THE PROPOSED PLAN OF REORGANIZATION AND DISCLOSURE STATEMENT HAVE
NOT YET BEEN APPROVED BY THE BANKRUPTCY COURT. A HEARING WITH
RESPECT TO THE ADEQUACY OF THE DISCLOSURE STATEMENT IS
SCHEDULED BEFORE THE BANKRUPTCY COURT FOR MARCH 7, 1996.
THE PROPOSED PLAN OF REORGANIZATION AND DISCLOSURE STATEMENT
ARE SUBJECT TO AMENDMENT, WHICH AMENDMENTS MAY BE MATERIAL.
February 8, 1996
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- -----------------------------------------x
In re : Chapter 11 Case Nos.
SPECTRUM INFORMATION TECHNOLOGIES, INC. : 195 10690 260
and SPECTRUM CELLULAR CORPORATION, : 195 10693 260
:
Debtors. :
:
:
- -----------------------------------------x
------------------------------------------
DISCLOSURE STATEMENT WITH RESPECT TO THE CONSOLIDATED PLAN
OF REORGANIZATION PROPOSED BY SPECTRUM INFORMATION
TECHNOLOGIES, INC. AND SPECTRUM CELLULAR CORPORATION
DATED AS OF: FEBRUARY 8, 1996
------------------------------------------
SPECTRUM INFORMATION TECHNOLOGIES,
INC. and SPECTRUM CELLULAR
CORPORATION
Debtors and
Debtors in Possession
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board of Directors
2700 Westchester Avenue
Purchase, New York 10577
(914) 251-1800
CLEARY, GOTTLIEB, STEEN
& HAMILTON
George Weisz
Barry M. Fox
Arthur H. Kohn
Shari Siegel
Mary M. McDonald
Mary P. Watson
One Liberty Plaza
New York, New York 10006
(212) 225-2000
Attorneys for Spectrum Information
Technologies, Inc. and Spectrum
Cellular Corporation,
Debtors and Debtors in Possession
THE CONFIRMATION AND EFFECTIVENESS OF THE PROPOSED PLAN
(AS DEFINED HEREIN) ARE SUBJECT TO MATERIAL CONDITIONS PRECEDENT,
SOME OF WHICH MAY NOT BE SATISFIED. SATISFACTION OF THESE
CONDITIONS PRECEDENT REMAINS TO BE NEGOTIATED OR LITIGATED.
THESE CONDITIONS PRECEDENT INCLUDE, AMONG OTHERS, SUCCESSFUL
RESOLUTION OF THE LITIGATION DESCRIBED IN "CONDITIONS PRECEDENT
TO EFFECTIVENESS OF THE PLAN," SECTION XII. THESE AND OTHER
ISSUES MUST BE RESOLVED TO THE SATISFACTION OF THE PROPONENTS AND
IN A MANNER CONSISTENT WITH AVAILABLE RESOURCES BEFORE
CONFIRMATION OF THE PLAN. THERE CAN BE NO ASSURANCE THAT THESE
ISSUES WILL BE RESOLVED TO THE SATISFACTION OF THE PROPONENTS; IN
THE EVENT THEY ARE NOT SATISFACTORILY RESOLVED, THE PLAN MAY NOT
BE ABLE TO BE CONFIRMED AND/OR BECOME EFFECTIVE.
EVEN IF ALL SUCH ISSUES ARE SATISFACTORILY RESOLVED,
THERE CAN BE NO ASSURANCE THAT THE PLAN CAN BE CONFIRMED AND
IMPLEMENTED. THE DEBTORS CONTINUE TO FACE SUBSTANTIAL
UNCERTAINTIES AND TO SUFFER SIGNIFICANT OPERATING LOSSES AND
EXPENSES INCURRED IN CONNECTION WITH THE COMPANY'S PENDING
BANKRUPTCY. AS A CONSEQUENCE, THERE CAN BE NO ASSURANCE THAT
DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO CONTINUE
OPERATIONS UNTIL THE PLAN CAN BE CONFIRMED AND IMPLEMENTED.
MOREOVER, THE PLAN CONTEMPLATES THAT ALL ADMINISTRATIVE
CLAIMS, PRIORITY TAX CLAIMS, PRIORITY NONTAX CLAIMS AND UNSECURED
CLAIMS (EACH AS DEFINED IN THE PLAN), TOGETHER WITH CERTAIN OTHER
COSTS, WILL BE PAID IN CASH. IN THE EVENT THAT THE AGGREGATE
AMOUNT OF ADMINISTRATIVE, PRIORITY TAX, PRIORITY NONTAX AND
UNSECURED CLAIMS, TOGETHER WITH CERTAIN COSTS, EXCEEDS THE AMOUNT
OF CASH AVAILABLE TO THE DEBTORS, THE PLAN CANNOT BE CONFIRMED
WITHOUT THE CONSENT OF THE HOLDERS OF THE ADMINISTRATIVE,
PRIORITY TAX AND PRIORITY NONTAX CLAIMS IN ADDITION TO OTHER
HOLDERS ENTITLED TO VOTE UNDER THE PLAN. SEE "SUMMARY OF THE
PLAN - GENERAL DESCRIPTION OF THE TREATMENT OF CLAIMS," SECTION
VIII(D). IN ANY EVENT, NO ASSURANCE CAN BE GIVEN THAT THE
DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO MAKE ALL PAYMENTS
NECESSARY FOR CONFIRMATION AND IMPLEMENTATION OF THE PLAN.
TABLE OF CONTENTS
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . .1
A. General Information. . . . . . . . . . . . . . . . .1
B. Who May Vote and Instructions for Voting . . . . . .2
C. Confirmation of the Plan . . . . . . . . . . . . . .4
D. Contents of the Disclosure Statement . . . . . . . .4
II. OVERVIEW OF THE PLAN. . . . . . . . . . . . . . . . . . .5
A. Summary of Distributions Under the Plan. . . . . . .6
B. Corporate Structure. . . . . . . . . . . . . . . . .8
1. Merger. . . . . . . . . . . . . . . . . . . . .8
2. Capital Structure of Reorganized Spectrum . . .8
3. Board of Directors and Officers . . . . . . . .9
4. Amended Spectrum Certificate and Bylaws . . . 10
5. Business Purpose; Assets. . . . . . . . . . . 10
6. Listing; Exchange Act Reporting . . . . . . . 11
7. Restrictions on Transferability of Shares of
Reorganized
Spectrum Stock. . . . . . . . . . . . . . . 11
8. Rights Plan . . . . . . . . . . . . . . . . . 12
III. GENERAL INFORMATION ABOUT THE DEBTORS' BUSINESS;
RESTRUCTURING EFFORTS AND FILING OF THE CHAPTER 11
CASES . . . . . . . . . . . . . . . . . . . . . . . . . 12
A. Description of the Debtors . . . . . . . . . . . . 12
1. The Operations. . . . . . . . . . . . . . . . 12
2. Directors and Officers. . . . . . . . . . . . 13
B. Summary of the Debtors' Prebankruptcy
Restructuring Efforts. . . . . . . . . . . . . . . 16
C. Commencement of Cases. . . . . . . . . . . . . . . 16
D. Summary of the Debtors' Postbankruptcy
Restructuring Efforts. . . . . . . . . . . . . . . 16
1. Discontinued Operations and Disposition of
Subsidiary. . . . . . . . . . . . . . . . . . 16
2. Dispositions of Other Assets. . . . . . . . . 17
3. Fund Raising Process. . . . . . . . . . . . . 17
IV. CHAPTER 11 PROCEEDINGS AND OTHER RECENT DEVELOPMENTS. . 18
A. Principal Proceedings in the Cases . . . . . . . . 18
1. Stay of Litigation. . . . . . . . . . . . . . 18
2. Executory Contracts . . . . . . . . . . . . . 18
3. Computer Bay Trustee's Claim. . . . . . . . . 19
4. The Debtors' Exclusivity Period . . . . . . . 19
5. Setting of the Bar Date for
Prepetition Claims. . . . . . . . . . . . . . 20
B. Other Recent Developments. . . . . . . . . . . . . 20
1. Securities Related Litigation . . . . . . . . 20
2. Patent Related Proceedings. . . . . . . . . . 22
3. Other Proceedings . . . . . . . . . . . . . . 23
V. PROPERTIES OF THE DEBTORS . . . . . . . . . . . . . . . 24
VI. SELECTED OPERATING AND FINANCIAL DATA . . . . . . . . . 26
A. Operating Results for Fiscal Years Ended 1995,
1994 and 1993. . . . . . . . . . . . . . . . . . . 26
B. Unaudited Operating Results for First Three
Quarters of Fiscal 1996. . . . . . . . . . . . . . 29
C. Net Worth. . . . . . . . . . . . . . . . . . . . . 31
D. Liquidity and Capital Resources. . . . . . . . . . 31
VII. SUBSTANTIVE CONSOLIDATION OF SPECTRUM AND CELLULAR. . . 34
VIII. SUMMARY OF THE PLAN. . . . . . . . . . . . . . . . . . 35
A. Means of Execution of the Plan . . . . . . . . . . 35
B. General Description of Reorganized
Spectrum Stock . . . . . . . . . . . . . . . . . . 36
1. Authorized and Issued Reorganized
Spectrum Stock. . . . . . . . . . . . . . . . 36
a. Reorganized Spectrum Common Stock. . . . 36
b. Class A Preferred Stock. . . . . . . . . 37
c. Preferred Stock. . . . . . . . . . . . . 37
2. Voting Rights of Reorganized Spectrum Stock . 38
a. Reorganized Spectrum Common Stock and
Class A Preferred Stock Held by the
Disbursing Agent or Class Action
Trustee. . . . . . . . . . . . . . . . . 38
b. Manner of Voting; Election and Removal
of Directors . . . . . . . . . . . . . . 39
c. Class Voting . . . . . . . . . . . . . . 39
d. Quorum . . . . . . . . . . . . . . . . . 39
3. Restrictions on Transferability of Shares of
Reorganized Spectrum Stock. . . . . . . . . . 39
4. Legend on Certificates. . . . . . . . . . . . 40
a. Legend on Class A Preferred Stock. . . . 40
b. Legend on Reorganized Spectrum
Common Stock . . . . . . . . . . . . . . 40
5. Transactions with Related Parties . . . . . . 41
6. Estimated Equity Value. . . . . . . . . . . . 42
7. Reverse Stock Split . . . . . . . . . . . . . 42
8. Fractional Shares . . . . . . . . . . . . . . 42
9. Rights Plan . . . . . . . . . . . . . . . . . 43
C. Certain Features of Amended Spectrum Certificate
and Amended Spectrum Bylaws. . . . . . . . . . . . 45
1. Summary . . . . . . . . . . . . . . . . . . . 45
2. The Evaluation Provision. . . . . . . . . . . 46
3. The Consent Provision . . . . . . . . . . . . 46
4. The Shareholder Meeting Provision . . . . . . 47
5. The Classified Board Provision. . . . . . . . 47
6. The Director Removal Provision. . . . . . . . 48
7. The Business Combination Provision. . . . . . 48
8. The Liability Provision . . . . . . . . . . . 49
9. The Bylaw Amendment Provision . . . . . . . . 49
10. The Restriction on Transfer of Reorganized
Spectrum Stock Provision . . . . . . . . . . 50
11. The Amendment Provision . . . . . . . . . . . 51
12. Other Provisions. . . . . . . . . . . . . . . 52
a. Quorum . . . . . . . . . . . . . . . . . 52
b. Ordinary Action by the Board . . . . . . 52
c. Issuance of Rights and Options to Purchase
Shares . . . . . . . . . . . . . . . . . 52
d. Supermajority Requirement. . . . . . . . 52
D. General Description of the Treatment of Claims . . 54
1. Unclassified Claims and Distributions . . . . 54
a. Administrative Claims. . . . . . . . . . 54
b. Priority Tax Claims. . . . . . . . . . . 55
2. Classification of Claims and Distributions. . 55
a. General Description. . . . . . . . . . . 55
b. Priority Nontax Claims (Class 1) . . . . 55
c. Unsecured Claims (Class 2) . . . . . . . 55
d. Class Action Claims (Class 3). . . . . . 56
e. Other Securities Claims (Class 4). . . . 56
f. Equity Interests (Class 5) . . . . . . . 56
g. Equitably Subordinated Claims (Class 6). 57
3. Objections to Claims. . . . . . . . . . . . . 57
4. Estimation of and Reserve for Disputed
Claims and Interests. . . . . . . . . . . . . 57
E. Distributions under the Plan . . . . . . . . . . . 58
1. Funding of the Plan . . . . . . . . . . . . . 58
2. Fractional Shares . . . . . . . . . . . . . . 58
3. Unclaimed Distributions . . . . . . . . . . . 58
F. Treatment of Executory Contracts and Unexpired
Leases . . . . . . . . . . . . . . . . . . . . . . 59
1. Assumption of Executory Contracts and Unexpired
Leases. . . . . . . . . . . . . . . . . . . . 59
2. Bar to Rejection Damages. . . . . . . . . . . 59
3. Indemnification Obligations to Be Assumed . . 59
4. Reorganized Spectrum's Liabilities. . . . . . 60
a. Effect of Implementation of the Plan on
Existing Employment Agreements . . . . 60
b. Contracts Entered Into on or After the
Petition Date. . . . . . . . . . . . . . 60
G. Adoption of Certain Compensation Plans . . . . . . 60
1. Stock Incentive Plan. . . . . . . . . . . . . 60
2. Incentive Deferral Plan . . . . . . . . . . . 66
IX. CERTAIN FACTORS TO BE CONSIDERED. . . . . . . . . . . . 68
A. Reorganized Spectrum's Business Plan . . . . . . . 69
1. Management's Vision . . . . . . . . . . . . . 69
2. Management's Strategic Plan . . . . . . . . . 69
3. The Wireless Data Industry. . . . . . . . . . 70
4. Industry Growth . . . . . . . . . . . . . . . 72
5. Summary of Reorganized Spectrum's Technology. 72
6. Marketing and Product Plan. . . . . . . . . . 74
7. Competition . . . . . . . . . . . . . . . . . 75
B. Certain Risk Factors Affecting Business Plan . . . 76
1. Financial Difficulties. . . . . . . . . . . . 76
2. Competiton. . . . . . . . . . . . . . . . . . 76
3. Legal Expenses and Risks Associated with
Proprietary Technology. . . . . . . . . . . . 76
4. Unit Sales Forecast . . . . . . . . . . . . . 76
5. Marketing Channels. . . . . . . . . . . . . . 77
6. Pricing . . . . . . . . . . . . . . . . . . . 77
7. Renegotiation of Existing Licenses. . . . . . 77
8. Certain Litigation. . . . . . . . . . . . . . 77
9. Staffing. . . . . . . . . . . . . . . . . . . 77
C. Major Assumptions. . . . . . . . . . . . . . . . . 78
1. Product and Licensing Business. . . . . . . . 78
2. Costs of Goods Sold . . . . . . . . . . . . . 78
3. Selling, General and Administrative Expenses
(All Other Operating Expenses). . . . . . . 78
4. Other Income. . . . . . . . . . . . . . . . . 79
5. Taxes . . . . . . . . . . . . . . . . . . . . 79
6. Balance Sheet Assumptions . . . . . . . . . . 79
D. Management's Summary Projections . . . . . . . . . 80
E. Postconfirmation Liquidity . . . . . . . . . . . . 83
F. Other Risk Factors to Be Considered. . . . . . . . 83
1. Inability to Pay Administrative and Priority
Claims. . . . . . . . . . . . . . . . . . . . 83
2. Lack of Established Market for the Common
Stock . . . . . . . . . . . . . . . . . . . . 84
3. Potential Unavailability of Substantial Net
Operating Loss Carryovers . . . . . . . . . . 84
4. Rights of Holders of Class A Stock. . . . . . 84
X. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS. . . 85
A. Initial Issuance of Reorganized Spectrum Stock under
the Plan . . . . . . . . . . . . . . . . . . . . . 85
B. Resale of Reorganized Spectrum Stock . . . . . . . 85
1. Effect of Applicable Law. . . . . . . . . . . 85
a. Controlling Persons. . . . . . . . . . . 85
b. Accumulators and Distributors. . . . . . 86
c. Syndicators. . . . . . . . . . . . . . . 87
d. Dealers. . . . . . . . . . . . . . . . . 87
2. Effect of Amended Spectrum Certificate. . . . 87
XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN . . 88
A. Tax Consequences to the Debtors. . . . . . . . . . 88
1. Debtors' Existing Tax Attributes. . . . . . . 88
Matters Affecting Utilization of the Debtors' Tax
Attributes. . . . . . . . . . . . . . . . . . 89
a. "Ownership Change" Under Tax Code Section
382. . . . . . . . . . . . . . . . . . . 89
b. Effect of Tax Code Section 382 . . . . . 89
c. The Bankruptcy Exception under Tax Code
Section 382(l)(5). . . . . . . . . . . 90
d. Subsequent Ownership Changes . . . . . . 91
e. Tax Code Section 269 . . . . . . . . . . 91
f. Discharge of Indebtedness. . . . . . . . 91
B. Tax Consequences to the Creditors. . . . . . . . . 91
1. Creditors Receiving Only Cash . . . . . . . . 92
2. Creditors Receiving Common Stock. . . . . . . 92
3. Treatment of Interest . . . . . . . . . . . . 93
XII. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN . . . 93
XIII. CONFIRMATION OF THE PLAN . . . . . . . . . . . . . . . 94
A. Confirmation Hearing . . . . . . . . . . . . . . . 94
B. Requirements for Confirmation of the Plan. . . . . 94
C. Definition of Impairment . . . . . . . . . . . . . 97
D. Vote Required for Class Acceptance . . . . . . . . 98
E. Cramdown . . . . . . . . . . . . . . . . . . . . . 98
F. Certain Effects of Confirmation of the Plan by the
Bankruptcy Court . . . . . . . . . . . . . . . . . 99
1. Continuing Jurisdiction of the
Bankruptcy Court. . . . . . . . . . . . . . . 99
2. Discharge of Claims Against the Debtors
and the Officers and Directors. . . . . . . . 99
3. Disallowance of Contribution Claims . . . . .100
4. Rights of Subordination . . . . . . . . . . .100
5. Exclusions of Liability . . . . . . . . . . .100
6. Payment of Fees and Expenses. . . . . . . . .101
a. Professional Fees and Expenses . . . . .101
b. United States Trustee's Fees . . . . . .101
7. Amendments and Modifications. . . . . . . . .101
XIV. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF
PLAN. . . . . . . . . . . . . . . . . . . . . . . . . .101
A. Continuation of the Cases. . . . . . . . . . . . .102
B. Alternative Plans of Reorganization. . . . . . . .102
C. Liquidation under Chapter 7 or Chapter 11. . . . .102
XV. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . .104
LIST OF EXHIBITS
A. Consolidated Plan of Reorganization Proposed by Spectrum
Information Technologies, Inc. and Spectrum Cellular
Corporation Dated as of: [ ], 1996
B. Spectrum Information Technologies, Inc.'s Annual Report to
the Securities and Exchange Commission on Form 10-K for the
year ended March 31, 1995, as amended by Form 8-K dated
April 27, 1995 (on file with the Bankruptcy Court and the
Securities and Exchange Commission and incorporated by
reference herein)
C. Spectrum Information Technologies, Inc.'s Quarterly Report
to the Securities and Exchange Commission on Form 10-Q for
the quarter ended June 30, 1995, as amended and restated by
Form 10-Q/A dated October 3, 1995 and by Form 8-K dated
October 17, 1995 (each on file with the Bankruptcy Court and
the Securities and Exchange Commission and incorporated by
reference herein)
D. Spectrum Information Technologies, Inc.'s Quarterly Report
to the Securities and Exchange Commission on Form 10-Q for
the quarter ended September 30, 1995 (on file with the
Bankruptcy Court and the Securities and Exchange Commission
and incorporated by reference herein)
E. Spectrum Information Technologies, Inc.'s Quarterly Report
to the Securities and Exchange Commission on Form 10-Q for
the quarter ended December 31, 1995 (on File with the
Bankruptcy Court and the Securities and Exchange Commission
and incorporated by reference herein)
F. Liquidation Analysis
G. Parties in Interest
H. Amended Spectrum Bylaws
I. Amended Spectrum Certificate
J. Stock Incentive Plan
K. Incentive Deferral Plan
DISCLOSURE STATEMENT WITH RESPECT TO THE CONSOLIDATED
PLAN OF REORGANIZATION PROPOSED BY SPECTRUM
INFORMATION TECHNOLOGIES, INC. AND SPECTRUM
CELLULAR CORPORATION DATED AS OF: [ ], 1996
SECTION I
INTRODUCTION
A. General Information
Spectrum Information Technologies, Inc., a corporation
organized under the laws of the State of Delaware ("Spectrum" or
the "Company") and Spectrum Cellular Corporation, a corporation
organized under the laws of the State of Delaware ("Cellular"),
the debtors and debtors in possession (the "Debtors") in the
above-referenced jointly administered Chapter 11 cases (the
"Chapter 11 Cases) (each a "Proponent" and together, the
"Proponents") submit this Disclosure Statement with Respect to
the Consolidated Plan of Reorganization Proposed by Spectrum
Information Technologies, Inc. and Spectrum Cellular Corporation
dated as of: [ ], 1996 (the "Plan") in connection
with the solicitation of acceptances for the Plan (the
"Disclosure Statement"). A copy of the Plan is attached hereto
as Exhibit A. Capitalized terms contained herein have the
meanings ascribed to them in the Plan, unless otherwise defined
herein.
This Disclosure Statement is being transmitted by the
Proponents to all known holders of Claims or Interests with
respect to the Debtors who have a right to vote (as set forth in
"Who May Vote and Instructions for Voting," Section I(B)), to
provide adequate information to enable them to make an informed
decision in exercising their right to vote for acceptance or
rejection of the Plan. On [ ], after notice and a
hearing, the United States Bankruptcy Court for the Eastern
District of New York (the "Bankruptcy Court"), approved this
Disclosure Statement as containing information, of a kind and in
sufficient detail, adequate to enable the holders of Claims or
Interests with respect to the Debtors to make an informed
judgment regarding acceptance or rejection of the Plan. THE
BANKRUPTCY COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT
CONSTITUTE EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF
THE INFORMATION CONTAINED HEREIN OR AN ENDORSEMENT OF THE PLAN BY
THE BANKRUPTCY COURT.
THE BOARDS OF DIRECTORS OF THE DEBTORS HAVE APPROVED
THE PLAN AND RECOMMEND THAT THE HOLDERS OF CLAIMS OR INTERESTS
UNDER THE PLAN WHO ARE ENTITLED TO VOTE THEREON VOTE IN FAVOR
THEREOF.
IF THE PLAN IS NOT CONFIRMED, THERE CAN BE NO ASSURANCE
THAT THE DEBTORS OR ANY OTHER PARTIES IN INTEREST WOULD BE ABLE
TO FORMULATE AND CONFIRM ANY OTHER PLAN. IN PARTICULAR, THERE
CAN BE NO ASSURANCE THAT THE DEBTORS WILL HAVE SUFFICIENT CASH TO
SUPPORT OPERATIONS UNTIL ANOTHER PLAN IS PREPARED, CONFIRMED, AND
IMPLEMENTED, AND THERE CAN BE NO ASSURANCE THAT THE DEBTORS WOULD
BE ABLE TO OBTAIN ADDITIONAL FUNDING NECESSARY TO CONTINUE
OPERATIONS UNTIL SUCH TIME. AS A RESULT, THE DEBTORS' CHAPTER 11
CASES MAY BE CONVERTED TO CHAPTER 7 CASES, OR THE DEBTORS COULD
BE FORCED TO LIQUIDATE IN CHAPTER 11, WHICH IN EITHER EVENT WOULD
LIKELY RESULT IN THE ELIMINATION OF ANY RECOVERY WHATSOEVER FROM
THE DEBTORS BY THE HOLDERS OF CLASS ACTION CLAIMS, SECURITIES
CLAIMS AND HOLDERS OF INTERESTS AND SUBSTANTIALLY REDUCED
RECOVERIES BY HOLDERS OF ADMINISTRATIVE CLAIMS, PRIORITY TAX
CLAIMS , PRIORITY NONTAX CLAIMS (SUCH PRIORITY TAX AND NONTAX
CLAIMS REFERRED TO COLLECTIVELY AS "PRIORITY CLAIMS") AND
UNSECURED CLAIMS. SEE "LIQUIDATION ANALYSIS," EXHIBIT E.
THERE CAN BE NO ASSURANCE THAT ANY PLAN OF
REORGANIZATION OF THE DEBTORS CAN BE CONFIRMED OR WILL BECOME
EFFECTIVE. IN ANY EVENT, EVEN IF THE PLAN IS CONFIRMED, HOLDERS
OF CLASS ACTION SECURITIES CLAIMS, SUBORDINATED CLAIMS AND/OR
INTERESTS WILL NOT RECEIVE ANY CASH DISTRIBUTION FROM THE ESTATE;
HOLDERS OF SUCH CLASS ACTION CLAIMS, SECURITIES CLAIMS,
SUBORDINATED CLAIMS AND/OR INTERESTS WILL, HOWEVER, RECEIVE
SECURITIES UNDER THE PLAN IF IT IS CONFIRMED.
B. Who May Vote and Instructions for Voting
A holder of an impaired Claim that is not disputed or
unliquidated is entitled to vote its Claim, respectively, to
accept or reject the Plan and such vote is important. A Claim
that will not be paid in full or otherwise falls within the
definition of "impaired" is considered "impaired." See
"Confirmation of the Plan - Definition of Impairment," Section
XIII(C). Under the Plan, holders of Claims in Classes 2, 4, and
6 and Interests in Class 5 are impaired (the "Impaired Classes"
and, individually, an "Impaired Class") and may vote to the
extent such Claim is not unliquidated or disputed or, in the case
of Interests, to the extent such Interests are reflected on the
records of the Stock Transfer Agreement on the Record Date.
HOLDERS OF CLAIMS IN CLASSES 1 AND 3 ARE NOT IMPAIRED, ARE DEEMED
TO HAVE ACCEPTED THE PLAN AND NEED NOT VOTE. See "Summary of the
Plan - General Description of the Treatment of Claims," Section
VIII(D).
The holder of an impaired Claim entitled to vote, after
carefully reviewing this Disclosure Statement, including the Plan
and other exhibits attached hereto, should indicate acceptance or
rejection of the Plan by voting in favor of or against the Plan
on the enclosed ballot, and returning the ballot to [ ],
the Proponents' information agent, at the address set forth on
the ballot, in the enclosed return envelope so that it is
received by the Proponents' information agent no later than 5:00
p.m., Eastern Standard Time, on [ ] (the "Voting
Deadline"). Only the beneficial owners of Interests are entitled
to vote to accept or reject the Plan. The record holders of
Interests will receive Disclosure Statements and ballots for
voting on the Plan, together with instructions for (i) voting on
the Plan if the record holder is also the beneficial owner of the
Interest or (ii) disseminating the Disclosure Statement and
ballots to the beneficial owner or owners represented by such
record holder and compiling a master ballot on such beneficial
owners' behalf. The record holders of Interests entitled to vote
should indicate acceptance or rejection of the Plan in accordance
with the instructions provided with their ballots and return such
ballots to the Proponents' information agent by the Voting
Deadline. Any questions with respect to the procedures for
voting Allowed Interests or requests for additional ballots or
Disclosure Statements for beneficial owners of such Interests
should be directed to the Proponents' information agent. ANY
BALLOT RECEIVED BY THE PROPONENTS' INFORMATION AGENT THAT DOES
NOT INDICATE ACCEPTANCE OR REJECTION OF THE PLAN WILL BE DEEMED
TO CONSTITUTE ACCEPTANCE OF THE PLAN. ANY BALLOTS RECEIVED BY
THE PROPONENTS' INFORMATION AGENT AFTER 5:00 P.M., EASTERN
STANDARD TIME, ON [ ], WILL NOT BE COUNTED.
IF YOU ARE THE HOLDER OF AN UNDISPUTED LIQUIDATED CLAIM
IN AN IMPAIRED CLASS, THE ENCLOSED BALLOT SETS FORTH A CLAIM
AMOUNT BASED EITHER ON YOUR PROOF OF CLAIM OR ON THE DEBTORS'
SCHEDULES OF LIABILITIES. BY INCLUDING SUCH CLAIM AMOUNT ON THE
BALLOT, DEBTORS ARE NOT ADMITTING THAT YOU HAVE A CLAIM IN THE
STATED OR ANY OTHER AMOUNT AND ARE NOT WAIVING ANY RIGHTS THEY
MAY HAVE TO OBJECT TO YOUR VOTING OF THE CLAIM IN SUCH AMOUNT OR
ANY OTHER AMOUNT OR YOUR RECOVERY UNDER THE PLAN BASED ON SUCH
AMOUNT OR ANY OTHER AMOUNT.
Ballots have been sent to the holders in all Impaired
Classes that are entitled to vote on the Plan, including holders
of Claims as to which the Debtors have not yet objected but
retain the right to do so after confirmation of the Plan, but
excluding holders of Claims that are unliquidated or indicate a
$0.00 amount as reflected in the Proofs of Claim that have been
filed with respect thereto. The Bankruptcy Code provides that
only the holders of Allowed Claims or Interests (or Claims or
Interests that are deemed Allowed) are entitled to vote on the
Plan. A Claim as to which an objection has been filed and is
still pending is a Disputed Claim and is not entitled to vote
unless the Bankruptcy Court temporarily allows the Claim in an
amount which it deems proper solely for the purpose of voting on
the Plan.
Although some holders of Disputed Claims may receive
ballots, their votes will not be counted if any objection has
been filed on or before [ ] and the Bankruptcy
Court does not rule thereon in the Claimant's favor or, with
respect to unliquidated claims, temporarily allow such Claims for
purposes of voting on the Plan. Creditors who believe they are
entitled to vote all or a portion of their Disputed Claims must
file an application with the Bankruptcy Court for such a
determination prior to the Confirmation Date.
The fact that you receive a ballot or ballots does not
signify that your Claim has been allowed for any purposes
including final allowance or for the purpose of voting.
C. Confirmation of the Plan
For the Plan to be confirmed, it must be accepted by
each Class of Allowed Claims and Interests whose rights are
impaired by the Plan, except as otherwise set forth below. Under
the Bankruptcy Code, a Class of Claims is deemed to have accepted
the Plan if the Plan is accepted by creditors of such Class that
hold at least two-thirds in amount and more than one-half in
number of the Allowed Claims of such Class that have voted on the
Plan. Under the Bankruptcy Code, a Class of Interests is deemed
to have accepted the Plan if the Plan is accepted by holders of
such Interests that hold at least two-thirds in amount of the
Allowed Interests in such Class that have voted on the Plan.
Regardless of whether the requisite acceptances with
respect to the Plan are obtained for all of the Classes that are
being requested to vote, the Proponents, in accordance with
section 1129(b) of the Bankruptcy Code, intend to request the
Bankruptcy Court to confirm the Plan, provided that at least one
impaired class has accepted the Plan, because the Plan does not
discriminate unfairly and is fair and equitable with respect to
each class of Claims and Interests that is impaired. See
"Confirmation of the Plan - Cramdown," Section XIII(E).
The Bankruptcy Court has entered an order fixing
[ ], 1996 at [ ] Eastern Standard
Time, Courtroom 313, United States Courthouse, 75 Clinton Street,
Brooklyn, New York, as the date, time and place for a hearing on
confirmation of the Plan (the "Confirmation Hearing"), and filing
by 5:00 p.m. Eastern Standard Time, on [ ], 1996,
as the time by which all objections to confirmation of the Plan
must be filed with the Court and received by the Proponents. Any
objections to confirmation of the Plan must be in writing and
must be filed and served in accordance with the procedure
described below. See "Confirmation of the Plan - Confirmation
Hearing," Section XIII(A).
D. Contents of the Disclosure Statement
NO PARTY IS AUTHORIZED TO GIVE INFORMATION WITH RESPECT
TO THE PLAN OTHER THAN THAT CONTAINED IN THIS DISCLOSURE
STATEMENT. NO REPRESENTATIONS CONCERNING THE DEBTORS, THEIR
BUSINESS OPERATIONS OR THE VALUE OF THEIR PROPERTY HAVE BEEN
AUTHORIZED, OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT.
ANY INFORMATION, REPRESENTATIONS OR INDUCEMENTS MADE TO OBTAIN
YOUR ACCEPTANCE THAT ARE OTHER THAN OR INCONSISTENT WITH THE
INFORMATION CONTAINED HEREIN AND IN THE PLAN SHOULD NOT BE RELIED
UPON BY ANY HOLDER OF A CLAIM IN VOTING ON THE PLAN.
UNAUTHORIZED INFORMATION, REPRESENTATIONS OR INDUCEMENTS SHOULD
BE REPORTED TO THE PROPONENTS OR THEIR RESPECTIVE COUNSEL WHO
SHALL DELIVER SUCH INFORMATION TO THE BANKRUPTCY COURT FOR SUCH
ACTION AS IT MAY DEEM APPROPRIATE.
THIS DISCLOSURE STATEMENT CONTAINS A SUMMARY OF CERTAIN
PROVISIONS OF THE PLAN, CERTAIN OTHER DOCUMENTS AND CERTAIN
FINANCIAL INFORMATION. WHILE THE PROPONENTS BELIEVE THAT THESE
SUMMARIES ARE FAIR AND ACCURATE IN ALL MATERIAL RESPECTS AND
PROVIDE ADEQUATE INFORMATION WITH RESPECT TO DOCUMENTS
SUMMARIZED, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY
DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS. FURTHER,
CERTAIN OF THE FINANCIAL INFORMATION CONTAINED HEREIN MAY BE
DATED AND HAS NOT BEEN SUBJECT TO AN AUDIT. THE PROPONENTS HAVE
MADE EVERY EFFORT TO BE ACCURATE IN ALL MATERIAL RESPECTS;
HOWEVER, THE PROPONENTS ARE UNABLE TO WARRANT OR REPRESENT THAT
THE INFORMATION CONTAINED HEREIN IS WITHOUT ANY MATERIAL
INACCURACIES. THE PROPONENTS CAUTION THAT, ALTHOUGH THE
PROJECTED FINANCIAL STATEMENTS HAVE AS THEIR BASIS SPECTRUM'S
ASSESSMENT OF ITS BUSINESS, NO REPRESENTATIONS CAN BE MADE WITH
RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY TO
ACHIEVE THE PROJECTED RESULTS. MANY OF THE ASSUMPTIONS UPON
WHICH THESE PROJECTIONS ARE BASED ARE SUBJECT TO MAJOR
UNCERTAINTIES. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE,
UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY OCCUR AND,
ACCORDINGLY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE
PROJECTION PERIOD WILL VARY FROM THE PROJECTED RESULTS AND THE
VARIATIONS MAY BE MATERIAL.
THIS DISCLOSURE STATEMENT WAS APPROVED BY THE
BANKRUPTCY COURT, AFTER NOTICE AND A HEARING, AS CONTAINING
ADEQUATE INFORMATION AS DEFINED IN THE BANKRUPTCY CODE. EACH
HOLDER OF AN IMPAIRED CLAIM OR INTEREST ENTITLED TO VOTE SHOULD
REVIEW THE ENTIRE PLAN AND THIS DISCLOSURE STATEMENT (AND THE
EXHIBITS THERETO AND HERETO) BEFORE CASTING ITS BALLOT.
SECTION II
OVERVIEW OF THE PLAN
THIS DISCLOSURE STATEMENT AND THE PLAN ASSUME THAT THE
PLAN IS CONFIRMED BY THE BANKRUPTCY COURT ON
[ ], 1996 AND THAT THE EFFECTIVE DATE WILL
OCCUR ON OR BEFORE [ ]. THE DEBTORS CONTINUE
TO FACE SUBSTANTIAL UNCERTAINTIES CONCERNING PENDING LITIGATION
WHICH COULD AFFECT THEIR ABILITY TO CONFIRM AND IMPLEMENT THE
PLAN. OTHER SUBSTANTIAL UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, CONTINUING SIGNIFICANT OPERATING LOSSES THAT CONTINUE
TO AFFECT ADVERSELY LIQUIDITY AND EXPENSES ASSOCIATED WITH
BANKRUPTCY. SEE "SELECTED OPERATING AND FINANCIAL DATA -
LIQUIDITY AND CAPITAL RESOURCES," SECTION VI(D).
THE CONFIRMATION AND EFFECTIVENESS OF THE PROPOSED PLAN
ARE SUBJECT TO MATERIAL CONDITIONS PRECEDENT, SOME OF WHICH MAY
NOT BE SATISFIED. SATISFACTION OF THESE CONDITIONS PRECEDENT
REMAINS TO BE NEGOTIATED OR LITIGATED. THESE CONDITIONS
PRECEDENT INCLUDE, AMONG OTHERS, SUCCESSFUL RESOLUTION OF THE
LITIGATION DESCRIBED IN "CONDITIONS PRECEDENT TO EFFECTIVENESS OF
THE PLAN," SECTION XII. THESE AND OTHER ISSUES MUST BE RESOLVED
TO THE SATISFACTION OF THE PROPONENTS AND IN A MANNER CONSISTENT
WITH AVAILABLE RESOURCES BEFORE CONFIRMATION OF THE PLAN. THERE
CAN BE NO ASSURANCE THAT THESE ISSUES WILL BE RESOLVED TO THE
SATISFACTION OF THE PROPONENTS; IN THE EVENT THEY ARE NOT
SATISFACTORILY RESOLVED, THE PLAN MAY NOT BE ABLE TO BE CONFIRMED
AND/OR BECOME EFFECTIVE.
EVEN IF ALL SUCH ISSUES ARE SATISFACTORILY RESOLVED,
THERE CAN BE NO ASSURANCE THAT THE PLAN CAN BE CONFIRMED AND
IMPLEMENTED. THE DEBTORS CONTINUE TO FACE SUBSTANTIAL
UNCERTAINTIES AND TO SUFFER SIGNIFICANT OPERATING LOSSES AND
BANKRUPTCY RELATED EXPENSES. AS A CONSEQUENCE THERE CAN BE NO
ASSURANCE THAT DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO
CONTINUE OPERATIONS UNTIL THE PLAN CAN BE CONFIRMED AND
IMPLEMENTED.
MOREOVER, THE PLAN CONTEMPLATES THAT ALL ADMINISTRATIVE
CLAIMS, PRIORITY CLAIMS AND UNSECURED CLAIMS, TOGETHER WITH
CERTAIN OTHER COSTS, WILL BE PAID IN CASH. IN THE EVENT THAT THE
AGGREGATE AMOUNT OF ADMINISTRATIVE AND PRIORITY CLAIMS TOGETHER
WITH THE AMOUNT OF UNSECURED CLAIMS AND CERTAIN COSTS, EXCEEDS
THE AMOUNT OF CASH AVAILABLE TO THE DEBTORS, THE PLAN CANNOT BE
CONFIRMED WITHOUT THE CONSENT OF THE HOLDERS OF SUCH
ADMINISTRATIVE AND PRIORITY CLAIMS IN ADDITION TO OTHER HOLDERS
ENTITLED TO VOTE UNDER THE PLAN. SEE "SUMMARY OF THE PLAN -
GENERAL DESCRIPTION OF THE TREATMENT OF CLAIMS," SECTION VIII(D).
IN ANY EVENT, NO ASSURANCE CAN BE GIVEN THAT THE DEBTORS WILL
HAVE SUFFICIENT FUNDS AVAILABLE TO MAKE ALL PAYMENTS NECESSARY
FOR CONFIRMATION AND IMPLEMENTATION OF THE PLAN.
A. Summary of Distributions Under the Plan
The distributions under the Plan to each class are
summarized in the following table, which is qualified by
reference to the more detailed and complete descriptions set
forth elsewhere in this Disclosure Statement and in the Plan.
Preliminary and Estimated
Table 1
Brief Descriptions of Classes and Their Distributions
Refer to text of Plan and Disclosure Statement
for more complete information
Description of Estimated Amount
Distribution Under of Claims
Class Description the Plan in Class
- ----------------- ------------------ ----------------
Class 1 -- See Section $ 6,838,269
Priority Nontax VIII(D)(2)(b)
Claims
Cash equal to 100%
of Allowed Claim
Amount
Class 2 -- See Section $ 7,438,269(1)
Unsecured Claims VIII(D)(2)(c)
Cash and Reorganized
Spectrum Common Stock
equal to 100% of the
Allowed Claim Amount
Class 3 -- See Section $675,669,900
Class Action Claims VIII(D)(2)(d)
Cash and Class A
Prefered Stock in
accordance with the
Class Action
Settlement
Class 4 -- See Section $ 6,953,937(2)
Other Securities VIII(D)(2)(e)
Claims
Reorganized Spectrum
Common Stock
Class 5 -- See Section $ 9,201,054
Equity Interests VIII(D)(2)(f)
Reorganized Spectrum
Common Stock
Class 6 -- See Section $ 0
Equitably VIII(D)(2)(g)
Subordinated
Claims Reorganized Spectrum
Common Stock
__________________
(1) Includes disputed and undisputed Claims. See "Certain
Factors to be Considered -- Major Assumptions," Section
IX(C) and "Alternatives to Confirmation and Consummation of
the Plan -- Liquidation under Chapter 7 or Chapter 11,"
Section XIV(C).
(2) All such Claims are disputed.
Administrative Claims and Priority Tax Claims have not
been classified under the Plan and are excluded from the classes
in accordance with section 1123(a)(1) of the Bankruptcy Code.
B. Corporate Structure
1. Merger
The Plan contemplates substantive consolidation of the
estates of Spectrum and Cellular into a single bankruptcy estate
and the merger of Spectrum and Cellular into a single surviving
corporation, Reorganized Spectrum, continuing in existence under
the Delaware General Corporation Law. The Amended Spectrum
Certificate and Amended Spectrum Bylaws will each become
effective on the Effective Date.
2. Capital Structure of Reorganized Spectrum
The Plan contemplates authorization of 10 million
shares of Reorganized Spectrum Common Stock, $.001 par value, of
which a number equal to the number of shares of Distributable
Common Stock will be issued and deposited with the Disbursing
Agent on or before the Effective Date for the initial
distribution to holders of Allowed Claims and Interests in
Classes 2, 4, 5 and 6 in accordance with the Plan. Holders of
Existing Spectrum Common Stock will receive one share of
Reorganized Spectrum Common Stock in exchange for each 100 shares
of Existing Spectrum Common Stock pursuant to the Reverse Stock
Split. Reorganized Spectrum shall reserve sufficient shares of
such stock as may be required for distribution to holders of
Disputed Claims and Disputed Interests in Classes 2, 4, 5 and 6,
pending the allowance or disallowance of such Disputed Claims or
Interests. See "Summary of the Plan - General Description of the
Treatment of Claims -- Estimation Of And Reserve For Disputed
Claims And Interests," Section VIII(D)(5).
Reorganized Spectrum shall also authorize and reserve
for issuance, pursuant to the Stock Incentive Plan and Incentive
Deferral Plan, an aggregate number of shares of Reorganized
Spectrum Common Stock equal to 2/9 of the aggregate number of
shares of Distributable Common Stock and Class A Preferred Stock.
See "Summary of the Plan - Means of Execution of the Plan,"
Section VIII(A).
The Plan also contemplates authorization of 1 million
shares of Class A Preferred Stock, $.001 par value, a portion of
which equal to the number of shares of Distributable Common Stock
will be issued to the Class Action Trustee for the benefit of the
Class Action Plaintiffs in accordance with the Class Action
Settlement and Plan. For two years after the Effective Date,
holders of Class A Preferred Stock will have a liquidation
preference over Reorganized Spectrum Common Stock, to the extent
that, in the event that within two years after the Effective
Date, Reorganized Spectrum again becomes a debtor in a bankruptcy
case under the Bankruptcy Code (unless the case is an involuntary
case and is dismissed before an order for relief is entered
therein against Reorganized Spectrum), interests of holders of
Class A Preferred Stock will have priority in such proceedings
over interests of holders of Reorganized Spectrum Common Stock.
At the expiration of the two-year preference period, Class A
Preferred Stock will automatically convert to and become
Reorganized Spectrum Common Stock. Holders of Class A Preferred
Stock will be entitled to vote in the same manner as holders of
Reorganized Spectrum Common Stock, although, for the period of
time that the Class A Preferred Stock is in the hands of the
Class Action Trustee and has not been distributed to members of
the class, such stock will be required to be voted in the same
proportions as the holders of the Reorganized Spectrum Common
Stock have voted. Secondary market trading by the public in the
Class A Preferred Stock will be permitted, subject to generally
applicable securities laws, but the Class A Preferred Stock will
not (by reason of NASD restrictions) be listed by Reorganized
Spectrum on the Nasdaq SmallCap Market or on any other exchange
or market. In addition, during the two-year preference period,
no person may be elected as a director unless he receives a
plurality of the votes cast by the holder of Reorganized Spectrum
Common Stock as well as a plurality of the votes cast by the
holders of Class A Preferred Stock, and no person may be removed
as a director by the holders of Class A Preferred Stock, unless
the holders of a majority of the outstanding Reorganized Spectrum
Common Stock vote in favor of such removal. See "Summary of the
Plan - General Description of Reorganized Spectrum Stock,"
Section VIII(B).
Additionally, the Plan contemplates authorization of 2
million shares of Preferred Stock, issuable in series as the
Board may by resolution authorize, with such designations,
relative rights, preferences and limitations as the Board may
specify in such resolution. The resolution authorizing such
issuance shall not require the approval of the shareholders of
Reorganized Spectrum. See "Summary of the Plan - General
Description of Reorganized Spectrum Stock - Authorized and Issued
Reorganized Spectrum Stock - Preferred Stock," Section
VIII(B)(1)(c).
3. Board of Directors and Officers
The individuals currently serving as directors and
officers of Spectrum will serve as the directors and officers of
Reorganized Spectrum commencing on the Effective Date. See
"General Information about the Debtors' Business; Restructuring
Efforts and Filing of the Chapter 11 Cases - Description of the
Debtors - Directors and Officers," Section III(A)(2), for the
list of such individuals. This list may be amended at any time
prior to the Effective Date upon such notice as may be required
by the Bankruptcy Court. Subject to any requirement of
Bankruptcy Court approval under section 1129(a)(5) of the
Bankruptcy Code, such individuals shall continue to serve in such
capacities until removed by the Board of Directors or
stockholders of Reorganized Spectrum in accordance with
applicable state law and Reorganized Spectrum's then-existing
certificate of incorporation and bylaws.
4. Amended Spectrum Certificate and Bylaws
The Amended Spectrum Certificate contains certain
provisions affecting the rights of shareholders, corporate
governance, and the transferability of the Class A Preferred
Stock and Reorganized Spectrum Common Stock. These provisions
include, but are not limited to: (i) a requirement that
shareholders act only at a duly called annual or special meeting;
(ii) a restriction on the ability of shareholders to call special
meetings; (iii) a requirement of a classified board of directors;
(iv) a restriction allowing directors to be removed from the
board of directors only for cause; (v) supermajority voting
requirements for the approval by shareholders of certain business
combinations; (vi) supermajority voting requirements for amending
the Reorganized Spectrum Bylaws and certain provisions of the
Amended Spectrum Certificate; and (vii) supermajority voting and
quorum requirements in connection with certain actions by the
board of directors.
The Amended Spectrum Bylaws contains certain provisions
relating to the nomination of directors and notice of business to
be conducted at shareholder meetings. See "Summary of the Plan -
Certain Features of the Amended Spectrum Certificate and Amended
Spectrum Bylaws," Section VIII(c) and Exhibit H attached hereto.
5. Business Purpose; Assets
Reorganized Spectrum's Strategic Plan contemplates
transforming the Company's business from an intellectual property
company generating low annual revenues from royalty to becoming a
supplier of wireless data communications technology and software.
Key to this strategy is expanding (i) the number of data
communications devices in use that incorporate the Company's
patented cellular technology and (ii) the use of Reorganized
Spectrum's patented cellular technology, as embodied in
Reorganized Spectrum-supplied activation kits, to activate such
devices. Over time, Reorganized Spectrum intends to expand its
product offering into a complete suite of data communications
software products that can be sold to a growing user population
of wireless data services in the mobile professional and field
sales workforce.
The Company's headquarters occupy approximately 4,200
square feet of office space in an office building located in
Purchase, New York. The Company holds a lease for such offices
which expires on April 30, 1998. Cellular leases approximately
2,800 square feet in an office building located in Carrollton,
Texas, a suburb of Dallas. The lease expires on October 31,
1998.
The Company also owns certain intellectual property
rights including patents and trademarks. The Company currently
has (i) six issued U.S. patents, (ii) three issued foreign
patents, and (iii) several pending U.S. and foreign patent
applications. The Company holds patents for techniques that
compensate for the high error rate conditions common during
cellular data communication. In addition, the Company has
license agreements for the use of its patents with such licensees
as AT&T, Rockwell International and U.S. Robotics. Finally, the
Company has regularly used the following trademarks and service
marks to describe certain of its products and services and has
obtained U.S. Federal Trademark registrations for: SPECTRUM
CELLULAR (registered trademark), SPCL (registered trademark),
AXSYS (registered trademark), SPECTRUM CONNECTED (registered
trademark) and the SPECTRUM CONNECTED logo.
6. Listing, Exchange Act Reporting
The Plan contemplates that Spectrum will have applied
for a listing of the Reorganized Spectrum Common Stock on The
Nasdaq SmallCap Market, effective as of the Effective Date, which
(if effected) would facilitate public trading of the Reorganized
Spectrum Common Stock, subject to the restrictions set forth in
paragraph 7 below. No assurance can be given that any such
listing will be obtained.
Although secondary market trading by the public in the
Class A Preferred Stock will be permitted, subject to generally
applicable securities laws, the Plan contemplates that no listing
application will be made with respect to the Class A Preferred
Stock. Trading of the Class A Preferred Stock will be subject to
the restrictions set forth in paragraph 7 below.
Spectrum expects to continue to comply with the
periodic reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the Effective Date.
7. Restrictions on Transferability of Shares of
Reorganized Spectrum Stock
The Amended Spectrum Certificate limits for a period of
three years after the Effective Date the transfer of shares of
Reorganized Spectrum Stock, and any other interests that would be
treated as stock of Reorganized Spectrum under the Internal
Revenue Code of 1986, as amended (the "Tax Code") or applicable
Internal Revenue Service ("IRS") regulations, that would cause
either a person or an entity to become an owner, directly or
indirectly, of five percent or more of Reorganized Spectrum Stock
or that would increase the percentage ownership interest of such
person in Reorganized Spectrum. This limitation is intended to
prevent transfers of Reorganized Spectrum Stock from triggering
an "ownership change," as defined in section 382 of the Tax Code,
which would result in the limitation of certain potential tax
benefits available to Reorganized Spectrum. This restriction may
be waived by the Board of Directors of Reorganized Spectrum if,
in its judgment, the proposed transfer does not increase the risk
that the use of such tax benefits will be limited. It is
anticipated that limited waivers to this restriction will be
granted with respect to Reorganized Spectrum Common Stock covered
by the Incentive Deferral Plan and the Stock Incentive Plan. Any
transfer of Reorganized Spectrum Stock effected in violation of
the restrictions set forth in the Amended Spectrum Certificate
shall be deemed null and void and shall have no force and effect,
and the transferee thereof shall have no rights as a shareholder
of Reorganized Spectrum. See "Certain Federal Income Tax
Consequences of the Plan," Section XI; "Summary of the Plan -
General Description of Reorganized Spectrum Stock - Restrictions
on Transferability of Shares of Reorganized Spectrum Stock," and
"- Certain Features of the Amended Spectrum Certificate - The
Restriction on Transfer of Reorganized Spectrum Stock Provision,"
Sections VIII(B)(3) and (C)(10); and Exhibit I attached hereto.
Certificates representing shares of Reorganized
Spectrum Stock and other securities of Reorganized Spectrum
treated as stock will bear an appropriate legend with respect to
such restrictions. See "Summary of the Plan - General
Description of Reorganized Spectrum Stock-Legend on
Certificates," Section VIII(B)(4).
8. Rights Plan.
Reorganized Spectrum anticipates that it will
adopt a shareholders rights plan (a "Rights Plan") after the
Effective Date. For a discussion of such anticipated Rights
Plan, see "Summary of the Plan-General Description of Reorganized
Spectrum Common Stock-Rights Plan," Section VIII(B)(9).
SECTION III
GENERAL INFORMATION ABOUT THE
DEBTORS' BUSINESS; RESTRUCTURING EFFORTS AND FILING
OF THE CHAPTER 11 CASES
A. Description of the Debtors
1. The Operations
Spectrum is a holding company with one continuing
subsidiary, Cellular. Spectrum discontinued the operations of
Dealer Services Business Systems, Inc., d/b/a Data One, a
corporation organized under the laws of the State of Delaware
("Data One") in fiscal 1994 and Computers Unlimited of Wisconsin,
Inc., d/b/a Computer Bay, a corporation organized under the laws
of the State of Wisconsin ("Computer Bay") in fiscal 1995.
Spectrum sold its subsidiary Spectrum Global Services, Inc., a
corporation organized under the laws of the State of Delaware
("Global") on October 17, 1995. A separate, liquidating plan of
reorganization is being filed for Data One, and that plan and its
accompanying Disclosure Statement will be mailed to Data One's
creditors and its shareholders.
Spectrum, through Cellular, develops and licenses
wireless data transmission technology and designs, markets and
supervises the manufacturing of direct connect data communication
products incorporating that technology. Spectrum's wireless data
transmission technology utilizes an error-correction protocol
permitting the reliable transmission of electronic data between
two computers over cellular telephone networks and other wireless
communication systems.
2. Directors and Officers
The following table sets forth information with respect
to the directors and executive officers of Spectrum:
Position with
Name Age Spectrum Director Since
- ---- --- ------------- --------------
Donald J. Amoruso 58 President and Chief January 1, 1995
Executive Officer,
Chairman of the
Board of Directors
Mikhail Drabkin 48 Chief Technical
Office (effective
March 20, 1996)
Richard F. duFosse 46 Vice President --
Software Engineering
Salvatore T. Marino 43 Vice President --
Licensing
Christopher M. Graham 31 General Counsel and
Secretary
Barry J. Hintze 39 Controller and
Principal Accounting
Officer
Sheldon A. Buckler 63 Director January 1, 1995
George Bugliarello 67 Director January 1, 1995
Robert D. Dalziel 60 Director January 1, 1995
Business Experience of Directors and Executive Officers
Donald J. Amoruso became Spectrum's President, Chief
Executive Officer and Chairman of its Board of Directors in
January 1995. From 1991 to 1994, Mr. Amoruso founded and was the
principal consultant of DMA Associates, a consulting firm
specializing in management, marketing and turnaround strategies
and alliances for small and mid-sized technology firms. Before
1991, Mr. Amoruso held several senior executive positions with
Norden Systems, a subsidiary of United Technologies Corporation.
As Senior Vice President and General Manager, he was responsible
for three high technology business units: the Command, Control
and Communications Systems operation based in Connecticut; the
Marine and Ground Systems operation based in New York; and Norden
Services Company of Maryland. Mr. Amoruso holds a Bachelors and
Masters degree in electrical engineering from Manhattan College
and Polytechnic University respectively.
Mikhail Drabkin has entered an agreement with the
Company to become its Chief Technical Officer on March 20, 1996.
Since 1988, Mr. Drabkin has held various positions with Hayes
Microcomputer Products, Inc. ("Hayes"). Most recently, as Vice
President - Corporate Engineering, Mr. Drabkin has responsibility
for new platform design and implementation of strategic
partnerships with key technology providers. Mr. Drabkin also
held the positions as Vice President - Product Development from
1992 to 1994, General Manager - Hayes ISDN Technologies from 1990
to 1992 and Director of Engineering-San Francisco Hayes
Development Center from 1988-1990. Before joining Hayes, Mr.
Drabkin was employed by SOFTCOM and Macleod Laboratories as a
design engineer and engineering manager, respectively. Mr.
Drabkin is a member of IEEE and Beta Gamma Sigma and holds a
Bachelors and Masters Degree from the St. Petersburg Institute
for Telecommunications and an M.B.A. from the University of San
Francisco.
Richard F. duFosse joined the Company as Vice President
of Software Engineering in February 1996. Immediately prior to
joining Spectrum, Mr. duFosse was providing consulting services
related to software product development and mobile computing to
Fortune 1000 clients. From 1990 through 1995, Mr. duFosse held
several positions with Lotus Development Corporation. From 1994
thorough 1995, as Director of Mobile Computing, Lotus Business
Partners Programs, Mr. duFosse created a business partner program
to implement and deliver products to wirelessly enable Lotus
Notes and cc:Mail. Mr. duFosse previously held the positions of
Development Director, Mobile Computing Group and Senior
Development Managers where he managed development of Lotus
products for mobile computing. Mr. duFosse is a former Member of
the Board of Directors of the Portable Computer and
Communications Association and former chairman of the Modern
Architecture Subcommittee of the PCCA. Mr. duFosse received a
Bachelor's Degree in Humanities and Technology, a Masters degree
in Computer Science and an M.B.A. from Worcester Polytechnic
University.
Salvatore T. Marino has served as Vice President-
Licensing since September 1995 and was Spectrum's Chief Financial
Officer since 1992 through September 1995. From 1992 until May
1995, Mr. Marino also served as Spectrum's Vice President -
Finance and Treasurer. From 1992 until January 1995, Mr. Marino
served as a Director of Spectrum. From 1990 to 1992, Mr. Marino
was the Controller of Angelo Francis Corva & Associates, an
architectural firm. From 1988 to 1990, Mr. Marino was Senior
Vice President of Owens Maintenance Corporation, a division of
Helmsley Enterprises. From 1977 to 1988, Mr. Marino was Vice
President of General Services for Goldman, Sachs & Co. Prior to
that, Mr. Marino served as Senior Accountant at Deloitte, Haskins
& Sells. Mr. Marino became a Certified Public Accountant in
January 1977. Mr. Marino received a Bachelor of Science degree
in accounting and a Masters degree in business administration
from St. John's University.
Christopher M. Graham has served as General Counsel and
Secretary of Spectrum since May 1995. From June 1994 until May
1995, Mr. Graham served as Spectrum's Associate General Counsel.
From 1992 until 1994, Mr. Graham was an attorney associated with
the New York law firm of Kelley Drye & Warren. Mr. Graham served
previously as an operations manager with The Chase Manhattan Bank
in its Capital Markets and Foreign Exchange Sector. Mr. Graham
received a Bachelor of Science degree in finance from Lehigh
University and a Juris Doctorate degree from the University of
Connecticut School of Law.
Barry J. Hintze has served as Spectrum's Controller
since May 1995 and also as Principal Accounting Officer since
September 1995. From 1988 to 1995 Mr. Hintze was Controller of
CEL Communications, Inc. Before joining CEL Communications, Mr.
Hintze served as the Assistant Controller of Delson Business
Systems and held various accounting positions with Ticketron.
Mr. Hintze holds a Bachelor of Science degree and an M.B.A. in
finance from C.W. Post Center, Long Island University.
Sheldon A. Buckler was Vice Chairman of the Board of
Directors of Polaroid before he retired in 1994. Mr. Buckler
held various positions at Polaroid from 1964 to 1994, including
Vice President - Research, and Executive Vice President -
Diversified Products. Mr. Buckler is the holder of 37 patents
and has authored numerous technical papers. Mr. Buckler has a
Ph.D. and M.A. in chemistry from Columbia University, and a B.A.
in chemistry from New York University. Mr. Buckler was recently
elected Chairman of the Board of Directors of Commonwealth Energy
Systems and is also a member of the Board of Directors of Lord
Corporation, Aseco Corporation, Speech Systems, Massachusetts Eye
and Ear Infirmary, and the American Repertory Theater.
George Bugliarello is the Chancellor of Polytechnic
University, and was President from 1973 to 1994. Before joining
Polytechnic University, Mr. Bugliarello was the Dean of
Engineering, and a Professor of Civil Engineering and
Biotechnology at the University of Illinois. Mr. Bugliarello was
also a Professor of Biotechnology and Civil Engineering, and
Chairman of the Biotechnology Program at Carnegie-Mellon
University. Mr. Bugliarello holds degrees from the Massachusetts
Institute of Technology, University of Minnesota, and the
University of Padua. Mr. Bugliarello is the recipient of many
professional honors, and has been associated with and held
positions in numerous professional societies throughout his
career. Mr. Bugliarello is on the Board of Directors of ANSER,
Comtech Corporation, Educational Commission for Foreign Medical
Graduates, Greenwall Foundation, Jura Corporation, Long Island
Lighting Company, Lord Corporation, Symbol Technologies, Inc.,
and Teagle Foundation.
Robert D. Dalziel is an international executive with
operations and sales experience. From 1991 to 1995, Mr. Dalziel
was the Chairman of Telecommunications Cooperative Network, Inc.
He has also served as a consultant to Bechtel National, Inc. and
the Government of Kazahkstan. From 1956 to 1991, Mr. Dalziel
served in numerous capacities for AT&T, including the positions
of Vice President - International Operations, President - AT&T
Europe, and Vice President - Global Networks. Mr. Dalziel has a
degree in electrical engineering from Polytechnic University,
where he is currently a trustee.
B. Summary of the Debtors' Prebankruptcy Restructuring Efforts
As of December 31, 1993, Spectrum adopted a plan to
discontinue operations at Data One. Accordingly, effective
December 31, 1993, Data One has been reported as a discontinued
operation and the consolidated financial statements have been
reclassified to report separately the operating results of the
subsidiary. Additionally, Spectrum recorded a provision for the
year ended March 31, 1994 of $2,920,000 related to the
anticipated loss on disposal of Data One although no tax effect
was taken due to the substantial net operating loss
carryforwards. Data One was completely closed down as of
December 31, 1994, and Spectrum subcontracted out the remaining
service obligations to a third party until it filed for
bankruptcy on January 26, 1995.
As of January 25, 1995, Spectrum closed Computer Bay,
which is reflected as a discontinued operation in the
consolidated financial statements. Spectrum did not record a
provision related to its anticipated loss on disposal since the
case was converted to a case under Chapter 7 of the Bankruptcy
Code ("Chapter 7"). As a result of the conversion of Computer
Bay to a case under Chapter 7, Spectrum has recorded a gain of
$2,539,000 by writing off the net liabilities of Computer Bay.
The Computer Bay trustee has filed a claim in the Bankruptcy
Court to substantively consolidate the Computer Bay liabilities
with the liabilities of the Debtors. Spectrum does not believe
that there are grounds for such consolidation and has objected
thereto.
C. Commencement of Cases
On January 26, 1995, Spectrum, Computer Bay, Data One
and Cellular filed petitions for relief under Chapter 11 in the
Bankruptcy Court, Case Nos. 195-10690-260, 195-10691-260,
195-10692-260 and 195-10693-260, respectively. Global did not
file for bankruptcy. On February 8, 1995, the United States
Trustee appointed the Creditors Committee for the Debtors and an
Official Committee of Unsecured Creditors for Computer Bay to
represent the interests of all unsecured creditors whose claims
arose before the Petition Date. No other committees have been
appointed.
D. Summary of the Debtors' Postbankruptcy Restructuring Efforts
1. Discontinued Operations and Disposition of Subsidiary
On February 8, 1995, the United States Trustee
appointed the Creditors Committee for Spectrum, Cellular and Data
One and another for Computer Bay. On May 25, 1995, the
Bankruptcy Court, upon motion by the Debtors, converted the
Computer Bay Chapter 11 case to a case under Chapter 7, and a
court appointed trustee is overseeing the liquidation of Computer
Bay's assets. Spectrum and Cellular are continuing to manage
their affairs and operate their business under Chapter 11 as
debtors in possession while formulating a plan of reorganization.
On September 11, 1995, Spectrum, entered into an
agreement to sell all of the capital stock of its wholly owned
subsidiary, Global, to COMFORCE Corporation, a corporation
organized under the laws of the State of Delaware, for $6 million
plus a closing adjustment related primarily to the allocation of
salaries and benefits of certain Spectrum and Global employees.
Other members of the purchasing group included The Lori
Corporation, a corporation organized under the laws of the State
of Delaware, ARTRA Group Incorporated, a corporation organized
under the laws of the State of Pennsylvania, Peter R. Harvey,
Marc L. Werner, James L. Paterek, Michael Ferrentino and
Christopher P. Franco. The sale of Global was subject to
Bankruptcy Court approval and receipt of higher and better
offers. A hearing regarding the transaction (and any higher and
better offers) was held on October 17, 1995 before the Bankruptcy
Court. On October 17, 1995, the Bankruptcy Court approved the
sale. The Purchaser paid cash for Global's stock at the October
17th closing.
2. Dispositions of Other Assets
In July 1995, Spectrum sold its AXCELL business and its
license to certain related patent rights to Telular Corporation
("Telular") for $3,000,000 pursuant to an agreement approved by
the Bankruptcy Court, which resulted in a gain of approximately
$1,616,000. The patent rights relate to wireless interface
technology and were obtained in a license agreement from Telular
and are not part of Spectrum's core direct connect patent
portfolio.
On September 21, 1995, Spectrum sold its Cellular
facility in Dallas, Texas. The building was sold for
approximately $780,000 resulting in a gain on the sale of
$85,976. Net proceeds after taxes from the sale were $734,000 of
which the Company has segregated $72,000 to cover claims related
to property taxes filed by the City and County of Dallas.
3. Fund Raising Process
Effective April 1, 1995, the Bankruptcy Court approved
the Company's retention of Gordian Group, L.P. ("Gordian") as its
financial advisor, to, among other things, assist the Company's
efforts to develop its plan of reorganization and to raise
capital. Gordian and the Company identified approximately 48
potential investors, comprising many of the nation's leading
venture capital firms and certain corporations that could have an
interest in developing a strategic relationship with the Company.
Gordian contacted such parties from October 1995 to January 1996,
and potential investors desiring further information were
provided with a Confidential Information Memorandum embodying the
Company's business plan, under appropriate confidentiality
arrangements. To date, none of these parties has expressed an
interest in investing in the Company. Gordian also assisted
Spectrum in the sale of Global.
SECTION IV
CHAPTER 11 PROCEEDINGS AND OTHER RECENT DEVELOPMENTS
A. Principal Proceedings in the Cases
1. Stay of Litigation
Pursuant to section 362 of the Bankruptcy Code, the
commencement of the Debtors' Chapter 11 cases operates as stays,
applicable to all entities, of the following: (i) commencement or
continuation of a judicial, administrative, or other proceeding
against the Debtors that was or could have been commenced prior
to commencement of the Debtors' Chapter 11 cases, or to recover
for a claim that arose before the commencement of the Debtors'
Chapter 11 cases; (ii) enforcement of any judgments against the
Debtors that arose before the commencement of the Debtors'
Chapter 11 cases; (iii) the taking of any action to obtain
possession of property of the Debtors or to exercise control over
property of the Debtors; (iv) the creation, perfection or
enforcement of any lien against the property of the Debtors; (v)
the taking of any action to collect, assess or recover a claim
against the Debtors that arose before the commencement of the
Debtors' Chapter 11 cases; or (vi) the setoff of any debt owing
to the Debtors that arose prior to the commencement of the
Debtors' Chapter 11 cases against a claim held by such creditor
or party-in-interest against the Debtors that arose before the
commencement of the Debtors' Chapter 11 cases. Any entity may
apply to the Bankruptcy Court for relief from the automatic stay
so that it may enforce any of the aforesaid remedies that are
automatically stayed by operation of law at the commencement of
the Debtors' Chapter 11 cases.
2. Executory Contracts
As debtors in possession, the Debtors have the right,
under the relevant provisions of the Bankruptcy Code, to assume
or reject executory contracts, including real property leases.
Certain parties to such executory contracts with the Debtors,
including parties to such real property leases, may file motions
with the Bankruptcy Court seeking to require the Debtors to
assume or reject those contracts or leases. In this context,
"assumption" means that the Debtors cure or proved adequate
assurance that they will cure all existing defaults under
contract or lease and provide adequate assurance of future
performance under the contract or lease. "Rejection," which is
a remedy available under the relevant provisions of the
Bankruptcy Code, means that the Debtors are relieved of their
obligations to perform further under the contract or lease.
Rejection of an executory contract or lease is traded as a breach
of
that contract immediately before the date of filing of the
petition
and gives the nondebtor party the right to assert a claim against
the bankruptcy estate for damages arising out of the breach which
shall be allowed or disallowed as if such claims had arisen
before the date of the filing of the petition.
Pursuant to the Bankruptcy Code, the Company has
rejected certain employment contracts and has terminated
employment of some of the affected individuals. The Bankruptcy
Court has approved the Company's employment agreement with its
current CEO. On January 23, 1996, the Bankruptcy Court approved
the assumption of modified employment contracts with other
employees with preexisting employment agreements, eliminating
some contractual perquisites and reducing severance benefits, and
approved severance agreements with two former employees. The
Company rejected all leases for automobiles leased on behalf of
employees. Additionally, the Company has rejected the real
property lease associated with its former Manhasset, New York
headquarters and leases for certain furniture and equipment.
Prepetition claims that were contingent, unliquidated,
or disputed as of the commencement of the Chapter 11 case,
including, without limitation, those that arise in connection
with rejection of executory contracts, may be allowed or
disallowed depending on the nature of the claim. Such claims may
be fixed by the Bankruptcy Court or otherwise agreed upon by the
parties.
3. Computer Bay Trustee's Claim
On May 25, 1995, the Bankruptcy Court, upon motion by
the Debtors, converted the Computer Bay proceeding to a case
under Chapter 7 of the Bankruptcy Code. An independent trustee
has been appointed to oversee liquidation of Computer Bay's
Chapter 7 estate. The Computer Bay trustee has filed a claim
with the Bankruptcy Court seeking to substantively consolidate
the Computer Bay estate and liabilities with the estates and
liabilities of the Company. The Debtors filed an objection to
this claim on November 20, 1995. In furtherance of his proofs of
claim, on January 11, 1996 the Computer Bay trustee filed a
complaint commencing litigation against the Company seeking to
substantively consolidate the Computer Bay estate with the
Company's estate and, in the alternative, seeking the return of
alleged preferences and fraudulent conveyances in the amount of
$4,351,396 (the "Computer Bay Litigation"). The Debtors filed an
answer on January 23, 1996. Although there can be no assurance
that the Debtors will be successful defending this claim, the
Company does not believe there are grounds for such
consolidation. Likewise, the Debtors believe they have valid
defenses to all claims made in the Computer Bay Litigation and
have asserted counterclaims against the Computer Bay estate in
the amount of $2,430,436.
4. The Debtors' Exclusivity Period
For 120 days after the Petition Date, the Company has
the exclusive right to propose and file a plan of reorganization
with the Bankruptcy Court. If the Company files a plan of
reorganization during the 120-day exclusivity period, no other
party may file a plan of reorganization until 180 days after the
Petition Date, during which period the Company has the exclusive
right to solicit acceptance of the plan. If the Company fails to
file a plan during the 120-day exclusivity period or such
additional time period ordered by the Bankruptcy Court (the
"Exclusivity Period") or, after such plan has been filed, fails
to obtain acceptance of such plan from Impaired Classes during
the exclusive solicitation period or such additional time period
ordered by the Bankruptcy Court, any party-in-interest, including
a creditor, an equity security holder, a committee of creditors,
or an indenture trustee, may file a plan of reorganization in the
Chapter 11 proceedings. Additionally, if the Bankruptcy Court
were to appoint a Chapter 11 trustee, any party-in-interest may
file a plan, regardless of whether any additional time remains in
the Company's Exclusivity Period. On January 23, 1996 the
Bankruptcy Court granted the Company's request to extend the
Exclusivity Period to March 8, 1996 or, if a plan is filed by
March 8, 1996, to May 9, 1996.
5. Setting of the Bar Date for Prepetition Claims
By order of the Bankruptcy Court, the bar date for
filing proofs of claim in the Chapter 11 proceedings was
established as September 7, 1995.
B. Other Recent Developments
1. Securities Related Litigation
On February 9, 1994, the class action filed against the
Company and two of its former officers in May 1993 (In re
Spectrum Information Technologies, Inc. Securities Litigation,
United States District Court for the Eastern District of New
York, Civil Action No. 93-2295) (the "Class Action Suits") was
supplemented (x) to extend the end of the class period from May
21, 1993 to February 4, 1994, (y) to add additional claims
against Spectrum and the individual defendants, and (z) to add
certain of its then officers as party defendants. In April 1994,
a Second Consolidated Amended Class Action Complaint was filed
adding additional employees as party defendants. The class and
certain subclasses have been certified. A similar putative class
action filed in the United States District Court of the Southern
District of Texas has been transferred and consolidated with the
Class Action Suits.
The plaintiffs in the Class Action Suits have made the
following claims against Spectrum: (i) misrepresenting the
potential value of the patent license agreement the Company
entered into with AT&T; (ii) improperly accounting for revenues
and expenses in connection with certain license and advertising
agreements; (iii) failing to disclose the existence of an inquiry
initiated by the Securities and Exchange Commission (the "SEC");
and (iv) making statements regarding the employment of John
Sculley. In addition, there are claims against certain of the
individual defendants for improper insider trading. The
Company's former management, based on the advice of its then
counsel, believed it had good and meritorious defenses to the
claims against it.
On July 20, 1994, the Company, certain of its then
officers and directors, and two former officers and directors
were served with a class action complaint. The complaint asserts
that Spectrum knowingly or recklessly made material false
statements or omitted material facts in its financial reporting
relating to Computer Bay prior to announcing the restatement of
earnings for the fiscal year 1992 and the first three quarters of
fiscal 1993, to correct inaccurate accruals of certain items into
income. For pretrial purposes, this litigation has been
consolidated with the Class Action Suits described above.
In November 1995, the Company announced that an
agreement in principle had been reached on a framework for
settlement of the Class Action Suits (the "Class Action
Settlement"). The Class Action Settlement is contingent on
numerous factors including, among other things, the successful
resolution of the Home Action (see "Chapter 11 Proceedings and
Other Recent Developments - Other Recent Developments - Other
Proceedings," Section IV(B)(3)), the negotiation and execution of
a definitive settlement agreement, the Company's ability to
develop and confirm a plan of reorganization in the Company's
pending bankruptcy proceeding satisfactory to all interested
parties, including the Class Action Plaintiffs, and the approval
of the Class Action Settlement by the District Court. The
Bankruptcy Court approved the Class Action Settlement on January
19, 1996. The Class Action Plaintiffs in the Class Action Suits
had filed a claim against the Company in its bankruptcy
proceedings in the amount of $676 million. The Class Action
Settlement, if consummated, will be in satisfaction of that claim
as well as any and all claims of the individual defendants
(former directors and officers) in that suit against the Company.
Under the terms of the Class Action Settlement, the
Company and the representatives of the Class Action Plaintiffs
have agreed to a framework under which the Company will issue to
the Class Action Plaintiffs in its plan of reorganization a
number of shares of its Class A Preferred Stock that would be
equal to the number of shares of Distributable Common Stock. In
addition, under the Class Action Settlement, the Class Action
Plaintiffs are to receive the proceeds, net of certain fees and
expenses, from insurance policies worth $10 million covering the
liabilities of the Company's directors and officers and, as a
result of court supervised negotiations and at the recommendation
of the District Court, $1,350,000 from the various individual
defendants in the action plus $250,000 from the Company.
One of the uncertainties surrounding the Class Action
Settlement is that issuers of insurance policies representing $6
million out of the $10 million of the insurance necessary to fund
the Class Action Settlement have disclaimed coverage. This
dispute is the subject of a litigation pending before the
District Court and must be successfully resolved to implement the
Class Action Settlement. A trial in the Home Action is scheduled
to take place February 20 to 22, 1996. See "Chapter 11
Proceedings and Other Recent Developments - Other Recent
Developments - Other Proceedings," Section IV(B)(3).
In May 1993, the SEC initiated a confidential and
informal fact gathering inquiry apparently directed toward
statements the Company purportedly made regarding the potential
value of the patent license agreement it had entered into in
fiscal 1994 with AT&T. On December 6, 1993, following the
Company's dismissal of its outside auditors, the SEC issued a
formal order of investigation. The Company believes that a focus
of the investigation relates to accounting and disclosure issues
with respect to certain of the patent license and advertising
agreements it entered into during fiscal 1994 and, based on
recent requests for information by the SEC, may also relate to
other activities of the Company's previous management. The
Company is cooperating fully with the investigation.
The accounting treatment at issue in the investigation,
which had been implemented after consultation with the Company's
previous outside auditors and had been disclosed in the Company's
quarterly filings with the SEC, was revised by Spectrum when it
voluntarily restated its earnings on February 7, 1994.
In October 1994, two individuals commenced an action
against two of the Company's former officers and directors
(Silverberg, et al. v. Sculley, et al., Superior Court of the
State of California for the County of Los Angeles, Case No. BC
111206). The claims against the former officers and directors
include breach of fiduciary duty, breach of covenant of good
faith and fair dealing, deceit and misrepresentation, negligent
misrepresentation, mismanagement and gross negligence. In
November 1995, the plaintiffs and all defendants entered into a
settlement, the terms of which are confidential.
In March 1995, Peter Caserta, the Company's former
Chief Executive Officer and Chairman of the Board, Howard Schor,
a former employee, John Bohrman, a former director, James
Paterek, former President of Global (which was sold by the
Company in October 1995), and six other non-Company employees
were indicted in the District Court on charges of mail and wire
fraud relating to activities of the Caserta Group, an
unaffiliated financial services company Mr. Caserta headed. In
January 1996, Mr. Caserta and Mr. Schor pleaded guilty to certain
of the charges against them.
The United States Attorney's Office for the Eastern
District of New York has informed the Company that it is the
subject of an investigation regarding violations of securities
laws that may have occurred prior to the appointment of the
Company's current Chief Executive Officer and Board of Directors.
The Company is cooperating fully with the investigation.
2. Patent Related Proceedings
During August 1994, Megahertz Corporation ("Megahertz")
filed a Demand for Arbitration with the American Arbitration
Association in Salt Lake City, Utah (Case No. 81 184 0008194)
seeking a determination as to whether royalty payments by
Megahertz were temporarily abated under the terms of a license
agreement between Megahertz and Spectrum. Megahertz, in its
arbitration request, asked for a determination of whether
Spectrum has achieved certain licensing objectives and/or
undertaken defined patent enforcement actions as set forth in the
agreement. The parties jointly agreed to delay this proceeding
in December 1994. The arbitration was subsequently automatically
stayed by the Company's bankruptcy filing. Megahertz, its parent
company, U.S. Robotics, and the Company in February 1996 entered
into a settlement agreement with respect to all disputes among
them, subject to the approval of the Bankruptcy Court, which
approval is being sought. See "Certain Factors to be
Considered," section IX.
On December 5, 1994, the Company filed a lawsuit
against Motorola, Inc. for infringement of claims in six of its
patents covering basic wireless data concepts. Motorola has
denied the allegations in its answer. The case was originally
filed in the United States District Court for the Eastern
District of Virginia, but was transferred to the United States
District Court for the Northern District of Alabama, Northeastern
Division (Spectrum Information Technologies, Inc. v. Motorola,
Inc., Civil Action No. 95-U-234-NE). On October 16, 1995, the
parties stipulated to extend the dates in the case's original
scheduling order to permit the parties to pursue settlement
discussions, which discussions are ongoing. On January 25, 1996
the parties entered another such stipulation.
3. Other Proceedings
In January 1994, Robert Fallah, a former financial
consultant to Spectrum, instituted a suit (Fallah v. Spectrum
Information Technologies, Inc., Index No. 94-1044) against the
Company seeking $5,790,000 in damages related to purported
promises made by the Company to give the plaintiff certain stock
warrants in exchange for the consultant's services. Fallah filed
a proof of claim in the Company's bankruptcy proceeding alleging
$5,790,000 in damages. Spectrum filed an objection to the Fallah
claim on January 31, 1996. The Company believes that it has sound
legal and factual defenses and will vigorously defend this claim.
In 1994, an action was filed against Spectrum, certain
former officers and directors of the Company and the Company's
former transfer agent (Blair v. Spectrum Information Technologies
Inc., 162nd District Court of Dallas County). Mr. Blair alleges
that he was induced to begin employment with Cellular through a
promise that he would be allowed to participate in Spectrum's
stock option plan and alleges against all defendants breach of
contract, fraud, negligence, breach of fiduciary relationship and
bad faith. Mr. Blair terminated his employment with Cellular in
August 1994. Mr. Blair filed a proof of claim in the bankruptcy
proceeding alleging $1 million in damages. The Texas lawsuit is
stayed as to Spectrum by operation of the automatic stay.
Settlement discussions have taken place between Spectrum and Mr.
Blair's counsel.
In October 1994, Gene Morgan ("Morgan") and Gene Morgan
Financial ("GMF") demanded in excess of $8 million dollars from
the Company based on an alleged breach of a consulting agreement
and failure to register certain underwriter's warrants. Morgan
filed a proof of claim in the bankruptcy proceeding claiming an
unsecured nonpriority claim of $6.3 million alleging breach of
contract under the warrants. Lowenstein, Sandler, Kohl Fisher &
Boylan, as assignee of GMF's claim, filed a proof of claim
alleging approximately $1.9 million in damages arising from the
alleged breach of the consulting agreement. The Debtors have
objected to the claims of both Morgan and GMF. In addition, the
Debtors are seeking equitable subordination of the GMF claim.
The Bankruptcy Court has already ruled that any claim Morgan may
have under the warrant is subordinated under section 510(b) of
the Bankruptcy Code. A trial on the liability for the amount,
allowability and priority of the Morgan and GMF claims is now
being conducted before the Bankruptcy Court.
On July 21, 1995, The Home Insurance Company of
Illinois ("The Home"), the Company's former directors' and
officers' primary insurance carrier, commenced an adversary
proceeding (the "Home Action") in the Company's bankruptcy
proceeding. The Honorable Frederic Block, United States District
Judge of the District Court, subsequently withdrew the reference
with respect to the Home Action such that the litigation is now
pending before him. The Home is seeking to rescind a renewal of
a directors' and officers' liability and company reimbursement
policy issued in June 1993 to the Company for the benefit of its
directors and officers (the "Renewal Policy") and alleges certain
material misrepresentations and/or omissions in the application
for the Renewal Policy. The Home also seeks a declaration that
coverage is not afforded under the Renewal Policy for the claims
made against the policy by the Company and certain of its
officers and directors. The Company believes The Home (as well
as the other carriers discussed below) are obligated to provide
the coverage at issue and is defending this action, and is
further seeking a declaration of coverage under the Renewal
Policy for the claims made against that policy.
In addition to the primary policy, the Company obtained
three excess policies for the insurance year at issue in the Home
Action. Two of the excess carriers, the Agricultural Excess and
Surplus Insurance Company ("AESIC") and The Aetna Casualty and
Surety Company ("Aetna") have intervened in the Home Action.
AESIC has agreed to be bound by any final judicial resolution
regarding The Home (a similar agreement was previously reached
with the third excess carrier) and is no longer actively
participating in the Home Action.
Both The Home and Aetna have recently filed motions for
summary judgment in the Home Action and the Company filed a
response on January 26, 1996. The District Court has scheduled a
three-day trial of the Home Action beginning on February 20,
1996.
The Company is also involved in other minor
litigations, all of which have been stayed by the automatic stay.
The likely outcomes of these claims are uncertain at this time.
SECTION V
PROPERTIES OF THE DEBTORS
The Company's headquarters occupy approximately 4,200
square feet of office space in an office building located in
Purchase, New York. The Company holds a lease for such offices
which expires on April 30, 1998. Cellular leases approximately
2,800 square feet in an office building located in Carrollton,
Texas, a suburb of Dallas. The lease expires on October 31,
1998.
The Company also owns certain intellectual property
rights including patents and trademarks. The Company currently
has (i) six issued U.S. patents, (ii) three issued foreign
patents, and (iii) several pending U.S. and foreign patent
applications. The Company holds patents for techniques that
compensate for the high error rate conditions common during
cellular data communication. The Company's six U.S. patents are
summarized below:
- Portable Hybrid Communication System and Methods: On
November 20, 1990, the Patent Office issued to the
Company this patent which covers the Company's unique
method of combining a cellular transceiver, modem and
variety of telephone devices into a single functioning,
user-controlled device providing wired or wireless
voice and data communications.
- System and Method for Interfacing Computers to Diverse
Telephone Networks: On June 30,1992, the Patent Office
issued to the Company this patent which covers (i) the
Company's original AXSYS brand cable interface circuit
and (ii) modems that are adapted to operate with the
AXSYS brand cable interface circuit. This patent
further covers other connectivity features useful in
connecting a modem to various cellular telephones.
- Cellular Telephone Data Communication System and
Method: On August l8, 1992, the Company obtained this
patent which has claims covering fundamental techniques
required for commercially acceptable and reliable data
transmission over any conventional cellular
communication channel. The Company was originally
issued a patent for these concepts on September 29,
1987 and this patent is a reissue of that original
patent.
- Programmable Universal Interface System: On September
28, 1993, the Company received this patent, which has
claims covering the Company's "direct-connect"
technology and which enables specially programmed
modems to be connected to a cellular telephone by a
simple passive cable. Software in the modem generates
control signals appropriate to the model of cellular
telephone in use.
This technology also allows a single computer modem to
be connected to different types of cellular telephones
without intervening electronic circuits to permit
computer control of the cellular telephone for data
transmission purposes. This product is currently being
marketed under the AXSYS brand name.
- System and Method for Interfacing Computers to Diverse
Telephone Networks: On October 4, 1994, the Company
received this patent which expands the Company's basic
patent rights in the area of direct-connect modem
technology originally covered by the Company's 1993
Programmable Universal Interface patent.
- Programmable Universal Interface System: On November
22, 1994, the Patent Office issued this patent which
broadens and expands the Company's coverage for direct-
connect modems, adds coverage for methods used in
direct-connect technology and provides coverage for
upgrade kits that provide a software driver and cable
to make the direct-connect modem compatible with a
specific cellular telephone.
The Company has nonexclusively licensed various aspects
of this proprietary technology to other companies, including
portable computer, modem and modem chipset manufacturers. Some
of these agreements require the modem manufacturer to pay a
royalty on modems they sell which include aspects of the
Company's proprietary technology. Others require payment of a
royalty following the activation of the cellular data capability.
In addition, most of these license agreements require the
licensee to indicate on its product packaging that the product
contains technology licensed from Spectrum and to use Spectrum's
logotype. Licensees of the Company include AT&T, Rockwell
International, U.S. Robotics, IBM and Zoom Telephonics, Inc.
The Company has also developed, and continues to
expand, a library of software drivers related to the direct-
connect technology. Each software driver is designed to permit
control of a particular cellular telephone by a direct-connect
modem. The software drivers are subject to copyright protection,
and the Company claims the right, pursuant to national and
international copyright laws, to control copying and distribution
of its software drivers.
The Company has regularly used the following trademarks
and service marks to describe certain of its products and
services and has obtained U.S. Federal Trademark registrations
for: SPECTRUM CELLULAR (registered trademark), SPCL (registered
trademark), AXSYS (registered trademark), SPECTRUM CONNECTED
(registered trademark) and the SPECTRUM CONNECTED (registered
trademark) logo.
SECTION VI
SELECTED OPERATING AND FINANCIAL DATA
THE FOLLOWING SECTION DISCUSSES CERTAIN HISTORICAL
OPERATING AND FINANCIAL INFORMATION ABOUT THE DEBTORS. AS A
RESULT OF MANY FACTORS, INCLUDING THE BANKRUPTCY PROCEEDINGS,
HISTORICAL RESULTS OF OPERATIONS ARE NOT NECESSARILY INDICATIVE
OF FUTURE RESULTS.
REFERENCE IS MADE TO REPORTS OF THE DEBTORS FILED WITH
THE SEC PURSUANT TO THE EXCHANGE ACT AND WITH THE BANKRUPTCY
COURT THAT ARE INCORPORATED BY REFERENCE HEREIN FOR A MORE
COMPLETE DESCRIPTION OF THE MATTERS SET FORTH HEREIN.
A. Operating Results for Fiscal Years Ended 1995, 1994 and 1993
The following table sets forth, for the periods
indicated, certain financial information and the percentage
relationship that certain items bear to revenue as reported in
the Company's Annual Report on Form 10-K for the Year Ended March
31, 1995, filed with the SEC (the "Form 10-K"). See Exhibit B
attached hereto. This summary provides trend data relating to
the Company's normal recurring operations. Amounts set forth
below reflect the Company's Data One and Computer Bay
subsidiaries as discontinued operations. See "General
Information about the Debtors' Business; Restructuring Efforts
and Filing of the Chapter 11 Cases - Summary of the Debtors'
Prebankruptcy Restructuring Efforts," Section III(B).
Years Ended March 31,
-------------------------------------------
1995 % 1994 % 1993 %
-------------------------------------------
(Amounts in thousands)
Revenues $11,627 100.0 $6,384 100.0 $1,229
100.0
Operating costs
and expenses:
Cost of
revenues 7,227 62.2 3,195 50.0 655
53.2
Selling,
general
and admin-
istrative 13,237 113.8 13,856 217.1 6,657
541.7
Provision for
litigation - - 4,719 73.9 - -
Provision for
restructuring 105 .9 2,410 37.8 1,349
109.8
Write-down of
carrying value
on certain
facilities - - 851 13.3 - -
Total operating
costs and
expenses 20,569 176.9 25,031 392.1 8,661
704.7
Operating
loss $(8,942) (76.9)$(18,647) (292.1) $(7,432)
(604.7)
Consolidated revenues increased by approximately
$5,243,000 or 82.1% from fiscal 1994 to 1995. The increase was
primarily due to the inclusion of a full year of operations of
Global in fiscal 1995, as compared to only five months of
operations in the prior year. Consolidated revenues increased by
approximately $5,155,000 or 419.5% from fiscal 1993 to 1994 due
to the acquisition of Global in October 1993, the revenues of
which were $3,460,000 in fiscal 1994, and the recording of
licensing and sign-up fees in fiscal 1994 of approximately
$1,700,000 relating to use of the Company's proprietary
technology.
Operating costs and expenses decreased $4,462,000 or
17.8% from fiscal 1994 to 1995. The decrease is primarily the
result of the recording of a special charge for litigation of
$4,719,000 during 1994, which had been management's estimate of a
portion of any ultimate Class Action Settlement, and the
recording of a write-down of approximately $851,000 for the
reduction in carrying value on certain of Cellular's property,
plant and equipment in Dallas, Texas in 1994. In addition, the
Company provided for restructuring charges in 1994 of $2,410,000.
In 1995, the Company took an additional charge of $105,000, which
related to anticipated payments to a terminated employee, to
complete its restructuring (see Spectrum's Annual Report on Form
10-K for the year ended March 31, 1995, Note 10 to the
Consolidated Financial Statements, attached hereto as Exhibit B).
These decreases were partially offset by an increase in the cost
of revenues of $4,032,000 or 126.2%, which is a direct result of
increased sales at the Company's Global subsidiary.
Operating costs and expenses increased $16,370,000 or
190.0% from fiscal 1993 to 1994. The increase related to an
increase in the cost of revenues of $2,540,000 or 387.8% due to
the acquisition of Global in October 1993, an increase in
selling, general and administrative expenses of $7,199,000 or
108.9%, the recording of a special charge for litigation of
$4,719,000 during 1994 (described in the preceding paragraph),
the recording of a write-down of approximately $851,000 for the
reduction in carrying value on certain facilities in 1994
(described in the preceding paragraph), and an increased charge
of $1,061,000 which represents anticipated costs associated with
the Company's restructuring efforts (see note 10 to consolidated
financial statements in the Form 10-K attached hereto as Exhibit
B). The increase in selling, general and administrative expenses
is primarily due to increased legal fees of approximately of
$2,161,000 associated with the defense of the Company's patents
and licensing efforts and other legal matters and increased
employee-related costs of approximately $2,551,000.
As a result of the factors discussed above and because
the Company's gross profit increased by $1,211,000 or 38%, the
Company's operating loss decreased approximately $9,705,000 from
1994 to 1995.
The Company's operating loss increased to $18,647,000
in 1994 from $7,432,000 in 1993. The increase was a result of
the increase in total operating costs and expenses (discussed in
the second preceding paragraph) which was partially offset by the
increase in gross profit of $918,000 realized primarily due to
the acquisition of Global in October 1993.
B. Unaudited Operating Results for the First Three Quarters of
Fiscal 1996
Nine Months Ended Dec. 31,
1995 1994
(Amounts in thousands)
Revenues:
Licensing and other revenue $1,758 $1,118
Merchandise sales, net 445 1,081
------ ------
Total revenues 2,203 2,199
Operating costs and expenses:
Cost of revenues 258 445
Selling, general and administrative 5,368 10,263
------ ------
Total operating costs and expenses 5,626 10,708
------ ------
Operating loss (3,423) (8,509)
Professional fees in connection
with Chapter 11 filing (2,464) --
Other income (expense), net 1,662 (158)
------ ------
Income (loss) from continuing operations (4,225) (8,667)
------ ------
Discontinued operations:
Income from operations of Global 790 666
Income from operations of
Computer Bay -- (4,388)
Gain on Sale of Global 773 --
Gain on disposal of Computer Bay 2,539 --
------ ------
Income from discontinued operations 4,102 (3,722)
------ ------
Cumulative effect of change
in accounting principle -- 316
Net (loss) $(123) $(12,073)
====== =======
Consolidated revenues for the nine months ended
December 31, 1995 increased $4,000 as compared to December 1994.
The increase in consolidated revenues for the nine months ended
December 31, 1995 is due to an increase in royalty/licensing
income of $640,000 or 57% offset by a decrease in product sales
of $636,000 or 59%. Royalties and licensing income increased
primarily as a result of payments received pursuant to the
Megahertz and Rockwell license agreements offset by decreased
royalties due to a disputed royalty agreement with a certain
licensee. The decrease in product sales is due to the sale of
the AXCELL product line. AXCELL sales decreased $762,000 for the
nine months ended December 31, 1995 as compared to the prior
year.
Operating costs and expenses decreased approximately
$5,082,000 or 47% during the nine months ended December 31, 1995
as compared to the same period ending December 31, 1994. This
decrease is primarily due to the decrease in selling, general and
administrative expenses of approximately $4,895,000 or 48% for
the nine months.
The decrease in selling, general and administrative
expenses for the nine months ended December 31, 1995 is primarily
due to the decrease in professional fees (other than professional
fees associated with the Chapter 11 Cases) of $1,144,000. This
decrease is primarily due to the stay of legal actions during the
Chapter 11 Cases. The decreases in personnel and related
expenses of $702,000, and a decrease in travel and entertainment
expenses of $207,000, are due to the overall downsizing of the
Company. Other administrative expenses decreased $2,372,000,
primarily due to the Company's move from Manhasset, New York to a
smaller location in Purchase, New York. Advertising expense
decreased $470,000 during the nine months ended December 31, 1995
primarily due to the sale of the AXCELL product line.
The Company's operating loss decreased $5,086,000 or
60% for the nine months ended December 31, 1995 as compared to
the same period in the prior year. The decrease is primarily due
to the decreased selling, general and administrative expenses of
48% for the nine month period reported, as well as a decrease in
cost of goods sold of $187,000 or 42% for the nine months ended
December 31, 1995 as compared to the prior year due to the sale
of the AXCELL product line.
Other income increased $1,820,000 for the nine months
ended December 31, 1995 compared to the prior year, primarily due
to the gain of $1,616,000 on the sale of the AXCELL product line.
As of January 25, 1995, the Company closed its Computer
Bay subsidiary which is reflected as a discontinued operation in
the consolidated financial statements. The Company did not
record a provision related to its anticipated loss on disposal
because the case was converted into a Chapter 7 bankruptcy
proceeding. As a result of the conversion, the Company has
recorded a gain of $2,539,000 by writing off the net liabilities
of Computer Bay. The Computer Bay trustee has filed a claim in
the Bankruptcy Court to substantively consolidate the Computer
Bay liabilities with the liabilities of the Debtors. However,
the Company does not believe there are grounds for such
consolidation. See "General Information about the Debtors'
Business; Restructuring Efforts and the filing of the Chapter 11
Cases - Summary of the Debtors' Postbankruptcy Restructuring
Efforts," Section III (D), and Spectrum's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995, attached
hereto as Exhibit E.
As of October 17, 1995, the Company sold its Global
subsidiary which is reflected as a discontinued operation in the
consolidated financial statements. See "General Information
about the Debtors' Business; Restructuring Efforts and the Filing
of the Chapter 11 Cases-Summary of the Debtors' Postbankruptcy
Restructuring Efforts," Section III (D).
In May 1993, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," effective for fiscal years beginning after December
15, 1993. The cumulative effect of adopting SFAS No. 115 as of
April 1, 1994 resulted in an increase in income of approximately
$316,000.
C. Net Worth
At March 31, 1995, the consolidated negative net worth
of the Debtors was $901,000. At December 31, 1995, the
consolidated net worth of the Debtors was $923,000. Losses from
continuing operations of $4,225,000 have been partially offset
primarily as a result of the sale of the AXCELL product line, the
sale of Global and the discontinuation of the operations of
Computer Bay. See "General Information about the Debtors'
Business; Restructuring Efforts and Filing of the Chapter 11
Cases - Summary of the Debtors' Postbankruptcy Restructuring
Efforts," Section III(D); and Spectrum's Annual Report on Form
10-K for the year ended March 31, 1995, attached hereto as
Exhibit B; and Spectrum's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1995, September 30, 1995 and December 31,
1995, attached hereto as Exhibits C, D and E, respectively.
D. Liquidity and Capital Resources
Since inception, the Company has experienced
significant operating losses and operating cash flow deficits
which ultimately caused the Company to restructure its largest
subsidiary, Computer Bay, as a discontinued operation and to file
for bankruptcy protection under Chapter 11 on January 26, 1995.
See "General Information about the Debtors' Business;
Restructuring Efforts and the Filing of the Chapter 11 Cases -
Commencement of Cases, and - Summary of Debtors' Postbankruptcy
Restructuring Efforts," Sections III(C) and (D); and Spectrum's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995, attached hereto as Exhibit E.
During the nine months ended December 31, 1995, working
capital (current assets less current liabilities) decreased by
approximately $1,916,000 to $7,517,000. This decrease is
primarily due to an increase in accrued liabilities of $1,461,000
primarily due to professional fees associated with the Chapter 11
Cases.
Net cash used by continuing operations decreased
approximately $9,037,000 when compared to the prior year
primarily as a result of the Company's net loss from operating
activities decreasing $12,073,000 for the nine months ended
December 31, 1994 to $123,000 for the comparative period ended
December 31, 1995. In addition, through downsizing and
bankruptcy protection relating to various litigation and
indemnifications, the Company was able to decrease its operating
expenses as compared to the prior year (see "Selected Operating
and Financial Data - Unaudited Operating Results for the First
Three Quarters of Fiscal 1996," Section VI(B).) An increase in
accrued expenses, primarily relating to bankruptcy professional
fees, was also responsible for the decrease in cash utilized.
Net cash provided by investing activities decreased
$467,000 for nine months ended December 31, 1995 when compared to
the prior fiscal year due to the cash proceeds from the sales of
Global, the AXCELL product line and certain real property in
Dallas, as compared to the cash proceeds from the sale of
marketable securities in fiscal 1995. Capital expenditures
amounted to approximately $58,000 for the nine months ended
December 31, 1995. These expenditures are primarily related to
office relocation and rejected capital leases. Capital
expenditures for the nine months ended December 31, 1994 were
approximately $130,000. The Company has no material commitments
outstanding as of quarter-end and anticipates that capital
expenditures may increase as a result of anticipated efforts to
develop further core technology.
There were no financing activities during the nine
months ended December 31, 1995. During the nine months ended
December 31, 1994, certain persons exercised stock options and
warrants which resulted in a $770,000 increase in cash.
For the nine months ended December 31, 1995, net cash
required by discontinued operations was $1,861,000 as compared to
net cash provided by discontinued operations of $1,214,000 for
the nine months ended December 31, 1994.
The Debtors reported significant operating losses as of
December 31, 1995, and expect that significant operating losses
will continue to be incurred prior to the Effective Date. Such
operating losses combined with other cash requirements are
expected to present a substantial cash funding requirement.
As part of the Plan, the Debtors are attempting to
settle all significant litigation. The adequacy of the Debtors'
capital resources and long-term liquidity will be determined when
the Plan is confirmed by the Bankruptcy Court. However, the
uncertainties relating to the confirmation of the Plan and the
continuing losses (see "Selected Operating and Financial Data -
Unaudited Operating Results for the First Three Quarters of
Fiscal 1996," Section VI(B)) raise substantial doubt about the
Company's ability to continue as a going concern. See Spectrum's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995, Note 1 to Consolidated Financial Statements, attached
hereto as Exhibit E. Spectrum continues to closely monitor its
expenditures in order to conserve cash. In July 1995, the
Company received $3,000,000 for the sale of its AXCELL business
and the related license to certain patent rights to Telular. See
"General Information about the Debtors' Business; Restructuring
Efforts and Filing of the Chapter 11 Cases - Summary of the
Debtors' Postbankruptcy Restructuring Efforts - Dispositions of
Other Assets," Section III(D)(2), and Spectrum's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1995, Note 6 to
Consolidated Financial Statements, attached hereto as Exhibit E.
As a result of the sale of the AXCELL business, the operations of
Cellular have been downsized. In addition, on October 17, 1995,
the Company sold its Global subsidiary for $6,101,081. The net
proceeds of the sale were $4,549,000. See "General Information
about the Debtors' Business; Restructuring Efforts and Filing of
the Chapter 11 Cases - Summary of the Debtors' Postbankruptcy
Restructuring Efforts - Discontinued Operations and Disposition
of Subsidiary," Section III(D)(1), and Spectrum's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1995, Note
6 to Consolidated Financial Statements, attached hereto as
Exhibit E.
NOTWITHSTANDING THE FOREGOING CASH CONSERVING EFFORTS,
THE DEBTORS CONTINUE TO FACE SUBSTANTIAL UNCERTAINTIES AND TO
SUFFER SIGNIFICANT OPERATING LOSSES AND BANKRUPTCY RELATED
EXPENSES, RAISING SUBSTANTIAL DOUBT ABOUT THE DEBTORS' ABILITY TO
CONTINUE AS GOING CONCERNS. AS A CONSEQUENCE, THERE CAN BE NO
ASSURANCE THAT DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO
CONTINUE OPERATIONS UNTIL THE PLAN CAN BE CONFIRMED AND
IMPLEMENTED.
MOREOVER, THE PLAN CONTEMPLATES THAT ALL ADMINISTRATIVE
AND PRIORITY CLAIMS, TOGETHER WITH UNSECURED CLAIMS AND CERTAIN
OTHER COSTS, WILL BE PAID IN CASH. IN THE EVENT THAT THE
AGGREGATE AMOUNT OF ADMINISTRATIVE, PRIORITY AND UNSECURED
CLAIMS, TOGETHER WITH CERTAIN COSTS, EXCEEDS THE AMOUNT OF CASH
AVAILABLE TO THE DEBTORS, THE PLAN CANNOT BE CONFIRMED WITHOUT
THE CONSENT OF THE HOLDERS OF SUCH ADMINISTRATIVE AND PRIORITY
CLAIMS IN ADDITION TO OTHER HOLDERS ENTITLED TO VOTE UNDER THE
PLAN. SEE "SUMMARY OF THE PLAN - GENERAL DESCRIPTION OF THE
TREATMENT OF CLAIMS," SECTION VIII(D). IN ANY EVENT, NO
ASSURANCE CAN BE GIVEN THAT THE DEBTORS WILL HAVE SUFFICIENT
FUNDS AVAILABLE TO MAKE ALL PAYMENTS NECESSARY FOR CONFIRMATION
AND IMPLEMENTATION OF THE PLAN.
SECTION VII
SUBSTANTIVE CONSOLIDATION OF SPECTRUM AND CELLULAR
The Plan contemplates the substantive consolidation of
the estates of Spectrum and Cellular into a single estate. The
Proponents will file a motion for the substantive consolidation
of the Spectrum and Cellular estates prior to the Confirmation
Hearing (the "Spectrum/Cellular Substantive Consolidation
Motion"). APPROVAL OF THE SPECTRUM/CELLULAR SUBSTANTIVE
CONSOLIDATION MOTION BY A FINAL ORDER OF THE BANKRUPTCY COURT IS
A CONDITION PRECEDENT TO EFFECTIVENESS OF THE PLAN. See
"Conditions Precedent to Effectiveness of the Plan," Section XII.
Giving effect to substantive consolidation will create
a single estate consisting of all assets of Spectrum's and
Cellular's separate estates. Consequently, the legal rights and
priorities of each Claim and Interest holder shall be treated as
having a single recourse against the assets of the consolidated
estate. All Claim holders who asserted a Claim against either or
both of the Debtors arising from or relating to the same
underlying obligation or cause of action, whether the basis for
the asserted liability of either Debtor arises by contract or by
operation of law, will be treated as having a single Claim
against the assets of the consolidated estate. Also, as a result
of giving effect to substantive consolidation of Spectrum's and
Cellular's estates, neither Spectrum nor Cellular will receive
any distribution pursuant to the Plan with respect to Claims and,
in the case of Spectrum only, Interests against or in each other.
Substantive consolidation is based on an equitable
doctrine and not on any provision of the Bankruptcy Code or other
applicable statute. As an equitable doctrine, substantive
consolidation is meant to ensure fair treatment of all creditors.
While courts consider a variety of factors when determining
whether substantive consolidation is appropriate, these
considerations generally involve two critical criteria: (i)
whether creditors dealt with the entities as a single company and
did not rely on their corporate separateness in extending credit
and (ii) whether the debtors' business and affairs are so
entangled that consolidation would benefit all of their
creditors.
Since Spectrum and Cellular do not have a separate body
of creditors and since Cellular's assets have been commingled
with Spectrum's assets, the Debtors believe that application of
the above criteria to the facts of this case mandates substantive
consolidation of the estates of Spectrum and Cellular.
SECTION VIII
SUMMARY OF THE PLAN
A. Means of Execution of the Plan
The respective Chairman of the Board of Directors, the
Chairman of any special committees designated by the Board of
Directors, the President, Principal Chief Accounting Officer, or
Corporate Secretary of Spectrum and Reorganized Spectrum shall be
authorized to take all such actions as may be necessary or
appropriate to effectuate and further evidence the terms and
conditions of the Plan, agreements approved thereby, or orders of
the Bankruptcy Court relating thereto. The respective Secretary
or any Assistant Secretary of Spectrum or Reorganized Spectrum
shall be authorized to certify or attest to any of the foregoing
actions.
The adoption of the Amended Spectrum Certificate and
Amended Spectrum Bylaws, or similar constituent documents for
Reorganized Spectrum; the initial selection of directors and
officers for Reorganized Spectrum; the distribution of Cash and
issuance and distribution of Distributable Common Stock and Class
A Preferred Stock, the adoption, execution, delivery, conveyance,
assignment, and implementation of all contracts, leases,
agreements, documents, instruments, amendments, schedules,
releases, indentures and other agreements related to any of the
foregoing or the Plan; the adoption, execution and implementation
of employment, retirement and indemnification agreements,
incentive compensation programs, retirement income plans, welfare
benefit plans and other employee plans and related agreements,
including the Stock Incentive Plan and the Incentive Deferral
Plan; and the other matters provided for under the Plan involving
the corporate structure of Spectrum or Reorganized Spectrum or
corporate action to be taken or required by Spectrum or
Reorganized Spectrum shall be authorized and approved in all
respects without any requirement of further action by the
stockholders or directors of Spectrum or Reorganized Spectrum.
Reorganized Spectrum shall adopt the Amended Spectrum
Certificate and the Amended Spectrum Bylaws in conformance with
section 303 of the Delaware General Corporation Law and pursuant
to section 1123(a)(5)(I) of the Bankruptcy Code. The Amended
Spectrum Certificate and Amended Spectrum Bylaws shall contain
provisions which, among other provisions, authorize the issuance
of the Reorganized Spectrum. The Amended Spectrum Certificate
and Amended Spectrum Bylaws will become effective upon (x)
Confirmation of the Plan, (y) the occurrence of the Effective
Date, and (z) the filing with the Delaware Secretary of State of
a certificate of amendment reflecting the Amended Spectrum
Certificate. On the Effective Date or as soon thereafter as is
practicable, pursuant to applicable state law, Reorganized
Spectrum shall file with the applicable state governmental
agencies or offices any required constituent documents for
Reorganized Spectrum. As of and after the Effective Date,
Reorganized Spectrum shall continue to engage in business in
accordance with the Plan and related documents. Following the
Effective Date, Reorganized Spectrum shall retain the right to
merge, consolidate, dissolve, or take any other corporate action
in accordance with applicable nonbankruptcy law, including
amending the Amended Spectrum Certificate and the Amended
Spectrum Bylaws pursuant to applicable nonbankruptcy law to
provide for the issuance of nonvoting equity securities.
Effective as of the time of confirmation of the Plan,
Reorganized Spectrum shall adopt the Spectrum Technologies, Inc.
1996 Stock Incentive Plan (the "Stock Incentive Plan"). A
summary of the Stock Incentive Plan is included under "Summary of
the Plan - Adoption of Certain Compensation Plans - Stock
Incentive Plan," Section VIII(G)(1). A copy of the Stock
Incentive Plan is attached as Exhibit J hereto. Approval of the
Plan shall be deemed to constitute approval of the Stock
Incentive Plan for purposes of Rule 16b-3 promulgated under the
Exchange Act and for purposes of section 422 of the Tax Code.
Effective as of the time of confirmation of the Plan,
Reorganized Spectrum shall also adopt the Spectrum Technologies,
Inc. 1996 Incentive Deferral Plan (the "Incentive Deferral
Plan"). A summary of the Incentive Deferral Plan is included
under "Summary of the Plan - Adoption of Certain Compensation
Plans - Incentive Deferral Plan," Section VIII(G)(2). A copy of
the Incentive Deferral Plan is attached as Exhibit K hereto.
Approval of the Plan shall be deemed to constitute approval of
the Incentive Deferral Plan for purposes of Rule 16b-3
promulgated under the Exchange Act.
Reorganized Spectrum shall transmit or cause to be
transmitted to the Disbursing Agent on or before the Effective
Date sufficient Cash and Distributable Common Stock to: (i) make
the Distributions to the holders of Allowed Claims and Interests
required by the Plan to be made on or as soon as practicable
after the Effective Date; and (ii) establish the reserves
required by the Plan. The Disbursing Agent shall make the
Distributions pursuant to the Plan to the holders of Allowed
Claims and Allowed Interests, as applicable on the Effective
Date, and Reorganized Spectrum will effect the Reverse Stock
Split on the Effective Date.
B. General Description of Reorganized Spectrum Stock
1. Authorized and Issued Reorganized Spectrum Stock
The authorized capital stock of Reorganized Spectrum
shall consist of 13 million shares, comprised of (i) 10 million
shares of Reorganized Spectrum Common Stock, (ii) 1 million
shares of Class A Preferred Stock, and (iii) 2 million shares of
Preferred Stock. The Amended Spectrum Certificate shall prohibit
the issuance of certain nonvoting securities as required by the
Bankruptcy Code.
a. Reorganized Spectrum Common Stock. The Amended
Spectrum Certificate will authorize the issuance of 10 million
shares of Reorganized Spectrum Common Stock, $.001 par value, and
Reorganized Spectrum will issue and deposit with the Disbursing
Agent on or before the Effective Date sufficient shares of such
stock as are required for the initial distribution to holders of
Allowed Claims in Classes 4 and 6 and Allowed Interests in Class
5 in accordance with the Plan. In addition, Reorganized Spectrum
shall reserve for issuance sufficient shares of such stock as are
required for distribution to (i) holders of Class 2 Claims in the
event that there is insufficient cash in the Class 2 Distribution
Pool to pay 100 percent of the aggregate Allowed Amount of all
Class 2 Claims (after all Class 2 Claims are Allowed or
Disallowed) in cash and (ii) holders of Disputed Claims and
Disputed Interests in Classes 4, 5 and 6, pending the allowance
or disallowance of such Disputed Claims or Disputed Interests.
See "Summary of the Plan - General Description of the Treatment
of Claims - Estimation of and Reserve for Disputed Claims and
Interests," Section VIII(D)(5). The Amended Spectrum Certificate
authorizes Reorganized Spectrum to issue shares of Reorganized
Spectrum Common Stock in the future for such business purposes as
may then be determined by the Board.
The Reorganized Spectrum Stock Incentive Plan and
Incentive Deferral Plan (as such terms are defined below) shall
authorize, and Reorganized Spectrum will issue, an aggregate
number of shares of Reorganized Spectrum Common Stock equal to
2/9 of the aggregate number of shares of Distributable Common
Stock and Class A Preferred Stock. See "Summary of the Plan -
Means of Execution of the Plan," Section VIII(A).
b. Class A Preferred Stock. The Amended Spectrum
Certificate will authorize the issuance of 1 million shares of
Class A Preferred Stock, $.001 par value, of which shares in an
amount equal to the Distributable Common Stock will be issued by
Reorganized Spectrum to the Class Action Trustee for the benefit
of the Class Action Plaintiffs in accordance with the Class
Action Settlement and Plan. For two years after the Effective
Date, holders of Class A Preferred Stock will have a liquidation
preference over Reorganized Spectrum Common Stock to the extent
that, in the event that within two years of the Effective Date,
Reorganized Spectrum again becomes a debtor in a bankruptcy case
under the Bankruptcy Code (unless the case is an involuntary case
and is dismissed before an order for relief is entered therein
against Reorganized Spectrum), interests of holders of Class A
Preferred Stock will have priority in such proceedings over
interests of holders of Reorganized Spectrum Common Stock. At
the expiration of the two-year preference period, Class A
Preferred Stock will automatically convert to and become
Reorganized Spectrum Common Stock. Secondary market trading by
the public in the Class A Preferred Stock will be permitted,
subject to generally applicable securities laws, but the Class A
Preferred Stock will not (by reason of NASD restrictions) be
listed by Reorganized Spectrum on the Nasdaq SmallCap Market or
on any other exchange or market. See "Summary of the Plan -
General Description of Reorganized Spectrum Stock - Restrictions
on Transferability of Shares of Reorganized Spectrum Stock," and
- - Certain Features of Amended Spectrum Certificate and Amended
Spectrum Bylaws - The Restriction on Transfer of Reorganized
Spectrum Stock Provision," Sections VIII(B)(3) and (C)(10).
c. Preferred Stock. Reorganized Spectrum is
authorized to issue 2 million shares of preferred stock (the
"Preferred Stock"), of Reorganized Spectrum, issuable in series
as the Board may by resolution authorize, with such designations,
relative rights, preferences and limitations as the Board may
specify in such resolution, which resolution shall not require
the approval of shareholders. The Preferred Stock is available
to Reorganized Spectrum for issuance for any proper corporate
purpose, including issuance for cash, acquisitions of property or
stock of other companies, stock dividends or for increased
flexibility in defending against an unsolicited attempt to
acquire Reorganized Spectrum. Moreover, it is contemplated that
shares of Preferred Stock will be reserved for issuance in
connection with the adoption of a shareholder purchase rights
plan by the Board after the Effective Date. See "Summary of the
Plan - General Description of Reorganized Spectrum Stock Rights
Plan," Section VIII(B)(9).
Unless otherwise required by applicable law or
regulation, the shares of Preferred Stock will be issuable
without further authorization by vote or consent of the holders
of Reorganized Spectrum Common Stock and on such terms and for
such consideration as may be determined by the Board. The Board
will have broad discretion with respect to designating and
establishing the terms of each series of Preferred Stock prior to
its issuance. In this connection, the Board may fix for each
series (1) the number of shares constituting that series, (2) the
rate of dividends, if any, and the preferences, if any, over any
other series with respect to dividends, (3) voting rights, if
any, (4) the terms and conditions on which shares may be
converted, if the shares of any series are issued with the
privilege of conversion, (5) the price at and the terms and
conditions on which shares may be redeemed, (6) sinking fund
provisions, if any, for the redemption or purchase of shares, (7)
the amount payable upon shares in the event of voluntary or
involuntary liquidation, (8) the conditions or restrictions upon
the creation of indebtedness of Reorganized Spectrum or upon the
issuance of capital stock of Reorganized Spectrum and (9) the
conditions or restrictions with respect to the payment of
dividends upon, or the making of other distributions to, or the
acquisition or redemption of, shares ranking junior to the
Preferred Stock.
Unless specifically provided for in the Board
resolution authorizing the issuance of the Preferred Stock,
holders of Preferred Stock will not have any preemptive rights.
2. Voting Rights of Reorganized Spectrum Stock.
a. Authorized and issued shares of Reorganized
Spectrum Common Stock held by a Disbursing Agent for
distribution to the holder of an Allowed Claim or Allowed
Interest shall not be entitled to vote in any election of
directors of Reorganized Spectrum, or any other matter
requiring the vote of shareholders, until such time as the
Reorganized Spectrum Common Stock has actually been
distributed to the holder of the Allowed Claim or Allowed
Interest. In addition, a holder of a Disputed Claim or
Disputed Interest shall not be entitled to vote in any
election of directors of Reorganized Spectrum, or any other
matter requiring the vote of shareholders until such time as
the Disputed Claim or Disputed Interest has become an
Allowed Claim or Allowed Interest, and the holder of such
Allowed Claim or Allowed Interest has received its
distribution and become a shareholder of record of
Reorganized Spectrum.
The Class Action Trustee shall be entitled to vote
Class A Preferred Stock that has not yet been distributed to
a Class Action Plaintiff and is held by the Class Action
Trustee; however, the Class Action Trustee shall be required
to vote the Class A Preferred Stock in the same proportions
and the same manner as the holders of shares of Reorganized
Spectrum Common Stock have voted.
b. Manner of Voting; Election and Removal of
Directors. Subject to Subsection (a) above, each
shareholder of record of Reorganized Spectrum Common Stock
and Class A Preferred Stock shall have one vote for each
share outstanding in his or her name on the books of
Reorganized Spectrum and entitled to vote. Cumulative
voting will not be permitted.
Holders of Class A Preferred Stock will be
entitled to vote in the same manner as holders of
Reorganized Spectrum Common Stock, although, for the period
of time that the Class A Preferred Stock is in the hands of
the Class Action Trustee and has not been distributed to
members of the class, such stock will be required to be
voted in the same proportions as the holders of the
Reorganized Spectrum Common Stock have voted. In addition,
during the two-year preference period, no person may be
elected as a director unless he receives a plurality of the
votes cast by the holder of Reorganized Spectrum Common
Stock as well as a plurality of the votes cast by the
holders of Class A Preferred Stock, and no person may be
removed as a director by the holders of Class A Preferred
Stock unless the holders of a majority of the outstanding
Reorganized Spectrum Common Stock vote in favor of such
removal.
c. Class Voting. So long as there are any shares of
Class A Preferred Stock outstanding, any of the actions
described in Sections VIII(C)(12)(d)(2), (4) and (9) will
require the affirmative vote of the plurality of the shares
of each of the Class A Preferred Stock and the Reorganized
Spectrum Common Stock, each voting separately as a class.
Except as may be otherwise required by law, or with regard
to (i) the election of directors, (ii) the amendment of the
Amended Spectrum Certificate or Amended Spectrum Bylaws,
(iii) mergers and consolidations, (iv) dispositions, and (v)
appointing or replacing Reorganized Spectrum's independent
public auditors, the holders of Class A Preferred Stock and
Reorganized Spectrum Common Stock shall vote together as a
single class.
d. Quorum. So long as any shares of Class A
Preferred Stock are outstanding, the holders of (i) a
majority of the issued and outstanding shares of Class A
Preferred Stock and (ii) a majority of the issued and
outstanding shares of Reorganized Spectrum Common Stock,
present in person or represented by proxy, will constitute a
quorum for the transaction of any business at any duly
called meeting of shareholders. Thereafter, the holders of
a majority of all issued and outstanding shares of
Reorganized Spectrum Common Stock, present in person or
represented by proxy, will constitute a quorum for the
transaction of any business at any duly called meeting of
shareholders.
3. Restrictions on Transferability of Shares of
Reorganized Spectrum Stock
The Amended Spectrum Certificate prohibits for a period
of three years after the Effective Date any transfer of shares of
Reorganized Spectrum Stock that would cause any Person or group
of Persons to become a Five Percent Shareholder (as defined
below) (See "Summary of the Plan - Certain Features of the
Amended Spectrum Certificate - The Restriction on Transfer of
Reorganized Spectrum Stock Provision," Section VIII(C)(10)) or
increase a Five Percent Shareholder's percentage ownership
interest in Reorganized Spectrum. This limitation is intended to
prevent transfers of Reorganized Spectrum Stock from triggering
an "ownership change," as defined in section 382 of the Tax Code,
which would result in the limitation of certain potential tax
benefits available to Reorganized Spectrum. This restriction may
be waived by the Board of Directors of Reorganized Spectrum if,
in its judgment, the proposed transfer does not increase the risk
that the use of such tax benefits will be limited. It is
anticipated that limited waivers to this restriction will be
granted with respect to Reorganized Spectrum Common Stock covered
by the Incentive Deferral Plan and the Stock Incentive Plan. Any
transfer or Reorganized Spectrum Stock effected in violation of
the restrictions set forth in the Amended Spectrum Certificate
shall be deemed null and void and shall have no force and effect,
and the transferee thereof shall have no rights as a shareholder
of Reorganized Spectrum. See "Certain Federal Income Tax
Consequences of the Plan," Section XI; "Summary of the Plan -
Certain Features of the Amended Spectrum Certificate - The
Restriction on Transfer of Reorganized Spectrum Stock Provision,"
Section VIII(C)(10); and Exhibit I attached hereto.
Certificates representing shares of Reorganized
Spectrum Stock and such other securities of Reorganized Spectrum
will bear an appropriate legend, as set forth in Section 4 below,
with respect to such restrictions.
4. Legend on Certificates
a. Legend on Class A Preferred Stock. All
certificates for shares of Class A Preferred Stock issued by
Reorganized Spectrum and shares of Reorganized Spectrum
Common Stock to be issued on conversion of Class A Preferred
Stock will conspicuously bear a legend in substantially the
following form:
"IN ORDER TO PRESERVE CERTAIN TAX BENEFITS UNDER THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN PROVISIONS OF THE CORPORATION'S CERTIFICATE
OF INCORPORATION AND BYLAWS WHICH LIMIT THE
TRANSFERABILITY OF SUCH SECURITIES. A COPY OF THE
CERTIFICATE OF INCORPORATION HAS BEEN DEPOSITED WITH
THE CORPORATION AT ITS PRINCIPAL OFFICE, AND THE
CORPORATION WILL FURNISH A COPY THEREOF TO THE RECORD
HOLDER OF THESE SECURITIES WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS.
b. Legend on Reorganized Spectrum Common Stock.
Certificates for shares of Reorganized Spectrum Common Stock
issued by Reorganized Spectrum (other than upon conversion
of Class A Preferred Stock), including shares of Reorganized
Spectrum Common Stock distributed by the Disbursing Agent,
will conspicuously bear a legend in substantially the
following form:
"IN ORDER TO PRESERVE CERTAIN TAX BENEFITS UNDER THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN PROVISIONS OF THE CORPORATION'S CERTIFICATE
OF INCORPORATION AND BYLAWS WHICH LIMIT THE
TRANSFERABILITY OF SUCH SECURITIES. A COPY OF SUCH
PLAN AND CERTIFICATE OF INCORPORATION HAVE BEEN
DEPOSITED WITH THE CORPORATION AT ITS PRINCIPAL OFFICE,
AND THE CORPORATION WILL FURNISH A COPY THEREOF TO THE
RECORD HOLDER OF THESE SECURITIES WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS.
5. Transactions with Related Parties.
The Amended Spectrum Certificate requires that certain
business combinations proposed by shareholders owning more than
10% of the outstanding stock entitled to vote (as defined in
Section VIII(C)(7), an "Interested Stockholder") be approved by
the affirmative vote of at least 66-2/3% of the votes entitled to
be cast on such transaction by the holders of all then-
outstanding shares of Reorganized Spectrum Common Stock and Class
A Preferred Stock, voting together as a single class, excluding
shares held by the Interested Stockholder, unless prior approval
by the Board of Directors has been obtained. Such restricted
business combinations include, but are not limited to, (i)
mergers of Reorganized Spectrum into the Interested Stockholder,
(ii) the sale or other disposition by Reorganized Spectrum of any
assets or securities to an Interested Stockholder, (iii) a plan
of liquidation or dissolution of Reorganized Spectrum, (iv) any
amendment to the Amended Spectrum Bylaws and (v) any
reclassification of securities, recapitalization, merger with a
subsidiary or other transaction which would increase an
Interested Stockholder's proportionate share of the outstanding
capital stock of Reorganized Spectrum. See "Summary of the
Plan -- Certain Features of Amended Spectrum Certificate and
Amended Spectrum Bylaws -- The Business Combination Provision,"
Section VIII(C)(7).
The restrictions on certain business combinations may
encourage companies interested in acquiring Reorganized Spectrum
to negotiate in advance with the Reorganized Spectrum Board since
the 66-2/3% vote requirement would not be invoked if a majority
of the Reorganized Spectrum Board approves such a business
combination prior to its effective date. In the event of a
proposed acquisition of Reorganized Spectrum, the Reorganized
Spectrum Board believes that the interests of Reorganized
Spectrum shareholders will best be served by a transaction that
results from negotiations based upon careful consideration of the
proposed terms, such as the price to be paid minority
shareholders, the form of consideration paid and tax effects of
the transaction. However, if the restriction on business
combinations has the effect of giving management more bargaining
power in negotiations with a potential acquiror, it could result
in management using the bargaining power not only to try to
negotiate a favorable price for an acquisition but also to
negotiate more favorable terms for management.
6. Estimated Equity Value
Following confirmation of the Plan, Reorganized
Spectrum shall be authorized to issue sufficient shares of such
stock to be distributed to holders of Claims in Classes 2,4,5 and
6 (the "Distributable Common Stock"). Following confirmation,
the holders of Distributable Common stock will hold approximately
forty-five percent (45%) of the total equity interest in
Reorganized Spectrum. Based on the outstanding shares of
Existing Common Stock and the average closing bid and ask price
as reported by the National Quotation Bureau as of February 2,
1996 of $.115 per share, the Existing Common Stock had a market
value of approximately $9.2 million. The market value of the
Distributable Common Stock will be approximately forty-five (45%)
of the market value of the total equity value of Reorganized
Spectrum. THE AMOUNT OF DISTRIBUTABLE COMMON STOCK TO EACH CLASS
IS NOT KNOWN AT THIS TIME AND WILL NOT BE KNOWN UNTIL ALL
DISPUTED CLAIMS ARE LIQUIDATED. FURTHER, THE COMPANY CANNOT
PREDICT THE EFFECT OF THE CONFIRMATION OF THIS PLAN ON THE FUTURE
TRADING PRICE OF SPECTRUM SECURITIES.
If no plan of reorganization can be confirmed, the
Debtors may be liquidated under Chapter 7 or Chapter 11. In the
case of a liquidation, the proceeds of the liquidation would be
distributed to the respective holders of Claims against the
Debtors in accordance with the priorities established by the
Bankruptcy Code. See "Alternatives to Confirmation and
Consummation of Plan" Section XIV. Under the current liquidation
analysis, Class 5; Equity Interests will receive distribution
from the liquidation proceeds after payment of Administrative
Expense Claims, Priority Tax Claims, Secured Claims, Priorty
Nontax Claims, and Unsecured Claims. The Company also believes
that holders of claims in Classes 3,4,5 and 6 will be treated
pari passu. This distribution will likely result in the
elimination of any recovery to holders of claims in those
Classes.
7. Reverse Stock Split
The Reverse Stock Split shall be effected by the
exchange and cancellation of all issued and outstanding Existing
Spectrum Common Stock for Reorganized Spectrum Common Stock at
the rate of one share of Reorganized Spectrum Common Stock for
every 100 shares of Existing Spectrum Common Stock. No
fractional shares of Reorganized Spectrum Common Stock will be
issued as a result of the Reverse Stock Split. Where the Reverse
Stock Split would create such fractional shares, shares will be
rounded up or down to the nearest whole number.
8. Fractional Shares
Fractional shares of Reorganized Spectrum Common Stock
created by the Reverse Stock Split shall be rounded up or down to
the nearest whole number.
9. Rights Plan.
Reorganized Spectrum anticipates that it will adopt a
Rights Plan after the Effective Date. The Amended Spectrum
Certificate will explicitly authorize the Board of Directors to
adopt a Rights Plan and to specify its actual terms, without the
need for shareholder approval. See "Summary of the Plan -
Certain Features of Amended Spectrum Certificate and Amended
Spectrum Bylaws - Other Provisions - Issuance of Rights and
Options to Purchase Shares," Section VIII(C)(12)(c). The time at
which a Rights Plan shall be adopted and the specific terms of
the Rights Plan shall be determined by the Board of Directors
upon adoption and set forth in the contracts or instruments
establishing the Rights Plan and evidencing the rights to be
issued thereunder. The authority of the Board of Directors with
respect to the Rights Plan and such rights shall include, but not
be limited to, determination of (i) the purchase price of the
capital stock to be purchased upon exercise of such rights; (ii)
provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise
transferred, either together with or separately from, any other
stock or other securities of Reorganized Spectrum; (iii)
provisions which set forth the type and amount of capital stock
for which the rights are initially exercisable and provisions
which adjust the number or exercise price of such rights or the
amount or nature of the stock or other securities receivable upon
exercise of such rights in the event of a combination, split or
recapitalization of any Reorganized Spectrum Stock, a change in
ownership of Reorganized Spectrum Stock or other securities or a
reorganization, merger, consolidation, sale of assets or other
occurrence relating to Reorganized Spectrum or any Reorganized
Spectrum Stock, and provisions restricting the ability of
Reorganized Spectrum to enter into any such transaction absent an
assumption by the other party or parties thereto of the
obligations of Reorganized Spectrum under such rights; (iv)
provisions which deny the holder of a specified percentage of the
outstanding securities of Reorganized Spectrum the right to
exercise such rights and/or cause such rights held by such holder
to become void; (v) provisions which permit Reorganized Spectrum
to redeem or exchange such rights; and (vi) the appointment of
the rights agent with respect to such rights. This provision is
intended to confirm (and not limit) the authority of the Board of
Directors to issue share purchase rights or other rights to
purchase stock or securities or assets of Reorganized Spectrum or
any other corporation.
It is anticipated that following the Effective Date,
Reorganized Spectrum would issue share purchase rights (each, a
"Right") to all holders of voting Stock. The Rights would be
subject to a Rights Agreement which would provide the
circumstances under which the Rights are to be distributed and
exercised. The circumstances in which the Rights would be
distributed could include, among other circumstances, (i) the
public announcement that a Person or group of affiliated or
associated Persons (an "Acquiring Person") shall have acquired
beneficial ownership of at least a specified percentage of the
outstanding shares of Reorganized Spectrum voting stock and (ii)
the commencement of, or an announcement of an intention to make,
a tender offer or exchange offer, the consummation of which would
result in the beneficial ownership by a Person or group of at
least a specified percentage of the outstanding shares of
Reorganized Spectrum voting stock (the earlier of such dates
being called the "Rights Distribution Date"). The Rights would
not be exercisable prior to the Rights Distribution Date and
would not be transferable prior to such time separate from the
shares of Reorganized Spectrum voting stock to which a Right
attaches.
Upon distribution, each Right would entitle the
registered holder to purchase newly-issued capital stock of
Reorganized Spectrum (which could be Reorganized Spectrum Common
Stock or a class or series of Preferred Stock having such terms
as would be established by the Board of Directors, and could be a
fractional share), all as specified in the Rights Agreement, at
an exercise price also specified therein.
It is anticipated that the Rights Agreement would
provide that, in the event that any Person or group of affiliated
Persons becomes an Acquiring Person (other than in a transaction
approved in advance by the Board of Directors and/or by directors
meeting specified criteria, by such vote of the Board and/or such
directors as would be specified in the Rights Agreement), proper
provision would be made so that each holder of a Right, other
than Rights beneficially owned by the Acquiring Person (which
Rights would thereafter be void), would thereafter have the right
to receive upon exercise that number of shares of Reorganized
Spectrum voting stock (or other specified security) having a
market value (as defined in the Rights Agreement) of two times
(or other specified multiple) of the exercise price of the Right.
In the event that, at any time on or after the date that any
Person has become an Acquiring Person, Reorganized Spectrum is
acquired in a merger or other business combination transaction,
or 50% or more (or other specified percentage) of its
consolidated assets or earning power are sold, it is anticipated
that the Rights Agreement would require that proper provision be
made so that each holder of a Right would thereafter have the
right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of Reorganized
Spectrum voting stock of the acquiring company which at the time
of such transaction would have a market value of two times (or
other specified multiple) of the exercise price of the Right. It
is anticipated that the Rights Agreement would provide that,
after any Person or group becomes an Acquiring Person, the Board
of Directors would have the right to exchange the Rights (other
than Rights held by such Acquiring Person which would have become
void), in whole or in part, at an exchange ratio of one share of
Reorganized Spectrum voting stock (or other specified amount of
Reorganized Spectrum voting stock or other securities) per Right,
subject to adjustment.
It is anticipated that the Rights Agreement would
provide that, prior to the acquisition by a Person or group of
affiliated or associated Persons of beneficial ownership of more
than a specified percentage of the outstanding shares of
Reorganized Spectrum voting stock, the Board of Directors would
have the right to redeem the Rights in whole, but not in part, at
a price per Right (and payable in cash or such other form of
consolidation) specified in the Rights Agreement. Redemption of
the Rights could be made at such time and on such basis as the
Board of Directors in its sole discretion might establish.
Immediately upon redemption of any Rights, the right to exercise
the Rights would terminate, other than the right of holders of
Rights to receive the redemption price.
The Rights Agreement would be anticipated to provide
that the terms of the Rights could be amended by the Board of
Directors (and/or by directors meeting specified criteria, and by
such vote of the Board or such directors as would be specified
therein) without consent of the holders of Rights.
Prior to exercise, a Right would not create any rights
in the holder thereof as a stockholder of Reorganized Spectrum,
including, without limitation, the right to vote or receive
dividends.
The Rights would have certain antitakeover effects.
The Rights would cause substantial dilution to a person or group
that attempts to acquire Reorganized Spectrum on terms not
approved by the Board of Directors. The Rights should not
interfere with any merger or other business combination approved
by the Board of Directors before the existence of an Acquiring
Person since the Rights would be able to be redeemed by
Reorganized Spectrum prior to the time that a Person or group of
Persons has become an Acquiring Person. In the event of a bona
fide offer to acquire Reorganized Spectrum conditioned on the
elimination or non-applicability of the Rights Plan, the Board of
Directors would decide, on a basis consistent with the directors
fiduciary duties, whether or not to redeem the Rights or
otherwise cause the Rights Plan to be inapplicable.
C. Certain Features of the Amended Spectrum Certificate and
Amended Spectrum Bylaws
The individuals currently serving as directors and
officers will serve initially as the directors and the executive
officers of Reorganized Spectrum commencing on the Effective
Date. See "General Information about the Debtors' Business;
Restructuring Efforts and Filing of the Chapter 11 Cases -
Description of the Debtors - Directors and Officers," Section
III(A)(2) for the list of such individuals. This list may be
amended at any time prior to the Effective Date upon such notice
as may be required by the Bankruptcy Court. Subject to the
requirement of Bankruptcy Court approval under section 1129(a)(5)
of the Bankruptcy Code, those persons so designated shall be
authorized to assume their offices as of the Effective Date and
shall be authorized to continue to serve in such capacities
thereafter pending further action of the Board of Directors or
stockholders of Reorganized Spectrum in accordance with
applicable state law and Reorganized Spectrum's then-existing
certificate of incorporation and bylaws.
The Amended Spectrum Bylaws will contain certain
provisions relating to the nomination of directors and notice of
business to be conducted at shareholder meetings. See "Summary
of the Plan - Certain Features of the Amended Spectrum
Certificate and Amended Spectrum Bylaws," Section VIII(C), and
Exhibit H attached hereto.
Certain significant features of the Amended Spectrum
Certificate, attached hereto as Exhibit I, are summarized below.
Certain additional features relating to the rights and
limitations of the Preferred Stock, the Class A Preferred Stock
and the Reorganized Spectrum Common Stock are described in
"Summary of the Plan - General Description of Reorganized
Spectrum Stock," Section VIII(B).
1. Summary. The Amended Spectrum Certificate
provides (i) that the Board may consider the interests of
constituents of Reorganized Spectrum other than Reorganized
Spectrum's shareholders in evaluating certain takeover proposals
(the "Evaluation Provision"); (ii) that shareholders of
Reorganized Spectrum may not act without a duly called annual or
special meeting, except upon the written consent signed by all of
the shareholders of Reorganized Spectrum entitled to vote thereon
(the "Consent Provision"); (iii) that shareholders of Reorganized
Spectrum may not call a special meeting of shareholders (the
"Shareholder Meeting Provision"); (iv) that directors on the
Board are classified into three classes, as nearly equal in
number as possible, each class to serve for three years, with one
class elected each year (the "Classified Board Provision"); (v)
that a director on the Board may be removed only for cause and
only by the affirmative vote of not less than 80% of the
outstanding stock of Reorganized Spectrum entitled to vote for
the election of such director (the "Director Removal Provision");
(vi) that a Business Combination (as defined below) with or
proposed by or on behalf of an Interested Stockholder (as defined
below) would require an affirmative vote of 66-2/3% of the votes
entitled to be cast by holders of the Voting Stock (as defined
below) of Reorganized Spectrum (excluding Voting Stock held by
the Interested Stockholder and certain related parties) unless
the transaction is approved by a majority of the Board prior to
the Determination Date (as defined below) (the "Business
Combination Provision"); (vii) that directors of Reorganized
Spectrum shall not be liable for damages for breach of their
fiduciary duty of care, subject to certain exceptions (the
"Liability Provision"); (viii) that the Board is expressly
authorized to make, adopt, alter, amend, change or repeal the
Amended Spectrum Bylaws, and that the shareholders of Reorganized
Spectrum do not have the right to make, adopt, alter, amend,
change or repeal the Amended Spectrum Bylaws except upon the
affirmative vote of not less than 80% of the outstanding stock of
Reorganized Spectrum entitled to vote thereon (the "Bylaws
Amendment Provision"); (ix) that limitations apply to the
transfer of shares of Reorganized Spectrum Stock that would cause
a person or entity to become a Five Percent Shareholder or
increase a Five Percent Shareholder's percentage ownership
interest in Reorganized Spectrum (the "Restriction on Transfer of
Stock Provision"); and (x) that notwithstanding anything to the
contrary in the Amended Spectrum Certificate, the affirmative
vote of at least 80% of all of the Voting Stock voting together
as a single class, other than Voting Stock beneficially owned by
an Interested Stockholder, is required to alter, amend or repeal
the Evaluation Provision, the Consent Provision, the Shareholder
Meeting Provision, the Classified Board Provision, the Director
Removal Provision, the Business Combination Provision, the Bylaw
Amendment Provision, the Restriction on Transfer of Stock
Provision and the Amendment Provision (as defined below) unless
such alteration, amendment, or repeal is recommended by a
majority of the members of the Board (the "Amendment Provision").
2. The Evaluation Provision. The Evaluation
Provision will permit the Board to take into account all factors
it deems relevant in evaluating, among other things, tender
offers, proposals for business sales or combinations and
proposals for corporate liquidation or reorganizations involving
Reorganized Spectrum, including the potential impact of any such
transaction on employees, customers, suppliers, partners, joint
ventures, and other constituents of Reorganized Spectrum and the
communities in which it operates.
3. The Consent Provision. The Consent Provision
provides that shareholders of Reorganized Spectrum may not act
without a duly called annual or special meeting except upon the
signing of a written consent setting forth the action to be taken
signed by all of the shareholders entitled to vote thereon.
The Consent Provision limits the ability of any
shareholder (other than a holder of all of the Reorganized
Spectrum Common Stock) to take action immediately and without
prior notice to the Board. The Consent Provision allows
shareholders to act only at an annual or special meeting thereby
ensuring that all shareholders will have the opportunity to
consider any matter that could affect their rights.
4. The Shareholder Meeting Provision. The
Shareholder Meeting Provision provides that shareholders of
Reorganized Spectrum may not call a special meeting of
shareholders, thus increasing the difficulty of shareholders from
taking any action not approved by the Board of Directors except
at an annual meeting of shareholders.
5. The Classified Board Provision. Under the
Classified Board Provision, the directors are divided into three
classes, designated Class I, Class II and Class III. Each class
consists, as nearly as possible, of one-third of the total number
of directors constituting the entire Board of Directors.
Initially, Class I directors shall be elected for a one-year
term, Class II directors for a two-year term, and Class III
directors for a three-year term. At each succeeding annual
meeting of stockholders beginning after the first meeting
following the Effective Date, successors to the class of
directors whose term expires at that annual meeting shall be
elected for a three-year term.
The Classified Board Provision provides that the Board
shall be comprised of no more than seven directors. The exact
number of directors and the number of directors constituting each
class of directors (with each of the three classes being as
nearly equal as possible) may be fixed or changed, from time to
time, by the Board within such authorized limits.
In addition, the Classified Board Provision provides
that if the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as
possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director. In
addition, a director shall hold office until the annual meeting
for the year in which his or her term expires and until his or
her successor shall be elected subject, however, to prior death,
resignation, retirement or removal from office. Any vacancy on
the Board that results from an increase in the number of
directors may be filled by a vote of the majority of the
directors then in office, provided that a quorum is present; any
other vacancy occurring in the Board may be filled by a vote of
the majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. Any director elected to
fill a vacancy not resulting from an increase in the number of
directors shall have the same remaining term as that of his
predecessor or if such director has no predecessor, as that of
the class of directors to which such director has been elected.
6. The Director Removal Provision. Under the
Director Removal Provision, each director on the Board may be
removed only for cause and by the affirmative vote of the holders
of not less than a majority of the shares of each class of
outstanding voting stock of Reorganized Spectrum then entitled to
vote for the election of such director. Cause for removal exists
only if the director whose removal is proposed has been convicted
of a felony by a court of competent jurisdiction or has been
adjudged by a court of competent jurisdiction to be liable for
gross negligence or misconduct in the performance of such
director's duty to Reorganized Spectrum and such adjudication is
no longer subject to direct appeal.
7. The Business Combination Provision. Under the
Business Combination Provision, a Business Combination (as
defined below) transaction would require approval by the
affirmative vote of at least 66-2/3% of the votes entitled to be
cast on such transaction by the holders of all then-outstanding
shares of Reorganized Spectrum Common Stock ("Voting Stock"),
voting together as a single class, excluding shares held by an
Interested Stockholder (as defined below) and certain related
parties if the Business Combination transaction is with or
proposed by or on behalf of any of them, unless the Business
Combination is approved by a majority of the Board prior to the
date on which such Interested Shareholder became the beneficial
owner of 10% or more of the Reorganized Spectrum Common Stock
(the "Acquisition Date"). Under certain circumstances a Business
Combination shall be presumed to be proposed by or on behalf of
an Interested Stockholder, unless a majority of the Board
determines otherwise. If such prior Board approval is obtained,
the Business Combination shall be subject to the applicable
voting requirement under the Delaware General Corporation Law
("DGCL") which presently, for most types of Business Combination
transactions on which a shareholder vote is required, is the
affirmative vote of the holders of a majority of the outstanding
shares entitled to vote on the matter.
An "Interested Stockholder" is defined in the Business
Combination Provision to include any person who is the beneficial
owner (as defined below) of more than 10% of the Voting Stock
other than Reorganized Spectrum, certain of its subsidiaries or
certain employee benefit plans, including employee stock
ownership plans, and the trustees of such plans. A person is the
"beneficial owner" of Voting Stock when such person and certain
related parties, directly or indirectly, own or have the right to
acquire or vote such stock.
A "Business Combination" includes the following
transactions with, or proposed by or on behalf of, any Interested
Stockholder or certain related parties: (a) a merger or
consolidation of Reorganized Spectrum or any subsidiary with an
Interested Stockholder or certain related parties; (b) the sale
or other disposition by Reorganized Spectrum or a subsidiary of
any assets or securities to an Interested Stockholder or certain
related parties, or any other arrangement with or for the benefit
of an Interested Stockholder or any such related party (including
investments, loans, advances, guarantees, extensions of credit,
creating security interests and participating in joint ventures)
which (except in certain circumstances), together with all other
such arrangements (including all contemplated future events),
involves assets or securities having a value (or involving
aggregate commitments) of $5 million or more or constitutes more
than 5% of the book value of the total assets (in the case of
transactions involving assets or commitments other than capital
stock) or of the shareholders' equity (in the case of
transactions in capital stock) of the entity in question (the
"Substantial Part"), as reflected in the most recent fiscal year-
end consolidated balance sheet of such entity existing at the
time the shareholders of Reorganized Spectrum would be required
to approve or authorize such transaction; (c) the adoption of any
plan or proposal for the liquidation or dissolution of
Reorganized Spectrum or for any amendment to Amended Spectrum
Bylaws; (d) any reclassification of securities, recapitalization,
merger with a subsidiary or other transaction which has the
effect, directly or indirectly, of increasing an Interested
Stockholder's proportionate share of the outstanding capital
stock of Reorganized Spectrum or a subsidiary; or (e) any
agreement or arrangement providing for any one or more of the
actions specified in the foregoing clauses (a) through (d).
If an Interested Stockholder consents to the adoption
of the proposed Business Combination and in certain other
circumstances, the Business Combination will be presumed to be on
behalf of the Interested Stockholder, unless a majority of the
Board in good faith determines otherwise.
8. The Liability Provision. Under the Liability
Provision, Reorganized Spectrum's directors will not have
personal liability to Reorganized Spectrum or its shareholders
for monetary damages for any breach of their fiduciary duties as
directors, except (i) for any breach of the duty of loyalty to
Reorganized Spectrum or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for liability
under section 174 of the DGCL involving certain unlawful
dividends or stock repurchases or redemptions or (iv) for any
transaction from which the director derived an improper personal
benefit.
The Liability Provision also provides that Reorganized
Spectrum shall indemnify to the full extent provided by law any
person made or threatened to be made a party or witness to any
action, suit or proceeding by reason of the fact that such person
is or was a director or officer of Reorganized Spectrum or by
reason of the fact that such person is or was serving any other
corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise in any capacity at the request of
Reorganized Spectrum.
In addition, the Liability Provision provides that
Reorganized Spectrum may maintain insurance, at its expense, to
protect itself and any director, officer, employee, or agent of
Reorganized Spectrum or another corporation, partnership, joint
venture, trust or other enterprise against such expense,
liability or loss, whether or not Reorganized Spectrum would have
the power to indemnify such person against such expense,
liability or loss under the DGCL.
9. The Bylaw Amendment Provision. Under the Bylaw
Amendment Provision, the Board is expressly authorized to make,
adopt, alter, amend, change or repeal the Amended Spectrum
Bylaws.
The Bylaw Amendment Provision further provides that the
shareholders of Reorganized Spectrum may not make, adopt, alter,
amend, change or repeal the Amended Spectrum Bylaws except upon
the affirmative vote of not less than 80% of the outstanding
stock of Reorganized Spectrum entitled to vote thereon.
10. The Restriction on Transfer of Reorganized
Spectrum Stock Provision. Spectrum currently has reflected on
its balance sheet certain net deferred tax benefits of
approximately $3.2 million with a valuation allowance of equal
value. The tax deductions associated with these deferred tax
benefits may be reviewed by the IRS, and it is possible that,
upon such review, the IRS may disallow a portion of such deferred
tax benefits. In addition, such tax deductions would be subject
to significant limitation under section 382 of the Tax Code if
Reorganized Spectrum undergoes an "ownership change." See
"Certain Federal Income Tax Consequences of the Plan - Matters
Affecting Utilization of Debtors' Tax Attributes," Section XI
(2)(a). Reorganized Spectrum will undergo an "ownership change"
if any Five Percent Shareholders (as defined below) of
Reorganized Spectrum increase their aggregate ownership of
Reorganized Spectrum Stock by more than 50 percentage points over
the lowest percentage of such stock owned by such shareholders at
any time during the testing period (generally three years). A
"Five Percent Shareholder" is a Person or group of Persons
identified as a "Five Percent Shareholder" of Reorganized
Spectrum for purposes of section 382 of the Tax Code and the
Treasury Regulations promulgated thereunder.
The Amended Spectrum Certificate limits transfers of
shares of Reorganized Spectrum Stock. This limitation is
intended to prevent transfers of Reorganized Spectrum Stock from
triggering an "ownership change." See "Certain Federal Income
Tax Consequences of the Plan - Matters Affecting Utilization of
Debtors' Tax Attributes," Section XI (2)(a).
Under the Amended Spectrum Certificate, any sale,
transfer, assignment, conveyance, pledge or other disposition or
the issuance of any option to sell, transfer, assign, convey,
pledge or otherwise dispose of (a "Transfer") legal or beneficial
ownership of Reorganized Spectrum Stock prior to the date which
is one day after the third anniversary of the Effective Date (the
"Release Date"), or any attempted Transfer of such Stock under
any agreement entered into prior to the Release Date, shall be
prohibited and deemed null and void to the extent that, as a
result of such Transfer (or any series of Transfers of which such
Transfer is a part), (i) any Person or group of Persons would
become a Five Percent Shareholder for purposes of section 382 of
the Tax Code, or (ii) the percentage of stock ownership of any
Five Percent Shareholder would be increased (a "Prohibited
Transfer"); provided, that nothing contained in the Amended
Spectrum Certificate shall preclude the settlement of any
transaction entered into through the facilities of the Nasdaq
SmallCap Market in the Reorganized Spectrum Common Stock. This
prohibition on Transfers will not apply to any Transfer (i) that
has been approved in advance by the Board of Directors of
Reorganized Spectrum, which approval may be withheld only if, in
the judgment of the Board of Directors, such Transfer may
increase the risk that the use of Reorganized Spectrum's net
operating loss carryforwards, tax losses recognized in the future
or other tax attributes will be limited or (ii) made in
compliance with exceptions provided by the Board of Directors of
Reorganized Spectrum in resolutions duly adopted from time to
time. It is anticipated that limited waivers to this prohibition
will be granted with respect to Reorganized Spectrum Common Stock
covered by the Incentive Deferral Plan and the Stock Incentive
Plan.
The Amended Spectrum Certificate shall prohibit any
employee or agent of Reorganized Spectrum from recording any
Transfer which is prohibited, and the transferee in any such
Transfer shall not be recognized as a holder of Reorganized
Spectrum Stock in respect of the Reorganized Spectrum Stock that
is the subject of such Prohibited Transfer.
If a purported Transfer would constitute a Prohibited
Transfer, then the transferee is required, upon demand of
Reorganized Spectrum, to transfer or cause to be transferred any
certificate or other evidence of ownership of the Reorganized
Spectrum Stock that is the subject of the Prohibited Transfer,
together with all dividends or distributions, if any, that may
have been received by the purported transferee from Reorganized
Spectrum in respect of such stock, to a designated transfer agent
(the "Agent"). The Agent shall sell such Reorganized Spectrum
Stock in an arm's length transaction. If the purported
transferee has resold the Reorganized Spectrum Stock before
receiving a transfer demand from Reorganized Spectrum, the
purported transferee will be deemed to have sold the Reorganized
Spectrum Stock on behalf of the Agent and will be required to
transfer to the Agent any distributions received in respect of
the stock and the proceeds of such sale, except to the extent the
Agent grants written permission to the purported transferee to
retain such portion of the proceeds not exceeding the amount the
purported transferee would have received from the Agent had the
Agent rather than the purported transferee resold the Reorganized
Spectrum Stock. The Agent shall apply any proceeds of sale of
Reorganized Spectrum Stock that has been the subject of a
Prohibited Transfer as follows: first, to cover its own expenses
in selling the stock; second, to the purported transferee, up to
the amount paid by the purported transferee for the Reorganized
Spectrum Stock (or the market price for such Reorganized Spectrum
Stock on the trading day immediately preceding the Transfer),
which amount shall be determined by the Board of Directors of
Reorganized Spectrum in its sole discretion; and third, to a
charitable organization selected by Reorganized Spectrum.
If the purported transferee fails to surrender the
Reorganized Spectrum Stock that is the subject of a prohibited
Transfer or the proceeds of sale thereof to the Agent within
thirty days of demand therefor by Reorganized Spectrum,
Reorganized Spectrum may institute legal proceedings to compel
the surrender.
Under the Amended Spectrum Certificate, each
certificate representing a share of Reorganized Spectrum Stock
issued prior to the Release Date shall bear a legend to the
effect that such Reorganized Spectrum Stock and any common stock
or other Reorganized Spectrum Stock acquired prior to the Release
Date upon exercise or conversion of such Reorganized Spectrum
Stock is subject to the transfer restrictions set forth in the
Reorganized Spectrum Certificate.
11. The Amendment Provision. Under the Amendment
Provision, the affirmative vote of 80% of all the Voting Stock
voting together as a single class, other than Voting Stock
beneficially owned by an Interested Stockholder, is required to
alter, amend, or repeal the Evaluation Provision, the Consent
Provision, the Stockholder Meeting Provision, the Classified
Board Provision, the Director Removal Provision, the Business
Combination Provision, the Bylaw Amendment Provision, the
Restriction on Transfer of Stock Provision and the Amendment
Provision. For purposes of the Amendment Provision, the
definitions of "Interested Stockholder" and "Voting Stock" are
the same as used in the Business Combination Provision.
12. Other Provisions.
a. Quorum. Not less than a majority of
directors shall constitute a quorum for the transaction of
business at any duly called meeting of the Board; provided
that not less than a majority of directors shall constitute
a quorum at such a meeting for the transaction of any
business relating to the approval of any action described in
Subsection (d) below.
b. Ordinary Action by the Board. A majority
vote of directors present at a meeting of directors at which
a quorum is present shall be required to effect any action
by the Board with respect to any matter other than those
described in Subsection (d) below.
c. Issuance of Rights and Options to Purchase
Shares. The Board of Directors shall have the authority to
issue, by a majority vote of directors present at a meeting
of directors at which a quorum is present, rights or options
entitling the holders of such rights or options to purchase
from Reorganized Spectrum, upon such consideration, terms
and conditions as may be fixed by the Board, (x) shares of
any class or series, whether authorized but unissued shares,
treasury shares or shares to be purchased or acquired or (y)
assets of the corporation, including, without limitation, to
issue without consideration to the stockholders of
Reorganized Spectrum any such rights or options (a "Rights
Plan"). See "Summary of the Plan - General Description of
Reorganized Spectrum Stock - Rights Plan," Section VIII
(B)(9). No shareholder vote is required for the adoption of
a Rights Plan or other issuance of rights or options and, in
the event the Board adopts such a Rights Plan, the Board
shall have the authority to waive any and all rights granted
therein to Shareholders as it in its judgment deems
necessary.
d. Supermajority Requirement. The affirmative
vote of not less than two-thirds of the directors present at
any meeting at which a quorum is present ("Supermajority
Vote") shall be required to effect any action by the Board
with respect to the matters set forth below, other than
actions determined by the Board to constitute Business
Combinations within the meaning of the Business Combination
Provision.
(1) Amendments. Any modification, revision,
alteration, amendment, repeal or rescission, in whole
or in part, of any provision of the Amended Spectrum
Certificate or Amended Spectrum Bylaws.
(2) Mergers and Consolidations. Entering into
any agreement to merge or consolidate Reorganized
Spectrum with or into any other Person.
(3) Acquisitions. Entering into any agreement
for Reorganized Spectrum or any of its subsidiaries to
acquire all or substantially all of the properties,
assets or equity of another person, if the value of the
aggregate consideration for such acquisition, including
any liabilities to be assumed by Reorganized Spectrum
or its subsidiaries, in the reasonable judgment of the
Board, exceeds $5 million or more or constitutes more
than 5 percent of the book value of the total assets
(in the case of transactions involving assets or
commitments other than capital stock) or of the
shareholders' equity (in the case of transactions in
capital stock) of the entity in question, as reflected
in the most recent fiscal year-end consolidated balance
sheet of such entity existing at the time the directors
of Reorganized Spectrum would be required to approve or
authorize such transaction.
(4) Dispositions. Selling, leasing, exchanging
or otherwise disposing of all or substantially all of
the business, assets or properties of Reorganized
Spectrum and its subsidiaries, taken as a whole.
(5) Securities Issuances, etc. Issuing, selling,
or modifying the terms of any capital stock of
Reorganized Spectrum or its subsidiaries, or any
warrant, option, note, debenture, call or other
securities or rights convertible into or exchangeable
therefor, or engaging in any recapitalization or
reclassification involving any such capital stock or
other securities.
(6) Redemption and Repurchase. Directly or
indirectly redeeming, purchasing or otherwise acquiring
any of Reorganized Spectrum's securities.
(7) Insolvency and Bankruptcy. Committing any
voluntary act of insolvency or bankruptcy on behalf of
Reorganized Spectrum, including but not limited to (a)
the filing of a voluntary petition in any bankruptcy,
reorganization, winding-up or liquidation proceeding or
other proceeding analogous in purpose and effect, (b)
applying for or consenting to the appointment of a
receiver or trustee for a substantial portion of its
assets, (c) making an assignment for the benefit of
creditors, (d) admitting in writing its inability to
pay its debts, or (e) consenting to the entry to any
court order or judgment confirming its bankruptcy or
insolvency or approving any reorganization, winding-up
or liquidation.
(8) Appointment and Removal of CEO. Appointing
or removing the Chief Executive Officer of Reorganized
Spectrum.
(9) Auditors. Appointing or replacing
Reorganized Spectrum's independent public auditors.
(10) Shareholders Meetings. Calling a special
meeting of the shareholders or fixing the date of an
annual meeting of the Shareholders.
D. General Description of the Treatment of Claims
1. Unclassified Claims and Distributions
Administrative Claims and Priority Tax Claims have not
been classified under the Plan and are excluded from the classes
described below in accordance with section 1123(a)(1) of the
Bankruptcy Code.
a. Administrative Claims. Each Allowed
Administrative Claim with the exception of Management
Administrative Claims described in the following paragraph,
shall be paid either (i) in full, in cash, on the later of
the Effective Date or the date on which such Administrative
Claim is allowed by Final Order or (ii) on such terms as the
Debtors or the Disbursing Agent and the holder of an Allowed
Administrative Claim agree; provided, however, that Allowed
Administrative Claims representing liabilities incurred in
the ordinary course of business by the Debtors in Possession
shall be paid in full, in cash, as they fall due, or paid by
the Disbursing Agent in the ordinary course of business in
accordance with the terms and conditions of the particular
transactions and any agreements relating thereto.
In lieu of a cash bonus or success fee for
effecting a Confirmed Plan of Reorganization for the
Debtors, the employees, officers and non-executive directors
of the Debtors in office as of the Confirmation Date will
(i) receive, pursuant to the Stock Incentive Plan and the
Incentive Deferral Plan, Deferral Awards and Director's
Stock Awards (as such terms are defined in Section IV(G)
below) in an aggregate amount equal to 1/9th of the
aggregate number of shares of Distributable Common Stock and
Class A Preferred Stock and (ii) be eligible to receive
future grants of Incentive Awards and Directors' Awards
under the Stock Incentive Plan with respect to an aggregate
number of shares equal to 1/9th of the aggregate number of
shares of Distributable Common Stock and Class A Preferred
Stock. The employees, officers and non-executive directors
to whom Deferral Awards and Director's Stock Awards will be
distributed and the amounts of each distribution are set
forth in Exhibits J and K attached hereto.
The amount necessary to pay (i) Disputed
Administrative Claims and (ii) Administrative Claims for
which applications for compensation or reimbursement of
expenses of professionals or other persons retained or to be
compensated pursuant to sections 327, 328, 330, 331 or
503(b) of the Bankruptcy Code are pending or yet to be
submitted will be deposited in the Distribution Reserve.
Such claims shall be paid upon allowance by a Final Order
and shall include Earned Interest on the amounts actually
allowed by Final Order, calculated from the Effective Date
to the date of distribution.
b. Priority Tax Claims. The holder of an
Allowed Priority Tax Claim shall be paid either (i) in cash,
in full, on the later of the Effective Date or the date on
which such Priority Tax Claim is allowed by Final Order or
(ii) on such terms as the Debtors or the Disbursing Agent
and the holder of the Allowed Priority Tax Claim agree. The
holder of an Allowed Priority Tax Claim shall not be
entitled to receive any payment on account of post-Petition
Date interest, or on account of any penalty arising with
respect to or in connection with the Allowed Priority Tax
Claim. Any such Claim or demand for any such penalty shall
be discharged by Confirmation of the Plan and section
1141(d)(1) of the Bankruptcy Code, and the holder of an
Allowed Priority Tax Claim shall not assess or attempt to
collect such penalty from Reorganized Spectrum or its
property.
2. Classification of Claims and Distributions
a. General Description. The following is the
designation of the classes of Claims and Interests under the
Plan. A Claim or Interest is classified in a particular
class only to the extent that the Claim or Interest
qualifies within the description of that class and is
classified in a different class to the extent that any
remainder of the Claim or Interest qualifies within the
description of such different class. A Claim or Interest is
in a particular class only to the extent that the Claim or
Interest is an Allowed Claim or Allowed Interest in that
class and has not been paid, released or otherwise satisfied
before the Effective Date.
There will be a reserve for issuance of sufficient
shares of Reorganized Spectrum Common Stock as required for
distribution to holders of Disputed Claims and Disputed
Interests in Classes 2, 4, 5 and 6 pending the allowances or
disallowances of such Disputed Claims or Disputed Interests.
b. Priority Nontax Claims (Class 1). Class 1 is
unimpaired under the Plan and not entitled to vote. Each
Claim in Class 1 shall be paid in Cash in full on the
Effective Date.
c. Unsecured Claims (Class 2). Class 2 is
impaired under the Plan. While it is expected that all
claims in Class 2 will be paid at the rate of 100 cents on
the dollar in Cash, such expectation cannot be confirmed
until the allowability of all Claims in Class 2 is finally
determined. Class 2 Claims will in any event, receive 100
percent of the Allowed Amount of their Class 2 Claims in
value under the Plan. Class 2 Claims are to be paid out of
a $3.5 million pool of funds and shares of Reorganized
Spectrum Common Stock set aside for payment of Class 2
Claims in such amount as may be necessary to provide holders
of Class 2 Claims with 100 percent of the Allowed amount of
their Claims. Distributions will be made to holders of an
Allowed Claim pro rata based on an aggregate amount of
Claims Filed other than Claims that have been disallowed (or
allowed in the reduced amount) by Final Order. Once
allowance of all Disputed Claims has been resolved, holders
of Allowed Class 2 Claims will get additional distributions
up to 100 percent of the amount of the Allowed Claim. Any
remaining funds will go to Reorganized Spectrum for
operations. In the event that the amount of the Allowed
Claims exceeds $3.5 million, and, thus, there are
insufficient funds to pay Allowed Claims in Class 2, the
unpaid balance of Allowed Claims in Class 2 will be
converted into an equivalence of Reorganized Spectrum Common
Stock. The calculation for determining the equivalent
shares will be the same as the calculation used for the
determination of equivalent shares used for Class 4 Claims.
No interest will be paid on Class 2 Claims.
d. Class Action Claims (Class 3). Class 3 is
unimpaired under the Plan and not entitled to vote. Class 3
Claims will be treated pursuant to the terms set forth in
the Class Action Settlement. It is expected that the Class
Action Settlement will provide that: (1) the Debtors will
pay $250,000 to the Class Action Trust; (2) assuming that
SIT is successful in the Home Action, the issuers of the
directors and officers insurance policies that are the
subject of the Home Action will pay the proceeds of such
policies to the Class Action Trust; (3) on the Effective
Date, Reorganized Spectrum will issue to the Class Action
Trustee a certificate representing a number of shares of
Class A Preferred Stock equal to the number of shares of
Distributable Common Stock; (4) the Class Action Trustee
will make distributions of cash to the individual Class
Action Plaintiffs in accordance with the terms of the Class
Action Trust Agreement; and (5) when the Class Action
Trustee has determined the proper allocation of the shares
of the Class A Preferred Stock issued to the Class Action
Trust among the individual Class Action Plaintiffs, the
Class Action Trustee will return the stock certificate to
Reorganized Spectrum with instructions to reissue
certificates in the appropriate pro rata share amounts to
the individual Class Action Plaintiffs. Confirmation of the
Plan is contingent on (1) the entry of a Final Order of the
District Court approving the Class Action Settlement Motion,
and (2) successful resolution of the Home Action.
e. Other Securities Claims (Class 4). Class 4
is impaired under the Plan. Class 4 Claims shall be
converted into an equivalence in shares of Reorganized
Spectrum Common Stock. The calculation for determining the
equivalent shares for Class 3 Claims shall be one (1) share
of Reorganized Spectrum Common Stock for each $11.50 of an
allowed Class 4 Claim.
f. Equity Interests (Class 5). Class 5 is
impaired under the Plan. Holders of Existing Spectrum
Common Stock will receive one share of Reorganized Spectrum
Common Stock in exchange for each 100 shares of Existing
Spectrum Common Stock pursuant to the Reverse Stock Split.
Holders of Options for Existing Spectrum Common Stock will
receive New Options to purchase Reorganized Spectrum Common
Stock. Such New Options will entitle the holder to purchase
one percent of the number of shares that could be purchased
under the Existing Spectrum Options at an exercise price
adjusted in accordance with the Reverse Stock Split. No
Fractional Shares of Reorganized Spectrum Common Stock will
be issued. Where the Reverse Stock Split would create such
fractional shares, Holders of Allowed Class 5 Claims will
receive shares of Reorganized Spectrum Common Stock that
have been rounded up or down to the nearest whole number.
g. Equitably Subordinated Claims (Class 6).
Class 6 is impaired under the Plan. Class 6 Claims shall
receive the same treatment as Class 4 Claims.
3. Objections to Claims
The Debtors will file a list of all Disputed Claims
(the "Disputed Claims List"), other than Administrative Claims,
with the Bankruptcy Court on or before the hearing on approval of
the Disclosure Statement. The comments of the Creditors
Committee will be solicited prior to the filing of the Disputed
Claims List. Any Claims, other than Administrative Claims, that
have been Filed prior to the Filing of the Disputed Claims List
and that are not included on the Disputed Claims List shall be
deemed Allowed Claims.
Unless another date is established by the Bankruptcy
Court, all objections to Claims shall be Filed and served on the
holders of such Claims within 45 days after the Effective Date,
except as extended by an agreement between the claimant and
Reorganized Spectrum or by order of the Bankruptcy Court upon an
application filed by Reorganized Spectrum. After the Effective
Date, only Reorganized Spectrum and the Post-Effective Date
Committee shall have the authority to File and prosecute
objections to Claims and only Reorganized Spectrum, upon notice
to the Post-Effective Date Committee shall have the authority to
settle or compromise objections to Claims. Notwithstanding any
prior order of the Bankruptcy Court or the provisions of
Bankruptcy Rule 9019, as of the Effective Date, Reorganized
Spectrum may settle or compromise any Disputed Claim without
approval of the Bankruptcy Court.
4. Estimation of and Reserve for Disputed Claims and
Interests.
Reorganized Spectrum shall reserve sufficient shares of
Reorganized Spectrum Common Stock based upon the "face amount" of
the existing Disputed Claims and Disputed Interests in Classes 2,
4, 5 and 6 for issuance and distribution to the holders thereof
if, as, and when such Disputed Claims and Disputed Interests
become Allowed Claims and Allowed Interests.
The "face amount" of a Disputed Claim or Disputed
Interest means the amount set forth on the proof of claim or
proof of interest unless the Disputed Claim or Disputed Interest
has been estimated for distribution purposes. Where no amount
has been specified on the face of a proof of claim or proof of
interest, or where the Disputed Claim or Disputed Interest has
been estimated for purposes of allowance and distribution by the
Bankruptcy Court, the "face amount" shall be the amount fixed by
the Bankruptcy Court in connection with a motion of the type
described in the following paragraph, unless otherwise agreed
between the claimant or interest holder and the Debtors or
Reorganized Spectrum.
As to any Disputed Claim (including Claims based upon
rejection of executory contracts or leases) or Disputed Interest,
the Bankruptcy Court, upon motion by the Debtors or Reorganized
Spectrum shall determine the amount sufficient to reserve, and
may estimate for purposes of allowance and distribution, the
likely maximum allowed amount of the Disputed Claim or Disputed
Interest. Any Person whose Disputed Claim or Disputed Interest
is so estimated shall have recourse only to the reserve
established for such Person's Disputed Claim or Disputed Interest
(and not to Reorganized Spectrum, holders of Reorganized Spectrum
Common Stock or Class A Preferred Stock, holders of Existing
Spectrum Common Stock, any Person receiving a distribution under
the Plan, or to any assets distributed on account of any Allowed
Claims or Allowed Interests) if such Person's Claim or Interest,
as finally allowed, exceeds the maximum estimated amount thereof.
THUS, THE BANKRUPTCY COURT'S ESTIMATION FOR PURPOSES OF ALLOWANCE
AND DISTRIBUTION OF A DISPUTED CLAIM OR DISPUTED INTEREST WILL
LIMIT THE DISTRIBUTION TO BE MADE THEREON, REGARDLESS OF THE
AMOUNT FINALLY ALLOWED ON ACCOUNT OF SUCH DISPUTED CLAIM OR
DISPUTED INTEREST.
Thirty-four (34) Disputed Unsecured Claims alleging
$17,907,129 in damages are currently pending against the Company.
The Company is litigating some of the claims, has objected to or
intends to object to others and is attempting to reconcile others
with claimants. The Company intends to object to the claims that
it believes were filed after the bar date. Additionally, Gene
Morgan Financial has filed a disputed claim against the Company
alleging $6.3 million in damages. The Bankruptcy Court has ruled
that this claim is statutorily subordinated pursuant to
Bankruptcy Court Section 310(b). This claim is currently being
litigated before the Bankruptcy Court. Due to the uncertainties
associated with pending litigation and settlement discussions,
the estimated amount of unsecured disputed claims reflects the
full amount of the claim. If favorable results are obtained in
the litigations and/or settlement discussions, the estimated
value will decrease accordingly.
E. Distributions under the Plan
1. Funding of the Plan
Cash payments required by the Plan shall be provided
from the funds of the Estate and from funds generated by
operation of Spectrum's and Reorganized Spectrum's business.
2. Fractional Shares
Fractional shares of Reorganized Spectrum Common Stock
created by the Reverse Stock Split shall be rounded to the
nearest whole number.
3. Unclaimed Distributions
If any holder of an Allowed Claim or Allowed Interest
(a) does not comply with a precondition of distribution as
provided in the Plan within two years of the date upon which
notice is sent regarding the holder's failure to meet a
precondition or (b) cannot be located within two years after the
date upon which a distribution is made available to the holder of
such Claim or Interest, the holder's right to any distribution
shall be forever discharged and the holder shall be forever
barred from asserting any Claim or Interest against Reorganized
Spectrum or its property. Nothing contained in the Plan shall
require Reorganized Spectrum or the Disbursing Agent to attempt
to locate any holder of an Allowed Claim or Allowed Interest,
other than to mail distributions to the claimant's or interest
holder's last known address. All unclaimed or undistributed
distributions under this Section shall, pursuant to section
347(b) of the Bankruptcy Code, be the property of Reorganized
Spectrum and shall not be subject to the unclaimed property or
escheat laws of any Governmental Unit.
F. Treatment of Executory Contracts and Unexpired Leases
1. Assumption of Executory Contracts and Unexpired Leases
On the Effective Date, and to the extent permitted by
applicable law, all executory contracts (including unexpired
leases) of the Debtors will be assumed in accordance with the
provisions of section 365 and section 1123 of the Bankruptcy Code
except for (a) any and all executory contracts which are the
subject of separate motions filed pursuant to section 365 of the
Bankruptcy Code by the Debtor prior to the commencement of the
Confirmation Hearing, (b) such contracts as are listed on any
"Schedule of Rejected Executory Contracts and Unexpired Leases"
filed by the Debtor on or before entry of the Confirmation Order,
all of which contracts shall be rejected pursuant to the
provisions of section 365 and section 1123 of the Bankruptcy
Code, and (c) any and all such contracts rejected prior to entry
of the Confirmation Order.
2. Bar to Rejection Damages
If the rejection of an executory contract or unexpired
lease pursuant to the Plan gives rise to a Claim by the other
party or parties to such contract or lease, such Claim, to the
extent that it is timely Filed and is an Allowed Claim, shall be
classified in Class 2, as applicable; provided, however, that the
Unsecured Claim arising from the rejection shall be forever
barred and shall not be enforceable against the Debtors,
Reorganized Spectrum, its successors or properties, unless a
proof of claim is Filed and served on Reorganized Spectrum within
30 days after the date of notice of the entry of an order of the
Bankruptcy Court rejecting the executory contract or unexpired
lease, including, if applicable, the Confirmation Order.
3. Indemnification Obligations to Be Assumed
Any obligation of the Debtors to indemnify any
individual serving as one of its present officers or directors or
any individual who served in such capacity on or after January
31, 1996 by reason of such individual's past or future service in
such capacity, or as a director, officer or partner of another
corporation, partnership or other legal entity at the behest of
the Debtors, to the extent provided in the applicable certificate
of incorporation, bylaws or similar constituent documents or by
statutory law or written agreement with the Debtors, shall
(except as expressly provided in the following subparagraph (b))
be deemed and treated as an executory obligation assumed by
Reorganized Spectrum as of the Effective Date pursuant to the
Plan and section 365 of the Bankruptcy Code. Accordingly, such
indemnification obligations shall survive and be unaffected by
entry of the Confirmation Order irrespective of whether such
indemnification obligations are owed for acts or events occurring
before or after the Petition Date.
The obligation of the Debtors to indemnify any Person
not within the scope of the preceding paragraph shall be rejected
and shall terminate and be discharged to the extent provided by
section 502(e) of the Bankruptcy Code or otherwise, as of the
Confirmation Date.
Pursuant to the Amended Spectrum Certificate,
individuals in respect of whom indemnity obligations are assumed
by Reorganized Spectrum pursuant to the Plan and section 365 of
the Bankruptcy Code or arise in the future by reason of such
individual's service as a director or officer of Reorganized
Spectrum, shall be deemed to have served at the request of the
predecessors of Reorganized Spectrum to the extent that they
served as directors or officers of the Debtors prior to the
Effective Date.
4. Reorganized Spectrum's Liabilities
a. Effect of Implementation of the Plan on Existing
Employment Agreements. Confirmation of the Plan and the
occurrence of the Effective Date is not intended to and shall not
constitute a change of ownership or change in control, as defined
in any employment agreement in effect on the Effective Date to
which either of the Debtors is a party.
b. Contracts Entered Into on or After the Petition
Date. All contracts, leases and other agreements entered into by
the Debtor in Possession on or after the Petition Date which have
not been breached by the other party or terminated in accordance
with their terms by the Debtor in Possession on or prior to the
Confirmation Date, shall remain in full force and effect as
against Reorganized Spectrum.
G. Adoption of Certain Compensation Plans
Following are summaries of the principal terms of the
Stock Incentive Plan and the Incentive Deferral Plan. Such
summaries are qualified in their entirety by reference to the
text of such plans, which are attached as Exhibits J and K
hereto.
1. Stock Incentive Plan
In General
The Stock Incentive Plan provides for the grant to
employees of the Company of non-qualified and incentive stock
options, limited, tandem and stand-alone stock appreciation
rights and stock bonuses (collectively referred to herein as
"Incentive Awards") and for the grant to non-executive directors
of the Company of non-qualified stock options and stock awards
("Directors Awards").
The maximum number of shares of Reorganized Spectrum
Common Stock that may be issued under the Stock Incentive Plan is
indicated in Section 3 thereof. Shares of Reorganized Spectrum
Common Stock issued under the Stock Incentive Plan may be either
newly issued shares or treasury shares. The average of the bid
and asked prices for Existing Spectrum Common Stock in over-the-
counter trading in such stock on February 2, 1996, was $0.115 per
share, as reported by the National Quotation Bureau.
Approximately 25 key employees and 3 non-executive directors are
currently eligible to participate in the Stock Incentive Plan.
Administration
The Stock Incentive Plan will be administered by the
Compensation Committee of the Company's Board of Directors, or
such other committee as the Board of Directors shall appoint from
time to time (the "Committee"). The Committee shall from time to
time designate the key employees of the Company who shall be
granted Incentive Awards (together with non-executive directors
who are granted Directors Awards, the "Participants") and the
amount and type of such Incentive Awards. No Incentive Award may
be granted under the Stock Incentive Plan after the tenth
anniversary of the confirmation of the Plan, and no Incentive
Award shall be exercisable after the expiration of ten years from
the date such Incentive Award was granted.
Except as provided below, the Committee will have full
authority to administer the Stock Incentive Plan, including
authority to interpret and construe any provision of the Stock
Incentive Plan and the terms of any Incentive Award issued under
it, to accelerate the date on which any Incentive Award becomes
exercisable and to adopt such rules and regulations for
administering the Stock Incentive Plan as it may deem necessary.
Decisions of the Committee shall be final and binding on all
Participants. The Committee shall have no discretionary
authority with respect to Directors Awards.
Significant Features of Incentive Awards
Non-Qualified and Incentive Stock Options. Each non-
qualified stock option ("NQO") and incentive stock option ("ISO")
shall entitle the holder thereof to purchase a specified number
of shares of Reorganized Spectrum Common Stock determined by the
Committee. The exercise price of each NQO and ISO granted under
the Stock Incentive Plan shall be the fair market value of a
share of Reorganized Spectrum Common Stock on the date on which
such NQO or ISO is granted. The exercise price shall be paid in
cash or, subject to the approval of the Committee, in shares of
Reorganized Spectrum Common Stock valued at their fair market
value on the date of exercise. An NQO or ISO may be exercisable
for a term not to exceed ten years, established by the Committee
on the date on which the NQO or ISO is granted.
In the event that the employment of a Participant shall
terminate (i) for any reason other than Disability, Cause (as
such terms are defined in the Stock Incentive Plan) or death,
NQOs or ISO granted to such Participant, to the extent that they
were exercisable at the time of such termination, shall remain
exercisable for ninety days after such termination, and those not
exercisable at such time shall expire at such time; (ii) on
account of the Disability or death of the Participant, such
Participant or his designated beneficiary, respectively, shall be
entitled to exercise, until the first anniversary of such
termination, NQOs and ISOs which were exercisable at the time of
such termination or would have become exercisable had his
employment continued until the first anniversary of such
termination, and all other NQOs and ISOs shall expire at such
time; and (iii) for Cause, all outstanding NQOs and ISOs granted
to such Participant shall expire at the commencement of business
on the date of such termination. However, no NQO or ISO may be
exercised after the expiration of its term.
Upon the occurrence of a Change in Control of the
Company (as defined in the Stock Incentive Plan), each NQO and
ISO granted under the Stock Incentive Plan and outstanding at
such time shall become fully and immediately exercisable.
Limited Stock Appreciation Rights. The Committee may
grant in connection with any NQO or ISO granted under the Stock
Incentive Plan a limited stock appreciation right ("LSAR") with
respect to a number of shares not exceeding the number of shares
subject to the NQO or ISO . In general, the exercise of an LSAR
by a Participant entitles the Participant to an amount in cash,
with respect to each share subject thereto, equal to the excess
of the value of a share of Reorganized Spectrum Common Stock
(determined pursuant to the Stock Incentive Plan) on the exercise
date over the exercise price of the related NQO or ISO . The
exercise of an LSAR with respect to a number of shares causes the
cancellation of the NQO or ISO to which it relates with respect
to an equal number of shares. The exercise, cancellation or
expiration of an NQO or ISO with respect to a number of shares
causes the cancellation of the LSAR related to it with respect to
an equal number of shares. An LSAR shall be exercisable only
during the period commencing on the first day following the
occurrence of a Change in Control and terminating on the
expiration of ninety days after such date.
Tandem Stock Appreciation Rights. The Committee may
grant, in connection with any NQO or ISO, a tandem stock
appreciation right ("Tandem SAR") with respect to a number of
shares of Reorganized Spectrum Common Stock not exceeding the
number of shares subject to the related NQO or ISO. In general,
the exercise of a Tandem SAR by a Participant entitles the
Participant to an amount in cash, shares of Reorganized Spectrum
Common Stock or a combination of cash and shares of Reorganized
Spectrum Common Stock, as determined by the Committee, with
respect to each share subject thereto, equal to the excess of the
fair market value of a share of Reorganized Spectrum Common Stock
on the exercise date over the exercise price of the related NQO
or ISO. The exercise of a Tandem SAR with respect to a number of
shares causes the cancellation of its related NQO or ISO with
respect to an equal number of shares. The exercise, cancellation
or expiration of an NQO or ISO with respect to a number of shares
causes the cancellation of its related Tandem SAR to the extent
that the number of shares subject to the NQO or ISO after its
exercise is less than the number of shares subject to the Tandem
SAR. A Tandem SAR is exercisable at the same time and to the
same extent as its related NQO or ISO. The payment upon exercise
of a Tandem SAR after the occurrence of a Change in Control shall
be made in cash.
Stand-Alone Stock Appreciation Rights. The Committee
may grant stand-alone stock appreciation rights ("Stand-Alone
SARs") with respect to a number of shares of Reorganized Spectrum
Common Stock and with an exercise price determined by the
Committee on the date on which such Stand-Alone SAR is granted.
A Stand-Alone SAR shall be exercisable for a term, not to exceed
ten years, established by the Committee on the date on which such
Stand-Alone SAR is granted. The payment upon the exercise of a
Stand-Alone SAR after the occurrence of a Change in Control shall
be made in cash. Except in the event of the death or
Disability of a Participant or the termination of the employment
of a Participant for Cause, Stand-Alone SARs are exercisable only
while a Participant is employed by the Company. In the event of
death, Disability or termination of employment for Cause, Stand-
Alone SARs shall be treated in the manner described above with
respect to NQOs and ISOs.
Stock Bonuses. The Committee may grant bonuses payable
in Reorganized Spectrum Common Stock in such amounts as it shall
determine from time to time (a "Stock Bonus"). A Stock Bonus
shall be paid at such time and subject to such conditions as the
Committee shall determine at the time of grant.
Significant Features of Directors Awards
Non-Qualified Stock Options. At the time of the
confirmation of the Plan, each non-executive director of the
Company shall be automatically granted a non-qualified option to
purchase such number of shares of Reorganized Spectrum Common
Stock as is indicated in Section 10 of the Stock Incentive Plan
(a "Director's Option"). Each person who subsequently is
appointed or elected as a non-executive director of the Company
shall also be granted a Director's Option upon such appointment
or election. Each Director's Option shall have an exercise price
equal to the fair market value of a share of Reorganized Spectrum
Common Stock on the date on which such Director's Option is
granted and shall have a term of ten years, provided that each
Director's Option shall expire no later than the first
anniversary of the date on which the holder thereof ceases to be
a director of the Company for any reason.
Director's Stock Awards. At the time of the
confirmation of the Plan, each non-executive director of the
Company shall be automatically allocated a number of shares of
Reorganized Spectrum Common Stock as indicated in Section 10 of
the Stock Incentive Plan ("Director's Stock Awards"). The shares
so allocated shall be distributed to such persons in two
portions. The first portion shall consist of 100 shares of
Reorganized Spectrum Common Stock for each such person, which
shall be distributed to such person immediately following the
confirmation of the Plan. The second portion shall be
distributed in three equal installments on a deferred basis, as
follows. The first installment shall be distributed during the
three day period commencing three days after Reorganized Spectrum
files its Quarterly Report on Form 10-Q for its fiscal quarter
ending December 31, 1997; the second installment shall be
distributed during the three day period commencing three days
after Reorganized Spectrum files its Quarterly Report on Form 10-
Q for its fiscal quarter ending June 30, 1998; and the third
installment shall be distributed during the three day period
commencing three days after Reorganized Spectrum files is
Quarterly Report on Form 10-Q for its fiscal quarter ending
December 31, 1998; provided that all shares allocated to a non-
executive director will be immediately distributed to such
director in the event of such director's membership on the Board
of Directors terminates for any reason. Each person who
subsequently is appointed or elected as a non-executive director
of the Company shall also be granted a Director's Stock Award of
an equal number of shares, to be distributed as described above,
upon such appointment or election.
General Plan Provisions
Share Counting. In the event that any outstanding NQO,
ISO, Stand-Alone SAR, Stock Bonus or Director's Option expires,
terminates or is canceled for any reason (other than by reason of
the exercise of a related LSAR or Tandem SAR), the shares of
Reorganized Spectrum Common Stock subject to the unexercised
portion of such NQO, ISO, Stand-Alone SAR or Director's Option,
and any canceled or forfeited Stock Bonus, shall again be
available for grants under the Stock Incentive Plan.
Adjustments Upon Changes in Capitalization. The Stock
Incentive Plan provides for an adjustment in the number of shares
of Reorganized Spectrum Common Stock available to be issued under
the Stock Incentive Plan, the number of shares subject to
Incentive Awards and Director's Options and the exercise prices
of certain Incentive Awards and Director's Options upon a change
in the capitalization of the Company, a stock dividend or split,
a merger or combination of shares and certain other similar
events.
Income Tax Withholding. The Stock Incentive Plan
provides that Participants may elect to satisfy certain federal
income tax withholding requirements by remitting to the Company
cash or, subject to certain conditions, shares of Reorganized
Spectrum Common Stock or by instructing the Company to withhold
shares payable to the Participant.
No Assignment or Transfer. During the lifetime of a
Participant, each Incentive Award and Directors Award granted to
him is exercisable only by him. No Incentive Award or Directors
Award is transferable or assignable other than by will or the
laws of descent and distribution.
Amendment. The Board of Directors of the Company may
at any time amend the provisions of the Stock Incentive Plan to
alter the allocation of benefits as between non-executive
directors and key employees, provided that not more that one such
amendment shall be made in any six month period, other than to
comport with changes to the Tax Code, the Employee Retirement
Income Security Act of 1974, or the regulations thereunder.
Federal Income Tax Consequences
Following is a summary of the U.S. federal income tax
consequences of the issuance and exercise of Incentive Awards and
Directors Awards to Participants and to Reorganized Spectrum.
NQOs. A Participant will not be deemed to receive any
income at the time an NQO or Director's Option is granted, nor
will the Company be entitled to a deduction at that time.
However, when any part of an NQO or Director's Option is
exercised the Participant will be deemed to have received
ordinary income in an amount equal to the difference between the
exercise price of the NQO or Director's Option and the fair
market value of the shares received on the exercise of the NQO or
Director's Option. The Company will be entitled to a tax
deduction in an amount equal to the amount of ordinary income
realized by the Participant.
Upon any subsequent sale of the shares acquired upon
the exercise of an NQO or Director's Option, any gain (the excess
of the amount received over the fair market value of the shares
on the date ordinary income was recognized) or loss (the excess
of the fair market value of the shares on the date ordinary
income was recognized over the amount received) will be a long-
term capital gain or loss the sale occurs more than one year
after such date or recognition and otherwise will be a short-term
capital gain or loss.
If all or any part of the exercise price of an NQO or
Director's Option is paid by the Participant with shares of
common stock, no gain or loss will be recognized on the shares
surrendered in payment. The number of shares received on such
exercise of the NQO or Director's Option equal to the number of
shares surrendered will have the same basis and holding period,
for purposes of determining whether subsequent dispositions
result in long-term or short-term capital gain or loss, as the
basis and holding period of the shares surrendered. The balance
of the shares received on such exercise will be treated for
federal income tax purposes as described in the preceding
paragraphs as though issued upon the exercise of the NQO or
Director's Option for an exercise price equal to the
consideration, if any, paid by the Participant in cash. The
Participant's compensation, which is taxable as ordinary income
upon such exercise, and the Company's deduction, will not be
affected by whether the exercise price is paid in cash or in
shares of Reorganized Spectrum Common Stock.
ISOs. A Participant will not be deemed to receive any
income at the time an ISO is granted or exercised. (However,
special rules apply to Participants who are subject to the
alternative minimum tax.) If a Participant does not dispose of
the shares acquired on exercise of an ISO within two years after
the grant of the ISO and one year after the exercise of the ISO,
the gain (if any) on a subsequent sale (the excess of the amount
received over the exercise price) or loss (if any) on a
subsequent sale (the excess of the exercise price over the amount
received) will be a long-term capital gain or loss. In order to
receive the favorable ISO income tax treatment described in the
preceding sentence, a Participant must exercise his ISO not later
than three months after his termination of employment.
Otherwise, the ISO will be treated as an NQO.
If the Participant sells the shares acquired on
exercise of an ISO within two years after the date of grant of
the ISO or within one year after the exercise of the ISO, the
disposition is a "disqualifying disposition", and the Participant
will recognize income in the year of the "disqualifying
disposition" equal to the excess of the amount received for the
shares over the exercise price. Of that income, the portion
equal to the excess of the fair market value of the shares at the
time the ISO was exercised over the exercise price will be
treated as compensation taxable as ordinary income and the
balance, if any, will be long-term or short-term capital gain
depending on whether the shares were sold more than one year
after the ISO was exercised. If a Participant uses shares
acquired upon the exercise of an ISO to exercise an ISO at a time
when the sale of such shares would constitute a "disqualifying
disposition", proposed IRS regulations appear to require the
Participant to recognize ordinary income in the amount described
in the preceding sentence.
LSARs, Tandem SARs and Stand-Alone SARs. A Participant
will not be deemed to receive any income at the time an LSAR,
Tandem SAR or Stand-Alone SAR is granted, nor will the Company be
entitled to a deduction at that time. However, when any part of
the LSAR, Tandem SAR or Stand-Alone SAR is exercised, the
Participant will be deemed to have received compensation taxable
as ordinary income in an amount equal to the amount of cash
received.
Stock Bonus and Director's Stock Award. Generally,
upon the receipt of a Stock Bonus or a Director's Stock Award, a
Participant will be deemed to have received ordinary income in an
amount equal to the fair market value of the Reorganized Spectrum
Common Stock at the time it is received.
Tabular Description
The following describes in tabular form the benefits
that will be received by non-executive directors under the Stock
Incentive Plan, which information is required under applicable
SEC rulings. Amounts that will be received by individual
executive officers of Spectrum, all executive officers of
Spectrum as a group and non-executive employees of Spectrum as a
group are not determinable.
New Plan Benefits
Stock Incentive Plan
- -----------------------------------------------------------------
Name and Position Dollar Value ($) Number of Units
----------------- ---------------- ---------------
Non-Executive -- A number of shares of
Director Group Reorganized Spectrum
Common Stock as
indicated in
Section 10 of the
Stock Incentive Plan
2. Incentive Deferral Plan
In General
The Incentive Deferral Plan provides for the deferred
distribution to employees and officers of the Debtors at the time
of the confirmation of the Plan ("Participants") of an aggregate
number of shares of Reorganized Spectrum Common Stock as
indicated in Section 3 thereof. Shares allocated to each
Participant shall be distributed in three equal installments.
The first installment shall be distributed during the three day
period commencing three days after Reorganized Spectrum files its
Quarterly Report on Form 10-Q for its fiscal quarter ending
December 31, 1997; the second installment shall be distributed
during the three day period commencing three days after
Reorganized Spectrum files its Quarterly Report on Form 10-Q for
its fiscal quarter ending June 30, 1998; and the third
installment shall be distributed during the three day period
commencing three days after Reorganized Spectrum files is
Quarterly Report on Form 10-Q for its fiscal quarter ending
December 31, 1998; provided that all shares allocated to a
Participant will be immediately distributed to such Participant
in the event of such Participant's death or disability or in the
event that such Participant's employment with Reorganized
Spectrum is terminated by Reorganized Spectrum without cause.
Administration
The Incentive Deferral Plan will be administered by the
Compensation Committee of the Company's Board of Directors, or
such other committee as the Board of Directors shall appoint from
time to time (the "Committee"). The Committee will have full
authority to administer the Incentive Deferral Plan, including
authority to interpret and construe any provision of the
Incentive Deferral Plan, to accelerate the date on which any
shares are distributed pursuant to the Incentive Deferral Plan
and to adopt such rules and regulations for administering the
Incentive Deferral Plan as it may deem necessary. Decisions of
the Committee shall be final and binding on all Participants.
General Plan Provisions
Adjustments Upon Changes in Capitalization. The
Incentive Deferral Plan provides for an adjustment in the number
of shares of Reorganized Spectrum Common Stock to be distributed
to Participants upon a change in the capitalization of the
Company, a stock dividend or split, a merger or combination of
shares and certain other similar events.
Income Tax Withholding. The Incentive Deferral Plan
provides that Participants may elect to satisfy certain federal
income tax withholding requirements by remitting to the Company
cash or, subject to certain conditions, shares of Reorganized
Spectrum Common Stock by instructing the Company to withhold
shares payable to the Participant.
No Assignment or Transfer. During the lifetime of a
Participant, his rights to shares pursuant to the Incentive
Deferral Plan are not transferable or assignable other than by
will or the laws of descent and distribution.
Tabular Description
The following describes in tabular form the benefits
that will be received by certain persons and groups under the
Incentive Deferral Plan, which information is required be
applicable SEC rulings.
New Plan Benefits
Incentive Deferral Plan
Name and Position Dollar Value ($) Number of Units
- ----------------- ---------------- ---------------
Donald J. Amoruso, -- *
President, Chairman
of the Board and
Chief Executive Officer
Edward W. Maskaly, -- --
Former Chairman of
the Board and Chief
Executive Officer
Albert D. Panico, -- --
Former Vice President
- - Operations
Salvatore T. Marino, -- *
Vice President
- - Licensing
Christopher P. Franco, -- --
Former Vice President
Executive Group -- *
Non-Executive Director -- --
Group
Non-Executive Officer -- *
Employee Group
* A number of shares of Reorganized Spectrum Common Stock as
indicated in Exhibit A to the Incentive Deferral Plan.
SECTION IX
CERTAIN FACTORS TO BE CONSIDERED
A fundamental factor underlying Reorganized Spectrum's
ability to reorganize successfully is the implementation of
Reorganized Spectrum's strategy and business plan. The financial
information included in Reorganized Spectrum's business plan is
based on future events and circumstances and reflects
Management's judgment with respect to same. The projections
should be read in conjunction with the assumptions,
qualifications, explanations, and other information set forth
herein.
MANAGEMENT CAUTIONS THAT THE PROJECTED FINANCIAL
STATEMENTS HAVE AS THEIR BASIS REORGANIZED SPECTRUM'S ASSESSMENT
OF ITS BUSINESS, AND HENCE NO REPRESENTATIONS CAN BE MADE WITH
RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY TO
ACHIEVE THE PROJECTED RESULTS. MANY OF THE ASSUMPTIONS UPON
WHICH THESE PROJECTIONS ARE BASED ARE SUBJECT TO MAJOR
UNCERTAINTIES. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE,
UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY OCCUR AND,
ACCORDINGLY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE
PROJECTION PERIOD WILL VARY FROM THE PROJECTED RESULTS AND THE
VARIATIONS MAY BE MATERIAL.
A. Reorganized Spectrum's Business Plan
1. Management's Vision
Reorganized Spectrum's Strategic Plan contemplates
transforming the Company's business from an intellectual property
company generating low annual revenues from royalty to becoming a
supplier of wireless data communications technology and software.
Key to this strategy is initially expanding (i) the number of
data communications devices in use that incorporate the Company's
patented cellular technology and (ii) the use of Reorganized
Spectrum's patented cellular technology, as embodied in
Reorganized Spectrum-supplied activation kits, to activate such
devices. Over time, Reorganized Spectrum intends to expand its
product offering into a complete suite of data communications
software products that can be sold to a growing user population
of wireless data services in the mobile professional and field
sales workforce.
2. Management's Strategic Plan
Since joining Reorganized Spectrum in January 1995, new
Management began to implement several key steps with the goal of
positioning Reorganized Spectrum as a provider of wireless
software communication products and solutions. Such key steps
include:
1. The operational restructuring of Reorganized
Spectrum to substantially reduce losses from
continuing operations, including elimination of
unprofitable operations.
2. The selling of non-core assets and realigning the
Company's remaining business.
3. Resolution of litigation issues and liabilities
through the bankruptcy process.
4. The redirection of the Company from an
intellectual property and licensing organization
with low royalty income to a provider of software-
based wireless communications solutions. This is
to be achieved by converting existing OEM license
relationships into strategic relationships that
will serve as channels for distribution of the
Company's software products. Management believes
that this strategy will expand the market for
wireless data communication, as well as position
Reorganized Spectrum to profit from such
expansion.
5. Hiring technical leaders in software and
communications, respectively, to form the core of
a creative technical organization.
6. Leveraging Reorganized Spectrum's patents by
developing a series of new software product
offerings enhancing the ability of cellular
subscribers to transmit data easily over wireless
cellular networks
Steps 1 and 2 above are complete, and the Company
intends to implement Step 3 through confirmation of the Plan.
Reorganized Spectrum is seeking to implement the remaining steps,
although there is no assurance it will be successful in such
regard.
3. The Wireless Data Industry
The development of networks linking portable computers,
workstations, minicomputers and mainframes at separate locations
has occurred primarily in connection with the decentralization of
business operations, the evolving enterprise environment of
client servers, and the need to perform data-intensive business
functions at distant offsite locations. As a result, demand is
also increasing for more sophisticated, cost-effective and
reliable mobile data communication system solutions, including
portable computers, wireless data communication devices,
associated peripheral equipment, and specially adapted mobile
software systems and applications.
Current mobile computing devices include laptop
computers, notebook computers, handheld computers (i.e, personal
digital assistants), and pen-based computers. Management
believes that such devices are the first generation of products
in a trend towards mobile computing - a truly "personal" computer
- - that allows virtually instant access to information anytime and
anywhere.
Computer and telecommunications companies have been
making significant investments in the manufacturing and
development of new mobile computing devices and wireless
networks. As a result, the wireless communication industry has
experienced the emergence of a substantial number of competing
wireless data technologies and services. The following is a
description of the basic technologies in place or being developed
that offer consumers wireless communication service.
Circuit-Switched Networks ("CSNs"): CSNs are similar
to land-line networks in that an unbroken communication path must
be established between the sender and the receiver before
communication and data transmission can occur. Once the link is
established, there is no delay and communication takes place in
real time.
In the United States, the following commercial wireless
networks are capable of sending circuit-switched data:
Analog Cellular: Analog cellular today is the most
widely available system, with coverage everywhere but
the most remote areas. Cellular telephones themselves
are inexpensive, but service is relatively expensive
today and expected to decrease with competition. Also,
transmission quality can be erratic.
Digital Cellular: Digital cellular is the planned
replacement for analog cellular and it is expected to
improve greatly both the capacity and quality of
transmission. At present, digital telephones cost more
than analog models, but Management expects the price to
decrease as digital service becomes more readily
available.
Personal Communication System ("PCS"): The personal
communication system is a new variety of cellular
service that operates on newly assigned frequencies
with differing PCS technologies, promising high
capacity and good quality with a potentially low
investment. Government auctions of frequencies were
held within the past year, and construction of networks
has only recently begun.
Specialized Mobile Radio ("SMR"): SMR is another form
of digital communications that can combine paging with
voice service. The main difference between cellular
telephone technology and SMR is cellular telephones
assign frequencies to individual cellular subscribers,
while SMR shares a pool of frequencies among a group of
subscribers.
Satellite Radio: Mobile satellite networks are being
designed for applications in which long-distance
wireless communications are required, especially in
remote locations.
Message Switched Networks ("MSNs"): Unlike CSNs, MSNs
do not establish a direct-connection between the sender
and receiver of data. When data is sent, the data is
addressed, and moves through the network (wireless and
wire-line) to the final destination. The network
continuously monitors the transmission of data and
determines the optimal path for sending the
information.
Packet Switched Networks ("PSNs"): With PSNs, data is
created in continuous blocks, but the network breaks
the data down to numerous small blocks called
"packets". PSNs transmit packets onto the network and
travel independently of each other until they reach
their final destination, where they are combined into
one continuous message.
The Company's technology and current patents are
particularly applicable to data transmission over circuit-
switched cellular telephones. While there are new wireless
communication networks coming to market, Management believes
(based upon market requirements) new wireless communication
technology will be "backwards" compatible with cellular
technology (i.e., able to work with current cellular telephone
networks). Management believes that this requirement will
establish continued demand for the Company's existing technology
even when alternate wireless data transmission technology is
developed.
Management also believes that, when analyzed closely,
no single wireless network vendor can provide all of the features
needed to support multiple groups of users with widely different
information needs and work behaviors. Mobile users would
appreciate access to multiple wireless networks. An ideal
communication product would be able to communicate/transmit data
on any one of the multiple networks available. Such product
would determine the optimal network for communicating based upon
features such as speed of communication, reliability of
transmission and price of transmission. Management believes that
its omni-modal technology will enable this to occur and believes
that the market will openly accept such products, particularly
the Company's software products enabling this technology.
The Company currently has patent applications on file
with the Patent Office for its omni-modal technology. Some, but
not all, of the protection sought in these applications has been
indicated as allowable by the U.S. Patent Office. The Company
believes that additional protection for the technology disclosed
in these applications is available and has filed responses
setting forth its position.
4. Industry Growth
Company's research indicates that numerous industry
activities and technologies are converging to support the mobile
work force. This indication is substantiated by growth observed
in portable computer, facsimile, cellular telephone, electronic
mail, client/server and database service applications. The
Company believes that wireless data communications capability is
essential to businesses seeking to provide automated support to
their field personnel to remain competitive in a mobile society.
In its market research, BIS Strategic Decisions
("BIS"), a leading analyst of the wireless data market, projects
significant growth in PC Card Fax/Modems sold over the next five
years within the United States from 2.6 million per year in 1995
to 7.5 million per year in the year 1999. The majority of these
PC FAX/Modems will include Reorganized Spectrum intellectual
property. BIS also projects that cellular subscribers in the
United States will increase from 24 million subscribers in 1994
to 60 million by the year 2000. The Gartner Group further
forecasts that, within this growth market of cellular
subscribers, wireless circuit switch cellular data subscribers
will increase in this same period from some 200 thousand to over
2.5 million by 1999. Management believes that these trends
provide a strong indication of future opportunities for growth in
its wireless data transmission market.
5. Summary of Reorganized Spectrum's Technology
The Company currently has six United States patents,
three foreign patents and several pending U.S. and foreign patent
applications covering various technologies related to wireless
data communication. See "Properties of the Debtors," Section V.
Direct-Connect Technology
Reorganized Spectrum's direct-connect technology -
consisting of proprietary cellular modem and cellular-activation
technologies - allows the user to directly connect ("direct
connect") a portable computer containing a PC Card modem to a
cellular telephone through a simple cable without additional
interface circuitry. Reorganized Spectrum's cellular technology
is incorporated into chipsets or PC Card modems, thereby making
the modem cellular capable. Activation products, which include an
appropriate connection cable and the cellular telephone software
driver for a selected cellular telephone, incorporate the
Company's proprietary cellular-activation technology and are
either sold by the Company's current licensees or Reorganized
Spectrum, depending upon the license arrangement.
To transmit data utilizing the Company's direct-connect
technology, a user must have a cellular data compatible cellular
telephone connected to the PC Card modem (which includes
necessary software and hardware incorporating Reorganized
Spectrum's proprietary technology) within the computer, and a
direct-connect cable and appropriate cellular telephone software
drivers (Activation Kit).
The Company's direct-connect technology generally
cannot be used unless an activation kit, which incorporates the
Company's proprietary cellular activation technology, is
purchased and installed by the consumer or PC Card modem
manufacturer. Depending upon the license agreement, certain
licensees of Reorganized Spectrum sell the activation products
directly and pay a royalty to Reorganized Spectrum, while under
other license agreements, Reorganized Spectrum retains the right
to sell the activation kit product to licensees and sub-
licensees. The activation product provides the "key" to
activation and use of the cellular direct-connect capability for
data transmission using the selected cellular telephone.
Software drivers are software routines that understand,
and control, the functional operations of a particular cellular
telephone. A cellular telephone software driver serves as the
connection between a PC Card modem and the cellular telephone,
enabling the modem to control the circuitry of the particular
telephone. Each cellular telephone's electronic circuitry
operates differently depending upon its architecture. In
addition, the software drivers activate a direct-connect PC Card
modem, allowing the modem to become cellular ready and
communicate with a cellular telephone for cellular data
transmission.
After connecting the cellular telephone and a cellular
modem with a direct-connect cable, a consumer can initiate a
cellular telephone call through the computer's communication
software. The cellular telephone software drivers control the
dialing and operation of the cellular telephone and allow the
computer to transmit data via the cellular telephone.
Omni-Modal Technology
Management anticipates that various wireless
communication networks will be available to consumers in the
future. Management believes that any portable communications
device capable of interacting with more than one
telecommunications service provider or radio infrastructure would
have significant advantages over a portable unit capable of
accessing only a single service provider.
To enhance the portable product's functionality,
Reorganized Spectrum believes that it must develop advanced omni-
modal applications software for the mobile user and the client
server that enable mobile users to receive and transmit data
utilizing existing communication software applications over
various wireless networks. Such advanced software would also
allow automatic selections based upon the user's current
communication needs.
Examples of some of these controlling factors are
desired cost of transmission, quality of connection link,
priority on the network, security of data and guaranteed delivery
of data/message. Management believes that for remote wireless
computing to become a routine business operation, the physical
transmission medium (i.e., the wireless infrastructure utilized)
must be totally transparent to the user.
6. Marketing and Product Plan
Management believes that the prior Reorganized Spectrum
business strategy (reliance on license royalty payments) failed
largely due to (i) significantly smaller-than-anticipated growth
in the number of cellular data transmission users (which may have
been suppressed in part by high Reorganized Spectrum royalty
rates) and (ii) unavailable "user friendly" software and support
for seamless and reliable transition to wireless data
communications. Reorganized Spectrum's Strategic Plan is
designed to address and overcome these problems by renegotiating
existing license agreements to remove royalty barriers and
instituting strategic relationships which seed the market with
Reorganized Spectrum technology. This will create the
opportunity for Reorganized Spectrum to market software products
that encourage the use of wireless data transmission encompassing
Reorganized Spectrum technology.
Reorganized Spectrum anticipates growth in wireless
data applications over the next several years based upon current
market forecasts. Reorganized Spectrum also believes that a
substantial portion of such growth will occur within the
corporate marketplace for applications such as automation of
field sales forces and the mobile office for professionals.
Because Management believes that a significant number of these
applications will require notebook computers or similar devices,
the Company believes that the number of PC Card modems sold and
the projected number of wireless data subscribers are a good
indicator of the potential wireless data market size.
As a result of the existing license grants, the Company
estimates that it has at present retained approximately 25
percent market share for its activation products, the balance of
the market share going to licensees. It is management's
objective to increase this share by renegotiation of existing key
license agreements to include strategic relationships that create
the opportunity for Reorganized Spectrum to increase its market
share for activation kits as well as establish larger channels of
distribution for the company's more advanced software products.
Initial products would include client utility software for
enhancing cellular communications that would work with existing
"client" applications as well as add capabilities where no
applications yet exist. Next generation products would enhance
the utility possibly through development of a "server" version.
This would permit more reliable cellular fax transmission.
Building on these products would be development of an "all-in-
one" or omni-modal mobile communications package. The first
priority of Reorganized Spectrum's new technical leadership will
be to define the specifics of these products.
7. Competition
The wireless data communications industry is intensely
competitive and is characterized by rapid technological advances.
These advances result in the frequent introduction of new
products with increased performance capabilities and significant
price/performance improvements.
Competition in this market is based upon several
factors, including product features, price, quality and
reliability, service and support, marketing and distribution.
Many of Reorganized Spectrum's competitors and potential
competitors have more extensive engineering and marketing
capabilities and greater financial, technological and personnel
resources than does the Company. The Company's manufacturing of
cables for activation kits is outsourced and hence no hardware
assembly is performed by the Company.
Management believes that certain of its competitors may
be infringing upon the Company's patents and/or may infringe upon
patent rights that will be acquired by Reorganized Spectrum by
virtue of its pending applications. In addition, certain of the
Company's licensees have been granted the right to make or have
made and sell activation kits. Reorganized Spectrum's
competitiveness is dependent upon its ability to develop and
introduce new performance-leading products and technologies and
to expand the market for its technology. There can be no
assurance that Reorganized Spectrum will be able to maintain its
performance leadership as competitive products based upon similar
or alternative technologies are introduced.
The Company has identified the following companies as
significant direct competitors or potential direct competitors of
Reorganized Spectrum:
AT&T: Currently, AT&T's Paradyne unit competes
directly with the Company as a result of the existing
license arrangement between the two companies. AT&T
has full rights to (i) Reorganized Spectrum's
established and pending technology and (ii) produce
competing products, while paying Reorganized Spectrum
only relatively modest royalties. The pending breakup
of AT&T and its decision to sell Paradyne may create an
opportunity for the company with the new Buyer.
However, there can be no assurance that this will be
accomplished.
U.S. Robotics/Megahertz: Currently, Megahertz enjoys
approximately 50% of PC Card modem sales. The existing
license arrangement with Megahertz permits Megahertz to
develop its own "activation kits" for its products.
U.S. Robotics/ Megahertz and Reorganized Spectrum have
entered a settlement of the arbitration filed by
Megahertz (see "Chapter 11 Proceedings and Other Recent
Developments - Other Recent Developments - Securities
Related Litigation," Section IV(B)(2)) and negotiated a
revised license agreement favorable to both parties
that has been submitted under seal to the Bankruptcy
Court for approval.
Motorola: The Company believes that Motorola has modem
products that infringe upon the Company's intellectual
property rights and that Motorola is distributing
activation kits. As a consequence, on December 6,
1994, the Company filed a lawsuit against Motorola for
infringement of claims in six of its patents, covering
basic wireless data concepts. Motorola has denied the
allegations and has alleged that Reorganized Spectrum's
patents are invalid and unenforceable. The parties
have stipulated to temporarily stay this patent
litigation while they pursue settlement discussions.
However, there can be no assurances a favorable
settlement can be achieved.
In addition, Reorganized Spectrum believes that a
number of other companies, many of which have significantly
greater resources than the Company, may compete directly or
indirectly with Reorganized Spectrum. Reorganized Spectrum will
also face competition from alternate technologies.
B. Certain Risk Factors Affecting Business Plan
1. Financial Difficulties: The Company's operations
have suffered significant operating losses in past years, and the
Company filed for bankruptcy protection in January 1995. While
Management has implemented a significant cost-reduction program,
and is optimistic that the Company's operations will be
profitable in the future pursuant to its strategy, there can be
no assurance in such regard. Moreover, the Company's revenues
from direct connect product and royalties, on an annualized
basis, are only about $1 million at this juncture.
2. Competition: The wireless data communications
industry is intensely competitive and is characterized by rapid
technological advances. These advances result in the frequent
introduction of new products with increased performance
capabilities and significant price/performance improvements.
Competition in this market is based upon several factors,
including product features, price, quality and reliability,
service and support, marketing and distribution. Many of
Reorganized Spectrum's competitors and potential competitors have
more extensive engineering and marketing capabilities and greater
financial, technological and personnel resources than does the
Company. See "Certain Factors to be Considered - Reorganized
Spectrum's Business Plan - Summary of Reorganized Spectrum's
Technology", Section IX(A)(5).
3. Legal Expenses and Risks Associated with
Proprietary Technology: The Company has historically spent
significant amounts in order to protect and develop its patent
rights. For example, in Fiscal 1995 Reorganized Spectrum
incurred legal costs of approximately $1.1 million relating to
enforcement and development of its proprietary rights. Although
Management does not anticipate spending at this rate in the
future, there can be no assurance that legal expenses will
diminish as the Company continues to protect its proprietary
patent rights. Additionally, the ability of Management to
successfully implement its Strategic Plan would be severely
constrained if certain of its basic patents were deemed invalid
or unenforceable.
4. Unit Sales Forecast: Reorganized Spectrum
anticipates that the number of software activation packages it
will provide will grow to 800,000 by Fiscal 2000. Such forecast
is predicated upon a number of assumptions that may not occur.
The number of PC Card modems and modem chipsets shipped, as well
as the activation rate and wireless data user subscriber rate is
subject to market demand and the actions of Reorganized
Spectrum's OEM customers. Accordingly, these factors are largely
out of Reorganized Spectrum's direct control. Additionally, to
the extent competitors become licensed to compete with
Reorganized Spectrum or develop greater market presence,
Reorganized Spectrum's market share will decline.
5. Marketing Channels: For the foreseeable future,
Reorganized Spectrum intends to deliver its activation kits and
software products to market through its original equipment
manufacturer ("OEM") licensees, whereby the OEM incorporates
Reorganized Spectrum's technology onto a component device and
sells Spectrum's activation kits typically under private label.
There can be no assurance that the Company will successfully
redirect its business and capitalize on these marketing channels.
6. Pricing: Reorganized Spectrum's software pricing
strategy is to maintain relatively competitive prices for the
immediate future. While Reorganized Spectrum believes that its
pricing assumptions are realistic, changes in its competitors'
pricing structure could force Reorganized Spectrum to respond
with competitive price reductions.
7. Renegotiation of Existing Licenses: The Company
is in the process of renegotiating its existing license
agreements. With certain licensees, the Company is focusing on
up front license payments and an opportunity for a strategic
relationship. There can be no assurances this will be achieved.
Megahertz, a licensee of the Company, U.S. Robotics, the parent
of Megahertz and the Company in February 1996 entered into a
settlement agreement with respect to all disputes among them.
This settlement provides for the payment of a substantial license
fee to Spectrum and establishes a framework for a strategic
relationship and is contingent upon Bankruptcy Court approval. A
hearing before the Bankruptcy Court on this matter is scheduled
to be held on March 7, 1996. If the settlement is not approved
or payment is not made, Spectrum's liquidity will be severely
adversely affected and its ability to implement Management's
Strategic Plan will be severely hindered.
8. Certain Litigation: The Company has both an SEC
and a federal grand jury investigation of prior management
activities pending. Additionally, the Company has several other
outstanding lawsuits, including class action litigation. See
"Chapter 11 Proceedings and other Recent Developments - Other
Recent Developments," Section IV(B). Although the Company
believes that it will be able to use the bankruptcy process to
resolve these other matters, there can be no assurance in this
regard.
9. Staffing: In order to achieve its Strategic Plan,
the Company will need to fill a number of key positions through
recruiting. An important part of the recruiting program will be
the hiring of key software and communication specialists. While
Management believes it will be successful in this effort, there
can be no assurance in this regard.
C. Major Assumptions
1. Product and Licensing Business
Reorganized Spectrum anticipates that the number of PC
Card modems sold annually in the U.S. will increase from 3.6
million in calendar year 1996 to 7.5 million in calendar year
1999.
Management believes that it will be able to supply
activations to the Company's 25% market share. Further, the
Company estimates that through development of strategic
relationships it will be able to increase this percentage market
share an additional 5% with advanced software products beginning
in fiscal year 1998, increasing to 20% by fiscal year 2000.
Projected revenues related to activation products and
software products are based upon expected market conditions for
distribution through the Company's current licensed OEM channels.
After product introduction, as is normal with software products,
average prices are assumed to decline.
Projected revenues from licensing are based upon the
following assumptions:
a. Rockwell license fee payments will continue
as contracted through the second quarter of
fiscal year 1997;
b. a new Megahertz license agreement will be
approved by the Bankruptcy Court by 1996
fiscal year-end;
c. AT&T royalties will remain relatively
constant through the projection period; and
d. all other royalties will not exceed twice the
current royalty stream in fiscal year 2000.
2. Cost of Goods Sold
During the restructuring of the Company, management
downsized manufacturing capacity and outsourced this effort. The
projections assume that this outsourcing will continue for the
projection period.
3. Selling, General and Administrative Expenses (All
Other Operating Expenses)
Major assumptions relating to administration,
licensing, research and development, selling, professional fees
(including bankruptcy related professional fees for fiscal years
1996 and 1997) and all other operating expenses include:
a. Additions to the current restructured staff a
research and development organization will be made
beginning in fiscal year 1997, including the
addition of two engineering facilities;
b. Distribution channels for the Company's products
are the current licensed OEMs. Selling is assumed
to be transitional to the current licensing staff
with an increase in staff starting fiscal year
1999. A marketing leader will be hired in the
third quarter of fiscal year 1997;
c. Bankruptcy related professional fees will
substantially end upon the Effective Date
following confirmation of the Plan, which is
expected to be no later than May 31, 1996; and
d. There will be no provision for Post-Effective Date
Committee expenses, based on the assumption that
all litigation and disputes will be resolved by
the time of confirmation of the Plan.
4. Other Income
Other Income for fiscal year 1997 reflects a gain
relating to the forgiveness of indebtedness associated with an
expected waiver of the holdback portion of professional fees
incurred during bankruptcy. Also, the projections assume that
payments to holders of Unsecured Claims will not exceed $3.5
million.
5. Taxes
Management's projections assume tax losses incurred
during the projected period are carried forward and applied to
future tax liabilities. For purposes of the projections,
Management has assumed that a substantial portion of its
estimated Net Operating Loss Carryforward ("NOLs") of $70.7
million can be applied to future earnings. See "Certain Federal
Income Tax Consequences of the Plan," Section XI.
6. Balance Sheet Assumptions
Cash: Management's projections assume that at the
Effective Date the Company's cash balance will be $7.3 million
for continuing operations.
Accounts Receivable: Management has assumed a 60-day
collection period and bad debt expense equal to 1.5% of sales,
based upon historical experience.
WHILE MANAGEMENT BELIEVES THAT THE ASSUMPTIONS
UNDERLYING THE PROJECTED FINANCIAL STATEMENTS, WHEN CONSIDERED ON
AN OVERALL BASIS, ARE REASONABLE IN LIGHT OF CURRENT
CIRCUMSTANCES, NO ASSURANCE CAN BE, OR IS BEING, GIVEN THAT THE
PROJECTIONS WILL BE REALIZED. REORGANIZED SPECTRUM URGES THAT
ALL ASSUMPTIONS DESCRIBED ABOVE BE CAREFULLY CONSIDERED BY
HOLDERS OF CLAIMS IN REACHING THEIR DETERMINATION OF WHETHER TO
ACCEPT OR REJECT THE PLAN.
D. Management's Summary Projections
Management has provided these financial projections for
informational purposes only. The projections involve the use of
assumptions and estimates. Accordingly, actual operating results
may differ materially from the amounts and estimates included in
the accompanying projections.
Projected Income Statement
(Dollars in Thousands)
Fiscal Year Ending March 31,
-------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Sales $591 $1,00 $4,375 $9,915 $17,100
Cost of Goods Sold 331 500 1,696 3,320 5,062
------ ------ ------ ------ ------
Gross Profit 260 500 2,679 6,595 12,038
Gross Margin 44.0% 50.0% 61.2% 66.5% 70.4%
License & Royalty 7,924 1,227 511 606 699
SG&A
Personnel 2,424 2,657 3,220 3,634 4,784
Insurance 892 523 588 603 677
Rent 117 190 228 250 300
Outside Services 176 245 140 140 140
Professional Fees
and Bankruptcy
Exp 5,878 1,487 410 410 410
Other 711 931 1,508 1,733 2,295
------ ------ ------ ------ ------
Total SG&A 10,198 6,033 6,094 6,770 8,606
EBITDA (2,014) (4,306) (2,904) 431 4,131
Depreciation and
Amortization 324 171 95 107 140
------ ------ ------ ------ ------
EBIT (2,338) (4,477) (2,999) 324 3,991
Other Expenses
(Income) (5,882) (7,141) (43) (28) (108)
------ ------ ------ ------ ------
Pre-Tax Income 3,544 2,664 (2,956) 352 4,099
Income Taxes 0 0 0 0 0
------ ------ ------ ------ ------
Net Income (Loss) $3,544 $2,664 ($2,956) $352 $4,099
====== ====== ====== ====== ======
Projected Balance Sheet
(Dollars in Thousands)
March 31,
-------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Current Assets
Cash & ST
Investments $12,428 $4,966 $1,428 $923 $3,591
Accounts
Receivable, net 1,403 202 699 1,473 2,414
Inventory 29 45 339 830 1,688
Other Current
Assets 284 286 286 286 286
------ ------ ------ ------ ------
Total
Current Assets 14,144 5,499 2,752 3,512 7,979
Fixed Assets, net 183 212 266 245 291
Other Assets 360 334 308 282 256
------ ------ ------ ------ ------
Total Assets $14,687 $6,045 $3,326 $4,039 $8,526
====== ====== ====== ====== ======
Accounts Payable $865 $161 $398 $759 $1,147
Accrued Expenses 2,091 477 477 477 477
Working Capital
Revolver 0 0 0 0 0
------ ------ ------ ------ ------
Total Current
Liabilities 2,956 638 875 1,236 1,624
Liabilities
Subject to
Compromise 8,987 0 0 0 0
------ ------ ------ ------ ------
Total
Liabilities 11,943 638 875 1,236 1,624
Shareholders'
Equity 2,744 5,407 2,451 2,803 6,902
------ ------ ------ ------ ------
Total
Liabilities
& Equity $14,687 $6,045 $3,326 $4,039 $8,526
====== ====== ====== ====== ======
Consolidated Statement of Cash Flows
(Dollars in Thousands)
Fiscal Year Ending March 31,
Cash Flow -------------------------------------------
From Operations 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Net Income $3,544 $2,664 ($2,956) $352 $4,099
Depreciation
& Amortization 324 171 95 107 140
Deferred Income (849) 0 0 0 0
Unrealized Gain
on Marketable
Securities 101 0 0 0 0
Gain from
Disposition
of Assets (2,475) 0 0 0 0
Gain on Debt
Forgiveness (2,539) (6,925) 0 0 0
Net Loss from
Write-off of
Assets
& Liabilities 279 0 0 0 0
Cash Generated
from Working
Capital Management:
Accounts
Receivable 4,391 1,201 (497) (774) (941)
Inventory 48 (16) (294) (491) (857)
Prepaid Expenses 75 (2) 0 0 0
Other Current
Assets 1,460 0 0 0 0
Accounts
Payable (2,542) (704) 238 361 387
Accrued Expenses (542) (164) 0 0 0
Cash used by
Discontinued
Operations (2,140) 0 0 0 0
------ ------ ------ ------ ------
Cash Flow from
Operations (865) (3,777) (3,414) (445) 2828
Cash Flow from
Investing
Capital Expenditures (58) (173) (124) (60) (160)
Asset Disposition 8,283 0 0 0 0
Investments 0 0 0 0 0
Cash used by
Discontinued
Operations (57) 0 0 0 0
------ ------ ------ ------ ------
Cash Flow
from Investing 8,168 (173) (124) (60) (160)
Cash Flow from
Financing
Liabilities Subject
to Compromise (69) (3,512) 0 0 0
------ ------ ------ ------ ------
Cash Flow from
Financing (69) (3,512) 0 0 0
------ ------ ------ ------ ------
Total Cash
Generated
(Used) $7,234 ($7,462) ($3,538) ($505) $2,668
====== ====== ====== ====== ======
E. Postconfirmation Liquidity
Spectrum anticipates that the initial consolidated cash
balance of $7.3 million generated from the sale of non-core
assets and cash flow from operations will be adequate to meet its
postconfirmation liquidity needs. Spectrum's primary use of its
cash resources will be to fund ongoing operations and develop
enhanced software products.
Capital expenditures are anticipated to aggregate $0.1
million in fiscal 1996, $0.2 million in fiscal 1997, $0.1 million
in fiscal 1998, $0.1 million in fiscal 1999 and $0.2 million in
fiscal 2000. Capital expenditures are related primarily to
computer and testing equipment needed in Research and
Development.
Spectrum will have no long term debt when it emerges
from bankruptcy therefore should not be burdened by debt service
or interest expense.
F. Other Risk Factors to be Considered
1. Inability to Pay Administrative and Priority
Claims.
Under Section 1129(a)(9) of the Bankruptcy Code, for
the Bankruptcy Court to confirm the Plan, holders of
Administrative Claims and Priority Tax Claims must be paid in
cash on the later of the Effective Date or the date on which such
Claim is allowed by Final Order the Allowed Amount of their
Claims, except to the extent that the holder of a particular
Claim has agreed to a different treatment of such Claim. Holders
of Priority Nontax Claims must be paid in cash in full on the
Effective Date. Holders of Unsecured Claims are expected to
receive an amount equal to 100 cents on the dollar on the
Effective Date, such expectation cannot be confirmed until the
allowability of all Unsecured Claims is finally determined.
Unsecured Claims are to be paid out of a pool set aside for the
payment of Unsecured Claims consisting of $3.5 million in Cash
and as many shares of Reorganized Spectrum Common Stock as may be
necessary (the "Class 2 Distribution Pool"). See "Summary of the
Plan - General Description of the Treatment of Claims," Section
VIII(D).
To confirm the Plan, the Debtors must have sufficient
cash to pay all Administrative Claims, Priority Claims and
Unsecured Claims in full on the Effective Date, except to the
extent otherwise indicated above. However, because
Administrative Claims continue to accrue, the amount of accrued
Administrative Claims is unliquidated and undeterminable at
present. Furthermore, the Debtors continue to sustain
significant operating losses and there can be no assurance that
the Debtors will have sufficient cash to make the cash payments
with respect to Administrative Claims, Priority Claims and
Unsecured Claims required under Section 1129 of the Bankruptcy
Code as a condition to confirmation. If the Debtors do not have
sufficient cash to make the required payments to satisfy
Administrative Claims, Priority Claims and Unsecured Claims on
the Effective Date, the Debtors may still be able to have the
Plan confirmed if the affected holders of such Claims consent to
a different treatment of these Claims, such as a reduction
thereof, or payment of said Claim through the issuance of
Reorganized Spectrum Common Stock. There can be no assurance
that any, or a sufficient number of, such holders of Claims will
consent to such treatment.
The Administrative and Priority Claims to be paid as of
the Effective Date are estimated to be approximately $2.7 million
unless a lesser amount is ordered by the Bankruptcy Court or
agreed to with holders of such claims. The $2.7 million will
consist of: (i) estimated wind-down costs of the Debtors' Estates
(including professional fees), and (ii) priority claims for
taxes. These claims are expected to be settled as of the
Effective Date.
2. Lack of Established Market for the Common Stock.
Existing Spectrum Common Stock is listed over the
counter and has a number of market makers. It is currently
contemplated that the Company will apply for listing of the
Reorganized Spectrum Common Stock on the Nasdaq SmallCap Market
shortly following confirmation of the Plan. There can be no
assurance that such application will be granted. As a result, no
assurance can be given as to the continuation of a liquid market
for the Reorganized Spectrum Common Stock or as to the market
prices of the Reorganized Spectrum Common Stock that will prevail
following confirmation of the Plan.
3. Potential Unavailability of Substantial Net
Operating Loss Carryovers.
The Debtors believe that the Company may have
substantial NOLs (as defined below) available that may not be
subject to the limitations imposed by section 382 of the Tax Code
and therefore may be used to offset a portion of the Company's
postreorganization taxable income. The Debtors also believe that
the satisfaction of certain Claims should not give rise to
discharge of indebtedness income. As discussed in "Certain
Federal Income Tax Consequences of the Plan", Section XI,
however, the availability of substantial NOLs and the absence of
significant discharge of indebtedness income are dependent on a
number of factual and legal assumptions as to which there is
uncertainty. Accordingly, notwithstanding the foregoing, the
Company's NOLs and other tax attributes may be reduced
significantly, eliminated or subject to substantial limitations
on their utilization pursuant to section 382 of the Tax Code and
other provisions. In that case, the Company may incur greater
tax liabilities than projected under the Business Plan. A
reduction or limitation in the amount of the Company's utilizable
NOLs could also adversely affect the value of the Reorganized
Spectrum Common Stock.
4. Rights of Holders of Class A Stock.
Under the Amended Spectrum Certificate, the holders of
Class A Preferred Stock shall have a liquidation preference over
the holders of Reorganized Spectrum Common Stock for two years
after the Effective Date pursuant to the following terms. In the
event that Reorganized Spectrum becomes insolvent and commences
liquidation proceedings within two years of the Effective Date,
interests of holders of Class A Preferred Stock will have
priority over interests of holders of Reorganized Spectrum Common
Stock. At the expiration of the preference period, which will be
two years to the date after the Effective Date, Class A Preferred
Stock will automatically convert to Reorganized Spectrum Common
Stock. Class A Preferred Stock will be voting stock although,
for the period that it is in the hands of the Class Action
Trustee, it will be voted with the restrictions described in
Section VIII(B)(1)(b), namely, only in the same proportions and
manner as the Reorganized Spectrum Common Stock which has been
distributed at the time of voting. Secondary market trading by
the public in the Class A Preferred Stock will be permitted,
subject to generally applicable securities laws, but the Class A
Preferred Stock will not (by reason of NASD restrictions) be
listed by Reorganized Spectrum on the Nasdaq SmallCap Market or
on any other exchange or market.
SECTION X
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
THE ISSUANCE OF REORGANIZED SPECTRUM STOCK UNDER THE
PLAN RAISES CERTAIN SECURITIES LAW ISSUES UNDER THE BANKRUPTCY
CODE AND FEDERAL AND STATE SECURITIES LAWS, WHICH ARE DISCUSSED
IN THIS SECTION. THIS SECTION SHOULD NOT BE CONSIDERED
APPLICABLE TO ALL SITUATIONS OR ALL CREDITORS RECEIVING
REORGANIZED SPECTRUM STOCK UNDER THE PLAN.
A. Initial Issuance of Reorganized Spectrum Stock under the
Plan
Section 1145 of the Bankruptcy Code provides that the
securities registration and/or qualification requirements of
federal and state securities laws do not apply to the offer or
sale of stock, warrants or other securities by a debtor or its
successor if the offer or sale occurs under a plan of
reorganization and the securities are transferred in exchange (or
principally in exchange) for a claim against or interest in a
debtor. Accordingly, the initial issuance of the Class A
Preferred Stock and the Reorganized Spectrum Common Stock shall
be exempt from the registration and/or qualification requirements
of federal and state law under section 1145 of the Bankruptcy
Code.
B. Resale of Reorganized Spectrum Stock
1. Effect of Applicable Law
Any person who is not an "underwriter" under section
1145 of the Bankruptcy Code and is not an "affiliate" under SEC
Rule 144 and who resells Reorganized Spectrum Common Stock or
Class A Preferred Stock need not comply with the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act"). The term "underwriter" as used in section
1145 of the Bankruptcy Code includes four categories of persons,
which are referred to herein as "controlling persons,"
"accumulators," "distributors" and "syndicators." The treatment
of the four types of underwriters and the treatment of "dealers"
are discussed below.
a. Controlling Persons. "Controlling Persons"
are persons who, after the Effective Date, have the
power, whether direct or indirect, formal or informal,
to control the management and policies of Reorganized
Spectrum. Whether a person has such power is a
question of fact which depends on certain factors,
including the person's equity ownership in Reorganized
Spectrum relative to other equity holders, and whether
the person, acting alone or in concert with others, has
a contractual or other relationship giving that person
power over management policies and decisions.
Based on certain legislative history and
applicable no-action letters issued by the SEC staff
with respect to section 1145 of the Bankruptcy Code, it
appears that any shareholder who beneficially owns less
than 1% of Reorganized Spectrum Stock, as calculated in
accordance with SEC Rule 13d-3 promulgated under the
Exchange Act, generally should not be deemed to be in a
control relationship with Reorganized Spectrum solely
by reason of such ownership.
Based on such legislative history and no-action
letters, it would also appear that if any shareholder
beneficially owns between 1% and 10% of the Reorganized
Spectrum Stock, that stockholder may be deemed to be in a
control relationship with Reorganized Spectrum, depending
upon the facts and circumstances of its particular
situation. A shareholder who beneficially owns more than
10% of Reorganized Spectrum Stock is more likely to be
deemed a controlling person, but acquiring such status would
still depend upon the facts and circumstances of such
shareholder's particular case.
Controlling persons are permitted to resell or
otherwise dispose of Reorganized Spectrum Stock only by
complying with the registration requirements of the
Securities Act or an exemption therefrom. Reorganized
Spectrum is currently not aware of any Person who is
expected to beneficially own greater than 10% of the
Reorganized Spectrum Stock immediately following the
consummation of the Plan.
ANY SUCH SHAREHOLDER SHOULD SEEK THE ADVICE OF ITS OWN
COUNSEL BEFORE RESELLING ANY REORGANIZED SPECTRUM STOCK.
In order to resell the Reorganized Spectrum Stock
without registration, controlling persons would be required
to comply with the restrictions set forth in SEC Rule 144 or
another exemption from registration under the Securities
Act. It is anticipated that after the Effective Date,
Reorganized Spectrum will continue to comply with the
reporting requirements under the Exchange Act and thus will
be in a position to fulfill the "Current Public Information"
requirements of SEC Rule 144(c).
b. Accumulators and Distributors. "Accumulators"
are persons who purchase Claims against the Debtors
with a view to distribution of any Reorganized Spectrum
Stock to be received under the Plan in exchange for
such Claim. "Distributors" are persons who offer to
sell Reorganized Spectrum Stock for the holders of such
Reorganized Spectrum Stock. In prior bankruptcy cases,
the SEC staff has taken the position that resales by
accumulators and distributors of securities distributed
under a plan are exempt from the registration
requirements of the Securities Act if made in "ordinary
trading transactions."
c. Syndicators. "Syndicators" are persons who
offer to buy Reorganized Spectrum Stock from the
holders with a view to distribution, under an agreement
made in connection with the Plan, with the consummation
of the Plan or with the offer or sale of Reorganized
Spectrum Stock under the Plan. The Debtors are not
aware of any arrangements for the resale of Reorganized
Spectrum Stock which would make any person a
Syndicator.
d. Dealers. "Dealers" are persons who engage
either for all or part of their time, directly or
indirectly, as agents, brokers, or principals, in the
business of offering, buying, selling or otherwise
dealing or trading in securities. Once the Reorganized
Spectrum Stock becomes publicly-traded after the
Effective Date, section 4(3) of the Securities Act will
exempt transactions in the Reorganized Spectrum Stock
by Dealers taking place more than 40 days after the
date the Reorganized Spectrum Stock was bona fide
offered to the public by the issuer or by or through an
underwriter (which date presumably would be no earlier
than the first Distribution Date). Within the 40-day
period after such date, transactions by Dealers who are
stockbrokers are exempt from the 1933 Act pursuant to
section 1145(a)(4) of the Bankruptcy Code, as long as
the stockbrokers deliver a copy of this Disclosure
Statement (and supplements hereto, if any, as ordered
by the Bankruptcy Court) at or before the time of the
transactions.
THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN
PROVISIONS OF SECTION 1145 OF THE BANKRUPTCY CODE AND THE FEDERAL
SECURITIES LAWS, AS THEY MAY APPLY TO RECIPIENTS OF REORGANIZED
SPECTRUM STOCK PURSUANT TO THE PLAN. THIS DISCUSSION DOES NOT
ADDRESS ANY ASPECT OF STATE SECURITIES OR "BLUE SKY" LAWS OR
FOREIGN SECURITIES LAWS. EACH RECIPIENT OF REORGANIZED SPECTRUM
STOCK IS STRONGLY URGED TO SATISFY ITSELF THROUGH CONSULTATION
WITH ITS OWN LEGAL ADVISORS AS TO WHETHER ANY RESALES OR OTHER
TRANSACTIONS IN REORGANIZED SPECTRUM STOCK ARE LAWFUL UNDER THE
FEDERAL AND STATE OR OTHER SECURITIES LAWS.
THE DEBTORS HAVE NOT SOUGHT A "NO-ACTION" LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION WITH RESPECT TO ANY MATTER DISCUSSED HEREIN.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS ANY SUCH COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
2. Effect of Amended Spectrum Certificate
Any purported transfer of Reorganized Spectrum Stock
will be subject to the restrictions on transferability found in
the Amended Spectrum Certificate. The Amended Spectrum
Certificate limits for a period of three years after the
Effective Date the transfer of shares of Reorganized Spectrum
Stock and other interests that would be treated as stock of
Reorganized Spectrum under the Tax Code or applicable IRS
regulations that would cause either a person or an entity to
become a Five Percent Shareholder (see "Summary of the Plan -
Certain Features of the Amended Reorganized Spectrum Certificate
- - The Restriction on Transfer of Reorganized Spectrum Stock
Provision," Section VIII(C)(10)) or increase a Five Percent
Shareholder's percentage ownership interest in Reorganized
Spectrum. This restriction is intended to prevent transfers of
stock of Reorganized Spectrum from triggering an "ownership
change," as defined in section 382 of the Tax Code, which would
result in the limitation of certain potential tax benefits
available to Reorganized Spectrum. This restriction may be
waived by the Board of Directors of Reorganized Spectrum if, in
its judgment, the proposed transfer does not increase the risk
that the use of such tax benefits will be limited. It is
anticipated that limited waivers to this restriction will be
granted with respect to Reorganized Spectrum Common Stock covered
by the Incentive Deferral Plan and the Stock Incentive Plan.
Certificates representing shares of Reorganized Spectrum Stock
and such other securities of Reorganized Spectrum will bear an
appropriate legend with respect to such restrictions. See
"Certain Federal Income Tax Consequences of the Plan - Limitation
on Use of Tax Losses," Section XI ( ); "Summary of the Plan -
Certain Features of the Amended Spectrum Certificate - The
Restriction on Transfer of Reorganized Spectrum Stock Provision,"
Section VIII(C)(10); and Exhibit I attached hereto.
SECTION XI
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
THE FOLLOWING DISCUSSION IS A SUMMARY OF THE MORE
SIGNIFICANT FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE
DEBTORS AND HOLDERS OF CLAIMS AND INTERESTS. HOWEVER, NO RULING
HAS BEEN SOUGHT FROM THE IRS WITH RESPECT TO THE PLAN, AND NO
ASSURANCE CAN BE GIVEN AS TO THE TAX CONSEQUENCES OF THE PLAN TO
THE DEBTORS. MOREOVER, THE TAX CONSEQUENCES TO INDIVIDUAL
HOLDERS OF CLAIMS MAY VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.
A. Tax Consequences to the Debtors
1. Debtor's Existing Tax Attribute. As discussed
above, the Debtors have substantial NOLs which may be available
to offset income of Reorganized Spectrum after the Plan.
However, whether and to what extent such NOLs may be utilized by
Reorganized Spectrum depends upon the application of section 382
of the Internal Revenue Code, as discussed further below.
As of the end of the fiscal year ended March 31, 1995,
the Debtors had approximately $70,668,000 NOLs. Of these NOLs,
approximately $56,411,000 were already subject to limitation
under section 382. Thus, even after reduction for cancellation
of indebtedness income realized in the reorganization, it is
anticipated that substantial NOLs will be available to
Reorganized Spectrum in the future without limitation under
section 382 unless Reorganized Spectrum becomes subject to
section 382 in the future, either as a result of the
reorganization or otherwise. These NOLs expire between 2001 and
2010 if not used.
2. Matters Affecting Utilization of Debtors' Tax
Attributes.
a. "Ownership Change" Under Tax Code Section 382.
Section 382 (in conjunction with section 383) of the Tax Code
provides in general that, following an "ownership change" with
respect to the stock of a corporation, the corporation's ability
to utilize its existing NOLs, general business credit carryovers
and other tax attributes will be subject to stringent limitations
unless section 382(1)(5) (the "Bankruptcy Exception") (discussed
below) is available.
Very generally, an ownership change within the meaning
of section 382 occurs when the percentage of stock (determined on
the basis of value) owned by one or more Five Percent
Shareholders has increased by more than 50 percentage points (in
relation to the corporation's total stock considered to be
outstanding for this purpose) from the lowest percentage of stock
that was owned by such Five Percent Shareholders at any time
during the applicable "testing period". The testing period is
ordinarily the shorter of (i) the three-year period preceding the
date of testing or (ii) the period of time since the most recent
ownership change of the corporation. In general, for purposes of
determining stock ownership and the aggregate amount of stock
outstanding, special rules apply for options and rights that are
similar to options, and broad constructive ownership and
attribution rules apply. Also, all persons holding less than 5%
of the value of the corporation's stock generally are treated as
a single Five Percent Shareholder. An ownership change can occur
as a result of, among other things, the purchase or sale of stock
by or to a Five Percent Shareholder, an issuance of stock by the
corporation (whether or not any particular shareholder holds 5%
of the value of the corporation's stock), or the redemption of
stock by the corporation. Although the matter is not free from
doubt, it is anticipated that the implementation of the Plan will
cause an ownership change.
b. Effect of Tax Code Section 382. Unless the
Bankruptcy Exception applies, a corporation may use pre-ownership
change NOLs in any taxable year following an ownership change
only up to an amount equal to its "section 382 limitation"
(described below) for that taxable year. The section 382
limitation for a taxable year equals, in general and subject to
adjustments, the product of (i) the long-term tax-exempt bond
rate as determined at the time of the ownership change and (ii)
the value of the corporation immediately before the ownership
change. In general, in the case of a corporation undergoing an
ownership change in a bankruptcy proceeding, the value of the
corporation is increased to reflect the increase (if any) in its
value resulting from any surrender or cancellation of creditors'
claims in the transaction unless the Bankruptcy Exception
applies. If the section 382 limitation applies with respect to
an ownership change, and the corporation does not continue its
historic business (as defined in the regulations under the Tax
Code) during the two year period following the date of such
ownership change, the NOLs are eliminated in their entirety.
If the corporation's taxable income in a given year
exceeds the section 382 limitation, the excess is subject to
federal income tax (except to the extent such taxable income is
attributable to certain "built-in gains" of the corporation).
NOLs not utilized in a given year because of the section 382
limitation remain available for use in future years until their
normal expiration dates. To the extent that a corporation's
section 382 limitation in a given year exceeds its taxable income
for such year, that excess will increase the section 382
limitation in future taxable years.
The section 382 limitation also applies in the case of
a corporation that has net unrealized built-in losses (i.e., if
the aggregate adjusted basis of the corporation's assets at the
time of the ownership change exceeds the fair market value of
such assets) in excess of a de minimis threshold amount, so as to
limit the corporation's utilization of such built-in losses that
are realized during the five-year period after the ownership
change. This rule also applies to deductions that have accrued
economically prior to the ownership change but are recognized for
tax purposes after the ownership change. Rules similar to those
under section 382 apply under section 383 to restrict a
corporation's utilization of business credit carryovers and other
tax attributes after an ownership change.
In general, if the Bankruptcy Exception does not apply,
the operation of section 382 may severely restrict the amount of
NOLs that may be utilized by Reorganized Spectrum after the
Effective Date in any given taxable year.
c. The Bankruptcy Exception under Tax Code Section
382(l)(5). The Bankruptcy Exception provides that the section
382 limitation does not apply if a corporation that is otherwise
subject to section 382 is under the jurisdiction of a court in a
case under the Bankruptcy Code and the shareholders and
"qualified creditors" of the corporation together own 50% or more
of the value and voting power of the reorganized corporation
after the ownership change as a result of being shareholders or
creditors immediately before the ownership change. "Qualified
creditors" include (i) persons who were creditors at least 18
months before the date of Chapter 11 petition was filed and (ii)
holders of claims which arose in the ordinary course of business
who have at all times held the beneficial interest in such trade
claims. Regulations with respect to the Bankruptcy Exception
provide that creditors with respect to liabilities relating to
the breach of a statutory duty constitute qualified creditors.
If this exception applies, the use of the corporation's NOLs is
not subject to the section 382 limitation, but the NOLs are
reduced by the amount of interest relating to any indebtedness
which is converted into stock and for which the corporation
claimed a deduction during the three-year period preceding the
taxable year of the ownership change plus the portion of the year
of the ownership change prior to the effective date of the plan
of reorganization. However, under the Bankruptcy Exception, if
there were a second ownership change during the two-year period
following the ownership change that results from the plan of
reorganization, the NOLs and other tax attributes of a
corporation would be subject to a section 382 limitation of zero
for all taxable years ending after the date of the second
ownership change (thereby, in effect, eliminating entirely the
corporation's ability thereafter to utilize such tax attributes).
The Bankruptcy Exception automatically applies if its
requirements are satisfied. A debtor, however, has the option of
filing an election not to have the Bankruptcy Exception apply
with the filing of its tax return for the year of the ownership
change. If the election is made, the section 382 limitation will
apply. It is currently anticipated that the Bankruptcy Exception
will apply in this case, and that the election not to have the
Bankruptcy Exceptions apply will not be made. However, the
applicability of the Bankruptcy Exception under these
circumstances is not absolutely free from doubt, and as noted
above no ruling has been sought from the IRS with respect to the
Plan of Reorganization.
d. Subsequent Ownership Changes. As described above,
if the Bankruptcy Exception applies to Reorganized Spectrum and a
second ownership change were to occur during the two-year period
following the ownership change that results pursuant to the Plan,
the section 382 limitation would be zero for all taxable years
ending after the date of the second ownership changes, thereby
eliminating in effect the ability of Reorganized Spectrum
thereafter to utilize the NOLs. In order to minimize the
likelihood that a second ownership change would occur and would
adversely affect the shareholders of Reorganized Spectrum, the
Plan incorporates certain restrictions on the transferability of
stock as described above. There can be no assurance, however,
that these restrictions will in fact prevent an ownership change
that could adversely affect the shareholders of Reorganized
Spectrum.
e. Tax Code Section 269. Notwithstanding a
corporation's compliance with the rules described above, the IRS
is authorized under Tax Code section 269 to disallow any
deduction, credit or other allowance (including the use of NOLs
and business credit carryovers) if control of a corporation is
acquired principally for tax avoidance purposes. Under section
269, "control" is regarded as the ownership of stock possessing
at least 50% of the total combined voting power or value of all
classes of stock. The existence of a principal tax avoidance
motive by persons acquiring control of Reorganized Spectrum would
be primarily a question of fact.
f. Discharge of Indebtedness. Under the Tax Code, a
taxpayer generally must include in gross income the amount of any
discharged indebtedness realized during the taxable year, except
to the extent payment of such indebtedness would have given rise
to a deduction. However, such amounts are not included in income
where the discharge of indebtedness is pursuant to a plan
approved by the court in a case under the Bankruptcy Code.
Instead, the amount of discharged indebtedness which would
otherwise have been required to be included in income will be
applied to reduce certain tax attributes of the taxpayer in the
following order: NOLs, general business credit carryovers,
capital loss carryovers, the taxpayer's basis in property and
foreign tax credit carryovers.
The satisfaction of Claims in Chapter 11 generally will
give rise to discharge of indebtedness and a reduction in
Reorganized Spectrum's tax attributes indebtedness unless the
discharged Claims are not satisfied for less than the amount of
such claims, the Claims do not constitute indebtedness for U.S.
federal income tax purposes or the discharged Claims would have
given rise to a deduction had they been paid in full and a
deduction for such amount has not already been claimed. Although
same cancellation of indebtedness income may be realized in the
reorganization, it is anticipated that substantial NOLs will
remain after such recognition of income.
B. Tax Consequences to Creditors.
1. Creditors Receiving Only Cash. A Creditor that
receives only cash pursuant to the Plan will generally be
required to recognize gain or loss equal to the difference
between the Creditor's basis in the Claim and the amount of
consideration allocable thereto (other than consideration
allocable to accrued interest, as discussed in paragraph 3
below). The character of any recognized gain or loss will depend
upon the status of the Creditor, the nature of the Claim in its
hands and its holding period.
2. Creditors Receiving Common Stock. The federal tax
consequences of the implementation of the Plan to a creditor that
receives Common Stock will depend primarily on whether the
creditor's Claim constitutes a "security" for federal income tax
purposes (hereinafter referred to as a "tax security"). Whether
a Claim constitutes a tax security is based on the facts and
circumstances surrounding the origin and nature of the Claim and
its maturity date. Generally, claims arising out of the
extension of trade credit or litigation will not constitute tax
securities. Instruments with a five-year term or less also
rarely qualify as tax securities. On the other hand, bonds or
debentures with an original term of at least ten years have
generally been considered to be tax securities. A holder of a
Claim that constitutes a tax security that exchanges its tax
securities solely for Common Stock pursuant to the Plan will not
recognize gain or loss on the exchange except (as discussed
below) to the extent, if any, such Common Stock is attributable
to interest accrued after the beginning of its holding period.
Notwithstanding the foregoing, if a holder of a Claim which
constitutes a tax security receives, in addition to Common Stock,
cash or other property, such holder may recognize gain (but not
loss) but only to the extent of the cash or other property
received. Such gain would be capital gain if the Claim was a
capital asset in the hands of the holder. A holder's aggregate
tax basis in any Common Stock received under the Plan in respect
of a Claim constituting a tax security (except for any amounts
allocable to interest) will generally equal the holder's basis in
the Claim, decreased by the value of any cash and other property
received in the exchange (other than in respect of interest) will
generally include the holder's holding period of the Claim
surrendered. A holder of a Claim not constituting a tax security
that receives cash and/or property in satisfaction of such Claim
will generally recognize gain or loss measured by the difference
between the amount realized and such holder's tax basis in the
Claim. The amount realized will equal the aggregate fair market
value of the property distributed to such creditor (to the extent
not allocable to interest). The character of any recognized gain
or loss will depend on the status of the holder, the nature of
the Claim in its hands and its holding period. Subject to
paragraph 3 below, such holder's tax basis in New Common Stock or
other property received in satisfaction of a Claim that does not
constitute a tax security will generally equal the fair market
value of such stock or other property at the time gain or loss is
recognized.
The precise treatment of the Class Action Trust and
Class Plaintiffs is not free from doubt. In particular, it is
not clear whether such Class Plaintiffs should recognize any
income with respect to the receipt of Class A Preferred Stock and
the timing of the recognition of such income if any. Because
individual circumstances may differ significantly, such persons
should consult their own tax advisors.
3. Treatment of Interest. A creditor that, under the
applicable accounting method, was not required to include in
income accrued but unpaid interest attributable to its Claim will
be treated as receiving ordinary interest income to the extent
consideration received is allocable to such interest. This
treatment applies regardless of whether that creditor realizes an
overall gain or loss as a result of the exchange of its Claim. A
creditor that had previously included in income accrued but
unpaid interest attributable to its Claim will recognize a loss
(generally deductible in full against ordinary income) to the
extent such accrued but unpaid interest is not satisfied in full.
For purposes of the above discussion, "accrued"
interest means interest that was accrued while the underlying
Claim was held by the creditor.
It is unclear how a Creditor who receives consideration
with respect to a Claim which is less than the amount of the
Allowed Claim should allocate such consideration between
principal and interest. It appears likely that the IRS would
require that the consideration be allocated proportionately
between the portion of the Allowed Claim representing principal
and the portion of the Allowed Claim representing interest.
SECTION XII
CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN
The following are conditions precedent to Confirmation:
1. A Final Order of the Bankruptcy Court is entered
granting the Motion for Substantive Consolidation of Spectrum and
Cellular.
2. A Final Order of the District Court is entered granting
approval of the Class Action Settlement Motion.
3. The Debtors are successful in the Home Action.
Reorganized Spectrum may waive any of the foregoing
conditions at any time, without notice, without leave or order of
the Bankruptcy Court and without any formal action other than
proceeding to confirm the Plan.
SECTION XIII
CONFIRMATION OF THE PLAN
A. Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the
Bankruptcy Court, after notice, to hold a hearing on confirmation
of a plan. By order of the Bankruptcy Court, the Confirmation
Hearing has been scheduled for [April ], 1996, at [ ] a.m.
Eastern Standard Time, in Courtroom 313, United States
Courthouse, 75 Clinton Street, Brooklyn, New York. The
confirmation hearing may be adjourned from time to time by the
Bankruptcy Court without further notice except for an
announcement made at the confirmation hearing or any adjournment
hereof.
Section 1128(b) of the Bankruptcy Code provides that
any party in interest may object to confirmation of a plan. Any
objection to confirmation of the Plan must be made in writing and
filed with the Bankruptcy Court and served by hand or by Federal
Express on, so received by, each of the Proponents, together with
proof of service, on or before 5:00 p.m., Eastern Standard Time,
on [April , 1996]. Counsel upon whom objections must be
served is:
George Weisz, Esq.
Cleary, Gottlieb, Steen & Hamilton
Attorneys for Reorganized Spectrum Information
Technologies, Inc. et al., the Debtors and Debtors in
Possession
One Liberty Plaza
New York, New York 10006
and on
Michael P. Richman, Esq.
Mayor, Brown & Platt
Counsel to the Creditors Committee
1675 Broadway
New York, New York
Objections to confirmation of the Plan are governed by Bankruptcy
Rule 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED
AND FILED IT WILL NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
B. Requirements for Confirmation of the Plan
At the confirmation hearing, the Bankruptcy Court shall
determine whether the Bankruptcy Code's requirements for
confirmation of the Plan have been satisfied, in which event the
Bankruptcy Court shall enter an order confirming the Plan. As
set forth in section 1129(a) of the Bankruptcy Code, these
requirements are as follows:
1. The Plan complies with the applicable provisions
of the Bankruptcy Code.
2. The Proponents of the Plan have complied with the
applicable provisions of the Bankruptcy Code.
3. The Plan has been proposed in good faith and not
by any means forbidden by law.
4. Any payment made or to be made by the Debtors or
by a person issuing securities or acquiring property under the
Plan, for services or for costs and expenses in or in connection
with the case, or in connection with the Plan and incident to the
case, has been approved by, or is subject to the approval of, the
court as reasonable.
5. (a) (i) The Proponents of the Plan have disclosed
the identity and affiliations of any individual proposed to
serve, after confirmation of the Plan, as a director,
officer, or voting trustee of the Debtors, an affiliate of
the debtor participating in a joint plan with the debtor, or
a successor to the Debtors under the Plan; and
(ii) the appointment to, or continuance in, such office
of such individual, is consistent with the interests of
creditors and equity security holders and with public
policy; and
(b) the Proponents of the Plan have disclosed the
identity of any insider that will be employed or retained by
the reorganized Debtors, and the nature of any compensation
for such insider.
6. Any governmental regulatory commission with
jurisdiction, after confirmation of the Plan, over the rates of
the Debtors has approved any rate change provided for in the
Plan, or such rate change is expressly conditioned on such
approval.
7. With respect to each impaired class of Claims or
Interests --
(a) each holder of a Claim or Interest of such class:
(i) has accepted the Plan; or
(ii) will receive under the Plan on account of such
Claim or Interest property of a value, as of the effective
date of the Plan, that is not less than the amount that such
holder would so receive or retain if the Debtors were
liquidated under Chapter 7 of the Bankruptcy Code on such
date; or
(b) if section 1111(b)(2) of the Bankruptcy Code
applies to the Claims of such class, each holder of a Claim
of such class will receive or retain under the Plan on
account of such Claim property of a value, as of the
effective date of the Plan, that is not less than the value
of such holder's interest in the estate's interest in the
property that secures such Claims.
8. With respect to each Class of Claims or
Interests --
(a) such Class has accepted the Plan; or
(b) such Class is not impaired under the Plan; or
(c) the test of section 1129(b) has been met (see
"Confirmation of the Plan-Cramdown," Section XIII(E)
9. Except to the extent that the holder of a
particular Claim has agreed to a different treatment of such
Claim, the Plan provides that --
(a) with respect to a Claim of a kind specified in
section 507(a)(1) or 507(a)(2) of the Bankruptcy Code, on
the Effective Date of the Plan, the holder of such Claim
will receive on account of such Claim cash equal to the
allowed amount of such Claim;
(b) with respect to a Class of Claims of a kind
specified in section 507(a)(3), 507(a)(4), 507(a)(5),
507(a)(6) or 507(a)(7) of the Bankruptcy Code, each holder
of a Claim of such class will receive --
(i) if such Class has accepted the Plan, deferred
cash payments of a value, as of the Effective Date of
the Plan, equal to the allowed amount of such Claim; or
(ii) if such Class has not accepted the Plan, cash
on the Effective Date of the Plan equal to the allowed
amount of such Claim; and
(c) with respect to a Claim of a kind specified in
section 507(a)(8) of the Bankruptcy Code, the holder of a
Claim will receive on account of such Claim deferred cash
payments, over a period not exceeding six years after the
date of assessment of such Claim of a value, as of the
Effective Date of the Plan, equal to the allowed amount of
such Claim.
10. If a class of Claims is impaired under the Plan,
at least one class of Claims that is impaired has accepted the
Plan, determined without including any acceptance of the Plan by
any insider.
11. Confirmation of the Plan is not likely to be
followed by the liquidation, or the need for further financial
reorganization, of the Debtors or any successor to the Debtors
under the Plan, unless such liquidation or reorganization is
proposed in the Plan.
12. All fees payable under 28 U.S.C. section 1930, as
determined by the court at the hearing on confirmation of the
Plan, have been paid or the Plan provides for the payment of all
such fees on the Effective Date of the Plan.
13. The Plan provides for the continuation after its
Effective Date of payment of all retiree benefits, as that term
is defined in section 1114 of the Bankruptcy Code, at the level
established pursuant to subsection (e)(1)(B) or (g) of section
1114 of the Bankruptcy Code, at any time prior to confirmation of
the Plan, for the duration of the period the Debtors have
obligated themselves to provide such benefits.
Proponents believe that the Plan satisfies all of the
statutory requirements of Chapter 11, that they have complied or
will have complied with all of the requirements of Chapter 11,
and that the proposal of the Plan is made in good faith.
Proponents believe that the holders of all Claims and
Interests impaired under the Plan will receive payments or
distributions under the Plan having a present value as of the
Effective Date in amounts not less than the amounts likely to be
received by such holders if Debtors were liquidated in a case
under Chapter 7. In particular, as set forth in Exhibit F, in a
liquidation, Interest holders would receive no distribution on
account of their Interests. At the Confirmation Hearing, the
Bankruptcy Court will determine whether holders of Claims and
Interests would receive distributions under the Plan not less
than the amount they would receive in a liquidation under Chapter
7.
Proponents also believe that confirmation of the Plan
is not likely to be followed by the liquidation or the need for
further financial reorganization of Debtors or any successor to
Debtors under the Plan. According to Debtors' business
projections, they will have sufficient postconfirmation
financing, earnings and cash flow from continuing operations with
which to meet the ongoing financial needs of their businesses.
C. Definition of Impairment
A Class of Claims or interests is Impaired under a plan
of reorganization unless, as set forth in section 1124 of the
Bankruptcy Code, with respect to each Claim or Interest of such
Class, the Plan:
1. leaves unaltered the legal, equitable, and
contractual rights to which such claim or interest entitles
the holder of such claim or interest; or
2. notwithstanding any contractual provision or
applicable law that entitles the holder of such claim or
interest to demand or receive accelerated payment of such
claim or interest after the occurrence of a default --
(a) cures any such default that occurred before
or after the commencement of the case under the
Bankruptcy Code other than a default of a kind
specified in section 365(b)(2) of the Bankruptcy Code;
(b) reinstates the maturity of such claim or
interest as such maturity existed before such default;
(c) compensates the holder of such claim or
interest for any damages incurred as a result of any
reasonable reliance by such holder on such contractual
provision or such applicable law; and
(d) does not otherwise alter the legal,
equitable, or contractual rights to which such claim or
interest entitles the holder of such claim or interest.
D. Vote Required for Class Acceptance
Section 1126 of the Bankruptcy Code defines acceptance
of a plan by a class of claims as acceptance by holders of at
least two-thirds in amount, and more than one-half in number, of
the claims of that Class that actually cast ballots for
acceptance or rejection of the plan. Thus, class acceptance
takes place only if two-thirds in amount and a majority in number
of the holders of Claims voting cast their ballots in favor of
acceptance. Under the Bankruptcy Code, a class of Interests is
deemed to have accepted the Plan if the Plan is accepted by
holders of such Interests that hold at least two-thirds in amount
of the Allowed Interests in such class that have voted on the
Plan.
E. Cramdown
The Bankruptcy Court may confirm the Plan at the
request of the Proponents if, as to each impaired Class which has
not accepted the Plan, the Plan "does not discriminate unfairly"
and is "fair and equitable." A plan of reorganization does not
discriminate unfairly within the meaning of the Bankruptcy Code
if no class receives more than it is legally entitled to receive
for its claims or equity interests.
"Fair and equitable" has different meanings with
respect to the treatment of secured and unsecured claims. As set
forth in section 1129(b)(2) of the Bankruptcy Code, those
meanings are as follows:
1. With respect to a class of secured claims, the
plan provides --
(i)(I) that the holder of such claims retain
the liens securing such claims, whether the property
subject to such liens is retained by the debtor or
transferred to another entity, to the extent of the
allowed amount of such claims; and
(II) that each holder of a claim of such
class receive on account of such claim deferred cash
payments totaling at least the allowed amount of such
claim, of a value, as of the effective date of the
plan, of at least the value of such holder's interest
in the estate's interest in such property;
(ii) for the sale, subject to section 363(k) of
the Bankruptcy Code, of any property that is subject to
the liens securing such claims, free and clear of such
liens, with such liens to attach to the proceeds of
such sale, and the treatment of such liens on proceeds
under clause (i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of
the indubitable equivalent of such claims.
2. With respect to a class of unsecured claims --
(i) the plan provides that each holder of a claim
of such class receive or retain on account of such
claim property of a value, as of the effective date of
the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is
junior to the claims of such class will not receive or
retain under the plan on account of such junior claim
or interest any property.
3. With respect to a class of interests --
(i) the plan provides that each holder of an
interest of such class receive or retain on account of
such interest property of a value, as of the effective
date of the plan, equal to the greatest of the allowed
amount of any fixed liquidation preference to which
such holder is entitled, any fixed redemption price to
which such holder is entitled, or the value of such
interest; or
(ii) the holder of any interest that is junior to
the interests of such class will not receive or retain
under the plan on account of such junior interest any
property.
The Bankruptcy Court will determine at the
Confirmation Hearing whether the Plan is fair and
equitable with respect to, and does not discriminate
unfairly against, any rejecting impaired class of
Claims or Interests.
F. Certain Effects of Confirmation of the Plan by the
Bankruptcy Court
1. Continuing Jurisdiction of the Bankruptcy Court.
If the Plan is confirmed, the Bankruptcy Court will retain all
legally permissible jurisdiction over all matters necessary to
ensure that the purposes and intent of the Plan are carried out
until such time as the Plan has been fully consummated through
the entry of a final decree completely closing the Chapter 11
Cases.
Unless otherwise provided by order of the Bankruptcy
Court, all injunctions or stays provided for in the Chapter 11
Cases and in effect on the date of entry of the Confirmation
Order will remain in full force and effect until the Effective
Date of the Plan.
2. Discharge of Claims Against the Debtors and the
Officers and Directors. The rights afforded in the Plan and the
treatment of all holders of Claims or Interests in the Plan will
be in exchange for and in complete satisfaction of all Claims or
Interests of any nature whatsoever, known or unknown, including
any interest accrued or expenses incurred thereon from and after
the Petition Date, against the Debtors. Except as otherwise
provided in the Plan, on the Effective Date, all Claims against
and Interests in the Debtors will be satisfied in full exchange
for the consideration, if any, provided for in the Plan. All
persons and entities will be precluded from asserting against the
Debtors, their successors (including Reorganized Spectrum and the
Plan Administrator) or their respective assets or properties, any
other Claims based upon any act or omission, transaction or other
activity of any kind or nature that occurred prior to the
Effective Date.
The Confirmation Order will provide, among other
things, that except as otherwise expressly provided in the Plan,
all persons and entities who have held, hold or may hold Claims
against or Interests in any of the Debtors are permanently
enjoined, on and after the Effective Date, from (a) commencing or
continuing in any manner any action or other proceeding of any
kind with respect to any such Claim or Interest against
Reorganized Spectrum, (b) the enforcement, attachment, collection
or recovery by any manner or means of any judgment, award, decree
or order against Reorganized Spectrum, (c) creating, perfecting,
or enforcing any encumbrance of any kind against Reorganized
Spectrum or against the property or interests in property of
Reorganized Spectrum, with respect to any such Claims, and
(d) asserting any right of setoff, subrogation, or recoupment of
any kind against any obligation due from Reorganized Spectrum or
against the property or interests in property of Reorganized
Spectrum, with respect to any such Claim. Upon confirmation of
the Plan, its provisions will bind the Debtors and all their
respective creditors and Interest holders, whether or not they
have filed proofs of Claims or Interests or have accepted the
Plan.
3. Disallowance of Contribution Claims. Except as
otherwise provided in the Plan, the Confirmation Order will
provide that any Claim for reimbursement, indemnification,
contribution or subrogation of an entity that is liable with the
Debtors on, or that has secured, the Claim of a Creditor not
disallowed by a prior order of the Bankruptcy Court, will be
disallowed to the extent (a) such Creditor's Claim against the
Debtors is disallowed, (b) such Claim for reimbursement,
indemnification, contribution or subrogation is contingent as of
the Confirmation Date or (c) such entity asserts a right of
subrogation to the rights of such Creditor under section 509 of
the Bankruptcy Code.
4. Rights of Subordination. The right of any
Claimant or the Debtors to enforce any subordination rights which
it has or may have against another Claimant, whether arising by
contract or by law will not be impaired, except to the extent as
may be otherwise provided for by an order of the Bankruptcy Court
as a result of a Class Action Settlement or compromise, or
otherwise. All rights of subordination arising under section 510
of the Bankruptcy Code are to be preserved without impairment.
5. Exclusions of Liability. Except for their own
gross negligence or willful misconduct, but subject to the
discharge of Claims pursuant to the Confirmation Order, neither
the Debtors, nor the directors, officers, employees or agents or
professionals of the foregoing, will be responsible for any
recitals, representations or warranties contained in, or for the
execution, validity, genuineness, effectiveness or enforceability
of, the Plan, this Disclosure Statement or any exhibit thereto or
hereto, or be liable to any person or entity for any action taken
or omitted by them in the Chapter 11 Cases or otherwise in
connection with their duties and each Claim or Interest holder is
enjoined from asserting any claim or cause of action relating to
the foregoing.
6. Payment of Fees and Expenses.
a. Professional Fees and Expenses. The
reasonable and necessary professional fees and expenses
incurred by the Debtors, Reorganized Spectrum, the
Disbursing Agent, the Creditors' Committee from and
after the Effective Date in connection with the
consummation and implementation of the Plan shall be
paid by the Disbursing Agent in the ordinary course of
business without further order of the Bankruptcy Court;
provided, however, that any unresolved dispute as to
such professional compensation and reimbursement of
expenses shall be submitted to (and resolved by) the
Bankruptcy Court.
b. United States Trustee's Fees. All fees
due and owing to the United States Trustee under 28
U.S.C. Section 1930 will be paid on the Effective Date,
or as
soon thereafter as may be practicable.
7. Amendments and Modifications. The Plan may be
amended or modified before the Effective Date only by Reorganized
Spectrum or, following the Effective Date, only by Reorganized
Spectrum to the extent provided in section 1127 of the Bankruptcy
Code.
In addition, Reorganized Spectrum reserves the right to
revoke or withdraw the Plan prior to the Confirmation Date. If
Reorganized Spectrum revokes or withdraws the Plan, or if
Confirmation of the Plan does not occur, then the Plan shall be
null and void and nothing contained herein shall: (1) constitute
a waiver or release of any Claims by or against, or any Interests
in, Reorganized Spectrum, or (2) prejudice in any manner the
rights of Reorganized Spectrum or holders of Claims or Interests
in any further proceedings involving Reorganized Spectrum.
SECTION XIV
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF PLAN
The Proponents believe that the Plan affords holders of
Claims the potential for the greatest realization on Debtors'
assets and, therefore, is in the best interests of such holders.
If the Plan is not confirmed the alternatives include: (a)
continuation of the pending Chapter 11 Cases; (b) alternative
plans of reorganization; or (c) liquidation of Debtors under
Chapter 7 or Chapter 11 of the Bankruptcy Code.
A. Continuation of the Cases
If the Debtors remain in Chapter 11, they would remain
subject to the restrictions imposed by the Bankruptcy Code and
would continue to face constraints as a result of continued
operating losses and professional fees while in bankruptcy. It
is unlikely that the Debtors would be able to generate positive
cash from operations, or that the Debtors would have or be able
to obtain sufficient resources if the Plan were not confirmed.
For a discussion of the Debtors' liquidity and capital resources,
see "Selected Operating and Financial Data -- Liquidity and
Capital Resources" Section VI(D).
B. Alternative Plans of Reorganization
If the Plan is not confirmed, the Debtors, or, subject
to further determinations by the Bankruptcy Court as to
extensions of exclusivity under the Bankruptcy Code, any party in
interest in the Chapter 11 Cases, could attempt to formulate and
propose a different plan or plans. Such plans might involve
either a reorganization and continuation of the Debtors'
businesses, or an orderly liquidation of their assets, or a
combination thereof. Based on the Debtors' current cash position
and due to continuing significant operating losses, there can be
no assurance that the Debtors will have sufficient cash to
support operations until such plan or plans are confirmed and
implemented, and there can be no assurance that the Debtors would
be able to obtain additional funding necessary to continue
operations until such time.
C. Liquidation under Chapter 7 or Chapter 11
If no plan can be confirmed, the Chapter 11 Cases may
be converted to cases under Chapter 7 of the Bankruptcy Code. In
Chapter 7 cases, 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 holders
of Claims against Debtors in accordance with the priorities
established by the Bankruptcy Code.
Under Chapter 7, a secured creditor whose claim is
fully secured would be entitled to full payment, including
interest, from the proceeds of the sale of its collateral.
Unless its claim is nonrecourse, a secured creditor whose
collateral is insufficient to pay its claim in full would be
entitled to assert an unsecured claim for its deficiency. Claims
entitled to priority under the Bankruptcy Code would be paid in
full before any distribution to general unsecured creditors.
Funds, if any, remaining after payment of secured claims and
priority claims would be distributed pro rata to general
unsecured creditors.
Proponents believe that liquidation under Chapter 7
would result in substantial diminution of the value of the
Debtors' estates because of additional administrative expenses
involved in the appointment of trustees and attorneys,
accountants and other professionals to assist such trustees;
additional expenses and claims, some of which would be entitled
to priority, that would arise by reason of the liquidation and
from the rejection of executory contracts in connection with a
cessation of Debtors' operations; and failure to realize the
greater going concern value of Debtors' assets.
The Debtors may also be liquidated pursuant to the
provisions of a Chapter 11 plan. In a liquidation under Chapter
11, the Debtors' assets would be sold in an orderly fashion over
a more extended period of time than in liquidations under Chapter
7. Thus, Chapter 11 liquidation might result in larger
recoveries than in a Chapter 7 liquidation, but the delay in
distributions could result in greater losses being incurred prior
to completing any sale. Further if a trustee were not appointed,
because a trustee is not required in a Chapter 11 case, expenses
for professional fees would likely be lower than in a Chapter 7
case, but any distribution to the holders of claims under a
Chapter 11 liquidation plan probably would be delayed
substantially.
Proponents have considered liquidation in the context
of a Chapter 11 case and their liquidation analysis is attached
hereto as Exhibit F. In the analysis, Proponents have taken into
account the nature, status and underlying value of the assets,
the ultimate realizablevalue of their assets and the extent to
which such assets are subject to liens and security interests.
Based on this analysis, it is apparent that a liquidation of each
of Debtors' assets would produce substantially less value for
distribution to the Impaired Classes than that recoverable in
each instance under the Plan with the possible exception of
Class 2 and Class 2 claimants would receive no greater
distribution on liquidation than they will receive under the
Plan. Moreover, for the reasons discussed above, under a Chapter
7 liquidation there would be no greater recovery to unsecured
creditors than under the Chapter 11 liquidation analyses.
SECTION XV
CONCLUSION
All holders of Claims against Debtors are urged to vote
to accept the Plan and to evidence such acceptance by returning
their ballots so that they will be received by [ ].
SPECTRUM INFORMATION TECHNOLOGIES,
INC., DEBTOR AND DEBTOR IN
POSSESSION
DATED: [ ] By:
-------------------------------
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board
SPECTRUM CELLULAR CORPORATION,
DEBTOR AND DEBTOR IN POSSESSION
DATED: [ ] By:
-------------------------------
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board
Submitted by:
CLEARY, GOTTLIEB, STEEN &
HAMILTON
___________________________
George Weisz, Esq.
A Member of the Firm
One Liberty Plaza
New York, New York 10006
(212) 225-2000
Attorneys for Reorganized
Spectrum Information
Technologies, Inc. and
Reorganized Spectrum Cellular
Corporation
Debtors and Debtors in
Possession
EXHIBIT A
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- -----------------------------------------x
In re : Chapter 11 Case Nos.
SPECTRUM INFORMATION TECHNOLOGIES, INC., : 195 10690 260
and SPECTRUM CELLULAR CORPORATION, : 195 10693 260
:
Debtors. :
:
:
:
- -----------------------------------------x
--------------------------------------------
CONSOLIDATED PLAN OF REORGANIZATION PROPOSED BY
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SPECTRUM
CELLULAR CORPORATION, DEBTORS IN POSSESSION DATED AS OF:
FEBRUARY 8, 1996
--------------------------------------------
SPECTRUM INFORMATION TECHNOLOGIES,
INC. and SPECTRUM CELLULAR
CORPORATION,
Debtors and
Debtors in Possession
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board of Directors
2700 Westchester Avenue
Purchase, New York 10577
(914) 251-1800
CLEARY, GOTTLIEB, STEEN &
HAMILTON
George Weisz
Barry M. Fox
Shari Siegel
Mary M. McDonald
Mary P. Watson
One Liberty Plaza
New York, New York 10006
(212) 225-2000
Attorneys for Spectrum Information
Technologies, Inc. and Spectrum
Cellular Corporation
Debtors and Debtors in Possession
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . .1
I. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION. . .1
A. Definitions.. . . . . . . . . . . . . . . . . . . . .1
B. Interpretation, Rules of Construction, Computation
of Time, and Choice of Law . . . . . . . . . . . . .8
II. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS. . . . . .9
A. Class 1: Priority Nontax Claims . . . . . . . . . . .9
B. Class 2: Unsecured Claims . . . . . . . . . . . . . 10
C. Class 3: Class Action Claims. . . . . . . . . . . . 10
D. Class 4: Other Securities Claims. . . . . . . . . . 10
E. Class 5: Equity Interests . . . . . . . . . . . . . 10
F. Class 6: Equitably Subordinated Claims. . . . . . . 10
III. TREATMENT OF CLASSES OF CLAIMS AND INTERESTS. . . . . . 10
A. Unclassified Claims . . . . . . . . . . . . . . . . 10
B. Class 1 - Priority Nontax Claims. . . . . . . . . . 11
C. Class 2 - Unsecured Claims. . . . . . . . . . . . . 11
D. Class 3 - Class Action Claims . . . . . . . . . . . 12
E. Class 4 - Other Securities Claims . . . . . . . . . 12
F. Class 5 - Equity Interests. . . . . . . . . . . . . 12
G. Class 6 - Equitably Subordinated Claims . . . . . . 12
IV. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES . 13
A. Assumption of Executory Contracts and
Unexpired Leases.. . . . . . . . . . . . . . . . . 13
B. Bar Date for Rejection Damages. . . . . . . . . . . 13
C. Special Executory Contract Issues.. . . . . . . . . 13
V. SUBSTANTIVE CONSOLIDATION. . . . . . . . . . . . . . . . 14
VI. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN. . . 15
A. On the Effective Date.. . . . . . . . . . . . . . . 15
B. Funding of Plan.. . . . . . . . . . . . . . . . . . 18
C. Revesting of Assets.. . . . . . . . . . . . . . . . 18
D. Management of Reorganized Spectrum. . . . . . . . . 19
E. Release of Liens. . . . . . . . . . . . . . . . . . 20
F. Exemption From Certain Transfer Taxes . . . . . . . 20
G. Cancellation and Surrender of Instruments,
Securities, and Other Documentation. . . . . . . . 20
H. Applicability of Sections 1125 And 1145 of the
Bankruptcy Code to Reorganized Spectrum
Common Stock, Class A Preferred Stock, and
Preferred Stock Issued Under The Plan. . . . . . . 21
I. Voting of Reorganized Spectrum Common Stock and
Class A Preferred Stock Held . . . . . . . . . . . 21
J. Setoffs.. . . . . . . . . . . . . . . . . . . . . . 21
K. Objection to Claims.. . . . . . . . . . . . . . . . 22
L. Discharge of the Debtors and Injunction.. . . . . . 22
M. Preservation of Rights of Action. . . . . . . . . . 24
N. Compromise of Controversies.. . . . . . . . . . . . 24
O. Limitation of Liability . . . . . . . . . . . . . . 25
P. Professional Fees and Expenses. . . . . . . . . . . 25
VII. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . 25
A. Conditions. . . . . . . . . . . . . . . . . . . . . 25
B. Waiver of Conditions. . . . . . . . . . . . . . . . 25
VIII. DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . 26
A. General . . . . . . . . . . . . . . . . . . . . . . 26
B. Distribution of Reorganized Spectrum Common Stock
and Class A Preferred Stock. . . . . . . . . . . . 27
IX. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . 30
X. CONFIRMATION REQUEST . . . . . . . . . . . . . . . . . . 31
XI. RETENTION OF JURISDICTION . . . . . . . . . . . . . . . 31
XII. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . 32
A. Amendment and Modification of the Plan. . . . . . . 32
B. Withdrawal or Revocation of the Plan. . . . . . . . 32
C. Payment of Fees in Connection with Balloting. . . . 32
D. Committees. . . . . . . . . . . . . . . . . . . . . 32
E. Successors and Assigns. . . . . . . . . . . . . . . 33
F. Severability of Provisions of the Plan. . . . . . . 33
INTRODUCTION
This Consolidated Plan of Reorganization (the "Plan")
is proposed by Spectrum Information Technologies, Inc. and
Spectrum Cellular Corporation, the debtors and debtors in
possession (the "Debtors") in the above-captioned cases pending
under chapter 11 of the Bankruptcy Code for the resolution of the
Debtors' outstanding creditor claims and equity security
interests. Data One, another subsidiary of Spectrum Information
Technologies, Inc., that filed a petition for relief under
chapter 11 of the Bankruptcy Code at the same time as the Debtors
herein, will be filing a separate liquidating plan of
reorganization pursuant to Chapter 11. Data One's plan and its
associated Disclosure Statement will be distributed to Data One's
creditors and Data One's sole stockholder. Reference is made to
the "Disclosure Statement to Accompany Plan of Reorganization"
(the "Disclosure Statement") for a discussion of the Debtors'
history, business, results of operations, historical financial
information, projections, and properties, and for a summary and
analysis of the Plan. All creditors and equity security holders
should review the Disclosure Statement before voting to accept or
reject the Plan. In addition, there are other agreements and
documents on file with the Bankruptcy Court and the Securities
and Exchange Commission which are referenced in the Plan and/or
the Disclosure Statement and which are available for review. No
solicitation materials, other than the Disclosure Statement and
related materials transmitted therewith and approved by the
Bankruptcy Court, have been authorized by the Court for use in
soliciting acceptances or rejections of the Plan.
I.
DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
A. Definitions.
In addition to such other terms as are defined in other
sections of the Plan, the following terms (which appear in the
Plan as capitalized terms) have the following meanings as used in
the Plan:
1. "Administrative Claim" means a Claim for costs and
expenses of administration allowed under sections 503(b), 507(a)
or 1114(e)(2) of the Bankruptcy Code, including all compensation
or reimbursement of expenses under sections 330, 331 or 503(b) of
the Bankruptcy Code to the extent incurred prior to the Effective
Date, and any fees or charges assessed against the estates of the
Debtors under section 1930, chapter 123 of title 28, United
States Code.
2. "Allowed Claim" or "Allowed Interest" means a Claim
against or Interest in either of the Debtors to the extent that
(a) a proof of such Claim or Interest was (1) timely Filed; or
(2) deemed timely Filed under applicable law or by reason of an
order of the Bankruptcy Court; and (b) (1) Debtors, Reorganized
Spectrum, or any other party in interest entitled to do so, does
not File an objection within the time period(s) set forth in
Section VI.K. of the Plan, and the Claim or Interest is not
otherwise a Disputed Claim or Disputed Interest; (2) the Claim or
Interest is allowed (and only to the extent allowed) by a Final
Order; or (3) the Claim or Interest is allowed under the Plan.
Allowed Interests include, without the necessity of filing a
proof of Interest, the Interests consisting of the issued and
outstanding Existing Spectrum Common Stock as of the Distribution
Record Date. Except as otherwise expressly provided herein,
Allowed Claims and Allowed Interests shall not, for purposes of
computing distributions under the Plan, include interest on such
Claim from and after the Petition Date, except as provided in
section 506(b) of the Bankruptcy Code. Terms such as "Allowed
Priority Tax Claim" mean, by way of example, an Allowed Claim
which is also a Priority Tax Claim.
3. "Amended Spectrum Bylaws" means the amended and restated
bylaws of Reorganized Spectrum that will be effective on the
Effective Date, in the form annexed to the Disclosure Statement
as Exhibit G.
4. "Amended Spectrum Certificate" means the amended and
restated certificate of incorporation of Reorganized Spectrum
that will be effective on the Effective Date, in the form annexed
to the Disclosure Statement as Exhibit H.
5. "Bankruptcy Code" means title 11 of the United States
Code, as it was in effect on the Petition Date, as amended by any
amendments applicable to the Reorganization Cases.
6. "Bankruptcy Court" means the United States Bankruptcy
Court for the Eastern District of New York or, in the event such
court ceases to exercise jurisdiction over the Reorganization
Cases, such other court or adjunct thereof that exercises
jurisdiction over the Reorganization Cases.
7. "Bankruptcy Rules" means the Federal Rules of Bankruptcy
Procedure, as the same may from time to time be in effect and
applicable to proceedings in the Reorganization Cases.
8. "Business Day" means any day, other than a Saturday,
Sunday or "legal holiday" (as defined in Bankruptcy Rule
9006(a)).
9. "Cellular" means Spectrum Cellular Corporation.
10. "Cash" means cash and cash equivalents, including, but
not limited to, bank deposits, wire transfers, checks, and other
similar items.
11. "Claim" means a claim as such term is defined in
section 101(5) of the Bankruptcy Code.
12. "Class" means one of the classes of Claims or Interests
established under Article III of the Plan pursuant to section
1122 of the Bankruptcy Code.
13. "Class A Preferred Stock" means the stock of
Reorganized Spectrum which will be issued to the Class Action
Trustee on behalf of the Class Action Plaintiffs pursuant to the
Class Action Settlement. For two years after the Effective Date
Class A Preferred Stock will have a liquidation preference over
Reorganized Spectrum Common Stock to the extent that, in the
event that within two years of the Effective Date, Reorganized
Spectrum again becomes a debtor in a bankruptcy case under the
United States Bankruptcy Code (unless the case is an involuntary
case and is dismissed before an order for relief is entered
therein against Reorganized Spectrum), interests of holders of
Class A Preferred Stock will have priority in such proceedings
over interests of holders of Reorganized Spectrum Common Stock.
At the expiration of the two-year preference period, Class A
Preferred Stock will automatically convert to and become
Reorganized Spectrum Common Stock. Holders of Class A Preferred
Stock will be entitled to vote in the same manner as holders of
Reorganized Spectrum Common Stock, although, for the period of
time that the Class A Preferred Stock is in the hands of the
Class Action Trustee and has not been distributed to members of
the class, such stock will be required to be voted in the same
proportions as the holders of the Reorganized Spectrum Common
Stock have voted. Class A Preferred Stock will be fully
tradeable, but it will not (by reason of NASD restrictions) be
listed on the NASD Small Capital market until it has been
converted to Reorganized Spectrum Common Stock. In addition,
during the two-year preference period, no person may be elected
as a director unless he receives a plurality of the votes cast by
the holders of Reorganized Common Stock as well as a plurality of
the votes cast by the holders of Class A Preferred Stock, and no
person may be removed as a director by the holders of Class A
Preferred Stock unless the holders of a majority of the
outstanding Reorganized Spectrum Common Stock vote in favor of
such removal.
14. "Class Action Claims" means all claims arising from the
Class Action Suits.
15. "Class Action Settlement" means the settlement of the
Class Action Suits pursuant to the terms authorized by the Final
Order of the District Court granting the Class Action Settlement
Motion, when and if that order is granted.
16. "Class Action Settlement Motion" means the Motion For
Approval of the Settlement of the Class Action Suits which will
be filed with the District Court once the terms of the proposed
Class Action Settlement are finalized.
17. "Class Action Suits" means the securities class action
litigation against SIT and certain of its present and former
officers and directors currently pending before Judge Frederic
Block in the Eastern District of New York under the consolidated
caption In Re Spectrum Information Technologies Litigation, No.
93 Civ. 2295 (FB).
18. "Class Action Trust" means that trust established for
the benefit of the Class Action Plaintiffs pursuant to the terms
of the Class Action Settlement.
19. "Class Action Trust Agreement" means the agreement
governing the trust to be established as part of the Class Action
Settlement attached to the Disclosure Statement as Exhibit I.
20. "Class Action Trustee" means the Trustee or Trustees
appointed pursuant to the Class Action Trust Agreement.
21. "Class Action Plaintiffs" means all plaintiffs in the
Class Action Suits.
22. "Class 2 Distribution Pool" has the meaning set forth
in section III.B.
23. "Computer Bay" means Computers Unlimited of Wisconsin,
Inc. d/b/a/ Computer Bay.
24. "Computer Bay Litigation" means the litigation
commenced by the trustee of the Computer Bay estate in the
Bankruptcy Court seeking substantive consolidation of its estates
with that of SIT or, alternatively, relief under sections 547 and
548 of the Bankruptcy Code.
25. "Confirmation" means the entry of an order of the
Bankruptcy Court confirming the Plan.
26. "Confirmation Date" means the date of Confirmation.
27. "Confirmation Hearing" is the hearing regarding
confirmation of the Plan which will be held by the Bankruptcy
Court prior to Confirmation as required by Section 1128(a) of the
Bankruptcy Code.
28. "Confirmation Order" means the order of the Bankruptcy
Court confirming the Plan.
29. "Consolidated Estates" means the combined assets and
liabilities of SIT and Cellular after giving effect to the
Court's granting of the SIT/Cellular Substantive Consolidation
Motion (if such relief is granted).
30. "Creditor" means a creditor as such term is defined in
section 101(10) of the Bankruptcy Code.
31. "Creditors' Committee" means the Official Committee of
Unsecured Creditors of SIT.
32. "Data One" means Dealer Services Business Systems, Inc.
d/b/a Data One.
33. "Debtors" means SIT and Cellular.
34. "Debtors in Possession" means the Debtors when acting
in their capacity as representatives of the Estates in the
Reorganization Cases.
35. "Disbursing Agent" means Reorganized Spectrum and/or
any other Person or Persons that are designated under the Plan or
by Reorganized Spectrum to disburse property pursuant to the
Plan.
36. "Disclosure Statement" means the Filed "Disclosure
Statement With Respect To The Consolidated Plan Of Reorganization
Proposed By The Debtors For Spectrum Information Technologies,
Inc. And Spectrum Cellular Corporation Dated As Of February 8,
1996" (and all exhibits and schedules annexed thereto or
referenced therein) that relates to the Plan and is approved
pursuant to section 1125 of the Bankruptcy Code in an order of
the Bankruptcy Court, as such Disclosure Statement may be
amended, modified or supplemented.
37. "Disputed Claim" or "Disputed Interest" means any
Claim or Interest, including any Administrative Expense Claim, to
the extent such Claim or Interest has not been allowed pursuant
to the Plan or Final Order, and (a) which is listed on any of the
Debtors' Schedules as disputed, unliquidated or contingent and as
to which a proof of claim designating such Claim as liquidated in
amount and not contingent was not timely and properly filed or
(b) to the extent any party in interest has interposed a timely
objection or request for estimation in accordance with the Plan,
Bankruptcy Code and the Bankruptcy Rules, which objection or
request for estimation has not been withdrawn or determined by
Final Order, or (c) to the extent such Claim is disputed on any
timely and properly filed Disputed Claim List.
38. "Disputed Claims List" shall have the meaning assigned
to it in Section VI.K.
39. "Distributable Common Stock" means the number of shares
of Reorganized Spectrum Common Stock to be distributed to holders
of Claims in Classes 2, 4, 5 and 6.
40. "Distribution Record Date" means the date fixed by the
Bankruptcy Court as (a) the deadline for any Disbursing Agent to
recognize assignments of Allowed Claims pursuant to Bankruptcy
Rule 3001(e), and (b) the record date for determining the holders
of record of Existing Spectrum Common Stock or Existing Spectrum
Stock Options who are entitled to receive distributions under the
Plan.
41. "Distribution Reserve" means the funds reserved to
ensure Reorganized Spectrum's ability to pay Disputed
Administrative Claims and Administrative Claims that have not yet
matured or been allowed when and if such Administrative Claims
become Allowed Administrative Claims.
42. "District Court" means the United States District Court
for the Eastern District of New York, the Honorable Frederic
Block presiding, or in the event such court ceases to exercise
jurisdiction over appeals from and proceedings relating to the
Reorganization Cases, including without limitation the Class
Action Suits and the Home Action, such other court or adjunct
thereof that exercises jurisdiction over direct appeals from and
proceedings related to the Reorganization Cases, including
without limitation the Home Action and the Class Action Suits.
43. "Effective Date" means the date specified as the
Effective Date of the Plan in Article IX.
44. "Estate" means either or both of the respective estates
created in the Reorganization Cases for SIT and Cellular by
section 541 of the Bankruptcy Code.
45. "Existing Spectrum Stock Options" means any option
granted by SIT to purchase authorized but unissued common shares
of stock, which, if issued, would have been Existing Spectrum
Common Stock, as such plans may have been amended from time to
time.
46. "Existing Spectrum Common Stock" means the common stock
of SIT issued and outstanding prior to the Effective Date.
47. "Filed" means filed with the Clerk of the Bankruptcy
Court in the Reorganization Cases.
48. "Final Order" means a court order as to which the time
to appeal or petition for certiorari has been timely filed, or
as to which any appeal or petition for certiorari that has been
timely filed has been resolved by the highest court to which the
order was timely appealed or from which certiorari was timely
sought.
49. "Governmental Unit" means a governmental unit as such
term is defined in section 101(27) of the Bankruptcy Code.
50. "Home Action" means the adversary proceeding commenced
by The Home Insurance Company of Illinois which is now pending
before the Honorable Frederic Block, United States District Judge
for the Eastern District of New York under the caption The Home
Insurance Company of Illinois v. Spectrum Information
Technologies, Inc., et al., 95 Civ. 3744 (FB).
51. "Incentive Deferral Plan" shall have the meaning
assigned to it in Section VI.A.8.b.
52. "Interest" means an equity security as defined in
section 101(16) of the Bankruptcy Code.
53. "IRS" means the Internal Revenue Service of the United
States of America.
54. "Management Administrative Claims" means certain
administration expense claims of officers and directors as more
fully set forth in Section III.A.1.b.
55. "Person" means any individual, corporation, general
partnership, limited partnership, association, joint stock
company, joint venture, estate, trust, Governmental Unit,
Creditors' Committee, Equity Committee, unofficial committee of
Creditors, Interest holders or retirees, or other entity.
56. "Petition Date" means January 26, 1995.
57. "Post-Effective Date Committee" shall have the meaning
assigned to it in Section XII.D.
58. "Preferred Stock" - means that preferred stock (other
than Class A Preferred Stock) authorized by the Amended Spectrum
Certificate which the Board of Directors of Reorganized Spectrum
may decide to issue, for value, from time to time. No Preferred
Stock will have been issued at the time the Plan becomes
effective.
59. "Priority Tax Claim" means a Claim entitled to priority
pursuant to section 507(a)(8) of the Bankruptcy Code.
60. "Professional Person" means a person, including any
Disbursing Agent and a trustee (if one is appointed), retained or
to be compensated pursuant to section 326, 327, 328, 330,
503(b)(2) and (4), 1103 and/or 1107(b) of the Bankruptcy Code.
61. "Record Date" means the date on which the identity of
the record holders of Allowed Interests entitled to vote on the
Plan, in accordance with the instructions provided with the
ballots respecting the votes of the beneficial owners of such
Allowed Interests, is established. The Record Date shall be the
date on which the Bankruptcy Court Order approving the Disclosure
Statement is entered.
62. "Reorganization Cases" means the cases pending in the
Bankruptcy Court under chapter 11 of the Bankruptcy Code for SIT
and Cellular.
63. "Reorganized Spectrum" means the merged corporations of
SIT and Cellular on and after the Effective Date.
64. "Reorganized Spectrum Common Stock" means the common
stock of Reorganized Spectrum to be authorized pursuant to the
Plan and the Amended Spectrum Certificate.
65. "Reorganized Spectrum Management Stock Option Plan"
means the Stock Incentive Plan and the Incentive Deferral Plan.
66. "Reorganized Spectrum Stock" means both Reorganized
Spectrum Common Stock and Class A Preferred Stock and Preferred
Stock (if any).
67. "Reverse Stock Split" means the exchange and
cancellation of all issued and outstanding Existing Spectrum
Common Stock for Reorganized Spectrum Common Stock at the rate of
one share of Reorganized Spectrum Common Stock for every 100
shares of Existing Spectrum Common Stock. No fractional shares
of Reorganized Spectrum Common Stock will be issued as a result
of the Reverse Stock Split. Where the Reverse Stock Split would
create such fractional shares, shares will be rounded up or down
to the nearest whole number.
68. "Scheduled" means set forth in the Schedules of Assets
and Liabilities.
69. "Schedules of Assets and Liabilities" means the
"Schedule of All Liabilities of Debtor and Statement of All
Property of Debtor" Filed by the Debtors, as the same have been
or may be amended from time to time prior to the Effective Date.
70. "Secured Claim" means a Claim, including interest, fees
and charges as determined pursuant to section 506(b) of the
Bankruptcy Code that is secured by a lien on property in which
the Estate has an interest, or that is subject to setoff under
section 553 of the Bankruptcy Code, to the extent of the value of
the claim holder's interest in the Estate's interest in such
property, or to the extent of the amount subject to setoff, as
applicable, as determined pursuant to sections 506(a) and, if
applicable, 1129(b) of the Bankruptcy Code.
71. "Securities Claims" means those claims against SIT that
are entitled to subordination under Section 510(b) of the
Bankruptcy Code.
72. "SIT" means Spectrum Information Technologies, Inc.
73. "SIT/Cellular Substantive Consolidation Motion" means
the motion, which will be filed by the Debtors' prior to the
Confirmation Hearing seeking substantive consolidation of the
estates of SIT and Cellular.
74. "Stock Incentive Plan" shall have the meaning assigned
to it in Section VI.A.8.a.
75. "Unsecured Claim" means a Claim against the Debtors
which is not an Administrative Claim, Priority Tax Claim, or
Secured Claim.
B. Interpretation, Rules of Construction, Computation of Time,
and Choice of Law.
1. The provisions of the Plan shall control over any
descriptions thereof contained in the Disclosure Statement.
2. Any term used in the Plan that is not defined in the
Plan, either in this Article I (Definitions) or elsewhere, but
that is used in the Bankruptcy Code or the Bankruptcy Rules has
the meaning assigned to that term in and will be construed in
accordance with the rules of construction under the Bankruptcy
Code or the Bankruptcy Rules. Without limiting the foregoing,
the definitions and rules of construction set forth in section
102 of the Bankruptcy Code shall apply. The definitions and
rules of construction contained herein do not apply to the
Disclosure Statement or to the Exhibits to the Plan except to the
extent expressly so stated in the Disclosure Statement or in each
Exhibit to the Plan.
3. The words "herein," "hereof," "hereto," "hereunder" and
others of similar import refer to the Plan as a whole and not to
any particular Article, Section, subsection or clause contained
in the Plan.
4. Unless specified otherwise in a particular reference,
all references in the Plan to Articles, Sections and Exhibits are
references to Articles, Sections and Exhibits of or to the Plan.
5. Any reference in the Plan to a contract, document,
instrument, release, bylaw, certificate, or other agreement or
document being in a particular form or on particular terms and
conditions means that such document shall be substantially in
such form or substantially on such terms and conditions.
6. Any reference in the Plan to an existing document or
Exhibit means such document or Exhibit as it may have been
amended, restated, modified or supplemented as of the Effective
Date.
7. Captions and heading of Articles and Sections in the
Plan are inserted for convenience of reference only and shall
neither constitute a part of the Plan nor in any way affect the
interpretation of any provisions hereof.
8. Whenever from the context it is appropriate, each term
stated in either the singular or the plural shall include both
the singular and the plural.
9. In computing any period of time prescribed or allowed by
the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply.
10. All Exhibits to the Plan are incorporated into the
Plan, and shall be deemed to be included in the Plan, regardless
of when Filed.
11. Subject to the provisions of any contract, certificate,
bylaws, instrument, release, or other agreement or document
entered into in connection with the Plan, the rights and
obligations arising under the Plan shall be governed by, and
construed and enforced in accordance with, federal law, including
the Bankruptcy Code and Bankruptcy Rules.
II.
DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS
The following is the designation of the Classes of Claims
and Interests under the Plan. Administrative Claims and Priority
Tax Claims have not been classified and are excluded from the
following Classes in accordance with section 1123(a)(1) of the
Bankruptcy Code. A Claim or Interest is classified in a
particular Class only to the extent that the Claim or Interest
qualifies within the description of that Class and is classified
in a different Class to the extent that any remainder of the
Claim or Interest qualifies within the description of such
different Class. A Claim or Interest is in a particular Class
only to the extent that the Claim or Interest is an Allowed Claim
or Allowed Interest in that Class and has not been paid, released
or otherwise satisfied before the Effective Date.
A. Class 1: Priority Nontax Claims: Class 1 consists of all
Priority Nontax Claims.
B. Class 2: Unsecured Claims: Class 2 consists of all
Unsecured Claims against Spectrum and Cellular.
C. Class 3: Class Action Claims: Class 3 consists of all
Class Action Claims.
D. Class 4: Other Securities Claims: Class 4 consists of all
Claims other than the Class Action Claims that arise from
the purchase or sale of SIT Securities within the meaning of
Section 510(b) of the Bankruptcy Code.
E. Class 5: Equity Interests: Class 5 consists of all Equity
Interests.
F. Class 6: Equitably Subordinated Claims: Class 6 consists
of all Equitably Subordinated Claims.
III.
TREATMENT OF CLASSES OF CLAIMS AND INTERESTS
A. Unclassified Claims.
1. Administrative Claims.
a. In General
Each Allowed Administrative Claim with the exception of
Management Administrative Claims which will be treated
as described below in Section III. A.1.b. shall be paid
either (i) in full, in cash, on the later of the
Effective Date or the date on which such Administrative
Claim is allowed by Final Order or (ii) on such terms
as the Debtors or the Disbursing Agent and the holder
of an Allowed Administrative Claim agree; provided,
however, that Allowed Administrative Claims
representing liabilities incurred in the ordinary
course of business by the Debtors in Possession shall
be paid in full, in cash, as they fall due, or paid by
the Disbursing Agent in the ordinary course of business
in accordance with the terms and conditions of the
particular transactions and any agreements relating
thereto.
The amount necessary to pay (i) Disputed Administrative
Claims and (ii) Administrative Claims for which
applications for compensation or reimbursement of
expenses of professionals or other persons retained or
to be compensated pursuant to sections 327, 328, 330,
331 or 503(b) of the Bankruptcy Code are pending or yet
to be submitted will be deposited in the Distribution
Reserve. Such claims shall be paid upon allowance by a
Final Order and shall include Earned Interest on the
amounts actually allowed by Final Order, calculated
from the Effective Date to the date of distribution.
b. Management Administrative Claims. In lieu of a
cash bonus or success fee for effecting a Confirmed
Plan of Reorganization for the Debtors, the employees,
officers and nonexecutive directors of the Debtors in
office as of the Confirmation Date will (i) receive,
pursuant to the Stock Incentive Plan and the Incentive
Deferral Plan, a distribution of shares of Reorganized
Spectrum Common Stock in an aggregate amount equal to
one ninth (1/9) of the aggregate number of shares of
Distributable Common Stock and Class A Preferred Stock
and (ii) be eligible to receive future grants of
incentive awards under the Stock Incentive Plan with
respect to an aggregate number of shares equal to 1/9th
of the aggregate number of shares of Distributable
Common Stock and Class A Preferred Stock. The
employees, officers and nonexecutive directors to whom
distributions will be made and incentive awards may be
granted and the amount of distributions and potential
future grants are set forth in Exhibits J and K to the
Disclosure Statement.
2. Priority Tax Claims. Each Allowed Priority Tax Claim
shall be paid either (i) in full, in cash, on the later of
the Effective Date or the date on which such Priority Tax
Claim is allowed by Final Order or (ii) on such terms as the
Debtors or the Disbursing Agent and the holder of an Allowed
Priority Tax Claim agree. Allowed Priority Tax Claims shall
not be entitled to receive any payment on account of post-
Petition Date interest, or on account of any penalty arising
with respect to or in connection with the Allowed Priority
Tax Claim. Any such Claim or demand for any such penalty
shall be discharged by Confirmation of the Plan and section
1141(d)(1) of the Bankruptcy Code, and the holder of an
Allowed Priority Tax Claim shall not assess or attempt to
collect such penalty from Reorganized Spectrum or its
property.
B. Class 1 - Priority Nontax Claims: Class 1 is unimpaired
under the Plan and not entitled to vote. Each Claim in Class 1
shall be paid in Cash in full on the Effective Date.
C. Class 2 - Unsecured Claims: Class 2 is impaired under the
Plan. While it is expected that all Claims in Class 2 will be
paid at the rate of 100 cents on the dollar in Cash, such
expectation cannot be confirmed until the allowability of all
Claims in Class 2 is finally determined. Class 2 Claims will, in
any event, receive 100 percent of the allowed amount of their
Class 2 Claims in value under the Plan. Class 2 Claims are to be
paid out of a pool set aside for the payment of Class 2 Claims
consisting of $3.5 million in Cash and as many shares of
Reorganized Spectrum Common Stock as may be necessary to provide
holders of Class 2 Claims with 100 percent of the Allowed amount
of their Claims. (the "Class 2 Distribution Pool").
Distributions will be made to holders of an Allowed Claim pro
rata based on an aggregate amount of Claims Filed other than
Claims that have been disallowed (or allowed in the reduced
amount) by Final Order. There will be a reserve for Disputed
Claims. Once allowance of all Disputed Claims has been resolved,
holders of Allowed Class 2 Claims will get additional Cash
distributions up to 100 percent of the amount of the Allowed
Claim. After all Disputed Claims have been Allowed or Disallowed
by a Final Order, any remaining funds will be returned to
Reorganized Spectrum for operations. In the event that the
aggregate amount of the Allowed Claims exceeds $3.5 million and
thus there are insufficient funds to pay 100 percent of the
amount of the Allowed Class 2 Claims in cash, the unpaid balance
of Allowed Class 2 Claims will be converted into an equivalence
in shares of Reorganized Spectrum Common Stock. The calculation
for determining the equivalent shares will be the same as the
calculation used for the determination of equivalent shares used
for Class 4 Allowed Claims. No interest will be paid on Class 2
Claims.
D. Class 3 - Class Action Claims: Class 3 is unimpaired under
the Plan and not entitled to vote. Class 3 Claims will be
treated pursuant to the terms set forth in the Class Action
Settlement. It is expected that the Class Action Settlement will
provide that: (1) the Debtors will pay $250,000 to the Class
Action Trust; (2) assuming that SIT is successful in the Home
Action, the issuers of the directors and officers insurance
policies that are the subject of the Home Action will pay the
proceeds of such policies to the Class Action Trust; (3) on the
Effective Date, Reorganized Spectrum will issue to the Class
Action Trustee a certificate representing a number of shares of
Class A Preferred Stock equal to the number of shares of
Distributable Common Stock; (4) the Class Action Trustee will
make distributions of cash to the individual Class Action
Plaintiffs in accordance with the terms of the Class Action Trust
Agreement; and (5) when the Class Action Trustee has determined
the proper allocation of the shares of the Class A Preferred
Stock issued to the Class Action Trust among the individual Class
Plaintiffs, the Class Action Trustee will return the stock
certificate to Reorganized Spectrum with instructions to reissue
certificates in the appropriate pro rata share amounts to the
individual Class Plaintiffs. Confirmation of the Plan is
contingent on (a) the entry of a Final Order of the District
Court approving the Class Action Settlement Motion, and (b)
successful resolution of the Home Action.
E. Class 4 - Other Securities Claims: Class 4 is impaired
under the Plan. Class 4 Claims shall be converted into an
equivalence in shares of Reorganized Spectrum Common Stock. The
calculation for determining the equivalent shares for Class 3
Claims shall be one (1) share of Reorganized Spectrum Common
Stock for each $11.50 of an allowed Class 4 Claim.
F. Class 5 - Equity Interests: Class 5 is impaired under the
Plan. Holders of Existing Spectrum Common Stock will receive one
share of Reorganized Spectrum Common Stock in exchange for each
100 shares of Existing Spectrum Common Stock pursuant to the
Reverse Stock Split. Holders of Options for Existing Spectrum
Common Stock will receive New Options to purchase Reorganized
Spectrum Common Stock at an exercise price adjusted in accordance
with the Reverse Stock Split. Such New Options will entitle the
holder to purchase one percent of the number of shares that could
be purchased under the Existing Spectrum Options. No Fractional
Shares of Reorganized Spectrum Common Stock will be issued.
Where the Reverse Stock Split would create such fractional
shares, Holders of Allowed Class 5 Claims will receive shares of
Reorganized Spectrum Common Stock that have been rounded up or
down to the nearest whole number.
G. Class 6 - Equitably Subordinated Claims - Class 6 is
impaired under the Plan. Class 6 Claims shall receive the same
treatment as Class 4 Claims.
IV.
TREATMENT OF EXECUTORY
CONTRACTS AND UNEXPIRED LEASES
A. Assumption of Executory Contracts and Unexpired Leases.
On the Effective Date, and to the extent permitted by
applicable law, all executory contracts (including unexpired
leases) of the Debtors will be assumed in accordance with the
provisions of section 365 and section 1123 of the Bankruptcy
Code, except for (a) any and all executory contracts which are
the subject of separate motions filed pursuant to section 365 of
the Bankruptcy Code by the Debtors prior to the commencement of
the Confirmation Hearing, (b) such contracts as are listed on any
"Schedule of Rejected Executory Contracts and Unexpired Leases"
filed by the Debtors on or before entry of the Confirmation
Order, all of which contracts shall be rejected pursuant to the
provisions of section 365 and section 1123 of the Bankruptcy
Code, and (c) any and all such contracts rejected prior to entry
of the Confirmation Order.
B. Bar Date for Rejection Damages.
If the rejection of an executory contract or unexpired lease
pursuant to Section IV.A. above gives rise to a Claim by the
other party or parties to such contract or lease, such Claim, to
the extent that it is timely Filed and is an Allowed Claim, shall
be classified in Class 2, as applicable; provided, however, that
the Unsecured Claim arising from the rejection shall be forever
barred and shall not be enforceable against the Debtors,
Reorganized Spectrum, its successors or properties, unless a
proof of claim is Filed and served on Reorganized Spectrum within
30 days after the date of notice of the entry of an order of the
Bankruptcy Court rejecting the executory contract or unexpired
lease, including, if applicable, the Confirmation Order.
C. Special Executory Contract Issues.
1. Obligations To Indemnify Officers and Directors.
a. Any obligation of the Debtors to indemnify any
individual serving as one of its present officers or
directors or any individual who served in such capacity
on or after January 31, 1996 by reason of such
individual's past or future service in such capacity,
or as a director, officer or partner of another
corporation, partnership or other legal entity at the
behest of the Debtors, to the extent provided in the
applicable certificate of incorporation, bylaws or
similar constituent documents or by statutory law or
written agreement with the Debtors, shall (except as
expressly provided in the following subparagraph (b))
be deemed and treated as an executory obligation
assumed by Reorganized Spectrum as of the Effective
Date pursuant to the Plan and section 365 of the
Bankruptcy Code. Accordingly, such indemnification
obligations shall survive and be unaffected by entry of
the Confirmation Order irrespective of whether such
indemnification obligations are owed for acts or events
occurring before or after the Petition Date.
b. The obligation of the Debtors to indemnify any
Person not within the scope of Section IV.C.1.a. above
shall be rejected and shall terminate and be discharged
to the extent provided by section 502(e) of the
Bankruptcy Code or otherwise, as of the Confirmation
Date.
c. Pursuant to the Amended Spectrum Certificate,
individuals in respect of whom indemnity obligations
are assumed by Reorganized Spectrum pursuant to the
Plan and section 365 of the Bankruptcy Code or arise in
the future by reason of such individual's service as a
director or officer of Reorganized Spectrum, shall be
deemed to have served at the request of the
predecessors of Reorganized Spectrum to the extent that
they served as directors or officers of the Debtors
prior to the Effective Date.
2. Effect Of Implementation Of The Plan On Existing
Employment Agreements.
Confirmation of the Plan and the occurrence of the Effective
Date is not intended to and shall not constitute a change of
ownership or change in control, as defined in any employment
agreement in effect on the Effective Date to which either of
the Debtors is a party.
3. Contracts Entered Into On Or After The Petition Date.
All contracts, leases and other agreements entered into by
the Debtor in Possession on or after the Petition Date which
have not been breached by the other party or terminated in
accordance with their terms by the Debtor in Possession on
or prior to the Confirmation Date, shall remain in full
force and effect as against Reorganized Spectrum.
V.
SUBSTANTIVE CONSOLIDATION
This Plan contemplates substantive consolidation of the
estates of SIT and Cellular into a single bankruptcy estate and
the merger of those two corporations into a single surviving
corporation. Prior to the Confirmation Hearing, the Debtors will
file with the Bankruptcy Court a motion seeking substantive
consolidation. If granted, the legal rights and priorities of
each Claim and Interest holder of SIT and Cellular will be
treated as having a single recourse against the assets of the
consolidated estate. All Claim holders who have asserted a Claim
against both SIT and Cellular from or related to the same
underlying obligation or cause of action, whether the basis for
the asserted liability of SIT or Cellular arises by contract or
by operation of law, will likewise be treated as having a single
Claim against the assets of the consolidated estate. As a result
of giving effect to the substantive consolidation of the SIT and
Cellular estates, the Claims and Interests of either SIT or
Cellular against or in each other will receive no distribution
pursuant to this Plan.
VI.
MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN
A. On the Effective Date.
The following shall occur on the Effective Date:
1. Reverse Stock Split.
Reorganized Spectrum will effect the Reverse Stock Split on
the Effective Date.
2. Continuation of Business.
As of and after the Effective Date, Reorganized Spectrum
shall continue to engage in business in accordance with the
Plan and related documents.
a. Distribution to the Disbursing Agent.
Reorganized Spectrum shall transmit or cause to be
transmitted to the Disbursing Agent on or before the
Effective Date sufficient Cash and Reorganized Spectrum
Common Stock: (i) make the Distributions to the
holders of Allowed Claims and Interests required by the
Plan to be made on or as soon as practicable after the
Effective Date; and (ii) establish the reserves
required by the Plan.
b. Distribution by the Disbursing Agent.
The Disbursing Agent shall make the Distributions
pursuant to the Plan to the holders of Allowed Claims
and Allowed Interests as applicable on the Effective
Date.
3. Authorization on the Effective Date.
The adoption of the Amended Spectrum Certificate and the
Amended Spectrum Bylaws, or similar constituent documents
for Reorganized Spectrum; the initial selection of directors
and officers for Reorganized Spectrum; the distribution of
Cash and issuance and distribution of Reorganized Spectrum
Common Stock and Class A Preferred Stock, the adoption,
execution, delivery, conveyance, assignment, and
implementation of all contracts, leases, agreements,
documents, instruments, amendments, schedules, releases,
indentures and other agreements related to any of the
foregoing or the Plan, the adoption, execution and
implementation of employment, retirement and indemnification
agreements, incentive compensation programs, retirement
income plans, welfare benefit plans and other employee plans
and related agreements, including the Reorganized Spectrum
Management Stock Option Plan; and the other matters provided
for under the Plan involving the corporate structure of the
Debtors or Reorganized Spectrum or corporate action to be
taken by or required by the Debtors or Reorganized Spectrum
shall be authorized and approved in all respects without any
requirement of further action by stockholders or directors
of the Debtors or Reorganized Spectrum.
4. Execution of Documents to Effect the Plan.
The respective Chairman of the Board of Directors, the
President, any Vice President, the Chief Accounting Officer,
or Corporate Secretary of the Debtors and Reorganized
Spectrum shall be authorized to execute all such documents
and other papers, and take all such actions as may be
necessary or appropriate to effectuate and further evidence
the terms and conditions of the Plan, agreements approved
thereby, or orders of the Bankruptcy Court relating thereto.
The respective Secretary or any Assistant Secretary of the
Debtors or Reorganized Spectrum shall be authorized to
certify or attest to any of the foregoing actions.
5. Adoption of Amended Certificate and Bylaws.
Reorganized Spectrum shall adopt the Amended Certificate and
the Amended Spectrum Bylaws in conformance with section 303
of the Delaware General Corporation Law and pursuant to
section 1123(a)(5)(I) of the Bankruptcy Code. The Amended
Spectrum Certificate and Amended Spectrum Bylaws shall
contain provisions which, among other provisions, shall
authorize the issuance of the Reorganized Spectrum Common
Stock, Class A Preferred Stock and Preferred Stock. The
Amended Spectrum Certificate and Amended Spectrum Bylaws
will become effective upon (x) Confirmation of the Plan,
(y) the occurrence of the Effective Date, and (z) the filing
with the Delaware Secretary of State of a certificate of
amendment reflecting the Amended Spectrum Certificate. On
the Effective Date or as soon thereafter as is practicable,
pursuant to applicable state law, Reorganized Spectrum shall
file with the applicable state governmental agencies or
offices any required constituent documents for Reorganized
Spectrum. Following the Effective Date, Reorganized
Spectrum shall retain the right to merge, consolidate,
dissolve, or take any other corporate action in accordance
with applicable nonbankruptcy law, including amending its
certificate and bylaws pursuant to applicable nonbankruptcy
law to provide for the issuance of nonvoting equity
securities.
6. Authorization of Stock.
Reorganized Spectrum shall cause ten million shares of
Reorganized Spectrum Common Stock, one million shares of
Class A Preferred Stock and two million shares of Preferred
Stock to be authorized for issuance in the Amended Spectrum
Certificate and shall issue and deposit with the Disbursing
Agent sufficient shares of such Reorganized Spectrum Common
Stock as are required for the initial distribution to
holders of Allowed Claims and Interests in Classes 2, 4, 5
and 6 under the Plan and shall issue and deposit with the
Class Action Trustee sufficient shares of Class A Preferred
Stock as are required for eventual distribution to holders
of Class 3 Claims. Reorganized Spectrum shall also reserve
for issuance sufficient shares of such Reorganized Spectrum
Common Stock as are required for distribution to holders of
Disputed Claims and Disputed Interests in Classes 2, 4, 5
and 6 pending the allowance or disallowance of such Disputed
Claims or Disputed Interests. In addition, Reorganized
Spectrum shall reserve for issuance sufficient shares of
Reorganized Spectrum Common Stock to satisfy the payment of
Management Administrative Claims as detailed in Section
III.A.1.b herein.
7. Authorization of Stock Options.
Reorganized Spectrum shall authorize the stock options and
other incentive compensation awards provided for in the
Reorganized Spectrum Management Stock Option Plan and issue
such stock options and other awards under the terms and
conditions provided for therein. Reorganized Spectrum also
shall reserve for issuance sufficient shares of Reorganized
Spectrum Common Stock as are required to be issued upon
exercise or payment of the stock options and other incentive
awards provided for in the Reorganized Spectrum Management
Stock Option Plan.
8. Adoption of the Reorganized Spectrum Management Stock
Option Plan
On the Effective Date, Reorganized Spectrum shall adopt the
Reorganized Spectrum Management Stock Option Plan which
shall include the Spectrum Technologies, Inc. 1996 Stock
Incentive Plan (the "Stock Incentive Plan") and the Spectrum
Technologies, Inc. 1996 Incentive Deferral Plan (the
"Incentive Deferral Plan").
a. The Stock Incentive Plan
The Stock Incentive Plan will provide for the grant of
stock options, stock appreciation rights, restricted
stock, stock bonuses and other stock-based incentive
compensation to key employees of Reorganized Spectrum.
In addition, the Stock Incentive Plan will provide for
the grant of stock options and stock awards to
nonexecutive directors of Reorganized Spectrum. A copy
of the Stock Incentive Plan is attached as Exhibit J to
the Disclosure Statement.
b. The Incentive Deferral Plan.
The Incentive Deferral Plan will provide for the
deferred distribution to employees of Reorganized
Spectrum of shares of Reorganized Spectrum Stock.
Shares allocated to each employee shall be distributed
to such persons in three equal installments on a
deferred basis, as follows. The first installment
shall be distributed during the three day period
commencing three days after Reorganized Spectrum files
its Quarterly Report on Form 10-Q for its fiscal
quarter ending December 31, 1997; the second
installment shall be distributed during the three day
period commencing three days after Reorganized Spectrum
files its Quarterly Report on Form 10-Q for its fiscal
quarter ending June 30, 1998; and the third installment
shall be distributed during the three day period
commencing three days after Reorganized Spectrum files
is Quarterly Report on Form 10-Q for its fiscal quarter
ending December 31, 1998; provided that all shares
allocated to an employee will be immediately
distributed to such employee in the event of such
employee's death or disability or in the event the
employment of such employee is terminated by
Reorganized Spectrum without cause. A copy of the
Incentive Deferral Plan is attached as Exhibit K to the
Disclosure Statement.
B. Funding of Plan.
Cash payments required by the Plan shall be provided from
the funds of the Estate and from funds generated by operation of
the Debtor's and Reorganized Spectrum's business.
C. Revesting of Assets.
Except as otherwise provided in any provision of the Plan,
agreements entered into in connection therewith, or the
Confirmation Order, on the Effective Date all property of the
Estate shall revest in Reorganized Spectrum, free and clear of
all Claims, liens, encumbrances and other interests of any
Person, and Reorganized Spectrum may thereafter operate its
business and may use, acquire and dispose of property and
compromise or settle any Claims or Interests without the
supervision or approval of the Bankruptcy Court, free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules, the
Local Bankruptcy Rules of the United States Bankruptcy Court for
the Eastern District of New York, and the guidelines and
requirements of the Office of the United States Trustee for the
Eastern District of New York, other than those restrictions
expressly imposed by the Plan or the Confirmation Order. Without
limiting the foregoing, Reorganized Spectrum may pay the fees and
charges that it incurs on or after the Effective Date for
Professional Persons' fees, disbursements, expenses or related
support services relating to the Reorganization Cases without
application to the Bankruptcy Court. From and after the
Effective Date, Reorganized Spectrum may use, acquire, and
dispose of property without the supervision or approval of the
Bankruptcy Court, free of any restrictions of the Bankruptcy
Code, other than those restrictions expressly imposed by the
Plan, agreements entered into in connection therewith, or the
Confirmation Order.
D. Management of Reorganized Spectrum.
1. Officers and Directors.
The Debtors have included in the Disclosure Statement a list
designating the individuals who will serve initially as the
directors and the executive officers of Reorganized Spectrum
commencing on the Effective Date. This list may be amended
at any time prior to the Effective Date upon such notice as
may be required by the Bankruptcy Court. Subject to any
requirement of Bankruptcy Court approval under section
1129(a)(5) of the Bankruptcy Code, those persons so
designated shall be authorized to assume their offices as of
the Effective Date and shall be authorized to continue to
serve in such capacities thereafter pending further action
of the Board of Directors or stockholders of Reorganized
Spectrum in accordance with applicable state law and
Reorganized Spectrum's then-existing certificate of
incorporation and bylaws.
2. New Employment And Incentive Compensation Programs.
a. Employment Agreements.
Reorganized Spectrum intends to enter into, assume, or
assume as modified employment agreements with certain
of its executive officers. Any employment agreements
that are to take effect on or before the Effective Date
shall be subject to the approval of the Bankruptcy
Court, summaries of which will be Filed prior to the
hearing on the Disclosure Statement. In addition, as
of the Effective Date, Reorganized Spectrum shall have
the authority to: (a) enter into employment,
retirement, indemnification and other agreements with
its active directors, officers and employees, and (b)
implement retirement income plans, welfare benefit
plans and other plans for active employees. Such
agreements and plans may include equity, bonus and
other incentive plans in which officers and other
employees of Reorganized Spectrum may be eligible to
participate.
b. Reorganized Spectrum Management Stock Option Plan.
On the Effective Date, Spectrum shall adopt and
implement the Reorganized Spectrum Management Stock
Option Plan which shall include the Stock Incentive
Plan and Incentive Deferral Plan and shall thereupon be
bound by the terms and conditions thereof. Nothing
contained in the Plan shall limit the right of
Reorganized Spectrum to modify or terminate any stock
incentive plan or plans adopted, including the
Reorganized Spectrum Management Stock Option Plan, or
to adopt any additional stock option, incentive or
other benefit plans or programs in accordance with
applicable nonbankruptcy law and Reorganized Spectrum's
then-existing bylaws and charter.
E. Release of Liens.
Except as otherwise provided in the Plan or in any contract,
instrument or other agreement or document created in connection
with the Plan, on the Effective Date, all mortgages, deeds of
trust, liens or other security interests against property of the
Estate shall be released, and all right, title and interest of
any holder of such mortgages, deeds of trust, liens or other
security interests shall revert to Reorganized Spectrum and its
successors and assigns.
F. Exemption From Certain Transfer Taxes.
Pursuant to section 1146(c) of the Bankruptcy Code, the
issuance, transfer or exchange of Reorganized Spectrum Common
Stock; the creation of any mortgage, deed of trust or other
security interest; the making or assignment of any lease or
sublease; or the making or delivery of any deed or other
instrument of transfer under, in furtherance of, or in connection
with, the Plan, including any deeds, bills of sale or assignments
executed in connection with the Plan, agreements entered into in
connection therewith, or the Confirmation Order, shall not be
subject to any stamp tax, real estate transfer tax or similar
tax.
G. Cancellation and Surrender of Instruments, Securities, and
Other Documentation.
On the Effective Date, except as otherwise provided by the
Plan, all Existing Spectrum Stock Options, and any other rights
to acquire Existing Spectrum Common Stock or other Interests
shall be deemed canceled and of no further force or effect
without any further action on the part of the Bankruptcy Court or
any Person. The holders of such canceled instruments, shall have
no rights arising from or relating to such instruments or the
cancellation thereof, except the rights provided pursuant to the
Plan.
Except to the extent, if any, otherwise provided in the
Plan, agreements entered into in connection therewith, and the
Confirmation Order, as a condition to participation under the
Plan, within 2 years following the Effective Date a holder of
certificates representing shares of Existing Spectrum Common
Stock that desires to receive the property to be distributed on
account of an Allowed Claim or Allowed Interest based on such
shares shall surrender the share certificate or certificates
representing such equity interests to the Disbursing Agent or its
designee.
Any stock certificate, or note, which is lost, stolen,
mutilated, or destroyed, shall be deemed surrendered when the
holder of a Claim based thereon delivers to the applicable stock
transfer agent, Disbursing Agent or its designee: (a) evidence
satisfactory to the Disbursing Agent or its designee of the loss,
theft, mutilation, or destruction of such instrument or
certificate, and (b) such security or indemnity as may be
required by the stock transfer agent, Disbursing Agent or its
designee to hold each of them harmless with respect thereto.
H. Applicability of Sections 1125 and 1145 of the Bankruptcy
Code to Reorganized Spectrum Common Stock, Class A Preferred
Stock and Preferred Stock Issued Under the Plan.
The protection afforded by section 1125 of the Bankruptcy
Code with regard to the solicitation of acceptances or rejections
of this Plan, and with regard to the offer, issuance, sale or
purchase of the Reorganized Spectrum Common Stock, issued to
holders of Claims and Interests under the Plan and distributed
pursuant to the Plan, shall apply to the full extent provided by
law, and the entry of the Confirmation Order shall constitute the
determination by the Bankruptcy Court that the Debtors,
Reorganized Spectrum, the Creditors' Committee, and each of their
respective officers, directors, partners, employees, members or
agents, and each Professional Person, attorney, accountant, or
other professional employed by any of them, shall have acted in
good faith and in compliance with the applicable provisions of
the Bankruptcy Code pursuant to section 1125 of the Bankruptcy
Code. In addition, the exemption from the requirements of
Section 5 of the Securities Act of 1933, 15 U.S.C. Section 77e,
and any
state or local law requiring registration for the offer or sale
of a security provided for in section 1145 of the Bankruptcy Code
shall apply to the Reorganized Spectrum Common Stock or Class A
Preferred Stock issued under the Plan in exchange for a Claim, an
Administrative Claim or an Interest.
I. Voting of Reorganized Spectrum Common Stock and Class A
Preferred Stock Held by the Disbursing Agent or Class Action
Trustee.
Authorized and issued shares of Reorganized Spectrum Common
Stock held by a Disbursing Agent for distribution to the holder
of an Allowed Claim or Allowed Interest shall not be entitled to
vote in any election of directors of Reorganized Spectrum, or any
other matter requiring the vote of shareholders, until such time
as the Reorganized Spectrum Common Stock has actually been
distributed to the holder of the Allowed Claim, or Allowed
Interest. In addition, a holder of a Disputed Claim or Disputed
Interest shall not be entitled to vote in any election of
directors of Reorganized Spectrum, or any other matter requiring
the vote of shareholders until such time as the Disputed Claim or
Disputed Interest has become an Allowed Claim or an Allowed
Interest, and the holder of such Allowed Claim or Allowed
Interest has received its distribution and become a shareholder
of record of Reorganized Spectrum.
The Class Action Trustee shall be entitled to vote Class A
Preferred Stock that has not yet been distributed to a Class
Action Plaintiff and is held by the Class Action Trustee,
however, the Class Action Trustee shall be required to vote the
Class A Preferred Stock in the same proportions and the same
manner as the holders of shares of Reorganized Spectrum Common
Stock have voted.
J. Setoffs.
Except as otherwise provided in the Plan, agreements entered
into in connection therewith, the Confirmation Order, or in
agreements previously approved by Final Order of the Bankruptcy
Court, Reorganized Spectrum may, pursuant to section 553 of the
Bankruptcy Code or applicable nonbankruptcy law, set off against
any Allowed Claim before any distribution is made on account of
such Claim, any and all of the claims, rights and causes of
action of any nature that the Debtors or Reorganized Spectrum may
hold against the holder of such Allowed Claim; provided, however,
that neither the failure to effect such a setoff nor the
allowance of any Claim hereunder shall constitute a waiver or
release by the Debtors or Reorganized Spectrum of any such
claims, rights and causes of action that the Debtors or
Reorganized Spectrum may possess against such holder. To the
extent the Debtors or Reorganized Spectrum fail to setoff against
a third party and seek to collect a Claim from such third party
after a distribution to such third party pursuant to the Plan on
account of its Allowed Claim, Reorganized Spectrum shall be
entitled to full recovery on its Claim against such third party.
K. Objection to Claims.
The Debtors will file a list of all Disputed Claims (the
"Disputed Claims List"), other than Administrative Claims, with
the Bankruptcy Court on or before the hearing on approval of the
Disclosure Statement. The comments of the Creditors Committee
will be solicited prior to the filing of the Disputed Claims
List. Any Claims, other than Administrative Claims, that have
been Filed prior to the Filing of the Disputed Claims List and
that are not included on the Disputed Claims List shall be deemed
Allowed Claims.
Unless another date is established by the Bankruptcy Court,
all objections to Claims shall be Filed and served on the holders
of such Claims within 45 days after the Effective Date, except as
extended by an agreement between the claimant and Reorganized
Spectrum or by order of the Bankruptcy Court upon an application
filed by Reorganized Spectrum. After the Effective Date, only
Reorganized Spectrum and the Post-Effective Date Committee shall
have the authority to File and prosecute objections to Claims and
only Reorganized Spectrum, upon notice to the Post-Effective Date
Committee shall have the authority to settle or compromise
objections to Claims. Notwithstanding any prior order of the
Bankruptcy Court or the provisions of Bankruptcy Rule 9019, as of
the Effective Date, Reorganized Spectrum may settle or compromise
any Disputed Claim without approval of the Bankruptcy Court.
L. Discharge of the Debtors and Injunction.
Except as otherwise provided in the Plan and agreements
entered into in connection therewith:
1. The rights afforded in the Plan, and the treatment of
all Claims and Interests therein, shall be in exchange for,
and in complete satisfaction, discharge and release of, all
Claims, including without limitation, all Administrative
Claims, Secured Claims, Priority Tax Claims, other priority
Claims and Unsecured Claims, including any interest accrued
on such Claims from and after the Petition Date, against the
Debtors, the Debtors in Possession, and Reorganized
Spectrum, or any of their assets or properties, and shall
terminate all Interests of any nature whatsoever.
2. On the Effective Date, the Debtors shall be deemed
discharged and released to the fullest extent permitted by
section 1141 of the Bankruptcy Code from all Claims that
arose prior to the Effective Date, including without
limitation, all Administrative Claims, Secured Claims,
Priority Tax Claims, other priority Claims and Unsecured
Claims, including any interest accrued on such Claims from
and after the Petition Date, against the Debtors and the
Debtor in Possession, or any of their assets or properties,
and all debts of the kind specified in sections 101(12),
502(g), 502(h) or 502(i) of the Bankruptcy Code. The
discharge and release shall be effective, in each case
whether or not: (a) a proof of claim or proof of interest
based on such Claim, Administrative Claim, or Interest is
Filed or deemed Filed pursuant to section 501 of the
Bankruptcy Code, (b) a Claim, Administrative Claim, or
Interest is allowed pursuant to the Bankruptcy Code, or (c)
the holder of a Claim, Administrative Claim, or Interest has
accepted the Plan.
3. All Persons shall be permanently enjoined by section
524 of the Bankruptcy Code from asserting against
Reorganized Spectrum, its successors, or its assets or
properties, any other or further Claims, Administrative
Claims, or Interests based upon any act or omission,
transaction, or other activity of any kind or nature that
occurred prior to the Confirmation Date. The discharge
shall void any judgment against the Debtors or Reorganized
Spectrum at any time obtained to the extent that it relates
to a Claim, Administrative Claim or Interest discharged or
terminated.
4. On and after the Effective Date, all Persons who have
held, currently hold or may hold a Claim, Administrative
Claim or Interest discharged or terminated pursuant to the
terms of the Plan shall be permanently enjoined by section
524 of the Bankruptcy Code from taking any of the following
actions on account of any such discharged Claim or
terminated Interest: (a) commencing or continuing in any
manner any action or other proceeding against the Debtors,
Reorganized Spectrum, its successors, assets or properties;
(b) enforcing, attaching, collecting or recovering in any
manner any judgment, award, decree or order against the
Debtors, Reorganized Spectrum, its successors, assets,
properties, agents or representatives; (c) creating,
perfecting or enforcing any lien or encumbrance against the
Debtors, Reorganized Spectrum, its successors, assets,
properties agents or representatives; (d) asserting any
setoff, right of subrogation or recoupment of any kind
against any obligation due to the Debtors, Reorganized
Spectrum, its successors, assets, properties, agents or
representatives; 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 or
the Confirmation Order. Any Person violating such
injunction may be liable for actual damages, including costs
and attorneys' fees and, in appropriate circumstances,
punitive damages.
5. On and after the Effective Date, all Persons who have
held, currently hold or may hold a Claim, Administrative
Claim or Interest discharged or terminated pursuant to the
terms of the Plan are permanently enjoined by section 524 of
the Bankruptcy Code from commencing or continuing in any
manner any action or other proceeding against any party on
account of a Claim or cause of action that was property of
the Estate, including without limitation, any derivative
Claims capable of being brought on behalf of the Debtors or
Reorganized Spectrum, and all such Claims and causes of
action shall remain exclusively vested in Reorganized
Spectrum to the maximum extent such Claims and causes of
action were vested in the Debtor in Possession.
6. The requirements of this Plan shall be binding upon and
govern the acts of all Persons including, without
limitation, all holders of Claims, Administrative Claims and
Interests, all filing agents or officers, title agents or
companies, recorders, registrars, administrative agencies,
Governmental Units and departments, agencies or officials
thereof, secretaries of state, and all other Persons who may
be required by law, the duties of their office, or contract
to accept, file, register, record or release any documents
or instruments, or who may be required to report or insure
any title or state of title in or to any of the assets of
the Debtors and/or Reorganized Spectrum.
M. Preservation of Rights of Action.
Except as provided in any other contract, instrument,
release, indenture or other agreement entered into in connection
with the Plan, in accordance with section 1123(b) of the
Bankruptcy Code, Reorganized Spectrum shall retain and may
enforce any Claims, rights and causes of action, including rights
and causes of action arising under the Bankruptcy Code which are
commenced prior to the closing of the Reorganization Case, that
the Debtors or their Estate may hold against any Person.
Reorganized Spectrum or its successor(s) may pursue such retained
Claims, rights or causes of action, as appropriate, in accordance
with the best interests of Reorganized Spectrum or its
successor(s) holding such rights of action.
N. Compromise of Controversies.
Pursuant to Bankruptcy Rule 9019, and in consideration for
the classification, distribution and other benefits provided
under the Plan, the provisions of this Plan shall constitute a
good faith compromise and settlement of all Claims or
controversies resolved pursuant to the Plan. The entry of the
Confirmation Order shall constitute the Bankruptcy Court's
approval of all compromises or settlements provided for in the
Plan, and the Bankruptcy Court's findings shall constitute its
determination that such compromises and settlements are in the
best interests of the Debtors, Reorganized Spectrum, the Estate,
and any Person holding Claims against or Interests in the
Debtors, and are fair, equitable and reasonable.
O. Limitation of Liability.
Neither the Debtors, Reorganized Spectrum, the Creditors'
Committee, or any of their respective officers, directors,
partners, employees, members or agents, nor any Professional
Persons, attorneys, accountants or other professionals employed
by any of them, shall have or incur any liability to any Person
for any act taken or omission made in good faith in connection
with or related to formulating, implementing, confirming, or
consummating the Plan (including soliciting acceptances or
rejections thereof), the Disclosure Statement or any contract,
instrument, release or other agreement or document entered into
in connection with the Plan, or regarding any distributions made
pursuant to the Plan, except as expressly provided in such
contract, instrument, release or other agreement or document
entered into in connection with the Plan. The entry of the
Confirmation Order shall constitute the determination by the
Bankruptcy Court that the Debtors, Reorganized Spectrum the
Creditors' Committee, and each of their respective officers,
directors, partners, employees, members or agents, and each
Professional Person employed by any of them, have acted in good
faith through the Confirmation Date with respect to the
foregoing.
P. Professional Fees and Expenses.
The reasonable and necessary professional fees and expenses
incurred by the Debtors, the Reorganized Debtor, the Disbursing
Agent, the Creditors' Committee from and after the Effective Date
in connection with the consummation and implementation of the
Plan shall be paid by the Disbursing Agent in the ordinary course
of business without further order of the Bankruptcy Court;
provided, however, that any unresolved dispute as to such
professional compensation and reimbursement of expenses shall be
submitted to and resolved by the Bankruptcy Court.
VII.
CONDITIONS PRECEDENT
A. Conditions - The following are conditions precedent to
confirmation of the Plan.
1. A Final Order of the Bankruptcy Court is entered
granting the SIT/Cellular Substantive Consolidation Motion.
2. A Final Order of the District Court is entered granting
approval of the Class Action Settlement Motion.
3. The Debtors are successful in the Home Action
Litigation.
B. Waiver of Conditions.
The Debtors may waive any conditions set forth in this
Article VII at any time, without notice, without leave of or
order of the Bankruptcy Court and without any formal action other
than proceeding to confirm the Plan.
VIII.
DISTRIBUTION
A. General.
1. Disbursing Agent.
Reorganized Spectrum and such other Person(s) as may be
approved by the Debtors or Reorganized Spectrum and the
Bankruptcy Court, such as a stock transfer agent for any
Existing Spectrum Common Stock or for Reorganized Spectrum
Common Stock, shall act as Disbursing Agent(s) under the
Plan. Any such Disbursing Agent may, with the prior
approval of Reorganized Spectrum, employ or contract with
other Persons to assist in or to perform the distribution
required. Each Disbursing Agent shall serve without
fidelity bond, except as required by Reorganized Spectrum,
and each third-party hired as a Disbursing Agent shall
receive from Reorganized Spectrum, and on terms acceptable
to Reorganized Spectrum without further Bankruptcy Court
approval, reasonable compensation for distribution services
rendered pursuant to the Plan and reimbursement of
reasonable out-of-pocket expenses, if required, incurred in
connection with such services.
2. Cash Payments.
Cash payments made pursuant to the Plan shall be in U.S.
dollars by checks drawn on a domestic bank selected by the
Debtors or Reorganized Spectrum, or by wire transfer from a
domestic bank, at the option of the Debtors or Reorganized
Spectrum; provided, however, that Cash payments to foreign
Creditors may be made, at the option of the Debtors or
Reorganized Spectrum, in such currency and by such means as
are necessary or customary in a particular foreign
jurisdiction.
3. Compliance With Tax Requirements.
In connection with the Plan, to the extent applicable, each
Disbursing Agent shall comply with all tax withholding and
reporting requirements imposed on it by any Governmental
Unit, and all distributions pursuant to the Plan shall be
subject to such withholding and reporting requirements. The
Disbursing Agent may withhold the entire distribution due to
any holder of an Allowed Claim or Interest until such time
as such holder provides the necessary information to comply
with any withholding requirements of any Governmental Unit,
or provides to the Disbursing Agent the Cash necessary to
comply with any applicable withholding requirements. Any
property so withheld will then be paid by the Disbursing
Agent to the appropriate taxing authority.
If the holder of an Allowed Claim or Allowed Interest fails
to provide the necessary information to comply with any
withholding requirements of any Governmental Unit, or fails
to provide to the Disbursing Agent the Cash necessary to
comply with any applicable withholding requirements within 2
years from the date of first notification by the Disbursing
Agent to the holder of the Allowed Claim or Allowed Interest
of the need for such information or for the Cash necessary
to comply with any applicable withholding requirements, then
the holder's distribution shall be treated as an
undeliverable distribution in accordance with
Section VIII.B.4 of the Plan.
4. Persons To Receive Distributions.
All distributions to holders of Allowed Claims or Allowed
Interests shall be made to the Person who appeared as the
holder of such Allowed Claim or Allowed Interest on the
Distribution Record Date. The Debtors, the Disbursing
Agent, Reorganized Spectrum and their employees, agents and
professionals shall bear no responsibility for ensuring that
distributions under the Plan are forwarded to Persons who
became the transferee or assignee of an Allowed Claim or
Allowed Interest unless the transaction reflecting such
transfer is reflected in the claims register of stock
transfer agent's records as of the Distribution Record Date.
B. Distribution of Reorganized Spectrum Common Stock and Class
A Preferred Stock.
1. Distribution.
a. Reorganized Spectrum Common Stock.
As soon as practicable following the Effective Date,
the Disbursing Agent shall make an initial distribution
of Reorganized Spectrum Common Stock to the holders of
Allowed Claims and Allowed Interests in Classes 4, 5
and 6. Holders of Class 2 Claims will only receive
shares of Reorganized Spectrum Common Stock in the
event that there is insufficient cash to pay all
Allowed Class 2 Claims in Cash. In that event a
subsequent distribution of Reorganized Spectrum Common
Stock will be made to holders of Allowed Class 2 Claims
for the difference between the Allowed Amount of their
Claims and the Cash received or to be received under
the Plan ("Cash Deficiency Amount"). One share of
Reorganized Spectrum Common Stock will distributed for
each $11.50 of Cash Deficiency Amount.
b. Class A Preferred Stock.
As soon as practicable following the Effective Date,
Reorganized Spectrum shall make a distribution to the
Class Action Trustee of a single stock certificate of
Class A Preferred Stock representing a number of shares
of Class A Preferred Stock equal to the number of
shares of Distributable Common Stock.
2. Estimation Of And Reserve For Disputed Claims And
Interests.
Reorganized Spectrum shall reserve sufficient shares of
Reorganized Spectrum Common Stock based upon the "face
amount" of the existing Disputed Claims and Disputed
Interests in Classes 3 and 4 for issuance and distribution
to the holders thereof if, as, and when such Disputed Claims
and Disputed Interests become Allowed Claims and Allowed
Interests.
The "face amount" of a Disputed Claim or Disputed Interest
means the amount set forth on the proof of claim or proof of
interest unless the Disputed Claim or Disputed Interest has
been estimated for distribution purposes. Where no amount
has been specified on the face of a proof of claim or proof
of interest, or where the Disputed Claim or Disputed
Interest has been estimated for purposes of allowance and
distribution by the Bankruptcy Court, the "face amount"
shall be the amount fixed by the Bankruptcy Court in
connection with a motion of the type described in the
following paragraph, unless otherwise agreed between the
claimant or interest holder and the Debtors or Reorganized
Spectrum.
As to any Disputed Claim (including Claims based upon
rejection of executory contracts or leases) or Disputed
Interest, the Bankruptcy Court, upon motion by the Debtors
or Reorganized Spectrum shall determine the amount
sufficient to reserve, and may estimate for purposes of
allowance and distribution, the likely maximum allowed
amount of the Disputed Claim or Disputed Interest. Any
Person whose Disputed Claim or Disputed Interest is so
estimated shall have recourse only to the reserve
established for such Person's Disputed Claim or Disputed
Interest (and not to Reorganized Spectrum, holders of
Reorganized Spectrum Common Stock or Class A Preferred
Stock, holders of Existing Spectrum Common Stock, any Person
receiving a distribution under the Plan, or to any assets
distributed on account of any Allowed Claims or Allowed
Interests) if such Person's Claim or Interest, as finally
allowed, exceeds the maximum estimated amount thereof.
THUS, THE BANKRUPTCY COURT'S ESTIMATION FOR PURPOSES OF
ALLOWANCE AND DISTRIBUTION OF A DISPUTED CLAIM OR DISPUTED
INTEREST WILL LIMIT THE DISTRIBUTION TO BE MADE THEREON,
REGARDLESS OF THE AMOUNT FINALLY ALLOWED ON ACCOUNT OF SUCH
DISPUTED CLAIM OR DISPUTED INTEREST.
3. Distribution On Disputed Claims Or Disputed Interests
Which Become Allowed Claims Or Allowed Interests.
From the securities authorized and reserved for issuance on
account of a Disputed Claim or Disputed Interest in
accordance with the preceding subsection of the Plan, and
within 90 days following the allowance by Final Order of all
or a portion of a Disputed Claim or Disputed Interest,
Reorganized Spectrum shall issue and the Disbursing Agent
shall distribute, the Reorganized Spectrum Common Stock to
which the holder of such newly Allowed Claim or Allowed
Interest is then entitled under the terms of the Plan.
Concurrently with such distribution, Reorganized Spectrum
shall pay (without interest) or issue to the holder of the
newly Allowed Claim or Allowed Interest an amount, if any,
equal to the allocable portion of any consideration
distributed on, received for, with respect to, or on account
of previously issued Reorganized Spectrum Common Stock.
Surplus authorized but unissued Reorganized Spectrum Common
Stock reserved on account of Disputed Claims or Disputed
Interests which are either disallowed, or allowed in a
lesser amount than the amount reserved therefor, shall be
released to Reorganized Spectrum free of any restrictions
thereon imposed by the Plan.
Nothing provided for herein shall limit the ability of
Reorganized Spectrum to issue and distribute Reorganized
Spectrum Common Stock in satisfaction of a Claim or Interest
which would otherwise be determined to be nondischargeable
based upon defective notice or otherwise.
4. Undeliverable Distributions.
a. Holding of Undeliverable Distributions.
If any distribution is returned to a Disbursing Agent
as undeliverable, no further distributions shall be
made to the holder of the Allowed Claim or Allowed
Interest on which such distribution was made unless and
until the Disbursing Agent is notified in writing of
such holder's then-current address. Undeliverable
distributions shall remain in the possession of the
Disbursing Agent until such time as a distribution
becomes deliverable or is deemed canceled in accordance
with Section VIII.B.4.b of the Plan. Any unclaimed
distribution held by a Disbursing Agent shall be
accounted for separately, but the Disbursing Agent
shall be under no duty to invest any such unclaimed
distribution in any manner.
b. Failure To Claim Undeliverable Distributions.
Any holder of an Allowed Claim or Allowed Interest that
does not present a Claim for an undeliverable
distribution within 2 years after the date upon which a
distribution is first made available to such holder, or
that does not comply with any precondition to
distribution provided for in the Plan (including
surrender of Existing Spectrum Common Stock or other
instruments as required by Section VI.G of the Plan or
compliance with the tax withholding requirements of
Section VIII.A.3 of the Plan) within 2 years after
notice is sent to the holder regarding the holder's
noncompliance with a precondition to distribution,
shall have its right to any distribution discharged and
shall be forever barred from asserting any such Claim
against Reorganized Spectrum or its property. In such
cases: (a) any Cash held for distribution on account
of such Allowed Claim or Allowed Interest, including
consideration distributed on, received for, with
respect to, or on account of previously issued
Reorganized Spectrum Common Stock (issued and
outstanding or reserved for issuance), shall be the
property of Reorganized Spectrum, free of any
restrictions thereon; and (b) Reorganized Spectrum
Common Stock held for issuance or distribution on
account of such Allowed Claim or Allowed Interest shall
either be canceled or otherwise treated as determined
by Reorganized Spectrum. To the extent that such
undeliverable Cash, and/or Reorganized Spectrum Common
Stock, or any rights thereto, are held by a Disbursing
Agent, the Disbursing Agent shall return such Cash and
the securities evidencing such Reorganized Spectrum
Common Stock, or any rights thereto, to Reorganized
Spectrum, and the securities and rights so returned
shall be canceled or otherwise treated as Reorganized
Spectrum may determine is appropriate. Nothing
contained in the Plan shall require Reorganized
Spectrum in its capacity as Disbursing Agent to attempt
to locate any holder of an Allowed Claim or Allowed
Interest, other than to mail distributions to the
claimant's or interestholder's last known address. If,
for any reason, a Disbursing Agent does not return such
securities evidencing such Reorganized Spectrum Common
Stock to Reorganized Spectrum as required herein, the
subsequent treatment of such securities by Reorganized
Spectrum after the obligation to return such securities
arises herein shall be unaffected by such nonreturn.
All unclaimed or undistributed distributions under this
subsection shall, pursuant to section 347(b) of the
Bankruptcy Code, be the property of Reorganized
Spectrum and shall not be subject to the unclaimed
property or escheat laws of any Governmental Unit.
IX.
EFFECTIVE DATE
The occurrence of the Effective Date shall be conditioned
upon satisfaction of each of the following conditions:
A. A Confirmation Order confirming the Plan, as such Plan
may have been modified with the consent of the Debtors, has been
entered.
B. The Conditions Precedent set forth in Section VII of the
Plan have been met.
In addition to the foregoing, the Effective Date shall
occur, if at all, only on a date selected by the Debtors which is
not earlier than the first business day after ten (10) days (as
calculated in accordance with Bankruptcy Rule 9006(a)) following
the Confirmation Date, and is not later than the later of (a) 30
days after the Confirmation Date and (b) the first business day
on which no stay of the Confirmation Order is and remains in
effect that is after ten (10) days (as calculated in accordance
with Bankruptcy Rule 9006(a)) following the Confirmation Date.
X.
CONFIRMATION REQUEST
The Debtors request Confirmation of the Plan under section
1129(a) or, if necessary, section 1129(b) of the Bankruptcy Code.
XI.
RETENTION OF JURISDICTION
Following Confirmation, the Bankruptcy Court shall retain
such jurisdiction as is legally permissible, including, without
limitation, for the following purposes:
A. To determine the allowability, classification, or
priority of Claims and Interests upon objection by Reorganized
Spectrum and/or the Post-Effective Date Committee;
B. To construe and to take any action to enforce and
execute the Plan, the Confirmation Order, or any other order of
the Bankruptcy Court, to issue such orders as may be necessary
for the implementation, execution, performance and consummation
of the Plan and all matters referred to herein, and to determine
all matters that may be pending before the Bankruptcy Court in
the Reorganization Case on or before the Effective Date with
respect to any Person;
C. To protect the property of the Estate revesting in
Reorganized Spectrum from Claims against, or interference with
such property, including actions to quiet or otherwise clear
title to such property based upon the terms and provisions of
this Plan, or to determine Reorganized Spectrum's exclusive
ownership of claims and causes of action retained under the Plan;
D. To determine any and all allocations for allowance of
compensation and expense reimbursement of Professional Persons
for periods on or before the Effective Date;
E. To determine any other request for payment of
Administrative Claims or expenses;
F. To resolve any dispute regarding the implementation,
execution, consummation or interpretation of the Plan;
G. To determine motions for the rejection, assumption, or
assignment of executory contracts or unexpired leases and to
determine the allowance of any Claims resulting from the
rejection of executory contracts and unexpired leases;
H. To determine all applications, motions, adversary
proceedings, contested matters, and any other litigated matters
instituted prior to the closing of the Reorganization Case;
I. To determine such other matters, and for such other
purposes, as may be provided in the Confirmation Order;
J. To modify the Plan under section 1127 of the Bankruptcy
Code, to remedy any defect or omission in the Plan, or to
reconcile any inconsistency in the Plan so as to carry out its
intent and purposes;
K. To issue injunctions or take such other actions or make
such other orders as may be necessary or appropriate to restrain
interference with the Plan or its execution or implementation by
any Person; and
L. To issue such order in aid of consummation of the Plan
and the Confirmation Order, notwithstanding any otherwise
applicable nonbankruptcy law, with respect to any person, to the
full extent authorized by the Bankruptcy Code.
XII.
MISCELLANEOUS PROVISIONS
A. Amendment and Modification of the Plan.
The Plan may be amended or modified before the Effective
Date only by the Debtors or, following the Effective Date, only
by Reorganized Spectrum to the extent provided in section 1127 of
the Bankruptcy Code.
B. Withdrawal or Revocation of the Plan.
The Debtors reserve the right to revoke or withdraw the Plan
prior to the Confirmation Date. If the Debtors revoke or
withdraw the Plan, or if Confirmation of the Plan does not occur,
then the Plan shall be null and void, and nothing contained
herein shall: (1) constitute a wavier or release of any Claims
by or against, or any Interests in, the Debtors, or (2) prejudice
in any manner the rights of the Debtors or holders of Claims or
Interests in any further proceedings involving the Debtors.
C. Payment of Fees in Connection with Balloting.
Each plan administrator, trustee, fiscal agent, or similar
Person providing services at the Debtors' request, related to
balloting pursuant to the Plan shall also receive, subject to the
approval of the Bankruptcy Court, reasonable compensation for
such services and reimbursement of reasonable out-of-pocket
expenses incurred in connection with such services.
D. Committees.
(1) The Creditors Committee will continue in existence from
and after the Effective Date as the Post-Effective Date
Committee for the limited purpose of filing and prosecuting
objections to Claims. The Post-Effective Date Committee
shall be a "party in interest" within the meaning of Section
1109(b) of the Bankruptcy Code with respect to the
resolution by litigation or settlement of any Disputed
Claim, and shall have standing to object to any Disputed
Claim and to any proposed settlement of any Disputed claim.
(2) The Post-Effective Date Committee shall have no powers
or duties other than those referred to above except that the
Post-Effective Date Committee may perform such other
functions as are consistent with winding up its functions
and discharging its duties to holders of General Unsecured
Claims.
(3) Members of the Post-Effective Date Committee will be
compensated for their reasonable and necessary expenses
incurred in the performance of their duties by Reorganized
Spectrum, and the reasonable fees and expenses of the
attorneys retained by the Post-Effective Date Committee will
be paid by Reorganized Spectrum except that Reorganized
Spectrum will not be obligated to pay more than $50,000 in
aggregate for such expenses and attorneys' fees. Such
payment and reimbursement of fees and expenses shall be
subject to determination and allowance by the Bankruptcy
Court if Reorganized Spectrum objects to any such fees and
expenses.
(4) Upon substantial completion of its functions as
designated herein, the Post-Effective Date Committee shall
be dissolved pursuant to a Final Order.
E. Successors and Assigns.
The rights, benefits and obligations of any Person named or
referred to in the Plan shall be binding on, and shall inure to
the benefit of, the heirs, executors, administrators, successors
and/or assigns of such Person.
F. Severability of Provisions of the Plan.
The Provisions of this Plan shall not be severable unless
such severance is agreed to by the Debtors or Reorganized
Spectrum, and such severance would constitute a permissible
modification of the Plan pursuant to section 1127 of the
Bankruptcy Code.
SPECTRUM INFORMATION
TECHNOLOGIES, INC.
DATED: Brooklyn, New York By
February 8, 1996 ---------------------------
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board of
Directors
2700 Westchester Avenue
Purchase, New York 10577
(914) 251-1800
Submitted by: SPECTRUM CELLULAR
CLEARY, GOTTLIEB, STEEN CORPORATION
& HAMILTON
By
- -------------------------- ---------------------------
George Weisz (GW 7120) Donald J. Amoruso
A Member of the Firm Chief Executive Officer and
One Liberty Plaza Chairman of the Board of
New York, New York 10006 Directors
(212) 225-2000 2700 Westchester Avenue
Purchase, New York 10577
(914) 251-1800
EXHIBIT B
[FILED]
[on file with the Bankruptcy Court and the Securities and
Exchange Commission and incorporated by reference herein]
EXHIBIT C
[FILED]
[on file with the Bankruptcy Court and the Securities and
Exchange Commission and incorporated by reference herein]
EXHIBIT D
[on file with the Bankruptcy Court and the Securities and
Exchange Commission and incorporated by reference herein]
[FILED]
EXHIBIT E
[to be filed with the Bankruptcy Court and the Securities and
Exchange Commission and incorporated by reference herein]
[TO BE FILED]
EXHIBIT F
SPECTRUM INFORMATION TECHNOLOGIES, INC.
SUMMARY OF LIQUIDATION
Estimated Estimated
Book Value Liquidation
STATEMENT OF May-96 Estimated Value
ASSETS (Unaudited) Recovery % (Unaudited)
----------- ---------- -----------
Current Assets:
Cash &
Investments 11,929,271 100% 11,929,271 (A)
Accounts
Receivable, net 1,306,227 50% 653,114 (B)
Inventory, net 45,455 75% 34,091 (C)
Prepaids 151,869 1% 1,519 (D)
Other 82,720 0% 0 (E)
----------- -----------
$13,515,542 $12,617,994
Owned Property
& Equipment:
Property, Plant
& Equipment 1,419,651 0
Accumulated
Depreciation (1,201,565) 0
----------- ------- ----------
$218,096 10% 21,809 (F)
----------- ------- ----------
----------- ------- ----------
Deferred Patent
Costs $355,828 0% 0 (G)
----------- ------- ----------
TOTAL ASSETS $14,089,456 $12,639,803
=========== ==========
APPLICATION OF
ESTIMATED
LIQUIDATION PROCEEDS
Estimated
Liquidation
Proceeds $12,639,803
Less: Secured
Claims 264,556 (H)
Less:
Administrative
and Corporate
Wind-Down
Expenses 6,513,949 (I)
Less:
Priority Tax
Claims (estimate) 45,000 (J)
----------
TOTAL ESTIMATED
ASSETS AVAILABLE
FOR DISTRIBUTION
TO UNSECURED CLAIMS
$5,816,298
==========
Present
Estima- Es- Present Value
ted Re- timated Value Es- Re-
Estimated covery Recovery timated Re- covery
Claim % Amount covery (O) %
--------- ------- -------- ----------- ------
Class 1 -
Priority
Non Tax
Claims 0 0% 0 (K)
Class 2 -
Unsecured
Claims 6,838,269 85.06% 5,816,298 (L) 5,234,668 76.55%
Class 3 -
Class
Action 675,669,900 0% 0
Class 4 -
Securities
claims 6,953,937 0% 0 (M)
Class 5 -
Equity
claims 9,201,054 0% 0 (N)
IV. PRINCIPAL ASSUMPTIONS
A. The Company assumes that it will realize 100% of the
estimated cash and investments balance as of the liquidation
date. Additionally, on February 6, 1996, the Company and U.S.
Robotics executed an agreement settling all disputes and
providing a license payment to Spectrum of $6,000,000. The
agreement is subject to bankruptcy court approval, however, the
payment is included in the Company's projected cash and
investments in this liquidation analysis. A hearing on the
settlement is scheduled before the bankruptcy court for March 7,
1996. If the settlement is not approved, the assets available
for distribution to unsecured creditors will be reduced
accordingly. The payment is also included in the Company's
business plan and projected results set forth in Section IX
herein.
B. The estimated liquidation of the accounts receivable was
determined based upon a review of the various different classes
of receivables. The most significant portion of the accounts
receivable balance originates from long term royalty obligations
arising from licensing agreements related to Spectrum's
proprietary technology. The Company has assumed a 50%
realization in a distressed liquidation. Based on the advice of
the independent accountants, the Company, in January 1996,
reduced its accounts receivable and accounts payable $4,450,000
to reflect deferred license fees that are directly offset by
advertising obligations to the Company's licensees. These
adjustments will be reflected in the Company's Annual Report on
Form 10-K for the Fiscal Year Ended March 31, 1996.
C. The estimated liquidation value of inventory is 75%
based upon the assumption that the inventory will be sold to
licensees. Inventory is carried on the books at cost, and the
Company believes it will be able to dispose of the inventory at a
substantial percentage of its cost in a distressed liquidation.
The Company owns no obsolete inventory.
D. Prepaid expenses relate primarily to premiums associated
with insurance coverage and have been assigned minimal value in
the liquidation analysis because it is unlikely that the Company
would be able to recover any significant cash proceeds from these
assets.
E. This liquidation analysis assumes no recovery value for
other assets because they are primarily associated with security
deposits paid to current and former lessors of real property.
F. Management has estimated a 10% realization rate for a
distressed liquidation of owned property & equipment which is
primarily furniture and obsolete computer equipment.
G. The deferred patent costs represent the unamortized
expense associated with the development of the Company's patents
and are not relevant to the value of the patents in a distressed
liquidation. This deferred royalty income associated with the
license of the Company's patents is reflected in the accounts
receivable entry.
H. The Secured Claim is composed of a claim by Kelley Drye
& Warren.
I. The Company's management has estimated the
administrative and wind-down expenses. The administrative
expenses are composed of projected professional fees, accrued
professional fees that have been held back to date pursuant to
court order, severance benefits associated with post-petition
employment agreements and post-petition leases and accounts
payable. The Company has estimated total wind-down expenses of
$3,000,000 The wind down expenses are based on a monthly run
rate of $250,000 over one (1) year associated with expenses
related primarily to resolution of the thirty-four (34) disputed
claims pending against the Company and the expenses entailed in
the conversion to a Chapter 7 case. Since the proposed
settlement of the Class Action requires confirmation of the
Debtors' Plan of Reorganization, the Company believes that absent
such confirmation, substantial incremental expense would be
incurred litigating the merits of, or otherwise liquidating the,
Class Action claims and\or litigating the priority of such
claims. This assumption is reasonable because the Class Action
presents a large number of extremely complicated legal and
factual issues. The trustee would be forced to spend resources
beyond those which the Company might have to expend because of
his lack of familiarity with each claim. The trustee will also
incur additional administrative expenses associated with
retaining the new accountants and financial advisors necessary to
administer the estate over this period.
J. The Priority Tax Claim is an estimate of the 1994 Dallas
city and county property taxes.
K. There are no Priority Non-Tax Claims.
L. To date, the Company has reconciled 205 unsecured claims
composing the estimated value of liquidated unsecured claims.
The Company has thirty-four (34) pending disputed claims alleging
total damages of $17.9 million. For the liquidation analysis,
Management has estimated the recoverable value of these claims,
together with undisputed claims, when liquidated by the trustee
at approximately $6.8 million. This estimate reflects a
significant reduction for disputed claims from the full amount
claimed because the Company, based on its analysis of the
disputed claims, believes that some of the claims lack merit and
others are inflated. The Company has objected to some claims and
is in the process of objecting to others. In a liquidation
analysis, the Company believes that the liquidating trustee would
have difficulty achieving the favorable results that the Company
projects in the Plan based on the trustee's lack of familiarity
with the claims and records of the Company and unavailability of
Company personnel to defend the claims. Additionally, the
Company believes liquidation and the difficulties liquidating
disputed claims and administering the case would delay
distribution to the claimants for approximately one (1) year.
Accordingly, the Company has estimated that the total recoverable
value of disputed claims, together with undisputed claims, of
$3.5 million in the projected results under the Plan set forth in
Section IX of the Disclosure Statement.
M. Includes the full value of claims filed by Gene Morgan
Financial, which the bankruptcy court has ruled is statutorily
subordinated pursuant to Bankruptcy Code Section 510(b)
($6,287,109) and claims filed by shareholders related to alleged
violations of securities laws that the Company believes are
duplicative of the Class Action claim ($666,828).
N. The Company believes that the Equity Claims would be
treated pari passu (without preference) with the Class Action and
Securities claims and has estimated the value of the Equity Claim
based on the market capitalization of the Company determined by
using the average of the closing bid and ask price of the
Company's stock as of February 2, 1996 ($.115).
O. Based on the delay arising from the difficulty
liquidating disputed claims, including but not limited to the
Class Action, this liquidation analysis assumes that any ultimate
payments made to the classes would not occur for approximately
one (1) year. The present value of the claims assumes a ten
percent (10%) discount.
EXHIBIT G
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
- --------------------------------------x
In re :
: Chapter 11 Case Nos.
SPECTRUM INFORMATION : 195 10690 260
TECHNOLOGIES, INC., : 195 10692 260
DEALER SERVICES BUSINESS : 195 10693 260
SYSTEMS, INC., AND SPECTRUM :
CELLULAR CORPORATION, :
:
Debtors. :
- --------------------------------------X
PARTIES IN INTEREST
Alfred Dimino, Esq.
Office of The United States Trustee
Eastern District of New York
825 East Gate Boulevard
Suite 304
Garden City, New York 11530
Michael Richman, Esq.
Ron D'Aversa, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019
Howard Seife, Esq.
Winston & Strawn
200 Park Avenue
New York, New York 10166
Luskin & Stern
330 Madison Avenue
New York, New York 10017
Attn: Michael Luskin, Esq.
Law Office of Burton S.Weston
1615 Northern Boulevard
Suite 103
Manhasset, New York 11030
Attn: Burton S. Weston, Esq.
Leonard Lazarus
EAB Plaza
West Tower, 14th Floor
Uniondale, New York 11556-0210
Lowenstein, Sandler, Kohl, Fisher & Boylan
65 Livingston Avenue
Roseland, New Jersey 07068-1791
Attn: Gary F. Eisenberg, Esq.
McDermott, Will & Emery
1211 Avenue of the Americas
New York, New York 10036
Attn: Joseph E. Saracheck, Esq.
Tracy Hope Davis, Esq.
Jeffrey M. Rosenblum, Esq.
Jeffrey M. Rosenblum, P.C.
98 Cutter Mill Road, Suite 384N
Great Neck, New York 11021
Nathan M. Fuchs, Esq.
Securities and Exchange Commission
7 World Trade Center
New York, New York 10048
Michael A. Berman, Esq.
Office of the General Counsel
Securities and Exchange Commission
450 Fifth Street, N.W.
(Stop 6-6)
Washington, D.C. 20549
Gary S. Jacobson, Esq.
James S. Carr, Esq.
Kelley Drye & Warren
101 Park Avenue
New York, New York 10178
Productive Computer Center
816 W. Lincoln Hwy.
DeKalb, IL 60115
Regina Stango Kelbon, Esq.
Blank, Rome, Cominsky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Michael S. Tucker, Esq.
Weltman, Weinberg & Reis Co., L.P.A.
Lakeside Place
323 Lakeside Avenue, West, Suite 200
Cleveland, OH 44113-1099
Mark L. Sax, Esq.
Sax & Associates
2925 Briarpark, Suite 1150
Houston, TX 77042
Mark S. Mandel, Esq.
Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, NY 10022
Neda Morvillo, Esq.
William J. Gannon, Esq.
Brown & Wood
One World Trade Center
New York, NY 10048
Richard M. Rubenstein
Providian Corporation
Providian Center, 6th Floor
400 West Market Street
Post Office Box 32830
Louisville, Kentucky 40202
EXHIBIT H
[TO BE FILED]
EXHIBIT I
[TO BE FILED]
EXHIBIT J
[TO BE FILED]
EXHIBIT K
[TO BE FILED]