warrants to purchase 1,764,706 shares of New Common Stock to holders of
Allowed Claims in Classes 5 and 6 under the Plan, (b) 150,000 shares of New
Common Stock issued to key employees of the Reorganized Debtors as restricted
stock under the Equity Incentive Plan, and (c) options granted to purchase
620,000 shares of New Common Stock under the Equity Incentive Plan.
It is contemplated that, as of the Effective Date, 750,000 shares of
New Common Stock will be reserved for issuance in satisfaction of awards under
the Equity Incentive Plan, including options to be granted and shares of
restricted stock to be issued to key executives as of the Effective Date. For
the purposes of calculating share price and equity ownership, it has been
assumed that 130,000 shares of New Common Stock will be issued as of the
Effective Date to key executives of the Reorganized Debtors as restricted stock
under the Equity Incentive Plan. The terms of the Equity Incentive Plan,
including amounts to be issued as restricted stock or granted as options, have
not yet been determined. The options granted as of the Effective Date are
anticipated to have a per share exercise price equal to the average of the daily
closing sales price per share of the New Common Stock as reported on The Nasdaq
Stock Market, Inc. or the National Securities Exchange on which it is listed, as
applicable, for the 30 consecutive trading days immediately following the
Effective Date. See "Reorganized Pillowtex -- Employee Benefit Matters -- New
Benefit Programs; Continuation or Termination of Existing Plans and Agreements."
The Plan also provides that, as of the Effective Date, Reorganized
Pillowtex will be authorized to issue 10 million shares of preferred stock, par
value $0.01 per share ("New Preferred Stock"). Reorganized Pillowtex's Board of
Directors will have the authority to issue shares of New Preferred Stock from
time to time in one or more
11
classes or series and to determine the various rights and privileges thereof. On
the Effective Date, Reorganized Pillowtex will be authorized to issue an initial
series of New Preferred Stock designated Series A Junior Participating Preferred
Stock. See "Securities to Be Issued Pursuant to the Plan; Post-Reorganization
Indebtedness -- New Preferred Stock" and "-- New Share Purchase Rights
Agreement." Reorganized Pillowtex's Board of Directors will have the authority
to issue additional shares of New Common Stock from time to time following the
Effective Date under the provisions of the Certificate of Incorporation of
Reorganized Pillowtex (the "Certificate"), the Bylaws of Reorganized Pillowtex
(the "Bylaws") and applicable law. See " Reorganized Pillowtex -- Certain
Corporate Governance Matters -- Authorized But Unissued Shares."
Exit Financing Revolver Facility and Other Post-Reorganization Indebtedness
The commitment of the Exit Financing Revolver Facility Agent Bank to
provide the Exit Financing Revolver Facility on terms satisfactory to the
Debtors is a condition to Confirmation, and the execution and delivery of the
documents effectuating the Exit Financing Revolver Facility by the Reorganized
Debtors and the Exit Financing Revolver Facility Agent Bank are conditions to
the Effective Date. The Debtors currently contemplate that the Exit Financing
Revolver Facility will consist of a senior secured revolving credit facility of
up to $200 million, including a letter of credit sub-facility. See "Securities
To Be Issued Pursuant to the Plan; Post-Reorganization Indebtedness -- Exit
Financing Revolver Facility."
See "Securities to Be Issued Pursuant to the Plan; Post-Reorganization
Indebtedness" for a description of the Exit Term Loan and certain secured
indebtedness to be Reinstated on the Effective Date.
Conditions to Confirmation and the Effective Date of the Plan
There are several conditions precedent to Confirmation and the
occurrence of the Effective Date. Subject to applicable legal requirements, the
Debtors may waive any of these conditions upon the terms and subject to the
conditions set forth in Section IX.C of the Plan.
Conditions to Confirmation
The Bankruptcy Court will not enter the Confirmation Order unless and
until the following conditions have been satisfied or duly waived pursuant to
Section IX.C of the Plan:
1. The Confirmation Order shall be reasonably acceptable in form
and substance to the Debtors.
2. The Debtors shall have received a commitment for the Exit
Financing Revolver Facility from the Exit Financing Revolver Facility Agent Bank
on terms and conditions satisfactory to the Debtors.
3. Each holder of a Claim in respect of a Designated Post-
Petition Loan shall have consented to the treatment thereof as contemplated
by Section III.A.1.d of the Plan.
4. The Plan shall not have been amended, altered or modified from
the Plan as Filed on December 28, 2001, unless such amendment, alteration or
modification has been consented to in accordance with Section XIII.C of the
Plan, and all Exhibits to the Plan shall be in form and substance reasonably
satisfactory to the Debtors.
In addition to the foregoing conditions to Confirmation, there are a
number of substantial confirmation requirements under the Bankruptcy Code that
must be satisfied for the Plan to be confirmed. See "Voting and Confirmation of
the Plan -- Confirmation."
Conditions to the Effective Date
The Effective Date will not occur and the Plan will not be consummated
unless and until each of the following conditions has been satisfied or duly
waived pursuant to Section IX.C of the Plan:
1. The documents effectuating the Exit Financing Revolver
Facility shall have been executed and delivered by the Reorganized Debtors and
the Exit Financing Revolver Facility Agent Bank.
12
2. The documents effectuating the Exit Term Loan shall have been
executed and delivered by the Reorganized Debtors and each of the holders of
Allowed Administrative Claims under Designated Post-Petition Loans.
3. The shares of New Common Stock to be issued pursuant to the
Plan shall have been designated as Nasdaq National Market securities by The
Nasdaq Stock Market, Inc. or authorized for listing on or accepted for quotation
through a National Securities Exchange subject to official notice of issuance.
4. The New Common Stock shall have been registered under the
Exchange Act pursuant to either a Form 8-A Registration Statement or a Form 10
Registration Statement that has become effective under the Exchange Act.
5. The Plan will not have been amended, altered or modified from
the Plan as Filed on December 28, 2001, unless such amendment, alteration or
modification has been consented to in accordance with Section XIII.C of the
Plan, and all Exhibits to the Plan shall be in form and substance reasonably
satisfactory to the Debtors.
Waiver of Conditions to Confirmation or to the Effective Date
The conditions to Confirmation and to the Effective Date may be waived
in whole or part by the Debtors at any time without notice or an order of the
Bankruptcy Court or any further action other than proceeding to Confirmation and
consummation of the Plan, provided, however, that the conditions set forth in
Section IX.A.4 and Section IX.B.5 of the Plan may only be waived pursuant to an
order of the Bankruptcy Court after notice and opportunity for a hearing.
Effect of Nonoccurrence of Conditions to the Effective Date
If each of the conditions to the Effective Date provided in the Plan is
not satisfied or duly waived in accordance with Section IX.C of the Plan, then
upon motion by the Debtors made before the time that each of such conditions has
been satisfied or duly waived and upon notice to any parties in interest as the
Bankruptcy Court may direct, the Confirmation Order will be vacated by the
Bankruptcy Court; provided, however, that, notwithstanding the Filing of such
motion, the Confirmation Order may not be vacated if each of the conditions to
the Effective Date is either satisfied or duly waived before the Bankruptcy
Court enters an order granting the motion. If the Confirmation Order is vacated
pursuant to Section IX.D of the Plan: (a) the Plan will be null and void in all
respects, including with respect to (i) the discharge of Claims and termination
of Interests pursuant to section 1141 of the Bankruptcy Code, and (ii) the
assumptions, assignments or rejections of Executory Contracts and Unexpired
Leases pursuant to Sections V.A and V.C of the Plan; and (b) nothing contained
in the Plan will (i) constitute a waiver or release of any Claims by or against,
or any Interest in, the Debtors, or (ii) prejudice in any manner the rights of
the Debtors or any other party in interest.
Modification or Revocation of the Plan
Subject to the restrictions on modifications set forth in section 1127
of the Bankruptcy Code, the Debtors or the Reorganized Debtors, as applicable,
reserve the right to alter, amend or modify the Plan before its substantial
consummation. The Debtors also reserve the right to revoke or withdraw the Plan
as to any or all of the Debtors prior to the Confirmation Date. If the Debtors
revoke or withdraw the Plan as to any or all of the Debtors, or if Confirmation
as to any or all of the Debtors does not occur, then, with respect to such
Debtors, the Plan will be null and void in all respects, and nothing contained
in the Plan will: (a) constitute a waiver or release of any Claims by or
against, or any Interests in, such Debtors; or (b) prejudice in any manner the
rights of any Debtors or any other party.
13
CERTAIN EVENTS PRECEDING THE DEBTORS' CHAPTER 11 FILINGS
Historical Overview
Introduction
Pillowtex was founded in 1954 and its common stock has been publicly
traded since March 17, 1993. Pillowtex expanded beyond its original pillow
manufacturing operations largely through an acquisition strategy, including the
1994 and 1996 acquisitions of its blanket manufacturing business (the "Blanket
Division"), the 1997 acquisition of Fieldcrest Cannon and the 1998 acquisition
of The Leshner Corporation ("Leshner"), each of which is described below.
Pillowtex, together with its subsidiaries, is one of the largest companies in
North America in the business of designing, manufacturing and marketing home
textile products. The Debtors offer a full line of utility and fashion bedding
and complementary bedroom textile products, as well as a full line of bathroom
and kitchen textile products. These products are marketed under the Debtors'
brand names, including among others, Royal Velvet(R), Cannon(R), Fieldcrest(R)
and Charisma.(R)
Blanket Manufacturing Acquisitions
On November 30, 1994, Pillowtex acquired the core of the Blanket
Division by purchasing Beacon Manufacturing Company ("Beacon") for approximately
$112 million. On November 18, 1996, Pillowtex increased the size of the Blanket
Division through the acquisition of certain assets from the blanket operations
of Fieldcrest Cannon for a purchase price of approximately $28.3 million.
Pillowtex funded this acquisition through the issuance of the Old 10% Notes. As
of the Petition Date, the Blanket Division had not generated a profit for the
Debtors.
Fieldcrest Cannon Acquisition
On December 19, 1997, Pillowtex acquired Fieldcrest Cannon by merger
for a combination of cash and stock valued at approximately $409 million (the
"Fieldcrest Cannon Acquisition"). In connection with the Fieldcrest Cannon
Acquisition, Pillowtex (a) retired approximately $199 million of existing
Fieldcrest Cannon long-term debt, (b) issued an aggregate of $185 million of Old
9% Notes and 65,000 shares of Old Preferred Stock of Pillowtex and (c) entered
into new senior secured revolving credit and term loan facilities consisting of
a $350 million revolving credit facility and a $250 million term loan facility.
The term loan facility included Facility A Term Loan Notes in an aggregate
amount of $125 million and Facility B Term Loan Notes in an aggregate amount of
$125 million. The Old 6% Debentures remained outstanding following the
Fieldcrest Cannon Acquisition, but became convertible into a combination of cash
and Old Common Stock as a result of the acquisition. See "--Overleverage--
Attempted Restructuring of Old 6% Debentures."
The Fieldcrest Cannon Acquisition more than doubled Pillowtex's
revenues, assets and liabilities. The acquisition also expanded Pillowtex's
product lines to include bathroom and kitchen textile products and gave the
Debtors a portfolio of products that includes many widely recognized names in
the textile industry. As a consequence of the Fieldcrest Cannon Acquisition,
Pillowtex's debt burden significantly increased and it began experiencing
operational difficulties, each of which are more fully described below.
Leshner Acquisition
On July 28, 1998, Pillowtex acquired all of the outstanding stock of
Leshner, a 91-year old manufacturer of towels and terry-related products, for a
cash purchase price of $41.8 million. In connection with the acquisition,
Pillowtex also retired $32.5 million of outstanding Leshner debt. The
acquisition was funded through an increase in the Facility B Term Loan Notes
from $125 million to $225 million.
Overleverage
Overview
The acquisitions of Fieldcrest Cannon and Leshner, in addition to
increased operational expenditures resulting from these acquisitions, created a
significant debt burden on the Debtors. By January 1999, the Debtors' total
outstanding long-term debt was almost $1 billion. As a consequence, a
significant portion of the Debtors' cash
14
flow from operations was dedicated to scheduled debt service. By the Petition
Date, cash flow was insufficient to meet the Debtors' significant debt service
obligations or to provide sufficient liquidity to operate their businesses.
Negotiations with Prepetition Lenders
By the end of 1999, the Debtors were not in compliance with certain
financial covenants under the Prepetition Credit Facility and began to
experience liquidity problems. During this time, the Debtors retained
professional financial advisors to assist management in developing business and
strategic plans and in exploring capital restructuring and financing
alternatives. In the early months of 2000, the Debtors expended substantial
efforts on their immediate liquidity needs and negotiations with the lenders
under the Prepetition Credit Facility (the "Prepetition Lenders") over
amendments to, and waivers of non-compliance with, the covenants under the
Prepetition Credit Facility. Effective as of March 31, 2000, the Debtors
obtained a permanent waiver of their prior non-compliance with financial
covenants under the Prepetition Credit Facility, and the Prepetition Credit
Facility was amended to, among other things, shorten the terms of its maturity,
increase the applicable interest rate margins, limit borrowings under certain
circumstances and add a covenant requiring that earnings before interest, taxes,
depreciation and amortization must exceed specified levels for future fiscal
periods (the "EBITDA Covenant").
Attempted Restructuring of Old 6% Debentures
The Debtors' liquidity problems were exacerbated by the terms of the
Old 6% Debentures, which became convertible into a combination of cash and Old
Common Stock of Pillowtex as a result of the Fieldcrest Cannon Acquisition.
Facing increasing financial difficulties, Pillowtex notified the holders of the
Old 6% Debentures during the fourth quarter of 1999 that it was not practicable
or prudent to make cash payments in respect of the conversion of the Old 6%
Debentures. Pillowtex further advised holders that had delivered notices of
conversion and surrendered their Old 6% Debentures (the "Converting Holders")
that they could rescind their notices of conversion, return to Pillowtex any Old
Common Stock of Pillowtex that had been issued to them pursuant to the
conversion ("Conversion Stock") and have their Old 6% Debentures reinstated.
Although many Converting Holders exercised their rescission rights and returned
their Conversion Stock, other holders were unable to rescind because they had
previously sold their Conversion Stock.
Pillowtex was prohibited under the terms of its Old 10% Notes and Old
9% Notes from making payments in respect of the Old 6% Debentures other than
interest payments, payments at maturity or payments pursuant to sinking fund
obligations. In an effort to address both the unpaid cash portion of the
conversion consideration owing to Converting Holders and the cash payment
prohibition in respect of the future conversions, Pillowtex initiated
discussions with certain holders of the Old 6% Debentures regarding the
potential restructuring of the Old 6% Debentures. Notwithstanding months of
effort, the parties to those discussions were unable to agree upon a mutually
satisfactory comprehensive restructuring of the Old 6% Debentures.
In September 2000, Pillowtex notified the holders of the Old 6%
Debentures of its plan for paying the unpaid cash portion of the conversion
consideration owing to Converting Holders as a "scheduled payment." The plan
contemplated cash payments in September 2000, March 2001 and March 2002.
Pillowtex issued Old 6% Debenture Promissory Notes in respect of amounts owed to
Converting Holders that were not paid the cash consideration owed to them. On
September 28, 2000, Pillowtex made the first scheduled payment in the amount of
$3.8 million.
As of the Petition Date, approximately $85.2 million aggregate
principal amount of the Old 6% Debentures and $5.2 million aggregate principal
amount of Old 6% Debenture Promissory Notes remained outstanding. If all of the
outstanding Old 6% Debentures were converted at the Petition Date, the resulting
cash component of the conversion consideration would have been approximately
$57.2 million.
Industry and Competitive Pressures
While the Debtors struggled with their debt burden, they also faced
increasing pressures resulting from competition within the home textile market.
The domestic home furnishings market experienced minimal pricing power and low
net margins as a result of competition with foreign manufactured goods. Cheap
labor and government subsidies, as well as low import prices resulting from the
depressed currencies of most Asian nations, helped foreign manufacturers produce
relatively low-cost products. In addition to this pressure from foreign
15
competitors, many major department stores and retailers experienced financial
difficulties as a result of slower retail sales and other factors. These
financial difficulties, in turn, prompted inventory reductions and delays in new
product introductions. To remain competitive and become more efficient, many
home textile companies, including the Debtors, found it necessary to invest
substantial capital in new machinery, updated equipment and new information
systems.
Integration and Operational Difficulties
Prior to the Fieldcrest Cannon Acquisition, Pillowtex and Fieldcrest
Cannon had each embarked on ambitious capital investment programs to update or
replace machinery, equipment and information systems. Following the Fieldcrest
Cannon Acquisition, the Debtors needed to combine these projects and to
integrate or consolidate numerous systems, facilities, personnel and business
practices. Integration proved more difficult than anticipated and the
efficiencies expected to result from the business combination were slow to
materialize. Among other integration problems, (a) the costs associated with the
consolidation of the blanket production facilities were higher than projected
and necessitated a material write-down of assets, (b) plant disruptions
(including shipping delays) and operating inefficiencies occurred in connection
with the installation of new machinery, equipment and computer systems to manage
production and warehousing functions, and (c) overhead costs could not be
absorbed because inventory reduction initiatives and the installation of new
computer systems caused a slowdown in certain operations.
Installation of New Management
In May 2000, Pillowtex hired Anthony T. Williams as its new Chief
Financial Officer. In the following months, the Debtors added members to their
management, including, John Wahoski as the new Vice President of Financial and
Operational Analysis, David J. Kott as the new Vice President of Profitability
Management and Donald Mallo as the new Vice President of Human Resources.
On October 27, 2000, Charles M. Hansen, Jr. resigned as Chairman and
Chief Executive Officer of Pillowtex. The Board of Directors of Pillowtex named
Ralph La Rovere, a long-time director of Pillowtex and former JC Penney
executive, to succeed Mr. Hansen as Chairman. The Board of Directors also
promoted Mr. Williams to President and Chief Operating Officer.
Implementation of Operational Initiatives
Commencing in May 2000, under Mr. Williams' direction, and with the
assistance of professional advisors, management began developing a comprehensive
plan to address the Debtors' operational and financial problems. Among other
initiatives to attempt to improve business efficiencies and improve cash flow
and position of the Debtors for long-term profitability, management (a) began a
production slowdown to reduce inventory and more efficiently operate the
Debtors' plants, (b) initiated a full analysis of facility and product line
profitability, and (c) retained consultants to assist in reducing accounts
receivable, developing disciplined revenue cycle procedures and processes and
improving certain manufacturing processes. The Debtors also began a strategic
planning process for the development of a comprehensive three-year strategic
plan. The strategic planning process and related operational initiatives have
continued after the Petition Date. See "Operations During the Reorganization
Cases -- Postpetition Operations."
Determination to File the Reorganization Cases
By October 2000, the costs associated with the operational initiatives
described above, specifically inventory reductions, closure and consolidation of
certain operations, combined with the continuation of the sluggish retail
environment caused the Debtors to be in violation of the EBITDA Covenant under
the Prepetition Credit Facility. The Debtors negotiated a temporary waiver of
this violation with the Prepetition Lenders through November 7, 2000.
On November 8, 2000, the temporary waiver obtained from the Prepetition
Lenders expired, placing the Debtors in default under the Prepetition Credit
Facility. The Prepetition Lenders also delivered to the Debtors a payment
blockage notice with respect to a scheduled interest payment on the Old 10%
Notes of approximately $6.25 million due on November 15, 2000. By operation of a
cross-default provision, the default under the Prepetition
16
Credit Facility also resulted in an event of default with respect to the
Debtors' Industrial Revenue Bonds. See "Capital Structure as of the Petition
Date" for a discussion of the Industrial Revenue Bonds and other components of
the Debtors' prepetition capital structure.
Taking into consideration all of the foregoing circumstances, and
desiring to give the Debtors the ability to continue their operational
initiatives, complete their strategic planning process and determine an
appropriate capital structure without the constraints imposed by its debt
burden, Pillowtex's Board of Directors and the Boards of Directors of the other
Debtors determined that the filing of the Reorganization Cases would be the best
alternative to preserve value for stakeholders and therefore authorized
commencement of the Reorganization Cases.
CAPITAL STRUCTURE AS OF THE PETITION DATE
Introduction
As of the Petition Date, the Debtors' principal indebtedness consisted
of the Prepetition Credit Facility, the Overline Facility, the Industrial
Revenue Bonds, the Old 10% Notes, the Old 9% Notes and the Old 6% Debentures. In
addition, as of the Petition Date, Pillowtex had outstanding shares of Old
Common Stock and Old Preferred Stock.
Prepetition Credit Facility
In connection with the Fieldcrest Cannon Acquisition, on December 19,
1997, Pillowtex entered into the Prepetition Credit Facility, a $700 million
senior secured credit facility. The Prepetition Credit Facility consists of: (a)
a revolving credit facility of up to $350 million, with a $55 million
sub-facility for letters of credit (the "Revolving Credit Facility"); and (b) an
aggregate of $350 million principal amount in term loans, divided into Facility
A Term Loan Notes of $125 million and Facility B Term Loan Notes of $225 million
(collectively, the "Prepetition Term Notes"). As of the Petition Date, (a)
outstanding obligations under the Revolving Credit Facility aggregated
approximately $316 million and (b) outstanding obligations under the Prepetition
Term Notes aggregated approximately $325 million.
The Prepetition Credit Facility is guaranteed by each of the Pillowtex
Subsidiary Debtors, and is secured by first-priority liens on all of the capital
stock of each domestic subsidiary of Pillowtex and on 65% of the capital stock
of Pillowtex's foreign subsidiaries. Pillowtex also granted a first-priority
security interest in substantially all of its unencumbered and future domestic
assets and properties and substantially all of the unencumbered and future
domestic assets and properties of each of the Pillowtex Subsidiary Debtors. The
Prepetition Lenders participating in the Prepetition Credit Facility and
Pillowtex entered into an Intercreditor Agreement governing the Prepetition
Lenders' rights and priorities with respect to the collateral securing the
Prepetition Credit Facility (the "Intercreditor Agreement").
Overline Facility
In order to obtain additional working capital, on May 4, 1999,
Pillowtex entered into the Overline Facility, a $20 million senior unsecured
revolving credit facility with Bank of America. The Overline Facility was
amended on July 27, 1999, to increase the amount of funds available under the
facility to $35 million and on December 7, 1999, to, among other things, grant
to Bank of America a security interest in the collateral securing the
Prepetition Credit Facility. Additionally, the Pillowtex Subsidiary Debtors
guaranteed Pillowtex's obligations under the Overline Facility. As of the
Petition Date, outstanding obligations under the Overline Facility aggregated
$34.7 million.
In connection with the second amendment to the Overline Facility, the
Debtors granted to Fleet National Bank, an affiliate of a Prepetition Lender, a
security interest in all of the collateral securing the Prepetition Credit
Facility to secure the Debtors' obligations under the Aircraft Lease. The
Intercreditor Agreement was amended effective December 7, 1999 to include the
obligations under the Overline Facility and Aircraft Lease and to provide that
such obligations would share pro rata in amounts distributed from the
collateral, but only after all obligations under the Prepetition Credit Facility
had been paid in full.
17
Industrial Revenue Bonds
At various times prior to the Petition Date, one or more of the Debtors
issued and sold industrial revenue bonds through state or municipal development
boards or authorities. As of the Petition Date, there were five separate revenue
bond financings outstanding (collectively, the "IRB Facilities"). The IRB
Facilities consist of the following:
o $5.3 million economic development revenue bond financing,
dated as of April 1, 1990, between Silversen-Hanover
Corporation, a predecessor-in-interest to Pillowtex, and the
Pennsylvania Economic Development Financing Authority (the
"PEDFA Revenue Bonds");
o $4.6 million industrial development revenue bond financing,
dated as of June 1, 1992, between Pillowtex and the
Mississippi Business Finance Corporation (the "MBFC Revenue
Bonds");
o $90 million taxable revenue bond financing (of which $10
million in aggregate principal amount of bonds were actually
issued) dated on or about July 1, 1994 between Fieldcrest
Cannon and the State Industrial Development Authority (the
"Alabama Revenue Bonds");
o $2.6 million revenue bond financing dated on or about
February 1, 1986, between Gold Kist, Inc., predecessor-in-
interest to Opelika Industries, Inc., and the Macon-Bibb
County Industrial Authority (the "Macon-Bibb Revenue Bonds");
and
o $4.5 million revenue bond financing dated on or about
July 1, 1996, between Opelika Industries, Inc. and the Pulaski
County-Hawkinsville Development Authority (the "Hawkinsville
Revenue Bonds").
Most of the IRB Facilities are secured by a first-priority lien on
specific land, property and equipment under the IRB Facilities. The collateral
for those IRB Facilities is not part of the collateral securing the Prepetition
Credit Facility, the Overline Facility or any of the other issuances of
industrial revenue bonds. The PEDFA Revenue Bonds, the MBFC Revenue Bonds and
the Alabama Revenue Bonds are also secured by separate irrevocable letters of
credit that exceed the amounts owed under the applicable IRB Facility. To
preserve tax advantages and avoid the payment of a higher interest rate under
the Prepetition Credit Facility, the Debtors obtained authority to make payments
in respect of the PEDFA Revenue Bonds, the MBFC Revenue Bonds and the Alabama
Revenue Bonds during the Reorganization Cases. The Debtors also obtained
authority to make the final payment on the Macon-Bibb Revenue Bonds, which was
paid on April 19, 2001. Furthermore, in February 2001, the Debtors closed their
Hawkinsville plant and determined that the equipment at Hawkinsville, certain of
which served as the only collateral for the Hawkinsville Revenue Bonds, was not
needed for their reorganization efforts. The Debtors thereafter agreed to have
the Bankruptcy Court lift the automatic stay under section 362 of the Bankruptcy
Code to permit GE Capital Public Finance, Inc. to foreclose on its equipment
collateral to help satisfy obligations in respect of the Hawkinsville Revenue
Bonds. Accordingly, only three of the IRB Facilities are currently secured and
outstanding: the PEDFA Revenue Bonds, the MBFC Revenue Bonds and the Alabama
Revenue Bonds (collectively, the "Industrial Revenue Bonds"). As of December 1,
2001, the outstanding aggregate amount outstanding under the Industrial Revenue
Bonds was approximately $12 million.
Old 10% Notes
On November 12, 1996, Pillowtex issued and sold $125 million aggregate
principal amount of Old 10% Notes, with interest payable semiannually beginning
May 15, 1997. The Old 10% Notes are general unsecured obligations of Pillowtex
and are structurally subordinate to all obligations of Pillowtex and Pillowtex's
direct and indirect subsidiaries under the Prepetition Credit Facility, the
Overline Facility and the Industrial Revenue Bonds.
Old 9% Notes
On December 18, 1997, in connection with the Fieldcrest Cannon
Acquisition, Pillowtex issued and sold $185 million aggregate principal amount
of Old 9% Notes, with interest payable semiannually beginning June 15, 1998. The
Old 9% Notes are general unsecured obligations of Pillowtex and rank pari passu
with the Old 10%
18
Notes. The Old 9% Notes are structurally subordinate to all obligations of
Pillowtex and Pillowtex's direct and indirect subsidiaries under the Prepetition
Credit Facility, the Overline Facility and the Industrial Revenue Bonds.
The Old 9% Notes and the Old 10% Notes are unconditionally guaranteed
on a senior subordinated basis by each of the other Debtors. The guarantees are
subordinated in right of payment to all existing and future senior indebtedness
of the relevant guarantor, including indebtedness under the Prepetition Credit
Facility, the Overline Facility and the Industrial Revenue Bonds.
Old 6% Debentures
On March 15, 1987, Fieldcrest Cannon issued and sold $125 million
aggregate principal amount of Old 6% Debentures. The Old 6% Debentures are
general unsecured obligations of Fieldcrest Cannon and are subordinate to all
obligations of Pillowtex and Pillowtex's direct and indirect subsidiaries under
the Prepetition Credit Facility, the Overline Facility, the Industrial Revenue
Bonds, the Old 10% Notes and the Old 9% Notes. The Old 6% Debentures became
convertible, at the option of the holder, into a combination of cash and Old
Common Stock of Pillowtex as a result of the Fieldcrest Cannon Acquisition.
During the fourth quarter of 1999, Pillowtex notified the holders of
the Old 6% Debentures that it was not practicable or prudent for payments to be
made in respect of the conversion of the Old 6% Debentures and advised the
Converting Holders that they had the right to rescind their notice of
conversion, return to Pillowtex any Conversion Stock that had been issued to
them and have their Old 6% Debentures reinstated. Although many Converting
Holders exercised their rescission rights and returned their Conversion Stock,
other Converting Holders were not able to exercise their rescission rights
because they had previously sold their Conversion Stock.
To compensate for the unpaid cash portion of the conversion
consideration owed to those Converting Holders of Old 6% Debentures who
surrendered their debentures for conversion and did not exercise their
rescission rights (the "Cash Claimants"), Pillowtex agreed to make three annual
cash payments in an aggregate amount of approximately $3.8 million each. The
unpaid cash portion for each Cash Claimant was evidenced by a non-interest
bearing subordinated promissory note executed by Fieldcrest Cannon
(collectively, the "Old 6% Debenture Promissory Notes"). Pillowtex made the
first scheduled payment of $3.8 million on September 28, 2000. As of the
Petition Date, the aggregate principal amount outstanding under the Old 6%
Debenture Promissory Notes was approximately $5.2 million. See "-- Overleverage
- -- Attempted Restructuring of Old 6% Debentures."
Old Preferred Stock of Pillowtex
In connection with the Fieldcrest Cannon Acquisition, on December 19,
1997, Pillowtex issued shares of its preferred stock, par value $.01 per share
(i.e., Old Preferred Stock of Pillowtex) for $65 million less $2.1 million of
issue costs. A total of 81,411 shares of Old Preferred Stock of Pillowtex were
issued and outstanding as of the Petition Date.
Old Common Stock of Pillowtex
Pillowtex is authorized to issue 50 million shares of common stock, par
value $.01 per share (i.e., Old Common Stock of Pillowtex). As of the Petition
Date, 14,252,069 shares of Old Common Stock of Pillowtex were issued and
outstanding. Prior to the commencement of the Reorganization Cases, shares of
the Old Common Stock of Pillowtex traded on the New York Stock Exchange (the
"NYSE") under the symbol "PTX." The NYSE suspended trading of the Old Common
Stock of Pillowtex on the Petition Date, and the Old Common Stock of Pillowtex
was delisted from the NYSE on January 23, 2001.
19
OPERATIONS DURING THE REORGANIZATION CASES
First Day Relief
Introduction
While preparing for the Filing of the Reorganization Cases, the Debtors
devoted significant attention to the stabilization of their respective
businesses after the Petition Date. In particular, the Debtors needed to
maintain sufficient liquidity to operate their businesses. Accordingly, on the
Petition Date, the Debtors Filed a motion for the entry of interim and final
orders to obtain debtor-in-possession financing in an aggregate amount of $150
million. Pending a final hearing, the Bankruptcy Court authorized the Debtors to
borrow up to $35 million. See " -- Debtor-in-Possession Financing."
On the Petition Date, the Debtors also Filed a number of other motions
(the "First Day Motions") designed to allow the Debtors to continue their
operations in chapter 11 while minimizing disruption and loss of productivity,
in addition to maintaining the confidence and support of customers, employees,
vendors and suppliers. The First Day Motions included: (a) motions relating to
case administration; (b) a motion relating to the continued use of the Debtors'
existing cash management system, bank accounts, business forms and investment
and deposit guidelines; (c) a motion relating to payment of prepetition wages
and other benefits to the Debtors' employees; (d) a motion relating to
continuation of workers' compensation programs; (e) motions relating to honoring
prepetition obligations to customers and payments to certain vendors and service
providers necessary to maintain uninterrupted operations; (f) a motion for
authority to pay outstanding prepetition trust fund taxes; and (g) a motion
authorizing the Debtors to pay installments under insurance premium finance
agreements. All the Debtors' First Day Motions were granted and certain of those
motions are described below.
Employee Wages and Benefits
The Debtors obtained authorization to: (a) pay certain prepetition
employee wages, salaries, contractual compensation, sick pay, vacation pay
(including "personal days"), holiday pay and other accrued compensation; (b)
reimburse prepetition employee business expenses; (c) make payments for which
employee payroll deductions were made; (d) make prepetition contributions and
pay benefits under employee benefits plans; and (e) pay all costs and expenses
incurred in connection with the foregoing payments and contributions.
Trust Fund Taxes
In the ordinary course of their businesses, the Debtors collect certain
trust fund taxes (collectively, the "Trust Fund Taxes") from their employees or
customers, as applicable, and hold them for a period of time before remitting
them to the appropriate taxing authorities (collectively, the "Taxing
Authorities"). The Debtors collect sales and use taxes from customers for
remittance to the appropriate state or local Taxing Authority. In addition, the
Debtors withhold certain taxes (such as income, FICA and Medicare taxes) from
their employees' paychecks, which amounts are then remitted periodically to the
appropriate federal or state Taxing Authorities. The Debtors obtained
authorization to pay the Trust Fund Taxes collected prior to the commencement of
their Reorganization Cases, but not yet remitted by the Debtors to the
applicable Taxing Authority.
Customer Claims
On the Petition Date, the Debtors had certain outstanding prepetition
obligations to their customers under a variety of incentive and promotional
arrangements as well as for refunds, adjustments, returns, discounts in lieu of
returns and other credits. Given the critical nature of the Debtors'
relationships with their customers and the importance of these relationships to
the Debtors' businesses and reorganization efforts, the Debtors obtained
authority, in their sole discretion, to pay or honor these prepetition
obligations to customers.
Critical Vendor and Service Provider Claims
In the ordinary course of their businesses, the Debtors regularly
obtain goods and services from certain vendors and service providers who are
critical to their businesses (collectively, the "Critical Vendors"). Many of
20
these Critical Vendors had outstanding claims for goods and services provided to
the Debtors prior to the Petition Date (collectively, the "Critical Vendor
Claims"). The Critical Vendor Claims included:
o claims of vendors who provide cotton, the primary raw material
used in the Debtors' businesses;
o claims of certain foreign vendors (primarily in China,
Pakistan and India) who supply other essential materials used
in manufacturing the Debtors' products;
o claims of certain suppliers who are effectively the only
available source of essential materials used to manufacture
certain products of the Debtors; and
o claims of certain freight carriers whose transportation
services are necessary for the Debtors to meet their
commitments to customers.
The Debtors obtained authority to pay the Critical Vendor Claims to avoid a
potentially substantial adverse effect on the Debtors' operations and
postpetition business stabilization efforts.
Workers' Compensation
The Debtors obtained authorization to continue their existing workers'
compensation programs in all states in which they have employees and to pay
prepetition self-insured workers' compensation claims and related administrative
expenses to the extent those claims or expenses would not otherwise be
satisfied.
The Debtors maintain a guaranteed-cost workers' compensation and
employers' liability insurance program (the "Insured Program") with United
States Fire Insurance Company that covers the Debtors' employees in every state
other than Ohio and Washington. The Debtors were current in their payments on
the premiums for the Insured Program on the Petition Date.
Prior to December 19, 1997, the Debtors operated self-insured workers'
compensation programs (the "Self-Insured Programs") for employees located in
five states: Alabama, Georgia, North Carolina, South Carolina and Virginia
(collectively, the "Self-Insured States"). Under the Self-Insured Programs, the
Debtors paid workers' compensation claims (excluding certain claims for which
the Debtors later purchased insurance coverage, the "Self-Insured Claims")
directly through one or more claims agents and provided the Self-Insured States
with various surety bonds (collectively, the "Surety Bonds") to secure the
Debtors' obligations to pay the Self-Insured Claims. To prevent any disruption
in coverage, the Debtors obtained approval from the Bankruptcy Court for a
90-day transition period (the "Transition Period") during which the Debtors
would have authority to pay Self-Insured Claims that came due regardless of
whether those claims were payable from the Surety Bonds or otherwise. During the
Transition Period, the Debtors paid many of the Self-Insured Claims that became
payable during the Transition Period.
The Debtors continued to face significant issues and risks regarding
the treatment of Self-Insured Claims in North Carolina. The North Carolina
Self-Insurance Guaranty Association (the "NCSIGA") is obligated to pay from the
North Carolina Self-Insurance Guaranty Fund (the "Fund") all self-insured
covered workers' compensation claims that are not paid by an employer after the
employer's insolvency or commencement of bankruptcy proceedings. However, the
NCSIGA informed the Debtors that payment of the North Carolina Self-Insured
Claims would exhaust the Fund and create a deficiency. Additionally, the NCSIGA
notified the Debtors that it would deny any workers' compensation claims against
the Fund that relate to injuries or exposures incurred prior to 1986, the year
in which the Fund was established, which would include many of the North
Carolina Self-Insured Claims.
As a consequence of these uncertainties, numerous claimants holding
North Carolina Self-Insured Claims elected during the Transition Period to
settle their claims at substantial discounts in order to receive an immediate
payment. The Debtors were able to resolve many more claims than they had
anticipated and the aggregate amount paid on these claims was significantly less
than previously estimated. Upon expiration of the Transition Period, there
remained approximately 107 Self-Insured Claims in North Carolina, aggregating
approximately $5 million. Given their success in resolving Self-Insured Claims
during the initial Transition Period, the Debtors determined that the most
cost-effective way to address the problem in North Carolina was to extend the
Transition Period. On
21
April 6, 2001, the Debtors obtained approval from the Bankruptcy Court to extend
the Transition Period for six months.
The Debtors settled a large majority of the North Carolina Self-Insured
Claims at substantial discounts during the extended Transition Period. The
Debtors transferred the remaining North Carolina Self-Insured Claims to the
NCSIGA on October 3, 2001 (other than those claims relating to pre-1986
injuries, for which the NCSIGA would not accept responsibility).
Debtor-in-Possession Financing
On December 12, 2000, the Bankruptcy Court entered the Final DIP Order
authorizing the Debtors to obtain debtor-in-possession financing in the
aggregate amount of $150 million, with a sub-facility of $60 million for letters
of credit (the "DIP Financing Facility"). Some of the DIP Lenders are a
sub-group of the Prepetition Lenders under the Debtors' Prepetition Credit
Facility. As security for the Debtors' obligations under the DIP Financing
Facility, the Debtors granted a first priority security interest in virtually
all of their prepetition and postpetition assets, subject and subordinate only
to valid and perfected pre-Petition Date liens other than liens granted under
the Prepetition Credit Facility and Overline Facility (the "Existing Liens") and
a specified exclusion for professional fees (the "Professional Fee Carve Out").
Claims for borrowings under the DIP Financing Facility were also granted
superpriority status over most other Administrative Claims. The DIP Financing
Facility originally had a 12-month term with an option for the Debtors to extend
the term for an additional six-month period if no event of default had occurred
and the Debtors met certain other conditions. The Final DIP Order required that
the net proceeds from any sale of the Debtors' assets outside of the ordinary
course of business, other than the sale of certain specified assets (including
the Debtors' Blanket Division assets) be used to prepay the principal under the
DIP Financing Facility. The DIP Financing Facility includes various financial
covenants, including an asset coverage covenant.
In connection with the DIP Financing Facility, as adequate protection
for the holders of Secured Claims under the Prepetition Credit Facility, the
Debtors agreed, among other things, to: (a) pay monthly interest at the
nondefault rate on the outstanding balances under the Prepetition Credit
Facility; (b) grant to the Prepetition Lenders a superpriority Administrative
Claim to the extent of any diminution in the value of the collateral under the
Prepetition Credit Facility, subject only to the superpriority Administrative
Claim granted to secure the DIP Financing Facility, the Existing Liens and the
Professional Fee Carve Out; and (c) grant to the Prepetition Lenders, to the
extent of any diminution in the value of the collateral under the Prepetition
Credit Facility, liens on all collateral under the DIP Financing Facility,
subject only to the DIP Lenders' liens, the Existing Liens, the Professional Fee
Carve Out and the Designated Post-Petition Loans. The Debtors and the official
committee of unsecured creditors appointed in the Reorganization Cases (the
"Creditors' Committee") reserved the right, however, to assert that the monthly
payment of interest should be applied to outstanding principal balances under
the Prepetition Credit Facility. In addition, under the Final DIP Order, the
Debtors were required to remit (or were deemed to have remitted) to the
Prepetition Lenders as payment for borrowings under the Prepetition Credit
Facility all cash collateral constituting proceeds of the Prepetition Lenders'
prepetition collateral (the "Cash Collateral") up to $150 million. All Cash
Collateral remitted or deemed remitted was required to be re-advanced, or was
deemed re-advanced, to the Debtors on a postpetition basis. The Designated
Post-Petition Loans are secured by liens on all of the collateral under the DIP
Financing Facility and have superpriority Administrative Claim status, in each
case, subject only to the DIP Financing Facility, the Existing Liens and the
Professional Fee Carve Out.
On March 13, 2001, the Bankruptcy Court entered an order authorizing
the Debtors to enter into a first amendment to the DIP Financing Facility (the
"First DIP Amendment"). Pursuant to the First DIP Amendment (a) the asset
coverage covenant was modified to account for certain asset adjustments that the
Debtors were previously in the process of completing, (b) the commitment under
the DIP Financing Facility was reduced from $150 million to $125 million and (c)
the Debtors paid an amendment fee of $250,000. A second amendment to the DIP
Financing Facility was also entered into between the Debtors and the DIP
Lenders, which made non-substantive modifications to certain financial reporting
requirements.
On August 27, 2001, the Bankruptcy Court entered an order authorizing
the Debtors to enter into a third amendment to the DIP Financing Facility (the
"Third DIP Amendment"). The Third DIP Amendment further modified the asset
coverage covenant and replaced the operating cash flow covenant with a covenant
based on the attainment of certain cash flow levels based on earnings before
interest, taxes, depreciation and amortization. The Third DIP Amendment also
eliminated the provisions providing for an automatic extension of the maturity
date of
22
the DIP Financing Facility upon the satisfaction of specified conditions and
modified and supplemented current reporting requirements. The Debtors paid an
amendment fee of $937,500 in connection with the Third DIP Amendment.
On November 21, 2001, the Bankruptcy Court entered an order authorizing
the Debtors to enter into a fourth amendment to the DIP Financing Facility (the
"Fourth Amendment"). Pursuant to the Fourth Amendment (a) the scheduled
termination date of the DIP Financing Facility was extended to June 29, 2002,
(b) certain covenants were modified based on the Debtors' three-year strategic
plan, (c) a new covenant was added limiting the incurrence of certain
operational restructuring costs relating to the relocation or closure of certain
facilities, (d) the commitment under the DIP Financing Facility was reduced from
$125 million to $100 million, and (e) certain events of default were added
relating to the Debtors' progress toward emergence from bankruptcy, which
require the Debtors to (i) file on or prior to December 31, 2001 a feasible plan
of reorganization and disclosure statement that is substantially complete in
form and substance, (ii) obtain the Bankruptcy Court's approval of the
disclosure statement on or prior to March 1, 2002, (iii) obtain confirmation of
a plan of reorganization on or prior to May 15, 2002 and (iv) cause a plan of
reorganization to become effective on or prior to June 29, 2002. The Debtors
paid an amendment fee of $500,000 in connection with the Fourth Amendment.
Retention Plan
To stabilize employee relations, the Debtors developed a key employee
retention plan (the "Retention Plan"), which the Bankruptcy Court approved on
March 6, 2001. The Retention Plan is designed to, among other things, ensure
that the employees most critical to the Debtors' reorganization efforts are
provided with sufficient economic incentives and protections to remain with the
Debtors and fulfill their responsibilities through the successful conclusion of
the Reorganization Cases. The Retention Plan consists of three separate
components: (a) a retention incentive plan (the "Retention Incentive Plan"), (b)
an emergence performance bonus plan (the "Emergence Performance Bonus Plan") and
(c) an employee severance plan (the "Severance Plan").
Under the Retention Incentive Plan, eligible employees earn a specified
retention incentive payment (the "Retention Incentive Payment"), based upon a
percentage of their salary as determined by the Debtors' management. If the
employee remains actively employed by the Debtors on the specified dates, the
payment schedule of payments under the Retention Incentive Plan is as follows:
(a) 25% of the total Retention Incentive Payment (approximately $1.5 million)
was paid on April 9, 2001, (b) 25% of the total Retention Incentive Payment
(approximately $1.5 million) was paid on November 14, 2001, (c) 25% of the total
Retention Incentive Payment is to be paid on the earlier of (i) six months after
the second payment is made or (ii) confirmation of the Plan and (d) 25% of the
total Retention Incentive Payment is to be paid 30 days following confirmation
of the Plan. The Debtors currently estimate the total cost of the Retention
Incentive Plan to be approximately $6.1 million. In addition, a discretionary
retention pool of $500,000 is available for non-union employees not already
included in the Retention Incentive Plan.
The Emergence Performance Bonus Plan provides an additional incentive
payment to certain management employees who are particularly essential to the
implementation of the Debtors' restructuring to encourage them to remain with
the Debtors through the plan of reorganization negotiation and confirmation
process. Payments under the Emergence Performance Bonus Plan are tied directly
to the amount of the distribution made under a confirmed plan of reorganization
to unsecured creditors and length of the Reorganization Cases.
The purpose of the Severance Plan is to consolidate all severance
agreements existing prior to the Petition Date into one severance plan, which
supersedes all prior severance plans and the severance provisions of executives'
employment arrangements. The Severance Plan covers all full-time employees of
the Debtors, the majority of whom are not eligible to participate in any other
components of the Retention Plan. With certain exceptions, employees who are
terminated after the Petition Date for reasons other than death, disability,
retirement or cause, will be eligible to receive severance benefits equal to one
week's salary for each completed year of service, with a minimum benefit of two
weeks' salary and a maximum of 26 weeks' salary. In addition, eligible employees
will be entitled to receive medical insurance, life insurance and certain other
benefits.
23
Case Administration and Related Activities
Appointment of the Creditors' Committee
On November 29, 2000, the Office of the United States Trustee appointed
the Creditors' Committee. The current members of, and advisors to, the
Creditors' Committee are:
Committee Members: Counsel:
Leon Barocas Fred S. Hodara, Esq.
Hugh Everett Harrington Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Santee Print Works 590 Madison Avenue
58 West 40th Street, 11th Floor New York, New York 10022
New York, New York 10018
Charles R. Gibbs, Esq.
H. Lee Brooks, III Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Parkdale Mills, Inc. 1700 Pacific Avenue, Suite 4100
P. O. Drawer 1787 Dallas, Texas 75201
Gastonia, North Carolina 28053
John D. McLaughlin, Esq.
Alexander C. Robinson Young, Conway, Stargatt & Taylor
Jeff Andreski 1100 North Market Street
Karen Crupi P.O. Box 391
Credit Suisse First Boston Wilmington, Delaware 19899
11 Madison Avenue
New York, New York 10010 Financial Advisors:
-------------------
Robert A. Conrad Irwin N. Gold
HSBC Bank USA, as Successor Houlihan, Lokey, Howard & Zukin
Indenture Trustee 1930 Century Park West
140 Broadway, 12th Floor Los Angeles, California 90067
New York, New York 10005
Laura L. Moran David Hilty
Financial Markets Group Corporate Trust Josh Scherer
State Street Bank & Trust Company Houlihan, Lokey, Howard & Zukin
2 Avenue de Lafayette 685 Third Avenue, 15th Floor
Boston, Massachusetts 02111 New York, New York 10024
David Prouty Gerard J. D'Amato
Union of Needletrades, Industrial William K. Lenhart
and Textile Employees David Berliner
1710 Broadway BDO Seidman LLP
New York, New York 10019 330 Madison Avenue
New York, New York 10017
Paul S. Drotch
Federated High Income Bond Fund
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222
24
Retention of Financial Advisors and Other Consultants
In connection with the commencement of the Reorganization Cases, the
Debtors obtained Bankruptcy Court approval to retain Ernst & Young Corporate
Finance LLC ("EYCF") as their financial and restructuring advisors. The Debtors
also obtained Bankruptcy Court approval to retain Arthur Andersen LLP ("Arthur
Andersen") as business consultants to complete certain consulting projects
initiated before the Petition Date as part of the Debtors' efforts to improve
the efficiency of their businesses. Specifically, Arthur Andersen assisted the
Debtors with (a) projects designed to improve their accounts receivable
collection processes and certain aspects of their manufacturing processes and
(b) the transition of their accounts receivable processes from Dallas, Texas to
Kannapolis, North Carolina. Arthur Andersen completed these projects in April
2001. During the Reorganization Cases and in conjunction with their efforts to
develop a comprehensive three-year strategic plan, the Debtors also obtained
Bankruptcy Court approval to retain Interbrand Corporation ("Interbrand"), Stern
Stewart & Co. ("Stern Stewart") and Huntley Financial Group, Ltd. ("Huntley").
Interbrand assisted the Debtors with decisions regarding the management and
positioning of their well recognized brands in the marketplace. Stern Stewart
assisted the Debtors in certain areas of their strategic planning, working with
the Debtors' management to establish a process to measure and evaluate the
economic implications of possible strategic alternatives. Interbrand and Stern
Stewart completed their respective projects in July 2001. Huntley is currently
assisting the Debtors in restructuring their numerous leases of production
equipment with various financing companies.
Executory Contracts and Unexpired Leases
Since the Petition Date, the Debtors have devoted significant time and
effort to reviewing their Executory Contracts and Unexpired Leases. The Debtors
have Filed motions to reject numerous burdensome Executory Contracts and
Unexpired Leases, the most significant of which are described below. Because the
Debtors are continuing to review their Executory Contracts and Unexpired Leases,
the Debtors anticipate that they may File additional motions to reject
additional burdensome Executory Contracts and Unexpired Leases prior to the
Confirmation Date. Pursuant to an order of the Bankruptcy Court dated January 4,
2001, the time within which the Debtors may assume, assume and assign or reject
unexpired nonresidential real property leases established by section 365(d)(4)
of the Bankruptcy Code was extended through and including the date of
confirmation of the Plan.
Rejection of Aircraft Lease
After the Petition Date, the Debtors Filed a motion to reject the
Aircraft Lease, pursuant to which the Debtors had been leasing a 1986 Gulfstream
Aerospace aircraft. The Debtors' obligations under the Aircraft Lease are
secured by all the collateral securing the Prepetition Credit Facility. See
"Capital Structure As of the Petition Date -- Overline Facility." The Bankruptcy
Court entered an order approving the rejection of the Aircraft Lease on January
16, 2001. The Debtors estimate that rejection of the Aircraft Lease eliminated
approximately $3.2 million of annual expenses.
Assumption and Rejection of Certain Contracts to Purchase Cotton
One of the primary raw materials used in the Debtors' businesses is
cotton and regular shipments from existing suppliers are necessary to prevent
disruptions to the Debtors' manufacturing processes. To provide for timely
delivery of cotton, Pillowtex historically entered into contracts in the
ordinary course of business with certain of its cotton suppliers to purchase
cotton at a fixed price for delivery during a future month or months
(collectively, the "Prepetition Cotton Contracts"). Under the terms of the
Prepetition Cotton Contracts, Pillowtex may elect not to take delivery of the
cotton during the specified period and instead pay certain carrying costs,
primarily interest and storage, and take delivery at a later date.
As of the Petition Date, the prices at which cotton was required to be
purchased under many of the Prepetition Cotton Contracts were higher than for
cotton that Pillowtex could otherwise purchase in the open market. Subsequent to
the Petition Date, the market price for cotton continued to decline, and the
losses on the Prepetition Cotton Contracts became greater. In February 2001,
Pillowtex approached its two largest cotton suppliers, Allenberg Cotton Co.
("Allenberg") and Staple Cotton Cooperative Association ("Staple Cotton"), to
request concessions on certain of Pillowtex's most unfavorable Prepetition
Cotton Contracts. Allenberg and Staple Cotton each agreed to modify certain of
the Prepetition Cotton Contracts to reduce the quantities required to be
purchased, to delay the delivery dates or alter the fixed price per pound.
Because the market price for cotton continued to
25
decline after the modifications were made, Pillowtex determined that it could
not, consistent with its fiduciary duties, justify honoring all of the
Prepetition Cotton Contracts.
Pillowtex again approached Allenberg and Staple Cotton, and in late
April 2001, the parties reached an agreement whereby the losses under the
Prepetition Cotton Contracts would be shared among the parties. Specifically,
they agreed, among other things, that Pillowtex would assume certain of the
Prepetition Cotton Contracts and would reject others. Allenberg also agreed to
issue new purchase contracts at market prices effective as of April 17, 2001.
The Bankruptcy Court authorized the assumption or rejection, as appropriate, of
the respective Prepetition Cotton Contracts in an order entered on June 12,
2001.
The Debtors believe that these agreements with Allenberg and Staple
Cotton were of substantial benefit to the Debtors' Estates and creditors for
several reasons. Rejection of certain Prepetition Cotton Contracts enabled
Pillowtex to take advantage of current market prices and convert the substantial
current loss (estimated at $5.2 million) under those contracts to a prepetition
claim. Additionally, although the Prepetition Cotton Contracts to be assumed
were in the aggregate $4.6 million above market, the Debtors fixed the prices on
a significant portion of the cotton under many of the Prepetition Cotton
Contracts after the Petition Date. As a consequence, Allenberg and Staple Cotton
had arguments that they were entitled to an Administrative Claim for a
significant portion of their losses on several of the Prepetition Cotton
Contracts. Nonetheless, both Allenberg and Staple Cotton agreed not to seek any
Administrative Claim status for these losses. Most importantly, Pillowtex's
agreement with Allenberg and Staple Cotton has permitted the Debtors to continue
to obtain their requirements for cotton with minimal disruption in their
manufacturing processes.
Assumption of Parkdale 2000 Agreement
A large and steady supply of yarn is critical to certain of the
Debtors' manufacturing processes. At various times prior to the Petition Date,
Pillowtex or Fieldcrest Cannon entered into long-term supply contracts with
Parkdale America, LLC ("Parkdale America") or its predecessor in interest
Parkdale Mills, Inc. ("Parkdale Mills"), pursuant to which Parkdale America
would supply Pillowtex or Fieldcrest Cannon with their weekly requirements for
certain specified yarns in excess of internal production. Parkdale America is
the nation's largest yarn supplier and the only supplier with the capacity to
meet all of the Debtors' requirements for those certain yarns. Parkdale America
is also a member of the Creditors' Committee. Fieldcrest Cannon or Pillowtex
entered into long-term yarn purchase agreements with Parkdale America on each of
the following dates: (a) January 1, 1996 (the "1996 Agreement"), (b) May 1, 1998
(the "1998 Agreement"); and (c) August 1, 2000 (the "2000 Agreement"). Although
the parties understood that the 1998 Agreement would replace the 1996 Agreement
and the 2000 Agreement would replace the 1998 Agreement, neither the 1998
Agreement nor the 2000 Agreement contained a provision expressly amending or
terminating the prior agreement. As a consequence, by their terms, the 1996
Agreement, the 1998 Agreement and the 2000 Agreement were all technically in
effect on the Petition Date. As of the Petition Date, Pillowtex and Fieldcrest
Cannon owed Parkdale America approximately $3.6 million (the "Prepetition
Balance") based on the pricing terms under the 1996 Agreement and 1998
Agreement.
The Debtors' relationship with Parkdale America is essential to their
bedding operations since there is currently no other single supplier that can
meet the Debtors' requirements for those certain yarns. Pillowtex successfully
negotiated an arrangement with Parkdale America to continue their relationship,
which included the consolidation of the 1996 Agreement, the 1998 Agreement and
the 2000 Agreement into one agreement by assumption of the 2000 Agreement.
Additionally, the parties agreed that (a) Pillowtex would pay the Prepetition
Balance over a six-month period; (b) Parkdale America would provide Pillowtex
with the more favorable cost-of-cotton pricing under the 1996 Agreement and 1998
Agreement until all cotton that Parkdale America had under contract was
consumed; (c) Parkdale America would provide Pillowtex with 30-day credit terms;
and (d) Parkdale America would grant Pillowtex a unilateral termination right
during the Reorganization Cases upon 135 days' notice. The assumption of the
2000 Agreement with Parkdale America, as modified, was approved by the
Bankruptcy Court on February 6, 2001.
Assumption of Wellman Agreement
A dependable supply of certain branded and unbranded polyester fiber
(collectively, the "Polyester Fiber") is critical to certain of the Debtors'
manufacturing processes. On two separate occasions prior to the Petition Date,
Debtor Pillowtex Management Services Company ("Pillowtex MSC"), entered into
supply contracts with Wellman,
26
Inc. ("Wellman"), pursuant to which Pillowtex MSC agreed to purchase, and
Wellman agreed to supply, specified minimum quantities of Polyester Fiber.
Pillowtex MSC and Wellman entered into two supply contracts during 1998 (the
"1998 Poly Fiber Agreements") and two new supply contracts on September 1, 2000
(the "2000 Poly Fiber Agreements"). The 1998 Poly Fiber Agreements expired on
December 31, 2000, and the 2000 Poly Fiber Agreements commenced on January 1,
2001 and originally expired on December 31, 2001. As of the Petition Date,
Pillowtex MSC owed Wellman approximately $1.7 million under the 1998 Poly Fiber
Agreements.
Wellman is currently the only potential supplier capable of fulfilling
the Debtors' need for both quality Polyester Fiber and reliable shipping of the
product. Because of Wellman's importance to the success of the Debtors'
manufacturing operations, Pillowtex MSC negotiated an addendum to each of the
2000 Poly Fiber Agreements with Wellman (collectively, the "Addenda") to: (a)
extend the term of each of the 2000 Poly Fiber Agreements through December 31,
2002; (b) provide Pillowtex MSC with more favorable pricing, resulting in an
approximate savings to Pillowtex MSC of at least $1 million over the term, as
extended; and (c) provide Pillowtex MSC with 45-day credit terms. Pillowtex MSC
agreed to pay the prepetition balance owing under the 1998 Poly Fiber Agreements
over a six-month period and assume the 2000 Poly Fiber Agreements. On November
21, 2001, the Bankruptcy Court entered an order approving the assumption of the
2000 Poly Fiber Agreements with Wellman, as modified by the Addenda.
Rejection of Technology Agreement
On August 12, 1996, Fieldcrest Cannon and Lockheed Martin Corporation
("Lockheed") entered into a long-term Information and Technology Service
Agreement (as subsequently amended from time to time, the "Technology
Agreement"), whereby Lockheed agreed to provide extensive technology and
information services to Fieldcrest Cannon. The services to be provided included
supplying and maintaining computers, telephones, hardware and software. The
parties made several modifications to the Technology Agreement, the last of
which was a Memorandum of Agreement, dated October 1, 1999. The Memorandum
resolved certain disputes between Fieldcrest Cannon and Lockheed, substantially
narrowed the scope of the Technology Agreement and shortened its term to expire
on December 31, 2001. During 2001, the monthly payments for Lockheed's services
were approximately $450,000 per month, and Fieldcrest Cannon owed Lockheed
approximately $1.86 million under the Technology Agreement on the Petition Date.
Prior to the Petition Date, Fieldcrest Cannon determined that it would
be significantly more cost efficient to perform the services provided by
Lockheed in-house. In anticipation of transitioning these services in-house,
Fieldcrest Cannon in the months following the Petition Date retained technical
personnel to replace the Lockheed personnel. Although not permitted under the
Technology Agreement, Fieldcrest Cannon, with Lockheed's consent, hired certain
Lockheed personnel and subcontractors. Fieldcrest Cannon agreed to pay Lockheed
a fee for each Lockheed subcontractor or employee that Fieldcrest Cannon hired.
The parties also agreed to reject the Technology Agreement effective as of June
30, 2001. On October 23, 2001, the Bankruptcy Court entered an order authorizing
Fieldcrest Cannon to reject the Technology Agreement effective as of June 30,
2001.
Assumption of Ralph Lauren License Agreement and Related Dispute
On July 1, 1998, Pillowtex entered into a license agreement (as
amended, the "Ralph Lauren License Agreement") with Ralph Lauren Home
Collections, Inc. ("RLHC") and Polo Ralph Lauren Corporation ("PRLC" and,
together with RLHC, "Ralph Lauren"). Pursuant to the terms of the Ralph Lauren
License Agreement, Ralph Lauren granted to Pillowtex an exclusive license to use
certain trademarks of Ralph Lauren in the manufacture and sale of certain
bedding products and related accessories specified in the agreement (the
"Licensed Products") throughout the United States and Canada. The Ralph Lauren
License Agreement expired on June 30, 2001.
Prior to the Petition Date, Ralph Lauren and WestPoint Stevens, Inc.
("WestPoint") agreed that, following termination of the Ralph Lauren License
Agreement, WestPoint would manufacture and sell decorative bedding products and
related accessories under the Ralph Lauren trademarks. To assist in the
transition from Pillowtex to WestPoint and to enable Pillowtex to sell on
favorable terms its current and discontinued inventory of Licensed Products, on
January 31, 2001, Pillowtex, Ralph Lauren and WestPoint entered into an
agreement (the "Sale Agreement") whereby (a) Ralph Lauren and WestPoint were
required to purchase a substantial amount of Pillowtex's current and
discontinued Ralph Lauren inventory at a price equal to Pillowtex's cost; and
(b) Pillowtex was required to assume the Ralph Lauren License Agreement and pay
a cure amount of approximately $1.6 million.
27
The parties agreed that the cure payment would be offset by any
amounts owed to Pillowtex by Ralph Lauren and their affiliates under the Sale
Agreement or otherwise. The Sale Agreement allowed Pillowtex to attempt to sell
a significant portion of its discontinued Ralph Lauren inventory at a price
substantially greater than it would have received on the open market and enabled
Pillowtex to sell existing Ralph Lauren inventory that it might have otherwise
been unable to sell to third parties (provided that the inventory had been
produced in accordance with Ralph Lauren's Spring 2001 forecasts). On March 6,
2001, the Bankruptcy Court approved the Sale Agreement and authorized Pillowtex
to assume the Ralph Lauren License Agreement.
On June 21, 2001, Pillowtex notified PRLC that Pillowtex considered
PRLC in breach of the Sale Agreement for its failure to place timely orders for
its $3 million share of Pillowtex's discontinued Ralph Lauren inventory. On July
9, 2001, PRLC notified Pillowtex that PRLC considered Pillowtex in breach of the
Ralph Lauren License Agreement for selling certain Licensed Products to a
customer that was not an "approved" Ralph Lauren customer under the Ralph Lauren
License Agreement. Pursuant to a letter agreement dated August 1, 2001 (the
"Settlement Agreement"), Pillowtex and Ralph Lauren settled their respective
disputes regarding breaches of the Ralph Lauren License Agreement and the Sale
Agreement. Under the terms of the Settlement Agreement, Pillowtex agreed to
waive the requirement that PRLC purchase $3 million of Pillowtex's discontinued
Ralph Lauren inventory, and Pillowtex assumed responsibility for selling that
inventory in accordance with the Ralph Lauren License Agreement and Sale
Agreement. Ralph Lauren, in turn, agreed to: (a) waive Pillowtex's alleged
breach of the Ralph Lauren License Agreement and any and all claims related
thereto; (b) extend the sale period under the Ralph Lauren License Agreement by
three months for the $3 million of discontinued inventory and any inventory that
WestPoint did not purchase under the Sale Agreement; and (c) work in good faith
with Pillowtex to facilitate WestPoint's performance of its obligations under
the Sale Agreement, including that Ralph Lauren use its reasonable best efforts
to assist Pillowtex in obtaining reasonable credit terms for sales to WestPoint.
In addition, Ralph Lauren agreed that if WestPoint did not purchase its share of
the required inventory by August 31, 2001, Pillowtex would have the right to
sell, to approved accounts, any such remaining inventory in accordance with and
subject to the terms of the Ralph Lauren License Agreement. The Debtors Filed a
motion to approve the Settlement Agreement on August 2, 2001.
In August 2001, the Debtors received a letter from WestPoint which
asserted that the Debtors' entry into the Settlement Agreement superseded and
terminated the Sale Agreement and, as a result, WestPoint was no longer required
to perform under the Sale Agreement. The Debtors strongly disagree with
WestPoint's position and believe that their settlement with Ralph Lauren had no
effect on WestPoint's rights or obligations under the Sale Agreement. WestPoint
subsequently Filed an objection to the Debtors' motion to approve the Settlement
Agreement. The Bankruptcy Court approved the Settlement Agreement on October 9,
2001. The Debtors intend to pursue their legal remedies against WestPoint for
WestPoint's failure to perform under the terms of the Sale Agreement.
Exclusivity
Under section 1121 of the Bankruptcy Code, a debtor has the exclusive
right to (a) file a plan of reorganization during the first 120 days of its
chapter 11 case and (b) solicit acceptances of the plan during the first 180
days of the case. These periods (the "Exclusive Periods") may be extended for
"cause." In March 2001, the Debtors Filed a motion seeking four-month extensions
of the Exclusive Periods through July 16, 2001 and September 14, 2001,
respectively, which the Bankruptcy Court thereafter granted. In August 2001, the
Bankruptcy Court extended the Exclusive Periods an additional four months, and
on December 18, 2001, the Bankruptcy Court approved a further extension of the
Exclusive Periods through March 15, 2002 and May 15, 2002, respectively.
Claims Process and Bar Dates
On February 22, 2001, the Debtors Filed their Schedules, identifying
the assets and liabilities of their Estates. In addition, pursuant to an order
entered on May 14, 2001, the following Bar Dates for the Filing of proofs of
claim were established in the Reorganization Cases: (a) July 23, 2001 as the
general Bar Date (the "General Bar Date") for all Claims other than Claims
arising out of the rejection of Executory Contracts and Unexpired Leases
("Rejection Damage Claims") and Claims in response to amendments to the
Schedules; (b) the later of (i) the General Bar Date and (ii) 30 days after the
date of an order rejecting an Executory Contract or Unexpired Lease as the Bar
Date for Rejection Damage Claims relating to such Executory Contract or
Unexpired Lease; and (c) the later of (i) the General Bar Date and (ii) 30 days
after the date that a notice of an amendment to the Schedules is served on a
claimant as the Bar Date for such claimant to File a proof of Claim or to amend
any previously Filed proof of Claim in respect of the amended scheduled Claim.
28
More than 5,000 Claims were originally scheduled by the Debtors or
Filed against the Debtors on or before the General Bar Date. The Debtors are
currently in the midst of their initial review and reconciliation of the proofs
of Claim Filed against the Debtors.
Postpetition Operations
Operational and Cost Reduction Initiatives
In the months following the commencement of the Debtors' Reorganization
Cases, the Debtors continued with their strategic planning process and continued
to implement operational and cost reduction initiatives identified as part of
that planning process. The Debtors' businesses, however, continued to suffer
from the effects of an industry-wide decline in sales caused by slowing consumer
demand, increased imports, continuing retail consolidations, overall economic
conditions and retail inventory reductions. This revenue slowdown, which
necessitated an acceleration of certain of the Debtors' operational initiatives,
was compounded by the Debtors' high fixed-cost structure and resulted in the
Debtors, and the entire industry, being burdened with significant excess
capacity. The Debtors responded to these industry conditions by (a)
significantly curtailing production followed by a series of plant closures and
operating improvements designed to increase the efficiency of the Debtors'
manufacturing capacity, (b) aggressively managing working capital requirements,
including significant improvements in inventory turnover, (c) selling the
Debtors' unprofitable Blanket Division (described below), and (d) implementing
various other cost reduction initiatives. To optimize manufacturing capacity,
the Debtors, among other things, closed (a) their towel wet-finishing facility
in Hawkinsville, Georgia in February 2001, (b) a sheet weaving facility in
Kannapolis, North Carolina (Plant 4) in June 2001, (c) a towel yarn mill in
Columbus, Georgia in June 2001, (d) a towel warehouse in Phenix City, Alabama in
June 2001, (e) a yarn facility in Newton, North Carolina in August 2001, and (f)
a yarn facility in Tarboro, North Carolina in December 2001. The Debtors also
changed shift patterns at their Fieldale, Virginia towel facility to reduce
capacity and ceased production in a towel weave room at a Kannapolis, North
Carolina facility, reducing structural costs and weaving capacity. In addition,
the Debtors continued to improve their working capital position by reducing
inventory through the implementation of improved production management, the
aggressive sale of distressed merchandise and the implementation of "lean
manufacturing" techniques. In conjunction with these actions, the Debtors also
undertook numerous cost reduction measures, including (a) relocating their
headquarters from Dallas, Texas to Kannapolis, North Carolina, (b) reducing
their workforce, resulting in a reduction of annual overhead costs by
approximately $8.0 million, (c) rejecting the Aircraft Lease, (d) rejecting
certain unfavorable Prepetition Cotton Contracts to purchase cotton, (e)
transitioning in-house the information technology services previously performed
by Lockheed and rejecting the Technology Agreement with Lockheed, (f) reducing
other expenses linked to lower inventory levels, and (g) restructuring their
numerous leases of production equipment. The Debtors believe these actions
represent significant progress toward adapting their businesses to address
existing market conditions.
Blanket Division and Other Dispositions
On September 6, 2001, pursuant to an asset purchase agreement (as
amended by the First Amendment thereto, the "Beacon Purchase Agreement"), Debtor
Beacon sold to Beacon Acquisition Corporation (the "Purchaser") substantially
all of the assets used in the operation of the Blanket Division other than
certain inventory and all accounts receivable. Certain former members of
Beacon's management team were among the principal founders of the Purchaser. The
Debtors also assumed and assigned to the Purchaser certain Executory Contracts
and Unexpired Leases (collectively, the "Beacon Contracts"). The Purchaser
assumed all liabilities arising under the terms of the Beacon Contracts and,
with limited exceptions, all environmental liabilities associated with the
assets sold.
The Beacon Purchase Agreement provides for a purchase price of
approximately $16.8 million, subject to adjustment based on inventory levels,
prepaid items and accrued but unpaid items as of the closing of the sale. After
giving effect to these adjustments, the purchase price paid at the closing was
approximately $13.4 million, consisting of approximately $12.1 million in cash
(a portion of which was placed in escrow to secure Beacon's post-closing
obligations under the Beacon Purchase Agreement) and a three-year promissory
note in a principal amount of approximately $1.3 million. The promissory note is
secured by a pledge of 100% of the stock of the Purchaser, a second lien on the
majority of the assets sold (excluding certain real property located in
Westminster, South Carolina) and a third lien on the Blanket Division's real
property located in Swannanoa, North Carolina. As required by the Final DIP
Order, the net cash proceeds from this sale were applied to the principal amount
owing under the
29
Prepetition Credit Facility. In addition, as required by a subsequent
order of the Bankruptcy Court, the net proceeds from the liquidation of accounts
receivable and inventory of the Blanket Division are required to be applied to
the principal amount owing under the Prepetition Credit Facility.
On June 5, 2001, the Bankruptcy Court approved a contract for the
purchase and sale of equipment dated June 4, 2001 (the "Loom Purchase
Agreement"), between Fieldcrest Cannon and Southeastern Textile Machinery Inc.
on behalf of Textrade Trading Co. Ltd. ("Textrade"). Pursuant to the Loom
Purchase Agreement, Fieldcrest Cannon sold to Textrade 352 Sulzer Weaving
Machines (the "Looms") for a purchase price of $2.1 million.
Shortly after commencement of the Reorganization Cases, the Debtors
began the process of evaluating each of their assets, some of which the Debtors
had already determined were no longer necessary for the successful operation and
reorganization of their businesses. To facilitate the sale of these nonessential
assets and to minimize unnecessary administrative expenses, the Debtors Filed a
motion seeking to establish procedures to streamline the sale of any assets for
aggregate consideration under a certain dollar threshold and permit such sales
to be consummated without further Bankruptcy Court approval. The Bankruptcy
Court entered an order on February 6, 2001, establishing procedures for
miscellaneous assets sales involving aggregate consideration to be received by
the Debtors of less than $750,000 (the "Miscellaneous Asset Sales Order"). As of
December 15, 2001, the Debtors had consummated sales under the Miscellaneous
Asset Sales Order aggregating approximately $2.0 million in proceeds received.
Fieldcrest Cannon Employee Restructuring
Along with the numerous other operational and cost reduction
initiatives described above, the Debtors determined to restructure the human
resources function of Fieldcrest Cannon by separating the management of
Fieldcrest Cannon's operations employees and the management of Fieldcrest
Cannon's corporate and administrative employees. To implement this employee
restructuring, Fieldcrest Cannon converted two of its inactive subsidiary
Debtors, St. Marys, Inc., a Delaware corporation, and Fieldcrest Cannon
International, Inc., a Delaware corporation, into Delaware limited liability
companies on December 18, 2001. St. Marys, Inc. was renamed FCI Operations LLC
("FCI Operations") and Fieldcrest Cannon International, Inc. was renamed FCI
Corporate LLC ("FCI Corporate"). Effective immediately prior to January 1, 2002,
Fieldcrest Cannon's production and operations personnel will be transferred to
FCI Operations and its corporate and administrative personnel will be
transferred to FCI Corporate. As of January 1, 2002, Fieldcrest Cannon, FCI
Corporate and FCI Operations will enter into a Production and Management
Services Agreement governing the respective companies' rights and obligations
with respect to their operations and employees. The restructure of Fieldcrest
Cannon's employees is expected to result in material administrative efficiencies
and to reduce Fieldcrest Cannon's state unemployment taxes. The Bankruptcy Court
entered an order authorizing the Debtors to implement the employee restructuring
on December 18, 2001.
REORGANIZED PILLOWTEX
Pillowtex Merger
The Plan provides that, pursuant to the Plan of Merger, the Pillowtex
Merger will be consummated on the Effective Date, and pursuant thereto: (a)
Pillowtex will be merged with and into New Pillowtex, with New Pillowtex being
the surviving corporation in the merger; (b) New Pillowtex will acquire all of
the assets and will assume all of the liabilities of Pillowtex; and (c) the Old
Common Stock of Pillowtex and Old Preferred Stock of Pillowtex will be canceled.
Restructuring Transactions
In addition to the Pillowtex Merger, on or after the Confirmation Date,
the Debtors or Reorganized Debtors may, at their option, cause one or more of
the Debtors or Reorganized Debtors to merge or consolidate with other Debtors or
Reorganized Debtors or to take certain other actions to simplify their corporate
structure. The only shares of capital stock of Reorganized Pillowtex to be
outstanding following the Effective Date will be the New Common Stock.
Thereafter, Reorganized Pillowtex may issue additional shares of capital stock
in accordance with the Certificate, the Bylaws and applicable law.
30
Business of Reorganized Pillowtex
Following the completion of the Pillowtex Merger and the Restructuring
Transactions, Reorganized Pillowtex will continue to operate the existing
businesses of the Debtors following the Effective Date. A brief description of
Reorganized Pillowtex's business is set forth below. Further information
regarding the businesses and properties of, and other matters relating to,
Pillowtex and the Pillowtex Subsidiary Debtors, including historical
consolidated financial statements and other financial information, are contained
in the Pillowtex 2000 Form 10-K and the Pillowtex Third Quarter 2001 Form 10-Q.
The information set forth below is qualified in its entirety by reference to
such other information.
It is anticipated that, following the Effective Date, Reorganized
Pillowtex will continue to design, manufacture and market a full line of utility
and fashion bedding and complementary bedroom textile products, as well as a
full line of bathroom and kitchen textile products. Reorganized Pillowtex,
through its operating subsidiaries, will continue to manufacture and market its
products utilizing their well-recognized brand names including Cannon(R),
Fieldcrest(R), Royal Velvet(R) and Charisma(R).
Reorganized Pillowtex will have three major operating divisions: a Bed
Division, a Bath Division and a Pillow and Pad Division. The Bed Division will
manufacture and sell sheets and other fashion bedding textiles. The Bath
Division will manufacture and sell towels, bath rugs and kitchen textile
products. The Pillow and Pad Division will manufacture and sell bed pillows,
down comforters and mattress pads.
The Debtors had approximately 9,650 full-time and part-time employees
as of September 30, 2001, approximately 45% of whom were union members.
Historically, the Debtors have had a good relationship with their employees,
including their unionized workers.
The Debtors will maintain their corporate headquarters in Kannapolis,
North Carolina and continue to own or lease manufacturing and warehousing
facilities in most of the states in which they currently have facilities.
The home textile market is a highly competitive environment with three
large domestic suppliers, including Pillowtex, and numerous importers dominating
the market. Smaller domestic suppliers generally focus on niche markets or one
specific segment of the market (e.g., pillows and pads). Reorganized Pillowtex
anticipates that it will distinguish itself from its competition by focusing on
quality, brand names, price and service, in addition to offering a wider range
of products than its niche competitors.
Business Plan and Strategy for Reorganized Pillowtex
The business plan and strategy of Reorganized Pillowtex was developed
with a view toward maintaining and improving Reorganized Pillowtex's position in
the highly competitive home textile marketplace. Reorganized Pillowtex's
business plan centers around four broad initiatives: branding and marketing,
capacity rationalization, strategic sourcing, and total quality management.
Branding and Marketing
Reorganized Pillowtex intends to develop and creatively market its
strong portfolio of brands, including Cannon(R), Fieldcrest(R), Royal Velvet(R)
and Charisma(R). The Debtors have already begun to change the focus of their
business from that of a manufacturer of home textiles to a marketer of their own
brands. Historically, brand development has been weak within the home textile
industry leaving the domestic producers with a lack of influence in the retail
market. As retailers continue to look for more product value and an increasing
level of services, brands are expected to play a more important role in building
and retaining loyalty and in providing the consumer with a level of assurance of
reliability and quality. As a consequence, Reorganized Pillowtex will focus on
developing more intimate relationships with both retailers and consumers with
respect to marketing, product development and customer service. Management
believes that in so doing it can improve the profitability and economic returns
on Reorganized Pillowtex's established brand names and its business as a whole.
31
Capacity Rationalization
The Debtors' continuously review their respective manufacturing
capacities to determine whether individual plants, processes or facilities can
be maintained on a profitable basis given prevailing market dynamics. In
addition to the steps already taken by the Debtors during fiscal years 2000 and
2001, Reorganized Pillowtex's business strategy will incorporate further
rationalization of manufacturing capacity in order to (i) concentrate production
on higher margin products, (ii) eliminate uneconomic facilities and (iii)
continue to provide quality service to its entire domestic customer base. In
connection with this strategy, the Debtors continue to examine the economics
behind their historic involvement in all aspects of the manufacturing supply
chain and have already begun to outsource certain components of their
operations. Through outsourcing of cost disadvantaged processes, Reorganized
Pillowtex will focus its manufacturing operations on its core competencies,
which are (i) weaving and finishing of higher margin sheeting and towel product
lines and (ii) its pillow and pad businesses.
Strategic Sourcing
Reorganized Pillowtex's business strategy is based on establishing
long-term partnerships with a select number of overseas textile suppliers,
initially to support the domestic markets and then to extend the relationships
to international markets under the umbrella of Reorganized Pillowtex's portfolio
of brands. By combining its manufacturing expertise, market reach and reputation
with low cost overseas manufacturing capabilities, management believes it will
be able to supply the domestic market while further improving Reorganized
Pillowtex's overall profitability. These potential partners, some of whom have
already been identified, will serve as an extension of Reorganized Pillowtex's
United States based facilities, employing production and technical expertise
transferred from Reorganized Pillowtex, with Reorganized Pillowtex personnel
utilizing the capabilities of Pillowtex's information technology in order to
maintain high quality and customer service standards. See "Risk Factors --
Relationships With Suppliers and Vendors" for a description of the risks may
that affect the implementation of this initiative.
Total Quality Management
The Debtors are introducing the concept of "total quality management"
to each and every business process. This concept requires a commitment to
excellence by all personnel within an organization, with customers, both
internal and external, becoming the core focus of all employees. Customers
define quality, which Pillowtex believes to be a key ingredient to success. As a
consequence, every aspect of Reorganized Pillowtex's business will be viewed
from the customers' perspective. This initiative supports Reorganized
Pillowtex's drive for operational excellence but is also designed to enable it
to operate as a single entity with all employees focused on exceeding each
customer's expectations and on becoming the undisputed leader in customer
service, if the initiative is successfully implemented.
32
Selected Historical Financial Information
The following table sets forth selected consolidated financial
information for the Debtors as of and for the nine months ended September 29,
2001 and September 30, 2000 and the fiscal years ended December 30, 2000,
January 1, 1999 and January 2, 1998.1 The selected consolidated financial
information should be read in conjunction with the audited and unaudited
historical consolidated financial statements of the Debtors, including the notes
thereto, included in the Pillowtex 2000 Form 10-K and the Pillowtex Third
Quarter 2001 Form 10-Q available over the Internet on the Document Website.
Nine Months Ended Year Ended
--------------------------- --------------------------------------------
September September
2001 2000(2) 2000(2) 1999 1998(3)
---- ----------- -------- ---- ------
(in thousands)
Statement of Operations Data:
Net sales .............................. $ 787,455 $ 978,678 $ 1,259,004 $ 1,552,068 $ 1,509,841
Cost of goods sold ..................... 769,033 866,051 1,222,865 1,371,790(4) 1,246,449(4)
----------- ----------- ----------- ----------- -----------
Gross profit ........................... 18,422 112,627 36,139 180,278 263,392
Selling, general and administrative
expenses ........................... 65,865 72,323 126,022 118,432 119,321
Impairments of long-lived assets and
restructuring charges .............. 29,661 - 24,400 2,000 1,539
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations ........ (77,104) 40,304 (114,283) 59,846 142,532
Interest expense ....................... 50,318 81,469 105,643 87,279 72,288
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations before reorganization
items and income taxes ............. (127,422) (41,165) (219,926) (27,433) 70,244
Reorganization items ................... 25,755 - 19,368 - -
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations before income taxes ..... (153,177) (41,165) (239,294) (27,433) 70,244
Income tax expense (benefit) ........... - (13,497) (92,849) (7,901) 27,389
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing
operations ......................... (153,177) (27,668) (146,445) (19,532) 42,855
Loss from discontinued operations ...... (19,414) (4,445) (115,963) - -
----------- ----------- ------------ ----------- -----------
Net earnings (loss) .................... (172,591) (32,113) (262,408) (19,532) 42,855
Preferred dividends and accretion ...... 12,000 5,977 8,928 12,294 2,097
----------- ----------- ----------- ----------- -----------
Earnings (loss) available for common
shareholders ....................... $ (184,591) $ (38,090) $ (271,336) $ (31,826) $ 40,758
=========== =========== =========== =========== ===========
EBITDA(8) .............................. $ (36,354) $ 83,536 $ (54,471) $ 119,920 $ 196,553
============ =========== ============ =========== ===========
Balance Sheet Data:
Working capital ........................ $ (350,451)(5)$ (138,384)(6) $ (237,376)(7) $ 404,732 $ 447,933
Property, plant and equipment, net ..... 474,469 566,809 525,990 644,821 629,205
Total assets ........................... 1,172,972 1,620,224 1,335,769 1,683,389 1,654,154
Long-term debt, net of current
portion ............................ 658 345,877 - 965,323 944,493
Redeemable convertible preferred
stock .............................. 94,827 79,875 82,827 73,898 63,057
Shareholders' equity (deficit) ......... (248,230) 169,371 (63,451) 207,389 237,933
(1) The historical financial information includes information on one of
Pillowtex's subsidiaries, Pillowtex Canada Inc., formerly known as
Torfeaco, which is not a Debtor.
(2) The September 30, 2000 and December 30, 2000 consolidated financial
information has been restated to present the Blanket Division as a
discontinued operation. The December 30, 2000 consolidated statement of
operations information reflects amounts reported in Pillowtex's Current
Report on Form 8-K dated as of September 6, 2001 and filed September 13,
2001.
(3) Amounts set forth in 1998 reflect the inclusion of The Leshner Corporation
from July 28, 1998.
(4) Information technology costs associated with Pillowtex's manufacturing
systems of $12.8 million and $9.4 million have been reclassified from a
selling, general and administrative expense to cost of goods sold in the
1999 and 1998 consolidated statements of operations information to conform
with the 2000 presentation.
(5) Includes long-term debt in default of $679.9 million.
(6) Includes long-term debt in default of $637.5 million.
(7) Includes long-term debt in default of $660.8 million.
(8) Represents earnings (loss) from operations plus depreciation and
amortization expense.
33
Projected Financial Information
Introduction
As a condition to confirmation of a plan of reorganization, the
Bankruptcy Code requires, among other things, that the Bankruptcy Court
determine that confirmation is not likely to be followed by the liquidation or
the need for further financial reorganization of the debtor. See "Voting and
Confirmation of the Plan -- Confirmation" and "-- Feasibility." In connection
with the development of the Plan, and for purposes of determining whether the
Plan satisfies this feasibility standard, the Debtors' management analyzed the
ability of the Reorganized Debtors to meet their obligations under the Plan with
sufficient liquidity and capital resources to conduct their businesses. As a
consequence, the Debtors' management developed and prepared certain projections
(the "Projections") of the Debtors' operating profit, free cash flow and certain
other items for the fiscal years 2002 through 2004 (the "Projection Period").
THE DEBTORS DO NOT, AS A MATTER OF COURSE, PUBLISH THEIR BUSINESS
PLANS, BUDGETS OR STRATEGIES OR MAKE EXTERNAL PROJECTIONS OR FORECASTS OF THEIR
ANTICIPATED FINANCIAL POSITIONS OR RESULTS OF OPERATIONS. ACCORDINGLY, THE
DEBTORS (INCLUDING THE REORGANIZED DEBTORS) DO NOT ANTICIPATE THAT THEY WILL,
AND DISCLAIM ANY OBLIGATION TO, FURNISH UPDATED BUSINESS PLANS, BUDGETS OR
PROJECTIONS TO HOLDERS OF CLAIMS OR INTERESTS PRIOR TO THE EFFECTIVE DATE OR TO
STOCKHOLDERS AFTER THE EFFECTIVE DATE OR TO INCLUDE SUCH INFORMATION IN
DOCUMENTS REQUIRED TO BE FILED WITH THE SEC OR ANY STOCK EXCHANGE OR OTHERWISE
MAKE SUCH INFORMATION PUBLICLY AVAILABLE.
The Projections should be read in conjunction with the assumptions,
qualifications and explanations set forth herein and the historical consolidated
financial information (including the notes and schedules thereto) included in
the Pillowtex 2000 Form 10-K and the Pillowtex Third Quarter 2001 Form 10-Q
which are available over the Internet on the Document Website.
Projections
The projected consolidated financial statements of the Reorganized
Debtors set forth below have been prepared based on the assumption that the
Effective Date will be June 29, 2002. Although the Debtors are seeking to cause
the Effective Date to occur as soon as practicable, there can be no assurance as
to when or if the Effective Date actually will occur.
The Reorganized Pillowtex Projected Consolidated Balance Sheet as of
June 29, 2002 (the "Effective Date Balance Sheet") set forth below presents: (a)
the projected consolidated financial position of the Reorganized Debtors prior
to Confirmation and the consummation of the transactions contemplated by the
Plan; (b) the projected adjustments to such projected consolidated financial
position required to reflect Confirmation and the consummation of the
transactions contemplated by the Plan (collectively, the "Balance Sheet
Adjustments"); and (c) the projected consolidated financial position of the
Reorganized Debtors, after giving effect to the Balance Sheet Adjustments, as of
June 29, 2002. The Balance Sheet Adjustments set forth in the columns captioned
"Debt Discharge" and "Fresh-Start and Other Adjustments" reflect the assumed
effects of Confirmation and the consummation of the transactions contemplated by
the Plan, including the settlement of various liabilities and related securities
issuances, cash payments and borrowings. The various Balance Sheet Adjustments
are described in greater detail in the Notes to the Projected Consolidated
Balance Sheet.
The Reorganized Pillowtex Projected Consolidated Balance Sheets set
forth below present the projected consolidated financial position of the
Reorganized Debtors, after giving effect to Confirmation and the consummation of
the transactions contemplated by the Plan, as of the end of each of 2002, 2003
and 2004.
The Reorganized Pillowtex Projected Consolidated Statements of
Operations set forth below present the projected consolidated results of
operations of the Reorganized Debtors for each of 2002, 2003 and 2004.
The Reorganized Pillowtex Projected Consolidated Statements of Cash
Flows set forth below present the projected consolidated cash flows of the
Reorganized Debtors for each of 2002, 2003 and 2004.
34
REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED BALANCE SHEET
JUNE 29, 2002
(Unaudited)
(In thousands)
Adjustments to Record
Confirmation of Plan and Estimates of Related Costs
---------------------------------------------------
Pre-Effective Post-Effective
Date Exit Costs Debt Discharge Fresh Start Date
----------------- ----------- --------------- ----------- ---------------
Assets:
Cash and cash equivalents ............... $ - $ - $ - $ - $ -
Accounts receivable - trade (net) ....... 155,971 - - - 155,971
Accounts receivable - other ............. 3,995 - - - 3,995
Inventory ............................... 195,973 - - - 195,973
Assets held for sale .................... 5,379 - - - 5,379
Net assets of discontinued operations ... 4,827 - - - 4,827
Prepaid expenses ........................ 6,095 - - - 6,095
------------ ----------- ------------ ----------- -------------
Total current assets ............... 372,240 - - - 372,240
Property, plant and equipment (net) ..... 401,440 - - (298,882) (9) 102,558
Intangible assets (net) ................. 219,789 - - (179,789) (9) 40,000
Other long-term assets .................. 29,082 - - (7,082) (9) 22,000
------------ ----------- ------------ ------------- -------------
Total assets ....................... $ 1,022,551 $ - $ - $ (485,753) $ 536,798
============ =========== ============ ============= =============
Liabilities and Stockholders' Equity
(Deficit):
Accounts payable ........................ $ 43,529 $ - $ - $ - $ 43,529
Accrued expenses ........................ 56,471 (1,645)(1) - - 54,826
Accrued professional fees ............... 4,859 (4,859)(2) - - -
Accrued interest expense ................ - - - - -
Income tax payable ...................... - - - - -
Deferred income taxes ................... - - - - -
------------ ----------- ------------ ------------ -------------
Total current liabilities .......... 104,859 (6,504) - - 98,355
Debtor-in-possession financing .......... 8,916 23,329 (32,245) (5) - -
Designated post-petition obligation ..... 150,000 - (150,000) (6) - -
------------ ----------- -------------- ----------- -------------
Total post-petition debt ........... 158,916 23,329 (182,245) - -
Deferred tax liabilities (assets) ....... - - - - -
Noncurrent liabilities .................. 38,443 - - - 38,443
------------ ----------- ------------ ------------ -------------
Total old debt & long-term
liabilities ...................... 302,218 16,825 (182,245) - 136,798
Liabilities subject to restructuring 1,018,046 (9,687)(3) (1,008,359) - -
New Debt:
Exit Financing Revolver Facility ........ - - 32,245 (5) - 32,245
Exit Term Loan Notes .................... - - 150,000 (6) - 150,000
Notes payable - priority taxes .......... - - 3,300 (7) - 3,300
Reinstated IRBs ......................... - - 11,959 (8) - 11,959
------------ ----------- ------------- ------------ -------------
Total new debt ..................... - - 197,504 - 197,504
Preferred stock (old) ................... 105,823 - - (105,823) (9) -
Common stock (old) ...................... 143 - - (143) (9) -
Common stock (new) ...................... - - 202,496 - 202,496
Additional paid-in capital .............. 160,120 - - (160,120) (9) -
Retained earnings (deficit) ............. (561,965) (7,138)(4) 790,604 (221,501) (9) -
Currency translation adjustment ......... (1,834) - - 1,834 (9) -
------------- ----------- ------------ ------------- -------------
Total stockholders' equity ......... (297,713) (7,138) 993,100 (485,753) 202,496
=========
Total liabilities and stockholders'
equity ................................ $ 1,022,551 $ - $ - $ (485,753) $ 536,798
============ =========== ============ ============= =============
35
NOTES TO REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED BALANCE SHEET
Notes:
- -----
(1) Represents the final payment under the Retention Plan.
(2) Represents payment of accrued but unpaid professional fees consisting of
monthly professional fees for April, May and June as well as unpaid
administrative holdbacks for the months of February and March.
(3) Represents payment of cure costs related to executory contracts, payment of
convenience class claims and settlement of other claims.
(4) Represents payment of estimated exit financing fees, administrative claims
of Indenture Trustees and other transaction costs.
(5) Represents the refinancing of the DIP Financing Facility with proceeds of
the Exit Financing Revolver Facility. The presentation above reflects the
payment of exit costs with proceeds from DIP Financing Facility while
depending on the timing of such payments, disbursements may be made
directly from proceeds of the Exit Financing Revolver Facility.
(6) Represents the repayment of outstanding Designated Post-Petition Loans with
the proceeds from the Exit Term Loan.
(7) Represents notes provided to holders of Priority Tax Claims as described in
the Plan.
(8) Represents the reinstatement of Industrial Revenue Bonds as described in
the Plan.
(9) Represent adjustments necessary under Fresh Start Accounting to restate the
assets, liabilities and equity accounts of Reorganized Pillowtex.
The Projections should be read only in conjunction with the
assumptions, qualifications and explanations set forth under "Reorganized
Pillowtex -- Projected Financial Information" and the consolidated historical
financial information included in the Pillowtex Form 2000 10-K and the Pillowtex
Third Quarter 2001 Form 10-Q available over the Internet on the Document
Website. The presentation of projected financial information, while believed to
be more meaningful by management for the purposes of this Disclosure Statement,
has not been prepared in accordance with generally accepted accounting
principles ("GAAP"), as it is presented in a condensed format and the Statement
of Cash Flows is presented in a modified format from that typically presented
under GAAP.
36
PILLOWTEX AND REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Pillowtex Reorganized Pillowtex
-------------------------------------------- -----------------------------------------
December June 29, June Fiscal Fiscal Fiscal
2001 2002 2002 2002 2003 2004
-------------- -------------- ------------- -------------- -------------- -----------
Assets:
Cash and cash equivalents .............. $ 35,204 $ - $ - $ - $ 24,469 $ 52,739
Trade accounts receivable (net) ........ 146,291 155,971 155,971 152,394 154,692 165,062
Other accounts receivable .............. 3,995 3,995 3,995 3,995 3,995 3,995
Inventory .............................. 194,973 195,973 195,973 194,973 194,973 194,973
Assets held for sale ................... 6,129 5,379 5,379 5,379 5,379 5,379
Net assets of discontinued operations .. 5,377 4,827 4,827 4,827 4,519 4,519
Prepaid expenses ...................... 6,095 6,095 6,095 6,095 6,095 6,095
------------ ------------ ----------- ----------- ----------- -----------
Total current assets .............. 398,064 372,240 372,240 367,663 394,122 432,762
Plant, property and equipment ......... 451,347 401,440 102,558 108,951 118,679 123,717
Intangible assets (net) ............... 221,624 219,789 40,000 30,331 12,463 129
Other long-term assets ................ 29,082 29,082 22,000 22,000 22,000 22,000
------------ ------------ ----------- ----------- ----------- -----------
Total assets ...................... $ 1,100,117 $ 1,022,551 $ 536,798 $ 528,945 $ 547,264 $ 578,608
============ ============ =========== =========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit):
Accounts payable ...................... $ 31,095 $ 43,529 $ 43,529 $ 46,316 $ 48,315 $ 51,983
Accrued expenses ...................... 55,066 56,471 54,826 54,827 54,827 54,827
Accrued professional fees ............. 6,754 4,859 - - - -
------------ ------------ ----------- ----------- ----------- -----------
Total current liabilities ......... 92,915 104,859 98,355 101,143 103,142 106,810
Debtor-in-possession financing ........ - 8,916 - - - -
Designated post-petition obligation ... 150,000 150,000 - - - -
------------ ------------ ----------- ----------- ----------- -----------
Total post-petition debt .............. 150,000 158,916 - - - -
Deferred tax liabilities (assets) ..... - - - -
Noncurrent liabilities ................ 38,443 38,443 38,443 38,443 38,443 38,443
------------ ------------ ----------- ----------- ----------- -----------
Total old debt and liabilities .... 281,358 302,218 136,798 139,586 141,585 145,253
Liabilities subject to restructuring .. 1,021,262 1,018,046 - - - -
New Debt:
Exit Financing Revolver Facility ...... - - 32,245 11,145 - -
Exit Term Loan ........................ - - 150,000 149,250 144,750 133,500
Notes payable - priority taxes ........ - - 3,300 3,300 2,750 2,200
Reinstated IRBs ....................... - - 11,959 11,959 11,764 11,304
------------ ------------ ----------- ----------- ----------- -----------
Total new debt .................... - - 197,504 175,654 159,264 147,004
Preferred stock (old) ................. 98,983 105,823 - - - -
Common stock (old) .................... 143 143 - - - -
Common stock (new) .................... - - 202,496 202,496 202,496 202,496
Additional paid-in capital ............ 160,120 160,120 - - - -
Retained earnings (accumulated
deficit) ........................... (459,915) (561,965) - 11,209 43,919 83,855
Currency translation adjustment ....... (1,834) (1,834) - - - -
------------ ------------- ----------- ----------- ----------- -----------
Total stockholders' equity ........ (202,503) (297,713) 202,496 213,706 246,415 286,351
Total liabilities and stockholders'
equity ............................. $ 1,100,117 $ 1,022,551 $ 536,798 $ 528,945 $ 547,264 $ 578,608
============ ============ =========== =========== =========== ===========
The Projections should be read only in conjunction with the
assumptions, qualifications and explanations set forth under "Reorganized
Pillowtex -- Projected Financial Information" and the consolidated historical
financial information included in the Pillowtex Form 2000 10-K and the Pillowtex
Third Quarter 2001 Form 10-Q available over the Internet on the Document
Website. The presentation of projected financial information, while believed to
be more meaningful by management for the purposes of this Disclosure Statement,
has not been prepared in accordance with GAAP, as it is presented in a condensed
format and the Statement of Cash Flows is presented in a modified format from
that typically presented under GAAP.
37
PILLOWTEX AND REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars In Thousands)
Pillowtex Reorganized Pillowtex
------------------------------- -------------------------------------------
Fiscal Dec. 30, 2001- Jun. 30, 2002- Fiscal Fiscal
2001 Jun. 29, 2002 Dec. 28, 2002 2003 2004
--------------- ---------------- ---------------- -------------- ----------
Gross sales ............................ $ 1,122,747 $ 499,945 $ 517,673 $ 1,052,482 $ 1,123,037
Deductions ............................. 69,814 22,730 24,844 49,782 51,968
------------ ------------ ------------ ------------ ------------
Net sales .......................... 1,052,933 477,215 492,829 1,002,700 1,071,069
Cost of goods sold ..................... 1,032,280 448,321 426,750 864,728 918,565
------------ ------------ ------------ ------------ ------------
Gross profit ....................... 20,653 28,894 66,079 137,972 152,504
Selling, general and administrative
expenses ............................ 86,634 38,897 34,688 69,183 70,625
Restructuring - assets impairment ...... 41,634 40,200 - - -
Restructuring expenses ................. 12,203 10,119 1,826 - -
------------ ------------ ------------ ------------ ------------
Operating income (loss) ............ (119,818) (60,322) 29,565 68,789 81,879
Interest expense ....................... 65,698 26,139 8,687 16,468 15,319
Bankruptcy expense ..................... 36,175 15,887 - - -
------------ ------------ ------------ ------------ ------------
Earnings (loss) before income (221,691) (102,348) 20,878 52,321 66,560
taxes ..........................
Income tax expense (benefits) .......... - - 9,669 19,611 26,624
------------ ------------ ------------ ------------ ------------
Net income (loss) .................. (221,691) (102,348) 11,209 32,710 39,936
Preferred dividends and accretion ...... 16,156 6,840 - - -
------------ ------------ ------------ ------------ ------------
Earning (loss) available for
common stockholders ....... $ (237,847) $ (109,188) $ 11,209 $ 32,710 $ 39,936
============= ============= ============ ============ ============
EBITDAR (1) ............................ $ (12,060) $ 13,134 $ 36,836 $ 79,746 $ 92,836
============= ============ ============ ============ ============
(1) EBITDAR of Cash Flow does not reflect professional fees included in
selling, general and administrative expenses and Blanket Division EBITDA that
are added back for DIP Reporting Purposes.
The Projections should be read only in conjunction with the
assumptions, qualifications and explanations set forth under "Reorganized
Pillowtex -- Projected Financial Information" and the consolidated historical
financial information included in the Pillowtex Form 2000 10-K and the Pillowtex
Third Quarter 2001 Form 10-Q available over the Internet on the Document
Website. The presentation of projected financial information, while believed to
be more meaningful by management for the purposes of this Disclosure Statement,
has not been prepared in accordance with GAAP, as it is presented in a condensed
format and the Statement of Cash Flows is presented in a modified format from
that typically presented under GAAP.
38
PILLOWTEX AND REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Pillowtex Reorganized Pillowtex
----------------------------- ---------------------------------------------
Fiscal Dec. 30, 2001- Jun. 30, 2002- Fiscal Fiscal
2001 Jun. 29, 2002 Dec. 28, 2002 2003 2004
------------ ---------------- ----------------- ------------- ----------
EBITDAR(1) ............................... $ (12,060) $ 13,134 $ 36,836 $ 79,746 $ 92,836
Change in working capital
Change in accounts receivable ........ 66,436 (9,680) 3,577 (2,298) (10,370)
Change in inventory .................. 83,834 (1,000) 1,000 - -
Change in accounts payable ........... (3,814) 12,434 2,787 1,998 3,669
Change in accrued expenses ........... 3,618 (241) 1 - -
Change in other current assets and
liabilities ..................... (2,012) 1,300 - 308 -
------------- ------------ ------------ ----------- -----------
Total change in working capital .... 148,062 2,813 7,365 8 (6,701)
Change in liabilities subject to
reorganization .................. (12,890) (12,903) - - -
Other cash flow items and adjustments
Cash interest paid .................. (67,117) (24,772) (8,687) (16,468) (15,318)
Cash income tax paid ................. -- - - (1,743) (14,290)
Capital expenditures ................. (13,811) (12,961) (11,838) (20,685) (15,995)
Restructuring cost/non-operations
adjustment ...................... (88,497) (72,960) (1,826) - -
Asset sale - other writedowns ........ 49,360 40,200 - - -
New term debt principal payments ..... -- - (750) (4,500) (11,250)
Notes payable - priority taxes ....... -- - - (550) (550)
Reinstated IRB payments .............. -- - - (195) (460)
------------ ------------ ------------ ------------ ------------
Total other cash flow items ........ (120,065) (70,493) (23,101) (44,141) (57,863)
Issuance and retirement of term debt
Retirement of post-petition
obligations .......... ............. - (150,000) - - -
Issuance of new term debt ............ - 150,000 - - -
------------ ------------ ------------ ----------- -----------
Net effect of term debt ............ - - - - -
Net cash flow ........................... $ 3,047 $ (67,449) $ 21,100 $ 35,613 $ 28,272
============ ============= ============ =========== ===========
(1) EBITDAR of Cash Flow does not reflect professional fees included in
selling, general and administrative expenses and Blanket Division EBITDA that
are added back for DIP Reporting Purposes.
The Projections should be read only in conjunction with the
assumptions, qualifications and explanations set forth under "Reorganized
Pillowtex -- Projected Financial Information" and the consolidated historical
financial information included in the Pillowtex Form 2000 10-K and the Pillowtex
Third Quarter 2001 Form 10-Q available over the Internet on the Document
Website. The presentation of projected financial information, while believed to
be more meaningful by management for the purposes of this Disclosure Statement,
has not been prepared in accordance with GAAP as it is presented in a condensed
format and the Statement of Cash Flows is presented in a modified format from
that typically presented under GAAP.
39
Management
Reorganized Pillowtex Executive Officers
The executive officers of Reorganized Pillowtex following the Effective
Date are presently expected to include each of the individuals identified below:
Name Age Anticipated Position with Reorganized Pillowtex
---- --- -----------------------------------------------
Anthony T. Williams 55 President and Chief Operating Officer
Michael R. Harmon 54 Executive Vice President and Chief Financial Officer
Scott E. Shimizu 48 Executive Vice President-Sales & Marketing
A. Allen Oakley 47 Executive Vice President-Manufacturing
Richard A. Grissinger 58 Senior Vice President-Marketing
Richard L. Dennard 53 Senior Vice President-Purchasing and Logistics
Deborah G. Poole 46 Vice President and Chief Information Officer
Donald Mallo 52 Vice President-Human Resources
John F. Sterling 37 Vice President and General Counsel
Henry T. Pollock 60 Vice President and Treasurer
Thomas D. D'Orazio 43 Vice President and Corporate Controller
John Wahoski 49 Vice President Financial and Operational Analysis
In addition to these executive officers, Pillowtex has commenced its
search for a new Chief Executive Officer. Pillowtex has had no individual
serving as Chief Executive Officer since October 27, 2000.
Certain biographical information relating to each of the individuals
who is presently expected to serve as an executive officer of Reorganized
Pillowtex is set forth below.
Anthony T. Williams has served as President and Chief Operating Officer
of Pillowtex since November 2000 and a director since August 2000. Mr. Williams
was Executive Vice President and Chief Financial Officer of Pillowtex from May
2000 to October 2000. From November 1995 until December 1998, Mr. Williams was
Vice President-Finance of LucasVarity Light Vehicle Braking Systems, the world's
second largest independent manufacturer of braking systems to the automotive
industry.
Michael R. Harmon has served as Executive Vice President and Chief
Financial Officer of Pillowtex since March 2001. Prior to joining Pillowtex, Mr.
Harmon spent 13 years at Galey & Lord, Inc., a $1 billion manufacturer of
textiles, where he last served as Executive Vice President and Chief Financial
Officer.
Scott E. Shimizu has served as Executive Vice President-Sales &
Marketing of Pillowtex since 1992 and a director since February 1996. Mr.
Shimizu was Executive Vice President of Pillowtex from 1988 to 1992. He was also
a director of Pillowtex from May 1994 to May 1995.
A. Allen Oakley has served as Executive Vice President-Manufacturing
and a director of Pillowtex since May 2000. Prior to that time and since 1976,
Mr. Oakley served in various managerial capacities for Pillowtex and Fieldcrest
Cannon.
Richard A. Grissinger has served as Senior Vice President-Marketing of
Pillowtex since March 2000. From September 1998 to February 2000, he was Senior
Vice President-Marketing-Bath of Pillowtex and from December 1997 to September
1998, Mr. Grissinger was Vice President-Marketing for the Department Store
Specialty Business of Pillowtex. Mr. Grissinger was Business Manager of the Bath
Division of Fieldcrest Cannon Inc. from 1995 to December 1997.
40
Richard L. Dennard has served as Senior Vice President-Purchasing and
Logistics of Pillowtex since August 1999. From December 1997 to July 1999, Mr.
Dennard was Vice President of Pillowtex in charge of purchasing. From January
1997 to December 1997, Mr. Dennard served as Vice President for Blankets and
Utility Bedding for Pillowtex and from January 1996 to December 1996, he served
as Vice President of Purchasing for Utility Bedding.
Deborah G. Poole has served as Vice President and Chief Information
Officer of Pillowtex since February 1999. Prior to joining Pillowtex, from 1991
to February 1999, Ms. Poole was Corporate Vice President, Information Services
of Guilford Mills, Inc., a textile manufacturer.
Donald Mallo has served as Vice President-Human Resources of Pillowtex
since September 2000. Prior to joining Pillowtex, from 1998 through 1999, Mr.
Mallo was Senior Vice President-Human Resources of Grove Worldwide LLC, a
leading manufacturer of construction cranes and aerial work platforms. From 1993
to 1998, Mr. Mallo was Executive Vice President-Human Resources and Counsel for
Foamex International, Inc., a large manufacturer of polyurethane foam products
for the automotive, furniture, bedding and medical supply industries. From 1985
until its acquisition by Foamex in 1993, Mr. Mallo was Vice President-Employee
Relations for General Felt Industries, Inc., a manufacturer of carpet cushions
and related products.
John F. Sterling has served as Vice President and General Counsel of
Pillowtex since November 1999. From May 1997 to November 1999, Mr. Sterling was
Associate General Counsel of Pillowtex. Prior to joining Pillowtex, Mr. Sterling
was an attorney with the law firm of Thompson & Knight, P.C.
Henry T. Pollock has served as Vice President and Treasurer of
Pillowtex since March 2001. From June 2000 to November 2000, Mr. Pollock was a
consultant to Pillowtex in the areas of finance and treasury and joined
Pillowtex full-time in November 2000. Prior to joining Pillowtex, Mr. Pollock
was assistant treasurer of Varity Corporation, a $2.5 billion worldwide
manufacturer of brake systems and diesel engines.
Thomas D. D'Orazio has served as Vice President and Corporate
Controller of Pillowtex since October 2001. Prior to joining Pillowtex, from
December 1998 to September 2001, Mr. D'Orazio was Corporate Controller of
Glatfelter, a $0.7 billion global manufacturer of specialty paper and engineered
products. From March 1994 to December 1998, Mr. D'Orazio was Assistant Corporate
Controller of Mohawk Industries, Inc., a multi-billion producer of woven and
tufted broadloom carpet and rugs for residential and commercial applications.
John Wahoski has served as Vice President - Financial and Operational
Analysis since July 2000. Prior to joining Pillowtex, Mr. Wahoski spent 12 years
at TRW Automotive Systems, a $6 billion automotive supplier, and its
predecessors where he last served as Director - Financial and Operational
Analysis.
Executive Compensation
The following table sets forth the compensation paid or payable by
Pillowtex during the fiscal year ended December 29, 2001 to the five most highly
compensated executive officers of Pillowtex who are expected to serve as
executive officers of Reorganized Pillowtex as of the Effective Date and whose
compensation for fiscal 2001 exceeded $100,000.
41
All Other
Name and Principal Position (1) Annual Base Salary Compensation(2)
- --------------------------------------- ------------------ ---------------
Anthony T. Williams $ 400,000 $ 120,000
President and Chief Operating Officer
Michael R. Harmon 350,000 52,500
Executive Vice President and
Chief Financial Officer
Scott E. Shimizu 375,000 112,500
Executive Vice President-Sales &
Marketing
A. Allen Oakley 300,000 90,000
Executive Vice President
-Manufacturing
Richard A. Grissinger 286,000 68,750
Senior Vice President-Marketing
(1) Pillowtex has had no individual serving as Chief Executive Officer since
October 27, 2000. As an interim measure, the Board of Directors created an
Executive Committee consisting of three outside directors and two
management directors to act in the capacity of the Chief Executive Officer.
Pillowtex has commenced its search for a new Chief Executive Officer.
(2) Relates to payments paid or payable under the Retention Plan.
Reorganized Pillowtex Board of Directors
Under the General Corporation Law of the State of Delaware (the "DGCL")
and pursuant to the Bylaws, the business and affairs of Reorganized Pillowtex
will be managed under the direction of the Board of Directors of Reorganized
Pillowtex. The Board of Directors will be divided into three classes, with two
classes consisting of two directors and one class consisting of three directors.
Members of each class of directors will serve for a term of three years. As of
the Effective Date, the initial Board of Directors of Reorganized Pillowtex will
consist of seven members, two of which will be officers of Reorganized
Pillowtex. The identity of the initial directors will be disclosed in a Filing
with the Bankruptcy Court as soon as the information is available, but in any
event no later than 10 days prior to the deadline to object to Confirmation of
the Plan.
The Bylaws will provide that the size of the Board of Directors will be
established from time to time only (a) by an affirmative vote of a majority of
the total number of directors that Reorganized Pillowtex would have if there
were no vacancies on the Board of Directors or (b) by the affirmative vote of
the holders of a majority of the issued and outstanding voting stock, voting
together as a single class, unless otherwise provided in any designation
containing the express terms of preferred stock to be issued pursuant to
resolution of the Board of Directors (a "Preferred Stock Designation"). The
Bylaws will also provide for a minimum and maximum number of directors, unless
otherwise provided in any Preferred Stock Designation. Once the number of
directors is fixed, that number will continue to be the authorized number of
directors until changed by the stockholders or directors in accordance with the
Bylaws.
Voting Power and Terms of Directors
Each director will be entitled to one vote on each matter submitted to
the Board of Directors for a vote. Unless otherwise provided in any Preferred
Stock Designation, directors may be elected by the stockholders (a) at an annual
meeting of stockholders or (b) at a special meeting of stockholders called for
that purpose. Directors will hold office for a term of three years. Unless
otherwise provided in any Preferred Stock Designation, any vacancy that occurs
on the Board of Directors may be filled only (a) by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum, or by the sole remaining director or (b) by the affirmative vote of the
stockholders at a meeting called for that purpose.
42
The first annual meeting of the stockholders of Reorganized Pillowtex
following the Effective Date will be held in 2003 following completion of
Reorganized Pillowtex's 2002 fiscal year.
Board Committees
The Bylaws will provide that Reorganized Pillowtex's Board of Directors
may establish an Executive Committee or any other committees as it may from time
to time determine are necessary. It is presently contemplated that the Board of
Directors will establish an Audit Committee and a Compensation Committee on or
promptly following the Effective Date. The composition of those committees has
not been determined, but it is contemplated that all of the members of the Audit
Committee and the Compensation Committee will be non-employee directors.
If Reorganized Pillowtex's Board of Directors establishes an Executive
Committee, that committee will possess and may exercise, subject to the control
and direction of the Board of Directors, all the powers of the Board of
Directors in the management and control of the business of Reorganized
Pillowtex, regardless of whether those powers are specifically conferred to the
Executive Committee by the Bylaws. The Executive Committee, however, will have
no right to: (a) approve a merger or consolidation of Reorganized Pillowtex with
or into any other entity or any other material business combination transaction
involving Reorganized Pillowtex or any of its significant subsidiaries; (b)
authorize the sale of all or substantially all of the assets of Reorganized
Pillowtex; or (c) fill any vacancies on the Executive Committee or the Board of
Directors.
The Audit Committee is expected to review, in accordance with a charter
to be adopted prior to the Effective Date: (a) the professional services to be
provided by Reorganized Pillowtex's independent auditors; (b) the independence
of the auditors from the management of Reorganized Pillowtex; (c) the scope of
the audit by the auditors; (d) the annual financial statements of Reorganized
Pillowtex; (e) Reorganized Pillowtex's systems of internal accounting controls;
and (f) any other matters with respect to the accounting, auditing and financial
reporting practices and procedures of Reorganized Pillowtex as it may find
appropriate or as may be brought to its attention. The Audit Committee will also
meet from time to time with members of Reorganized Pillowtex's internal audit
staff.
The Compensation Committee is expected to: (a) review executive
salaries; (b) administer the bonus, incentive compensation and equity incentive
plans of Reorganized Pillowtex; and (c) approve the salaries and other benefits
of the executive officers of Reorganized Pillowtex. See "-- Employee Benefit
Matters -- Existing Benefit Programs and Agreements" and " -- New Benefit
Programs; Continuation or Termination of Existing Plans and Agreements." In
addition, the Compensation Committee is expected to advise and consult with
Reorganized Pillowtex's management regarding pension and other benefit plans and
compensation policies and practices of Reorganized Pillowtex.
Director Nomination Procedures
Reorganized Pillowtex's Bylaws will provide that nominations for
election of directors by the stockholders will be made by Reorganized
Pillowtex's Board of Directors as described above or by any stockholder entitled
to vote in the election of directors generally. The Bylaws will require that
stockholders intending to nominate candidates for election as directors provide
timely notice in writing. To be timely, a stockholder's notice must be delivered
to or mailed and received at Reorganized Pillowtex's principal executive offices
not less than 60 calendar days nor more than 90 calendar days prior to the
anniversary date of the date on which Reorganized Pillowtex first mailed proxy
materials for the prior year's annual meeting of stockholders. However, if an
annual meeting was not held during the prior year or if the annual meeting is
called for a date that is not within 30 calendar days before or after that
anniversary date, in order to be timely, a stockholder's notice must be received
no later than the close of business on the later of (a) 90 calendar days prior
to the annual meeting or (b) the tenth calendar day following the public
announcement of the date of the annual meeting. Reorganized Pillowtex's Bylaws
will also specify requirements as to the form and content of a stockholder's
notice. These provisions of the Bylaws may preclude stockholders from making
nominations of directors.
43
Director Compensation
Commencing on the Effective Date, each director who is not an employee
of Reorganized Pillowtex or any of its subsidiaries will be paid compensation as
determined by the Debtors and the Creditor's Committee, which compensation will
be disclosed in a Filing with the Bankruptcy Court no later than ten days prior
to the Confirmation Hearing. All directors will be entitled to participate in
the Equity Incentive Plan. See "-- Employee Benefit Matters -- New Benefit
Programs; Continuation or Termination of Existing Plans and Agreements."
Employee Benefit Matters
Existing Benefit Plans and Agreements
On the Petition Date, the Debtors' employees participated in various
retirement and welfare plans administered by Pillowtex. The following discussion
summarizes the principal terms of the existing employment, compensation and
benefit arrangements of the Debtors that are presently expected to be maintained
by Reorganized Pillowtex as of the Effective Date. Pillowtex is analyzing its
current benefits plans and arrangements to determine whether modifications
should be made to those plans.
401(k) Retirement Plans. Pillowtex sponsors a Salaried 401(k)
Retirement Savings Plan and an Hourly 401(k) Retirement Savings Plan. Employees
of the Debtors may make pre-tax contributions to the applicable plan of up to
20% of compensation (subject to statutory maximum contributions) and receive an
employer matching contribution of up to 70% of the first 2% of compensation and
20% of the next 4% of compensation (in each case, subject to statutory maximum
contributions). Pillowtex has negotiated collective bargaining agreements with
the Union of Needletrades, Industrial and Textile Employees ("UNITE"), the
United Auto Workers and the Warehouse & Mail Order Employees Union. Employee
contributions and employer matching contributions for employees within
collectively bargained units are determined and governed by the terms of those
collective bargaining agreements and the collective bargaining process.
Retiree Benefits. Pillowtex provides a Salaried Retirement Plan and an
Hourly Retirement Plan for employees of the Debtors. Benefits under the Salaried
Retirement Plan are based upon a career average formula. Benefits under the
Hourly Retirement Plan are based upon a dollars-per-month method, however,
benefits earned prior to January 1, 2000 are calculated under the earnings and
service method, the method in effect prior to that date. Retirement benefits for
employees within collectively bargained units are determined and governed by the
terms of those collective bargaining agreements and the collective bargaining
process.
Health and Welfare Benefits. Current employees of the Debtors
participate in health and other welfare benefit plans providing life insurance,
disability and accidental death and dismemberment benefits. Health and welfare
benefits for employees within collectively bargained units are determined and
governed by the terms of those collective bargaining agreements and the
collective bargaining process.
Executive Medical Expense Reimbursement Plan. The Executive Medical
Expense Reimbursement Plan supplements the existing medical benefits program and
provides full and complete care for participating employees, their spouses and
eligible dependents.
Deferred Compensation. Participating executives of Pillowtex and
non-employee members of the Board of Directors have the opportunity to defer
base salary, incentive compensation or other eligible payments.
Supplemental Executive Retirement Plan. The Supplemental Executive
Retirement Plan provides certain executive employees of Pillowtex a targeted
level of retirement income upon retirement or other termination of employment.
Key Employee Retention Plan. The Debtors adopted the Retention Plan in
the first quarter of 2001. The Retention Plan is designed to, among other
things, ensure that the employees most critical to the Debtors' reorganization
efforts are provided with sufficient economic incentives and protections to
remain with the Debtors and fulfill their responsibilities through the
successful conclusion of the Reorganization Cases. The Retention Plan
44
consists of three separate components: (a) the Retention Incentive Plan, (b) the
Emergence Performance Bonus Plan and (c) the Severance Plan. See "Operations
During the Reorganization Cases - Retention Plan."
Retention Incentive Plan. The Retention Plan authorized the payment of
-------------------------
retention bonuses to approximately 150 key employees totaling
approximately $6.1 million. In accordance with the payment schedule
approximately $1.5 million in bonuses was paid on April 9, 2001 and
approximately $1.5 million was paid on November 14, 2001. Subject to
the terms of the Retention Plan, the remaining payments will be paid in
accordance with the payment schedule. See "Operations During the
Reorganization Cases -Retention Plan."
Emergence Performance Bonus Plan. Under the current circumstances, the
--------------------------------
Debtors do not anticipate making any emergence payment bonuses under
the Retention Plan.
Severance Plan. The Severance Plan was implemented to consolidate all
---------------
severance agreements existing prior to the Petition Date into one
severance plan, which supersedes all prior severance plans and the
severance provisions of executives' employment arrangements. The
Severance Plan covers all full-time salaried employees of the Debtors,
the majority of whom are not eligible to participate in any other
components of the Retention Plan. With certain exceptions, employees
whose employment is terminated after the Petition Date for reasons
other than death, disability, retirement or cause, will be eligible to
receive severance benefits equal to one week's salary for each
completed year of service, with a minimum benefit of two weeks' salary
and a maximum of 26 weeks' salary. In addition, eligible employees will
be entitled to receive medical insurance, life insurance and certain
other benefits.
New Benefit Programs; Continuation or Termination of Existing Plans
and Agreements
General. One of the key elements of Reorganized Pillowtex's business
--------
plan is a compensation and benefit program designed to attract, retain and
provide incentives to directors, officers and key employees for Reorganized
Pillowtex and to provide those persons appropriate incentives and rewards for
superior performance. Information regarding new employment, compensation and
benefit arrangements that are presently expected to become effective as of the
Effective Date is set forth below.
Equity Incentive Plan. As of the Effective Date, Reorganized Pillowtex
----------------------
will implement the Equity Incentive Plan to attract, retain and motivate key
employees following the Effective Date. On the Effective Date and in accordance
with the Plan, options exercisable for shares of New Common Stock will be
granted and shares of restricted stock will be issued to certain senior
executives of the Reorganized Debtors as described on Exhibit IV.C.3 of the
Plan. Thereafter, Reorganized Pillowtex's Board of Directors (or a committee
thereof) will determine the awards to be granted under the Equity Incentive
Plan. The Equity Incentive Plan will provide for grants of stock options,
restricted stock, deferred shares and other typical equity incentive awards to
the employees and members of the Board of Directors of Reorganized Pillowtex. A
total of 750,000 shares of New Common Stock will be available for issuance in
satisfaction of awards under the Equity Incentive Plan, including the grant of
options and issuance of restricted stock, in amounts to be determined, to be
made as of the Effective Date. All shares available under the Equity Incentive
Plan not covered by the options granted or restricted stock issued as of the
Effective Date will remain available for future grants under the Equity
Incentive Plan.
Certain Corporate Governance Matters
Introduction
Certain provisions of the Certificate and the Bylaws and the provisions
of the Share Purchase Rights Agreement described under "Securities to Be Issued
Pursuant to the Plan; Post-Reorganization Indebtedness -- New Share Purchase
Rights Agreement," together with applicable Delaware state law, may discourage
or make more difficult the acquisition of control of Reorganized Pillowtex by
means of a tender offer, open market purchase, proxy fight or otherwise. These
provisions are intended to discourage, or may have the effect of discouraging,
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Reorganized Pillowtex to first
negotiate with Reorganized Pillowtex. The management of the
45
Debtors believes that the foregoing measures, many of which are substantially
similar to the takeover-related measures in effect for numerous other
publicly-held companies, provide benefits by enhancing Reorganized Pillowtex's
potential ability to negotiate with the proponent of an unsolicited proposal to
acquire or restructure Reorganized Pillowtex, which outweigh the disadvantages
of discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. In addition, management
of the Debtors believes that such takeover-related measures aid in protecting
stockholders from takeover bids that the directors of such companies have
determined to be inadequate. While there necessarily can be no assurance in this
regard, the management of the Debtors also believes that the foregoing measures
are not likely to have a material impact on market prices for New Common Stock
in circumstances other than those described above in light of, among other
factors, the existence of generally comparable measures in effect for other
publicly-held companies and management's belief that market prices will be
influenced most significantly by Reorganized Pillowtex's actual results of
operations, general market and economic conditions and other traditional
determinants of stock market prices, rather than takeover-related measures and
other corporate governance provisions. See "Risk Factors -- Certain Provisions
Will Have Anti-Takeover Effects."
Removal of Directors and Filling Vacancies in Directorships
The Certificate will provide that directors may be removed only by the
affirmative vote of the holders of at least 66 2/3% of securities entitled to
vote generally in the election of directors unless otherwise provided in any
Preferred Stock Designation. Under the Certificate, any vacancy on the
Reorganized Pillowtex Board of Directors, including a vacancy resulting from an
increase in the number of members of the Reorganized Pillowtex Board of
Directors, may be filled by the vote of a majority of the directors then in
office unless otherwise provided in a Preferred Stock Designation. The
limitations on the removal of directors and filling of vacancies may deter a
third party from seeking to remove incumbent directors and simultaneously
gaining control of the Reorganized Pillowtex Board of Directors by filling the
vacancies created by such removal with its own nominees. See "Risk Factors --
Certain Provisions Will Have Anti-Takeover Effects."
Stockholder Action and Special Meetings of Stockholders
The Certificate will eliminate the ability of stockholders to act by
written consent in lieu of a meeting. It will also provide that special meetings
of the stockholders may only be called by (a) the Chairman of the Board, (b) the
President, (c) the Secretary within ten calendar days after receipt of a written
request of a majority of the total number of directors (assuming no vacancies)
or (d) persons holding at least 25% of all shares outstanding and entitled to
vote at such meeting. Upon the receipt by Reorganized Pillowtex of a written
request by any stockholder or stockholders entitled to call a meeting of
stockholders, the Board of Directors will (a) call a special meeting of the
stockholders for the purposes specified in the request for a special meeting and
(b) fix a record date for the determination of stockholders entitled to notice
of and to vote at such meeting, which record date will not be later than 60
calendar days after the date of receipt by Reorganized Pillowtex of the request
to call the meeting. No special meeting pursuant to a stockholder's request will
be required to be convened if (a) the Board of Directors calls an annual or
special meeting of stockholders to be held not later than 90 calendar days after
receipt by Reorganized Pillowtex of a proper request by a stockholder to call a
meeting and (b) the purposes of such annual or special meeting include the
purposes specified in the stockholder's request. The Bylaws will provide that
the business permitted to be conducted at any such meeting will be limited to
that business specified in the notice of the meeting given by or at the
direction of the Chairman of the Board, the President or a majority of the total
number of directors (assuming no vacancies) or that is otherwise properly
brought before the meeting by the presiding officer or by or at the direction of
a majority of the total number of directors (assuming no vacancies).
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The Bylaws will provide that a stockholder seeking to bring any
business before any annual meeting of stockholders or nominate candidates for
election as directors must provide timely notice in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at Reorganized
Pillowtex's principal executive offices not less than 60 calendar days nor more
than 90 calendar days, prior to the anniversary date on which Reorganized
Pillowtex first mailed its proxy materials for the prior year's annual meeting
of stockholders, except that if there was no annual meeting held during the
prior year or if the annual meeting is called for a date that is not within 30
calendar days before or after that anniversary, notice by the stockholder in
order to be timely must be
46
received not later than the close of business on the later of the 90th calendar
day prior to such annual meeting or the tenth calendar day following the day on
which public disclosure of the date of the annual meeting was made. The Bylaws
will also specify requirements as to the form and content of a stockholder's
notice. These provisions may preclude stockholders from bringing matters before
an annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
Authorized But Unissued Shares
The Certificate will provide that Reorganized Pillowtex is authorized
to issue 50 million shares of New Common Stock, par value $0.01 per share, and
10 million shares of New Preferred Stock, par value $0.01 per share. See
"Securities To Be Issued Pursuant to the Plan; Post-Reorganization Indebtedness
- -- New Common Stock" for a description of the New Common Stock.
The Reorganized Pillowtex Board of Directors will have the authority,
within the limitations and restrictions stated in the Certificate, to provide by
resolution for the issuance of shares of New Preferred Stock, in one or more
classes or series, and to fix the rights, preferences, privileges and
restrictions for them, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series and the designation of that series.
Authorized but unissued shares of New Common Stock and New Preferred
Stock under the Certificate will be available for future issuance without
stockholder approval. These additional shares may be used for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of New Common Stock and New Preferred Stock could
render more difficult or discourage an attempt to obtain control of Reorganized
Pillowtex by means of a proxy contest, tender offer, merger or otherwise. In
addition, any future issuance of shares of New Common Stock or New Preferred
Stock could have the effect of diluting the earnings per share, book value per
share and voting power of shares held by the stockholders of Reorganized
Pillowtex. The Certificate will provide, to the extent required by section 1123
of the Bankruptcy Code, that Reorganized Pillowtex will not issue nonvoting
equity securities.
Supermajority Vote Requirements
Delaware law provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage. The Certificate and Bylaws will require the affirmative vote of the
holders of at least 66 2/3% of securities entitled to vote, to amend, repeal or
adopt any provision inconsistent with some provisions, including those
provisions relating to (a) the election of directors, (b) directorship vacancies
and removal of directors, (c) action by written consent of stockholders, (d)
special meetings of stockholders, and (e) stockholder proposals and nomination
of directors.
Delaware Section 203
Reorganized Pillowtex will be subject to the provisions of Section 203
of the DGCL. Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the person became an interested stockholder, unless
the interested stockholder attained that status with the approval of the board
of directors or the business combination is approved in a prescribed manner. A
"business combination" includes certain mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within the prior three years
did own, 15% or more of the corporation's voting stock.
For purposes of Section 203 of the DGCL, as of the Effective Date, the
Board of Directors of Pillowtex will be deemed to have approved: (a) the
issuance pursuant to the Plan of New Common Stock to any person or entity that
will become the owner of 15% or more of the outstanding New Common Stock as a
result of such issuance, and (b) any issuance to any person or entity that will
become the owner of 12% or more but less than 15% of the
47
outstanding New Common Stock as a result of the issuance pursuant to the Plan of
New Common Stock which causes such person or entity to become the owner of 15%
or more of the outstanding New Common Stock.
Indemnity Arrangements
Existing Indemnification Obligations
Pillowtex's existing bylaws provide for indemnification of its
officers, directors, employees and agents to the fullest extent permitted by the
Texas Business Corporations Act.
Treatment of Existing Indemnification Obligations Under the Plan
Under the Plan and subject to the provisions described below and in
Section V.E.1 of the Plan, the obligations of each Debtor or Reorganized Debtor
to indemnify any person serving as one of its directors, officers or employees
as of or following the Petition Date by reason of such person's prior or future
service in such a capacity or as a director, officer or employee of another
corporation, partnership or other legal entity to the extent provided in the
applicable certificates of incorporation, bylaws or similar constituent
documents, by statutory law or by written agreement, policies or procedures of
or with such Debtor, will be deemed and treated as executory contracts that are
assumed by the applicable Debtor or Reorganized Debtor pursuant to the Plan and
section 365 of the Bankruptcy Code as of the Effective Date. Accordingly, such
indemnification obligations will survive and be unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date. The obligations of
each Debtor or Reorganized Debtor to indemnify any person who, as of the
Petition Date, was no longer serving as a director, officer or employee of such
Debtor or Reorganized Debtor, which indemnity obligation arose by reason of such
person's prior service in any such capacity or as a director, officer or
employee of another corporation, partnership or other legal entity, whether
provided in the applicable certificates of incorporation, bylaws or similar
constituent documents, by statutory law or by written agreement, policies or
procedures of or with such Debtor, will terminate and be discharged pursuant to
section 502(e) of the Bankruptcy Code or otherwise, as of the Effective Date;
provided, however, that, to the extent that such indemnification obligations no
longer give rise to contingent Claims that can be disallowed pursuant to section
502(e) of the Bankruptcy Code, such indemnification obligations will be deemed
and treated as executory contracts that are rejected by the applicable Debtor
pursuant to the Plan and section 365 of the Bankruptcy Code, as of the Effective
Date, and any Claims arising from such indemnification obligations (including
any rejection damage claims) will be subject to the bar date provisions of the
Plan.
New Indemnification Arrangements
The DGCL permits a corporation to indemnify current and former
directors, officers, employees and agents of the corporation and other persons
serving at the request of the corporation against expenses, judgments, fines and
amounts paid in settlement in connection with a legal proceeding. To be
indemnified, the person must have acted in good faith and in a manner the person
reasonably believed to be in, or not opposed to, the best interest of the
corporation. With respect to any criminal action or proceeding, the person must
not have had reasonable cause to believe the conduct was unlawful. Each
indemnification must be authorized by a majority of disinterested directors or
by the stockholders. Unless a court determines that a person is fairly and
reasonably entitled to indemnification, however, a person may not be indemnified
with respect to any claim resulting in the person being adjudged liable to the
corporation.
The DGCL requires a present or former director or officer of a
corporation to be indemnified against certain expenses if the person has been
successful, on the merits or otherwise, in the defense of any proceeding or in
defense of any issue therein. In addition, the DGCL permits the advancement of
expenses relating to the defense of any proceeding to directors, officers, other
employees and agents of the corporation, contingent upon the person's commitment
to repay advances for expenses against which the person is not ultimately
entitled to be indemnified.
The DGCL provides that the indemnification provisions contained in the
DGCL are not exclusive of any other right that a person seeking indemnification
may have or later acquire under any provision of the corporation's bylaws, by
any agreement, by any vote of stockholders or disinterested directors or
otherwise. In addition, the
48
DGCL provides that a corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the corporation
against any expense, liability or loss. This insurance may provide benefits
regardless of whether the corporation has the power to indemnify under the DGCL.
The Bylaws will provide for the indemnification of any present or
former director, officer, other employee or agent of Reorganized Pillowtex
against certain expenses related to any proceeding or defense of any issue
therein to the fullest extent permitted or required by Delaware law. In
addition, the Bylaws will provide for the advancement of expenses relating to
the defense of any proceeding to directors, officers, other employees and
agents, contingent upon the person's commitment to repay all advances against
which the person ultimately is not entitled to be indemnified.
If a claim for indemnification is not paid in full by Reorganized
Pillowtex within 60 days after a written claim has been received by Reorganized
Pillowtex, except in the case of a claim for an advancement of expenses, in
which case the applicable period will be 20 days, the director, officer, other
employee or agent seeking indemnification may, at any time thereafter, bring
suit against Reorganized Pillowtex to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit initiated by
Reorganized Pillowtex to recover an advancement of expenses, the director,
officer, other employee or agent also will be entitled to be reimbursed for the
expense of prosecuting or defending such suit.
The Bylaws will provide that Reorganized Pillowtex may maintain
insurance, at its expense, to protect itself and any director, officer, other
employee or agent of Reorganized Pillowtex or another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or loss,
whether or not Reorganized Pillowtex would have the power to indemnify such
person against such expense, liability or loss under Delaware law.
Reorganized Pillowtex will enter into indemnification agreements,
effective as of the Effective Date, with each of its directors and officers and
each of the directors and officers of the Reorganized Pillowtex Subsidiary
Debtors. The indemnification agreements will provide for, among other things:
(a) the indemnification of the indemnitees by Reorganized Pillowtex for conduct
in the capacities described above; (b) the advancement of attorneys' fees and
other expenses; and (c) the establishment, upon approval by Reorganized
Pillowtex's Board of Directors at its option, of trusts or other funding
mechanisms to fund Reorganized Pillowtex's indemnification obligations
thereunder.
SECURITIES TO BE ISSUED PURSUANT TO THE PLAN; POST-REORGANIZATION
INDEBTEDNESS
Reorganization Value
The Debtors have been advised by EYCF with respect to the
reorganization value of the Reorganized Debtors on a going concern basis. Solely
for purposes of the Plan, the estimated range of reorganization values of the
Reorganized Debtors was estimated to be approximately $350 million to $450
million, with a midpoint value of $400 million as of the assumed Effective Date
of June 29, 2002. The reorganization value is comprised of a total enterprise
value range of $335 million to $425 million and $15 million to $25 million for
various non-operating assets of the Reorganized Debtors. Based on the assumed
range of reorganization values of the Reorganized Debtors of between $350
million to $450 million and $197.5 million of assumed total debt (including the
Exit Financing Revolver Facility, the Exit Term Loan and Industrial Revenue
Bonds), EYCF has estimated the reorganization equity value to be between $152.5
million and $252.5 million, with a midpoint value of $202.5 million. The
foregoing reorganization value (ascribed as of the date of this Disclosure
Statement) reflects, among other factors discussed below, current financial
market conditions and the inherent uncertainty today as to the achievement of
the Projections.
The assumed range of reorganization values reflects work performed by
EYCF on the basis of information related to the business and assets of the
Debtors available to EYCF as of December 21, 2001. For the purposes of
49
determining the reorganization value, EYCF has not considered any impact on the
equity value of the Reorganized Debtors from the issuance of the New Warrants or
options granted under the Equity Incentive Plan.
Based on the assumed range of reorganization equity value set forth
above, the value of the 9,249,500 shares of New Common Stock to be issued to the
holders of Allowed Claims in Classes 5 and 6 under the Plan and 130,000 shares
of New Common Stock to be issued to certain senior executives of the Reorganized
Debtors under the Equity Incentive Plan is estimated to be between $16.26 per
share and $26.92 per share, with a midpoint of $21.59 per share. The foregoing
valuations also reflect a number of assumptions, including a successful
reorganization of the Debtors' businesses and finances in a timely manner, the
achievement of the forecasts reflected in the Projections, the amount of
available cash, market conditions as of December 21, 2001 continuing through the
assumed Effective Date and the Plan becoming effective in accordance with its
terms on a basis consistent with the estimates and other assumptions discussed
herein. For the purposes of calculating the share prices, it has been assumed
that 130,000 shares of New Common Stock will be issued as of the Effective Date
to key executives of the Reorganized Debtors as restricted stock under the
Equity Incentive Plan. The terms of the Equity Incentive Plan, including amounts
to be issued as restricted stock or granted as options, have not yet been
determined.
In preparing the estimated theoretical reorganization value, EYCF: (a)
analyzed certain historical financial information of the Debtors for recent
years and interim periods; (b) analyzed certain internal financial and operating
data of the Debtors, including financial projections prepared and provided by
management of Pillowtex; (c) met with certain members of senior management of
the Debtors to discuss the Debtors' operations and future prospects; (d)
analyzed publicly available financial data and considered the market values of
public companies that EYCF deemed generally comparable to the operating
businesses of the Debtors; (e) analyzed the financial terms, to the extent
publicly available, of certain acquisitions of companies that EYCF believes were
comparable to the operating businesses of the Debtors; (f) considered certain
economic and industry information relevant to the Debtors' operating businesses;
and (g) conducted such other analyses as EYCF deemed appropriate. Although EYCF
conducted a review and analysis of the Debtors' businesses, operating assets and
liabilities and business plans, EYCF assumed and relied on the accuracy and
completeness of all (i) financial and other information furnished to it by the
Debtors and by other firms retained by the Debtors and (ii) publicly available
information. In addition, EYCF did not independently verify the assumptions
underlying the Projections in connection with such valuation. No independent
evaluations or appraisals of the Debtors' assets were sought or were obtained in
connection therewith.
Estimates of reorganization value do not purport to be appraisals, nor
do they necessarily reflect the values that might be realized if assets were to
be sold. The estimates of hypothetical reorganization value prepared by EYCF
assume that the Reorganized Debtors continue to operate independently as a going
concern. Such estimates were developed solely for purposes of formulation and
negotiation of a plan of reorganization and analysis of implied relative
recoveries to creditors thereunder. Such estimates reflect computations of the
estimated reorganization value of the Reorganized Debtors through the
application of various valuation techniques and do not purport to reflect or
constitute appraisals, liquidation values or estimates of the actual market
value that may be realized through the sale of any securities to be issued
pursuant to the Plan, which may be significantly different from the amounts set
forth herein. The value of an operating business is subject to uncertainties and
contingencies that are difficult to predict and will fluctuate with changes in
factors affecting the financial conditions and prospects of such a business. As
a result, the estimate of reorganization value set forth herein is not
necessarily indicative of actual outcomes, which may be significantly more or
less favorable than those set forth herein. Because such estimates are
inherently subject to uncertainties, neither the Debtors, EYCF nor any other
person assumes responsibility for their accuracy. Depending on the results of
the Debtors' operations or changes in the financial markets, EYCF's valuation
analysis as of the Effective Date may differ from that disclosed herein.
In addition, the valuation of newly-issued securities is subject to
additional uncertainties and contingencies, all of which are difficult to
predict. Actual market prices of such securities at issuance will depend upon,
among other things, prevailing interest rates, conditions in the financial
markets, the anticipated initial securities holding of prepetition creditors,
some of which may prefer to liquidate their investment rather than hold it on a
long-term basis, and other factors that generally influence the prices of
securities. Actual market prices of such securities also may be affected by the
Debtors' history in chapter 11 or by other factors not possible to predict.
Accordingly, the reorganization equity value estimated by EYCF does not
necessarily reflect, and should not be construed as reflecting, values that will
be attained in the public or private markets. The range of equity value ascribed
in the analysis does not purport to be an estimate of the post-reorganization
market trading value. Such trading value may
50
be materially different from the reorganization equity value ranges associated
with EYCF's valuation analysis. Indeed, there can be no assurance that a trading
market will develop for the New Common Stock.
The Plan contemplates the distribution of the New Warrants to holders
of Allowed Claims in Class 6, if Class 6 accepts the Plan. The exercise price of
each New Warrant issued under the Plan exceeds the estimated reorganization
equity value per share, and exercise of the New Warrants requires the payment to
Reorganized Pillowtex of cash in the amount of the exercise price. As of the
date of filing of this Disclosure Statement, the New Warrants have not been
valued. The New Warrants will be valued at a later date, when additional
information regarding their terms and conditions is determined.
New Common Stock
As of the Effective Date, Reorganized Pillowtex will be authorized to
issue 50 million shares of New Common Stock, par value $0.01 per share, of
which: (a) 9,249,500 will be distributed to holders of Allowed Claims in Classes
5 and 6; (b) 750,000 shares of New Common Stock will be available for issuance
of in satisfaction of awards to senior executives of the Reorganized Debtors
under the Equity Incentive Plan, including grants of options and the issuance of
restricted stock to be made as of the Effective Date. See "Reorganized Pillowtex
- -- Employee Benefit Plans -- New Benefit Programs; Continuation or Termination
of Existing Plans and Agreements."
The holders of New Common Stock will be entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. See
"Distributions Under the Plan -- Disputed Claims; Reserve and Estimations" and
Section VI.E.2.a.ii of the Plan for provisions regarding voting of New Common
Stock held in the Unsecured Claims Reserve. Holders of New Common Stock will be
entitled to receive ratably such dividends as may be declared by Reorganized
Pillowtex's Board of Directors out of funds legally available for payment of
dividends. However, Reorganized Pillowtex does not presently anticipate that
dividends will be paid on New Common Stock in the foreseeable future. In the
event of a liquidation, dissolution or winding up of Reorganized Pillowtex,
holders of New Common Stock will be entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding preferred stock of Reorganized Pillowtex. Holders of New Common
Stock will have no preemptive, subscription, redemption or conversions rights.
All of the outstanding shares of New Common Stock to be issued pursuant
to the Plan will be, upon such issuance, validly issued, fully paid and
nonassessable. Subject to the terms and conditions set forth in the New Share
Purchase Rights Agreement, each share of New Common Stock issued pursuant to the
Plan will be accompanied by a New Share Purchase Right. See "Securities to Be
Issued Pursuant to the Plan; Post-Reorganization Indebtedness -- New Share
Purchase Rights Agreement."
New Warrants
Under the Plan, on the Effective Date, holders of Allowed Claims in
Class 6, if Class accepts the Plan, will receive, among other things, a Pro Rata
share of New Warrants exercisable for up to an aggregate of 1,764,706 shares of
New Common Stock. See "Overview of Plan -- Summary of Classes and Treatment of
Claims and Interests."
The New Warrants are to be issued under the New Warrant Agreement to be
entered into between Reorganized Pillowtex and the agent for the holders of the
New Warrants to be named therein. The following description of the New Warrants
is qualified in its entirety by reference to the New Warrant Agreement, a copy
of which will be Filed as Exhibit IV.K to the Plan and will be available over
the Internet on the Document Website.
Each New Warrant will entitle the holder thereof to acquire one share
of New Common Stock at an initial exercise price equal to approximately $61.00.
The exercise price and the number and kind of shares purchasable upon exercise
of a New Warrant will be subject to adjustment in the following events: (a) if
Reorganized Pillowtex (i) pays a dividend or otherwise distributes to holders of
New Common Stock, as such, shares of its capital stock (whether New Common Stock
or capital stock of any other class), (ii) subdivides outstanding shares of New
Common Stock into a greater number of shares of New Common Stock, (iii) combines
outstanding shares of New Common Stock into a smaller number of shares of New
Common Stock, or (iv) issues any shares of capital stock in
51
a reclassification of outstanding shares of New Common Stock; (b) if Reorganized
Pillowtex issues rights, options or warrants to holders of the outstanding
shares of New Common Stock, as such, entitling the holders of such rights,
options or warrants to subscribe for or purchase shares of New Common Stock at a
price per share that is lower on the record date than the current market price
per share of New Common Stock on such record date (as determined in accordance
with the New Warrant Agreement); or (c) if Reorganized Pillowtex issues shares
of New Common Stock, securities convertible into or exchangeable for shares of
New Common Stock or rights, options or warrants entitling holders of such
rights, options or warrants to subscribe for or purchase shares of New Common
Stock (excluding shares of New Common Stock, convertible or exchangeable
securities or rights, options or warrants issued in any of the transactions
described in clauses (a) or (b) above) for a purchase price per share of such
New Common Stock, for a conversion or exchange price per share of New Common
Stock initially deliverable upon conversion or exchange of such securities or
for a subscription or purchase price per share of New Common Stock initially
deliverable upon exercise of such rights, options or warrants, that is less than
the current market price per share of New Common Stock on the date the purchase,
conversion, exchange or subscription price of such additional shares of New
Common Stock are first fixed (as determined in accordance with the New Warrant
Agreement).
No adjustment in the number of shares purchasable upon the exercise of
a New Warrant will be required unless such adjustment would require an increase
or decrease in the number of shares purchasable upon the hypothetical exercise
of a New Warrant of at least 1%; provided, however, that any adjustments which
are not required to be made currently will be carried forward and made at the
time and together with the next subsequent adjustment which, together with any
adjustments so carried forward, would require an increase or decrease in the
number of shares purchasable upon the hypothetical exercise of a New Warrant of
1% or more. In addition, no adjustment in the number of shares purchasable upon
the exercise of a New Warrant will be made in circumstances described in clause
(a)(i), (b) or (c) in the second sentence of the immediately preceding paragraph
if Reorganized Pillowtex issues or distributes to each holder of a New Warrant
the shares, rights, options, warrants, convertible or exchangeable securities,
assets or other securities referred to in such clause that such holder would
have been entitled to receive had the New Warrant been exercised prior to the
happening of such event or the record date with respect thereto. Further, no
adjustment in the number of shares purchasable upon the exercise of a New
Warrant will be made on account of: (a) any issuance of shares of New Common
Stock, or of options, rights or warrants to purchase, or securities convertible
into or exchangeable for, shares of New Common Stock pursuant to the Plan; (b)
any issuance of shares of New Common Stock upon the exercise of options, rights
or warrants or upon the conversion or exchange of convertible or exchangeable
securities, in either case issued pursuant to the Plan or outstanding as of the
Effective Date; (c) any issuance of shares of New Common Stock, or of options,
rights or warrants, or of other securities, pursuant to a share purchase rights
plan or any similar plan adopted by the Board of Directors of Reorganized
Pillowtex; (d) any issuance of shares of New Common Stock, or of options, rights
or warrants to purchase, or securities convertible into or exchangeable for,
shares of New Common Stock, in accordance with any plan for the benefit of the
employees or directors of Reorganized Pillowtex existing as of the Effective
Date or contemplated by the Plan or any other plan adopted by the Board of
Directors of Reorganized Pillowtex for the benefit of the employees or directors
of Reorganized Pillowtex or any of its subsidiaries; (e) any issuance of shares
of New Common Stock in connection with a company-sponsored plan for reinvestment
of dividends or interest; (f) any issuance of shares of New Common Stock,
securities convertible into or exchangeable for shares of New Common Stock or
rights, options or warrants entitling holders of such rights, options or
warrants to subscribe for or purchase shares of New Common Stock pursuant to an
underwritten public offering for a price per share of New Common Stock in the
case of an issuance of shares of New Common Stock, for a subscription or
purchase price per share of New Common Stock initially deliverable upon exercise
of such securities or for a subscription or purchase price per share of New
Common Stock initially deliverable upon exercise of such rights, options or
warrants, that is equal to or greater than 95% of the closing price per share of
New Common Stock on the date the offering, conversion, exchange or subscription
price of such additional shares of New Common Stock is first fixed (as
determined in accordance with the New Warrant Agreement); or (g) any issuance of
shares of New Common Stock or other securities to the owners of any entity that
is acquired by Reorganized Pillowtex in an arm's-length transaction approved by
the Board of Directors of Reorganized Pillowtex. No adjustment in the number of
shares purchasable upon the exercise of a New Warrant will be made for a change
in the par value of the shares of New Common Stock. The New Warrant Agreement
will also provide certain protections for the holder in the event of a sale or
change of control of Reorganized Pillowtex.
52
New Preferred Stock
As of the Effective Date, Reorganized Pillowtex will be authorized to
issue 10 million shares of New Preferred Stock. The Board of Directors will have
the authority to issue preferred stock from time to time in one or more classes
or series and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by Reorganized Pillowtex's stockholders. The New Preferred Stock
may be issued in distinctly designated series, may be convertible into New
Common Stock and may rank prior to the New Common Stock as to dividend rights,
liquidation preferences or both. The express terms of shares of a different
series of any particular class of New Preferred Stock will be identical except
for such variations as may be permitted by law. Without limiting the foregoing,
Reorganized Pillowtex will be authorized to issue an initial class of New
Preferred Stock that will be designated as Series A Junior Participating
Preferred Stock. Each holder of Series A Junior Participating Preferred Stock
will be entitled to 100 votes per share and, except as otherwise required by
law, will vote together with the New Common Stock as a single class on all
matters properly submitted to a vote at a meeting of the stockholders. The
Series A Junior Participating Preferred Stock may be issued only in connection
with the exercise of New Share Purchase Rights under the New Share Purchase
Rights Agreement. See "-- New Share Purchase Rights Agreement." All other New
Preferred Stock will have one vote per share.
New Share Purchase Rights Agreement
As of the Effective Date, Reorganized Pillowtex will enter into the New
Share Purchase Rights Agreement with a rights agent, selected by Reorganized
Pillowtex, which agreement will be approved by the Bankruptcy Court pursuant to
the Confirmation Order. Under the New Share Purchase Rights Agreement,
Reorganized Pillowtex will effect a distribution of one New Share Purchase Right
for each share of New Common Stock. Each New Share Purchase Right provides the
holder with the right to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock of Reorganized Pillowtex (the "Series A
Preferred Shares") at a price of $100 per one one-hundredth of a Series A
Preferred Share, subject to adjustment in accordance with the terms of the New
Share Purchase Rights Agreement (the "Purchase Price"). Under the New Share
Purchase Rights Agreement, the New Share Purchase Rights will be evidenced by
the New Common Stock share certificates until the earlier of the following (the
"Distribution Date"): (a) the close of business on the first date (the "Share
Acquisition Date") of public announcement that a person (other than a person
that acquired beneficial ownership of at least 15% of the outstanding shares of
New Common Stock solely as a result of distributions made pursuant to the Plan
on account of Allowed Claims held as of the Distribution Record Date (an "Exempt
Acquiror"), Reorganized Pillowtex, a subsidiary or employee benefit or stock
ownership plan of Reorganized Pillowtex or any of its affiliates or associates),
together with its affiliates and associates, has acquired beneficial ownership
of 15% or more of the outstanding shares of New Common Stock (any such person or
group being hereinafter called an "Acquiring Person"); or (b) the close of
business on the 10th Business Day (or such later date as may be specified by the
Board of Directors) following the commencement of a tender offer or exchange
offer by any person (other than Reorganized Pillowtex, a subsidiary or employee
benefit or stock ownership plan of Reorganized Pillowtex, or any of its
affiliates or associates), the consummation of which would result in beneficial
ownership by such person of 15% or more of the outstanding shares of New Common
Stock.
Under the New Share Purchase Rights Agreement, in the event (a "Flip-in
Event") that: (a) any person or group, together with its affiliates and
associates, becomes an Acquiring Person; (b) any Acquiring Person or any
affiliate or associate thereof merges into or combines with Reorganized
Pillowtex and Reorganized Pillowtex is the surviving corporation; (c) any
Acquiring Person or any affiliate or associate thereof effects certain other
transactions with Reorganized Pillowtex; or (d) during such time as there is an
Acquiring Person, Reorganized Pillowtex effects certain transactions, in each
case as described in the New Share Purchase Rights Agreement, then, in each such
case, proper provision will be made so that from and after the later of the
Distribution Date and the date of the occurrence of such Flip-in Event each
holder of a New Share Purchase Right, other than New Share Purchase Rights that
are or were owned beneficially by an Acquiring Person (which, from and after the
date of a Flip-in Event, will be void), will have the right to receive, upon
exercise thereof at the adjusted Purchase Price, that number of shares of New
Common Stock (or, under certain circumstances, an economically equivalent
security or securities of Reorganized Pillowtex) that at the time of such
Flip-in Event have a market value of two times the Purchase Price, as adjusted.
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In the event (a "Flip-over Event") that, at any time after a person has
become an Acquiring Person: (a) Reorganized Pillowtex merges with or into any
person and Reorganized Pillowtex is not the surviving corporation; (b) any
person merges with or into Reorganized Pillowtex and Reorganized Pillowtex is
the surviving corporation, but all or part of the New Common Stock is changed or
exchanged for stock or other securities of any other person or cash or any other
property; or (c) 50% or more of Reorganized Pillowtex's assets or earning power,
including securities creating obligations of Reorganized Pillowtex, are sold, in
each case as described in the New Share Purchase Rights Agreement, then, in each
such case, proper provision will be made so that each holder of a New Share
Purchase Right, other than New Share Purchase Rights that have become void, will
thereafter have the right to receive, upon the exercise thereof at the adjusted
Purchase Price, that number of shares of common stock (or, under certain
circumstances, an economically equivalent security or securities) of such other
person that at the time of such Flip-over Event have a market value of two times
the Purchase Price, as adjusted.
For all purposes under the New Share Purchase Rights Agreement, any (a)
Exempt Acquiror or (b) person that becomes the beneficial owner of 15% or more
of the then-outstanding shares of New Common Stock solely as a result of a
reduction in the number of shares of New Common Stock outstanding, will not be
deemed to have be an Acquiring Person unless and until such time as (i) such
Exempt Acquiror or other such person, or any affiliate or associate thereof,
subsequently becomes the beneficial owner of additional shares of New Common
Stock representing 1% or more of the then-outstanding New Common Stock or (ii)
any other person that is the beneficial owner of shares of New Common Stock
representing 1% or more of the then-outstanding New Common Stock subsequently
becomes an affiliate or associate of such Exempt Acquiror or other such person.
Reorganized Pillowtex may, at its option, redeem the New Share Purchase
Rights in whole, but not in part, at a price of $0.01 per New Share Purchase
Right, subject to adjustment (the "Redemption Price"), at any time prior to the
close of business on the Share Acquisition Date. Immediately upon any redemption
of the New Share Purchase Rights, the right to exercise the New Share Purchase
Rights will terminate and the only right of the holders of New Share Purchase
Rights will be to receive the Redemption Price. In addition, at any time after
the Share Acquisition Date and prior to the acquisition by any person or group
of affiliated or associated persons of 50% or more of the outstanding shares of
New Common Stock, Reorganized Pillowtex may exchange the New Share Purchase
Rights (other than any Share Purchase Rights that have become void), in whole or
in part, at an exchange ratio of one share of New Common Stock per New Share
Purchase Right (subject to adjustment).
The New Share Purchase Rights Agreement may be amended by the Board of
Directors of Reorganized Pillowtex without the approval of any holders of Share
Purchase Rights, including amendments that (a) increase or decrease the Purchase
Price, (b) add other events requiring adjustment to the Purchase Price payable
and the number of the Series A Preferred Shares or other securities issuable
upon the exercise of the New Share Purchase Rights or (c) modify procedures
relating to the redemption of the New Share Purchase Rights, except that no
amendment may be made that decreases the stated Redemption Price to an amount
less than $0.01 per New Share Purchase Right. The New Share Purchase Rights
Agreement will expire on (i) the first anniversary of the Effective Date or (ii)
such later date as the Board of Directors, by resolution adopted prior to the
first anniversary of the Effective Date, may establish, but not later than the
tenth anniversary of the Effective Date. In accordance with the foregoing, the
Board of Directors (A) will have the right to reconsider any of the terms of the
New Share Purchase Rights Agreement at any time and (B) may take such action
with respect to the New Share Purchase Rights Agreement as the Board of
Directors deems appropriate.
Exit Financing Revolver Facility
On the Effective Date, the Debtors and the Exit Financing Revolver
Facility Bank Agent will enter into the Exit Financing Revolver Facility. See
"Overview of the Plan -- Exit Financing Revolver Facility and Other
Post-Reorganization Indebtedness." The commitment by the Confirmation Date of
the Exit Financing Revolver Facility Agent Bank to provide the Exit Financing
Revolver Facility on terms satisfactory to the Debtors is a condition to
Confirmation, and the execution and delivery of the documents effectuating the
Exit Financing Revolver Facility by Reorganized Pillowtex and the Exit Financing
Revolver Facility Agent Bank are conditions to the Effective Date.
The Debtors currently contemplate that the Exit Financing Revolver
Facility will be a senior secured revolving credit facility of up to $200
million, including a sub-facility for letters of credit. The specific terms and
54
conditions of the Exit Financing Revolver Facility are not known at this time
but are expected to be consistent with market terms for credit facilities with
similar characteristics.
Exit Term Loan
On the Effective Date, Reorganized Pillowtex will issue an Exit Term
Loan Note to each holder of an Allowed Administrative Claim with respect to the
Designated Post-Petition Loans deemed to have been made under the Final DIP
Order. The Debtors currently contemplate that the Exit Term Loan will be a $150
million term loan facility that will bear interest at a fixed rate of 10% per
annum. The Exit Term Loan will be secured by a first priority lien on the
Reorganized Debtors' fixed assets (including real property) located at their
facilities in Phenix City, Alabama and Columbus, Georgia and the Reorganized
Debtors' fixed assets (including real property) used by the Reorganized Debtors
in connection with their rugs division. The commitment by the Confirmation Date
of the holders of Allowed Administrative Claims under Designated Post-Petition
Loans to provide the Exit Term Loan on terms satisfactory to the Debtors is a
condition to Confirmation, and the execution and delivery of the documents
effectuating the Exit Term Loan by Reorganized Pillowtex and the holders of
Allowed Administrative Claims under Designated Post-Petition Loans are
conditions to the Effective Date.
Industrial Revenue Bonds
As provided in the Plan, the PEDFA Revenue Bonds, MBFC Revenue Bonds
and Alabama Revenue Bonds will be Reinstated as of the Effective Date. The
letters of credit securing these Industrial Revenue Bonds will be reissued under
the terms of the Exit Financing Revolver Facility. See "Capital Structure as of
the Petition Date -- Industrial Revenue Bonds."
RISK FACTORS
The securities to be distributed pursuant to the Plan are subject to a
number of material risks, including the risks set forth below. These risk
factors assume Confirmation and the consummation of the Plan and the
transactions contemplated by the Plan and do not include matters that could
prevent Confirmation. See "Overview of the Plan -- Summary of Classes and
Treatment of Claims and Interests," "-- Conditions to Confirmation and the
Effective Date of the Plan" and "Voting and Confirmation of the Plan" for
discussions of such matters. Prior to voting on the Plan, each holder of Claims
entitled to vote should carefully consider the following risk factors, as well
as all of the information contained in this Disclosure Statement, including the
exhibits hereto.
Projections Are Inherently Uncertain
The fundamental premise of the Plan is the successful implementation of
the Debtors' business plan, as reflected in the Projections. The Projections are
inherently uncertain and are dependent upon the successful implementation of the
business plan and the reliability of the other assumptions contained therein.
The Projections reflect numerous assumptions, including Confirmation and
consummation of the Plan in accordance with its terms, the anticipated future
performance of Reorganized Pillowtex, industry performance, general business and
economic conditions and other matters, most of which are beyond the control of
Reorganized Pillowtex and some of which may not materialize. In addition,
unanticipated events and circumstances occurring subsequent to the date of this
Disclosure Statement, including unanticipated changes in applicable regulations
or generally accepted accounting principles, may affect the actual financial
condition, results of operations and cash flows of the Reorganized Debtors in
the future.
Substantial Leverage Will Continue
Giving pro forma effect to the Confirmation of the Plan, on the
Effective Date the Reorganized Debtors' total long-term indebtedness (including
the current portion thereof) is expected to be approximately $197.5 million.
While management of the Debtors believes that future operating cash flow,
together with financing arrangements, will be sufficient to finance operating
requirements under the Debtors' business plan, the Reorganized Debtors' leverage
and debt service requirements could make them more vulnerable to economic
downturns in the markets the
55
Reorganized Debtors intend to serve or in the economy generally. The Reorganized
Debtors' indebtedness could restrict their ability to obtain additional
financing in the future and, because the Reorganized Debtors may be more
leveraged than certain of their competitors, could place the Reorganized Debtors
at a competitive disadvantage. In addition, the Exit Financing Revolver Facility
and Exit Term Loan will contain covenants that impose operating and financial
restrictions on the Reorganized Debtors. These covenants could adversely affect
the Reorganized Debtors' ability to finance future operations, potential
acquisitions or capital needs or to engage in business activities that may be in
their interest, including in implementing the Debtors' business plan.
As a result of the restrictions described above, the ability of
Reorganized Pillowtex to respond to changing business and economic conditions
may be significantly restricted and Reorganized Pillowtex may be prevented from
engaging in transactions that might otherwise be considered beneficial to
Reorganized Pillowtex.
Substantially All of the Debtors' Assets Will Be Subject To Security Interests
Substantially all cash, receivables, inventory and other assets of
Reorganized Pillowtex and its subsidiaries will be subject to various liens and
security interests. See "Overview of the Plan -- Exit Financing Revolver
Facility and Other Post-Reorganization Indebtedness." If a holder of a security
interest becomes entitled to exercise its rights as a secured party, it would
have the right to foreclose upon and sell or otherwise transfer the collateral
subject to its security interest, and the collateral accordingly would be
unavailable to Reorganized Pillowtex or the subsidiary owning the collateral and
to other creditors of Reorganized Pillowtex or such subsidiary, except to the
extent, if any, that such other creditors have a superior or equal security
interest in the affected collateral or the value of the affected collateral
exceeds the amount of indebtedness in respect of which such foreclosure rights
are exercised.
Dividends Are Not Anticipated; Payment of Dividends Is Subject to Restriction
Reorganized Pillowtex does not anticipate paying any dividends on the
New Common Stock in the foreseeable future. In addition, covenants in the Exit
Financing Revolver Facility and Exit Term Loan will restrict the ability of
Reorganized Pillowtex to pay dividends and may prohibit the payment of dividends
and certain other payments. Certain institutional investors may only invest in
dividend-paying equity securities or may operate under other restrictions that
may prohibit or limit their ability to invest in the New Common Stock.
There Is No Established Market for New Common Stock or New Warrants;
Volatility Is Possible
No established market exists for the New Common Stock or the New
Warrants. Although it is anticipated that the New Common Stock will be
designated as a Nasdaq National Market security by The Nasdaq Stock Market,
Inc., there can be no assurance, even if such designation is obtained, that an
active market for the New Common Stock will develop or, if any such market does
develop, that it will continue to exist. In addition, there can be no assurance
as to the degree of price volatility in any such market that does develop.
Moreover, the New Common Stock will be issued pursuant to the Plan to holders of
Allowed Claims in Classes 5 and 6, some of which may prefer to liquidate their
investment rather than to hold it on a long-term basis. Accordingly, it is
anticipated that the market for the New Common Stock will be volatile, at least
for an initial period after the Effective Date. Moreover, although the Plan was
developed based upon an assumed reorganization value of $21.59 per share of the
New Common Stock, such valuation was not an estimate of the prices at which the
New Common Stock may trade in the market, and the Debtors have not attempted to
make any such estimate in connection with the development of the Plan. In
addition, the market price of the New Common Stock may be subject to significant
fluctuations in response to numerous factors, including variations in
Reorganized Pillowtex's annual or quarterly financial results or those of its
competitors, changes by financial analysts in their estimates of the future
earnings of Reorganized Pillowtex, conditions in the economy in general or in
the home textile industry in particular or unfavorable publicity. The stock
market also has, from time to time, experienced significant price and volume
fluctuations that have been unrelated to the operating performance of companies
with publicly-traded securities. See "Securities to Be Issued Pursuant to the
Plan; Post-Reorganization Indebtedness -- Reorganization Value." No assurance
can be given as to the market prices for the New Common Stock that will prevail
following the Effective Date.
The New Warrants will not be listed on any exchange. In addition, there
can be no assurance that an active market therefore will develop or as to the
degree of price volatility in any such particular market. Accordingly, no
56
assurance can be given that a holder of New Warrants will be able to sell such
securities in the future or as to the price at which any such sale may occur. If
a market for the New Warrants were to exist, the market price for the New
Warrants at any particular time will be influenced by a number of factors,
including factors affecting the value of the New Common Stock discussed in the
immediately preceding paragraph. There can be no assurance that the market value
of the New Common Stock will exceed the exercise price of the New Warrants at
any time prior to their expiration.
Historical Financial Information Will Not Be Comparable
As a result of the consummation of the Plan and the transactions
contemplated thereby, Reorganized Pillowtex will operate the existing business
of the Pillowtex Entities under a new capital structure. In addition,
Reorganized Pillowtex will be subject to the fresh-start accounting rules. See
"Reorganized Pillowtex -- Restructuring Transactions," "-- Business of
Reorganized Pillowtex" and "-- Projected Financial Information." Accordingly,
the financial condition and results of operations of Reorganized Pillowtex from
and after the Effective Date will not be comparable to the financial condition
or results of operations reflected in the historical financial statements of
Pillowtex set forth in the Pillowtex 2000 Form 10-K and the Pillowtex Third
Quarter 2001 Form 10-Q.
Disputed Claims May Adversely Affect Distribution Amounts
A number of Disputed Claims are expected to be material, and the total
amount of all Claims in Class 6, including Disputed Claims, may be materially in
excess of the total amount of Allowed Claims assumed in the development of the
Plan. The actual ultimate aggregate amount of Allowed Claims in Class 6 may
differ significantly from the estimate set forth in the table under the caption
"Overview of the Plan -- Summary of Classes and Treatment of Claims and
Interests." Accordingly, the amount of distributions of New Common Stock that
ultimately will be received by any particular holder of an Allowed Unsecured
Claim in Class 6 may be adversely affected by the aggregate amount of Claims
ultimately allowed in that Class. Distributions to holders of Allowed Unsecured
Claims in Class 6 will be made on an incremental basis until all Disputed Claims
in such Class have been resolved. See "Distributions Under the Plan -- Timing
and Calculation of Amounts to Be Distributed." In addition, the amount of any
Disputed Claim that ultimately is allowed by the Bankruptcy Court may be
significantly less than the amount of the Disputed Claim asserted by the holder
thereof.
Enforcement of Contractual Subordination Rights May Adversely Affect
Distribution Amounts to Certain Creditors
Other than the contractual subordination rights of the holders of
Overline Facility Claims and Aircraft Lease Claims, the Plan preserves all
contractual subordination rights that a holder of an Allowed Claim in Class 6
may be entitled to enforce against any other holder of an Allowed Claim in Class
6. If such subordination rights are enforced pursuant to section 510 of the
Bankruptcy Code, holders of Allowed Claims in Class 6 subject to subordination
may be adversely affected or even lose the right to receive a distribution under
the Plan.
Dependence on Specific Raw Materials
Cotton is the primary raw material used in the Debtors' businesses. The
availability of cotton is subject to weather conditions and other factors
affecting agricultural markets. Historically, there have been periods of rapid
and significant movement in the price of cotton both upward and downward. Other
raw materials on which the Debtors are dependent include the raw feathers and
down that they use to produce natural fill pillows and down comforters. China is
currently the Debtors' primary source of raw feathers and down. See "--
Dependence on Supply Sources in China."
The raw materials used by the Debtors are generally available from a
number of sources. No significant shortage of these materials is currently
anticipated. However, the Debtors use significant quantities of these raw
materials, which are subject to price fluctuations. The Debtors cannot be
certain that shortages of these materials will not occur in the future, which
could increase the cost or delay the shipment of their products. Moreover, the
Debtors cannot be certain that Reorganized Pillowtex will be able to pass on any
increase in the price of raw materials to their customers.
57
Relationships With Suppliers and Vendors
Reorganized Pillowtex's business plan centers around, among other
initiatives, strategic sourcing. See "Reorganized Pillowtex -- Business Plan and
Strategy for Reorganized Pillowtex -- Strategic Sourcing." Reorganized Pillowtex
may have difficulty in maintaining existing or creating new relationships with
suppliers or vendors as a result of the Reorganization Cases. The Debtors'
suppliers and vendors may stop providing supplies or services to Reorganized
Pillowtex or provide such supplies or services only on "cash on delivery," "cash
on order," or other terms that could have an adverse impact on the Reorganized
Pillowtex short-term cash flow. There can be no assurance that Reorganized
Pillowtex can successfully implement its business plan in respect of strategic
sourcing.
Dependence on Supply Sources in China
In fiscal year 2000, based on cost, approximately 88.5% of the raw
feathers and down that the Debtors used to produce natural fill pillows and down
comforters was imported from China. The Reorganized Debtors' relationships with
their suppliers in China could be disrupted or adversely affected due to a
number of factors, including governmental regulation, fluctuation in exchange
rates and changes in economic and political conditions in China. If the
Reorganized Debtors' supply sources in China were disrupted for any reason, the
Debtors believe, based on existing market conditions, that they could establish
alternative supply relationships. However, because establishing these
relationships involves numerous uncertainties relating to delivery requirements,
price, payment terms, quality control and other matters, the Debtors are unable
to predict whether such relationships would be on similar or satisfactory terms.
Industry Competition
The Debtors participate in a highly competitive industry. They compete
with a number of established manufacturers, importers and distributors of home
textile furnishings, some of which have greater financial distribution and
marketing resources than the Debtors. The Debtors must remain competitive in the
areas of quality, price, selection and convenience, which could result in the
reduction of their prices. If the Debtors are unable to compete effectively,
they may lose market share.
Imports of foreign-made textile products are a significant source of
competition for most sections of the domestic textile industry. The United
States has attempted to regulate the growth of certain textile imports through
tariffs and bilateral agreements, which establish quotas on imports from
lesser-developed countries that historically account for significant shares of
United States imports. The General Agreement on Tariffs and Trade ("GATT") have
a negative effect on the domestic textile industry and Reorganized Pillowtex.
The WTO is coordinating the phase-out of textile quotas over a 10-year period
through 2004. The 10-year phase-out of quotas will replace the existing system
of bilateral import restrictions and revert to GATT rules that prohibit quotas
to gradually allow more imports to enter the United States. In addition, under
the GATT, the United States is obligated to lower its tariffs on imports of
textiles. These reductions are being phased in gradually over the 10-year period
through 2004. If there is a significant influx of imports, there may be intense
price competition, which could adversely affect the Debtors' business. Finally,
the United States has agreed to a new round of multilateral trade negotiations.
Those negotiations, which are scheduled to conclude within three years, could
result in additional tariff reductions on imports of textile products. Any such
further reductions in tariffs could have an adverse affect on Reorganized
Pillowtex's results of operations.
Adverse Retail Industry Conditions
The Debtors sell their products to a number of department stores and
other major retailers who have experienced financial difficulties during past
years. Some of these retailers have previously sought protection under the
Bankruptcy Code. In addition, some of the Debtors' current retail customers may
seek protection under the Bankruptcy Code or state insolvency laws in the
future. As a result of these financial difficulties and bankruptcy and
insolvency proceedings, the Debtors or Reorganized Pillowtex may be unable to
collect some or all amounts owed to them by these retail customers. In addition,
all or part of the operations of a retail customer that seeks bankruptcy or
other debtor protection may be discontinued or sales of the Debtors' or
Reorganized Pillowtex's products to the customer may be curtailed or terminated
as a result of bankruptcy or insolvency proceedings. There
58
can be no assurance, however, that Reorganized Pillowtex will not be adversely
affected by retail industry conditions.
Dependence on Specific Brand Names
In fiscal year 2000, sales of products bearing Pillowtex's principal
proprietary brand names of Royal Velvet(R) , Cannon(R), Charisma(R), Royal
Velvet Big & Soft(R), Fieldcrest(R), Royal Family(R), Caldwell(R) and St.
Marys(R) made up a substantial portion of its net sales. Accordingly,
Reorganized Pillowtex's future success may depend in part upon the goodwill
associated with these brand names.
The Debtors' principal brand names are registered in the United States
and certain foreign countries. However, the Debtors cannot be certain that the
steps taken by them to protect their proprietary rights in such brand names will
be adequate to prevent their misappropriation in the United States or abroad. In
addition, the laws of some foreign countries do not protect proprietary rights
in brand names to the same extent as do the laws of the United States. There can
be no assurance of the effect of specific brand names on Reorganized Pillowtex.
Risk of Loss of Material Customers
In fiscal year 2000, the Debtors' top 10 customers accounted for
approximately 61.9% of their total net sales. Net sales to Wal-Mart Stores, Inc.
(including Sam's Club stores) accounted for approximately 24.5% of the Debtors'
total net sales. Other than Wal-Mart, no other single customer accounted for
more than 10% of total net sales during this period. Consistent with industry
practice, the Debtors do not operate under a long-term written supply contract
with Wal-Mart or any of their other customers. As a result of the Reorganization
Cases, the Debtors may experience added difficulty in retaining customers such
as Wal-Mart. The loss of Wal-Mart as a customer could have a materially adverse
effect on Reorganized Pillowtex's business, financial condition, results of
operations, or prospects.
Labor Relations
As of September 30, 2001, the Debtors had approximately 9,650
employees. As of that date, approximately 75% of the Debtors' employees were
located in areas covered by collective bargaining agreements and approximately
45% of those employees had chosen to have union dues deducted from their
paychecks.
Since 1991, UNITE has campaigned to organize hourly workers of the
Debtors' plants in Concord, North Carolina; Kannapolis, North Carolina; and
Salisbury, North Carolina. In June 1999, UNITE was elected as a bargaining
representative for hourly workers at those plants. In February 2000, the Debtors
and UNITE entered into a contract covering employees at those plants, as well as
the employees represented by UNITE at the Debtors' plants in Eden, North
Carolina; Phenix City, Alabama; Columbus, Georgia; and Fieldale, Virginia. The
Debtors cannot be certain that they will not face similar campaigns at other
plants in the future or as to the effect that any such campaign would have on
the productivity of their workforce or labor costs.
Seasonality of Business
The Debtors' businesses are subject to a pattern of seasonal
fluctuation. Sales and earnings from operations generated during the second half
of a given fiscal year generally are expected to be higher than sales and
earnings from operations generated during the first half of the year.
Accordingly, the Debtors' needs for working capital generally are expected to
increase in the second half of the year. As a result, total debt levels
generally tend to peak in the third and fourth quarters, falling off again in
the first quarter of the following year. The amount of the Debtors' sales
generated during the second half of the year generally will depend upon a number
of factors, including the level of retail sales for home textile furnishings
during the fall and winter, weather conditions affecting the sales of down
comforters, general economic conditions and other factors beyond the Debtors'
control. The seasonality of the Debtors' businesses may impact the results of
operations achieved by Reorganized Pillowtex.
59
Certain Provisions Will Have Anti-Takeover Effects
Certain provisions of the Certificate and Bylaws, as well as Delaware
statutes, may have the effect of delaying, deferring or preventing a change in
control of Reorganized Pillowtex. Such provisions, including those providing for
the possible issuance of preferred stock and regulating the nomination of
directors, together with Reorganized Pillowtex's adoption of the New Share
Purchase Rights Agreement, may make it more difficult for other persons, without
the approval of Reorganized Pillowtex's Board of Directors, to make a tender
offer or otherwise acquire substantial amounts of the New Common Stock or to
launch other takeover attempts that a stockholder might consider to be in such
stockholder's best interest. These provisions could limit the price that certain
investors may be willing to pay in the future for shares of New Common Stock.
See "Reorganized Pillowtex -- Certain Corporate Governance Matters" and
"Securities to Be Issued Pursuant to the Plan; Post-Reorganization Indebtedness
- -- New Share Purchase Rights Agreement."
GENERAL INFORMATION CONCERNING THE PLAN
Confirmation of the Plan and the occurrence of the Effective Date will
result in the discharge of certain Claims and Interests and the creation of
related injunctions with respect thereto. Moreover, upon Confirmation and the
occurrence of the Effective Date, the Debtors will retain and may enforce
certain claims and causes of actions against other entities. These legal effects
of the Plan are set forth in Article XI of the Plan and described below.
Discharge of Claims and Termination of Interests; Related Injunction
Except as provided in the Plan or in the Confirmation Order, the rights
afforded under the Plan and the treatment of Claims and Interests under the Plan
will be in exchange for and in complete satisfaction, discharge and release of
all Claims and termination of all Interests arising on or before the Effective
Date, including any interest accrued on Claims from the Petition Date. Except as
provided in the Plan or in the Confirmation Order, Confirmation will, as of the
Effective Date and immediately after the cancellation of the Old Common Stock of
Pillowtex and the Old Preferred Stock of Pillowtex: (a) discharge the Debtors
from all Claims or other debts that arose on or before the Effective Date, and
all debts of the kind specified in section 502(g), 502(h) or 502(i) of the
Bankruptcy Code, whether or not (i) a proof of Claim based on such debt is Filed
or deemed Filed pursuant to section 501 of the Bankruptcy Code, (ii) a Claim
based on such debt is allowed pursuant to section 502 of the Bankruptcy Code or
(iii) the holder of a Claim based on such debt has accepted the Plan; and (b)
terminate all Interests and other rights of equity security holders in the
Debtors.
Except as provided in the Plan or the Confirmation Order, the
Confirmation Order will be a judicial determination, as of the Effective Date
and immediately after the cancellation of the Old Common Stock of Pillowtex and
Old Preferred Stock of Pillowtex and the issuance of the New Common Stock, of a
discharge of all such Claims and other debts and liabilities against the Debtors
and a termination of all such Interests and other rights of equity security
holders in the Debtors, pursuant to sections 524 and 1141 of the Bankruptcy
Code, and such discharge will void any judgment obtained against a Debtor at any
time, to the extent that such judgment relates to a discharged Claim or
terminated Interest.
Except as provided in the Plan or the Confirmation Order, as of the
Effective Date, all entities that have held, currently hold or may hold a Claim
or other debt or liability that is discharged or an Interest or other right of
an equity security holder that is terminated pursuant to the terms of the Plan
will be permanently enjoined from taking any of the following actions on account
of any such discharged Claims, debts or liabilities or terminated Interests or
rights: (a) commencing or continuing in any manner any action or other
proceeding against the Debtors, the Reorganized Debtors or their respective
property, other than to enforce any right pursuant to the Plan to a
distribution; (b) enforcing, attaching, collecting or recovering in any manner
any judgment, award, decree or order against the Debtors, the Reorganized
Debtors or their respective property, other than as permitted pursuant to (a)
above; (c) creating, perfecting or enforcing any lien or encumbrance against the
Debtors, the Reorganized Debtors or their respective property; (d) asserting a
setoff, right of subrogation or recoupment of any kind against any debt,
liability or obligation due to the Debtors or the Reorganized Debtors; and (e)
commencing or continuing any action, in any manner, in any place that does not
comply with or is inconsistent with the provisions of the Plan.
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As of the Effective Date, all entities that have held, currently hold
or may hold any claims, obligations, suits, judgments, damages, demands, debts,
rights, causes of action or liabilities that are released pursuant to the Plan
will be permanently enjoined from taking any of the following actions against
any released entity or its property on account of such released claims,
obligations, suits, judgments, damages, demands, debts, rights, causes of action
or liabilities: (a) commencing or continuing in any manner any action or other
proceeding; (b) enforcing, attaching, collecting or recovering in any manner any
judgment, award, decree or order; (c) creating, perfecting or enforcing any lien
or encumbrance; (d) asserting a setoff, right of subrogation or recoupment of
any kind against any debt, liability or obligation due to any released entity;
and (e) commencing or continuing any action, in any manner, in any place that
does not comply with or is inconsistent with the provisions of the Plan.
By accepting distributions pursuant to the Plan, each holder of an
Allowed Claim receiving distributions pursuant to the Plan will be deemed to
have specifically consented to the injunctions set forth in Section XI.B of the
Plan.
The classification and manner of satisfying all Claims and Interests
under the Plan take into consideration all subordination rights, whether arising
under general principles of equitable subordination, contract, section 510(c) of
the Bankruptcy Code or otherwise, that a holder of a Claim or Interest may have
against other Claim or Interest holders with respect to any distribution made
pursuant to the Plan. Except as provided in Section XI.C.3 of the Plan, all
subordination rights that a holder of a Claim may have with respect to any
distribution to be made pursuant to the Plan will be discharged and terminated,
and all actions related to the enforcement of such subordination rights will be
permanently enjoined. Accordingly, distributions pursuant to the Plan to holders
of Allowed Claims will not be subject to payment to a beneficiary of such
terminated subordination rights or to levy, garnishment, attachment or other
legal process by a beneficiary of such terminated subordination rights.
Pursuant to Bankruptcy Rule 9019 and in consideration for the
distributions and other benefits provided under the Plan, the provisions of the
Plan will constitute a good faith compromise and settlement of all claims or
controversies relating to the subordination rights that a holder of a Claim may
have with respect to any Allowed Claim or any distribution to be made pursuant
to the Plan on account of any Allowed Claim. The entry of the Confirmation Order
will constitute the Bankruptcy Court's approval, as of the Effective Date, of
the compromise or settlement of all such claims or controversies and the
Bankruptcy Court's finding that such compromise or settlement is in the best
interests of the Debtors, the Reorganized Debtors and their respective property
and Claim and Interest holders and is fair, equitable and reasonable.
Notwithstanding any provisions in the Plan to the contrary, all
contractual subordination rights that a holder of an Allowed Claim in Class 6
may be entitled to enforce against any other holder of an Allowed Claim in Class
6 (other than the contractual subordination rights of holders of Overline
Facility Claims or Aircraft Lease Claims) are hereby expressly preserved and
shall be enforced pursuant to section 510 of the Bankruptcy Code.
Preservation of Rights of Action Held by the Debtors or the Reorganized Debtors
Except as provided in the Plan or in any contract, instrument, release
or other agreement entered into or delivered in connection with the Plan, in
accordance with section 1123(b) of the Bankruptcy Code, the Reorganized Debtors
will retain and may enforce any claims, demands, rights and causes of action
that any Debtor or Estate may hold against any entity. The Reorganized Debtors
or their successors may pursue such retained claims, demands, rights or causes
of action, as appropriate, in accordance with the best interests of the
Reorganized Debtors or their successors holding such claims, demands, rights or
causes of action. Further, the Reorganized Debtors retain their rights to File
and pursue any adversary proceedings against any trade creditor or vendor
related to debit balances or deposits owed to any Debtor.
Releases and Related Injunction
As of the Effective Date, in consideration for the obligations of the
Debtors and the Reorganized Debtors under the Plan and the cash, New Common
Stock, New Warrants and other contracts, instruments, releases, agreements or
documents to be entered into or delivered in connection with the Plan (a) each
holder of a Claim or Interest that votes in favor of the Plan and (b) to the
fullest extent permissible under applicable law, each person or entity that has
held, holds or may hold a Claim or Interest or at any time was a creditor or
stockholder of any of the
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Debtors and that does not vote on the Plan or votes against the Plan, will be
deemed to forever release, waive and discharge all claims, obligations, suits,
judgments, damages, demands, debts, rights, causes of action and liabilities
(other than the right to enforce the Debtors' or the Reorganized Debtors'
obligations under the Plan and the contracts, instruments, releases, agreements
and documents delivered thereunder), whether liquidated or unliquidated, fixed
or contingent, matured or unmatured, known or unknown, foreseen or unforeseen,
then existing or thereafter arising in law, equity or otherwise, that are based
in whole or in part on any act, omission, transaction or other occurrence taking
place on or prior to the Effective Date in any way relating to a Debtor or other
Pillowtex Entity, the Reorganization Cases or the Plan that such person or
entity has, had or may have against any Debtor or other Pillowtex Entity, the
members of the Creditors' Committee and each of their respective present or
former directors, officers, employees, attorneys, accountants, advisors and
agents, acting in such capacity (which release will be in addition to the
discharge of Claims and termination of Interests provided in the Plan and under
the Confirmation Order and the Bankruptcy Code).
As of the Effective Date, (a) each Debtor, (b) in the event that Class
6 accepts the Plan, each holder of a Claim in Class 6, and (c) each holder of a
Claim or Interest other than holders of Claims in Class 6 that vote in favor of
the Plan, will be deemed to forever release, waive and discharge all claims,
obligations, suits, judgments, damages, demands, debts, rights, causes of action
and liabilities whether liquidated or unliquidated, fixed or contingent, matured
or unmatured, known or unknown, foreseen or unforeseen, then existing or
thereafter arising in law, equity or otherwise, that such person or entity has,
had or may have against each lender under the Prepetition Credit Facility and
each of such lender's respective present and former directors, officers,
attorneys, accountants, advisors and agents, acting in such capacity, that arose
at any time on or prior to the Effective Date and that were in any manner
related to the conduct of the Reorganization Cases, the Prepetition Credit
Facility, any of the loan or collateral documents in respect of the Prepetition
Credit Facility or the enforcement or attempted enforcement of rights, remedies
or recourses related to the Prepetition Credit Facility.
As further provided in Section XI.B of the Plan, the Confirmation Order
will permanently enjoin the commencement or prosecution by any entity, whether
directly, derivatively or otherwise, of any claims, obligations, suits,
judgments, damages, demands, debts, rights, causes of action or liabilities
released pursuant to the Plan.
Continuation of Certain Employee and Retiree Benefits
Except as modified or replaced by the agreements, plans and programs
described in "Reorganized Pillowtex -- Employee Benefit Matters," from and after
the Effective Date, the Reorganized Debtors intend to continue (or continue as
modified or replaced) their existing employee benefit policies, plans and
agreements, including: (a) medical, dental, life, travel accident and accidental
death and dismemberment insurance; (b) sick pay, short-term disability pay and
long-term disability insurance; (c) vacation and holiday pay; (d) bonus and
severance programs; (e) tuition assistance policies; and (f) qualified deferred
compensation plans. The Reorganized Debtors intend to continue sponsoring the
Pillowtex Pension Plan (i.e., both the retirement plans for hourly employees and
the retirement plan for salaried employees) from and after the Effective Date
and complying with all legal requirements applicable thereto. The PBGC and the
Pillowtex Pension Plan retain the right to seek available remedies under
applicable law against the Pillowtex Entities arising from (a) the failure to
comply with the minimum funding standards of the Internal Revenue Code of 1986,
as amended, and ERISA; (b) the failure to pay required premiums to the PBGC; (c)
any unfunded benefit liabilities in the event of the termination of the
Pillowtex Pension Plan; or (d) any other violation of Title IV of ERISA.
From and after the Effective Date, the Reorganized Debtors will be
obligated to pay retiree benefits (as defined in section 1114(a) of the
Bankruptcy Code) and any similar health, disability or death benefits in
accordance with the terms of the retiree benefit plans or other agreements
governing the payment of such benefits, subject to any rights to amend, modify
or terminate such benefits under the terms of the applicable retiree benefits
plan, other agreement or applicable nonbankruptcy law.
Executory Contracts and Unexpired Leases
Except as otherwise provided in the Plan or in any contract,
instrument, release or other agreement or document entered into in connection
with the Plan, on the Effective Date, pursuant to section 365 of the Bankruptcy
Code, the applicable Debtor or Debtors will assume or assume and assign, as
indicated, each of the Executory
62
Contracts and Unexpired Leases listed on Exhibit V.A.1 to the Plan; provided,
however, that the Debtors reserve the right, at any time prior to the Effective
Date, to amend Exhibit V.A.1 to the Plan to: (a) delete any Executory Contract
or Unexpired Lease listed therein, thus providing for its rejection pursuant to
Section V.C of the Plan; or (b) add any Executory Contract or Unexpired Lease
thereto, thus providing for its assumption or assumption and assignment pursuant
to Section V.A.1 of the Plan. The Debtors will provide notice of any amendments
to Exhibit V.A.1 to the Plan to the parties to the Executory Contracts and
Unexpired Leases affected thereby and to the parties on the then-applicable
service list in the Reorganization Cases (including counsel to the Creditors'
Committee). Each contract and lease listed on Exhibit V.A.1 to the Plan will be
assumed only to the extent that any such contract or lease constitutes an
Executory Contract or Unexpired Lease. Listing a contract or lease on Exhibit
V.A.1 to the Plan will not constitute an admission by a Debtor or Reorganized
Debtor that such contract or lease (including any related assumed agreements as
described in Sections I.A.114 and V.A.2 of the Plan) is an Executory Contract or
Unexpired Lease or that a Debtor or Reorganized Debtor has any liability
thereunder.
Each Real Property Executory Contract or Unexpired Lease listed on
Exhibit V.A.1 to the Plan will include any modifications, amendments,
supplements, restatements or other agreements made directly or indirectly by any
agreement, instrument or other document that in any manner affects such contract
or lease, irrespective of whether such agreement, instrument or other document
is listed on Exhibit V.A.1 to the Plan, unless any such modification, amendment,
supplement, restatement or other agreement is rejected pursuant to Section V.C
of the Plan and is listed on Exhibit V.C to the Plan.
As of the effective time of an applicable Restructuring Transaction,
any Executory Contract or Unexpired Lease (including any related agreements as
described in Section I.A.114 and V.A.2 of the Plan) to be held by any Debtor or
another surviving, resulting or acquiring corporation in an applicable
Restructuring Transaction, will be deemed assigned to the applicable entity,
pursuant to section 365 of the Bankruptcy Code.
The Confirmation Order will constitute an order of the Bankruptcy Court
approving the assumptions and assignments described in Sections V.A and V.E of
the Plan, pursuant to section 365 of the Bankruptcy Code, as of the Effective
Date. An order of the Bankruptcy Court entered on or prior to the Confirmation
Date will specify the procedures for providing notice to each party to an
Executory Contract or Unexpired Lease that is being assumed or assumed and
assigned pursuant to the Plan of: (a) the contract or lease being assumed or
assumed and assigned; (b) the Cure Amount Claim, if any, that the applicable
Debtor believes it would be obligated to pay in connection with such assumption;
and (c) the procedures for such party to object to the assumption or assumption
and assignment of the applicable contract or lease or the amount of the proposed
Cure Amount Claim.
To the extent that such Claims constitute monetary defaults, the Cure
Amount Claims associated with each Executory Contract and Unexpired Lease to be
assumed pursuant to the Plan will be satisfied, pursuant to section 365(b)(1) of
the Bankruptcy Code, at the option of the Debtor assuming such contract or lease
or the assignee of such Debtor, if any (a) by payment of the Cure Amount Claim
in cash on the Effective Date or (b) on such other terms as are agreed to by the
parties to such Executory Contract or Unexpired Lease. If there is a dispute
regarding: (i) the amount of any Cure Amount Claim; (ii) the ability of the
applicable Reorganized Debtor or any assignee to provide "adequate assurance of
future performance" (within the meaning of section 365 of the Bankruptcy Code)
under the contract or lease to be assumed; or (iii) any other matter pertaining
to assumption or assumption and assignment of such contract or lease, the
payment of any Cure Amount Claim required by section 365(b)(1) of the Bankruptcy
Code will be made following the entry of a Final Order resolving the dispute and
approving the assumption. For assumptions of Executory Contracts and Unexpired
Leases between Debtors, the Reorganized Debtor assuming such contract may cure
any monetary default (A) by treating such amount as either a direct or indirect
contribution to capital or distribution (as appropriate) or (B) through an
intercompany account balance in lieu of payment in cash.
On the Effective Date, except for an Executory Contract or Unexpired
Lease that was previously assumed, assumed and assigned or rejected by an order
of the Bankruptcy Court or that is assumed pursuant to Section V.A of the Plan
(including any related agreements assumed pursuant to Sections I.A.114 and V.A.2
of the Plan), each Executory Contract and Unexpired Lease entered into by a
Debtor prior to the Petition Date that has not previously expired or terminated
pursuant to its own terms will be rejected pursuant to section 365 of the
Bankruptcy Code. The Executory Contracts and Unexpired Leases to be rejected
will include the Executory Contracts and Unexpired Leases listed on Exhibit V.C
to the Plan. Each contract and lease listed on Exhibit V.C to the Plan will be
rejected
63
only to the extent that any such contract or lease constitutes an Executory
Contract or Unexpired Lease. Listing a contract or lease on Exhibit V.C to the
Plan will not constitute an admission by a Debtor or Reorganized Debtor that
such contract or lease (including related agreements as described in Section
I.A.114 of the Plan) is an Executory Contract or Unexpired Lease or that a
Debtor or Reorganized Debtor has any liability thereunder. Any Executory
Contract and Unexpired Lease not listed on Exhibit V.A.1 to the Plan and not
previously assumed, assumed and assigned or rejected by an order of the
Bankruptcy Court will be rejected irrespective of whether such contract is
listed on Exhibit V.C to the Plan. The Confirmation Order will constitute an
order of the Bankruptcy Court approving such rejections, pursuant to section 365
of the Bankruptcy Code, as of the Effective Date.
Notwithstanding anything in the Bar Date Order to the contrary, if the
rejection of an Executory Contract or Unexpired Lease pursuant to Section V.C of
the Plan gives rise to a Claim (including any Claims arising from those
indemnification obligations described in Section V.E.1 of the Plan) by the other
party or parties to such contract or lease, such Claim will be forever barred
and will not be enforceable against the Debtors, the Reorganized Debtors, their
respective successors or their respective properties unless a proof of Claim is
Filed and served on the Reorganized Debtors, pursuant to the procedures
specified in the Confirmation Order and the notice of the entry of the
Confirmation Order or another order of the Bankruptcy Court, no later than 30
days after the Effective Date.
Contracts and leases entered into after the Petition Date by any
Debtor, including any Executory Contracts and Unexpired Leases assumed by such
Debtor, will be performed by the Debtor or Reorganized Debtor liable thereunder
in the ordinary course of its business. Accordingly, such contracts and leases
(including any assumed Executory Contracts and Unexpired Leases) will survive
and remain unaffected by entry of the Confirmation Order.
DISTRIBUTIONS UNDER THE PLAN
General
Except as otherwise provided in Article VI of the Plan, distributions
of cash, New Common Stock and New Warrants to be made on the Effective Date to
holders of Claims that are allowed as of the Effective Date will be deemed made
on the Effective Date if made on the Effective Date or as promptly thereafter as
practicable, but in any event no later than (a) 45 days after the Effective Date
or (b) such later date when the applicable conditions of Section V.B of the Plan
(regarding cure payments for Executory Contracts and Unexpired Leases being
assumed), Section VI.E.2 of the Plan (regarding undeliverable distributions) or
Section VI.J of the Plan (regarding surrender of canceled instruments and
securities) are satisfied. Distributions on account of Claims that become
Allowed Claims after the Effective Date will be made pursuant to Sections VI.H
and VII.C of the Plan.
Methods of Distributions
The method of distributing the consideration provided for in the Plan
is set forth in Article VI of the Plan and summarized below.
Distributions to Holders of Allowed Claims
Reorganized Pillowtex, or such Third Party Disbursing Agents as
Reorganized Pillowtex may employ in its sole discretion, will make all
distributions of cash, New Common Stock, New Warrants and other instruments or
documents required under the Plan. Each Disbursing Agent will serve without
bond, and any Disbursing Agent may employ or contract with other entities to
assist in or make the distributions required by the Plan. With respect to Class
5 Claims, Bank of America in its capacity as Administrative Agent will act as
Disbursing Agent. With respect to Old Senior Subordinated Notes Claims and Old
6% Debenture Claims, the applicable Indenture Trustee will act as Disbursing
Agent in respect of its respective series of Old Senior Subordinated Notes or
Old 6% Debentures.
Compensation and Reimbursement for Services Related to Distributions
Each Third Party Disbursing Agent providing services related to
distributions pursuant to the Plan will receive from Reorganized Pillowtex,
without further Bankruptcy Court approval, reasonable compensation for such
64
services and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services. These payments will be made on terms agreed to
with Reorganized Pillowtex and will not be deducted from distributions to be
made pursuant to the Plan to any holders of Allowed Claims (including any
distributions of Cash Investment Yield) receiving distributions from a Third
Party Disbursing Agent.
Delivery of Distributions in General
Except as provided in the following paragraph relating to distributions
to holders of Old Senior Subordinated Notes Claims and Old 6% Debenture Claims,
distributions to holders of Allowed Claims will be made by a Disbursing Agent:
(a) at the addresses set forth on the respective proofs of Claim Filed by
holders of such Claims; (b) at the addresses set forth in any written
certification of address change delivered to the Disbursing Agent (including
pursuant to a letter of transmittal delivered to a Disbursing Agent) after the
date of Filing of any related proof of Claim; or (c) at the addresses reflected
in the applicable Debtor's Schedules if no proof of Claim has been Filed and the
applicable Disbursing Agent has not received a written notice of a change of
address.
Special Provisions for Distributions to Holders of Old Senior
Subordinated Notes Claims or Old 6% Debenture Claims
Subject to the requirements of Section VI.J of the Plan, distributions
to holders of Allowed Old Senior Subordinated Notes Claims or Old 6% Debenture
Claims will be made by a Disbursing Agent to the record holders of the Old
Senior Subordinated Notes and Old 6% Debentures as of the Distribution Record
Date, as identified on a record holder register prepared by the applicable
Indenture Trustee. The record holder register (a) will provide the name, address
and holdings of each respective registered holder of Old 9% Notes, Old 10% Notes
or Old 6% Debentures, as applicable, as of the Distribution Record Date and (b)
must be consistent with the applicable Indenture Trustee's Allowed proof of
Claim. Each entry on the applicable record holder register will be treated as an
Allowed Class 6 Claim for purposes of distributions made pursuant to Article VI
of the Plan.
Undeliverable or Unclaimed Distributions
If any distribution to a holder of an Allowed Claim is returned to a
Disbursing Agent as undeliverable, no further distributions will be made to such
holder unless and until the applicable Disbursing Agent is notified by written
certification of such holder's then-current address. Subject to Section VI.E.2.c
of the Plan (regarding the failure to claim undeliverable distributions),
undeliverable distributions will remain in the possession of the applicable
Disbursing Agent pursuant to Section VI.E.2.a.i of the Plan until such time as a
distribution becomes deliverable. Undeliverable cash (including dividends or
other distributions on account of undeliverable New Common Stock) will be held
in segregated bank accounts in the name of the applicable Third Party Disbursing
Agent for the benefit of the potential claimants of such funds. Any Disbursing
Agent holding undeliverable cash will invest such cash in a manner consistent
with the Reorganized Debtors' investment and deposit guidelines. Undeliverable
New Common Stock and New Warrants will be held by the applicable Disbursing
Agent for the benefit of the potential claimants of such securities.
Pending the distribution of any New Common Stock, the Disbursing Agent
will cause all of the New Common Stock held by it in its capacity as Disbursing
Agent (i.e., all New Common Stock in the Unsecured Claims Reserve, whether
relating to undeliverable distributions or simply undelivered distributions) to
be: (a) represented in person or by proxy at each meeting of the stockholders of
Reorganized Pillowtex; (b) voted in any election of directors of Reorganized
Pillowtex for the nominees recommended by the Board of Directors of Reorganized
Pillowtex; and (c) voted with respect to any other matter as recommended by the
Board of Directors of Reorganized Pillowtex.
On each Quarterly Distribution Date, each Disbursing Agent will make
all distributions that become deliverable to holders of Allowed Claims during
the preceding calendar quarter. Each such distribution will include, to the
extent applicable: (a) a Pro Rata share of dividends or other distributions, if
any, that were previously paid to the Disbursing Agent in respect of any New
Common Stock included in such distribution; and (b) a Pro Rata share of the Cash
Investment Yield from the investment of any undeliverable cash (including
dividends or other distributions on undeliverable New Common Stock) from the
date that such distribution would have first been due had it then been
deliverable to the date that such distribution becomes deliverable.
65
Any holder of an Allowed Claim that does not assert a claim pursuant to
the Plan for an undeliverable distribution to be made by a Disbursing Agent
within two years after the later of (a) the Effective Date and (b) the last date
on which a distribution was deliverable to such holder will have its claim for
such undeliverable distribution discharged and will be forever barred from
asserting any such claim against the Reorganized Debtors or their respective
property. In such cases, with respect to Allowed Claims in Class 6, (a)
unclaimed cash, New Common Stock and New Warrants will be retained in the
Unsecured Claims Reserve for Pro Rata redistribution to holders of Allowed
Claims in such Class, pursuant to Section VI.H.2.b of the Plan, and (b) for
purposes of this redistribution, each Allowed Claim in Class 6 for which such
distributions are undeliverable will be deemed disallowed in its entirety. In
such cases, with respect to Allowed Claims in any other Class, (a) unclaimed
cash will become property of Reorganized Pillowtex, free of any restrictions
thereon, and any such cash held by a Third Party Disbursing Agent will be
returned to Reorganized Pillowtex, and (b) unclaimed New Common Stock and New
Warrants will be returned to Reorganized Pillowtex for cancellation. Nothing
contained in the Plan will require any Debtor, Reorganized Debtor or Disbursing
Agent to attempt to locate any holder of an Allowed Claim.
Distribution Record Date
A Disbursing Agent will have no obligation to recognize the transfer
of, or the sale of any participation in, any Allowed Bank Loan Claim that occurs
after the close of business on the Distribution Record Date and will be entitled
for all purposes under the Plan to recognize and make distributions only to
those holders of Allowed Bank Loan Claims that are holders of such Claims, or
participants therein, as of the close of business on the Distribution Record
Date. In addition, as of the close of business on the Distribution Record Date,
the respective transfer registers for the Old Senior Subordinated Notes, Old 6%
Debentures and Old 6% Debenture Promissory Notes, as maintained by the Debtors
or the applicable Indenture Trustee, will be closed. The applicable Disbursing
Agent will have no obligation to recognize the transfer or sale of any Old
Senior Subordinated Notes Claim, Old 6% Debenture Claim or Old 6% Debenture
Promissory Note Claim that occurs after the close of business on the
Distribution Record Date and will be entitled for all purposes under the Plan to
recognize and make distributions only to those holders of Old Senior
Subordinated Notes Claims, Old 6% Debenture Claims or Old 6% Debenture
Promissory Note Claims who are holders of such Claims as of the close of
business on the Distribution Record Date. Except as otherwise provided in a
Final Order of the Bankruptcy Court, the transferees of Claims in Class 6 that
are transferred pursuant to Bankruptcy Rule 3001 on or prior to the Distribution
Record Date will be treated as the holders of such Claims for all purposes,
notwithstanding that any period provided by Bankruptcy Rule 3001 for objecting
to such transfer has not expired by the Distribution Record Date.
Means of Cash Payments
Except as otherwise specified in the Plan, cash payments made pursuant
to the Plan will be in United States currency by checks drawn on a domestic bank
selected by the applicable Debtor or Reorganized Debtor or, at the option of the
applicable Debtor or Reorganized Debtor, by wire transfer from a domestic bank;
provided, however, that cash payments to foreign holders of Allowed Trade Claims
may be made, at the option of the applicable Debtor or Reorganized Debtor, in
such funds and by such means as are necessary or customary in a particular
foreign jurisdiction.
Timing and Calculation of Amounts to Be Distributed
Subject to Section VI.A of the Plan, on the Effective Date, each holder
of an Allowed Claim in a Class other than Class 6 will receive the full amount
of the distributions that the Plan provides for Allowed Claims in the applicable
Class. On each Quarterly Distribution Date, distributions also will be made,
pursuant to Section VII.C of the Plan, to holders of Disputed Claims in any such
Class that were allowed during the preceding calendar quarter. Such quarterly
distributions also will be in the full amount that the Plan provides for Allowed
Claims in the applicable Class.
The amount of distributions to be made on the Effective Date (subject
to Section VI.A of the Plan) to holders of Allowed Claims in Class 6 on account
of such Claims will be made from the Unsecured Claims Reserve and will be
calculated as if each Disputed Claim in such Class 6 were an Allowed Claim in
its Face Amount. On each Quarterly Distribution Date, distributions also will be
made, pursuant to Section VII.C of the Plan, to holders
66
of Disputed Claims in Class 6 that were allowed during the preceding calendar
quarter. Such quarterly distributions also will be calculated pursuant to the
provisions set forth in Section VI.H.2.a of the Plan.
On the fourth Quarterly Distribution Date and annually thereafter, each
holder of a Claim previously allowed in Class 6 will receive an additional
distribution from the Unsecured Claims Reserve on account of such Claim in an
amount equal to: (a) the amount of New Common Stock and New Warrants that such
holder would have been entitled to receive pursuant to Section VI.H.2.a of the
Plan as if such Claim had become an Allowed Claim on the applicable Quarterly
Distribution Date; minus (b) the aggregate amount of New Common Stock and New
Warrants previously distributed on account of such Claim. Each such additional
distribution also will include, on the basis of the amount then being
distributed: (a) a Pro Rata share of any dividends or other distributions made
on account of the New Common Stock held in the Unsecured Claims Reserve and (b)
a Pro Rata share of the related Cash Investment Yield from the investment of any
cash dividends and other distributions in the Unsecured Claims Reserve, from the
date such cash was deposited into the Unsecured Claims Reserve to the date that
such distribution is made.
Distributions of New Common Stock and New Warrants
Notwithstanding any other provision of the Plan, only whole numbers of
shares of New Common Stock and New Warrants will be issued. When any
distribution on account of an Allowed Claim in Class 5 or 6 would otherwise
result in the issuance of a number of shares of New Common Stock that is not a
whole number or New Warrants exercisable to purchase a number of shares of New
Common Stock that is not a whole number, the number of shares of such stock or
warrants will be rounded to the next higher or lower whole number as follows:
(a) fractions equal to or greater than 1/2 will be rounded to the next higher
whole number; and (b) fractions less than 1/2 will be rounded to the next lower
whole number. The total number of shares of New Common Stock and New Warrants to
be distributed on account of Allowed Claims will be adjusted as necessary to
account for the rounding provided for in Section VI.H.3 of the Plan. No
consideration will be provided in lieu of fractional shares that are rounded
down.
Each share of New Common Stock distributed pursuant to the Plan will be
accompanied by one New Share Purchase Right.
De Minimis Distributions
No Disbursing Agent will distribute cash to the holder of an Allowed
Claim in an impaired Class if the amount of cash to be distributed on account of
such Claim is less than $10. Any holder of an Allowed Claim on account of which
the amount of cash to be distributed is less than $10 will have its claim for
such distribution discharged and will be forever barred from asserting any such
claim against the Reorganized Debtors or their respective property. Any cash not
distributed pursuant to Section VI.H.4 of the Plan with respect to Claims in a
Class other than Class 6 will be the property of Reorganized Pillowtex, free of
any restrictions thereon, and any such cash held by a Third Party Disbursing
Agent will be returned to Reorganized Pillowtex. Any cash not distributed
pursuant to Section VI.H.4 of the Plan with respect to Allowed Claims in Class
6, including dividends or other distributions made on account of New Common
Stock and New Warrants held in the Unsecured Claims Reserve, will be retained in
the Unsecured Claims Reserve for redistribution Pro Rata to holders of Allowed
Claims in Class 6, pursuant to Section VI.H.2.b of the Plan. For purposes of
this redistribution, each Allowed Claim in Class 6 for which distributions are
less than $25 will have its claim for such distribution discharged and will be
forever barred from asserting any such claim against the Unsecured Claims
Reserve or otherwise.
Compliance with Tax Requirements
In connection with the Plan, to the extent applicable, each Disbursing
Agent will comply with all Tax withholding and reporting requirements imposed on
it by any governmental unit, and all distributions pursuant to the Plan will be
subject to such withholding and reporting requirements. Each Disbursing Agent
will be authorized to take any actions that may be necessary or appropriate to
comply with such withholding and reporting requirements. Notwithstanding any
other provision of the Plan, each entity receiving a distribution of cash, New
Common Stock or New Warrants pursuant to the Plan will have sole and exclusive
responsibility for the satisfaction and payment of
67
any Tax obligations imposed on it by any governmental unit on account of such
distribution, including income, withholding and other Tax obligations.
Surrender of Canceled Securities or Other Instruments
As a condition precedent to receiving any distribution pursuant to the
Plan on account of an Allowed Claim evidenced by the notes, instruments,
securities or other documentation canceled pursuant to Section IV.H of the Plan,
the holder of such Claim must tender, as specified in Section VI.J of the Plan,
the applicable notes, instruments, securities or other documentation evidencing
such Claim to the applicable Disbursing Agent, together with any letter of
transmittal required by such Disbursing Agent. Pending such surrender, any
distributions pursuant to the Plan on account of any such Claim will be treated
as an undeliverable distribution pursuant to Section VI.E.2 of the Plan.
Except as provided in Section VI.J.2 of the Plan for lost, stolen,
mutilated or destroyed Old Senior Subordinated Notes, Old 6% Debentures or Old
6% Debenture Promissory Notes, each holder of an Allowed Old Senior Subordinated
Notes Claim, Allowed Old 6% Debenture Claim or Allowed Old 6% Debenture
Promissory Note Claim must tender the Old Senior Subordinated Notes, the Old 6%
Debentures or the Old 6% Debenture Promissory Notes to the applicable Disbursing
Agent in accordance with a letter of transmittal to be provided to such holders
by the Disbursing Agent as promptly as practicable following the Effective Date.
The letter of transmittal will include, among other provisions, customary
provisions with respect to the authority of the holder of the Old Senior
Subordinated Notes, Old 6% Debentures or Old 6% Debenture Promissory Notes to
act and the authenticity of any signatures required thereon. All surrendered Old
Senior Subordinated Notes, Old 6% Debentures and Old 6% Debenture Promissory
Notes will be marked as canceled and delivered to the appropriate Reorganized
Debtor.
Any holder of an Allowed Old Senior Subordinated Notes Claim, Allowed
Old 6% Debenture Claim or Allowed Old 6% Debenture Promissory Note Claim with
respect to which the underlying Old Senior Subordinated Note, Old 6% Debenture
or Old 6% Debenture Promissory Note has been lost, stolen, mutilated or
destroyed must, in lieu of surrendering such Old Senior Subordinated Note, Old
6% Debenture or Old 6% Debenture Promissory Note, deliver to the applicable
Disbursing Agent (a) evidence satisfactory to the Disbursing Agent of the loss,
theft, mutilation or destruction and (b) such security or indemnity as may be
required by the Disbursing Agent to hold the Disbursing Agent and the
Reorganized Debtors, as applicable, harmless from any damages, liabilities or
costs incurred in treating such individual as a holder of an Old Senior
Subordinated Note, Old 6% Debenture or Old 6% Debenture Promissory Note. Upon
compliance with the foregoing procedures (as contained in Section VI.J.2 of the
Plan) by a holder of an Allowed Old Senior Subordinated Notes Claim, Allowed Old
6% Debenture Claim or Allowed Old 6% Debenture Promissory Note Claim, such
holder will, for all purposes under the Plan, be deemed to have surrendered the
Old Senior Subordinated Note, Old 6% Debenture or Old 6% Debenture Promissory
Note.
Any holder of an Allowed Old Senior Subordinated Notes Claim, Allowed
Old 6% Debenture Claim or Allowed Old 6% Debenture Promissory Note Claim that
fails to surrender or be deemed to have surrendered the Old Senior Subordinated
Notes, Old 6% Debentures or Old 6% Debenture Promissory Notes within two years
after the Effective Date will have its right to distributions pursuant to the
Plan on account of such Old Senior Subordinated Notes Claim, Old 6% Debenture
Claim or Old 6% Debenture Promissory Note Claim discharged and will be forever
barred from asserting any such Claim against the Reorganized Debtors or their
respective property. In such case, any cash, New Common Stock and New Warrants
held for distribution on account of such Old Senior Subordinated Notes Claim,
Old 6% Debenture Claim or Old 6% Debenture Promissory Note Claim will be treated
pursuant to the provisions set forth in Section VI.E.2.c of the Plan.
Holders of Allowed Bank Loan Claims or Overline Facility Claims will be
required to tender any Prepetition Credit Facility Notes or other promissory
notes in respect thereof or, if not evidenced by a note, any other instrument
evidencing their respective Allowed Claims to the applicable Disbursing Agent as
and when such entities receive New Common Stock and New Warrants, as applicable.
If any such entity's notes or other instruments evidencing its Allowed Claims
are lost, stolen, mutilated or destroyed, such entity will be required, in lieu
of surrendering such note or other instrument, to deliver to the applicable
Disbursing Agent evidence satisfactory to the Disbursing Agent of the loss,
theft, mutilation or destruction.
68
Setoffs
Except with respect to claims of a Debtor or Reorganized Debtor
released pursuant to the Plan or any contract, instrument, release or other
agreement or document entered into or delivered in connection with the Plan, the
Reorganized Debtors or, as instructed by the applicable Reorganized Debtor, a
Third Party Disbursing Agent may, pursuant to section 553 of the Bankruptcy Code
or applicable nonbankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim) the claims, rights and causes
of action of any nature that the applicable Debtor or Reorganized Debtor may
hold against the holder of such Allowed Claim; provided that neither the failure
to effect a setoff nor the allowance of any Claim under the Plan will constitute
a waiver or release by the applicable Debtor or Reorganized Debtor of any
claims, rights and causes of action that the Debtor or Reorganized Debtor may
possess against such a Claim holder.
Disputed Claims; Reserve and Estimations
Notwithstanding any other provisions of the Plan, no payments or
distributions will be made on account of a Disputed Claim until such Claim
becomes an Allowed Claim. In lieu of distributions under the Plan to holders of
Disputed Claims in Class 6, if allowed, the Unsecured Claims Reserve will be
established on the Effective Date to hold property for the benefit of these
Claim holders, as well as holders of Allowed Claims in Class 6. Reorganized
Pillowtex will fund the Unsecured Claims Reserve with New Common Stock and New
Warrants, as described in Section VI.D.1 of the Plan.
Funding of Unsecured Claims Reserve
On the Effective Date, the Reserved Shares and Reserved Warrants will
be placed in the Unsecured Claims Reserve for the benefit of holders of Allowed
Claims in Class 6.
Each holder of an Allowed Claim (or a Disputed Claim that ultimately
becomes an Allowed Claim) in Class 6 will have recourse only to the
undistributed cash, New Common Stock and New Warrants held in the Unsecured
Claims Reserve for satisfaction of the distributions to which holders of Allowed
Class 6 Claims are entitled under the Plan, and not to any Reorganized Debtor,
its property or any assets previously distributed on account of any Allowed
Claim.
Cash dividends and other distributions on account of New Common Stock
and New Warrants held in the Unsecured Claims Reserve will be transferred to the
Unsecured Claims Reserve concurrently with the transfer of such dividends and
other distributions to the holders of New Common Stock and New Warrants. Cash
held in the Unsecured Claims Reserve (including as a result of dividends and
other distributions on New Common Stock held in the Unsecured Claims Reserve)
(a) will be deposited in a segregated bank account in the name of the applicable
Disbursing Agent and held in trust pending distribution by the Disbursing Agent
for the benefit of holders of Class 6 Claims, (b) will be accounted for
separately and (c) will not constitute property of the Reorganized Debtors. The
Disbursing Agent will invest the cash held in the Unsecured Claims Reserve in a
manner consistent with the Reorganized Debtors' investment and deposit
guidelines. The Disbursing Agent also will place in the Unsecured Claims Reserve
the Cash Investment Yield from such investment of cash.
Distributions on Account of Disputed Claims Once They Are Allowed
On each Quarterly Distribution Date, the applicable Disbursing Agent
will make all distributions on account of any Disputed Claim that has become an
Allowed Claim during the preceding calendar quarter. The distributions will be
made pursuant to the provisions of the Plan governing the applicable Class,
including the incremental distribution provisions set forth in Section VI.H.2 of
the Plan.
Payment of Post-Effective Date Interest from Cash Investment Yield
In the event that any cash or dividends on New Common Stock are held in
the Unsecured Claims Reserve, holders of Allowed Unsecured Claims in Class 6 may
receive post-Effective Date interest at a rate determined by the
69
Cash Investment Yield. For the federal income tax consequences to the holders
who receive Cash Investment Yield, see "Certain Federal Income Tax Consequences
of Consummation of the Plan -- Certain Other Tax Considerations for Holders of
Claims -- Receipt of Dividend and Interest Income Earned by the Unsecured Claims
Reserve" and "-- Receipt of Pre-Effective Date Interest."
Objections to Claims and Authority to Prosecute Objections
All objections to Claims must be Filed and served on the holders of
such Claims by the Claims Objection Bar Date, and, if Filed prior to the
Effective Date, such objections will be served on the parties on the
then-applicable service list in the Reorganization Cases. If an objection has
not been Filed to a proof of Claim or a scheduled Claim by the Claims Objection
Bar Date, the Claim to which the proof of Claim or scheduled Claim relates will
be treated as an Allowed Claim if such Claim has not been allowed earlier. An
objection is deemed to have been timely Filed as to all Tort Claims, thus making
each such Claim a Disputed Claim as of the Claims Objection Bar Date. Each such
Tort Claim will remain a Disputed Claim until it becomes an Allowed Claim in
accordance with Section I.A.6 of the Plan.
After the Confirmation Date, only the Debtors or the Reorganized
Debtors will have the authority to File, settle, compromise, withdraw or
litigate to judgment objections to Claims, including pursuant to any alternative
dispute resolution or similar procedures approved by the Bankruptcy Court. After
the Effective Date, the Reorganized Debtors or their successors may settle or
compromise any Disputed Claim without approval of the Bankruptcy Court.
Dissolution of the Creditors' Committees
On the Effective Date, the Creditors' Committee will dissolve and the
members of the Creditors' Committee will be released and discharged from all
duties and obligations arising from or related to the Reorganization Cases.
VOTING AND CONFIRMATION OF THE PLAN
General
To confirm the Plan, the Bankruptcy Code requires that the Bankruptcy
Court make a series of findings concerning the Plan and the Debtors, including
that:
o the Plan has classified Claims and Interests in a permissible
manner;
o the Plan complies with the applicable provisions of the Bankruptcy
Code;
o the Debtors have complied with the applicable provisions of the
Bankruptcy Code;
o the Debtors, as proponents of the Plan, have proposed the Plan in
good faith and not by any means forbidden by law;
o the disclosure required by section 1125 of the Bankruptcy Code has
been made;
o the Plan has been accepted by the requisite votes of creditors and
equity interest holders (except to the extent that cramdown is
available under section 1129(b) of the Bankruptcy Code (see "--
Confirmation" and "-- Acceptance or Cramdown");
o the Plan is feasible and Confirmation will not likely be followed
by the liquidation or the need for further financial
reorganization of the Debtors or the Reorganized Debtors;
o the Plan is in the "best interests" of all holders of Claims or
Interests in an impaired Class by providing to creditors or
interest holders on account of such Claims or Interests property
70
of a value, as of the Effective Date, that is not less than the
amount that such holder would receive or retain in a chapter 7
liquidation, unless each holder of a Claim or Interest in such
Class has accepted the Plan;
o all fees and expenses payable under 28 U.S.C.ss. 1930, as
determined by the Bankruptcy Court at the Confirmation Hearing,
have been paid or the Plan provides for the payment of such fees
on the Effective Date;
o the Plan provides for the continuation after the Effective Date of
all retiree benefits, as defined in section 1114 of the Bankruptcy
Code, at the level established at any time prior to Confirmation
pursuant to sections 1114(e)(1)(B) or 1114(g) of the Bankruptcy
Code, for the duration of the period that the applicable Debtor has
obligated itself to provide such benefits; and
o the disclosures required under section 1129(a)(5) concerning the
identity and affiliations of persons who will serve as officers,
directors and voting trustees of the Reorganized Debtors have been
made.
The Plan constitutes a separate plan of reorganization for each Debtor.
As such, in order to confirm the Plan as to any Debtor, the Bankruptcy Court
will have to find compliance of the Plan with respect to each of the foregoing
as to each such Debtor.
Voting Procedures and Requirements
Pursuant to the Bankruptcy Code, only classes of claims against or
equity interests in a debtor that are "impaired" under the terms of a plan of
reorganization are entitled to vote to accept or reject a plan. A class is
"impaired" if the legal, equitable or contractual rights attaching to the claims
or interests of that class are modified, other than by curing defaults and
reinstating maturity. Classes of Claims and Interests that are not impaired are
not entitled to vote on the Plan and are conclusively presumed to have accepted
the Plan. In addition, Classes of Claims and Interests that receive no
distributions under the Plan are not entitled to vote on the Plan and are deemed
to have rejected the Plan unless that Class otherwise indicates acceptance. The
classification of Claims and Interests is summarized, together with an
indication of whether each Class of Claims or Interests is impaired or
unimpaired, in "Overview of the Plan -- Summary of Classes and Treatment of
Claims and Interests."
Pursuant to section 502 of the Bankruptcy Code and Bankruptcy Rule
3018, the Bankruptcy Court may estimate and temporarily allow a Claim for voting
or other purposes. By order of the Bankruptcy Court, certain vote tabulation
rules have been approved that temporarily allow or disallow certain Claims for
voting purposes only. These tabulation rules are described in the solicitation
materials provided with your Ballot.
VOTING ON THE PLAN BY EACH HOLDER OF AN IMPAIRED CLAIM ENTITLED TO VOTE
ON THE PLAN IS IMPORTANT. IF YOU HOLD CLAIMS IN MORE THAN ONE CLASS OR IF YOU
HOLD MULTIPLE GENERAL UNSECURED CLAIMS OR UNDER CERTAIN OTHER CIRCUMSTANCES, YOU
MAY RECEIVE MORE THAN ONE BALLOT. YOU SHOULD COMPLETE, SIGN AND RETURN EACH
BALLOT YOU RECEIVE.
PLEASE CAREFULLY FOLLOW ALL OF THE INSTRUCTIONS CONTAINED ON THE BALLOT
PROVIDED TO YOU. ALL BALLOTS MUST BE COMPLETED AND RETURNED IN ACCORDANCE WITH
THE INSTRUCTIONS PROVIDED.
TO BE COUNTED, YOUR BALLOT MUST BE ACTUALLY RECEIVED BY 5:00 P.M.,
EASTERN TIME, ON __________, 2002 (UNLESS THE VOTING DEADLINE IS EXTENDED) AT
THE ADDRESS SET FORTH ON THE PREADDRESSED ENVELOPE PROVIDED TO YOU. IT IS OF THE
UTMOST IMPORTANCE TO THE DEBTORS THAT YOU VOTE PROMPTLY TO ACCEPT THE PLAN.
A CREDITOR WHOSE CLAIMS ARE HELD IN THE NAME OF A BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE MUST COMPLETE AND DELIVER TO
71
SUCH NOMINEE THE BALLOTS PROVIDED TO THE CREDITOR IN ORDER TO VOTE ON THE PLAN.
CREDITORS ARE URGED TO DELIVER THE BALLOT(S) TO THEIR RESPECTIVE NOMINEE HOLDERS
NO LATER THAN __________, 2002 IN ORDER TO ENSURE THAT THEIR VOTE WILL BE
COUNTED.
Votes cannot be transmitted orally. Accordingly, you are urged to
return your signed and completed Ballot promptly.
ANY BALLOT RECEIVED WHICH DOES NOT INDICATE EITHER AN ACCEPTANCE OR
REJECTION OF THE PLAN OR WHICH INDICATES BOTH ACCEPTANCE AND REJECTION OF THE
PLAN WILL BE COUNTED AND WILL BE DEEMED TO BE CAST AS AN ACCEPTANCE OF THE PLAN.
IF ANY OF THE CLASSES OF HOLDERS OF IMPAIRED CLAIMS VOTE TO REJECT THE
PLAN, (A) THE DEBTORS MAY SEEK TO SATISFY THE REQUIREMENTS FOR CONFIRMATION OF
THE PLAN UNDER THE CRAMDOWN PROVISIONS OF SECTION 1129(b) OF THE BANKRUPTCY CODE
AND, IF REQUIRED, MAY AMEND THE PLAN TO CONFORM TO THE STANDARDS OF SECTION
1129(b) OR (B) THE PLAN MAY BE MODIFIED OR WITHDRAWN WITH RESPECT TO A
PARTICULAR DEBTOR, WITHOUT AFFECTING THE PLAN AS TO OTHER DEBTORS, OR IN ITS
ENTIRETY. See "Voting and Confirmation of the Plan --Acceptance or Cramdown" and
"-- Alternatives to Confirmation and Consummation of the Plan."
Confirmation Hearing
The Bankruptcy Code requires the Bankruptcy Court, after notice, to
hold a hearing on whether the Debtors have fulfilled the Confirmation
requirements of section 1129 of the Bankruptcy Code. The Confirmation Hearing
has been scheduled for __________, 2002 at __:__ a.m. before the Honorable Sue
L. Robinson, United States District Judge for the District of Delaware, in the
Judge's usual courtroom at the United States District Court for the District of
Delaware, 844 King Street, 6th Floor, Wilmington, Delaware 19801. The
Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court
without further notice, except for an announcement of the adjourned date made at
the Confirmation Hearing. Any objection to Confirmation must be made in writing
and must specify in detail the name and address of the objector, all grounds for
the objection and the amount of the Claim or Interest held by the objector. Any
objections must be Filed and served upon the persons designated in the notice of
the Confirmation Hearing, in the manner and by the deadline described therein.
Confirmation
At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan
only if all of the applicable requirements of section 1129 of the Bankruptcy
Code are met. Among the requirements for Confirmation are that the Plan: (a) is
accepted by the requisite holders of Claims in impaired Classes of such Debtor
or, if not so accepted, is "fair and equitable" and "does not discriminate
unfairly" as to the nonaccepting Class; (b) is in the "best interests" of each
holder of a Claim in each impaired Class under the Plan for such Debtor; (c) is
feasible; and (d) complies with the applicable provisions of the Bankruptcy
Code.
Acceptance or Cramdown
A plan is accepted by an impaired class of claims if holders of at
least two-thirds in dollar amount and a majority in number of claims of that
class vote to accept the plan. Only those holders of claims who actually vote
(and are entitled to vote) to accept or to reject a plan count in this
tabulation. In addition to this voting requirement, section 1129 of the
Bankruptcy Code requires that a plan be accepted by each holder of a claim or
interest in an impaired class or that the plan otherwise be found by the
Bankruptcy Court to be in the best interests of each holder of a claim or
interest in an impaired class. See "Voting and Confirmation of the Plan -- Best
Interests Test; Liquidation Analysis." The Bankruptcy Code contains provisions
for confirmation of a plan even if it is not accepted by all impaired classes,
as long as at least one impaired class of claims has accepted it. These
so-called "cramdown" provisions are set forth in section 1129(b) of the
Bankruptcy Code. As indicated above, the Plan may be confirmed under the
cramdown provisions if, in addition to satisfying the other requirements of
section 1129 of the Bankruptcy Code, it (a) is "fair and equitable" and (b)
"does not discriminate unfairly" with respect to each Class
72
of Interests or Claims that is impaired under, and has not accepted, the Plan.
The "fair and equitable" standard, also known as the "absolute priority rule,"
requires, among other things, that unless a dissenting Class of Interests or
Class of Unsecured Claims receives full compensation for its Interests or
Allowed Claims, no holder of Interests or Allowed Claims in any junior Class may
receive or retain any property on account of such Interests or Claims. With
respect to a dissenting Class of Secured Claims, the "fair and equitable"
standard requires, among other things, that holders either (i) retain their
liens and receive deferred cash payments with a value as of the Effective Date
equal to the value of their interest in property of the applicable Estate or
(ii) receive the indubitable equivalent of their Secured Claims. The "fair and
equitable" standard has also been interpreted to prohibit any Class senior to a
dissenting Class from receiving under a plan more than 100% of its Interests or
Allowed Claims. The Debtors believe that, if necessary, the Plan may be crammed
down over the dissent of certain Classes of Claims, in view of the treatment
proposed for such Classes. If necessary and appropriate, the Debtors intend to
modify the Plan to permit cramdown of dissenting Classes of Claims.
The requirement that the Plan not "discriminate unfairly" means, among
other things, that a dissenting Class must be treated substantially equal with
respect to other Classes of equal rank. The Debtors do not believe that the Plan
unfairly discriminates against any Class that may not accept or otherwise
consent to the Plan.
Any Class of Claims that receives nothing under the Plan are deemed to
be dissenting Classes. As a result, in addition to any Class that does not vote
to accept the Plan, the Debtors will, to the extent required, seek to use the
"cramdown" provisions described above with respect to the Interests in Classes 8
and 9. While the Intercompany Claims in Class 7 will receive nothing under the
Plan, the Pillowtex Entities will be deemed to have consented.
Subject to the conditions set forth in the Plan, a determination by the
Bankruptcy Court that the Plan, as it applies to any particular Debtor, is not
confirmable pursuant to section 1129 of the Bankruptcy Code will not limit or
affect: (a) the confirmability of the Plan as it applies to any other Debtor or
(b) the Debtors' ability to modify the Plan, as it applies to any particular
Debtor, to satisfy the provisions of section 1129(b) of the Bankruptcy Code.
Best Interests Test; Liquidation Analysis
Notwithstanding acceptance of the Plan by each impaired Class, to
confirm the Plan, the Bankruptcy Court must determine that the Plan is in the
best interests of each holder of a Claim in any impaired Class who has not voted
to accept the Plan. Accordingly, if an impaired Class does not unanimously
accept the Plan, the "best interests" test requires that the Bankruptcy Court
find that the Plan provides to each member of such impaired Class a recovery on
account of the member's Claim that has a value, as of the Effective Date, at
least equal to the value of the distribution that each such member would receive
if the applicable Debtors were liquidated under chapter 7 of the Bankruptcy Code
on such date.
To estimate what members of each impaired Class of Claims would receive
if the Debtors were liquidated under chapter 7 of the Bankruptcy Code, the
Bankruptcy Court must first determine the aggregate dollar amount that would be
available if each of the Reorganization Cases were converted to a chapter 7 case
under the Bankruptcy Code and each of the respective Debtor's assets were
liquidated by a chapter 7 trustee (the "Hypothetical Liquidation Value"). The
Hypothetical Liquidation Value of a Debtor would consist of the net proceeds
from the disposition of the assets of the Debtor, augmented by any cash held by
the Debtor.
The Hypothetical Liquidation Value available to holders of Unsecured
Claims would be reduced by, among other things: (a) the Claims of secured
creditors to the extent of the value of their collateral; (b) the costs, fees
and expenses of the liquidation, as well as other administrative expenses of the
Debtor's chapter 7 case; (c) unpaid Administrative Claims; and (d) Priority
Claims and Priority Tax Claims. The Debtors' costs of liquidation in chapter 7
cases would include the compensation of trustees, as well as of counsel and of
other professionals retained by such trustees, asset disposition expenses,
applicable Taxes, litigation costs, Claims arising from the operation of the
Debtors during the pendency of the chapter 7 cases and all unpaid Administrative
Claims incurred by the Debtors during the Reorganization Cases that are allowed
in the chapter 7 cases. The liquidation itself would trigger certain Priority
Claims, such as Claims for severance pay, and would likely accelerate the
payment of other Priority Claims and Priority Tax Claims that would otherwise be
payable in the ordinary course of business. These Priority Claims and Priority
Tax Claims would be paid in full out of the net liquidation proceeds, after
payment of Secured Claims, before the balance would be made available to pay
Unsecured Claims. The Debtors believe that the liquidation also
73
would generate a significant increase in Unsecured Claims, such as Rejection
Damage Claims, and Tax and other governmental Claims.
The information contained in Exhibit III provides a summary of the
Hypothetical Liquidation Value of the Debtors' interests in property, on a
consolidated basis, assuming a hypothetical chapter 7 liquidation in which a
trustee appointed by the Bankruptcy Court would liquidate the Debtors'
properties and interests in property (the "Hypothetical Liquidation Analysis").
As more fully described in Exhibit III, the Hypothetical Liquidation Analysis is
based on a number of estimates and assumptions that are subject to significant
uncertainties, including estimates and assumptions relating to the proceeds of
sales of assets, the timing of such sales, the impact of pending liquidations on
continuing operations and values and certain tax matters. WHILE THE DEBTORS
BELIEVE THAT THESE ESTIMATES AND ASSUMPTIONS ARE REASONABLE FOR THE PURPOSE OF
PREPARING HYPOTHETICAL CHAPTER 7 LIQUIDATION ANALYSES, NO ASSURANCE EXISTS THAT
SUCH ESTIMATES AND ASSUMPTIONS WOULD BE VALID IF THE DEBTORS WERE, IN FACT, TO
BE LIQUIDATED. Moreover, as noted above, the Debtors believe that chapter 7
liquidations could result in substantial litigation that could delay the
liquidation beyond the periods assumed in Exhibit III. This delay could
materially reduce the amount determined on a present value basis to be available
for distribution to creditors to an extent that cannot be estimated at this
time.
The Hypothetical Liquidation Analysis was prepared based on the
assumption that the Debtors cease operations on June 29, 2002. The liquidation
of the Debtors is assumed to commence under the direction of a Bankruptcy Court
appointed trustee and to continue for 12 months, during which time all the major
assets would either be sold or conveyed to the respective lienholders and the
cash proceeds, net of costs to liquidate, would be distributed to creditors.
Certain assets are assumed to be liquidated in less than six months, while other
assets may be more difficult to collect or sell, requiring the longer
liquidation period. The Hypothetical Liquidation Analysis was performed on a
consolidated basis, resulting in the elimination of certain Intercompany Claims
and assumes that distributions are made by the chapter 7 trustee beginning six
months following commencement of the liquidation and completed within 12 months
of commencement on average. As explained in more detail in Exhibit III, because
there would not be sufficient liquidation proceeds to satisfy the Bank Loan
Claims and the Designated Post-Petition Loans, the distribution of liquidation
proceeds to creditors would not be affected if the analysis were performed on an
entity-by-entity basis.
Based on the Hypothetical Liquidation Analysis, the Debtors believe
that chapter 7 liquidations of the Debtors would result in substantial
diminution in the value to be realized by holders of Claims, as compared to the
proposed distributions under the Plan, because of, among other factors: (a) the
failure to realize the maximum going concern value of the Debtors' assets; (b)
the substantial negative impact of conversion to a chapter 7 case and subsequent
liquidation on the employees and customers of the Debtors; (c) additional costs
and expenses involved in the appointment of trustees, attorneys, accountants and
other professionals to assist such trustees in the chapter 7 cases and potential
litigation arising from the same; (d) additional expenses and Claims, some of
which would be entitled to priority in payment, which would arise by reason of
the liquidation and from the rejection of unexpired real estate leases and other
Executory Contracts and Unexpired Leases in connection with a cessation of the
Debtors' operations; and (e) the substantial time that would elapse before
entities would receive any distribution in respect of their Claims.
Consequently, the Debtors believe that the Plan will provide a substantially
greater ultimate return to holders of Claims than would a liquidation under
chapter 7.
Feasibility
Section 1129(a)(11) of the Bankruptcy Code requires that Confirmation
not be likely to be followed by the liquidation, or the need for further
financial reorganization, of the Debtors or any successor to the Debtors (unless
such liquidation or reorganization is proposed in the Plan). For purposes of
determining whether the Plan meets this requirement, the Debtors have analyzed
their ability to meet their respective obligations under the Plan. As part of
this analysis, the Debtors have prepared the Projections. Based upon the
Projections, the Debtors believe that their reorganization under the Plan will
meet the feasibility requirements of the Bankruptcy Code.
74
Compliance with Applicable Provisions of the Bankruptcy Code
Section 1129(a)(1) of the Bankruptcy Code requires that the Plan comply
with the applicable provisions of the Bankruptcy Code. The Debtors have
considered each of these issues in the development of the Plan and believe that
the Plan complies with of the all provisions of the Bankruptcy Code.
Alternatives to Confirmation and Consummation of the Plan
The Debtors have evaluated numerous alternatives to the Plan, including
alternative structures and terms of the Plan, the liquidation of the Debtors and
delaying the adoption of any plan of reorganization. While the Debtors have
concluded that the Plan is the best alternative and will maximize recoveries by
holders of Claims, if the Plan is not confirmed, the Debtors, individually or
collectively, or (subject to the Debtors' exclusive periods under the Bankruptcy
Code to File and solicit acceptances of a plan or plans of reorganization) any
other party in interest in the Reorganization Cases could attempt to formulate
and propose a different plan or plans of reorganization. Further, if no plan of
reorganization can be confirmed, the Reorganization Cases may be converted to
chapter 7 cases. In a liquidation case under chapter 7 of the Bankruptcy Code, a
trustee or trustees would be elected or appointed to liquidate the assets of
each Debtor. The proceeds of the liquidation would be distributed to the
respective creditors of the Debtors in accordance with the priorities
established by the Bankruptcy Code. For further discussion of the potential
impact on the Debtors of the conversion of the Reorganization Cases to chapter 7
liquidations, see "-- Best Interests Test; Liquidation Analysis." The Debtors
believe that Confirmation and consummation of the Plan is preferable to the
alternatives described above.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF CONSUMMATION OF THE PLAN
General
A DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN IS
PROVIDED BELOW. THIS DESCRIPTION IS BASED ON THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED ("TAX CODE"), TREASURY REGULATIONS ISSUED THEREUNDER ("TREASURY
REGULATIONS"), JUDICIAL DECISIONS AND IRS AND ADMINISTRATIVE DETERMINATIONS IN
EFFECT AS OF THE DATE OF THIS DISCLOSURE STATEMENT. CHANGES IN ANY OF THESE
AUTHORITIES, WHICH MAY HAVE RETROACTIVE EFFECT, MAY CAUSE THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN TO DIFFER MATERIALLY FROM THE CONSEQUENCES DESCRIBED
BELOW. MOREOVER, NO RULINGS HAVE BEEN REQUESTED FROM THE IRS AND NO LEGAL
OPINIONS HAVE BEEN REQUESTED FROM COUNSEL CONCERNING ANY TAX CONSEQUENCE OF THE
PLAN, AND NO TAX OPINION IS GIVEN BY THIS DISCLOSURE STATEMENT.
THIS DESCRIPTION DOES NOT COVER ALL ASPECTS OF FEDERAL INCOME TAXATION
THAT MAY BE RELEVANT TO THE DEBTORS OR HOLDERS OF CLAIMS. FOR EXAMPLE, THE
DESCRIPTION PROVIDED BELOW DOES NOT ADDRESS ISSUES OF SPECIAL CONCERN TO CERTAIN
TYPES OF TAXPAYERS, SUCH AS DEALERS IN SECURITIES, LIFE INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS, TAX EXEMPT ORGANIZATIONS AND FOREIGN TAXPAYERS, NOR DOES
IT ADDRESS TAX CONSEQUENCES TO HOLDERS OF INTERESTS. IN ADDITION, THIS
DESCRIPTION DOES NOT ADDRESS ANY TAX CONSEQUENCES OF THE SUBSIDIARY
RESTRUCTURING TRANSACTIONS. MOREOVER, THE DESCRIPTION IS LIMITED TO FEDERAL
INCOME TAX CONSEQUENCES AND DOES NOT DISCUSS STATE LAW OR THE POSSIBLE STATE TAX
CONSEQUENCES OR NON-UNITED STATES TAX CONSEQUENCES THAT MIGHT APPLY TO THE
DEBTORS OR TO HOLDERS OF CLAIMS UNDER FOREIGN TAX LAWS.
FOR THESE REASONS, THE DESCRIPTION THAT FOLLOWS IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND PROFESSIONAL TAX ADVICE BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST. HOLDERS OF CLAIMS OR
INTERESTS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PLAN.
75
Federal Income Tax Consequences to the Debtors; Reduction of the Debtors'
Indebtedness
Generally, the discharge of a debt obligation by a debtor for an amount
less than the adjusted issue price (in most cases, the amount the debtor
received on incurring the obligation, with certain adjustments) gives rise to
cancellation of indebtedness ("COD") income, which must be included in the
debtor's income. However, COD income is not recognized by a taxpayer that is a
debtor in a chapter 11 case if the discharge is granted by the Bankruptcy Court
or pursuant to a plan of reorganization approved by the Bankruptcy Court. The
Plan, if approved, would enable the Debtors to qualify for this bankruptcy
exclusion rule with respect to any COD income triggered by the Plan.
If debt is discharged in a chapter 11 case, however, certain tax
attributes otherwise available and of value to the debtor are reduced, in most
cases by the principal amount of the indebtedness forgiven. Tax attributes
subject to reduction include: (a) net operating losses ("NOL's") and NOL
carryforwards; (b) most credit carryforwards, including the general business
credit and the minimum tax credit; (c) capital losses and capital loss
carryforwards; (d) the tax basis of the debtor's depreciable and nondepreciable
assets, but not in an amount greater than the excess of the aggregate tax bases
of the property held by the debtor immediately after the discharge over the
aggregate of the debtor's liabilities immediately after the discharge; and (e)
foreign tax credit carryforwards. Attribute reduction is calculated only after
the tax for the year of discharge has been determined.
A debtor may elect to avoid the prescribed order of attribute reduction
and instead reduce the basis of depreciable property first. This election
extends to the stock of a subsidiary if the subsidiary consents to reduce the
basis of its depreciable property. If the Debtors make this election, the
limitation prohibiting the reduction of asset basis below the amount of its
remaining undischarged liability does not apply. In the case of affiliated
corporations filing a consolidated return (such as the Debtors), the attribute
reduction rules generally should apply separately to the particular corporation
whose debt is being discharged, not to the entire consolidated group without
regard to the identity of the particular debtor. The IRS recently has taken the
position, however, that consolidated NOL's must be reduced irrespective of the
source of those losses. The current IRS position as to the impact of the
attribute reduction rules on other tax attributes of consolidated group members
is unclear.
Federal Income Tax Consequences to Holders of Claims
The federal income tax consequences of the Plan to a holder of a Claim
will depend, in part: (a) on whether the Claim constitutes a "tax security" for
federal income tax purposes; (b) what type of consideration was received in
exchange for the Claim; (c) whether the holder is a resident of the United
States for tax purposes; (d) whether the holder reports income on the accrual or
cash basis; (e) whether the holder has taken a bad debt deduction or worthless
security deduction with respect to the Claim; and (f) whether the holder
receives distributions under the Plan in more than one taxable year. In some
cases, the modification of a Claim may represent for tax purposes an exchange of
the Claim for a modified Claim, even though no actual transfer takes place.
Definition of Securities
There is no precise definition of what constitutes a "security" under
federal income tax law, and all facts and circumstances pertaining to the origin
and character of a claim are relevant in determining its status. Nevertheless,
courts generally have held that corporate debt obligations evidenced by written
instruments with original maturities of ten years or more will be considered tax
securities for this purpose. Based on their original maturities, it is likely
that the Old Senior Subordinated Notes, the Old 6% Debentures and the Old 6%
Debenture Promissory Notes will be considered tax securities for this purpose.
By contrast, it is likely that Unsecured Claims in respect of other liabilities
will not be considered tax securities for this purpose.
Holders of Claims Constituting Tax Securities
Under the terms of the Plan, holders of Allowed Claims constituting tax
securities will receive some combination of, among other things (a) cash, (b)
New Common Stock and (c) New Warrants in satisfaction of their Claims under the
Plan. Holders of Claims constituting tax securities generally will not recognize
gain on the exchange (except amounts allocable to interest on their Claims will
be treated as interest income). Holders of
76
Claims constituting tax securities may, however, recognize gain if they receive
cash, an obligation not constituting a tax security or any other non-cash items
("Boot") in either full or partial satisfaction of those claims. In that event,
any gain on the exchange, measured generally by the excess of the amount
realized by the holder over the holder's tax basis in the Claim, will be
recognized by the holder, but in an amount not exceeding the sum of the cash and
the fair market value of the non-cash Boot received. Any gain so recognized will
generally be capital gain provided that the Claim was held as a capital asset by
the holder at the time of exchange.
Holders of Claims constituting tax securities who receive New Common Stock
or New Warrants under the Plan in either partial or full satisfaction of their
Claims generally will not be permitted to recognize any loss on the exchange.
A holder's aggregate tax basis in the New Common Stock received under the
Plan in respect of a Claim constituting a tax security, aside from amounts
allocable to interest, generally will equal the holder's basis in the Claim,
decreased by the amount of any cash and any other consideration not constituting
tax securities received by the holder and increased by the amount of any gain
recognized by the holder in connection with the exchange. The holding period for
any New Common Stock or New Warrants received in the exchange in respect of a
Claim constituting a tax security, aside from amounts allocable to interest,
generally will include the holding period of the Claim surrendered. A holder's
tax basis in New Common Stock or New Warrants constituting tax securities
allocable to interest will equal the fair market value of the New Common Stock
or New Warrants, and the holding period will begin on the day after the day of
receipt.
Holders of Claims Not Constituting Tax Securities
Holders of Claims not constituting tax securities likely will recognize
gain or loss equal to the amount realized under the Plan in respect of their
Claims less their respective tax bases in those Claims. The amount realized for
this purpose generally will equal the sum of the cash and the fair market value
of any other consideration received under the Plan, including any New Common
Stock.
Any gain or loss recognized in the exchange will be capital or ordinary
depending on the status of the Claim in the holder's hands. The holder's
aggregate tax basis for any consideration received under the Plan generally will
equal the amount realized. The holding period for any consideration received
under the Plan generally will begin on the day following the receipt of that
consideration.
Dividend and Interest Income Earned by the Unsecured Claims Reserve
Pursuant to the Plan, shares of New Common Stock and New Warrants issued as
of the Effective Date but not yet subject to distribution to holders of Allowed
Claims will be held by an Unsecured Claims Reserve until distribution is
required by the Plan. Therefore, it is possible that the Unsecured Claims
Reserve will receive cash dividends or other distributions from Reorganized
Pillowtex on account of the shares of New Common Stock held in the Unsecured
Claims Reserve. Any cash thus received would be reinvested pursuant to the Plan,
thereby generating additional income.
Congress has made it clear that amounts earned by an escrow account,
settlement fund or similar fund are subject to current tax, but effective
Treasury Regulations addressing the tax treatment of reserve accounts like the
Unsecured Claims Reserve in a bankruptcy setting have not yet become effective.
Therefore, depending on the facts (and the interpretation given to those facts),
reserve accounts like the Unsecured Claims Reserve might be treated for tax
purposes under current law as separately taxable trusts, grantor trusts treated
as owned by either the corporate transferor or the creditor beneficiaries, or in
some other fashion.
On February 1, 1999, the IRS issued a proposed Treasury Regulation that
would cause reserve accounts like the Unsecured Claims Reserve to be treated as
"qualified settlement funds" for federal income tax purposes, which, in turn,
would have the consequence of causing income earned by those accounts to be
subject to a separate entity-level tax. The proposed Treasury Regulation is not
currently in effect and will only become effective once it is promulgated in
final form. In the interim, the proposed Treasury Regulation provides that the
IRS will not
77
challenge any reasonable, consistently-applied method for reporting income
earned by a reserve account like the Unsecured Claims Reserve.
Against this background, the Debtors have determined to treat the Unsecured
Claims Reserve as a grantor trust of which the Reorganized Debtors are the
grantors, and therefore will treat income earned by the Unsecured Claims Reserve
as income of the Reorganized Debtors. To assure that this income is fully
subject to tax, the Reorganized Debtors will waive whatever right they might
otherwise have to claim a dividend received deduction with respect to any
dividends paid to the Unsecured Claims Reserve on account of the undistributed
New Common Stock. Any income thus earned should be offset dollar-for-dollar on a
current basis by an interest deduction to the Reorganized Debtors reflecting
their obligations under the Plan to pay any income earned by the Unsecured
Claims Reserve on account of New Common Stock (or on the reinvestment of
dividends paid on that New Common Stock) to holders of Allowed Claims.
Certain Other Tax Considerations for Holders of Claims
Receipt of Pre-Effective Date Interest
Holders of Claims not previously required to include in their taxable
income any accrued but unpaid pre-Effective Date interest on a Claim may be
treated as receiving taxable interest to the extent any consideration they
receive under the Plan is allocable to such interest. Holders previously
required to include in their taxable income any accrued but unpaid interest on a
Claim may be entitled to recognize a deductible loss to the extent that such
interest is not satisfied under the Plan.
Receipt of Dividend and Interest Income Earned by the Unsecured Claims
Reserve
As described above (see "Certain Federal Income Tax Consequences of
Consummation of the Plan -- Federal Income Tax Consequences to Holders of Claims
- -- Dividend and Interest Income Earned by the Unsecured Claims Reserve"), it is
possible that the Unsecured Claims Reserve will receive cash dividends on shares
of New Common Stock held by it and then generate additional cash by reinvesting
those dividends pending distribution. When that cash is distributed to holders
of Allowed Claims, the Reorganized Debtors will treat the cash as taxable
interest income to the holder and will file information returns reflecting that
treatment.
Reinstatement of Claims
Holders generally should not recognize gain, loss or other taxable income
upon the Reinstatement of their Claims under the Plan. Taxable income,
however, may be recognized by those holders if they are considered to receive
interest, damages or other income in connection with the Reinstatement or if the
Reinstatement is considered for tax purposes to involve a modification of the
Claim.
Bad Debt Deduction
A holder who, under the Plan, receives in respect of a Claim an amount less
than the holder's tax basis in that Claim may be entitled in the year of receipt
(or in an earlier year) to a bad debt deduction in some amount under section
166(a) of the Tax Code. The rules governing the timing and amount of bad debt
deductions place considerable emphasis on the facts and circumstances of the
holder, the obligor and the instrument with respect to which a deduction is
claimed. Holders of Claims, therefore, are urged to consult their tax advisors
with respect to their ability to take such a deduction.
Information Reporting and Backup Withholding
Under the Tax Code's backup withholding rules, a holder of a Claim may be
subject to backup withholding with respect to distributions or payments made
pursuant to the Plan unless that holder (a) comes within certain exempt
categories (which generally include corporations) and, when required,
demonstrates that fact or (b) provides a correct taxpayer identification number
and certifies under penalty of perjury that the taxpayer identification number
is correct and that the holder is not subject to backup withholding because of a
failure to report all dividend
78
and interest income. Backup withholding is not an additional tax, but merely an
advance payment that may be refunded to the extent it results in an overpayment
of tax. Holders of Claims may be required to establish exemption from backup
withholding or to make arrangements with respect to the payment of backup
withholding.
APPLICABILITY OF CERTAIN FEDERAL AND STATE SECURITIES LAWS
General
No registration statement will be filed under the Securities Act or any
state securities laws with respect to the offer and distribution under the Plan
of the New Common Stock or New Warrants. The Debtors believe that the provisions
of section 1145(a)(1) of the Bankruptcy Code exempt the offer and distribution
of such securities under the Plan from federal and state securities registration
requirements.
Bankruptcy Code Exemptions from Registration Requirements
Initial Offer and Sale of Securities
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under the Securities
Act and state securities laws if three principal requirements are satisfied: (a)
the securities must be offered and sold under a plan of reorganization and must
be securities of the debtor, an affiliate participating in a joint plan with the
debtor or a successor to the debtor under the plan; (b) the recipients of the
securities must hold a prepetition or administrative expense claim against the
debtor or an interest in the debtor; and (c) the securities must be issued
entirely in exchange for the recipient's claim against or interest in the
debtor, or principally in such exchange and partly for cash or property. Section
1145(a)(2) of the Bankruptcy Code exempts both the offer of a security through
any warrant, option, right to purchase or conversion privilege that is sold in
the manner specified in Section 1145(a)(1) and the sale of a security upon the
exercise of such warrant, option, right or privilege. The Debtors believe that
the offer and sale of the New Common Stock and New Warrants under the Plan
satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code and,
therefore, are exempt from registration under the Securities Act and state
securities laws. Similarly, the Debtors believe that the offer of New Common
Stock through the New Warrants and the sale of New Common Stock upon exercise of
the New Warrants satisfy the requirements of section 1145(a)(2) of the
Bankruptcy Code and, therefore, are exempt from registration under the
Securities Act and state securities laws.
Subsequent Transfers of Securities
In general, all resales and subsequent transactions in the New Common Stock
and New Warrants distributed under the Plan will be exempt from registration
under the Securities Act pursuant to section 4(1) of the Securities Act, unless
the holder thereof is deemed to be an "affiliate" of Reorganized Pillowtex or an
"underwriter" with respect to such securities. Rule 144 under the Securities Act
defines "affiliate" of an issuer as any person directly or indirectly through
one or more intermediaries controlling, controlled by or under common control
with the issuer. Section 1145(b) of the Bankruptcy Code defines four types of
"underwriters":
o persons who purchase a claim against, an interest in, or a
claim for administrative expense against the debtor with a
view to distributing any security received in exchange for
such claim or interest ("accumulators");
o persons who offer to sell securities offered under a plan for
the holders of such securities ("distributors");
o persons who offer to buy securities from the holders of such
securities, if the offer to buy is (i) with a view to
distributing such securities and (ii) made under a
distribution agreement; and
o a person who is an "issuer" with respect to the securities, as
the term "issuer" is defined in section 2(11) of the
Securities Act.
79
Under section 2(11) of the Securities Act, an "issuer" includes any "affiliate"
of the issuer. Whether or not any particular person would be deemed to be an
"affiliate" of Reorganized Pillowtex or an "underwriter" with respect to any
security to be issued pursuant to the Plan would depend upon various facts and
circumstances applicable to that person. Accordingly, the Debtors express no
view as to whether any person would be deemed to be an "affiliate" of
Reorganized Pillowtex or an "underwriter" with respect to any security to be
issued pursuant to the Plan.
Rule 144 provides an exemption from registration under the Securities Act
for certain limited public resales of unrestricted securities by "affiliates" of
the issuer of such securities. Rule 144 allows a holder of unrestricted
securities that is an affiliate of the issuer of such securities to sell,
without registration, within any three-month period a number of shares of such
unrestricted securities that does not exceed the greater of 1% of the number of
outstanding securities in question or the average weekly trading volume in the
securities in question during the four calendar weeks preceding the date on
which notice of such sale was filed pursuant to Rule 144, subject to the
satisfaction of certain other requirements of Rule 144 regarding the manner of
sale, notice requirements and the availability of current public information
regarding the issuer. The Debtors believe that, pursuant to section 1145(c) of
the Bankruptcy Code, the New Common Stock and New Warrants to be distributed
pursuant to the Plan will be unrestricted securities for purposes of Rule 144.
In connection with prior bankruptcy cases, the staff of the SEC has taken
the position that resales by accumulators and distributors of securities
distributed under a plan of reorganization that are not "affiliates" of the
issuer are exempt from registration under the Securities Act if effected in
"ordinary trading transactions." The staff of the SEC has indicated in this
context that a transaction may be considered an "ordinary trading transaction"
if it is made on an exchange or in the over-the-counter market and does not
involve any of the following factors:
o either (i) concerted action by the recipients of securities
issued under a plan in connection with the sale of such
securities or (ii) concerted action by distributors on behalf
of one or more such recipients in connection with such sales;
o the use of informational documents concerning the offering of
the securities prepared or used to assist in the resale of
such securities, other than a bankruptcy court-approved
disclosure statement and supplements thereto and documents
filed with the SEC pursuant to the Exchange Act; or
o the payment of special compensation to brokers and dealers in
connection with the sale of such securities designed as a
special incentive to the resale of such securities (other than
the compensation that would be paid pursuant to arms' length
negotiations between a seller and a broker or dealer, each
acting unilaterally, not greater than the compensation that
would be paid for a routine similar-sized sale of similar
securities of a similar issuer).
The Debtors have not sought the views of the SEC on this matter and therefore,
no assurance can be given regarding the proper application of the "ordinary
trading transaction" exemption described above. Any persons intending to rely on
such exemption are urged to consult their own counsel as to the applicability
thereof to any particular circumstances.
GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON MAY
BE AN "AFFILIATE" OF REORGANIZED PILLOWTEX OR AN "UNDERWRITER" WITH RESPECT TO
THE NEW COMMON STOCK AND NEW WARRANTS TO BE DISTRIBUTED PURSUANT TO THE PLAN,
THE DEBTORS MAKE NO REPRESENTATIONS CONCERNING THE RIGHT OF ANY PERSON TO TRADE
IN SUCH SECURITIES AND RECOMMEND THAT HOLDERS OF CLAIMS CONSULT THEIR OWN
COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
Subsequent Transfers Under State Law
State securities laws generally provide registration exemptions for
subsequent transfers by a bona fide owner for the owner's own account and
subsequent transfers to institutional or accredited investors. Such exemptions
generally are expected to be available for subsequent transfers of the New
Common Stock and New Warrants.
80
Certain Transactions by Stockbrokers
Under section 1145(a)(4) of the Bankruptcy Code, stockbrokers effecting
transactions in the New Common Stock and New Warrants prior to the expiration of
40 days after the first date on which such securities were bona fide offered to
the public by Reorganized Pillowtex or by or through an underwriter are required
to deliver to the purchaser of such securities a copy of this Disclosure
Statement (and supplements hereto, if any, if ordered by the Bankruptcy Court)
at or before the time of delivery of such securities to the purchaser. In
connection with prior bankruptcy cases, the staff of the SEC has taken
"no-action" positions with respect to noncompliance by stockbrokers with such
requirement in circumstances in which the debtor was, and the reorganized debtor
was to continue to be, subject to and in compliance with the periodic reporting
requirements of the Exchange Act. The views of the SEC on this matter, however,
have not been sought by the Debtors and, therefore, no assurance can be given
regarding the possible consequences of noncompliance by stockbrokers with the
disclosure statement delivery requirements of section 1145(a)(4). Stockbrokers
are urged to consult their own counsel with respect to such requirements.
Registration Rights
Pursuant to the Plan, on the Effective Date, Reorganized Pillowtex will
agree to enter into agreements (collectively, the "New Registration Rights
Agreement") with certain entities providing for the registration of shares of
New Common Stock under the Securities Act. Only entities entitled to receive
distributions pursuant to the Plan of New Common Stock representing at least 10%
of the aggregate shares of New Common Stock issuable pursuant to the Plan
(collectively, "Eligible Holders") will be entitled to enter into the New
Registration Rights Agreements.
81
RECOMMENDATION AND CONCLUSION
For all of the reasons set forth in this Disclosure Statement, the
Debtors believe that the Confirmation and consummation of the Plan is preferable
to all other alternatives. Consequently, the Debtors urge all holders of Claims
in voting Classes to vote to accept the Plan and to evidence their acceptance by
duly completing and returning their Ballots so that they will be received on or
before the Voting Deadline.
Dated: December 28, 2001 Respectfully submitted,
PILLOWTEX CORPORATION (for itself and on behalf
of the Pillowtex Subsidiary Debtors)
By: /s/ ANTHONY T. WILLIAMS
-----------------------------------
Anthony T. Williams, President and
Chief Operating Officer
COUNSEL:
/s/ WILLIAM H. SUDELL, JR.
--------------------------------------
William H. Sudell, Jr. (DE 463)
Eric D. Schwartz (DE 3134)
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 North Market Street
Wilmington, Delaware 19899-1347
(302) 658-9200
- and -
David G. Heiman (OH 0038271)
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
Henry L. Gompf (TX 08116400)
Gregory M. Gordon (TX 08435300)
Sharon A. Alexander (TX 00998580)
Daniel P. Winikka (TX 00794873)
JONES, DAY, REAVIS & POGUE
2727 North Harwood Street
Dallas, Texas 75201
(214) 220-3939
ATTORNEYS FOR DEBTORS AND
DEBTORS IN POSSESSION
82
GLOSSARY
(continued)
Page Page
---- ----
1996 Agreement .................................. 26 DGCL ............................................ 42
1998 Agreement .................................. 26 DIP Financing Facility .......................... 22
1998 Poly Fiber Agreements ...................... 27 Distribution Date ............................... 53
2000 Agreement .................................. 26 EBITDA Covenant ................................. 15
2000 Poly Fiber Agreements ...................... 27 Effective Date Balance Sheet .................... 34
Acquiring Person ................................ 53 Eligible Holders ................................ 81
Addenda ......................................... 27 Emergence Performance Bonus Plan ................ 23
Alabama Revenue Bonds ........................... 18 Exclusive Periods ............................... 28
Allenberg ....................................... 25 Exempt Acquiror ................................. 53
Arthur Andersen ................................. 25 Existing Liens .................................. 22
Balance Sheet Adjustments ....................... 34 EYCF ............................................ 25
Beacon .......................................... 14 FCI Corporate ................................... 30
Beacon Contracts ................................ 29 FCI Operations .................................. 30
Beacon Purchase Agreement ....................... 29 Fieldcrest Cannon Acquisition ................... 14
Blanket Division ................................ 14 First Day Motions ............................... 20
Boot ............................................ 77 First DIP Amendment ............................. 22
Bylaws .......................................... 12 Flip-in Event ................................... 53
Cash Claimants .................................. 19 Flip-over Event ................................. 54
Cash Collateral ................................. 22 Fourth Amendment ................................ 23
Certificate ..................................... 12 Fund ............................................ 21
COD ............................................. 76 GAAP ............................................ 36
Conversion Stock ................................ 15 GATT ............................................ 58
Converting Holders .............................. 15 General Bar Date ................................ 28
Creditors' Committee ............................ 22 Hawkinsville Revenue Bonds ...................... 18
Critical Vendor Claims .......................... 21 Huntley ......................................... 25
Critical Vendors ................................ 20 Hypothetical Liquidation Analysis ............... 74
Debtors ............................... Cover Page 1 Hypothetical Liquidation Value .................. 73
83
GLOSSARY
(continued)
Page Page
---- ----
Industrial Revenue Bonds ........................ 18 Pillowtex Third Quarter 2001 Form 10-Q ......... vi
Insured Program ................................. 21 Plan .................................. Cover Page 1
Interbrand ...................................... 25 Polyester Fiber ................................ 26
Intercreditor Agreement ......................... 17 Preferred Stock Designation .................... 42
IRB Facilities .................................. 18 Prepetition Balance ............................ 26
Leshner ......................................... 14 Prepetition Cotton Contracts ................... 25
Licensed Products ............................... 27 Prepetition Lenders ............................ 15
Lockheed ........................................ 27 Prepetition Term Notes ......................... 17
Loom Purchase Agreement ......................... 30 PRLC ........................................... 27
Looms ........................................... 30 Professional Fee Carve Out ..................... 22
Macon-Bibb Revenue Bonds ........................ 18 Projection Period .............................. 34
MBFC Revenue Bonds .............................. 18 Projections .................................... 34
Miscellaneous Asset Sales Order ................. 30 Purchase Price ................................. 53
NCSIGA .......................................... 21 Purchaser ...................................... 29
New Preferred Stock ............................. 11 Ralph Lauren ................................... 27
New Registration Rights Agreement ............... 81 Ralph Lauren License Agreement ................. 27
New Warrant Agreement ........................... 11 Redemption Price ............................... 54
NOL's ........................................... 76 Rejection Damage Claims ........................ 28
NYSE ............................................ 19 Retention Incentive Payment .................... 23
Old 6% Debenture Promissory Notes ............... 19 Retention Incentive Plan ....................... 23
Parkdale America ................................ 26 Retention Plan ................................. 23
Parkdale Mills .................................. 26 Revolving Credit Facility ...................... 17
PEDFA Revenue Bonds ............................. 18 RLHC ........................................... 27
Pillowtex ............................. Cover Page 1 Sale Agreement ................................. 27
Pillowtex 2000 Form 10-K ........................ vi SEC ................................... Cover Page 2
Pillowtex Merger ................................ 1 Segregated Account ............................. 9
Pillowtex MSC ................................... 26 Self-Insured Claims ............................ 21
84
GLOSSARY
(continued)
Page Page
---- ----
Self-Insured Programs ........................... 21 Technology Agreement ............................. 27
Self-Insured States ............................. 21 Textrade ......................................... 30
Series A Preferred Shares ....................... 53 Third DIP Amendment .............................. 22
Settlement Agreement ............................ 28 Transition Period ................................ 21
Severance Plan .................................. 23 Treasury Regulations ............................. 75
Share Acquisition Date .......................... 53 Trust Fund Taxes ................................. 20
Staple Cotton ................................... 25 UNITE ............................................ 44
Stern Stewart ................................... 25 Voting Deadline ........................ Cover Page 1
Surety Bonds .................................... 21 Wellman .......................................... 27
Tax Code ........................................ 75 WestPoint ........................................ 27
Taxing Authorities .............................. 20
85
EXHIBIT I
DEBTOR SUBSIDIARIES
Amoskeag Management Corporation
Bangor Investment Company
Beacon Manufacturing Company
Crestfield Cotton Company
Downeast Securities Corporation
Encee, Inc.
FCC Canada, Inc.
Fieldcrest Cannon, Inc.
Fieldcrest Cannon Transportation, Inc.
Fieldcrest Cannon Financing, Inc.
FCI Corporate LLC (formerly known as Fieldcrest Cannon International, Inc.)
Fieldcrest Cannon Licensing, Inc.
Fieldcrest Cannon SF, Inc.
The Leshner Corporation
Leshner of California, Inc.
Manetta Home Fashions, Inc.
Moore's Falls Corporation
Opelika Industries, Inc.
Pillowtex, Inc.
Pillowtex Management Services Company
PTEX Holding Company
FCI Operations LLC (formerly known as St. Marys, Inc.)
Tennessee Woolen Mills, Inc.
86
EXHIBIT II
JOINT PLAN OF REORGANIZATION OF
PILLOWTEX CORPORATION AND ITS DEBTOR SUBSIDIARIES
[See Exhibit 99.2]
87
EXHIBIT III
LIQUIDATION ANALYSIS
88
Pillowtex Corporation and Its Debtor Subsidiaries
Hypothetical Liquidation Analysis
The liquidation analysis presented herein (the "Hypothetical Liquidation
Analysis") reflects the projected outcome of the hypothetical, orderly
liquidation of the Debtors/1/ under chapter 7 of the Bankruptcy Code. The
Hypothetical Liquidation Analysis was performed on a consolidated basis,
resulting in the elimination of certain Intercompany Claims, and assumes that
distributions are made by the chapter 7 trustee beginning six months following
commencement of the liquidation and completed within twelve months of
commencement on average. As reflected in the Hypothetical Liquidation Analysis,
projected proceeds from the orderly liquidation of the Debtors' assets are
substantially less than would be necessary to satisfy obligations under the Bank
Loan Claims and other Secured Claims. Liquidation proceeds would all be
distributed to satisfy obligations under the DIP Financing Facility,
Administrative Claims in respect of Designated Post-Petition Loans and Bank Loan
Claims whether the Debtors' estates were liquidated on an entity-by-entity basis
or on a consolidated basis because (a) the Bank Loan Claims are secured by the
vast majority of all the Debtors' assets and are guaranteed by each of the
Debtors and (b) the few postpetition assets and other assets of any value that
are not collateral for the Bank Loan Claims are, pursuant to the Final DIP
Order, collateral for all obligations under the DIP Financing Facility and for
the Designated Post-Petition Loans, and have a value substantially less than
those obligations. A formal hypothetical liquidation analysis was not performed
on an entity-by-entity basis because the ultimate distribution of liquidation
proceeds to creditors under such an analysis would not be different from the
distribution under the Hypothetical Liquidation Analysis.
Underlying the Hypothetical Liquidation Analysis are a number of estimates and
assumptions that, although developed and considered reasonable by the Debtors'
management and its advisors, are inherently subject to economic, competitive and
other contingencies beyond the control of the Debtors. It is possible that the
time needed to dispose of the operating assets could exceed the timeframes
assumed in this analysis, causing an adverse impact on the recoveries depicted
herein. Similarly, other assumptions with respect to the liquidation process may
be subject to change. For all of the foregoing reasons, there can be no
assurance that the values reflected in the Hypothetical Liquidation Analysis or
recovery percentages would be realized if the Debtors were, in fact, liquidated
in chapter 7 cases, and actual results could vary materially from those shown in
this analysis. The following major assumptions have been made in this
Liquidation Analysis:
. The book values used in this analysis are the projected asset values as of
June 29, 2002, the assumed Effective Date in the Disclosure Statement.
. No cash and cash equivalents are projected to be available on the Effective
Date. Estimated checks outstanding as of June 30, 2002 of $10 million have
been added to the projected borrowings under the DIP Financing Facility as
of the Effective Date and have been eliminated from postpetition payable
balances.
. The majority of accounts receivable are assumed to be collected over a
three to six month period, with any remaining balances sent to a collection
agency. Recovery rates on domestic receivables are largely based upon
advance rates on accounts receivable provided by asset based lenders in the
home textile industry, recent discussions with these lenders, and the
Debtors' accounts receivable aging. Recovery rates are generally less than
100% because of the impact of dilution (returns and chargebacks) and likely
increases in disputes with retailers resulting from the discontinuation of
manufacturing operations. Receivables due from entities outside the
domestic United States and Canada, from entities that no longer do business
with the Debtors and from companies that have filed for bankruptcy
protection have been heavily discounted with assumed collection ranging
between 0% and 40% of gross value.
. Inventories, composed of raw materials, work-in-process and finished goods,
are assumed liquidated over a three to four month period, with remaining
balances sold for scrap or destroyed. Raw materials includes both commodity
materials such as cotton and feathers that are assumed to be recoverable at
approximately 65% of cost based on current market prices and advance rates
on similar asset based financings and a significant amount of supplies and
other materials (including dyes and chemicals) that are assumed to have
much lower resale value. Work-in-process inventories are assumed liquidated
for 10% and 20% of cost based on the Debtors' recent experience with the
sale of similar products. Finished goods inventory recoveries reflect
different percentages for each of the Debtors' product lines and brands,
primarily based upon advance rates on inventory provided by asset based
lenders in the home textile industry, recent discussions with these
lenders, and actual recoveries on distressed merchandise sales completed in
2002. The liquidation of inventories is anticipated to require significant
logistical and sales related costs that are described in the paragraph
below on liquidation costs.
. Machinery and equipment (included in "Plant, Property and Equipment")
include textile equipment and other miscellaneous equipment at the Debtors'
various facilities and offices, including furniture and fixtures, which
have been assumed sold over a
________________
/1/ Capitalized terms not otherwise defined herein have the meanings given to
them in the Joint Plan of Reorganization of Pillowtex Corporation and its Debtor
Subsidiaries.
nine to twelve month liquidation period with all the equipment necessarily
being brought to market at the same time. Proceeds from these sales have
been estimated based upon the results of recently completed sales and
auctions of textile equipment and upon general market conditions. These
results were then applied to the equipment at each facility, and adjusted
as necessary based upon certain factors, including the age of the equipment
at each facility and whether the equipment is for general use or
specialized for the Debtors' unique facilities. The analysis takes into
account the significant number of plant closures and bankruptcies in the
industry over the past year (estimated at approximately 200 plant closures
during the past year) and the trend toward the use of foreign manufacturers
to produce home textiles. Recoveries are presented net of any costs to
employ an auctioneer and any tax obligations related to the equipment being
sold.
. Land and buildings (included in "Plant, Property and Equipment") include
the various manufacturing, distribution and office facilities owned by the
Debtors, which have been assumed to be sold over a nine to twelve month
liquidation period. The value of land and buildings was estimated based
upon the results of recent sales and broker quotes that were then applied
to each of the Debtors' locations and adjusted based on qualitative factors
including location, age, number of stories and configuration of the
facility.
. Intangible Assets primarily consists of unamortized costs related to
acquisitions (which are assumed to have no value) and the Debtors' various
trademarks and brand names. The Debtors' brand names and trademarks are
assumed to have significantly less value in liquidation than on a going
concern basis because of the negative impact of a forced sale environment
and the resulting negative connotations to customers and consumers. The
value of the intangibles was based on forecasts of potential future branded
sales, fair and reasonable royalty rates for similar brands, administrative
costs, taxes and the liquidation environment.
. Other Current and Long-Term Assets primarily consists of miscellaneous
other receivables, assets currently classified as assets held for sale and
recorded at estimated net realizable value, pension assets, notes
receivable and assets of the Blanket Division (which was sold September 6,
2001) that are already recorded at estimated net realizable value.
Liquidation values were derived based on the individual characteristics of
each asset, recent experience with similar assets (when applicable) and
consideration of the overall liquidation environment. Because of the
uncertainty of success and collection and the attendant costs of
litigation, proceeds from preference or other avoidance actions are assumed
to be immaterial.
. Senior Secured Claims include miscellaneous non-bank Secured Claims
primarily arising from certain mechanics' liens, Industrial Revenue Bonds
Claims and Bank Loan Claims. Bank Loan Claims are presented before the
application to principal of adequate protection payments made and projected
to be made through June 29, 2002. Industrial Revenue Bond Claims are
secured by letters of credit that are assumed drawn in satisfaction of
these Claims. Bank Loan Claims are presented before the application to
principal of adequate protection payments made and projected to be made
through June 29, 2002.
2
PILLOWTEX CORPORATION, ET AL.
HYPOTHETICAL LIQUIDATION ANALYSIS
($ in thousands)
Hypothetical Hypothetical
Projected Liquidation Recovery Liquidation Value
Net Book Value -------------------- -----------------
June 29, 2002 Low High Low High
------------- --- ---- --- ----
Cash ...................................... $ -- 0% 0% $ -- $ --
Accounts Receivable (net) ................. 155,971 73% 79% 114,000 123,000
Inventory (net) ........................... 195,973 37% 48% 73,000 94,000
Property, Plant & Equipment ............... 401,439 9% 16% 38,000 66,000
Intangible Assets ......................... 219,789 10% 16% 23,000 35,000
Other Current & Long-Term Assets .......... 49,379 26% 34% 13,000 17,000
----------- ----------- ----------- ----------- -----------
$ 1,022,551 26% 33% $ 261,000 $ 335,000
===========
Less: Costs to Liquidate ................. (55,779) (49,889)
----------- -----------
HYPOTHETICAL LIQUIDATION VALUE
AVAILABLE FOR DISTRIBUTION ............................................................... $ 205,221 $ 285,111
=========== ===========
Estimated Super-Priority and Post-Petition
Secured Claims
DIP Financing Obligations ................................................................ $ 33,953 $ 33,953
Designated Post-Petition Loans ........................................................... 150,000 150,000
----------- -----------
Total Super-Priority/Post-Petition Secured............................................... 183,953 183,953
HYPOTHETICAL LIQUIDATION VALUE
AVAILABLE FOR SECURED PRE-PETITION
CLAIMS ................................................................................... $ 21,268 $ 101,158
=========== ===========
Pre-Petition Secured Claims
Non-Bank Secured Claims .................................................................. 628 628
Industrial Revenue Bonds ................................................................. -- --
Bank Loan Claims (before application of
Adequate Protection Payments) ............................................................ 481,073 481,073
----------- -----------
Total Pre-Petition Secured .............................................................. 481,701 481,701
HYPOTHETICAL LIQUIDATION VALUE
AVAILABLE FOR JUNIOR SECURED
CLAIMS, ADMINISTRATIVE CLAIMS AND
UNSECURED CLAIMS ......................................................................... $ 0 $ 0
=========== ===========
3