WPI
Litigation
FEDERAL
PROCEEDINGS
In
November and December 2005, the U.S. District Court for the Southern District
of
New York, or the District Court, rendered a decision in
Contrarian Funds LLC
v.
WestPoint Stevens, Inc. et al.,
and
issued
orders reversing certain provisions of the Bankruptcy Court order, or the
Sale
Order, pursuant to which we acquired our ownership of a majority of the common
stock of WPI. WPI
acquired substantially all of the assets of WestPoint Stevens, Inc. The
District Court remanded to the Bankruptcy Court for further
proceedings.
On
April
13, 2006, the Bankruptcy Court entered a remand order, or the Remand Order,
which provided, among other things, that all of the shares of common stock
and
rights to acquire shares of common stock of WPI issued to us and the other
first
lien lenders or held in escrow pursuant to the Sale Order constituted
“replacement collateral.”
The
Bankruptcy Court held that the
5,250,000 shares of common stock that we acquired for cash were
not
included in the replacement collateral. The Bankruptcy Court also held that,
in
the
event
of a sale of the collateral, including the sale of the shares we received
upon
exercise of certain subscription rights, or the Exercise Shares, all proceeds
would be distributed, pro
rata,
among
all first lien lenders, including us, until the first lien debt was satisfied,
in full. The parties filed cross-appeals of the Remand Order.
On
October 9, 2007, the District Court entered an Order, or the Oct.
9
Order,
on the
appeal and cross-appeal. The District Court affirmed the Remand Order but
held
that,
as to
the Exercise Shares,
any sale
proceeds would be divided
between
us and
the
first lien
lenders (including us), generally based upon the ratio of the amount
we
paid
to exercise the rights to the total
value of
the Exercise Shares on the date they were acquired. We are holders of
approximately 39.99% of the outstanding first lien debt and approximately
51.21%
of the outstanding second lien debt.
We
have
the right to appeal the Oct. 9, 2007 Order to the United States Court of
Appeals
for the Second Circuit. The Contrarian Funds, LLC and the other first lien
lenders who had appealed to the District Court similarly have a right to
appeal
to the Second Circuit. As part of that appeal, the parties have the right
to
raise issues relating to the District Court’s November 2005 Opinion, and the
Orders entered thereon, as well as relating to the Oct. 9, 2007
Order.
DELAWARE
PROCEEDINGS
On
October 3, 2007, the Court of Chancery of the State of Delaware In and For
New
Castle County, or the Chancery Court, issued a Limited Status Quo Order,
or the
Order, in Beal
Bank, S.S.B., et. al. v. WestPoint International, Inc. et. al.,
in
connection with the complaint filed on January 19, 2007, as amended, by Beal
Bank, S.S.B. and certain creditors of WestPoint Stevens, Inc., collectively,
the
Plaintiffs. The Order
required
that WPI
and
subsidiaries, or the Company
seek a
further court order, obtain consent, or give notice before engaging in certain
actions.
On
October 15, 2007, the Chancery Court issued a Modified Limited Status Quo
Order,
or the Modified Order, modifying certain provisions of the prior order to
permit
the Company to conduct ordinary course of business activities without further
notice,
consent, or
order,
including (i) ordinary course of business sales and purchases provided any
particular transaction does not exceed $20,000,000 and (ii) transfers of
excess
inventory, unused equipment and/or unused real property to an unrelated third
party provided the sale price for any particular real property transaction
does
not exceed $30,000,000,
We
continue to vigorously defend against all claims asserted in the Federal
and
Delaware proceedings and believe that we have valid defenses. However, we
cannot
predict the outcome of these proceedings or the ultimate impact on our
investment in WPI or the business prospects of WPI.