Pillowtex Files Healthcare Claims Petition, Key Employee Retention Plan with Bankruptcy Court

August 26, 2003

North Carolina-based Pillowtex Corporation has filed a motion with the U.S. Bankruptcy Court in Wilmington, Del. seeking court approval for a plan to address payments associated with an estimated $5 million in unpaid employee medical claims incurred prior to the company’s Chapter 11 bankruptcy filing on July 30, 2003.

The company also petitioned the court for approval of its Key Employee Retention Plan (KERP), intended to encourage the retention of employees with job functions essential to the efficient management of the bankruptcy process and the company’s efforts to maximize distributions to its creditors.

Pre-petition Employee Medical Claims
Pillowtex has negotiated an agreement with various constituencies to help it honor unpaid medical expenses incurred by terminated employees prior to the company’s Chapter 11 filing on July 30, 2003, which would have normally been covered by the company’s insurance plan.

As detailed in the court filing, the company is seeking approval to contribute up to $2.5 million of Pillowtex assets to mitigate outstanding medical claims. The company is also seeking authority to negotiate with health-care providers to accept partial payment of claims as a settlement of the employee’s account. By accepting the partial payment the medical care provider would agree to not seek further collection from the employee that incurred the medical expense.

In addition, the Fieldcrest Cannon Foundation has informed the company that it will seek to reserve a portion of its assets for the purpose of paying unpaid medical claims. The Foundation’s ability to use its assets for this purpose is subject to various rules and regulations governing the distribution of funds by private foundations. The Foundation has also advised the company that the balance of its assets will be used to continue scholarship programs awarded by the Foundation to children of current and terminated Pillowtex employees.

The total amount of medical claims outstanding is undetermined due to the delay between the provision of medical-care services and submission of claims for payment. The company estimates that unprocessed medical claims incurred on or prior to July 30, 2003 could approximate $5 million.

All terminated employees are currently eligible for medical and dental insurance coverage under the company’s plans through COBRA. In addition, state-qualified health care plans are available in most states in which Pillowtex operated. In North Carolina, beginning Oct. 1, terminated employees will have access to a state-qualified health-care program administered through Blue Cross/Blue Shield.

Key Employee Retention Plan (KERP)
The company’s proposed KERP pertains to 143 salaried employees retained by the company who are critical to the efficient administration of the company’s Chapter 11 cases and the company’s efforts to maximize distributions to its creditors. If approved, payments under the KERP will be in lieu of any payments to which qualifying employees would otherwise be entitled under existing employment agreements and under the company’s existing severance policy.

The KERP provides for three types of payments: retention payments, incentive payments and variable payments. Plan participants and payment amounts were carefully considered and decisions were based on the following three factors:

* The nature of the employees job requirements, the position’s relevance
to the orderly liquidation of assets and that individuals unique
capability to perform the relevant tasks;
* The employees estimated length of continued employment; and
* An estimation of the risk that without incentives to stay the employee
would seek alternate employment.

The retention payment applies to all 143 retained employees in the KERP. The retention payment is based on a specified percentage of an employee’s base salary and payable upon termination of employment for other than cause or voluntary resignation.

The company has identified 29 retained employees eligible for incentive payments under the KERP. Payment of these amounts will be conditioned on the company’s ability to make cash distributions of at least $168.5 million to creditors. Incentive payment plan participants will receive a payment ranging from 4.2 weeks to 18.4 weeks regular base salary.

Each incentive payment participant is eligible to receive a variable payment which is entirely contingent upon the company’s ability to meet additional specific financial goals throughout the bankruptcy process. The company estimates that retention payments could be up to $4.1 million and incentive payments could be up to $1.2 million. The existence and amount of variable payments will depend on whether and to what extent the company is successful in achieving the set performance targets. If the company is unsuccessful, the variable payments would be zero.

The development of a KERP is reportedly a common procedure for companies in bankruptcy and is intended to retain key employees needed to maximize the value of the estate during the bankruptcy process. The loss of key employees during this time period, especially members of senior management, would likely result in significant delays in achieving bankruptcy objectives.

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