Exhibit 99.2
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 First amended 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
Sharon A. Alexander (TX 00998580)
Henry L. Gompf (TX 08116400)
Gregory M. Gordon (TX 08435300)
Daniel P. Winikka (TX 00794873)
JONES, DAY, REAVIS & POGUE
2727 North Harwood Street
Dallas, Texas 75201
(214) 220-3939
ATTORNEYS FOR DEBTORS AND
February 25, 2002 DEBTORS IN POSSESSION
DISCLOSURE STATEMENT, DATED FEBRUARY 25, 2002
SOLICITATION OF VOTES
WITH RESPECT TO THE
FIRST AMENDED 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") AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS APPOINTED IN THE
REORGANIZATION CASES (THE "CREDITORS' COMMITTEE") BELIEVE THAT THE FIRST AMENDED
JOINT PLAN OF REORGANIZATION OF PILLOWTEX CORPORATION AND ITS DEBTOR
SUBSIDIARIES, DATED FEBRUARY 25, 2002 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 79 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 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 63, 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 Analysis attached as Exhibit III to this Disclosure
Statement 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
----
INTRODUCTION.......................................................................................... 1
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.......................................................................... 7
Additional Information Regarding Assertion and Treatment of Administrative Claims and Priority
Tax Claims..................................................................................... 7
Administrative Claims...................................................................... 7
Priority Tax Claims........................................................................ 9
Special Provisions Regarding the Treatment of Allowed Secondary Liability Claims.................. 9
Summary of Terms of Certain Securities To Be Distributed Pursuant to the Plan..................... 10
Equity Securities.......................................................................... 10
Exit Term Loan Notes....................................................................... 11
Exit Financing Revolver Facility and Other Post-Reorganization Indebtedness....................... 11
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.............................................. 13
Historical Overview............................................................................... 13
Introduction............................................................................... 13
Blanket Manufacturing Acquisitions......................................................... 14
Fieldcrest Cannon Acquisition.............................................................. 14
Leshner Acquisition........................................................................ 14
Overleverage...................................................................................... 14
Overview................................................................................... 14
Negotiations with Prepetition Lenders...................................................... 14
Attempted Restructuring of Old 6% Debentures............................................... 15
Industry and Competitive Pressures................................................................ 15
Integration and Operational Difficulties.......................................................... 15
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.......................................................................... 17
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
-----------------
(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 or Unexpired Leases................................................... 25
Rejection of Aircraft Lease............................................................... 25
Assumption and Rejection of Certain Contracts to Purchase Cotton.......................... 25
Assumption of 2000 Parkdale Agreement..................................................... 26
Assumption of Wellman Agreement........................................................... 27
Rejection of Technology Agreement......................................................... 27
Assumption of Ralph Lauren License Agreement and Related Dispute.......................... 27
CIT's Motion for Administrative Expense Claim............................................. 28
State Street's Motion for Leave of Court to Prosecute Adversary Proceeding on Behalf
of Fieldcrest Cannon...................................................................... 29
SouthTrust Bank and DukeSolutions Disputes................................................ 29
Exclusivity............................................................................... 31
Claims Process and Bar Dates.............................................................. 31
Postpetition Operations............................................................................ 31
Operational and Cost Reduction Initiatives................................................ 31
Blanket Division and Other Dispositions................................................... 32
Fieldcrest Cannon Employee Restructuring.................................................. 32
The Settlement of Potential Actions Against the Prepetition Lenders and Certain Unsecured
Creditors..................................................................................... 33
REORGANIZED PILLOWTEX....................................................................................... 33
Pillowtex Merger................................................................................... 33
Other Restructuring Transactions................................................................... 33
Business of Reorganized Pillowtex.................................................................. 34
Business Plan and Strategy for Reorganized Pillowtex............................................... 34
Branding and Marketing.................................................................... 34
Capacity Rationalization.................................................................. 35
Strategic Sourcing........................................................................ 35
Total Quality Management.................................................................. 35
Selected Historical Financial Information.......................................................... 36
Projected Financial Information.................................................................... 37
Introduction.............................................................................. 37
Principal Assumptions..................................................................... 37
Projections............................................................................... 40
Management......................................................................................... 47
Reorganized Pillowtex Executive Officers.................................................. 47
Executive Compensation.................................................................... 48
Reorganized Pillowtex Board of Directors.................................................. 49
Voting Power and Terms of Directors....................................................... 50
Board Committees.......................................................................... 50
Director Nomination Procedures............................................................ 51
Director Compensation..................................................................... 51
Employee Benefit Matters........................................................................... 51
Existing Benefit Plans, Programs and Agreements........................................... 51
New Benefit Plan, Programs and Agreements................................................. 54
Certain Corporate Governance Matters............................................................... 55
Removal of Directors and Filling Vacancies in Directorships............................... 55
Stockholder Action and Special Meetings of Stockholders................................... 55
Consent of Stockholders in Lieu of Meeting................................................ 55
Authorized But Unissued Shares............................................................ 55
ii
TABLE OF CONTENTS
-----------------
(continued)
Page
----
Delaware Section 203...................................................................... 56
Indemnity Arrangements............................................................................. 56
Existing Indemnification Obligations...................................................... 56
Treatment of Existing Indemnification Obligations Under the Plan.......................... 56
New Indemnification Arrangements.......................................................... 57
SECURITIES TO BE DISTRIBUTED PURSUANT TO THE PLAN; POST-REORGANIZATION INDEBTEDNESS......................... 58
Reorganization Value............................................................................... 58
New Common Stock................................................................................... 60
New Warrants....................................................................................... 60
New Preferred Stock................................................................................ 61
Exit Financing Revolver Facility................................................................... 61
Exit Term Loan..................................................................................... 62
Intercreditor Arrangements......................................................................... 62
Outstanding Industrial Revenue Bonds............................................................... 62
MBFC Revenue Bonds........................................................................ 63
Alabama Revenue Bonds..................................................................... 63
Tax Notes.......................................................................................... 63
RISK FACTORS................................................................................................ 63
Projections Are Inherently Uncertain............................................................... 63
Substantial Leverage Will Continue................................................................. 64
Substantially All of the Debtors' Assets Will Be Subject to Security Interests..................... 64
Dividends Are Not Anticipated; Payment of Dividends Is Subject to Restriction...................... 64
There Is No Established Market for New Common Stock or New Warrants; Volatility Is Possible........ 64
Historical Financial Information Will Not Be Comparable............................................ 65
Disputed Claims May Adversely Affect Distribution Amounts.......................................... 65
Enforcement of Contractual Subordination Rights May Adversely Affect Distribution Amounts to
Certain Creditors............................................................................. 65
Dependence on Specific Raw Materials............................................................... 66
Certain Stockholders May Exercise Significant Control.............................................. 66
Relationships with Suppliers and Vendors........................................................... 66
Dependence on Supply Sources in China.............................................................. 66
Industry Competition............................................................................... 67
Adverse Retail Industry Conditions................................................................. 67
Dependence on Specific Brand Names................................................................. 67
Risk of Loss of Material Customers................................................................. 67
Labor Relations.................................................................................... 68
Seasonality of Business............................................................................ 68
GENERAL INFORMATION CONCERNING THE PLAN..................................................................... 68
Discharge of Claims and Termination of Interests; Related Injunction............................... 68
Preservation of Rights of Action Held by the Debtors or the Reorganized Debtors.................... 69
Releases and Related Injunction.................................................................... 70
Continuation of Certain Employee and Retiree Benefits.............................................. 71
Executory Contracts or Unexpired Leases............................................................ 71
DISTRIBUTIONS UNDER THE PLAN................................................................................ 73
General............................................................................................ 73
Methods of Distributions........................................................................... 73
Distributions to Holders of Allowed Claims................................................ 73
Distributions in Respect of Old 6% Debentures............................................. 73
Compensation and Reimbursement for Services Related to Distributions...................... 73
Delivery of Distributions in General...................................................... 73
Special Provisions for Distributions to Holders of Old Senior Subordinated Notes
Claims or Old 6% Debenture Claims......................................................... 74
iii
TABLE OF CONTENTS
-----------------
(continued)
Page
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Undeliverable or Unclaimed Distributions...................................................... 74
Distribution Record Date...................................................................... 75
Means of Cash Payments........................................................................ 75
Timing and Calculation of Amounts To Be Distributed........................................... 75
Distributions of New Common Stock and New Warrants................................... 76
De Minimis Distributions............................................................. 76
Compliance with Tax Requirements..................................................... 76
Surrender of Canceled Securities or Other Instruments......................................... 76
Setoffs....................................................................................... 77
Disputed Claims; Reserve and Estimations...................................................... 77
Funding of Unsecured Claims Reserve.................................................. 78
Distributions on Account of Disputed Claims Once They Are Allowed.................... 78
Payment of Post-Effective Date Interest from Cash Investment Yield............................ 78
Objections to Claims and Authority to Prosecute Objections.................................... 78
Dissolution of the Creditors' Committees...................................................... 79
VOTING AND CONFIRMATION OF THE PLAN.................................................................... 79
General....................................................................................... 79
Voting Procedures and Requirements............................................................ 80
Confirmation Hearing.......................................................................... 81
Confirmation.................................................................................. 81
Acceptance or Cramdown........................................................................ 81
Best Interests Test; Liquidation Analysis..................................................... 82
Feasibility................................................................................... 83
Compliance with Applicable Provisions of the Bankruptcy Code.................................. 83
Alternatives to Confirmation and Consummation of the Plan..................................... 83
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF CONSUMMATION OF THE PLAN.................................... 84
General....................................................................................... 84
Federal Income Tax Consequences to the Debtors; Reduction of the Debtors' Indebtedness........ 84
Federal Income Tax Consequences to Holders of Claims.......................................... 85
Definition of Securities............................................................. 85
Holders of Claims Constituting Tax Securities........................................ 85
Holders of Claims Not Constituting Tax Securities.................................... 86
Dividend and Interest Income Earned by the Unsecured Claims Reserve.................. 86
Certain Other Tax Considerations for Holders of Claims........................................ 87
Receipt of Pre-Effective Date Interest............................................... 87
Receipt of Dividend and Interest Income Earned by the Unsecured Claims Reserve....... 87
Reinstatement of Claims.............................................................. 87
Bad Debt Deduction................................................................... 87
Information Reporting and Backup Withholding......................................... 87
APPLICABILITY OF CERTAIN FEDERAL AND STATE SECURITIES LAWS............................................. 87
General....................................................................................... 87
Bankruptcy Code Exemptions from Registration Requirements..................................... 88
Initial Offer and Sale of Securities................................................. 88
Subsequent Transfers of Securities................................................... 88
Subsequent Transfers Under State Law................................................. 89
Certain Transactions by Stockbrokers.......................................................... 89
Registration Rights........................................................................... 90
RECOMMENDATION AND CONCLUSION.......................................................................... 91
iv
TABLE OF EXHIBITS
-----------------
Exhibit I - Debtor Subsidiaries
Exhibit II - First Amended 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. Pillowtex expects to file its Annual Report
on Form 10-K for the year ended December 29, 2001 (the "Pillowtex 2001 Form 10-K
") with the SEC on or before March 29, 2002. The Pillowtex 2001 Form 10-K will
be made available on the Document Website promptly after it has been filed with
the SEC.
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:
. the cancellation of certain indebtedness in exchange for cash, New
Common Stock and/or New Warrants;
. the cancellation of indebtedness under the Designated Post-Petition
Loans in exchange for Exit Term Loan Notes;
. the cancellation of the Old Common Stock of Pillowtex and Old
Preferred Stock of Pillowtex;
. the assumption, assumption and assignment, or rejection of Executory
Contracts or Unexpired Leases to which any Debtor is a party;
. the selection of boards of directors of the Reorganized Debtors;
. the merger of Pillowtex with and into New Pillowtex, a Delaware
corporation, with New Pillowtex as the surviving corporation (the
"Pillowtex Merger"); and
. the corporate restructuring of certain Pillowtex Subsidiary Debtors in
order 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. (S)
1125(a)(1).
THE DEBTORS' BOARDS OF DIRECTORS AND THE CREDITORS' COMMITTEE 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. A SUMMARY OF THE VOTING INSTRUCTIONS IS SET FORTH UNDER
"VOTING AND CONFIRMATION OF THE PLAN -- VOTING PROCEDURES AND REQUIREMENTS."
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 cancellation of
each share of Old Common Stock of Pillowtex and Old Preferred Stock of
Pillowtex; (b) the Pillowtex Merger; (c) the distribution of New Common Stock
and New Warrants to holders of certain Allowed Claims; and (d) the liquidation
or consolidation of certain of Pillowtex's subsidiaries. See "-- Summary of
Classes and Treatment of Claims and Interests" and "Reorganized Pillowtex --
Pillowtex Merger" and "--Other 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/or New Warrants of Reorganized
Pillowtex in respect of their Allowed Claims. See "Securities To Be Distributed
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 or (b) will receive cash equal to the value of the collateral
securing their Claims and an Unsecured Claim for the deficiency. Shares of Old
Common Stock of Pillowtex and Old Preferred Stock of Pillowtex outstanding
immediately prior to the Effective Date 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 28, 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
certain Secured Claims against the Debtors, has been subdivided into seven
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." For purposes of
estimating the percentage recovery set forth in "-- Summary of Classes and
Treatment of Claims and Interests" for Class 6, it is assumed that (a) Class 6
accepts the Plan and (b) all creditors in Class 6 share in the distributions in
respect of Class 6 on a Pro Rata basis; however, (i) if Class 6 does not accept
the Plan, the percentage recovery for holders of Overline Facility Claims and
Aircraft Lease Claims and holders of Old 6% Debentures and Old Senior
Subordinated Notes will differ as a result of the subordination rights of
holders of Overline Facility Claims and Aircraft Lease Claims against holders of
Old 6% Debentures and Old Senior Subordinated Notes and (ii) whether or not if
Class 6 accepts the Plan, the percentage recovery for holders of Old 6%
Debentures and Old Senior Subordinated Notes will differ as a result of the
State Street Settlement. See "Operations During the Reorganization Cases -- Case
Administration and Related Activities -- State Street's Motion for Leave of
Court to Prosecute Adversary Proceeding on Behalf of Fieldcrest Cannon." In
addition, the percentage recovery for creditors in Class 6 could differ if the
estimate of the Allowed Claims in Class 6, despite the Debtors' reasonable best
efforts, proves to be inaccurate.
2
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
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
(including claims in respect of Designated Post-Petition Loans under the DIP
Order) and Priority Tax Claims have not been classified. For a discussion of
certain additional matters related to Administrative Claims, including
Designated Post-Petition Loan Claims and Priority Tax Claims, see "-- Additional
Information Regarding Assertion and Treatment of Administrative Claims and
Priority Tax 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 Disputed Claims. Certain
of the Disputed Claims are material, and the total amount of all Claims
ultimately allowed 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/or 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/or 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 $200.1 million, or
$10.76 per share, as of the Effective Date, based upon the midpoint of the range
for assumed reorganization value of the Reorganized Debtors; (b) the New
Warrants to be distributed to the holders of Allowed Claims under the Plan will
have an estimated aggregate value of approximately $7.9 million, or $2.24 per
New Warrant, as of the Effective Date based upon a computed theoretical value
for such New Warrants; and (c) that Class 6 accepts the Plan. See "Securities To
Be Distributed 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 factors that could materially affect the value of the New
Common Stock and New Warrants.
3
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 factors, 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. However, (i) if Class 6 does
not accept the Plan, the percentage recovery for holders of Overline Facility
Claims and Aircraft Lease Claims and holders of Old 6% Debentures and Old Senior
Subordinated Notes will differ as a result of the subordination rights of
holders of Overline Facility Claims and Aircraft Lease Claims against holders of
Old 6% Debentures and Old Senior Subordinated Notes and (ii) whether or not if
Class 6 accepts the Plan, the percentage recovery for holders of Old 6%
Debentures and Old Senior Subordinated Notes will differ as a result of the
State Street Settlement. See "Operations During the Reorganization Cases -- Case
Administration and Related Activities -- State Street's Motion for Leave of
Court to Prosecute Adversary Proceeding on Behalf of Fieldcrest Cannon."
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 that 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
Priority Claims against any Debtor entitled to priority the amount of the Allowed Claim.
under Sections 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
Unsecured Claims against any Debtor that otherwise would 10% of the amount of the Allowed Claim.
be classified in Class except that each applicable Claim
is equal to or less than $2,500. For of treatment under
Class 2, multiple Claims of a holder against a Debtor
arising in a series of similar or related transactions
between the ebtor and the original holder of the Claims
will be treated as a single 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 and any letters
Industrial Revenue Bond Claims against any Debtor. of credit issued in respect thereof under the
Industrial Revenue Bond Claims include Claims arising Prepetition Credit Facility be replaced, substituted
under or in respect of any of the documents or agreements or otherwise satisfied with equivalent letters of
pertaining to the Alabama Revenue Bonds, MBFC Revenue credit to be issued under the Exit Financing Revolver
Bonds or a loan of proceeds from any of those bonds to Facility.
any of the Debtors.
Estimated Aggregate Claims Amount: $11,380,000 Estimated Percentage Recovery: 100%
- --------------------------------------------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------------------------------------------
Class/Description Proposed Treatment
- --------------------------------------------------------------------------------------------------------------------
Class 4 - Divisions 4A, 4B, 4C, 4D and 4E (Other Secured Unimpaired; on the Effective Date, each holder of an
Claims): Allowed Claim in Division 4A, 4B, 4C, 4D or 4E 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 seven separate Divisions (4A through 4F).
Divisions 4A through 4E consist of Secured Claims against
any Debtor pertaining to mechanics' liens asserted by the
following:
. 4A - R. Phillips Construction
. 4B - Smith Gray Electric
. 4C - Southern Mechanical Services
. 4D - Adams Electric
. 4E - Sander Brothers
Estimated Aggregate Claims Amount: $544,559 Estimated Percentage Recovery: 100%
- --------------------------------------------------------------------------------------------------------------------
Class 4 - Division 4F (Other Secured Claims): Unimpaired; on the Effective Date, each holder of an
Allowed Claim in Division 4F will receive, in full
Secured Claims against any Debtor that are not otherwise satisfaction of the Allowed Claim, monthly payments
classified in Class 3 or 5 are included in Class 4, which for up to 60 months bearing interest at a rate of 8%
is divided into seven separate Divisions (4A through 4G). per annum as provided for in the Stipulation and
Division 4F consists of Secured Claims arising under or Agreed Order Regarding Secured Claim of General
evidenced by Debtor Opelika Industries, Inc.'s Promissory Electric Capital Corporation signed by the Bankruptcy
Note dated December 29, 1995 payable to General Electric Court on November 16, 2001.
Capital Corporation.
Estimated Aggregate Claims Amount: $125,000 Estimated Percentage Recovery: 100%
- --------------------------------------------------------------------------------------------------------------------
Class 4 - Division 4G (Other Secured Claims): Impaired; if the Bankruptcy Court rules that the MESA
is a financing arrangement, then on the later of the
Secured Claims against any Debtor that are not otherwise Effective Date or the date that the Bankruptcy Court
classified in Class 3 or 5 are included in Class 4, which rules, unless otherwise agreed by a Claim holder and
is divided into seven separate Divisions (4A through 4G). each applicable Debtor, each holder of an Allowed
Division 4G consists of Secured Claims, if any, arising Claim in Division 4G will receive, in full satisfaction
under the Master Energy Services Agreement, dated as of of its Allowed Claim, cash equal to the value of the
June 3, 1998 between Pillowtex and DukeSolutions, Inc. collateral securing the Allowed Claim (but only to the
(the "MESA"). extent the holder has a valid, enforceable lien on such
collateral) and an Unsecured Claim (to be included in
Class 6) for the remainder of the Allowed Claim amount.
If the Bankruptcy Court rules that the MESA is a true
lease, there will be no Secured Claim with respect to
the MESA and the MESA will be treated as an Unexpired
Lease pursuant to Article V of the Plan.
Estimated Aggregate Claims Amount: $17,190 Estimated Percentage Recovery: 100%
- --------------------------------------------------------------------------------------------------------------------
5
- --------------------------------------------------------------------------------------------------------------------
Class/Description Proposed Treatment
- --------------------------------------------------------------------------------------------------------------------
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) if
Prepetition Credit Facility. Class 6 accepts the Plan, a Pro Rata share of
18,034,200 shares of New Common Stock or (b) if Class
6 does not accept the Plan, a Pro Rata share of
18,411,400 shares of New Common Stock
Estimated Aggregate Claims Amount: $474,353,000 Estimated Percentage Recovery: 40.9%
- --------------------------------------------------------------------------------------------------------------------
Class 6 (Unsecured Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 6 will receive in full
Overline Facility Claims, Aircraft Lease Claims, Old satisfaction of its Allowed Claim: (a) if Class 6
Senior Subordinated Notes Claims, Old 6% Debenture accepts the Plan, a Pro Rata share of (i) 565,800
Claims and Old 6% Debenture Promissory Note Claims shares of New Common Stock ,subject to the State
against any Debtor and Unsecured Claims against any Street Settlement, and (ii) New Warrants to purchase
Debtor that are not otherwise classified under Article 3,529,412 shares of New Common Stock or (b) if Class
II of the Plan, including Trade Claims and Tort Claims. 6 does not accept the Plan, a Pro Rata share of 188,600
shares of New Common Stock and no New Warrants,
subject to the State Street Settlement and the
Estimated Aggregate Claims Amount: $552,356,000 subordination rights of holders of Overline Facility
Claims and Aircraft Lease Claims.
Estimated Percentage Recovery: 2.5%
- --------------------------------------------------------------------------------------------------------------------
Class 7 (Intercompany Claims): Unimpaired; on the Effective Date, Allowed
Intercompany Claims will be Reinstated.
Intercompany Claims that are not Administrative Claims.
Estimated Percentage Recovery: 100%
- --------------------------------------------------------------------------------------------------------------------
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
Interests in Pillowtex on account of the Old Preferred the Interests 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
Interests in Pillowtex on account of the Old Common the Interests will be canceled on the Effective Date.
Stock of Pillowtex.
Estimated Percentage Recovery: 0%
- --------------------------------------------------------------------------------------------------------------------
Class 10 (Pillowtex Subsidiary Debtors Old Common Stock Unimpaired; on the Effective Date, Interests in Class
Interests): 10 will be Reinstated.
Interests on account of the Old Common Stock of the Estimated Percentage Recovery: 100%
Pillowtex Subsidiary Debtors.
- --------------------------------------------------------------------------------------------------------------------
6
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:
Initial borrowings under the Exit Financing Revolver Facility/(1)/ ..... $ 57,711,000
Cash generated from operations ......................................... --
-------------
Total Sources ..................................................... $ 57,711,000
=============
Uses of Cash:
Cash distributions with respect to Classes 1, 2 and 4 .................. $ 937,000
Cure payments relating to assumptions of
Executory Contracts or Unexpired Leases .............................. 9,262,000
Repayment of DIP Financing Facility .................................... 9,259,000
Payment of earned but unpaid Professional fees ......................... 8,358,000
Financing fees and related costs ....................................... 3,049,000
Other reorganization expenses/(2)/ ..................................... 1,846,000
Pre-payment of Exit Term Loan/(3)/ ..................................... 25,000,000
-------------
Total Uses ........................................................ $ 57,711,000
=============
_________________
(1) The Exit Financing Revolver Facility is anticipated to be a $200
million senior secured revolving credit facility with a $60 million
sub-limit for letters of credit. See "Securities to be Distributed
Pursuant to the Plan; Post-Reorganization Indebtedness -- Exit
Financing Revolver Facility."
(2) Other reorganization expenses include, among other things,
compensation costs associated with the effectiveness of the Plan and
the Administrative Claims of Indenture Trustees.
(3) For purposes of this Disclosure Statement, it has been assumed that
the Exit Term Loan will be partially pre-paid using borrowings under
the Exit Financing Revolver Facility on or immediately following the
Effective Date.
Additional Information Regarding Assertion and Treatment of Administrative
Claims and Priority Tax Claims
Administrative Claims
General. 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
7
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 $32 million
as of the Effective Date, excluding accounts payable and other accrued expenses
as of the Effective Date.
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; (b) holders of Administrative Claims
under the DIP Financing Facility; and (c) holders of Administrative Claims with
respect to the Designated Post-Petition Loans deemed to have been made under the
DIP Order.
Claims of Indenture Trustees. If Class 6 accepts the Plan, in full
satisfaction of the Claims of each Indenture Trustee, including Claims secured
by the charging liens of the Indenture Trustee under the Prepetition Indentures,
subject to the provisions of Section III.E of the Plan, each Indenture Trustee
will receive from the Reorganized Debtors cash equal to the amount of the Claims
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. If
Class 6 does not accept the Plan, the provisions of Section III.E of the Plan
will be of no force and effect.
Ten days after entry of the Confirmation Order, 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 that 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 thereafter. The estimate of fees and expenses may
include, without limitation, projected fees and expenses relating to surrender
and cancellation of notes, distribution of securities and fees and expenses
expected to be incurred in connection with obtaining Bankruptcy Court approval
of the fees and expenses. 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 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 set forth
in Section III.E of the Plan. The Confirmation Order will provide that
8
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 Effective Date, 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 permitted
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 guidelines and rules applicable to a fee application or the standards
contained in sections 330 or 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 Date will be treated as Allowed
Claims and will be paid from the applicable Segregated Account.
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.
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 DIP Order will receive an Exit Term Loan Note in an
amount equal to the amount of such Allowed Administrative Claim, and as required
by Section 1129 of the Bankruptcy Code, will have to consent to such treatment
on the condition the Plan is confirmed.
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 $3.1 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.
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) except as provided in
clause (a) above or as otherwise specifically provided in the Plan, holders of
all other
9
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 Distributed Pursuant to the Plan
The following sets forth a summary of the securities to be distributed
pursuant to the Plan. This summary is qualified by reference to the description
of such securities under "Securities To Be Distributed Pursuant to the Plan;
Post-Reorganization Indebtedness."
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 Distributed Pursuant to the Plan;
Post-Reorganization Indebtedness -- New Common Stock." On the Effective Date,
(a) if Class 6 accepts the Plan, an aggregate of 18,034,200 shares of New Common
Stock will be issued and available for distribution to holders of Allowed Claims
in Class 5 and an aggregate of 565,800 shares of New Common Stock will be issued
and available for distribution to the holders of Allowed Claims in Class 6 or
(b), if Class 6 does not accept the Plan, an aggregate of 18,411,400 shares of
New Common Stock will be issued and available for distribution to holders of
Allowed Claims in Class 5 and an aggregate of 188,600 shares of New Common Stock
will be issued and available for distribution to the holders of Allowed Claims
in Class 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 and Exit Term Loan Note
Agreement. See "Securities To Be Distributed Pursuant to the Plan;
Post-Reorganization Indebtedness -- Exit Financing Revolver Facility" and "--
Exit Term Loan." Reorganized Pillowtex is not expected to pay any dividends on
the New Common Stock in the foreseeable future.
On the Effective Date, if Class 6 accepts the Plan, New Warrants
exercisable to purchase up to an aggregate of 3,529,412 shares of New Common
Stock will be issued and available for distribution to holders of Allowed Claims
in Class 6. Initially, each New Warrant, when exercised, will entitle the holder
thereof to acquire one share of New Common Stock at an exercise price of $28.93
per share. The New Warrants will expire on the date that is seven and one-half
years (or 90 months) after 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 Distributed Pursuant to the Plan; Post-Reorganization
Indebtedness -- New Warrants."
It is contemplated that, as of the Effective Date, 1,400,000 shares of New
Common Stock will be reserved for issuance in satisfaction of awards under the
Equity Incentive Plan, including awards to be made to key executives in
connection with the Effective Date. See "Reorganized Pillowtex -- Employee
Benefit Matters -- New Benefit Programs, Plans and Agreements."
On the Effective Date, if Class 6 accepts the Plan, (a) holders of Allowed
Bank Loan Claims will receive their Pro Rata share of 18,034,200 shares of New
Common Stock, representing approximately 95.6% of the aggregate shares of New
Common Stock to be distributed pursuant to the Plan (or 76.6% of the total
number of shares of New Common Stock that would be outstanding on a fully
diluted basis calculated as described below); and (b) subject to the State
Street Settlement, holders of Allowed Claims in Class 6 will receive (i) their
Pro Rata share of 565,800 shares of New Common Stock, representing approximately
3.0% of the aggregate shares of New Common Stock to be distributed pursuant to
the Plan (or 2.4% of the total number of shares of New Common Stock that would
be outstanding on a fully diluted basis calculated as described below), and (ii)
their Pro Rata share of New Warrants exercisable to purchase an aggregate of
3,529,412 shares of New Common Stock, representing 15% of the total number of
shares of New Common Stock that would be outstanding on a fully diluted basis
calculated as described below. The percentages above are calculated based on the
following: (a) 18,034,200 shares of New Common Stock being issued and available
for distribution to holders of Allowed Claims in Class 5, (b) 565,800 shares of
New Common Stock and New Warrants to purchase 3,529,412 shares of New Common
Stock being issued and available for distribution to holders of Allowed Claims
in Class 6, and (c) 260,000 shares of New Common Stock and options to purchase
766,600 shares of New Common Stock being issued to key employees of the
10
Reorganized Debtors under the Equity Incentive Plan and 373,400 shares of New
Common Stock being reserved for future issuance under the Equity Incentive Plan.
The fully diluted calculations above are further based on the following: (a) the
assumed issuance of 3,529,412 shares of New Common Stock upon the exercise of
New Warrants, (b) the assumed issuance of 766,600 shares of New Common Stock
upon exercise of the options issued under the Equity Incentive Plan, and (c) the
assumed issuance of the remaining 373,400 shares of New Common Stock reserved
for future issuance under the Equity Incentive Plan.
On the Effective Date, if Class 6 does not accept the Plan, (a) holders of
Allowed Bank Loan Claims will receive their Pro Rata share of 18,411,400 shares
of New Common Stock, representing approximately 97.6% of the aggregate shares of
New Common Stock to be distributed pursuant to the Plan (or 92.1% of the total
number of shares of New Common Stock that would be outstanding on a fully
diluted basis calculated as described below); and (b) subject to the State
Street Settlement and the subordination rights of holders of Overline Facility
Claims and Aircraft Lease Claims, holders of Allowed Claims in Class 6 will
receive their Pro Rata share of 188,600 shares of New Common Stock, representing
approximately 1.0% of the aggregate shares of New Common Stock to be distributed
pursuant to the Plan (or 0.9% of the total number of shares of New Common Stock
that would be outstanding on a fully diluted basis calculated as described
below). The percentages above are calculated based on the following: (a)
18,411,400 shares of New Common Stock being issued and available for
distribution to holders of Allowed Claims in Class 5, (b) 188,600 shares of New
Common Stock being issued and available for distribution to holders of Allowed
Claims in Class 6, and (c) 260,000 shares of New Common Stock and options to
purchase 766,600 shares of New Common Stock being issued to key employees of the
Reorganized Debtors under the Equity Incentive Plan and 373,400 shares of New
Common Stock being reserved for future issuance under the Equity Incentive Plan.
The fully diluted calculations above are further based on the following: (a) the
assumed issuance of 766,600 shares of New Common Stock upon exercise of the
options issued under the Equity Incentive Plan, and (b) the assumed issuance of
the remaining 373,400 shares of New Common Stock reserved for future issuance
under the Equity Incentive Plan.
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 classes or series and to determine the various
rights and privileges thereof, subject to certain restrictions in the
Certificate of Incorporation of Reorganized Pillowtex (the "Certificate").
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, the Bylaws of Reorganized
Pillowtex (the "Bylaws") and applicable law. See "Reorganized Pillowtex --
Certain Corporate Governance Matters -- Authorized But Unissued Shares."
Exit Term Loan Notes
It is a condition to Confirmation that each holder of a Claim in respect of
a Designated Post-Petition Loan consent to receiving an Exit Term Loan Note as
provided in Section III.A.1.d of the Plan. The execution and delivery of the
documents effectuating the Exit Term Loan by the Reorganized Debtors and each of
the holders of Allowed Administrative Claims under Designated Post-Petition
Loans are conditions to the Effective Date. 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 DIP Order. The aggregate principal amount of the
Exit Term Loan Notes will be $150 million (prior to any pre-payments made from
the proceeds of the Exit Financing Revolver Facility), and will bear simple
interest at a fixed rate of 10% per annum. The Exit Term Loan Notes 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,
Columbus, Georgia and Scottsboro, Alabama and certain other specifically
identified assets, as well as a second priority lien on the assets pledged to
secure the Exit Financing Revolver Facility. See "Securities To Be Distributed
Pursuant to the Plan; Post-Reorganization Indebtedness -- Exit Term Loan."
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
11
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 $200 million, including
a $60 million letter of credit sub-facility. See "Securities To Be Distributed
Pursuant to the Plan; Post-Reorganization Indebtedness -- Exit Financing
Revolver Facility."
See "Securities To Be Distributed Pursuant to the Plan; Post-Reorganization
Indebtedness -- Outstanding Industrial Revenue Bonds" for a description of
certain secured indebtedness to be Reinstated on the Effective Date.
See "-- Additional Information Regarding Assertion and Treatment of
Administrative Claims and Priority Tax Claims -- Priority Tax Claims" for a
description of indebtedness that will be owing in respect of Priority Tax Claims
as of 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 and Bank of America as administrative agent
to the lenders under the Prepetition Revolving Credit Agreement and
the Prepetition Term Credit Agreement.
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 February 25, 2002, 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 and Bank of America
as administrative agent to the lenders under the Prepetition Revolving
Credit Agreement and the Prepetition Term Credit Agreement.
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.
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 Plan will not have been amended, altered or modified from the Plan
as Filed on February 25, 2002, unless such amendment, alteration or
modification has been consented to in accordance with
12
Section XIII.C of the Plan, and all exhibits to the Plan shall be
in form and substance reasonably satisfactory to the Debtors and
Bank of America as administrative agent to the lenders under the
Prepetition Revolving Credit Agreement and the Prepetition Term
Credit Agreement.
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.3 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 or
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.
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)
13
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 towels and sheets and gave
the Debtors a portfolio of products that includes many widely recognized names
in the textile industry.
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 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 and 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 exceed specified levels for future fiscal periods
(the "EBITDA Covenant").
14
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.
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. Pillowtex's flexibility in the
discussions was limited by the terms of its Old 10% Notes and Old 9% Notes,
which prohibited payments in respect of the Old 6% Debentures other than
scheduled interest payments, payments at maturity or payments pursuant to
sinking fund obligations.
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
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 as
15
a result of a slowdown in certain operations caused by inventory reduction
initiatives and the installation of new computer systems.
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, cash flow and market
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 and the 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 Credit
Facility also resulted in an event of default with respect to the Debtors' IRB
Facilities. See "Capital Structure as of the Petition Date" for a discussion of
the IRB Facilities 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.
16
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 IRB Facilities,
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, which was increased from the original $125 million in connection with
the acquisition of Leshner (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.
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:
. $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");
17
. $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");
. $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");
. $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
. $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.
As of the Petition Date, the aggregate amount outstanding under the
IRB Facilities was approximately $14.9 million. 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 anticipate making the final payment on the
PEDFA Revenue Bonds which will be due on March 1, 2002. 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, after March 1, 2002,
only two of the IRB Facilities will be currently secured and outstanding: the
MBFC Revenue Bonds and the Alabama Revenue Bonds (collectively, the "Outstanding
Industrial Revenue Bonds"). As of February 25, 2002, the aggregate amount
outstanding under the Outstanding Industrial Revenue Bonds was approximately
$12.0 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 Outstanding Industrial Revenue Bonds. As of the
Petition Date, all of the Old 10% Notes remained outstanding.
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% 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 Outstanding
Industrial Revenue Bonds. As of the Petition Date, all of the Old 9% Notes
remained outstanding.
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
18
indebtedness of the relevant guarantor, including indebtedness under the
Prepetition Credit Facility, the Overline Facility and the Outstanding
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 Outstanding
Industrial Revenue Bonds, the Old 10% Notes and the Old 9% Notes. The Indenture
Trustee under the Old 6% Debenture Indenture, however, has filed the State
Street Motion in connection with a potential challenge to the subordination
rights of the Old 6% Debentures with respect to the Old 10% Notes and Old 9%
Notes. If the Plan is Confirmed, the State Street Settlement will resolve the
issues under the State Street Motion. See "Operations During the Reorganization
Cases -- State Street's Motion for Leave of Court to Prosecute Adversary
Proceeding on Behalf of Fieldcrest Cannon." 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, approximately $85.2 million aggregate
principal amount of the Old 6% Debentures and $5.2 million of the Old 6%
Debenture Promissory Notes remained outstanding. 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 65,000 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. As a result of dividends paid in kind, 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 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:
. claims of vendors who provide cotton, the primary raw material
used in the Debtors' businesses;
. claims of certain foreign vendors (primarily in China, Pakistan
and India) who supply essential materials other than cotton used
in manufacturing the Debtors' products;
. claims of certain suppliers who are effectively the only
available source of essential materials used to manufacture
certain products of the Debtors; and
. 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 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 DIP Order required that,
subject to limited exceptions, the net proceeds from any sale of the Debtors'
assets outside of the ordinary course of business, excluding the sale of the
Debtors' Blanket Division assets and certain other specified 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 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 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 DIP Amendment"). Pursuant to the Fourth DIP Amendment, (a)
the scheduled termination date of the DIP Financing Facility was extended to
June 30, 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 required the Debtors to file on or prior to December 31, 2001 a feasible
plan of reorganization and disclosure statement that is substantially complete
in form and substance, and further require the Debtors to (i) obtain the
Bankruptcy Court's approval of a disclosure statement on or prior to March 1,
2002, (ii) obtain confirmation of a plan of reorganization on or prior to May
15, 2002 and (iii) cause a plan of reorganization to become effective on or
prior to June 30, 2002. The Debtors paid an amendment fee of $500,000 in
connection with the Fourth DIP 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, each eligible employee earns a
specified retention incentive payment (the "Retention Incentive Payment"), based
upon a percentage of his or her salary as determined by the Debtors' management,
if the employee remains actively employed by the Debtors on the specified dates.
Under the Retention Incentive Plan: (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. Under the current
circumstances, the Debtors do not anticipate making any payments of emergence
bonuses under the Retention Plan.
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, under the severance
plan, employees who are terminated for reasons other than death, disability,
retirement or cause, are 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
are 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:
- ----------------- -------
Santee Print Works Akin, Gump, Strauss, Hauer & Feld, L.L.P.
58 West 40/th/ Street, 11/th/ Floor 590 Madison Avenue
New York, New York 10018 New York, New York 10022
Parkdale Mills, Inc. Akin, Gump, Strauss, Hauer & Feld, L.L.P.
P.O. Drawer 1787 1700 Pacific Avenue, Suite 4100
Gastonia, North Carolina 28053 Dallas, Texas 75201
Credit Suisse First Boston Young, Conway, Stargatt & Taylor
11 Madison Avenue 1100 North Market Street
New York, New York 10010 P.O. Box 391
Wilmington, Delaware 19899
HSBC Bank USA, as Successor
Indenture Trustee Financial Advisors:
140 Broadway, 12/th/ Floor ------------------
New York, New York 10005
Houlihan, Lokey, Howard & Zukin
1930 Century Park West
State Street Bank & Trust Company, as Los Angeles, California 90067
Indenture Trustee
2 Avenue de Lafayette Houlihan, Lokey, Howard & Zukin
Boston, Massachusetts 02111 685 Third Avenue, 15/th/ Floor
New York, New York 10024
Union of Needletrades, Industrial
and Textile Employees BDO Seidman LLP
1710 Broadway 330 Madison Avenue
New York, New York 10019 New York, New York 10017
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"), Huntley Financial Group, Ltd. ("Huntley") and
Ernst & Young LLP ("E&Y"). 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. E&Y
assisted the Debtors with the development of and decisions regarding the Equity
Incentive Plan. The Debtors have engaged the services of the executive search
firm of Russell Reynolds Associates to identify and recruit potential directors
and a chief executive officer for Reorganized Pillowtex.
On November 16, 2000, the Debtors filed an application with the Bankruptcy
Court to retain Jones, Day, Reavis & Pogue as their general bankruptcy counsel.
On February 22, 2001, the United States Trustee (the "US Trustee") filed an
objection to the retention of Jones, Day, Reavis & Pogue. The Bankruptcy Court
overruled the US Trustee's objection and entered an order authorizing the
Debtors to retain Jones, Day, Reavis & Pogue on May 8, 2001. The US Trustee has
appealed the Bankruptcy Court's order.
Executory Contracts or Unexpired Leases
Since the Petition Date, the Debtors have devoted significant time and
effort to reviewing their Executory Contracts or Unexpired Leases. The Debtors
have Filed motions to reject numerous burdensome Executory Contracts or
Unexpired Leases, the most significant of which are described below. Because the
Debtors are continuing to review their Executory Contracts or Unexpired Leases,
the Debtors anticipate that they may File additional motions to reject
additional burdensome Executory Contracts or 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.
25
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 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 2000 Parkdale 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 Parkdale Agreement"), (b)
May 1, 1998 (the "1998 Parkdale Agreement"); and (c) August 1, 2000 (the "2000
Parkdale Agreement"). Although the parties understood that the 1998 Parkdale
Agreement would replace the 1996 Parkdale Agreement and the 2000 Parkdale
Agreement would replace the 1998 Parkdale Agreement, neither the 1998 Parkdale
Agreement nor the 2000 Parkdale Agreement contained a provision expressly
amending or terminating the prior agreement. As a consequence, by their terms,
the 1996 Parkdale Agreement, the 1998 Parkdale Agreement and the 2000 Parkdale
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 Parkdale Agreement and 1998 Parkdale 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 Parkdale Agreement, the 1998
Parkdale Agreement and the 2000 Parkdale Agreement into one agreement by
assumption of the 2000 Parkdale 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 Parkdale Agreement and 1998 Parkdale 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
26
Reorganization Cases upon 135 days' notice. The assumption of the 2000 Parkdale
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, 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. 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. Despite prohibitions under the Technology
Agreement, with Lockheed's consent, Fieldcrest Cannon 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.
27
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. 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. On
November 16, 2001, the Bankruptcy Court authorized the Debtors to retain Duane,
Morris & Heckscher LLP as special counsel to represent the Debtors in their
dispute with WestPoint.
CIT's Motion for Administrative Expense Claim
On or about June 26, 1996, The CIT Group/Equipment Financing, Inc. ("CIT")
and Debtor Opelika Industries, Inc. ("Opelika") entered into a Loan and Security
Agreement (the "CIT Loan Agreement"), pursuant to which CIT financed Opelika's
purchase of certain production equipment (the "Opelika Equipment"). On July 25,
2001, CIT filed a motion for relief from the automatic stay to enforce its
rights and remedies under the CIT Loan Agreement and take possession of the
Opelika Equipment (the "CIT Motion"). The CIT Motion also requested the
allowance and payment of a super-priority Administrative Claim in the amount of
approximately $1 million based on CIT's allegation that a substantial portion of
the Opelika Equipment purportedly had been converted or disposed of without
CIT's permission.
Because the Debtors were no longer using the Opelika Equipment and had
closed the Hawkinsville Facility where it was located, the Debtors did not
oppose CIT's request for relief from the automatic stay. The Debtors,
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however, do not believe that there is any merit to CIT's request for a
super-priority Administrative Claim and, accordingly, filed an objection to
CIT's Administrative Claim request. CIT's request for an Administrative Claim
has been continued pending CIT's repossession and sale of the Opelika Equipment
and has not yet been argued to, or adjudicated by, the Bankruptcy Court.
State Street's Motion for Leave of Court to Prosecute Adversary Proceeding
on Behalf of Fieldcrest Cannon
On or about December 21, 2001, State Street Bank & Trust Company ("State
Street"), the Indenture Trustee for Fieldcrest's Old 6% Debentures, filed a
Motion for Leave of Court to Prosecute, Inter Alia, an Adversary Proceeding on
Behalf of Fieldcrest Cannon, Inc. (the "State Street Motion"). The State Street
Motion sought leave of the Bankruptcy Court to commence and prosecute an
adversary proceeding against Pillowtex, HSBC Bank USA, the Indenture Trustee for
the Old Senior Subordinated Notes, and any other appropriate entities to avoid
and recover, as fraudulent transfers, Fieldcrest Cannon's guarantees of the Old
Senior Subordinated Notes, which were given in order to obtain the various forms
of financing to consummate the Fieldcrest Cannon Acquisition. The guarantees, if
not avoided in their entirety, may constitute Senior Debt (as described in the
6% Debenture Indenture) of Fieldcrest Cannon entitled to the benefits of
contractual subordination set forth in the Old 6% Debenture Indenture. HSBC Bank
USA, as Indenture Trustee for the holders of the Old Senior Subordinated Notes,
Bank of America, as agent for the Prepetition Lenders and the DIP Lenders, and
the Debtors each filed an objection to the State Street Motion.
Subsequently, certain members of the Creditors' Committee acting as
representative holders of the Old 6% Debentures, the Old Senior Subordinated
Notes and the Indenture Trustees agreed to settle the State Street Motion,
subject to confirmation of a plan of reorganization containing certain agreed
terms (the "State Street Settlement"). Pursuant to the State Street Settlement,
holders of Old Senior Subordinated Notes would waive their rights to contractual
subordination against holders of Old 6% Debentures in consideration of delivery
to holders of Old Senior Subordinated Notes of (a) all of the New Common Stock
that otherwise would be distributable to holders of Old 6% Debentures in the
absence of contractual subordination and (b) 50% percent of the New Warrants
that otherwise would be distributable to holders of Old 6% Debentures in the
absence of contractual subordination. Pursuant to the State Street Settlement,
holders of Old 6% Debentures would remain entitled to 50% of the New Warrants
that would otherwise be distributable to them in absence of contractual
subordination, without further dilution or turnover by virtue of the
subordination provisions, and holders of Old 6% Debentures will be deemed to
have waived any claims against the Debtors, holders of Old Senior Subordinated
Notes and the Indenture Trustees. Holders of Old Senior Subordinated Notes will
be deemed to have waived any Claims against the Debtors, holders of Old 6%
Debentures, holders of Old 6% Debenture Promissory Notes and the respective
Indenture Trustees.
The Plan contains provisions that reflect the State Street Settlement. The
State Street Settlement will avoid the expense, delay and uncertainty of
potentially protracted litigation over the avoidability of the guarantees.
The State Street Motion has been continued pending the approval of the
State Street Settlement as part of the Plan. If the Plan (or another plan of
reorganization reflecting the State Street Settlement) is not confirmed, State
Street intends to prosecute the State Street Motion to finality. HSBC Bank USA,
the Prepetition Lenders and the Debtors intend to oppose such prosecution. If
State Street prosecutes the State Street Motion, the Debtors will, pending a
resolution of the State Street Motion, withhold any distribution to holders of
Old 6% Debentures to the extent appropriate in light of the contractual
subordination rights. There can be no assurance that there will be any recovery
to the holders of Old 6% Debentures. If the Bankruptcy Court permits State
Street to prosecute the avoidance of the guarantees, it is uncertain whether the
cost of that litigation will be borne by the Debtors' estates.
SouthTrust Bank and DukeSolutions Disputes
On or about June 3, 1998, Pillowtex and DukeSolutions, Inc.
("DukeSolutions") entered into a Master Energy Services Agreement (i.e., the
MESA). As part of the MESA, DukeSolutions prepared for Pillowtex an Energy
Solutions Report dated December 1, 1998 (the "ESR"), which set forth an analysis
of the potential for cost savings for certain lighting equipment improvements to
be installed at certain of the Debtors' plants. Pursuant to the terms of the
MESA, DukeSolutions, among other things, agreed to install certain equipment
anticipated to improve energy consumption or to otherwise reduce the operating
costs at certain of the Debtors' facilities. The energy-savings equipment
included certain lighting fixtures, T8 lamps and electronic ballasts
(collectively, the "Lighting Fixtures") and was eventually installed in nine of
the Debtors' facilities.
29
Under the MESA, DukeSolutions paid approximately $8.75 million for the cost
of the acquisition and installation of the Lighting Fixtures, approximately
$4.29 million of which was for labor and $4.46 million for the Lighting
Fixtures. Pillowtex, in turn, agreed to repay DukeSolutions based on the annual
energy savings set forth in the ESR, which were agreed upon in advance. For each
facility, the Debtors and DukeSolutions agreed to a predetermined level monthly
payment amount required to be paid to DukeSolutions. The MESA provided that the
term of each project would not exceed eight years and the simple payback of all
of DukeSolutions' costs for the project would not exceed five years. The
aggregate monthly payment owed to DukeSolutions under the MESA is approximately
$153,000. At the end of the respective term of the lighting project for each
facility and unless Pillowtex at that time agreed to purchase the Lighting
Fixtures or extend the term of the MESA, DukeSolutions had two options under the
MESA: (a) pay for removal of the Lighting Fixtures and replace them with
equipment comparable to what was previously in place or (b) abandon the Lighting
Fixtures. Based on the prohibitive cost of removal and replacement, the Debtors
believe that DukeSolutions had no economic choice but to abandon the Lighting
Fixtures at the conclusion of the MESA and that the parties clearly understood
that DukeSolutions would do so.
Subsequent to the execution of the MESA, DukeSolutions entered into a
Master Lease Agreement with General Electric Capital Corporation ("GECC"), dated
August 2, 1999 (the "Master Lease"), pursuant to which GECC agreed to finance
the Lighting Fixtures for four plants in which DukeSolutions was to install new
fixtures under the MESA. Under the Master Lease, DukeSolutions' monthly payment
to GECC was to be repaid solely out of the monthly payments made by Pillowtex to
DukeSolutions under the MESA. On or about August 12, 1999, GECC assigned its
interests under the Master Lease to SouthTrust Bank ("SouthTrust").
On April 10, 2001, SouthTrust filed a motion (the "SouthTrust Motion")
seeking an order compelling Pillowtex to pay the postpetition monthly amounts
under the MESA as to the four plants for which Lighting Fixtures were financed
under the Master Lease, or alternatively, for adequate protection payments for
SouthTrust's interest in the Lighting Fixtures. Based upon, among other things,
the fact that the Lighting Fixtures would be abandoned at the end of the term of
the MESA, the Debtors strongly believe that the MESA is a financing arrangement
under which Pillowtex was to acquire the Lighting Fixtures and that the MESA is
not a true lease that would entitle SouthTrust or DukeSolutions to postpetition
monthly payments under section 365(d)(10) of the Bankruptcy Code. Accordingly,
the Debtors filed an objection to the SouthTrust Motion.
On August 9, 2001, the Bankruptcy Court held an evidentiary hearing on the
SouthTrust Motion. The Bankruptcy Court took the dispute under advisement and
has not yet ruled on the SouthTrust Motion. In addition, at an earlier
scheduling hearing on the SouthTrust Motion in May 2001, SouthTrust requested
that Pillowtex be required to make its monthly payments to SouthTrust under the
MESA pending an adjudication of the SouthTrust Motion. The Bankruptcy Court
ordered Pillowtex to make these payments on the condition that SouthTrust return
the payments to the Debtors (less any adequate protection payment to which
SouthTrust might be entitled) if the Bankruptcy Court concludes that the MESA is
not a true lease. Accordingly, the Debtors have paid SouthTrust approximately
$42,000 per month pending a decision on the SouthTrust Motion.
On February 21, 2002, DukeSolutions filed a motion similar to the
SouthTrust Motion seeking to compel Pillowtex to make its monthly payments to
DukeSolutions under the MESA. The Debtors intend to oppose this motion.
If the Bankruptcy Court determines that the MESA is an agreement to finance
the purchase and installation of the Lighting Fixtures rather than a true lease,
the Plan provides that any Secured Claim of SouthTrust or DukeSolutions will be
satisfied in accordance with the treatment set forth for Class 4G under the
Plan. If the Court determines that the MESA is a true lease, it will be treated
as an Unexpired Lease in accordance with the Plan. With respect to the potential
Secured Claims of SouthTrust and DukeSolutions, the Debtors believe that
DukeSolutions does not have a valid, enforceable lien in its Lighting Fixtures
because, among other reasons, it did not make the appropriate fixture filings or
obtain the necessary consents from the Prepetition Lenders. DukeSolutions
disputes this contention. The Debtors also believe that because the cost to
remove the Lighting Fixtures is substantial and there is essentially no market
for used lighting fixtures of this kind, the Lighting Fixtures have little or no
value under any appropriate valuation methodology for confirmation purposes.
SouthTrust and DukeSolutions dispute this contention.
30
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 or 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.
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' review and
reconciliation of the proofs of Claim Filed against the Debtors is nearly
complete.
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 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 as 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
31
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 or
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 provided 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 DIP Order, the
net cash proceeds from this sale were applied to the principal amount owing
under the 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 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
February 22, 2002 the Debtors had consummated sales under the Miscellaneous
Asset Sales Order aggregating approximately $4.4 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. 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 were transferred to FCI Operations and its
corporate and administrative personnel were transferred to FCI Corporate.
Effective as of January 1, 2002, Fieldcrest Cannon, FCI Corporate and FCI
Operations entered 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
32
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.
The Settlement of Potential Actions Against the Prepetition Lenders and Certain
Unsecured Creditors
The Plan, if accepted by Class 6, embodies a settlement of potential
actions against the Prepetition Lenders and certain unsecured creditors.
Potential fraudulent transfer actions and other actions may exist against the
Prepetition Lenders and potential preference actions may exist against certain
unsecured creditors. The potential fraudulent transfer actions against the
Prepetition Lenders include actions to recover certain amendment and waiver fees
paid by the Debtors prepetition and to avoid the guarantees given by certain of
the Debtors to the Prepetition Lenders in connection with the Debtors'
acquisitions of Fieldcrest Cannon and Leshner. Other potential actions against
the Prepetition Lenders include an action to challenge the Prepetition Lenders'
liens against certain manufacturing facilities in Phenix City, Alabama and
Columbus, Georgia. The potential preference actions against unsecured creditors
include actions against Credit Suisse First Boston for amounts paid prepetition
in respect of Old 6% Promissory Notes and other amounts paid to unsecured
creditors within 90 days of the Petition Date.
The Plan, if accepted by Class 6, will be deemed to release all these
claims as of the Effective Date.
REORGANIZED PILLOWTEX
Pillowtex Merger
The sole purpose of the Pillowtex Merger is to change Pillowtex's domicile
from the State of Texas to the State of Delaware. In connection with the
Pillowtex Merger, the Plan provides that on the Effective Date, (a) each share
of Old Common Stock of Pillowtex and Old Preferred Stock of Pillowtex
outstanding immediately prior to such date will be canceled; (b) Pillowtex will
issue to one or more Disbursing Agents (i) for the benefit of holders of Allowed
Claims in Class 5, if Class 6 accepts the Plan, 18,034,200 shares of Old Common
Stock of Pillowtex, or, if Class 6 does not accept the Plan, 18,411,400 shares
of Old Common Stock, and (ii) for the benefit of holders of Allowed Claims in
Class 6, if Class 6 accepts the Plan, 565,800 shares of Old Common Stock of
Pillowtex or, if Class 6 does not accept the Plan, 188,600 shares of Old Common
Stock of Pillowtex; (c) Pillowtex will merge with and into New Pillowtex, with
New Pillowtex being the surviving corporation in the merger; (d) New Pillowtex
will acquire all of the assets and will assume all of the liabilities of
Pillowtex; and (e) the Disbursing Agents will surrender the shares of Old Common
Stock of Pillowtex issued for the benefit of the holders of Allowed Claims in
Classes 5 and 6 in exchange for an equal number of shares of New Common Stock.
Thereafter, the Disbursing Agent will disburse to (i) each holder of an Allowed
Claim in Class 5, if Class 6 accepts the Plan, its Pro Rata share of 18,034,200
shares of New Common Stock, or, if Class does not accept the Plan, its Pro Rata
share of 18,411,400 shares of New Common Stock, and (ii) each Holder of an
Allowed Claim in Class 6, if Class accepts the Plan, its Pro Rata share of
565,800 shares of New Common Stock and New Warrants to purchase 3,529,412 shares
of New Common Stock or, if Class 6 does not accept the Plan, 188,600 shares of
Old Common Stock of Pillowtex, all in accordance with the provisions of the
Plan.
Other 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 (collectively, the "Subsidiary Restructuring Transactions"). The sole
purpose of the Subsidiary Restructuring Transactions is to reduce the
administrative expenses of eliminating inactive subsidiaries and consolidating
certain corporate and operational functions of certain active subsidiaries into
fewer corporate entities. The Subsidiary Restructuring Transactions may include
one or more mergers, consolidations, restructurings, conversions, dispositions,
liquidations or dissolutions, as may be determined by the Debtors or the
Reorganized Debtors to be necessary or appropriate. The actions to effect these
transactions may include: (a) the execution and delivery of appropriate
agreements or other documents of merger, consolidation, restructuring,
conversion, disposition, liquidation or dissolution containing terms that are
consistent with the terms of the Plan and that satisfy the applicable
requirements of applicable state law and any other terms to which the applicable
entities may agree; (b) the execution and delivery of appropriate instruments of
transfer, assignment, assumption or delegation of any asset,
33
property, right, liability, duty or obligation on terms consistent with the
terms of the Plan and having any other terms to which the applicable entities
may agree; (c) the filing of appropriate certificates or articles of merger,
consolidation, conversion or dissolution pursuant to applicable state law; and
(d) all other actions that the applicable entities determine to be necessary or
appropriate, including making filings or recordings that may be required by
applicable state law in connection with the transactions.
Business of Reorganized Pillowtex
Following the completion of the Pillowtex Merger and the other
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 and will be contained in the Pillowtex 2001 Form 10-K when it is
filed with the SEC on or before March 29, 2002. 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 two major operating divisions: a Bed and
Bath Division and a Pillow and Pad Division. The Bed and Bath Division will
manufacture and sell sheets and other fashion bedding textiles as well as
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 9,560 full-time and part-time employees as of
December 31, 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
34
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.
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) the 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 subsequently 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 the 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.
35
Selected Historical Financial Information
The following table sets forth selected consolidated financial
information for the Debtors as of and for the fiscal years ended December 29,
2001, December 30, 2000, January 1, 2000 and January 2, 1999. The selected
consolidated financial information should be read in conjunction with the
audited historical consolidated financial statements of the Debtors, including
the notes thereto, included in the Pillowtex 2000 Form 10-K, which is available
over the Internet on the Document Website. The Pillowtex 2001 Form 10-K will be
made available over the Internet on the Document Website after it has been filed
with the SEC.
Year Ended/(1)/
--------------------------------------------------------------------------
2001/(2)/ 2000/(2)/ 1999 1998/(3)/
--------------- --------------- --------------- ----------------
(unaudited) (in thousands)
Statement of Operations Data:
Net sales ...................................... $ 1,031,021 $ 1,259,004 $ 1,552,068 $ 1,509,841
Cost of goods sold ............................. 992,506 1,222,572 1,371,790/(4)/ 1,246,449/(4)/
------------ ----------- ----------- -----------
Gross profit ................................... 38,515 36,432 180,278 263,392
Selling, general and administrative expenses ... 92,275 126,353 118,432 119,321
Impairment of long-lived assets and
restructuring charges ...................... 51,720 24,400 2,000 1,539
------------ ----------- ----------- -----------
Earnings (loss) from operations ................ $ (105,480) $ (114,321) $ 59,846 $ 142,532
Interest expense ............................... 63,326 107,062 87,279 72,288
------------ ----------- ----------- -----------
Earnings (loss) from continuing operations
before reorganization items and
income taxes ............................... (168,806) (221,383) (27,433) 70,244
Reorganization items ........................... 31,401 19,368 - -
------------ ----------- ----------- -----------
Earnings (loss) from continuing
operations before income taxes ............. (200,207) (240,751) (27,433) 70,244
Income tax expense (benefit) ................... - (61,146) (7,901) 27,389
------------ ----------- ----------- -----------
Earnings (loss) from continuing operations ..... (200,207) (179,605) (19,532) 42,855
Loss from discontinued operations .............. (22,554) (82,803) - -
------------ ------------ ----------- -----------
Net earnings (loss) ............................ (222,761) (262,408) (19,532) 42,855
Preferred dividends and accretion .............. 16,358 8,928 12,294 2,097
------------ ----------- ----------- -----------
Earnings (loss) available for common
shareholders ............................... $ (239,119) $ (271,336) $ (31,826) $ 40,758
============ ============ ============ ===========
Other Data:
Earnings (loss) from operations ................ $ (105,480) $ (114,321) $ 59,846 $ 142,532
Depreciation and amortization .................. 53,785 57,517 60,074 54,021
------------ ----------- ----------- -----------
EBITDA/(5)/ .................................... $ (51,695) $ (56,804) $ 119,920 $ 196,553
============ ============ =========== ===========
Balance Sheet Data:
Working capital ................................ $ (331,179)/(6)/ $ (237,376)/(7)/ $ 404,732 $ 447,933
Property, plant and equipment, net ............. 453,440 525,990 644,821 629,205
Total assets ................................... 1,085,682 1,335,769 1,683,389 1,654,154
Long-term debt, net of current portion ......... 645 - 965,323 944,493
Redeemable convertible preferred stock ......... 99,185 82,827 73,898 63,057
Shareholders' equity (deficit) ................. (329,118) (63,451) 207,389 237,933
- ----------
(1) The financial information for each year presented reflects the inclusion of
one of Pillowtex's subsidiaries, Pillowtex Canada Inc., formerly known as
Torfeaco, which is not a Debtor.
(2) The financial information for 2001 and 2000 has been restated to present
the Blanket Division as a discontinued operation.
(3) The financial information for 1998 reflects the inclusion of The Leshner
Corporation from and after July 28, 1998.
(4) Information technology costs associated with Pillowtex's manufacturing
systems of $12.8 million and $9.4 million for 1999 and 1998, respectively,
have been reclassified from a selling, general and administrative expense
to cost of goods sold to conform with the presentation for 2000.
(5) EBITDA is earnings (loss) from operations plus depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness;
however, EBITDA should not be considered as an alternative to net earnings
as a measure of operating results or to cash flow as a measure of
liquidity. In addition, EBITDA as presented herein may not be directly
comparable to EBITDA as reported by other companies.
(6) Includes long-term debt in default of $635.1 million.
(7) Includes long-term debt in default of $694 million.
36
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 which is available over the Internet on the
Document Website. The Pillowtex 2001 Form 10-K will be made available over the
Internet on the Document Website after it has been filed with the SEC.
Principal Assumptions
The Projections are based on, and assume the successful implementation
of, the business plan and strategy for Reorganized Pillowtex, and the
Projections reflect numerous assumptions, including various assumptions
regarding 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. Although the Projections
are necessarily presented with numerical specificity, the actual results
achieved during the Projection Period will vary from the Projections. These
variations may be material. Accordingly, no representation can be or is being
made with respect to the accuracy of the Projections or the ability of
Reorganized Pillowtex to achieve the Projections. See "Risk Factors" for a
discussion of certain factors that may affect the future financial performance
of Reorganized Pillowtex.
Although the Debtors believe that the assumptions underlying the
Projections, when considered on an overall basis, are reasonable in light of
current circumstances, no assurance can be or is given that the Projections will
be realized. In deciding whether to vote to accept or reject the Plan, holders
of Claims entitled to vote must make their own determinations as to the
reasonableness of such assumptions and the reliability of the Projections. See
"Risk Factors."
The independent auditors for Pillowtex have not examined nor compiled
the Projections and, accordingly, assume no responsibility for them. Moreover,
the Projections have not been prepared to comply with guidelines established
with respect to projections by the SEC or the American Institute of Certified
Public Accountants.
Information relating to the principal assumptions used in preparing
the projections is set forth below:
(a) Effective Date; Plan Terms. The Projections assume
Confirmation of the Plan and that all transactions contemplated by the
Plan to be consummated by the Effective Date will be consummated as of
June 28, 2002. The Projections also assume that:
37
. the total amount of each Class of Allowed Claims is the estimated
amount as set forth in "Overview of the Plan -- Summary of
Classes and Treatment of Claims and Interests"; and
. the total amount of Allowed Administrative Claims (excluding
ordinary course accounts payable and accrued expenses), financing
fees and other reorganization expenses required to consummate the
Plan is $32 million consisting of the following:
. the total cure payments relating to assumptions of Executory
Contracts or Unexpired Leases is $9.3 million;
. Repayment of the DIP Financing Facility of $9.3 million;
. Payment of earned but unpaid Professional fees of $8.4
million;
. Financing fees and related costs of $3.1 million; and
. Other reorganization expenses of $1.9 million
See "Overview of the Plan" for a brief summary of the principal provisions
of the Plan, including the classification and treatment of Claims and
Interests and conditions to Confirmation and consummation of the Plan, and
a summary of the principal sources and uses of cash expected to be
available on the Effective Date.
(b) General Economic and Industry Conditions. The Projections were
prepared based on the assumption that the market for home textiles would
grow 1% to 3% per annum during the Projection Period but that a portion of
such growth would be absorbed by imported product resulting in a lower
"net" growth rate for domestically produced product. The Projections also
assume relatively stable domestic and global economic conditions.
(c) Net Sales. The Projections assume that net sales for 2002 will
decline 5.9% as compared to 2001 primarily due to decreased gross sales as
a result of (i) the expiration of the Ralph Lauren License Agreement on
June 30, 2001 (see "Operations During the Reorganization Cases -- Case
Administration and Related Activities -- Assumption of Ralph Lauren License
Agreement and Related Dispute") and resulting discontinuation of the sale
of Licensed Products thereunder, which sales accounted for $37.7 million of
gross sales in 2001, (ii) one-time distressed inventory sales completed in
2001, and (iii) lost sales associated with capacity reductions implemented
during 2001 and 2002, as partially offset by new sales associated with the
implementation of Reorganized Pillowtex's branding and marketing strategy
(see "Reorganized Pillowtex -- Business Plan and Strategy for Reorganized
Pillowtex -- Branding and Marketing") and other sales initiatives and a
1.6% decline in deductions as a percentage of gross sales associated with
the introduction of Reorganized Pillowtex's "total quality management"
concept (see "Reorganized Pillowtex -- Business Plan and Strategy for
Reorganized Pillowtex -- Total Quality Management") and other procedures.
The Projections assume that net sales for 2003 will increase 3.3% as
compared to 2002 primarily due to increased gross sales as a result of new
sales associated with (i) the continued implementation of Reorganized
Pillowtex's branding and marketing strategy and (ii) a modest improvement
in general economic conditions and in the market for home textiles (see (b)
above), partially offset by lost sales associated with capacity reductions
implemented in 2002. The Projections assume that net sales for 2004 will
increase 6.9% as compared to 2003 primarily due to increased gross sales as
a result of new sales associated with the continued implementation of
Reorganized Pillowtex's branding and marketing strategy and its strategic
sourcing strategy and a modest improvement in general economic conditions
and in the market for home textiles (see "Reorganized Pillowtex -- Business
Plan and Strategy for Reorganized Pillowtex -- Total Quality Management").
(d) Gross Profit. The Projections assume that gross profit will
increase from 3.7% of net sales in 2001 to 9.6% of net sales in 2002
primarily due to cost savings associated with (i) capacity reductions
implemented during 2001, (ii) capacity reductions and realignments
implemented during 2002, and (iii) lower cotton prices, partially offset by
increased wage and benefits costs. The Projections assume that gross profit
will increase from 9.6% of net sales in 2002 to 12.7% of net sales in 2003
primarily due to
38
(i) cost savings associated with capacity reductions and realignments
implemented during 2002 and (ii) increased net sales (see note (c)
above), partially offset by increased wage and benefits costs. The
Projections assume that gross profit will increase for 12.7% of net
sales in 2003 to 13.6% of net sales primarily due to (i) cost savings
associated with improvements in capacity usage and (ii) increased net
sales (see note (c) above), partially offset by increased wage and
benefits costs.
(e) Selling, General & Administrative Expense ("SG&A"). The
Projections assume that SG&A for 2002 will decrease 19.8% as compared
to 2001 primarily due to (i) staff reductions implemented in 2001,
(ii) the discontinuation of goodwill amortization, in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," per FASB 142, as of January 2002, (iii)
reduced depreciation due to the application of "fresh-start"
accounting principles (see note (i) below), (iv) the elimination of
certain expenses incurred in 2001 associated with the relocation of
the corporate office from Dallas, Texas to Kannapolis, North Carolina
and (v) the non-reoccurrence of the write-off of certain accounts
receivable balances, partially offset by increased wage and benefit
costs. The Projections assume that SG&A for 2003 will decrease 9.5% as
compared to 2002 primarily due to (i) cost reductions initiated in
2002 and (ii) reduced depreciation due to the application of
"fresh-start" accounting principles (see note (i) below), partially
offset by increased wage and benefit costs. The Projections assume
that SG&A for 2004 will increase 6.6% as compared to 2003 primarily
due to increased wage and benefits costs.
(f) Capital Expenditures. The Projections assume cash capital
expenditures related to operational restructuring initiatives,
information technology and general maintenance items of $24.5 million,
$20.7 million and $16.0 million in 2002, 2003 and 2004, respectively.
(g) Post-Reorganization Debt. The Projections assume that the
Reorganized Debtors will obtain the Exit Financing Revolver Facility
and the Exit Term Loan and that such indebtedness has terms described
in this Disclosure Statement. See "Securities To Be Distributed
Pursuant to the Plan; Post-Reorganization Indebtedness -- Exit
Financing Revolver Facility" and "--Exit Term Loan." The Projections
further assume borrowings of $57.7 million under the Exit Financing
Revolver Facility on the Effective Date and the use of $25 million of
such borrowings to immediately pre-pay the Exit Term Loan. The
Projections also assume the issuance of approximately $3.1 million in
notes to the holders of Allowed Priority Tax Claims and the
Reinstatement of the MBFC Revenue Bonds and the Alabama Revenue Bonds,
and that such indebtedness has the terms described in this Disclosure
Statement. See "Overview of the Plan -- Additional Information
Regarding Assertion and Treatment of Administrative Claims and
Priority Tax Claims -- Priority Tax Claims" and "Securities To Be
Distributed Pursuant to the Plan; Post-Reorganization Indebtedness--
Outstanding Industrial Reserve Bonds."
(h) Income Taxes. As of December 29, 2001, Pillowtex had $532.7
million of net operating losses (NOLs) available, with expiry dates
ranging from 2006 to 2021. The Projections assume that $291.6 million
of Pillowtex's existing NOLs will be eliminated and the tax basis in
certain assets will be partially reduced as a result of the
cancellation of debt income created by the confirmation of the Plan as
required under the Tax Code. The use of Pillowtex's surviving NOLs
will be limited by the applicable provisions of Section 382 of the Tax
Code. After consideration of NOLs and the difference between tax and
book depreciation available to shield taxable income, a 40% combined
statutory federal and state tax rate has been assumed to project cash
taxes payable. Cash taxes payable and book tax expense may not equal
each other due to timing differences related to the depreciation of
fixed assets, the amortization of intangible assets and certain other
expenditures, as well as the treatment of the deferred tax valuation
allowance anticipated to be required under GAAP, resulting in
effective tax rates based on pre-tax income for book purposes that do
not equal 40%.
(i) Fresh-Start Reporting. The American Institute of Certified
Public Accountants has issued a Statement of Position on Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code (the
"Reorganization SOP"). The Projections have been prepared in
accordance with the "fresh-start" reporting principles set forth in
the Reorganization SOP, giving effect thereto as of June 28, 2002. The
principal effects of the application of these fresh-start reporting
principles are summarized below:
. The Reorganization SOP requires the Reorganized Pillowtex to
record all assets and liabilities at their fair market value
as of the Effective Date. The Projections reflect
39
Reorganized Pillowtex's best estimates of the fair values as
follows: (1) working capital is valued at its carrying value
immediately prior to the Effective Date; (2) property, plant
and equipment is valued based on estimated replacement cost;
(3) intangibles, which comprise trademarks, are valued based
on replacement cost, which has been determined using a
royalty avoided approach; and (4) other long-term assets
have been valued based on net realizable values. After
determining the fair values as outlined above, the resulting
net value exceeded reorganization value by approximately
$117 million (negative goodwill). In accordance with the
Reorganization SOP, the negative goodwill was applied to
reduce pro-rata the fair values otherwise assigned to
long-lived, non-financial assets, i.e., property, plant and
equipment and trademarks.
. Reorganized Pillowtex has not recorded as an asset the
estimated NOL and deferred tax debits that will be available
at the Effective Date, as there is no assurance it will
realize the benefits based on historical operating
performance. Based on the Projections, however, the
Reorganized Pillowtex will realize such benefits. In
accordance with the Reorganization SOP, the value of such
benefits is recorded in the periods realized as a reduction
in the values assigned to intangible assets under the
"fresh-start" accounting principles described above.
. The foregoing assumptions and resulting computations were
made solely for purposes of preparing the Projections.
Reorganized Pillowtex will be required to determine the
amount by which its reorganization value as of the Effective
Date exceeds, or is less than, the fair value of its assets
as of the Effective Date. Such determination will be based
upon the fair values as of that time, which could be
materially higher or lower than the values assumed in the
foregoing computations and may be based on, among other
things, a different methodology with respect to the
valuation of Reorganized Pillowtex's reorganization value.
In all events, such valuation, as well as the determination
of the fair value of Reorganized Pillowtex's assets and the
determination of its actual liabilities, will be made as of
the Effective Date, and the changes between the amounts of
any or all of the foregoing items as assumed in the
Projections and the actual amounts thereof as of the
Effective Date may be material.
Projections
The projected consolidated financial statements of Pillowtex and
Reorganized Pillowtex set forth below have been prepared based on the assumption
that the Effective Date will be June 28, 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 28, 2002 (the "Effective Date Balance Sheet") set forth below presents: (a)
the projected consolidated financial position of Pillowtex as of June 28, 2002
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 28, 2002. The Balance Sheet Adjustments set forth in the columns captioned
"Exit Costs," "Debt Discharge" and "Fresh-Start" 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 Reorganized Pillowtex
Projected Consolidated Balance Sheet.
The Pillowtex and Reorganized Pillowtex Consolidated Balance Sheets
set forth below present: (a) the historical consolidated financial position of
Pillowtex at the end of 2001, (b) the projected consolidated financial position
of Pillowtex as of June 28, 2002 before giving effect to Confirmation and the
consummation of the transactions contemplated by the Plan, and (c) the projected
consolidated financial position of Reorganized Pillowtex as of June 28, 2002,
after giving effect to Confirmation and the consummation of the transactions
contemplated by the Plan at the end of each of 2002, 2003 and 2004.
40
The Pillowtex and Reorganized Pillowtex Consolidated Statements of
Operations set forth below present: (a) the historical consolidated results of
operations of Pillowtex for 2001, (b) the projected consolidated results of
operations of Pillowtex for the period commencing December 30, 2001 and ending
June 28, 2002, and (c) the projected consolidated results of operations of
Reorganized Pillowtex for the period commencing June 29, 2002 and ending
December 28, 2002 and for each of 2003 and 2004.
The Pillowtex and Reorganized Pillowtex Consolidated Statements of Cash
Flows set forth below present: (a) the historical consolidated cash flows of
Pillowtex for 2001, (b) the projected consolidated cash flows for Pillowtex for
the period commencing December 30, 2001 and ending June 28, 2002, and (c) the
projected consolidated cash flows of Reorganized Pillowtex for the period
commencing June 29, 2002 and ending December 28, 2002 and for each of 2003 and
2004.
41
Page 42
REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED BALANCE SHEET
JUNE 28, 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 .................. 4,478 - - - 4,478
Inventory .................................... 195,973 - - - 195,973
Assets held for sale ......................... 5,325 - - - 5,325
Net assets of discontinued operations ........ - - - - -
Prepaid expenses ............................. 3,604 - - - 3,604
------------ ----------- ----------- ---------- -------------
Total current assets .................... 365,351 - - - 365,351
Property, plant and equipment (net) .......... 403,532 - - (268,531)/(8)/ 135,001
Intangible assets (net) ...................... 219,894 - - (179,894)/(8)/ 40,000
Other long-term assets ....................... 11,250 - - (7,082)/(8)/ 4,168
------------ ----------- ----------- ---------- -------------
Total assets ............................ $ 1,000,027 $ - $ - $ (455,507) $ 544,520
============ =========== =========== ========== =============
Liabilities and Stockholders' Equity
(Deficit):
Accounts payable ............................. $ 43,529 $ - $ - $ - $ 43,529
Accrued expenses ............................. 52,042 - - - 52,042
Accrued professional fees and other
compensation costs ........................ 6,505 (6,505)/(1)/ - - -
Accrued interest expense ..................... - - - - -
Income tax payable ........................... - - - - -
Deferred income taxes ........................ - - - - -
------------ ----------- ----------- ---------- -------------
Total current liabilities ............... 102,076 (6,505) - - 95,571
Debtor-in-possession financing ............... 9,259 23,453 (32,712)/(4)/ - -
Designated post-petition obligation .......... 150,000 - (150,000)/(5)/ - -
------------ ----------- ------------- ---------- -------------
Total post-petition debt ................ 159,259 23,453 (182,712) - -
Deferred tax liabilities (assets) ............ - - - - -
Noncurrent liabilities ....................... 48,950 - - - 48,950
------------ ----------- ----------- ---------- -------------
Total old debt & long-term liabilities... 208,209 23,453 (182,712) - 48,950
Liabilities subject to restructuring ......... 1,014,796 (10,199)/(2)/ (1,004,597) - -
New Debt:
Exit Financing Revolver Facility ............. - - 57,711/(4)/ - 57,711
Exit Term Loan Notes ......................... - - 125,000/(5)/ - 125,000
Notes payable - priority taxes ............... - - 3,055/(6)/ - 3,055
Notes payable - capitalized leases ........... - - - - -
Reinstated IRBs .............................. - - 11,380/(7)/ - 11,380
------------ ----------- ----------- ---------- -------------
Total new debt .......................... - - 197,146 - 197,146
Preferred stock (old) ........................ 106,025 - - (106,025)/(8)/ -
Common stock (old) ........................... 143 - - (143)/(8)/ -
Common stock (new) ........................... - - 202,853 - 202,853
Additional paid-in capital ................... 160,120 - - (160,120)/(8)/ -
Retained earnings (deficit) .................. (563,146) (6,749)/(3)/ 787,310 (217,415)/(8)/ -
Pension Equity Adjustment .................... (26,405) - - 26,405 -
Currency translation adjustment .............. (1,791) - - 1,791 /(8)/ -
------------ ----------- ----------- ---------- -------------
Total stockholders' equity .............. (325,054) (6,749) 990,163 (455,507) 202,853
========
Total liabilities and stockholders' equity ... $ 1,000,027 $ - $ - $ (455,507) $ 544,520
============ =========== =========== ========== =============
42
NOTES TO REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED BALANCE SHEET
(1) Represents payment of $4,858,000 of accrued but unpaid Professional fees
and $1,646,000 of compensation costs associated with the effectiveness of
the Plan.
(2) Represents payment of $9,262,000 of cure costs related to Executory
Contracts or Unexpired Leases and $937,000 of Claims in Classes 1, 2 and 4.
(3) Represents payment of $3,049,000 of estimated financing fees, $200,000 of
Administrative Claims of Indenture Trustees and $3,500,000 of other unpaid
Professional fees.
(4) 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.
(5) Represents the repayment of outstanding Designated Post-Petition Loans with
the proceeds from the Exit Term Loan.
(6) Represents notes provided to holders of Priority Tax Claims pursuant to the
Plan.
(7) Represents the reinstatement of Outstanding Industrial Revenue Bonds
pursuant to the Plan.
(8) Represents adjustments necessary under "fresh-start" reporting principles
set forth in the Reorganization SOP 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 Pillowtex 2001 Form 10-K will be made available over the Internet
on the Document Website promptly after it has been filed with the SEC. 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 Statements of Cash Flows are presented in a modified format from that
typically presented under GAAP.
43
PILLOWTEX AND REORGANIZED PILLOWTEX
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Projected
----------------------------------------------------------------------------
Historical
Pillowtex Pillowtex Reorganized Pillowtex
------------- ------------- -----------------------------------------------------------
Fiscal June 28, June 28, Fiscal Fiscal Fiscal
2001 2002 2002 2002 2003 2004
------------- ------------- ------------ ------------- ------------- --------------
Assets:
Cash and cash equivalents ............. $ 38,444 $ - $ - $ - $ - $ 8,669
Trade accounts receivable (net) ....... 144,727 155,971 155,971 152,394 154,692 165,063
Other accounts receivable ............. 4,478 4,478 4,478 4,478 4,478 4,478
Inventory ............................. 200,578 195,973 195,973 195,562 195,694 195,650
Assets held for sale .................. 6,075 5,325 5,325 5,325 5,325 5,325
Net assets of discontinued
operations ......................... 1,357 - - - - -
Prepaid expenses ...................... 3,604 3,604 3,604 3,604 3,604 3,604
------------ ------------ ----------- ----------- ----------- -----------
Total current assets .............. 399,263 365,351 365,351 361,363 363,793 382,789
Plant, property and equipment ......... 453,440 403,532 135,001 139,553 143,929 141,724
Intangible assets (net) ............... 221,729 219,894 40,000 31,069 13,410 3,967
Other long-term assets ................ 11,250 11,250 4,168 4,168 4,168 4,168
------------ ------------ ----------- ----------- ----------- -----------
Total assets ...................... $ 1,085,682 $ 1,000,027 $ 544,520 $ 536,153 $ 525,300 $ 532,648
============ ============ =========== =========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit):
Accounts payable ...................... $ 35,119 $ 43,529 $ 43,529 $ 46,316 $ 48,314 $ 51,983
Accrued expenses ...................... 51,590 52,042 52,042 51,036 49,526 49,526
Accrued professional fees and other
compensation costs ................. 8,246 6,505 - - - -
------------ ------------ ----------- ----------- ----------- -----------
Total current liabilities ......... 94,955 102,076 95,571 97,352 97,840 101,509
Debtor-in-possession financing ........ - 9,259 - - - -
Designated post-petition obligation ... 150,000 150,000 - - - -
------------ ------------ ----------- ----------- ----------- -----------
Total post-petition debt .............. 150,000 159,259 - - - -
Deferred tax liabilities (assets) ..... - - - - -
Noncurrent liabilities ................ 48,950 48,950 48,950 48,950 48,950 48,950
------------ ------------ ----------- ----------- ----------- -----------
Total old debt and liabilities .... 198,950 208,209 48,950 48,950 48,950 48,950
Liabilities subject to restructuring .. 1,021,710 1,014,796 - - - -
New Debt:
Exit Financing Revolver Facility ...... - - 57,711 39,375 4,858 -
Exit Term Loan ........................ - - 125,000 124,375 120,625 93,021
Notes payable - priority taxes ........ - - 3,055 3,055 2,546 2,037
Reinstated IRBs ....................... - - 11,380 10,920 10,460 10,000
------------ ------------ ----------- ----------- ----------- -----------
Total new debt .................... - - 197,146 177,725 138,489 105,058
Preferred stock (old) ................. 99,185 106,025 - - - -
Common stock (old) .................... 143 143 - - - -
Common stock (new) .................... - - 202,853 202,853 202,853 202,853
Additional paid-in capital ............ 160,120 160,120 - - - -
Retained earnings (accumulated
deficit) ........................... (461,186) (563,146) - 9,273 37,168 74,278
Pension Equity Adjustment ............. (26,405) (26,405) - - - -
Currency translation adjustment ....... (1,790) (1,790) - - - -
------------ ------------- ----------- ----------- ----------- -----------
Total stockholders' equity ........ (229,933) (325,053) 202,853 212,126 240,021 277,131
Total liabilities and stockholders'
equity ... .......................... $ 1,085,682 $ 1,000,027 $ 544,520 $ 536,153 $ 525,300 $ 532,648
============ ============ =========== =========== =========== ===========
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 Pillowtex 2001 Form 10-K will be made available over the Internet
on the Document Website promptly after it has been filed with the SEC. 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 Statements of Cash Flows are presented in a modified format from that
typically presented under GAAP.
44
PILLOWTEX AND REORGANIZED PILLOWTEX
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars In Thousands)
Projected
---------------------------------------------------
Historical
Pillowtex Pillowtex Reorganized Pillowtex
----------- ----------- -------------------------------------
Fiscal Jan. - Jun. Jul. - Dec. Fiscal Fiscal
2001 2002 2002 2003 2004
------------ ----------- ----------- ---------- ----------
Net sales .................................. $ 1,031,021 $ 477,215 $ 492,829 $1,001,971 $1,071,069
Cost of goods sold ......................... 992,506 448,321 428,190 868,547 925,006
------------ ----------- ----------- ---------- ----------
Gross profit ........................... 38,515 28,894 64,639 133,424 146,063
Selling, general and administrative
expenses ................................ 92,275 38,897 35,090 66,985 71,427
Restructuring - assets impairment .......... 40,961 40,200 - - -
Restructuring expenses ..................... 10,759 10,119 1,826 - -
------------ ----------- ----------- ---------- ----------
Earnings (loss) from operations ........ (105,480) (60,322) 27,723 63,439 74,636
Interest expense ........................... 63,326 26,050 9,519 17,886 14,597
Reorganization items ....................... 31,401 15,499 - - -
------------ ----------- ----------- ---------- ----------
Earnings (loss) from continuing
operations before income
taxes .............................. (200,207) (101,871) 18,204 45,553 60,039
Income tax expense (benefit) ............... - - 8,932 17,657 22,929
------------ ----------- ----------- ---------- ----------
Earnings (loss) from continuing
operations ........................... (200,207) (101,871) 9,272 27,896 37,110
Preferred dividends and accretion .......... 16,358 6,840 - - -
------------ ----------- ----------- ---------- ----------
Earning (loss) available for
common stockholders .................. $ (216,565) $ (108,711) $ 9,272 $ 27,896 $ 37,110
============ =========== =========== ========== ==========
Earnings (loss) from operations ............ $ (105,480) $ (60,322) $ 27,723 $ 63,439 $ 74,636
Depreciation and amortization .............. 53,785 23,137 7,287 16,309 18,201
Restructuring expenses ..................... 10,759 10,119 1,826 - -
Restructuring-asset impairment ............. 40,961 40,200 - - -
Restructuring-professional fees ............ 3,135 - - - -
------------ ----------- ----------- ---------- ----------
EBITDAR /(1)/ .............................. $ 3,160 $ 13,134 $ 36,836 $ 79,748 $ 92,837
============ =========== =========== ========== ==========
______________
(1) EBITDAR is earnings (loss) from operations plus depreciation and
amortization, restructuring expenses, restructuring-asset impairment and
restructuring-professional fees (comprised of certain professional fees
included in SG&A). EBITDAR is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness; however, EBITDAR should not be considered as an alternative
to net earnings as a measure of operating results or to cash flow as a
measure of liquidity. In addition, EBITDAR as presented herein may not be
directly comparable to EBITDAR as reported by other companies.
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 Pillowtex 2201 Form 10-K will be made available over the Internet
on the Document Website promptly after is has been filed with the SEC. 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 Statements of Cash Flows are presented in a modified format from that
typically presented under GAAP.
45
Page 46
PILLOWTEX AND REORGANIZED PILLOWTEX
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Projected
--------------------------------------------------
Historical
Pillowtex Pillowtex Reorganized Pillowtex
---------- ----------- -------------------------------------
Fiscal Jan. - Jun. Jul. - Dec. Fiscal Fiscal
2001 2002 2002 2003 2004
---------- ----------- ------------ ---------- -----------
EBITDAR/(1)/ ............................. $ 3,160 $ 13,134 $ 36,836 $ 79,748 $ 92,837
Change in working capital ................
Change in accounts receivable ........ 68,000 (11,244) 3,577 (2,298) (10,370)
Change in inventory .................. 78,229 4,605 411 (131) 44
Change in accounts payable ........... 210 8,410 2,787 1,999 3,668
Change in accrued expenses ........... (1,922) 2,516 (1,006) (1,510) -
Change in other current assets and
liabilities ........................ (7,033) 2,107 - - -
----------- ---------- ----------- ---------- -----------
Total change in working capital .... 151,550 6,394 5,769 (1,940) (6,658)
Change in liabilities subject to
reorganization ..................... (12,442) (17,113) - - -
Other cash flow items and adjustments
Cash interest paid .................. (63,770) (26,747) (9,519) (17,886) (14,597)
Cash income tax paid ................. - - - - (13,486)
Capital expenditures ................. (13,862) (12,961) (11,838) (20,685) (15,995)
Restructuring cost/non-operations
adjustment ......................... (106,140) (74,064) (1,826) - -
Asset sale - other writedowns ........ 47,792 40,200 - - -
New term debt principal payments ..... - (25,000) (625) (3,750) (27,604)
Notes payable - priority taxes ....... - - - (509) (509)
Notes payable - cure payments ........ - - - - -
Reinstated IRB payments .............. - - (460) (460) (460)
---------- ---------- ------------ ----------- ------------
Total other cash flow items ........ (135,980) (98,572) (24,268) (43,290) (72,651)
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 ........................... $ 6,288 $ (96,157) $ 18,337 $ 34,518 $ 13,527
========== =========== =========== ========== ===========
_____________
(1) EBITDAR is earnings (loss) from operations plus depreciation and
amortization, restructuring expenses, restructuring-asset impairment and
restructuring-professional fees (comprised of certain professional fees
included in SG&A). EBITDAR is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness; however, EBITDAR should not be considered as an alternative
to net earnings as a measure of operating results or to cash flow as a
measure of liquidity. In addition, EBITDAR as presented herein may not be
directly comparable to EBITDAR as reported by other companies.
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 Pillowtex 2001 Form 10-K will be made available over the Internet
on the Document Website promptly after is has been filed with the SEC. 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 Statements of Cash Flows are presented in a modified format from that
typically presented under GAAP.
46
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 48 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 47 Vice President and Chief Information Officer
Donald Mallo 52 Vice President-Human Resources
John F. Sterling 38 Vice President and General Counsel
Henry T. Pollock 61 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 engaged the executive
search firm of Russell Reynolds Associates to assist in identifying and
recruiting 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. Prior to joining Pillowtex, from January 1999 to April
2000, Mr. Williams was a consultant. 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
for 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.
47
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, Mr. Mallo practiced labor and
employment law in New York. 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.
48
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. The Debtors
have engaged the services of the executive search firm of Russell Reynolds
Associates to assist in identifying a new Chief Executive Officer. Pillowtex
anticipates hiring a new Chief Executive Officer on or before the Effective
Date.
(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"). As of the Effective Date, the initial
Board of Directors will consist of seven members, two of which will be officers
of Reorganized Pillowtex. The Board of Directors will be divided into three
classes, initially 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. 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 Debtors have engaged the services of the executive
search firm of Russell Reynolds Associates to assist in identifying potential
directors to serve on the Board of Directors. Pillowtex and certain creditors
will assess the qualifications of director candidates identified by Russell
Reynolds Associates and otherwise, interview potential candidates and, based
thereon, make determinations with respect to the candidates. Pillowtex
anticipates that the seven members of the initial Board of Directors will be
identified on or before the Effective Date.
The Certificate and 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 (the "Whole Board") 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 Certificate and Bylaws will also provide that the Board of
Directors will consist of no less than three nor more than 15 directors. 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 Certificate or Bylaws.
49
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. Unless otherwise provided in any Preferred Stock Designation, any
vacancy that occurs on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause (other than an increase in the number
of directors) will be filled solely by (a) 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) the affirmative vote of a plurality of the
issued and outstanding voting stock present in person or represented by proxy at
a meeting of stockholders called for that purpose. Unless otherwise provided in
any Preferred Stock Designation, any vacancy that occurs on the Board of
Directors resulting from any increase in the number of directors will be filled
solely by the affirmative vote of a plurality of the issued and outstanding
voting stock present in person or represented by proxy at a meeting of
stockholders called for that purpose.
See " -- Certain Corporate Governance Matters -- Consent of
Stockholders in Lieu of Meeting," for a discussion of the ability of
stockholders to take any action which may be taken at any annual or special
meeting of such stockholders by written consent without a meeting, without prior
notice and without a vote.
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 the 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 all of the members of the Audit Committee and the
Compensation Committee will be non-employee directors.
If the 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 of the authority of the Board of Directors in the
management of the business and affairs of Reorganized Pillowtex, regardless of
whether those powers are specifically conferred to the Executive Committee by
the Bylaws. Pursuant to the DGCL, the Executive Committee, however, will have no
right to: (a) approve or adopt, or recommend to the stockholders, any action or
matter expressly required by the DGCL to be submitted to the stockholders for
approval or (b) adopt, amend or repeal any bylaw of Reorganized Pillowtex.
The Audit Committee is expected to review, in accordance with a charter
to be adopted prior to or promptly following 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, Plans and Agreements." In addition, the Compensation Committee will
advise and consult with Reorganized Pillowtex's management regarding pension and
other benefit plans and compensation policies and practices of Reorganized
Pillowtex.
50
Director Nomination Procedures
The Bylaws will provide that nominations for election of directors by
the stockholders at a stockholders meeting will be made by or at the direction
of the Board of Directors or by any stockholder entitled to vote in the election
of directors generally and who otherwise complies with the procedures set forth
in the Bylaws. The Bylaws will require that stockholders intending to nominate
candidates for election as directors at a stockholders meeting provide timely
notice in writing. To be timely with respect to an annual meeting, 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 of the date on which Reorganized
Pillowtex first mailed its 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) the 90th calendar day prior to the annual meeting or (b) the tenth
calendar day following the first public announcement of the date of the annual
meeting. To be timely with respect to a special meeting, a stockholder's notice
must be delivered to or mailed and received at Reorganized Pillowtex's principal
executive offices together with the stockholder's request for the special
meeting. The Bylaws will also specify requirements as to the form and content of
a stockholder's notice. These provisions of the Bylaws may hinder or preclude
stockholders from making nominations of directors if the stockholders do not
follow the procedures set forth in the Bylaws.
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, 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, Plans and Agreements."
Employee Benefit Matters
Existing Benefit Plans, Programs 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 after the Effective Date.
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. These
plans will continue to be maintained by Reorganized Pillowtex after the
Effective Date.
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, which was 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. These plans will continue to be maintained by
Reorganized Pillowtex after the Effective Date.
51
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. These plans will continue to be maintained by
Reorganized Pillowtex after the Effective Date.
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. This plan will continue to be maintained by Reorganized
Pillowtex after the Effective Date.
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. This plan will
continue to be maintained by Reorganized Pillowtex after the Effective Date.
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.
This plan will continue to be maintained by Reorganized Pillowtex after the
Effective Date.
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 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." This plan will not be
maintained by Reorganized Pillowtex after the Effective Date, except to
the extent scheduled payments thereunder are payable after such date.
Emergence Performance Bonus Plan. Under the current circumstances, the
--------------------------------
Debtors do not anticipate making any emergence payment bonuses under
the Retention Plan. This plan will not be maintained by Reorganized
Pillowtex after the Effective Date.
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 are 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 are
entitled to receive medical insurance, life insurance and certain other
benefits. This plan will continue to be maintained by Reorganized
Pillowtex after the Effective Date.
Certain Employment Agreements. Pillowtex has entered into employment
agreements with Mr. Anthony T. Williams, its President and Chief Operating
Officer, Mr. Michael R. Harmon, its Executive Vice President and Chief Financial
Officer, Mr. Scott E. Shimizu, its Executive Vice President-Sales & Marketing,
Mr. A. Allen Oakley, its Executive Vice President-Manufacturing, and Mr. Richard
Grissinger, its Senior Vice President -Marketing (collectively, the "Named
Executive Officers"). The employment agreement of each Named Executive Officer
states that the Named Executive Officer is an at-will employee and that the
relationship between the Named Executive Officer and Pillowtex may be terminated
by either party, subject to satisfaction of any applicable
52
severance pay obligations. The employment agreements provide for initial annual
base salaries for the Named Executive Officers as follows:
Initial Amount
Named Executive Officer Base Salary
----------------------------------- ----------------
Anthony T. Williams .............. $ 400,000
Michael R. Harmon ................ 350,000
Scott E. Shimizu ................. 375,000
A. Allen Oakley .................. 300,000
Richard Grissinger ............... 286,000
In each case, the Named Executive Officer's base salary is subject to increase
in accordance with company policy. Mr. Harmon's employment agreement also
provides for a $50,000 bonus payable March 19, 2002, provided that in the event
his employment is terminated before March 19, 2002 under circumstances that
would entitle him to a severance benefit under the provisions of the employment
agreement described in the first sentence of the second following paragraph, Mr.
Harmon will receive a prorated amount of the bonus based on the number of days
he was employed during the year ending March 19, 2002. The employment agreements
for all the Named Executive Officers also provide (a) that the Named Executive
Officers will be eligible to participate in the Retention Incentive Plan and the
Severance Plan and in any stock option plan made available generally to its
senior executives and (b) for other customary benefits.
Under Mr. William's employment agreement, if his employment is
involuntarily terminated for reasons other than death, disability, retirement at
or after the earliest retirement age under any company-sponsored pension plan in
which he participates or cause, or if following a change in control he
terminates employment for good reason no later than six months after the
occurrence of an event constituting good reason, Pillowtex will pay to Mr.
Williams in a single lump sum no later than five days after such termination of
employment a severance benefit equal to his base salary then in effect for a
period of 24 months, less the amount of any severance benefit payable to him
under the Retention Plan.
Under Mr. Harmon's employment agreement, if his employment is involuntarily
terminated for reasons other than death, disability, retirement at or after the
earliest retirement age under any company-sponsored pension plan in which he
participates or cause, or if following a change in control he terminates
employment for good reason no later than six months after the occurrence of an
event constituting good reason under the agreement, Pillowtex will pay to Mr.
Harmon in a single lump sum no later than five days after such termination of
employment a severance benefit in an amount equal to his annual base salary then
in effect, reduced by the amount of any severance benefit payable to him under
the Retention Plan. If, however, Mr. Harmon's employment is involuntarily
terminated for reasons other than death, disability, retirement at or after the
earliest retirement age under any company-sponsored pension plan in which he
participates or cause within one year after the commencement of employment, as
chief executive officer, of an individual who is not an officer of Pillowtex on
the Effective Date, then, notwithstanding any provision in the Retention Plan to
the contrary, the amount of such severance benefit will be equal to two times
Mr. Harmon's annual base salary then in effect, reduced by the amount of any
severance benefit payable to him under the Retention Plan.
Under the employment agreements with Mr. Shimizu, Mr. Oakley and Mr.
Grissinger, if employment of the applicable Named Executive Officer is
involuntarily terminated for reasons other than death, disability, retirement at
or after the earliest retirement age under any company-sponsored pension plan in
which he participates or cause, or if following a change in control he
terminates employment for good reason no later than six months after the
occurrence of an event constituting good reason under the employment agreement,
Pillowtex will pay to him a severance benefit equal to his base salary then in
effect for a period of 24 months, less any amount received by him under the
Retention Plan. The severance benefit shall be paid to the applicable Named
Executive Officer as follows: (i) the portion of the severance benefit equal to
his annual base salary then in effect, shall be paid in a single lump sum no
later than five days after the termination of his employment; and (ii) the
remainder of the severance benefit shall be paid in equal monthly installments
beginning on the first anniversary date of the termination of his employment;
provided, however, that he will not be entitled to the remaining amount if he
obtains
53
other full-time employment prior to such anniversary and the obligation to pay
the remaining amount shall immediately cease if he obtains other full-time
employment after such anniversary.
Pillowtex has entered into similar employment agreements with seven other
executive officers.
New Benefit Plan, Programs and Agreements
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.
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. The Equity Incentive Plan will provide
for grants of stock options, restricted stock, deferred shares and other typical
equity incentive awards to the key employees, officers and members of the Board
of Directors. A total of 1,400,000 shares of New Common Stock will be available
for issuance in satisfaction of awards under the Equity Incentive Plan. Pursuant
to the Plan, initial grants of 260,000 shares of restricted stock and options
exercisable to purchase 766,600 shares of New Common Stock will be made on the
date that is 30 Business Days after the Effective Date (or earlier than such
date in certain circumstances as described below) to certain key employees of
the Reorganized Debtors as described on Exhibit IV.C.3 to the Plan. The
remaining 373,400 shares available under the Equity Incentive Plan will be
available for future grants under the Equity Incentive Plan as determined by the
Board of Directors (or a committee thereof).
The initial grants of restricted stock and options under the Equity
Incentive Plan are presently expected to include grants as follows:
No. of Shares of
No. of Shares New Common Stock
Recipient of Restricted Stock Underlying Option Grant
----------------------- ------------------- -----------------------
Anthony T. Williams 80,000 123,200
Scott T. Shimizu 60,000 90,000
Michael R. Harmon 60,000 90,000
A. Allen Oakley 60,000 90,000
The initial grants are also expected to include grants of options exercisable to
purchase 373,400 shares of New Common Stock in the aggregate to other key
employees. The detail of such grants will be determined by Pillowtex prior to
the Confirmation Date.
Pursuant to the terms of the Plan, the initial grants of restricted stock
and options under the Equity Incentive Plan will be made on the date that is 30
Business Days after the Effective Date; provided, however, if a terminating
event occurs prior to the expiration of the 30-day period with respect to an
officer designated to receive such a grant, the grant will be made to such
officer on the date immediately preceding the date of the terminating event. For
such purposes, a "terminating event" means, with respect to any such officer,
any of the following: death, retirement, long-term disability, termination
without cause or termination upon change of control (as such terms are used in
the Equity Incentive Plan). The options will have a per share exercise price
equal to the 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 on the date of grant (or, if there was no sale on that date, on the
last preceding date on which there was a sale), or, if not so listed, equal to
the fair market value of the New Common Stock on the date of grant as otherwise
determined in accordance with the terms of the Equity Incentive Plan. With
respect to the options to be granted to Messrs. Williams, Shimizu, Harmon and
Oakley, the options will become exercisable as to 1/3 of the underlying shares
on each of the first, second and third anniversaries of the date of grant. With
respect to the options to be granted to the other key employees, the options
will become exercisable as to 1/3 of the underlying shares on the date of grant
and as to 1/3 of the underlying shares on each of the first and second
anniversaries of the date of grant. The shares of restricted stock to be issued
will vest as to 1/3 of such shares on the date of grant and 1/3 of such shares
on each of the first and second anniversaries of the date of grant.
54
Severance Arrangements. Messrs. Williams, Shimizu, Harmon and Oakley will
receive a severance arrangement pursuant to which each of them will receive up
to two and one-half years' compensation under certain circumstances relating to
a change in control or a change of management of Reorganized Pillowtex.
Certain Corporate Governance Matters
Removal of Directors and Filling Vacancies in Directorships
The Certificate will provide that directors may be removed only for cause
by the stockholders entitled to vote generally in the election of directors
unless otherwise provided in any Preferred Stock Designation. Under the
Certificate, unless otherwise provided in any Preferred Stock Designation, any
vacancy on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause (other than an increase in the number
of directors), will be filled only by (a) the vote of a majority of the
directors then in office, even though less than a quorum or by the sole
remaining director or (b) the affirmative vote of a plurality of the issued and
outstanding voting stock present in person or represented by proxy at a meeting
of stockholders called for that purpose. Unless otherwise provided in any
Preferred Stock Designation, any vacancy that occurs on the Board of Directors
resulting from any increase in the number of directors will be filled solely by
the affirmative vote of a plurality of the issued and outstanding voting stock
present in person or represented by proxy at a meeting of stockholders called
for that purpose. As a result of these provisions, a majority stockholder or
group of stockholders seeking to gain control of the Board of Directors could
create additional board seats and fill the resulting vacancies with its own
nominees. See "Risk Factors -- Certain Stockholders May Exercise Significant
Control."
Stockholder Action and Special Meetings of Stockholders
The Certificate will provide that special meetings of the stockholders may
only be called by (a) the Chairman of the Board, (b) the Chief Executive
Officer, (c) the President, or (d) within ten calendar days after receipt of a
written request of (i) a majority of the Whole Board or (ii) holders of at least
35% of the issued and outstanding shares of voting stock 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 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 meeting include the purposes specified in the
stockholder's request. The Bylaws will provide that the business permitted to be
conducted at any 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 Chief Executive Officer, 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 Whole Board.
Consent of Stockholders in Lieu of Meeting
Under Section 228 of the DGCL, unless otherwise provided in the certificate
of incorporation, any action required or permitted by the DGCL to be taken at
any annual or special meeting of stockholders of a corporation may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents setting forth the action so taken is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. The Certificate will not
contain any prohibition on action by written consent of stockholders in lieu of
meeting.
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.
55
See "Securities To Be Distributed Pursuant to the Plan; Post-Reorganization
Indebtedness -- New Common Stock" for a description of the New Common Stock.
The 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, subject to certain
restrictions stated in the Certificate, New Preferred Stock 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.
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.
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. In addition, Pillowtex has entered into
indemnification agreements with William B. Madden, Scott E. Shimizu and Mary R.
Silverthorne, directors of Pillowtex. There are no claims for indemnification
currently asserted against any of the Debtors.
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 or officers 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
56
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 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 Certificate and Bylaws will provide for the indemnification, with
certain exceptions, of any person serving as an officer or director of Pillowtex
or Reorganized Pillowtex on or after November 14, 2000 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 Certificate and Bylaws
will provide for the advancement of expenses relating to the defense of any
proceeding to such officers and directors, contingent upon the person's
commitment to repay all advances against which the person ultimately is not
entitled to be indemnified. The Certificate and Bylaws will also provide that
the Board of Directors may authorize Reorganized Pillowtex to indemnify and
provide advancement of expenses to any employee or agent of Reorganized
Pillowtex and to any person acting at the request of Reorganized Pillowtex as a
director, manager, trustee, officer or employee of another company or of a
partnership, joint venture, trust or other enterprise including service with
respect to an employee benefit plan, to the same or lesser extent as provided to
officers and directors under the Certificate and Bylaws.
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 or officer 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 or officer also will be
entitled to be reimbursed for the expense of prosecuting or defending such suit.
The Certificate and Bylaws will provide that Reorganized Pillowtex may
maintain insurance, at its expense, to protect itself and any director, officer,
manager, trustee, or employee of Reorganized Pillowtex or another
57
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 the Board of
Directors at its option, of trusts or other funding mechanisms to fund
Reorganized Pillowtex's indemnification obligations thereunder.
SECURITIES TO BE DISTRIBUTED 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 28, 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 $197.1 million of assumed total debt (including (a)
borrowing under the Exit Financing Revolver Facility, (b) the Exit Term Loan,
(c) the Outstanding Industrial Revenue Bonds, and (d) notes issued to holders of
Allowed Priority Tax Claims), EYCF has estimated the reorganization equity value
to be between $152.9 million and $252.9 million, with a midpoint value of $202.9
million. The foregoing reorganization value (ascribed as of the date of this
Disclosure Statement) reflects, among other factors discussed below, current
financial market conditions.
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 February 15, 2002. For the purposes of
determining the reorganization value, EYCF has not considered any impact on the
Reorganized Debtors' financial performance that may occur as a result of
renegotiation of existing leases. In addition, for purposes of determining the
reorganization value, EYCF assumed that the impact on the equity value of the
Reorganized Debtors from the issuance of the New Warrants and options granted
under the Equity Incentive Plan would be minimal.
Based on the assumed range of reorganization equity value set forth
above, the value of the 18,600,000 shares of New Common Stock to be distributed
to the holders of Allowed Claims in Classes 5 and 6 under the Plan and the
260,000 shares of New Common Stock to be issued as restricted stock to certain
key employees of the Reorganized Debtors under the Equity Incentive Plan is
estimated to be between $8.10 per share and $13.41 per share, with a midpoint of
$10.76 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 February 15, 2002
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.
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
58
conducted an 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 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 distributed
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 significantly 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 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. See "Risk Factors - There Is No Established Market for New Common
Stock or New Warrants; Volatility Is Possible."
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 will exceed the estimated reorganization
equity value per share, and exercise of the New Warrants will require the
payment to Reorganized Pillowtex of cash in the amount of the exercise price.
While warrants may be valued using complex mathematical computations, these
computations are based upon highly subjective assumptions, including, among
others, the estimated trading prices of the equity securities for which the
warrants may be exercised and the projected volatility of price movements of
those equity securities. Based on an assumed trading price equal to the midpoint
of the estimated reorganization equity value of $10.76 per share and an
estimated trading volatility of 40%, EYCF computed the theoretical value of a
New Warrant, using a variant of a standard computation methodology for the
valuation of warrants, to be $2.24 per New Warrant. There can be no assurance
that the New Common Stock will trade at the estimated reorganization equity
value per share, that the trading volatility of the New Common Stock will be or
will be perceived to be 40% or that the market value of a New Warrant will be
$2.24. Finally, actual trading values for warrants frequently differ materially
from those values derived from mathematical computations, based on a number of
factors including but not limited to market conditions, size of the block of
warrants being sold, liquidity of the warrants and trading volume. Accordingly,
the foregoing computation of value cannot be relied upon as a measure of
realizable value of the New Warrants.
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New Common Stock
As of the Effective Date, Reorganized Pillowtex will be authorized to
issue 50,000,000 shares of New Common Stock, par value $0.01 per share, of
which: (a) 18,600,000 will be distributed to holders of Allowed Claims in
Classes 5 and 6; and (b) 1,400,000 shares of New Common Stock will be available
for issuance in satisfaction of awards to key employees of the Reorganized
Debtors under the Equity Incentive Plan. See "Reorganized Pillowtex -- Employee
Benefit Plans -- New Benefit Programs, Plans and Agreements" for a discussion of
grants of restricted stock and options to be made under the Equity Incentive
Plan in connection with the Effective Date.
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 the 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 New Preferred
Stock. 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 distributed pursuant to the Plan will be, upon such issuance,
validly issued, fully paid and nonassessable.
New Warrants
Under the Plan, on the Effective Date, holders of Allowed Claims in
Class 6, if Class 6 accepts the Plan, will receive, among other things, a Pro
Rata share of New Warrants exercisable for up to an aggregate of 3,529,412
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.J 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 $28.93. 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 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).
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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 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 for the benefit of the employees or directors of Reorganized Pillowtex
or any of its subsidiaries; (d) any issuance of shares of New Common Stock in
connection with a company-sponsored plan for reinvestment of dividends or
interest; (e) 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 current market 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 (f) 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. 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.
New Preferred Stock
As of the Effective Date, Reorganized Pillowtex will be authorized to
issue 10 million shares of New Preferred Stock, subject to certain restrictions
set forth in the Certificate. The Board of Directors will have the authority to
issue New 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. The Certificate will provide
that the Board of Directors may not, without the approval of the holders of a
majority of the capital stock of Reorganized Pillowtex or any class or series
entitled to vote generally in the election of directors, authorize any series of
New Preferred Stock or issue any shares of New Preferred Stock, or rights to
acquire shares of New Preferred Stock, in connection with a stockholders rights
plan or any similar plan or arrangement.
Exit Financing Revolver Facility
On the Effective Date, the Debtors and the Exit Financing Revolver
Facility Agent Bank will enter into the Exit Financing Revolver Facility. See
"Overview of the Plan-- Exit Financing Revolver Facility and Other Post-
61
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 asset-based revolving credit facility of $200
million, including a $60 million sub-facility for letters of credit. The Exit
Financing Revolver Facility will be secured primarily by a first priority lien
on the Reorganized Debtors' accounts receivables, inventory and trademarks and
may be secured by a first priority lien on other fixed assets as well as a
second priority lien on assets pledged to the provider of the Exit Term Loan. A
portion of the Exit Financing Revolver Facility will be used to replace certain
existing letters of credit and may be used to prepay the Exit Term Loan in an
amount to be negotiated with the exit lender subject to certain minimum excess
liquidity requirements. Assuming an initial borrowing eligibility of $175
million, initial borrowings of $57.7 million and approximately $40 million of
trade and stand-by letters of credit, of which $25 million of the initial
borrowings would be used to prepay the Exit Term Loan, it is anticipated that
immediately following the Effective Date the Reorganized Debtors will have
availability under the Exit Financing Revolver Facility of between $50 million
and $100 million, depending on advance rates on accounts receivable and
inventory yet to be negotiated, for general working capital and corporate
purposes. The other specific terms and conditions of the Exit Financing Revolver
Facility including, but not limited to, pricing, fees, advance rates, borrowing
base and covenants are currently being negotiated and 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 DIP Order. The
Debtors currently anticipate that such Exit Term Loan Notes will be issued in an
aggregate principal amount of $150 million pursuant to a five-year term loan
facility and will bear interest at a fixed rate of 10% per annum. It is further
anticipated that (a) in addition to regularly scheduled loan amortization, 50%
of excess cash flow (as determined in accordance with the relevant agreements)
of Reorganized Pillowtex each year will be applied as a mandatory prepayment of
the Exit Term Loan subject to certain minimum availability requirements to make
such payments under the Exit Financing Revolver, (b) 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;
Columbus, Georgia and Scottsboro, Alabama and certain other specifically
identified assets, as well as a second priority lien on assets pledged to the
provider of the Exit Financing Revolver Facility, and (c) all of the domestic
subsidiaries of Reorganized Pillowtex will guarantee the Exit Term Loan.
Further, the Exit Term Loan is contemplated to be reduced on or immediately
after the Effective Date in an amount yet to be determined (but assumed to be
$25 million for purposes of the Disclosure Statement) from the proceeds of the
Exit Financing Revolver Facility. 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.
Intercreditor Arrangements
It is anticipated that an Intercreditor Agreement will be entered into
among the Agent Bank for the Exit Financing Revolver Facility, the Agent Bank
for the Exit Term Loan and the Reorganized Debtors that addresses intercreditor
and collateral arrangements.
Outstanding Industrial Revenue Bonds
As provided in the Plan, the MBFC Revenue Bonds and Alabama Revenue
Bonds, having an aggregate outstanding amount of approximately $11.4 million,
will be Reinstated as of the Effective Date. The letters of credit securing
these Outstanding 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."
62
MBFC Revenue Bonds
The MBFC Revenue Bonds are collateralized by buildings, equipment and
certain agreements executed in connection with the issuance of the MBFC Revenue
Bonds, including (a) a security interest in the lease agreement between
Pillowtex (as lessee) and Tunica County, Mississippi, covering the real property
on which Pillowtex constructed facilities with the proceeds of the issuance of
the MBFC Revenue Bonds, and (b) an irrevocable direct pay letter of credit
issued by Bank of America, N.A. (as successor to NationsBank of Texas, N.A.),
for the account of Pillowtex, in the initial face amount of $4.7 million in
support of the MBFC Revenue Bonds. The letter of credit, which provides
assurance that payments on the MBFC Revenue Bonds will be made as scheduled,
will be replaced, substituted or otherwise satisfied with equivalent letters of
credit to be issued under the Exit Financing Revolver Facility. The MBFC Revenue
Bonds bear interest, payable monthly (or, in certain circumstances, quarterly),
at a variable rate (2.75% to 4.5% per annum), provide for annual principal
payments of $460,000 and mature on July 1, 2004.
Alabama Revenue Bonds
The Alabama Revenue Bonds are collateralized by certain funds
established and agreements executed in connection with the issuance of the
Alabama Revenue Bonds, including a irrevocable direct pay letter of credit
issued by CoreStates Bank, N.A., for the account of Fieldcrest Cannon, in the
initial face amount of $10.2 million. The letter of credit, which provides
assurance that the payments on the Alabama Revenue Bonds will be made as
scheduled, will be replaced, substituted or otherwise satisfied with equivalent
letters of credit to be issued under the Exit Financing Revolver Facility. The
Alabama Revenue Bonds bear interest at a variable rate (approximately the LIBOR
Interbank rate), and mature on July 1, 2021.
Tax Notes
See "Overview of the Plan -- Additional Information Regarding Assertion
and Treatment of Administrative Claims and Priority Tax Claims -- Priority Tax
Claims" for a description of indebtedness that will be owing in respect of
Priority Tax Claims as of the Effective Date.
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 and strategy, as reflected in the Projections.
Projections are inherently uncertain and are dependent upon the successful
implementation of a business plan and strategy 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 GAAP, may affect the actual financial
condition, results of operations and cash flows of the Reorganized Debtors in
the future.
63
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 $197.1 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 and strategy, the Reorganized
Debtors' leverage and debt service requirements could make them vulnerable to
economic downturns in the markets the 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 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 and strategy.
As a result of the restrictions described above, the ability of
Reorganized Pillowtex to respond to changing business and economic conditions
may be 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 the Debtors presently intend to apply for quotation of the
New Common Stock as a Nasdaq National Market security by The Nasdaq Stock
Market, Inc., there can be no assurance that the minimum listing requirements
will be met, and even if such application is granted, 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 may develop. Moreover, the New
Common Stock will be distributed 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 $10.76 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
64
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 Distributed 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 Debtors also presently intend to apply for quotation of the New
Warrants on The Nasdaq Stock Market, Inc. However, there can be no assurance
that such application will be granted, or, even if such application is granted,
that an active market for the New Warrants will develop or as to the degree of
price volatility in any particular market that might develop. Accordingly, no
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 actual 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. Moreover, although EYCF has computed a
theoretical value of $2.24 per New Warrant as discussed above, such valuation is
not an estimate of the price at which the New Warrants may trade in the market
and the Debtors have not attempted to make any such estimate in connection with
the development of the Plan. See "Securities To Be Distributed Pursuant to the
Plan; Post-Reorganization Indebtedness -- Reorganization Value."
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 -- Other 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, including those set forth in the Pillowtex 2000 Form 10-K, the
Pillowtex Third Quarter 2001 Form 10-Q and the Pillowtex 2001 Form 10-K to be
filed with the SEC on or before March 29, 2002.
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
The Plan preserves the contractual subordination rights of the holders
of Overline Facility Claims and Aircraft Lease Claims in the event that Class 6
does not accept the Plan. 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.
65
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.
Certain Stockholders May Exercise Significant Control
Immediately following the Effective Date, seven of the DIP Lenders are
expected to own, in the aggregate, more than 50% of the issued and outstanding
shares of New Common Stock. As a result of their share ownership, these
stockholders will be in a position to exercise significant control over
Reorganized Pillowtex's direction and management and will have a significant
influence on all matters requiring stockholder approval, including the election
of directors.
In addition, the Certificate and Bylaws do not contain a number of
anti-takeover provisions that are included in the governance documents of many
public companies, such as provisions prohibiting (a) action by written consent
of the stockholders in lieu of meeting, (b) the ability of stockholders to call
a special meeting of stockholders, and (c) the ability of stockholders to fill
vacancies on the board of directors. In addition, the Certificate prohibits the
Board of Directors from utilizing New Preferred Stock to implement a stockholder
rights plan without the approval of holders of a majority of the outstanding
voting stock. As a result, Reorganized Pillowtex and its minority stockholders
may be vulnerable to potentially coercive or unfair takeover practices or to
takeover bids that are inadequately priced or otherwise inconsistent with the
best interests of all of Reorganized Pillowtex's stockholders.
Relationships with Suppliers and Vendors
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.
Reorganized Pillowtex's business plan centers around, among other initiatives,
strategic sourcing. See "Reorganized Pillowtex -- Business Plan and Strategy for
Reorganized Pillowtex -- Strategic Sourcing." 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 satisfactory terms.
66
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. It is important that the Debtors remain
competitive in the areas of quality, price, selection and convenience, as
failure to do so could result in the reduction of the price at which the
Debtors' sell their products. 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 sectors 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") may
have a negative effect on the domestic textile industry and Reorganized
Pillowtex. The World Trade Organization 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 can be no assurance
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.
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
67
supply contract with Wal-Mart or any of their other customers. 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 December 31, 2001, the Debtors had approximately 9,560 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 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.
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: (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 of
a discharge of all Claims and other debts and liabilities against the Debtors
and a termination of all 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.
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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
with respect to any Debtor or Reorganized Debtor 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.
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
with respect to any Debtor or Reorganized Debtor 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 the 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.
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, including Recovery
Actions. The Reorganized Debtors or their successors may pursue any retained
claims, demands, rights or causes of action, as appropriate, in accordance with
the best interests of the Reorganized Debtors or their successors holding those
claims, demands, rights or causes of action. Further, the
69
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, each
holder of a Claim or Interest that votes 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 (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 the 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).
If Class 6 accepts the Plan, as of the Effective Date, (a) each Debtor,
(b) 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 votes 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 the person or entity has,
had or may have against each lender under the Prepetition Credit Facility and
each of the 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.
If Class 6 accepts the Plan, as of the Effective Date, (a) each Debtor,
(b) 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 votes 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 the person or entity has,
had or may have against each holder of a Claim in Class 6 and each of the Claim
holder'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
any preference action under section 547 of the Bankruptcy Code.
Insofar as the releases and related injunctions described above purport
to discharge and release the third-party liabilities of non-Debtors, the staff
of the SEC views these provisions of the Plan as being inconsistent with section
524(e) of the Bankruptcy Code. The staff of the SEC may object to Confirmation
of the Plan on these grounds. The Debtors believe that these provisions are
permissible under the Bankruptcy Code and applicable Delaware law.
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 with
respect to any of the Debtors or Reorganized Debtors released pursuant to the
Plan.
70
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 identified on Exhibit IV.C.3 to the Plan, 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 also intend to continue sponsoring the Pillowtex Pension
Plan 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
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 those benefits, subject to any rights to amend, modify
or terminate those benefits under the terms of the applicable retiree benefits
plan, other agreement or applicable nonbankruptcy law.
Executory Contracts or 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 Contracts or 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 or 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 the
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 the contract or lease
(including any related agreements as described in Sections I.A.112 or 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 the 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 Sections I.A.112 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 whose
Executory Contract or Unexpired Lease is being assumed or assumed and assigned
pursuant to the Plan of: (a) the contract or lease being assumed or assumed and
assigned;
71
(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 the 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 the Claims constitute monetary defaults, the Cure
Amount Claims associated with each Executory Contract or 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 the contract or lease
or the assignee of the 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 the Executory Contract or Unexpired Lease. If there is a dispute
regarding: (a) the amount of any Cure Amount Claim, (b) 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 (c) any other matter pertaining to
assumption or assumption and assignment of the 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 or Unexpired Leases
between Debtors, the Reorganized Debtor assuming the contract or lease 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.112 and V.A.2
of the Plan), each Executory Contract or 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 or Unexpired Leases to be rejected will
include the Executory Contracts or Unexpired Leases listed on Exhibit V.C to the
Plan. Each contract or lease listed on Exhibit V.C to the Plan will be rejected
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 the
contract or lease (including related agreements as described in Section I.A.112
of the Plan) is an Executory Contract or Unexpired Lease or that a Debtor or
Reorganized Debtor has any liability thereunder. Any Executory Contract or
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 the contract or lease is listed on
Exhibit V.C to the Plan. The Confirmation Order will constitute an order of the
Bankruptcy Court approving the 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, the 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 or Unexpired Leases assumed by the
Debtor, will be performed by the Debtor or Reorganized Debtor liable thereunder
in the ordinary course of its business. Accordingly, those contracts and leases
(including any assumed Executory Contracts or Unexpired Leases) will survive and
remain unaffected by entry of the Confirmation Order.
The Debtors have entered into discussions with the other parties
thereto with respect to potential modifications or amendments to certain
Executory Contracts or Unexpired Leases. Pending the outcome of these
discussions, the Debtors are unable to determine whether those Executory
Contracts or Unexpired Leases will be assumed or rejected. If no agreement is
reached with respect to a particular Executory Contract or Unexpired Lease prior
to the Effective Date, the Debtors intend to reject that Executory Contract or
Unexpired Lease, resulting in a Claim for the non-Debtor party or parties in
Class 6.
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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 or Unexpired Leases being
assumed), Section VI.A.3 of the Plan (regarding subordination of Old 6%
Debentures), 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 and 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,
subject to VI.A.3 of the Plan, if applicable, Old 6% Debenture Claims, the
applicable Indenture Trustee will act as Disbursing Agent with respect to its
respective series of Old Senior Subordinated Notes or Old 6% Debentures.
Distributions in Respect of Old 6% Debentures
The shares of New Common Stock and New Warrants, if any, included in
the Subordination Reserve Allocation of the Unsecured Claims Reserve will be
distributed to the holders of Allowed Old Senior Subordinated Note Claims in
accordance with the State Street Settlement.
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
(other than Bank of America and the Indenture Trustees), without further
Bankruptcy Court approval, reasonable compensation for its services and
reimbursement of reasonable out-of-pocket expenses incurred in connection with
the 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 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 the Claims, (b) at the addresses set forth in any written
certification of address change delivered to the applicable 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.
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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 Allowed Old 6%
Debenture Claims will be made by the applicable 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 the
holder unless and until the applicable Disbursing Agent is notified by written
certification of the holder's then-current address. Subject to Section VI.E.2.c
of the Plan, 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
Disbursing Agent for the benefit of the potential claimants of those funds. Any
Disbursing Agent holding undeliverable cash will invest the 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 those 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 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 the 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 the distribution would have first been due had it then been
deliverable to the date that the distribution becomes deliverable.
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 the holder will have its claim for
the undeliverable distribution discharged and will be forever barred from
asserting any 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 the 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 the
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 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.
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Distribution Record Date
No Disbursing Agent will have any 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. Any Disbursing
Agent 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, the Old 6% Debentures and the 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 those 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 those Claims for all purposes,
notwithstanding that any period provided by Bankruptcy Rule 3001 for objecting
to the 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 those Claims will be made from the Unsecured Claims Reserve and will be
calculated as if each Disputed Claim in 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 of Disputed Claims in
Class 6 that were allowed during the preceding calendar quarter. The 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 the 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 the Claim. Each additional
distribution also will include, on the basis of the amount then being
distributed: (i) a Pro Rata share of any dividends or other distributions made
on account of the New Common Stock and New Warrants held in the Unsecured Claims
Reserve; and (ii) 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 the cash was deposited into the Unsecured Claims Reserve
to the date that the distribution is made.
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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.
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
the 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 applicable withholding and reporting requirements. Each Disbursing
Agent will be authorized to take any actions that may be necessary or
appropriate to comply with those withholding and reporting requirements
including but not limited to requiring recipients to fund the payment of such
withholding as a condition to delivery or entering into arrangements for the
sale of a sufficient number of shares of New Common Stock or New Warrants to
generate net proceeds sufficient to fund the payment of any such withholding.
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 any
Tax obligations imposed on it by any governmental unit on account of the
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 the Claim must tender, as specified in Section VI.J of the Plan,
the applicable notes, instruments, securities or other documentation evidencing
the 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
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Promissory Notes to the applicable Disbursing Agent in accordance with a letter
of transmittal to be provided to the holders by the applicable 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 the individual as a holder of an Old Senior
Subordinated Note, Old 6% Debenture or Old 6% Debenture Promissory Note. Upon
compliance with 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 the 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 the 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 and 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 the entities receive New Common Stock. If any entity's notes or other
instruments evidencing its Allowed Claims are lost, stolen, mutilated or
destroyed, the entity will be required, in lieu of surrendering the note or
other instrument, to deliver to the applicable Disbursing Agent evidence
satisfactory to the Disbursing Agent of the loss, theft, mutilation or
destruction.
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 the Claim (before
any distribution is made on account of the Claim) the claims, rights and causes
of action of any nature that the applicable Debtor or Reorganized Debtor may
hold against the holder of the 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 the 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
77
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 Warrants (if the holders of Class 6
Claims accept the Plan) and the Reserved Shares will be placed in the Unsecured
Claims Reserve for the benefit of holders of Allowed Claims in Class 6.
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 other holders of New Common Stock and New Warrants. Cash
held in the Unsecured Claims Reserve as a result of such dividends and other
distributions (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
applicable 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 applicable 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 applicable Disbursing Agent also
will place in the Unsecured Claims Reserve the Cash Investment Yield from such
investment of cash.
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.
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 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 the
Claims by the Claims Objection Bar Date, and, if Filed prior to the Effective
Date, the 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 the 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.
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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 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:
. the Plan has classified Claims and Interests in a permissible
manner;
. the Plan complies with the applicable provisions of the Bankruptcy
Code;
. the Debtors have complied with the applicable provisions of the
Bankruptcy Code;
. the Debtors, as proponents of the Plan, have proposed the Plan in
good faith and not by any means forbidden by law;
. the disclosure required by section 1125 of the Bankruptcy Code
has been made;
. 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"));
. 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;
. 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
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;
. 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;
. 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
. 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.
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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
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
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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 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.
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Any Class of Claims that receives nothing under the Plan will be 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.
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 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.
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The Hypothetical Liquidation Analysis was prepared based on the
assumption that the Debtors cease operations on June 28, 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 or 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.
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.
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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.
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 ("NOLs") 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
84
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 NOLs 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.
Any attributes that should remain after the reductions described above
may be subject to an annual limitation on their use under section 382 of the Tax
Code and Treasury Regulations Sections 1.1502-90 through -99, which provide that
when a corporation, loss group, or loss subgroup with NOL carryforwards and/or
similar tax attributes undergoes a change in more than 50% of its ownership, its
use of such attributes to offset future taxable income is generally limited on
an annual basis to a percentage of its value at the time of the ownership change
unless a lower annual limitation would apply due to a previous ownership change.
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 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
85
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 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.
86
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 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. The following discussion does not apply to
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securities to be issued pursuant to the Equity Incentive Plan as such securities
are not being offered or distributed under the Plan within the meaning of
section 1145 of the Bankruptcy Code.
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":
. 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");
. persons who offer to sell securities offered under a plan for the
holders of such securities ("distributors");
. 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
. 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.
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
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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 (other than shares issued pursuant to
the Equity Incentive Plan) 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:
. 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;
. 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
. 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.
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
89
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 will
be entitled to enter into the New Registration Rights Agreements.
90
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: February 25, 2002 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
Gregory M. Gordon (TX 08435300)
Henry L. Gompf (TX 08116400)
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
91
1996 Parkdale Agreement .............................. 26
1998 Parkdale Agreement .............................. 26
1998 Poly Fiber Agreements ........................... 27
2000 Parkdale Agreement .............................. 26
2000 Poly Fiber Agreements ........................... 27
Addenda .............................................. 27
Alabama Revenue Bonds ................................ 18
Allenberg ............................................ 26
Arthur Andersen ...................................... 25
Balance Sheet Adjustments ............................ 40
Beacon ............................................... 14
Beacon Contracts ..................................... 32
Beacon Purchase Agreement ............................ 32
Blanket Division ..................................... 13
Board of Directors ................................... 49
Boot ................................................. 85
Bylaws ............................................... 11
Cash Claimants ....................................... 19
Cash Collateral ...................................... 22
Certificate .......................................... 11
CIT .................................................. 28
CIT Loan Agreement ................................... 28
CIT Motion ........................................... 28
COD .................................................. 84
Conversion Stock ..................................... 15
Converting Holders ................................... 15
Critical Vendor Claims ............................... 21
Critical Vendors ..................................... 20
Debtors .............................................. 1
DGCL ................................................. 49
DIP Financing Facility ............................... 22
DukeSolutions ........................................ 29
E&Y .................................................. 25
EBITDA Covenant ...................................... 14
Effective Date Balance Sheet ......................... 40
Emergence Performance Bonus Plan ..................... 23
ESR .................................................. 29
Exclusive Periods .................................... 31
Existing Liens ....................................... 22
EYCF ................................................. 25
FCI Corporate ........................................ 32
FCI Operations ....................................... 32
Fieldcrest Cannon Acquisition ........................ 14
First Day Motions .................................... 20
First DIP Amendment .................................. 22
Fourth DIP Amendment ................................. 23
Fund ................................................. 21
GATT ................................................. 67
GECC ................................................. 30
General Bar Date ..................................... 31
Hawkinsville Revenue Bonds ........................... 18
Huntley .............................................. 25
Hypothetical Liquidation Analysis ................. 82, 98
Hypothetical Liquidation Value ....................... 82
92
Insured Program ....................................... 21
Interbrand ............................................ 25
Intercreditor Agreement ............................... 17
IRB Facilities ........................................ 17
Leshner ............................................... 13
Licensed Products ..................................... 27
Lighting Fixtures ..................................... 29
Lockheed .............................................. 27
Loom Purchase Agreement ............................... 32
Macon-Bibb Revenue Bonds .............................. 18
Master Lease .......................................... 30
MBFC Revenue Bonds .................................... 18
MESA .................................................. 5
Miscellaneous Asset Sales Order ....................... 32
NCSIGA ................................................ 21
New Preferred Stock ................................... 11
New Registration Rights Agreement ..................... 90
New Warrant Agreement ................................. 10
NOLs .................................................. 84
NYSE .................................................. 19
Old 6% Debenture Promissory Notes ..................... 19
Opelika ............................................... 28
Opelika Equipment ..................................... 28
Outstanding Industrial Revenue Bonds .................. 18
Parkdale America ...................................... 26
Parkdale Mills ........................................ 26
PEDFA Revenue Bonds ................................... 17
Pillowtex ............................................. 1
Pillowtex 2000 Form 10-K .............................. vi
Pillowtex 2001 Form 10-K .............................. vi
Pillowtex Merger ...................................... 1
Pillowtex MSC ......................................... 27
Pillowtex Third Quarter 2001 Form 10-Q ................ vi
Plan .................................................. 1
Polyester Fiber ....................................... 27
Preferred Stock Designation ........................... 49
Prepetition Balance ................................... 26
Prepetition Cotton Contracts .......................... 25
Prepetition Lenders ................................... 14
Prepetition Term Notes ................................ 17
Priority Tax Claims ................................... 39
PRLC .................................................. 27
Professional Fee Carve Out ............................ 22
Projection Period ..................................... 37
Projections ........................................... 37
Purchaser ............................................. 32
Ralph Lauren .......................................... 27
Ralph Lauren License Agreement ........................ 27
Rejection Damage Claims ............................... 31
Reorganization SOP .................................... 39
Retention Incentive Payment ........................... 23
Retention Incentive Plan .............................. 23
Retention Plan ........................................ 23
Revolving Credit Facility ............................. 17
RLHC .................................................. 27
Sale Agreement ........................................ 28
93
SEC ................................................... 2
Segregated Account .................................... 8
Self-Insured Claims ................................... 21
Self-Insured Programs ................................. 21
Self-Insured States ................................... 21
Settlement Agreement .................................. 28
Severance Plan ........................................ 23
SG&A .................................................. 39
SouthTrust ............................................ 30
SouthTrust Motion ..................................... 30
Staple Cotton ......................................... 26
State Street .......................................... 29
State Street Motion ................................... 29
State Street Settlement ............................... 29
Stern Stewart ......................................... 25
Subsidiary Restructuring Transactions ................. 33
Surety Bonds .......................................... 21
Tax Code .............................................. 84
Taxing Authorities .................................... 20
Technology Agreement .................................. 27
Textrade .............................................. 32
Third DIP Amendment ................................... 22
Transition Period ..................................... 21
Treasury Regulations .................................. 84
Trust Fund Taxes ...................................... 20
UNITE ................................................. 51
US Trustee ............................................ 25
Voting Deadline ....................................... 1
Wellman ............................................... 27
WestPoint ............................................. 28
Whole Board ........................................... 49
94
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.
95
EXHIBIT II
FIRST AMENDED JOINT PLAN OF REORGANIZATION OF
PILLOWTEX CORPORATION AND ITS DEBTOR SUBSIDIARIES
96
EXHIBIT III
LIQUIDATION ANALYSIS
97
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 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 28, 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 28, 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.
_____________________________
/1/ Capitalized terms not otherwise defined herein have the meanings given to
them in the First Amended Joint Plan of Reorganization of Pillowtex Corporation
and its Debtor Subsidiaries.
98
. 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 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,
Outstanding Industrial Revenue Bonds Claims and Bank Loan Claims.
Bank Loan Claims are presented before the application to principal
of adequate protection
99
payments made and projected to be made through June 28, 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 28, 2002.
100
PILLOWTEX CORPORATION, ET AL.
HYPOTHETICAL LIQUIDATION ANALYSIS
($ IN THOUSANDS)
Projected Hypothetical Hypothetical
Net Book Liquidation Recovery Liquidation Value
-------------------- -----------------
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 ......................... 403,532 9% 16% 38,000 66,000
Intangible Assets ................................... 219,894 10% 16% 23,000 35,000
Other Current & Long-Term Assets .................... 24,657 53% 69% 13,000 17,000
----------- ------ ------ ---------- ----------
$ 1,000,027 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 .................................................................. $ 9,259 $ 9,259
Designated Post-Petition Loans ............................................................. 150,000 150,000
---------- ----------
Total Super-Priority/Post-Petition Secured ................................................ 159,259 159,259
HYPOTHETICAL LIQUIDATION VALUE
AVAILABLE FOR SECURED PRE-PETITION
CLAIMS ..................................................................................... $ 45,962 $ 125,852
========== ==========
Pre-Petition Secured Claims
Non-Bank Secured Claims .................................................................... 687 687
Outstanding Industrial Revenue Bonds ....................................................... -- --
Bank Loan Claims (before application of
Adequate Protection Payments) .............................................................. 484,353 484,353
---------- ----------
Total Pre-Petition Secured ................................................................ 485,040 485,040
HYPOTHETICAL LIQUIDATION VALUE
AVAILABLE FOR JUNIOR SECURED
CLAIMS, ADMINISTRATIVE CLAIMS AND
UNSECURED CLAIMS ........................................................................... $ 0 $ 0
========== ==========
101