EXHIBIT 2.5
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
GREENSBORO DIVISION
IN RE: )
)
)
PLUMA, INC. ) CASE NUMBER B-11104C-11G
)
)
DEBTOR. )
________________________________________________________________________________
DEBTOR'S MODIFIED DISCLOSURE STATEMENT
OCTOBER 5, 1999
________________________________________________________________________________
R. Bradford Leggett
C. Edwin Allman, III
M. Joseph Allman
ALLMAN SPRY LEGGETT & CRUMPLER, P.A.
380 Knollwood Street, Suite 700
Post Office Drawer 5129
Winston-Salem, NC 27113-5129
Telephone: (336) 722-2300
Facsimile: (336) 722-8720
Counsel for the Debtor
________________________________________________________________________________
TABLE OF CONTENTS
I. INTRODUCTION..................................................................................................1
II. BUSINESS AND STRUCTURE OF THE DEBTOR AND EVENTS LEADING TO CHAPTER 11.........................................4
A. Structure..............................................................................4
B. History................................................................................4
C. Events Leading to the Chapter 11 Filing................................................6
D. Business Locations and Property.......................................................11
III. OPERATIONS DURING CHAPTER 11................................................................................14
A. Appointment of Committees and Retention of Professionals..............................14
B. Significant Post-Petition Events......................................................14
1. Cash Collateral..............................................................14
2. DIP Financing................................................................15
3. Payment of Non-Domestic Contractors..........................................16
4. Sale of Stardust Division....................................................18
5. July 1999 Profit.............................................................18
6. Exit Financing...............................................................18
7. Discontinuance of Operations ................................................20
IV. SUMMARY OF THE PLAN..........................................................................................20
A. Classification and Treatment of Claims................................................20
1. Class 1 - Administrative Expenses............................................21
2. Class 2 - Wage and Benefit Claims............................................21
3. Class 3 - Tax Claims .......................................................21
4. Class 4 - Secured Claim of Gaston Dye
and Finishing Company................................................21
5. Class 5 - Secured Claim of the Bank Group....................................22
6. Class 6 - General Unsecured Claims...........................................22
7. Class 7 - Bank Group Deficiency Claim........................................22
8. Class 8 - Shareholders.......................................................23
V. IMPLEMENTATION OF THE PLAN....................................................................................23
A. Generally.............................................................................23
B. Asset Sales ..........................................................................24
1. Sales of Personal Property ..................................................24
2. Sales of Real Property ......................................................25
C. Causes of Action .....................................................................25
1. Preference Claims ...........................................................25
D. Recovery Actions .....................................................................27
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E. Funding ..............................................................................28
1. Liquidation Budget ..........................................................28
2. Committee Expense Fund ......................................................28
3. Creditors' Fund .............................................................29
F. Distributions ........................................................................30
1. Administrative Expenses .....................................................30
2. Post-Confirmation Costs and Expenses ........................................30
3. Secured Tax Claims ..........................................................31
4. Priority Unsecured Claims ...................................................31
5. Bank Group Secured Claim ....................................................31
6. Unsecured Creditor Claims ...................................................32
7. Shareholder Interests .......................................................32
G. Assumption and Rejection of Executory Contracts
And Unexpired Leases ........................................................32
H. Discharge of Debtor and Bank Group Release ...........................................33
I. Retention of Jurisdiction ............................................................33
J. Cancellation of Corporate Charter ....................................................33
VI. CONFIRMATION AND CONSUMMATION PROCEDURE......................................................................33
VII. LIQUIDATION ANALYSIS........................................................................................36
A. Realization of Value..................................................................37
1. Chapter 11 ..................................................................37
2. Chapter 7 Liquidation .......................................................40
B. Benefit to Creditors..................................................................41
1. Chapter 11 ..................................................................41
2. Chapter 7 ...................................................................42
C. Benefit to Employees..................................................................42
1. Chapter 11 ..................................................................42
2. Chapter 7 ...................................................................43
D. Efficiency in the Administration of the Case..........................................44
VIII. PROJECTED CASH DISBURSEMENTS
FROM THE LIQUIDATION BUDGET ............................................................................45
IX. ATTACHMENTS OF SPECIFIC INFORMATION .........................................................................46
X. CONCLUSION....................................................................................................47
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MODIFIED DISCLOSURE STATEMENT TO DEBTOR'S PLAN OF LIQUIDATION
PLUMA, INC., Debtor in the above-entitled Chapter 11 case (hereinafter
sometimes referred to as the "Company" or "Pluma" or the "Debtor"), submits the
following Modified Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code(1)to Creditors and shareholders of the Debtor in connection with
the solicitation of acceptances or rejections of its Plan of Liquidation dated
September 24, 1999 and modified October 5, 1999 (the "Plan"), a copy of which is
attached hereto as Exhibit G. Unless otherwise defined herein, all capitalized
terms contained herein shall have the meanings ascribed to them in the Plan.
I.
INTRODUCTION
Section 1125 requires that there be submitted to holders of claims
against the Debtor a copy of the Plan, or a summary thereof, and a written
Disclosure Statement containing sufficient information about the Company to
enable Creditors and shareholders to make an informed decision concerning
acceptance of the Plan. As will be described in greater detail hereafter,
Pluma's Chapter 11 filing was the result of market factors, circumstances, and
financial difficulties which began in 1997 and from which the Company was not
able to recover. The Plan has been formulated to provide a basis for the orderly
liquidation of the Company's assets and thus enable the Company to maximize the
value of the Estate. It is
- -----------------
(1)References to "Section _____" herein shall refer to a Section of the
Bankruptcy Code, 11 U.S.C.ss.101, et seq.
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the Company's belief that the Plan provides value to Creditors in excess of what
they would recover under a Chapter 7 liquidation. It contemplates an orderly
liquidation of the Company's assets which are secured by liens in favor of the
Company's secured creditor, the Bank Group. It also provides, however, a Carve
Out pursuant to which $750,000.00 of the Net Proceeds from asset sales which
would otherwise go to the Bank Group will instead be paid the Creditors' Fund
primarily for the benefit of Unsecured Creditors. Additionally the Bank Group
will not participate in the distribution of any Net Proceeds realized from
Preference Claims.
EXCEPT AS OTHERWISE SPECIFICALLY INDICATED HEREIN, THE INFORMATION IN
THIS DISCLOSURE STATEMENT REGARDING THE COMPANY AND THE COMPANY'S BUSINESS
OPERATIONS IS DERIVED ENTIRELY FROM REPORTS AND DOCUMENTS PREPARED BY OR FOR THE
COMPANY. UNLESS OTHERWISE STATED HEREIN, THE INFORMATION AND ANALYSIS SET OUT IN
THIS DISCLOSURE STATEMENT IS CURRENT AS OF SEPTEMBER 20, 1999.
THE FINANCIAL INFORMATION CONTAINED HEREIN RELATIVE TO THE COMPANY'S
FISCAL YEAR ENDING DECEMBER 31, 1998 HAS BEEN SUBJECT TO A CERTIFIED AUDIT.
HOWEVER, FINANCIAL INFORMATION ATTRIBUTABLE TO SUBSEQUENT PERIODS HAS NOT. WHILE
GREAT EFFORT HAS BEEN MADE TO ASSURE THAT THE FINANCIAL INFORMATION CONTAINED
HEREIN IS ACCURATE, THE COMPANY IS
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UNABLE TO REPRESENT OR WARRANT THAT THE INFORMATION CONTAINED HEREIN IS WITHOUT
ANY INACCURACY.
NO REPRESENTATIONS MADE CONCERNING THE COMPANY, ITS BUSINESS
OPERATIONS, THE VALUE OF ITS PROPERTY, OR THE VALUE OF ANY BENEFITS CONFERRED TO
CREDITORS OR OTHER PARTIES IN INTEREST IN CONNECTION WITH THE PLAN ARE
AUTHORIZED OR MADE OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT. ANY
REPRESENTATIONS OR INDUCEMENTS MADE TO SECURE YOUR ACCEPTANCE WHICH ARE CONTRARY
TO THE INFORMATION CONTAINED IN A DISCLOSURE STATEMENT APPROVED BY THE
BANKRUPTCY COURT SHOULD NOT BE RELIED UPON BY YOU IN REACHING YOUR DECISION
CONCERNING VOTING ON THE PLAN.
It is the opinion of the Company that the treatment of Creditors under
the Plan contemplates a recovery preferable to that which would be achieved
under a Chapter 7 liquidation of the Company's assets, the only other
alternative available to the Debtor. In a Chapter 7 liquidation the Company
believes that Unsecured Creditors would receive nothing, whereas by virtue of
the Carve Out and the manner of distribution of proceeds of Recovery Actions
under the Plan, Unsecured Creditors should receive a dividend distribution on
their Allowed Claims. Further, as an orderly liquidation is contemplated under
the Plan, the possibility is preserved that portions of the assets may be sold
in such manner as to preserve jobs and business relationships. Accordingly, the
Company believes strongly that
3
confirmation of the Plan is in the best interests of Creditors and other parties
in interest and recommends acceptance of the Plan.
II.
BUSINESS AND STRUCTURE OF THE DEBTOR AND
EVENTS LEADING TO CHAPTER 11
A. STRUCTURE
Pluma, Inc. is a publicly traded corporation and its common
stock was, until May, 1999, traded on the New York Stock Exchange under the
symbol PLU. As of March 29, 1999, there were approximately 233 shareholders of
record and 8,109,152 shares of common stock outstanding.
B. HISTORY
Pluma was incorporated on December 1, 1986 by a group of
individuals who at the time had over one hundred (100) years of collective
industry experience. The founders envisioned that the Company could produce high
quality activewear cost effectively and sell to a more diverse customer base
than was common in the industry. The Company fashioned itself an industry leader
in the development of new products and styles while at the same time also
establishing higher quality standards. The Company was one of the first to
introduce heavy weight fuller cut fleece products at attractive price points and
fleece wear with higher cotton content. These products were well received by
customers and the Company rapidly increased sales and profitability as it
expanded its business across broad market segments. In 1990 the Company began to
produce heavy weight cotton jersey products suitable for
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outerwear thus diversifying its product mix and more efficiently utilizing its
manufacturing base. By 1997 the Company had continued to be a leading innovator
of products introducing pique' fleece, 100% cotton fleece and
cotton/Spandex(TM) five way stretch fleece.
In 1997 the Company completed the initial public offering of
its stock. Proceeds raised by the public offering of approximately $27.0 million
were used by the Company to reduce the Company's outstanding indebtedness to
First Union National Bank, then the Company's lender.
To take advantage of lower production costs, during 1997 Pluma
began utilizing the services of joint ventures and contractors in Mexico to sew
certain of its goods. Additionally, in 1998 the Company utilized the services of
a company in Honduras to complete the manufacturing process necessary to
complete certain of the Company's jersey products.
As part of a strategy of distributing its products to a
diverse customer base, in December of 1997 Pluma initiated the creation of a
national distribution network by acquiring for cash substantially all the assets
and properties of two nationally recognized wholesale distributorships, Stardust
Corporation ("Stardust") and Frank L. Robinson Company ("FLR"), both of which
had been major customers of the Company. Stardust is located in Verona,
Wisconsin and has operated since 1988. It served approximately 6,000 customers
throughout the midwestern United States. FLR was located in Los Angeles,
California and had operated since 1936 and served approximately 3,000 customers
in the western United States.
5
The Company had been notified separately by FRL and Stardust
that each was going to be sold and that the Company should consider making an
offer. The Company, considering the effect of a sale of FLR and/or Stardust to
third parties, possibly competitors, became concerned that their respective
acquisitions by third parties would have a negative impact on the Company's
sales. The Company felt that FLR and Stardust had the experience and capability
to distribute the Company's products to smaller customers, which the Company, as
a manufacturer, found difficult to serve as efficiently. The Company determined
that the creation of this network would be of great benefit by bringing Pluma
closer to the ultimate consumer and allowing the Company to sell directly to
retail customers which had largely been inaccessible in the past except through
wholesale distributors. Pluma also contemplated the continuation of the ability
to service other wholesale distributors not owned by the Company.
C. EVENTS LEADING TO THE CHAPTER 11 FILING.
Pluma's financial difficulties began in the second quarter of
fiscal year 1997 when a reconfiguration of certain of the Company's textile
operations caused sales and earnings to fall short of expectations. This
reconfiguration involved the relocation of the knitting, greige fabrics, and
cutting departments in Eden, North Carolina and resulted in delays in production
and the shipment of orders. During the third quarter of 1997, the Company
continued to feel the negative impact of the reconfiguration and also
experienced product quality issues due to changes in manufacturing processes and
defective yarn. As a
6
result of these events, the Company's third quarter 1997 earnings fell
significantly below expectations.
Also, by the beginning of 1997 the Company's management
information system was no longer sufficient to service the Company's needs.
During 1997, the Company contracted for a new management information system with
SAP America, Inc. (SAP). The implementation of the SAP system was protracted and
consumed more capital and managerial time than had been anticipated.
In the fourth quarter of 1997, Pluma reported a loss due
primarily to $2.1 million in expenses associated with the implementation of the
new management information system. Throughout 1997, the Company had capitalized
these costs; however, in the fourth quarter, it expensed them in accordance with
an accounting policy that was released in November 1997. The implementation of
the new management information system was intended to improve the Company's
production planning, scheduling, distribution, and financial reporting
capabilities. The SAP system did not accomplish these objectives. To the
contrary, the integration of the new system created substantial problems in each
of these areas.
In addition to the operational problems described above, Pluma
took on additional debt during the fourth quarter of 1997 as a result of the
acquisition of the two wholesale distributors referenced above. In December
1997, the Company purchased Stardust and FLR for a total of $51.5 million in
cash, including acquisition costs, and the assumption of $16.7 million in
liabilities.
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Over the course of 1998, the Company incurred increasing
losses due to market conditions and other factors. Market conditions
contributing to the decline in performance included a drop in sale prices
related to increased competition and lower than expected sales of fleece
products due to a relatively warm winter. In addition, the Company's sales as
well as margins suffered from disruptions in production associated with the
implementation of the SAP system, including continuous system problems that
affected its ability to schedule and produce its products according to customer
specifications. As a result, the Company accumulated excess inventory of certain
types of products, while at the same time losing sales because it could not
timely manufacture other types of products ordered by its customers.
A temporary supply disruption to Stardust and FLR in 1988 also
contributed to lost sales and the build-up of inventory. Two third party
manufacturers, who in 1997 had supplied over 50% of Stardust's inventory and a
significant portion of FLR's inventory, ceased shipping product to the two
distributors in early 1998. These manufacturers did not resume shipments until
mid-year 1998. During the supply disruption to the distributors, Pluma attempted
to manufacture product for its distributors internally and/or acquire product
from alternate sources. This unexpected demand on the Company's manufacturing
facilities resulted in delayed production and missed orders for other customers.
Another outcome of the supply disruption was the Company's
accelerated effort to obtain product from Latin American manufacturers. During
1998, Pluma aggressively sought arrangements with Latin American manufacturers;
however, it did not
8
realize the full benefit of these relationships due to quality problems and the
failure of these manufacturers to provide product in a timely manner.
By the Spring of 1998, the Company's operational performance
and attendant lack of earnings were of great concern to the Company's Board of
Directors. During that period two additional outside directors were added to the
Board and a review of the adequacy of the Company's management structure and a
preliminary analysis of the SAP system were undertaken.
During this difficult period, the Company closed a new credit
facility (the "Credit Agreement") in the amount of $115 million with
NationsBank, N.A., Crestar Bank, Fleet Bank, N.A., Suntrust Bank Atlanta and
Centura Bank (the "Bank Group"). In June of 1998, two months after the loan
closing, the Company violated certain financial and performance covenants and
became in default under the Credit Agreement. Subsequent to this default, the
Bank Group agreed to a number of short-term amendments and waivers to the Credit
Agreement. On November 16, 1998, the Bank Group and the Company entered into a
Forbearance Agreement, pursuant to which the Bank Group agreed to forbear from
exercising its rights and remedies as set forth in the Credit Agreement. The
Forbearance Agreement was generally amended in 30-day intervals, until March 31,
1999, when the Bank Group agreed to extend and modify the Credit Agreement until
September 30, 1999. On April 15, 1999, the Bank Group agreed to an additional
amendment to the Credit Agreement. This amendment provided a cure period for an
interest payment default until June 11, 1999.
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As a part of its negotiations with its Bank Group, the Company
was required to retain various consultants to assist in the development and
implementation of a strategic business plan and in the management of the
Company's operations. This was at a period of time when the Company was
operating under the strain of severe cash shortages. Business plans were
prepared but the Company's acute shortage of cash made their implementation
difficult. During the fourth quarter of 1998 and first quarter of 1999, the
Company implemented a number of initiatives in order to remain operationally
viable. These initiatives included the expedited liquidation of a significant
amount of inventory, the closure of certain domestic manufacturing and
distribution operations, and a substantial reduction in employees.
In October 1998, Pluma announced an eleven percent reduction
in salaried and hourly indirect labor positions. In January 1999, the Company
announced the consolidation of its sewing plant in Eden, North Carolina into
existing facilities, the anticipated closing of its sewing facility in Rocky
Mount, Virginia and the closing of six outlet stores, and twenty-five percent
and nineteen percent reductions in its indirect and direct labor pools,
respectively. In March 1999, the Company announced the elimination of one
hundred thirty-five more positions and its intention to close the operations of
FLR. The decision to close FLR came after the Company was unsuccessful in its
efforts to locate a buyer for FLR. Early in the second quarter of 1999, the
Company announced further cost cutting measures, including the closing of
facilities in Altavista and Chatham, Virginia and the planned sale of its sales
office in Martinsville, Virginia.
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The Company also implemented changes to its senior management
team. On January 31, 1999, Ronald A. Norelli, Vice Chairman and an outside
member of the Board of Directors, was appointed as Pluma's interim Chief
Executive Officer. Shortly thereafter, the Company's President and former Chief
Executive Officer announced his resignation. On March 8, 1999, the Company put
in place a new Chief Financial Officer, William H. Watts, and on May 10, 1999,
it appointed John D. Wigodsky as its permanent President and Chief Executive
Officer.
Despite Pluma's continuing efforts to reduce costs, the
Company was unable to resolve its liquidity shortfall. In the second quarter of
1999, tighter supplier restrictions, the erosion of the Company's borrowing base
due to certain uncollectible accounts receivable of FLR, and the bankruptcy of a
major customer exacerbated an already severe cash crisis. On May 14, 1999, the
Company filed its petition under Chapter 11 of the United States Bankruptcy
Code.
D. BUSINESS LOCATIONS AND PROPERTY.
As of the Petition Date, all of the Company's facilities were
located in North Carolina, California, Virginia and Wisconsin. All of the
Company's buildings are well maintained and several of its facilities have been
expanded since operations were commenced in 1987. All of the facilities owned by
the Company are encumbered by deeds of trust in favor of the Bank Group. The
principal facilities summarized below are those facilities utilized by the
Company in 1998. The Company consolidated certain of its operations in 1999 and
any changes occurring prior to March 26, 1999 are footnoted. The location,
approximate size, owned or leased status, year in which operations commenced and
use of the Company's principal facilities are summarized in the following table:
LOCATION SQUARE FOOTAGE OWNERSHIP OPERATIONS USE
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
11
COMMENCED
----------------------
Eden, NC 170,900 Owned 1987 Executive offices,
dyeing, finishing
and cutting
Eden, NC 139,169 Owned 1993 Knitting and yarn
storage
Eden, NC 20,600 Leased 1996(1) Outlet Store
Eden, NC 18,000 Leased 1987(2) Sewing
Martinsville, VA 198,000 Leased 1996 Distribution and
warehouse
Martinsville, VA 181,600 Leased 1988 Distribution,
packaging and
warehouse
Martinsville, VA 83,200 Leased 1994(7) Distribution,
packaging and
management
information systems
Martinsville, VA 43,900 Owned 1988 Sewing
Martinsville, VA 15,600 Leased 1992(3) Storage
Martinsville, VA 11,500 Leased 1997(1) Product
Development and
Outlet Store
Martinsville, VA 8,300 Owned 1997 Marketing and sales
office and some
executive offices
Rocky Mount, VA 82,000 Owned 1995(4) Sewing
Chatham, VA 52,000 Owned 1990 Sewing
Vesta, VA 24,000 Owned 1994(5) Sewing
Altavista, VA 2,200 Leased 1997(1) Outlet store
Los Angeles, CA 139,500 Leased 1997(6) Distributor
Verona, WI 63,000 Owned 1997 Distributor
(1) In December 1998, the Company made the decision to close the factory
outlet locations. The Eden Factory Outlet lease terminated December 31,
1998. The Martinsville Factory Outlet lease ended March 20, 1999.
Product Development, once housed at this same location, was relocated
to the Company's main facility in Eden, NC. The Altavista Factory
outlet closed January 31, 1999.
(2) The Company leased this facility to perform sewing operations from 1987
through 1993 and subsequently executed a new lease for this facility in
December 1996. Sewing operations ceased in this facility in January
1999 and it is currently used for storage.
(3) This lease terminated February 12, 1999.
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(4) Sewing operations ceased at this facility in April 1999 and the Company
sold this property by an absolute auction in August of 1999.
(5) The Company exercised its option to purchase this property in October
1997.
(6) The Company began the process of closing this facility in March 1999.
The lease for this facility was rejected by order of the Bankruptcy
Court on June 23, 1999.
(7) The pre-assembly, packaging and distribution operations at this
facility were consolidated into the Company's other existing facilities
in March 1999. The Company entered a new lease effective March 31, 1999
to lease 1,116 square feet of this same facility to house some of its
Management Information Systems.
[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]
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III.
OPERATIONS DURING CHAPTER 11
A. APPOINTMENT OF COMMITTEES AND RETENTION OF PROFESSIONALS.
The Company, with Court approval, engaged Allman Spry Leggett
& Crumpler, P.A. to serve as its general counsel in connection with the Chapter
11 case. With Court approval, the Debtor also engaged the services of
PricewaterhouseCoopers as its financial advisors and consultants and Deloitte &
Touche as its certified public accounting firm.
During the early stages of this case an Unsecured Creditors
Committee was appointed pursuant to Section 1102. The Committee, with Court
approval, engaged the services of Blair Conaway Bograd & Martin, P.A. of
Charlotte, North Carolina to represent it in this case. In addition the Court
authorized the Committee to engage the services of Arthur Andersen, LLP to serve
as the Committee's financial consultants and to perform certain investigatory
functions to assist the Committee in performing its duties and responsibilities.
B. SIGNIFICANT POST-PETITION EVENTS.
During the course of this Chapter 11 case a number of events
occurred which were of significance. These are summarized as follows:
1. CASH COLLATERAL. The Bankruptcy Code prohibits a Debtor
from using cash collateral without the consent of the secured creditor
or an order of the Bankruptcy Court. The Company would have been unable
to continue its operations
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without the use of proceeds from the collection of its accounts
receivable which were pledged to the Bank Group and which constitute
the Bank Group's cash collateral.
Contemporaneously with the filing of its bankruptcy petition,
the Company filed a motion seeking authority to use cash collateral in
the ordinary course of its business and the Company proposed to
adequately protect the Bank Group's interests by granting to the Bank
Group a replacement lien on post-petition assets to the extent cash
collateral was consumed in the Company's operations. On May 17, 1999
the Bank Group and the Company reached an agreement on the Company's
use of the Bank Group's cash collateral and an order approving the
agreement was entered by the Court on a preliminary basis. A final
hearing was scheduled for early June. The Court order approving the
Company's use of cash collateral contained an operational budget and
required the Company to maintain certain levels of accounts receivable
and inventory (the "Borrowing Base"). From the beginning the Company
experienced difficulty in complying with the Borrowing Base
restrictions in the cash collateral order. Faster than anticipated
collection of accounts, write downs of inventory to appropriate levels
to reflect the lower of cost or market and the aging of existing
accounts receivable created a continual erosion of the Borrowing Base
and made compliance with the cash collateral order difficult for the
Company.
2. DIP FINANCING. At the time of its Chapter 11 filing it was
anticipated that the Company would need additional financing in order
to sustain its operations during the Chapter 11 case. Negotiations with
the Bank Group concerning the
15
availability of a Debtor-In- Possession financing facility (the "DIP
Facility") were initiated and remained ongoing from the inception of
the case. On June 21, 1999 the Company and the Bank Group agreed to a
$3.0 million short-term DIP Facility and a motion to approve and
authorize such facility was filed with the Court. On June 23, 1999 an
interim order was entered approving the DIP Facility and authorizing
the Company to borrow up to $2.0 million on an interim, emergency
basis. Following the entry of this order the Company borrowed $1.5
million, thereby relieving an immediate cash crisis. On July 9, 1999 a
final order was entered authorizing the DIP Facility. By its terms,
however, the DIP Facility expired on August 27, 1999 and all amounts
borrowed under the Facility were repaid on that date.
The failure of the Company to obtain a longer term
DIP Facility adversely affected its ability to obtain trade credit from
its suppliers. Perhaps more importantly, the Company's customers,
concerned about the Company's operational viability given its lack of
financing, were reluctant to submit orders for future sales. As a
result, without having a sufficient number of booked sales, the
Company's ability to obtain exit financing in amounts necessary to fund
a reorganization plan vanished.
3. PAYMENT OF NON-DOMESTIC CONTRACTORS. Prior to its Chapter
11 filing, the Company maintained strategic business alliances with a
number of non-domestic contractors. These included shipping and
transportation companies, contractors that improved or enhanced
inventory received from the Company, and
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companies that manufactured finished goods for the Debtor for resale to
the Debtor's customers.
On the Petition Date a significant amount of the
Company's inventory, in varying stages of completion, was located in
Honduras and Mexico. The return of these goods to the Debtor in the
United States virtually stopped with the Debtor's bankruptcy filing.
Shipping and transportation companies would not allow the goods to
cross the border into the United States without payment of outstanding
pre-petition amounts. Similarly, contractors refused further work or
deliveries until their pre-petition indebtedness was paid. The failure
to maintain and preserve its relationships with its foreign contractors
was potentially fatal to the Company's ability to continue in business.
On May 21, 1999 the Company filed a motion for
authority to pay non-domestic contractors for post-petition receipt of
goods in the ordinary course of business and for authority to pay
certain pre-petition obligations due non-domestic contractors in order
to preserve the ability of the Debtor to conduct business outside the
United States. An expedited hearing was scheduled and notice of the
hearing was served on parties in interest. On May 27, 1999, following a
hearing on notice, an order granting the Debtor authority to pay
certain non-domestic contractors and shippers to preserve the ability
of the Debtor to conduct business outside the United States was entered
by the Court. As a result of the entry of this order, the Debtor's
goods again began to flow across the border and the Company's business
was able to
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continue. Had these payments not been made, the Company believes that
the losses it would have incurred would have been substantially greater
than the amounts paid to the non-domestic contractors.
4. SALE OF THE STARDUST DIVISION: On July 13, 1999, the Debtor
filed its motion seeking authority to sell the assets realized in
connection with the operation of its Stardust division. On August 3,
1999, the Court entered an order authorizing the sale of these assets
to TAM Acquisition Corp. The sale was consummated and the Debtor
received a net payment of $10,437,000.00 for the sale. As a result of
the fact that the Debtor had previously announced its intent to sell
the Stardust Division, the Debtor's accounting firm wrote off the good
will attributable to the Stardust Division which had been reflected on
the December 31, 1998 balance sheet. This adjustment, together with
significant adjustments for inventory were the two major reasons for
the differences in the Debtor's balance sheet as of December 31, 1998
and as of June 30, 1999. See Exhibit A attached hereto.
5. JULY 1999 PROFIT. In July, 1999 the measures previously
implemented by management which reduced overhead and improved plant
efficiency resulted in net consolidated income (earnings before
interest and taxes) of $335,000. July, 1999 thus became the first
profitable month for the Company since early in 1998.
6. EXIT FINANCING. From the beginning of this case, the
Company made continuous and diligent efforts to secure outside
financing in order to fund a Plan of reorganization. Such a plan would
have been premised upon the write down
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of the Bank Group secured claim to a level that could have been retired
through new borrowings and perhaps new equity infusion. This approach
was mandated by the Bank Group's stated desire to exit from the Credit
Facility altogether. Investors were sought as well as new lenders.
The Debtor's ability to secure an equity investment
was made difficult by an its inability to demonstrate a consistent
profitability. The Debtor did develop a business plan that projected
profitable operations during calendar year 2000. However, the Plan also
projected an operational shortfall for the remainder of 1999, for which
the company would need sufficient working capital in order to
compensate for the projected losses and still remain a viable business
concern. Prospective lenders, rightly concerned about the projected
losses, insisted that sufficient availability remain on any proposed
loan to cover the shortfalls. This requirement, in turn, reduced the
amount that would be available for payment to the Bank Group under a
plan, thus making reorganization difficult without significant new
equity investment in the Company. Although considerable effort was
expended in attempts to locate new investors, none were forthcoming.
The failure to secure new equity together with the inability to book a
sufficient volume of future sales from new or existing customers
ultimately proved to be fatal to the Company's ability to continue as a
going concern.
7. DISCONTINUANCE OF OPERATIONS. Following extended
negotiations with the Bank Group concerning financing and after exhausting the
prospects of the sale of part
19
or all of the Company as a going concern, the Company, on September 7, 1999,
announced its intention to discontinue its operations. Lay offs of Company
employees were begun at the end of that week and a plan of orderly liquidation
was agreed upon in concept by the Debtor and the Bank Group. In connection with
the shutdown, discussions with the Committee also took place, during which the
Committee was advised of the Company's status and inviting the Committee's input
with respect to a formal Plan of Liquidation.
IV.
SUMMARY OF THE PLAN THE
FOLLOWING IS A SUMMARY RELATING TO THE PLAN AND SHOULD NOT BE RELIED UPON FOR
VOTING PURPOSES. CREDITORS ARE URGED TO READ THE PLAN IN FULL. THE PLAN
REPRESENTS A PROPOSED LEGALLY BINDING CONTRACT BY THE COMPANY AND AN INTELLIGENT
DECISION CONCERNING SUCH PLAN CANNOT BE MADE WITHOUT AN UNDERSTANDING OF THE
PLAN. FURTHERMORE, CERTAIN TERMS ARE USED IN THIS AND THE FOLLOWING PARAGRAPHS,
WHICH ARE DEFINED IN THE TEXT OF THE PLAN AND REFERENCE SHOULD BE MADE THERETO
FOR A CLEAR UNDERSTANDING OF THE IMPORTANCE OF THESE TERMS.
A. CLASSIFICATION AND TREATMENT OF CLAIMS.
The Plan divides the Claims into classes, sets forth the treatment
afforded to each class, and states whether such class is impaired or
unimpaired. A summary of the treatment of the seven classes of Claims
in the Plan and one class of Interests is as follows: 1.
CLASS 1 - ADMINISTRATIVE EXPENSES. Administrative Expenses generally
consist of debts incurred in the ordinary course of the Debtor's
20
business and Chapter 11 related costs and expenses and are entitled to
be paid in full, in cash, when due. The Debtor's Plan proposes such
treatment and sufficient funds will remain on hand to fund the
Liquidation Budget, a tentative draft of which is attached hereto as
Exhibit C, which may be modified from time to time with the consent of
the Bank Group. Administrative Expense claims are not impaired.
2. CLASS 2 - WAGE AND BENEFIT CLAIMS. All Wage and Benefit
Claims will be paid in full from the Creditors' Fund, in cash on the
later of the Effective Date or the date which is twenty (20) business
days after the date on which the Employee Wage or Benefit Claim becomes
an Allowed Claim. To the extent that any such Allowed Claims exist,
Pluma believes that they will not be significant.
3. CLASS 3 - TAX CLAIMS. All Tax Claims secured by real estate
shall be paid in full in cash upon the sale of such real estate. If a
sale has not occurred within twelve (12) months following the Effective
Date, the taxing authority may pursue its statutory remedies against
any property which is subject to the tax lien of such taxing authority.
4. CLASS 4 - SECURED CLAIM OF GASTON DYE AND FINISHING
COMPANY. This Class 4 Claim is secured by a lien on certain equipment
owned by the Debtor. The Debtor will abandon the collateral to the
Class 4 Creditor in full satisfaction of the Class 4 Claim and this
creditor shall have a right to assert any deficiency claim as a Class 6
Claim. Class 4 is impaired.
21
5. CLASS 5 - SECURED CLAIM OF THE BANK GROUP. This Class
consists of the pre-petition Secured Claim of the Bank Group, which is
impaired. The Bank Group, after the funding of the Carve Out and the
Liquidation Budget shall receive all of the Net Proceeds from the
post-petition realization, sale or disposition of Estate Property on
which the Bank Group holds a perfected lien. Payment to the Class 5
Creditor shall be limited to distributions from realizations on assets
which serve as collateral for the Bank Group's Allowed Secured Claim.
The Bank Group deficiency claim shall be a Class 7 Unsecured Claim.
6. CLASS 6 - GENERAL UNSECURED CLAIMS. Class 6 shall consist
of the Allowed Claims of General Unsecured Creditors, exclusive of the
Bank Group deficiency claim. Class 6 Claims are impaired. Class 6
Creditors shall receive pro rata distributions from the Creditors'
Fund, as provided in Article IV of the Plan, until all Estate assets
have been fully liquidated and the proceeds distributed to Creditors,
or until their respective Claims shall have been paid in full,
whichever first occurs.
7. CLASS 7 - BANK GROUP DEFICIENCY CLAIM. Class 7 shall
consist of the unsecured deficiency claim of the Bank Group. The Class
7 Claim is impaired. The Class 7 Claim will share, pro rata, with Class
6 Creditors on all distributions from the Creditors' Fund exclusive of
and after taking account of distributions resulting from the Carve Out
and the recovery of Preference Claims. For distribution and voting
purposes, the Bank Group deficiency claim shall be deemed Allowed in
the amount of $50.0 million.
22
8. CLASS 8 - SHAREHOLDERS. Class 8 shall consist of the
holders of the Stock of Pluma, Inc. Class 8 Interests are impaired.
Shareholders shall retain their respective equity interests and shall
be entitled to pro-rata distributions from the Creditors' Fund after
all Allowed Creditor Claims have been paid in full and discharged. The
Company anticipates that it is extremely unlikely that all Creditor
Claims will be paid in full and therefore no distribution is expected
to be made to shareholders of the Debtor.
V.
IMPLEMENTATION OF THE PLAN
A. GENERALLY. The Plan serves as the mechanism for the orderly
liquidation of all Estate Property in Pluma's bankruptcy case and provides for
the distribution of funds realized through the liquidation process to Creditors.
It does not appear that sufficient funds will be realized from the liquidation
to satisfy all Creditor Claims in full. Accordingly, the Plan provides for
distribution to shareholders of Pluma only after all Creditor Claims have been
satisfied. While the Debtor expects that the sale of the Debtor's real property
and tangible personal property will be accomplished within six months following
Confirmation, the final distribution to Creditors will need to await the
conclusion of any litigation by or against the Debtor and the Debtor's Estate.
The Plan does provide a mechanism, however, for an interim distribution to
Unsecured Creditors, if circumstances warrant.
B. ASSET SALES. With respect to the sale of assets following
Confirmation, the following procedures shall apply:
23
1. SALES OF PERSONAL PROPERTY. In winding down its business
operations, the Debtor may continue to sell inventory in the ordinary
course of its business. The Debtor, with the consent of the Bank Group
Representative, shall be free to consummate any sales of personal
property which is subject to the Bank Group's lien, outside the
ordinary course of its business without further notice, hearing or
Court order. Further, with the consent of the Bank Group
Representative, the Debtor may engage, as necessary or desirable, one
or more auctioneers, brokers or sales agents, upon three business days
notice to the Bankruptcy Administrator, which notice shall disclose the
proposed agent's contacts with the Debtor, the compensation to be paid
to such agent and whether such agent has agreed to share its
compensation with any other party. Unless objection is raised in
writing by the Bankruptcy Administrator and received by the Debtor
within three business days, such agent's engagement shall be deemed
approved without the need for formal application, notice or hearing. If
written objection is received by the Debtor, and not subsequently
waived, the terms and conditions of any such employment shall be
subject to approval of the Court.
2. SALES OF REAL PROPERTY. The Debtor shall be authorized to
sell real property with the express written consent of the Bank Group
or upon entry of a specific Court order authorizing the sale. In the
event the Bank Group agrees in writing to the specific terms of a
proposed real estate sale, as evidenced by the signature of its
attorney, such sale shall be deemed to be authorized by and made
pursuant to the Plan. Although so authorized, the Court will retain
jurisdiction to
24
enter an order in aid of consummation, upon such terms as the Court
deems appropriate, to facilitate such sale. With the consent of the
Bank Group, the Debtor may engage, as necessary or desirable, one or
more auctioneers, brokers or sales agents, upon three business days
notice to the Bankruptcy Administrator, which notice shall disclose the
agent's contacts with the Debtor, the compensation paid such agent and
whether such agent has agreed to share its compensation with any other
party. Unless written objection is received by the Debtor from the
Bankruptcy Administrator within three business days after such notice,
such agent's engagement shall be deemed approved. If written objection
is received by the Debtor, and not subsequently waived, the terms and
conditions of any such employment shall be subject to approval of the
Court.
C. CAUSES OF ACTION.
1. PREFERENCE CLAIMS. Within sixty (60) days following the
Effective Date, the Debtor shall prepare and make available to the
Committee an analysis of all potential Preference Claims. This analysis
shall include information sufficient to determine, with respect to each
Creditor, and to the best of the Debtor's knowledge, the preferential
payments made to such Creditor and the extent to which new value was
received by the Debtor subsequent to the payment in question. Committee
professionals may critically review the Debtor's analysis and undertake
independent efforts to determine its accuracy. The Debtor will make
available to the Committee those employees and professionals primarily
responsible for the analysis and the
25
Debtor shall provide, as requested, reasonable assistance to the
Committee in the verification process. After the Committee has had a
reasonable opportunity to verify the accuracy of the Debtor's analysis,
the Debtor shall, in due course, extend to each Creditor which has
received an alleged preferential transfer of $2,500.00 or more, a
written notice which shall contain the following:
(a) Notice of the amount of the Preference Claim and a
particular description of the basis therefor;
(b) A request that the Creditor provide the Debtor with
information in writing which would constitute a
complete or partial defense to the Preference Claim
asserted;
(c) Notice that the Creditor may elect to settle and
fully compromise the alleged Preference Claim by the
payment of sixty percent (60%) of the amount of such
claim and that such settlement offer will remain open
until the later of thirty days (30) days following
the date of said notice or the date an adversary
proceeding is filed seeking recovery of the
preferential payment; and
(d) The notice will constitute a formal demand for
payment, and that upon the filing of an adversary
proceeding to recover the preference, the Debtor will
seek to recover interest from the date of the demand.
In the event the Creditor alleged to have received a
Preference is an Insider, the Notice described above shall be issued by
the Committee.
26
In the event an adversary proceeding is instituted to recover
a Preference Claim, any proposed settlement shall be approved only in
accordance with the provisions of Bankruptcy Rule 9019.
The prosecution of Preference Claims against non-Insider
Creditors shall be the responsibility of the Debtor.
All proceeds derived from the prosecution of Preference Claims
shall be deposited in the Creditors' Fund, but will be separately
accounted for so that no portion of those proceeds will be paid to the
Class 7 Creditor.
D. RECOVERY ACTIONS. All Recovery Actions, other than Preference Claims
against non-Insiders, may be prosecuted on behalf of the Debtor by the
Committee. The Committee shall also have the responsibility of prosecuting
Preference Claims against Insiders in accordance with the procedures outlined in
Paragraph V(C)(i) above.
27
E. FUNDING.
1. LIQUIDATION BUDGET. Prior to the Confirmation hearing, the
Debtor shall submit a Liquidation Budget which shall be made a part of
the Plan. The Liquidation Budget shall describe in reasonable detail
all anticipated costs and expenses involved in the sale of Estate
Property, including professional fees and expenses of the Debtor other
than fees and expenses which may be attributable to the litigation of
Recovery Actions. Upon the Effective Date sufficient funds will be held
in the DIP account to fund the Liquidation Budget. The Liquidation
Budget shall be subject to modification from time to time, as
circumstances dictate, with the consent of the Bank Group, and, to the
extent that such modification would result in additional charges being
made to the Creditors' Fund, with the consent of the Committee. If the
Liquidation Budget does not appear sufficient to cover all reasonable
costs and expenses involved in the orderly liquidation of Estate
Property and final administration of this Bankruptcy Case, the Court
may, after notice and hearing, approve additions to the Budget and
appropriate procedures for funding such additions from the Net Proceeds
of Asset Sales (up to a maximum of $450,000, provided such additional
charge to the Bank Group is fair and equitable) or the Creditors' Fund.
2. COMMITTEE EXPENSE FUND. For the purpose of defraying the
post-Confirmation expenses of the Committee, a separate interest
bearing account will be established and maintained by the Debtor into
which the sum of Fifty Thousand
28
Dollars ($50,000) will be initially deposited on the Effective Date.
(The "Initial Deposit"). To the extent that the Court approves
post-Confirmation professional fees and expenses of the Committee in
excess of the Initial Deposit in the aggregate, the Bank Group shall
deposit additional funds into the Committee Expense Fund to pay for
such fees and expenses, up to a maximum additional amount of Fifty
Thousand Dollars ($50,000) (the "Supplemental Deposit"). The Bank Group
shall be reimbursed for all funds advanced as a Supplemental Deposit
from the first proceeds of Recovery Actions (other than Preference
Actions) otherwise available for distribution to Classes VI and VII.
The Initial Deposit is not refundable.
3. CREDITORS' FUND. On the Effective Date the Creditors' Fund
will be established and maintained by the Debtor. The Creditors' Fund
will be funded from time to time by the following:
(a) The Carve Out (which amount shall be deposited in the
Creditors' Fund on the Effective Date);
(b) Net proceeds from the sale of assets not encumbered by
liens; and
(c) The proceeds of Recovery Actions.
The Creditors' Fund will be utilized primarily for the purpose of
making distributions to Classes 6, 7 and, if applicable, 8. In
addition, the Creditors' Fund will serve as the source of payment of
that portion of professional fees and expenses incurred by the Debtor
post-confirmation with respect to Preference Claims and may serve as
the source of payment of other professional fees and expenses of the
Debtor as provided
29
below. The Creditors' Fund will also serve as the source of payment of
approved fees and expenses of Committee professionals attributable to
the pursuit of Recovery Actions, other than non-Insider preference
claims, after the Committee Expense Fund has been depleted. The
Creditors' Fund may be used for the purpose of paying Administrative
Expenses only upon Court order entered after a determination that the
use of such funds is necessary and fair in order to ensure the payment
of such costs and expenses.
F. DISTRIBUTIONS.
1. ADMINISTRATIVE EXPENSES. On the Effective Date all
Administrative Expenses will be paid in full from cash retained by the
Debtor in the DIP account. The fees and expenses of court approved
professionals rendering services pre-confirmation shall be paid from
funds maintained in the DIP account, if within the parameters of the
Liquidation Budget. If outside the parameters of the Liquidation
Budget, said fees and expenses will be paid from the Creditors' Fund.
In any event, such fees and expenses shall be paid only upon entry of
an appropriate Court order approving same.
2. POST-CONFIRMATION COSTS AND EXPENSES. Following
Confirmation, the costs and expenses of administering the Estate, as
set forth in the Liquidation Budget, will be paid when due from funds
maintained by the Debtor or, in the case of professionals, in
accordance with applicable orders and procedures then in effect for the
payment of professional fees. It is the express purpose and intent of
the Plan that
30
all reasonable costs and expenses of administering this case shall be
paid and appropriate provisions for such payment be made prior to any
distribution to Creditors from the Creditors' Fund.
3. SECURED TAX CLAIMS. All Tax Claims secured by real estate
shall be paid in full in cash upon the sale of such real estate. If a
sale has not occurred within twelve (12) months following the Effective
Date, the taxing authority may pursue its statutory remedies against
any property which is subject to the tax lien of such taxing authority.
4. PRIORITY UNSECURED CLAIMS. The Debtor has scheduled a small
amount of priority employee related Claims which, if determined and
allowed, will be paid in full in cash from the Creditors' Fund on the
Effective Date. The Debtor is unaware of any pre-petition unsecured Tax
Claims. If any such Claim is determined and allowed, such taxing
authority will receive full payment prior to any distribution to
general Unsecured Creditors in Class 6 or the Bank Group deficiency
claim in Class 7.
5. BANK GROUP SECURED CLAIM. On the Effective Date all funds
held by the Debtor in excess of the Liquidation Budget and the Carve
Out shall be paid to the Bank Group in partial satisfaction of its
Allowed Secured Claim. Thereafter, all Net Proceeds from the
realization, liquidation or sale of Estate Property which serves as the
Bank Group's collateral will be paid to the Bank Group.
6. UNSECURED CREDITOR CLAIMS. Unsecured Creditors (Classes 6
and 7)
31
will receive pro rata distributions from the Creditors' Fund upon entry
of an order authorizing and approving the distribution after the Final
Claims Resolution Order has been entered, provided however, that Class
7 shall not participate in the pro rata distributions of the Net
Proceeds derived from Preference Claims. Earlier distributions to these
Unsecured Creditors will occur only upon Court order issued after
notice and hearing. The Debtor, Bank Group and Committee each shall
have standing to file a motion seeking authorization for earlier,
partial distributions.
7. SHAREHOLDER INTERESTS. After all Creditors have been paid
in full, including the Bank Group on its deficiency claim and general
Unsecured Creditor Claims, any funds remaining will be distributed to
the shareholders of the Debtor in accordance with their percentage of
stock ownership in the Debtor.
G. ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES.
Other than the Debtor's contract with Trigon Blue Cross Blue Shield
relating to claims administration and excess risk concerning the Debtor's
employee health insurance plan for 1999, all executory contracts which have not
previously been rejected by order of the Court or which are not the subject of a
pending motion to assume or reject as of the Confirmation Date, shall be deemed
rejected on the Effective Date.
H. DISCHARGE OF DEBTOR AND BANK GROUP RELEASE.
Pursuant to Section 1141(d)(3)(A), Confirmation of the Plan shall not
effect a discharge of the Debtor's liabilities. The Plan does provide that, in
consideration of the Carve Out and the funding of the Liquidation Budget,
Confirmation of the Plan shall have
32
the effect of fully and forever discharging the members of the Bank Group and
their respective officers, directors, shareholders, employees, agents and others
from any and all claims, losses, liabilities, demands, actions or causes of
action of any kind or character that the Debtor or the Estate may have against
the Bank Group.
I. RETENTION OF JURISDICTION.
The Plan provides that the Bankruptcy Court will retain jurisdiction
over the business and assets of the Debtor until all Estate Property is
liquidated and the proceeds distributed in full. In other words, the Court shall
retain jurisdiction to the same extent and in the same manner as jurisdiction
existed prior to Confirmation of the Plan.
J. CANCELLATION OF CORPORATE CHARTER.
Upon entry of an appropriate order by the Court approving the final
distribution to Creditors and the Final Report filed by the Debtor, the
corporate charter of the Debtor shall be canceled.
VI.
CONFIRMATION AND CONSUMMATION PROCEDURE
On September 13, 1999, the Debtor filed a Motion seeking an order
providing for an expedited confirmation process which would include conditional
approval of the Disclosure Statement. Since the Plan contemplates a full
liquidation of the assets of the Debtor and contains provisions for
distributions to Creditors which are relatively uncomplicated, it was the
opinion of the Debtor that the time periods generally applicable in the
confirmation process, which could extend beyond sixty (60) days, could be
considerably shortened.
33
Moreover, Section 105(d)(2)(B)(vi) indicates that the Court may hold a hearing
on the approval of the Disclosure Statement which can be combined with the
hearing on the Confirmation of the Plan. The Debtor's Motion for an expedited
confirmation process, which will be heard on September 30, 1999, requests that
the Court conditionally approve the Disclosure Statement and permit the
submission of the Disclosure Statement and the Plan of Reorganization to the
Creditors and shareholders of the Debtor for voting. At a Confirmation hearing
to be established by order of the Court, the Court would consider not only the
adequacy of the Disclosure Statement, but also the Confirmation of the Plan.
In order to be approved, the Disclosure Statement must contain "adequate
information" which means information of a kind, and in sufficient detail, as far
as reasonably practicable in light of the nature and history of the Company and
the condition of the Company'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.
The order approving the Disclosure Statement, conditionally or
otherwise, will also establish the date of the Confirmation hearing and will
establish a deadline for the filing of objections to Confirmation of the Plan.
Generally, all impaired Creditors and Interest Holders have the right
to vote on the Plan. In this case, the following classes are entitled to vote on
the Plan: Class 4 -- Gaston County Dye and Finishing Secured Claims; Class 5 --
Secured Claim of Bank Group; Class 6 -- General Unsecured Claims; Class 7 --
Bank Group Deficiency Claim; and Class 8-- Shareholders. All other classes of
Claims are treated by the Company as unimpaired. Holders of Impaired Claims
shall be entitled to vote if:
34
A. Such Claim has been timely filed against the Debtor in a
liquidated amount regardless of whether the Claim is the subject of an
objection filed by the Debtor. The Claim shall be allowed solely for
the purpose of voting on the Plan in the amount in which the Claim has
been filed or in such other amount as may be agreed upon by the holder
of such Claim and the Debtor;
B. Such Claim has been listed on the Debtor's schedules other
than as contingent, unliquidated or disputed and as to which no proof
of claim has been filed, such Claim shall be allowed, solely for the
purpose of voting on the Plan in the amount in which such Claim has
been listed on the Debtor's schedules or as may be agreed upon by the
holder of such Claim and the Debtor;
C. Such Claim has been filed in an undetermined amount, in
which case the claimant shall not be entitled to vote unless the Debtor
and the holder of the Claim agree on an amount for voting purposes or
the Court enters an order determining the amount of the Claim that the
Creditor may vote;
D. Such Claim has been adjusted or reconciled for post
petition credits, in which case it shall be allowed for voting purposes
in a reduced amount consistent with such reconciliation after full
adjustment. In the event of a dispute over the remaining portion of the
Claim, subparagraph A will control;
E. Any entity holding a duplicate Claim shall be allowed to
vote only one Claim.
The requirements for Confirmation of the Plan are set forth in Section
1129 and will
35
not be repeated verbatim here. A class of Claims is deemed to have accepted the
Plan if the Plan is accepted by Creditors who hold at least two-thirds in dollar
amount and more than one-half in number of the Allowed Claims of such class
which actually vote for acceptance or rejection of the Plan. The class of
Interests is deemed to have accepted the Plan if the Plan is accepted by
shareholders of the Debtor who hold at least two-thirds shares voting for
acceptance or rejection of the Plan. In the event a class votes to reject the
Plan, the Court cannot confirm the Plan unless it determines that, with respect
to the rejecting class, the Plan treatment is fair and equitable as defined in
Section 1129.
VII
LIQUIDATION ANALYSIS
The following is a comparative analysis of the advantages and
disadvantages of liquidating Pluma pursuant to a confirmed Chapter 11
Liquidation plan as opposed to the
36
conversion of this Chapter 11 case to a case under Chapter 7 and the resulting
liquidation of assets and administration of the Estate through a Chapter 7 case.
A. REALIZATION OF VALUE.
1. CHAPTER 11. This Chapter 11 Liquidation Plan envisions an
orderly Liquidation of the Debtor's assets with the objective of maximizing the
value of the Estate. The Liquidation Plan provides for a run out of the Debtor's
existing work in process and a conversion of the work in process to finished
goods so that the goods can be shipped to fill existing orders. By doing so the
Debtor expects to maximize the value of its inventory, since work in process
would have virtually no value on the open market. Similarly, the Debtor is
negotiating with existing customers for the sale of large portions of the
Debtor's existing inventory at favorable prices. Hand in hand with the
conversion of work in process to finished goods, and the resulting sale to
existing customers is the resolution of outstanding accounts receivable. In
order to achieve these goals, the Liquidation Plan provides retention incentives
for certain officers and employees of the Debtor which are set forth in the
footnote to Exhibit B and on Exhibit F, attached hereto. These incentives are
provided for in the Liquidation Budget and funded by the Bank Group.
The following chart represents expected recoveries under a Chapter 11
orderly liquidation versus a forced liquidation under Chapter 7. As the chart
demonstrates, the Debtor projects that recoveries on inventory and accounts
receivable will be at least $11.0 million greater through a Chapter 11
liquidation. Significant differences also exist in the
37
value of real estate as the sale of such property over time can reasonably be
expected to bring more than through an immediate forced sale.
[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]
38
Chapter 11 Chapter 7
Assets (in 000's) Liquidation Liquidation
Sales Consummated Prior to September 24, 1999
Stardust Sale 10,437 10,437
Rocky Mount
Real Estate and Equipment 1,173 1,173
------------ ------------
TOTAL 11,610 11,610
...................................................................................................................
Remaining Real Estate
Altavista 126 126
Chatham Sewing 805 805
Beaver Creek 675 675
Eden Main 2,990 2,000
Eden Knitting 2,623 1,500
Martinsville Sewing 683 683
Vesta 280 280
--- ---
TOTAL 8,182 6,069
Remaining Equipment
Altavista 51 51
Beaver Creek
Chatham Sewing 192 192
Eden Main 2,104 1 ,400
Eden Knitting 457 300
Eden Sewing 61 61
Martinsville Dist. Ctr. 240 240
Martinsville Sewing 219 219
Vesta 129 129
--- ---
TOTAL 3,453 2,592
Accounts
Receivable (9/10/99) TOTAL 8,528 5,482
Inventory (9/10/99) TOTAL 16,825 8,868
------- -------
GROSS RECOVERY 36,988 23,011
Cash on Hand (9/16/99) 11,237 11,237
GROSS AVAILABLE 48,225 34,248
Liquidation Expenses and 8,098 2,000
Chapter 11 Admin. NA 1,000
...................................................................................................................
Net Available for Distribution to
Pre-Petition Creditors (including consummated sales) 51,737 42,658
2. CHAPTER 7 LIQUIDATION. Chapter 7 would appear to have no
benefits
39
for Unsecured Creditors. No funds would be initially set aside
to benefit Unsecured Creditors. In addition, the Bank Group's $50.0
million unsecured deficiency claim would dwarf all other Unsecured
Claims such that, if amounts ultimately came available for distribution
to Unsecured Creditors, the Bank Group would receive an estimated
seventy-seven percent (77%) of such distributions. Furthermore,
virtually all property of the Bankruptcy Estate is encumbered by the
pre or post-petition liens granted to the Bank Group. It is clear that
the value of all of the Debtor's tangible property and accounts is
considerably less than the amount of the Bank Group's Secured Claim.
Accordingly, based on procedures now in effect for Chapter 7 cases
pending in the Middle District of North Carolina, a Chapter 7 Trustee
would not administer the liquidation of the Debtor's tangible property
and accounts as the Chapter 7 Estate would have no equity in the
property being sold. Either the Bank Group would be granted relief from
stay or the property would be abandoned. In either case, the Bank Group
would be responsible for liquidating the property outside bankruptcy.
However, whether the Bank Group liquidated the property directly, or a
Chapter 7 Trustee liquidated the property, considerable value would be
lost as the result of the unavoidable forced liquidation of the
property. Substantial inventory value would be lost both as the result
of a failure to convert work in process to finished goods and the
inability of a Chapter 7 Trustee or the Bank Group to utilize the
Debtor's existing resources to effectuate ongoing sales. Most likely,
an inventory liquidation specialist would be brought in to purchase the
inventory in bulk, resulting
40
in substantial losses. Moreover, losses would likely occur in the
collection of accounts receivable in that the account Debtor would no
longer have an incentive to make an early settlement of its account. In
conclusion, it appears clear that considerably more value will be
realized from the sale of the Debtor's assets in a Chapter 11
liquidation through a confirmed Plan than would be the case under a
Chapter 7 liquidation.
B. BENEFIT TO CREDITORS.
CHAPTER 11. Under the Chapter 11 Plan of Liquidation
significant benefits are granted to Unsecured Creditors which would not
be available under a Chapter 7 Liquidation. The Bank Group has agreed
to "carve out" $750,000.00 of Net Proceeds from the sale of its
collateral and to pay that amount into the Creditors' Fund which will
primarily benefit Unsecured Creditors. The $750,000.00 Carve Out,
representing five percent (5%) or more of the anticipated universe of
Allowed Unsecured Claims,2 would not be available in a Chapter 7, as
the payment of the Carve Out would not otherwise be required. In
addition to the Carve Out, the Bank Group has agreed not to participate
in any distribution of Preference Claim recovery proceeds. This is
significant in that the Bank Group's deficiency claim, established
- ---------------------
( 2) Based on an initial review of unsecured claims scheduled and timely
filed, it is anticipated that Class 6 claims would not exceed $14,750,000.00,
exclusive of rejection claims which might be subsequently filed.
41
in the Plan at $50.0 million, represents approximately seventy-seven
percent (77%) of the expected total Unsecured Claims debt in the case.
2. CHAPTER 7. Chapter 7 would appear to have no increased
benefit for Unsecured Creditors. Furthermore, in a Chapter 7
liquidation there would likely be significant unpaid Chapter 11
Administrative Expenses including, most notably, unpaid insurance
benefits incurred by the Debtor's employees prior to the conversion of
the case but not otherwise paid during the Chapter 11. It is estimated
that this amount would be substantial, likely in excess of $1.2
million. In the Liquidation Budget to be used in connection with the
Chapter 11 Plan, $1,250,000.00 has been allocated for this particular
Administration Expense. Under Chapter 7, Chapter 11 Administrative
Expenses are entitled to priority in payment before any distribution is
made to General Unsecured Claims. Under a Chapter 7 Liquidation it
would thus appear most unlikely that Unsecured Creditors would receive
more than a minuscule dividend in the case. Under the Chapter 11
Liquidation Plan, on the other hand, it appears possible that Unsecured
Creditors will in fact receive a dividend on their Allowed Claims which
could exceed 10%.
C. BENEFIT TO EMPLOYEES.
1. CHAPTER 11. Under the Chapter 11 Liquidation Plan certain
of the Company's employees will continue to work to wind down the
Debtor's business, thereby providing significant value in the
conversion of inventory to finished goods and the sale of assets.
Others will need to remain employed by the Company to
42
furnish assistance in concluding the administration of the case. The
Bank Group has agreed to allow what is essentially a charge against its
collateral for the funding of the Liquidation Budget in order that
money will be available to cover the wind down expenses of the Company.
Both before and after the Chapter 11 filing, the Debtor
maintained a partially self funded insurance plan with Trigon Blue
Cross and Blue Shield ("Trigon"). Under this insurance plan the Debtor
was responsible for paying medical claims incurred by its employees and
covered under the plan subject to both specific and aggregate stop loss
or excess coverage provided by Trigon. Under the insurance plan there
exists a natural lag time between the time a claim is incurred and the
time it is reported for payment. Under the Chapter 11 Liquidation Plan,
the Debtor projects that sufficient funds have been set aside to cover
the Debtor's cost for paying the medical claims of its employees not
covered by the Trigon stop loss or reinsurance coverage. Finally, under
the Chapter 11 Liquidation Plan, there remains the possibility, however
remote, that substantial portions of the Debtor's assets might be sold
in bulk, thus providing similar employment opportunities for current
employees.
2. CHAPTER 7. If the case were converted to a Chapter 7, all
of the Debtor's remaining employees would immediately be terminated.
Similarly, conversion to Chapter 7 would result in the termination of
the Debtor's partially self-funded medical insurance reimbursement plan
described above. The termination of the plan might give rise to
substantial claims of employees for medical bills incurred
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during the Chapter 11 that remain unpaid at the time of the conversion.
Administrative Expenses might be filed by Trigon as well. Because the
Estate does not currently have unencumbered assets, it is quite likely
that these claims would remain unpaid, in whole or in part. The failure
of the Company to honor its obligations under the self funded medical
insurance plan could give rise to claims directly against the employees
by the medical provider. Accordingly, the interest of the Debtor's
employees would be best served through an orderly liquidation pursuant
to the Chapter 11 Plan of Liquidation.
D. EFFICIENCY IN THE ADMINISTRATION OF THE CASE.
The Chapter 11 Liquidation Plan provides procedures and mechanisms for
the disposition of Estate property, the pursuit of Recovery Actions and the
compliance with Court reporting requirements. The Plan delegates to the
Committee and its professional responsibility to investigate and instigate
Recovery Actions, exclusive of Preference Claims against non-insiders, that the
Committee deems appropriate. The Debtor's professionals are given the
responsibility of administering and overseeing the liquidation of Estate assets,
the reconciliation of Creditor Claims and the pursuit of Preference Actions
against non-insiders. Because of the familiarity with the Debtor, its operations
and personnel, both the Committee and the Debtor are ideally situated to
administer the case to a conclusion with their respective responsibilities as
outlined above. Under the Chapter 11 Plan all of these matters can coincide with
the liquidation of Estate assets such that, absent the institution of
significant litigation matters, this case might be brought to an efficient and
expeditious conclusion.
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Whether professionals engaged by the Committee and the Debtor would charge more
or less for their services than a Chapter 7 Trustee, attorney and accountant
would charge is perhaps subject to debate. However, all fees of professionals
will remain subject to the reasonableness requirement mandated by the Bankruptcy
Code and will be subject to approval or disapproval by order of the Court. The
Debtor does believe that the liquidation of the Debtor's Estate in a manner
agreed upon by all concerned parties, as set forth in the Liquidation Plan, will
occur with far greater efficiency than would occur under Chapter 7.
VIII
PROJECTED CASH DISBURSEMENTS FROM THE LIQUIDATION BUDGET
The professionals for the Bank Group have performed certain analyses
projections with reference to the liquidation process which has resulted in
preparation of a document entitled Pluma, Inc. -- Projected Chapter 11 Winddown
& Liquidation is attached hereto as Exhibit B. Exhibit B tentatively projects
total cash disbursements of $6,800,000.00 and liquidation costs of $1,038,000.00
for total cash expenditures in the liquidation process of $7,838,000.00. The
Debtor, on the other hand, has projected total cash disbursements during the
course of the liquidation of $8,098,000.00. See Exhibit C. Consequently, there
is a variance of less than 3% between the projections of management of the
Debtor and the professionals for the Bank Group. Exhibit D attached hereto
provides the detail for the salaries, wages and benefits listed on Exhibit C as
$3,960,000.00. Exhibit E, attached hereto, itemizes the $415,000.00 estimated
for professional fees in Exhibit C.
IX
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ATTACHMENTS OF SPECIFIC INFORMATION
Attached to this Disclosure Statement as Exhibits are the following documents:
Exhibit A: Comparative Balance Sheets reflecting the Debtor's status
as of year end 1998 and as of the end of the second quarter
1999. The information set forth on this Exhibit is a
compilation of the balance sheets which were attached to the
Form 10K for the fiscal year ended December 31, 1998 and the
Form 10-Q for the quarter ending June 30, 1999, filed with the
Securities and Exchange Commission. Specific reference is made
to the Form 10-K and Form 10-Q for the information set forth
in the footnotes to the respective balance sheets and
management's discussion and analysis of financial condition
and results of operations.
Exhibit B: The tentative Liquidation Budget as prepared by The
Recovery Group, the Bank Group's financial consultant covering
the period from the week ending September 17, 1999 through the
week ending December 10, 1999.
Exhibit C: Debtor's Tentative Projected Summary of Disbursements.
Exhibit D: Debtor's Projected Salaries, Wages, and Benefits.
Exhibit E: Debtor's Projected Professional Fees.
Exhibit F: Employee Stay Incentives/Severance. (see also the footnote on
Exhibit B)
Exhibit G: Debtor's Plan of Liquidation. [If the Plan is served as a
separate document together with this Disclosure Statement,
Exhibit G will not be attached.]
X
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CONCLUSION
Based on the foregoing analysis of the Company, its liquidation, and
the Plan of Liquidation, the Debtor believes that the best interests of all
parties would be served through confirmation of the Plan and the Company's
solicits your support thereof.
Respectfully submitted this the 5th day of October, 1999.
PLUMA, INC.
By: _______________________________________
John D. Wigodsky, President/Chief Executive
Officer
- --------------------------------------------
R. Bradford Leggett
North Carolina State Bar No. 2697
C. Edwin Allman, III
North Carolina State Bar No. 8625
M. Joseph Allman
North Carolina State Bar No. 13395
Attorneys for Debtor
ALLMAN SPRY LEGGETT & CRUMPLER, P.A.
380 Knollwood Street, Suite 700
Post Office Drawer 5129
Winston-Salem, NC 27113-5129
Telephone: 336/722-2300
Telecopier: 336/722-8720
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EXHIBITS
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