EXHIBIT 99.3
THIS IS NOT A SOLICITATION OF ACCEPTANCE OR REJECTION OF THE PLAN OF
REORGANIZATION. ACCEPTANCES OR REJECTIONS MAY NOT BE SOLICITED UNTIL A
DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT. THIS DISCLOSURE
STATEMENT IS BEING SUBMITTED FOR APPROVAL BUT HAS NOT BEEN APPROVED BY THE
BANKRUPTCY COURT
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- --------------------------------------------------------X
:
IN RE : CHAPTER 11 CASE NO.
:
HEADWAY CORPORATE RESOURCES, INC., : 03-_____ (___)
:
DEBTOR. :
:
- --------------------------------------------------------X
DISCLOSURE STATEMENT RELATING TO DEBTOR'S PLAN OF
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
------------------------------------------------------
WEIL, GOTSHAL & MANGES LLP
Attorneys for Debtor and
Debtor In Possession
767 Fifth Avenue
New York, New York 10153
(212) 310-8000
Dated: July 1, 2003
TABLE OF CONTENTS
PAGE
I. DESCRIPTION OF THE BUSINESS....................................................................................5
A. General..............................................................................................5
B. Locations; Competition...............................................................................5
C. Common Stock Traded on American Stock Exchange.......................................................6
II. KEY EVENTS LEADING TO THE SOLICITATION AND DECISION
TO COMMENCE A VOLUNTARY CHAPTER 11 REORGANIZATION CASE.........................................................6
III. ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE..................................................................8
A. Chapter 11 Financing.................................................................................8
B. Confirmation Hearing.................................................................................8
IV. THE PLAN OF REORGANIZATION.....................................................................................8
A. Introduction.........................................................................................8
B. Classification and Treatment of Claims and Equity Interests Under
the Plan of Reorganization...........................................................................9
C. Securities to Be Issued Pursuant to the Plan of Reorganization......................................15
D. Means of Implementation of the Plan of Reorganization...............................................18
E. Provisions Governing Distributions..................................................................19
F. Procedures for Treating Disputed Claims Under Plan of Reorganization................................22
G. Provisions Governing Executory Contracts and Unexpired Leases.......................................23
H. Conditions Precedent to Consummation Date...........................................................25
I. Effect of Confirmation..............................................................................25
J. Waiver of Claims....................................................................................28
K. Retention of Jurisdiction...........................................................................28
L. Miscellaneous Provisions............................................................................29
V. PROJECTIONS AND VALUATION ANALYSIS............................................................................31
A. Consolidated Condensed Projected Financial Statements...............................................31
B. Valuation...........................................................................................41
VI. CERTAIN FACTORS AFFECTING HEADWAY.............................................................................41
A. Certain Bankruptcy Law Considerations...............................................................41
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TABLE OF CONTENTS
(CONTINUED)
PAGE
B. Factors Affecting the Value of the Securities to be Issued Under
the Plan of Reorganization..........................................................................42
C. Certain Tax Matters.................................................................................44
D. Pending Litigation or Demands Asserting Prepetition Liability.......................................44
VII. VOTING PROCEDURES AND REQUIREMENTS............................................................................44
A. Voting Deadline.....................................................................................44
B. Holders of Claims and Equity Interests Entitled to Vote.............................................45
C. Vote Required for Acceptance by a Class.............................................................45
D. Voting Procedures...................................................................................46
VIII. CONFIRMATION OF THE PLAN OF REORGANIZATION....................................................................47
A. Confirmation Hearing................................................................................47
B. Requirements for Confirmation of the Plan of Reorganization.........................................47
IX. FINANCIAL INFORMATION.........................................................................................54
A. General.............................................................................................54
B. Selected Financial Data.............................................................................55
C. Management's Discussion and Analysis of Financial Condition and Results of Operations..............55
D. Recent Performance..................................................................................55
X. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN OF REORGANIZATION...................................55
A. Liquidation Under Chapter 7.........................................................................55
B. Alternative Plan of Reorganization..................................................................56
XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN OF REORGANIZATION........................................56
A. Consequences to Headway.............................................................................57
XII. CONCLUSION....................................................................................................61
ii
INTRODUCTION
IMPORTANT -- PLEASE READ
Headway Corporate Resources, Inc. ("Headway") is soliciting
acceptances of the "pre-arranged" chapter 11 plan of reorganization (the "Plan
of Reorganization") attached as Exhibit 1 to this Disclosure Statement. This
solicitation is being conducted at this time in order to obtain sufficient votes
to enable the Plan of Reorganization to be confirmed by the Bankruptcy Court.
Capitalized terms used in this Disclosure Statement but not defined herein have
the meanings ascribed to such terms in the Plan of Reorganization.
WHO IS ENTITLED TO VOTE: The holders of Secured Credit Agreement
Claims and the holders of Old Senior Subordinated Note Claims, are entitled to
vote on the Plan of Reorganization. Holders of (i) General Unsecured Claims,
(ii) Old Preferred Stock Interests, (iii) Old Common Stock Interests and (iv)
Old Warrants are deemed to reject the Plan of Reorganization and are not
entitled to vote to accept or reject the Plan of Reorganization.
Headway is commencing this solicitation after extensive
discussions with the Lenders and the holders of Old Senior Subordinated Note
Claims. The Lenders have been represented by O'Melveny & Myers LLP, as legal
advisors, and FTI Consulting, as financial advisors. Headway has entered into
the Lender Lock Up Agreement, dated as of June 30, 2003, with each of the
Lenders. Pursuant to the terms and conditions of the Lender Lock Up Agreement,
and subject to the approval of the Disclosure Statement by the Bankruptcy Court,
each of the Lenders has agreed to vote to accept the Plan of Reorganization.
GarMark Partners, L.P., one of the holders of Old Senior
Subordinated Notes has been represented by Swidler Berlin Shereff Friedman, LLP,
as legal advisors. Headway has entered into the Sub Debt Lock Up Agreement,
dated as of June 30, 2003, with each of the holders of Old Senior Subordinated
Notes. Pursuant to the terms and conditions of the Sub Debt Lock Up Agreement,
and subject to the approval of the Disclosure Statement by the Bankruptcy Court,
each of the holders of Old Senior Subordinated Note Claims has agreed to vote to
accept the Plan of Reorganization.
Headway's legal advisors are Weil, Gotshal & Manges LLP; its
financial advisors are Carl Marks Consulting Group LLC. They can be contacted
at:
Weil, Gotshal & Manges LLP Carl Marks Consulting Group LLC
767 Fifth Avenue 135 East 57th Street
New York, NY 10153 New York, NY 10022
(212) 310-8000 (212) 909-8400
Attn: Jeffrey L. Tanenbaum, Esq. Attn: Anthony Accordino
2
The following table summarizes the treatment for creditors and
shareholders under the Plan of Reorganization. For a complete explanation,
please refer to the discussion in Section IV below, entitled "THE PLAN OF
REORGANIZATION" and to the Plan of Reorganization itself.
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
CLASS DESCRIPTION TREATMENT ESTIMATED RECOVERY
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
1 Priority Non-Tax Claims Unimpaired 100%
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
2 Secured Credit Agreement Claims Impaired 33.4%
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
3 Other Secured Claims Unimpaired 100%
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
4 Old Senior Subordinated Note Claims Impaired 7.8%
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
5 General Unsecured Claims No Distribution; deemed to reject the
Plan of Reorganization -
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
6 Old Preferred Stock Interests No Distribution; deemed to reject the
Plan of Reorganization -
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
7 Old Common Stock Interests No Distribution; deemed to reject the
Plan of Reorganization -
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
8 Old Warrants No Distribution; deemed to reject the
Plan of Reorganization -
- ------------ ---------------------------------------------------- ----------------------------------------- -------------------
For detailed historical and projected financial information and
financial estimates, see Section V below, entitled "PROJECTIONS AND VALUATION
ANALYSIS." ADDITIONAL FINANCIAL INFORMATION IS CONTAINED IN HEADWAY'S MOST
RECENT ANNUAL REPORTS ON FORM 10-K AND FORM 10-K/A FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002 AND QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 2003, ATTACHED AS EXHIBITS 2, 3 AND 4, RESPECTIVELY, TO THIS DISCLOSURE
STATEMENT.
SUMMARY OF VOTING PROCEDURES
To be counted your vote must be received, pursuant to the
following instructions, by Headway's Voting Agent at the following address,
before the Voting Deadline of 5:00 p.m. (Eastern Time) on [Insert Date], 2003:
WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
ATTN: TAL SAPEIKA
TEL (212) 310-8000
FAX (212)310-8007
3
1. IF YOU ARE, AS OF THE JULY 1, 2003 RECORD DATE, THE OWNER OF SECURED CREDIT
AGREEMENT CLAIMS (CLASS 2):
Please complete the information requested on the Ballot, sign, date and
indicate your vote on the Ballot, and return your completed Ballot in the
enclosed pre-addressed postage-paid envelope so that it is actually
received by the Voting Agent before the Voting Deadline.
2. IF YOU ARE, AS OF THE JULY 1, 2003 RECORD DATE, THE OWNER OF OLD SENIOR
SUBORDINATED NOTE CLAIMS (CLASS 4):
Please complete the information requested on the Ballot, sign, date and
indicate your vote on the Ballot, and return your completed Ballot in the
enclosed pre-addressed postage-paid envelope so that it is actually
received by the Voting Agent before the Voting Deadline.
* * *
For detailed voting instructions, see SectionVII below, entitled
"VOTING PROCEDURES AND REQUIREMENTS" and the instructions on your Ballot.
4
I.
DESCRIPTION OF THE BUSINESS
A. GENERAL
Headway Corporate Resources, Inc., a holding company
("Headway"), and its wholly owned non-debtor operating subsidiaries (the
"Subsidiaries and, together with Headway, the "Company"), are leading providers
of staffing services to businesses in a variety of industries, including,
financial services, media, entertainment, biotechnology, information technology
and telecommunications. The Company established its human resource business
through 20 acquisitions of staffing and professional services companies from
1996 through 1999.
The Company's goal is to build a national human resource
business focused on providing staffing services to the industries identified
above. The Company's strategy for achieving this goal is to emphasize programs
that generate internal growth and market penetration in the industries and
geographical areas that the Company services.
Headway has filed a chapter 11 petition in order to revise its
capital structure, while minimizing the effects of the bankruptcy proceeding on
its non-debtor operating Subsidiaries. Substantially all of the Company's trade
and other ordinary course creditors are located at the Subsidiary level.
Accordingly, Headway seeks a prompt confirmation of its consensual plan of
reorganization and an expedited exit from chapter 11, resulting in the least
amount of dislocation to the Company's business, employees and customers.
B. LOCATIONS; COMPETITION
Headquartered in New York City, the Company operates
domestically from regional and local offices in, California, Connecticut,
Florida, New York, North Carolina, Virginia and, until recently, Texas. Until
recently, the Company was also a leading provider of executive search services
to the financial services industry through its Whitney subsidiaries. In March
2003, the Company exited the executive search segment through a sale of the
Whitney subsidiaries so that it could focus on its core staffing business.
The staffing industry is intensely competitive and fragmented
and has limited barriers to entry. The Company competes for employees and
clients in national, regional, and local markets with full-service and
specialized temporary staffing service businesses. A significant number of the
Company's competitors have greater marketing, financial, and other resources and
more established operations than the Company. Price competition in the staffing
industry is intense and pricing pressures from competitors and customers are
increasing. Many of the Company's clients have relationships with more than one
staffing service company. However, in recent years, an increasing number of
companies have consolidated their staffing services purchases and entered into
5
exclusive contracts with a single temporary staffing company or small number of
temporary staffing companies. If current or potential clients enter into
exclusive contracts with competitors of the Company, it will be difficult or
impossible for the Company to obtain business from such clients. The Company
expects that the level of competition will remain high in the future, which
could limit the Company's ability to maintain or increase its market share or
maintain or increase gross margins. However, the Company believes that its
strategy of becoming a dominant provider in each of its markets will allow it to
remain competitive in this environment.
C. COMMON STOCK TRADED ON AMERICAN STOCK EXCHANGE
Headway's common stock is currently traded on the American Stock
Exchange under the symbol "HEA." Upon the Consummation Date, however, Headway
will no longer be a public company. Pursuant to the Plan of Reorganization,
Headway's common stock will be cancelled and the New Common Stock will not be
listed on the American Stock Exchange or any other nationally recognized market
or exchange. Accordingly, no assurance can be given that a holder of New Common
Stock will be able to sell such securities in the future or as to the price at
which any sale may occur.
ADDITIONAL INFORMATION CONCERNING HEADWAY AND ITS SUBSIDIARIES'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS IS SET FORTH IN HEADWAY'S (I)
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDING DECEMBER 31, 2002, (II) ANNUAL
REPORT ON FORM 10-K/A FOR THE PERIOD ENDING DECEMBER 31, 2002, AND (III)
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003, COPIES OF
WHICH ARE ANNEXED AS EXHIBITS 2, 3 AND 4, RESPECTIVELY, TO THIS DISCLOSURE
STATEMENT.
II.
KEY EVENTS LEADING TO THE SOLICITATION AND DECISION TO
COMMENCE A VOLUNTARY CHAPTER 11 REORGANIZATION CASE
Prior to 2001, the temporary employment service industry
experienced significant growth in response to the changing work environment in
the United States. Employers developed increasingly stringent criteria for
permanent employees, while moving toward project-oriented temporary and contract
hiring. These changes were the result of increasing automation that resulted in
shorter technological cycles, and global competitive pressures. Many employers
responded to these challenges by turning to temporary and contract personnel to
keep personnel costs variable, achieve maximum flexibility, outsource highly
specialized skills, and avoid the negative effects of layoffs.
During this period of industry growth, the Company expanded its
domestic and international operations through a number of key acquisitions
funded, in the main, through its Old Credit Agreement. However, in 2001 and 2002
the temporary employment industry experienced a significant slowdown in demand
in response to unfavorable conditions in the overall economy. Many companies
initiated layoffs of both temporary and permanent workers, and implemented
hiring freezes.
6
As of June 30, 2003, $74,937,085.73 in aggregate principal
amount, plus $1.6 million in letter of credit exposure, was outstanding under
the Old Credit Agreement. The Old Credit Agreement expires on June 30, 2003 with
all outstanding amounts then due. Substantially all assets of the Company have
been pledged as collateral for the Old Credit Agreement. In December 2002, the
Company amended the Old Credit Agreement and obtained a waiver of compliance
with certain financial covenants, which the Company had failed as of that date,
including maintenance of a minimum level of EBITDA and the requirement that the
Company make a partial repayment of the loan if its accounts receivable are
below a certain level. The amendment provided a waiver and reduced the amount of
the monthly cash interest payment through March 31, 2003. The waiver expired on
March 31, 2003 causing the Company to be in default of the Old Credit Agreement.
On May 7, 2003, the waiver was renewed through May 31, 2003 and extended again
to June 27, 2003.
As of June 30, 2003, $10,000,000 in aggregate principal amount,
plus $2,901,000 in accrued and unpaid interest, was outstanding under Headway's
Senior Subordinated Notes and $20,000,000 in face amount of Headway's preferred
stock was outstanding. The Senior Subordinated Notes are payable in March 2006
and originally bore interest at 12% per annum until March 2001, increasing to
14% per annum thereafter. In January 2001, the terms of the Senior Subordinated
Notes were amended, including increasing the effective interest rate to 13%
until March 2001 and 15% thereafter. In December 2002, the Company obtained a
waiver of the events of default on the Senior Subordinated Notes and the
preferred stock and the payment (but not the accrual) of interest and dividends
from March 31, 2002 through June 30, 2003, or such earlier date on which
indebtedness under the Old Credit Agreement is accelerated or the Lenders
exercise any of their rights or remedies.
As of March 31, 2003, the Company had a working capital deficit
of approximately $58,749,000 compared to a working capital deficit of
$55,252,000 at December 31, 2002. The deficiency was a direct result of the
classification of the Old Credit Agreement and Senior Subordinated Notes as
current liabilities.
Prior to the Commencement Date, the Company entered into
discussions with the Lenders and the holders of Old Senior Subordinated Notes
concerning the restructuring of the Company's outstanding debt and equity. After
extensive discussions with the Lenders and the holders of the Old Senior
Subordinated Notes, the Company entered into (i) the Lender Lock Up Agreement
with the Lenders and (ii) the Sub Debt Lock Up Agreement with the holders of the
Old Senior Subordinated Notes. Pursuant to the terms and conditions of the
Lender Lock Up Agreement and the Sub Debt Lock Up Agreement, each of the Lenders
and holders of Old Senior Subordinated Notes, respectively, has agreed to vote
to accept the Plan of Reorganization subject to the terms thereof, including the
approval of the Disclosure Statement by the Bankruptcy Court.
7
III.
ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE
A. CHAPTER 11 FINANCING
Headway anticipates financing its case under chapter 11 of the
Bankruptcy Code by obtaining an order of the Bankruptcy Court authorizing it to,
among other things, use the Lenders' cash collateral.
B. CONFIRMATION HEARING
Headway anticipates that as soon as practicable after commencing
its chapter 11 case, it will seek an order of the Bankruptcy Court scheduling a
hearing to approve this Disclosure Statement and a hearing to consider
confirmation of the Plan of Reorganization. Headway anticipates that notice of
the Disclosure Statement hearing and the confirmation hearing will be published
in The Wall Street Journal (National Edition), and will be mailed to all known
holders of Claims and Equity Interests, at least 25 days before the date by
which objections to the Disclosure Statement or confirmation, as the case may
be, must be filed with the Bankruptcy Court. See Section VIII.A. below, entitled
"CONFIRMATION OF THE PLAN -- Confirmation Hearing."
IV.
THE PLAN OF REORGANIZATION
A. INTRODUCTION
The Plan of Reorganization provides for a major restructuring of
Headway's financial obligations. In essence, the Plan of Reorganization (i)
provides each holder of a Secured Credit Agreement Claim in the aggregate
approximate principal amount of $74.9 million, including accrued and unpaid
interest thereon through the Petition Date, with its Ratable Proportion of 100%
of Headway's New Common Stock, subject to dilution by the New Convertible
Subordinated Note, plus its Ratable Proportion of the notes in the aggregate
principal amount of $26.6 million, including $1.6 million in letters of credit,
to be issued pursuant to the New Credit Agreement and (ii) provides the holders
of Old Senior Subordinated Notes with their Ratable Proportion of the New
Convertible Subordinated Note. The New Credit Agreement, New Common Stock and
New Convertible Subordinated Note are described in detail in subsection C below,
entitled "Securities to Be Issued Pursuant to the Plan of Reorganization." The
Plan of Reorganization also provides for Reorganized Headway to satisfy in full
its Cash Collateral Obligations.
As described in subsection IV.J. below, entitled "Effect of
Confirmation -- Limited Release," the Plan of Reorganization provides certain
parties with releases of all claims and causes of action based in whole or in
part upon any act or omission, transaction, agreement, event or other occurrence
taking place on or before the Consummation Date.
8
The result of the restructuring will be a significant reduction
of debt. Headway believes that the proposed restructuring will provide Headway
with the necessary liquidity to fund essential capital expenditures and to
compete effectively in today's business environment.
Headway believes, and will demonstrate to the Bankruptcy Court,
that creditors and shareholders will receive at least as much, if not more, in
value under the Plan of Reorganization than they would receive in a liquidation
case under chapter 7 of the Bankruptcy Code.
The following is a non-technical discussion of the provisions of
the Plan of Reorganization. The Plan of Reorganization is attached as Exhibit 1
to this Disclosure Statement. The terms of the Plan of Reorganization govern in
the event there are any discrepancies in the following discussion.
B. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN
OF REORGANIZATION
One of the key concepts under the Bankruptcy Code is that only
claims and equity interests that are "allowed" may receive distributions under a
chapter 11 plan. This term is used throughout the Plan of Reorganization and the
descriptions below. In general, an "allowed" claim or "allowed" equity interest
simply means that the debtor agrees, or in the event of a dispute, that the
Bankruptcy Court determines, that the claim or equity interest, and the amount
thereof, is in fact a valid obligation of the debtor. Section 502(a) of the
Bankruptcy Code provides that a timely filed claim or equity interest is
automatically "allowed" unless the debtor or other party in interest objects.
However, section 502(b) of the Bankruptcy Code specifies certain claims that may
not be "allowed" in bankruptcy even if a proof of claim is filed. These include,
but are not limited to, claims that are unenforceable under the governing
agreement between Headway and the claimant or applicable non-bankruptcy law,
claims for unmatured interest, property tax claims in excess of the debtor's
equity in the property, claims for services that exceed their reasonable value,
lease and employment contract rejection damage claims in excess of specified
amounts, late-filed claims, and contingent claims for contribution and
reimbursement.
Because Headway is providing notice of the Commencement Date,
the hearing to approve the Disclosure Statement and the Confirmation Hearing, to
all holders of Claims, it does not intend to set a bar date by which holders of
claims and equity interests must file proofs of claim and proofs of equity
interest. The Plan of Reorganization contemplates that holders of General
Unsecured Claims, such as trade vendor and other business claims, but excluding
its Allowed Old Senior Subordinated Note Claims, shall not receive any
distribution on account of their General Unsecured Claims. Few, if any, of the
creditors of the Subsidiaries are creditors of the parent, Headway. Accordingly,
Headway's filing of a chapter 11 petition will have little or no impact on the
business relationship with such creditors of the Subsidiaries.
9
The Bankruptcy Code requires that, for purposes of treatment and
voting, a chapter 11 plan divide the different claims against, and equity
interests in, the debtor into separate classes based upon their legal nature.
Claims of a substantially similar legal nature are usually classified together,
as are equity interests of a substantially similar legal nature. Because an
entity may hold multiple claims and/or equity interests which give rise to
different legal rights, the "claims" and "equity interests" themselves, rather
than their holders, are classified.
Under a chapter 11 plan, the separate classes of claims and
equity interests must be designated either as "impaired" (affected by the plan)
or "unimpaired" (unaffected by the plan). If a class of claims is "impaired,"
the Bankruptcy Code affords certain rights to the holders of such claims, such
as the right to vote on the plan, and the right to receive, under the chapter 11
plan, no less value than the holder would receive if the debtor were liquidated
in a case filed under chapter 7 of the Bankruptcy Code. Under section 1124 of
the Bankruptcy Code, a class of claims or interests is "impaired" unless the
plan (i) does not alter the legal, equitable and contractual rights of the
holders or (ii) irrespective of the holders' acceleration rights, cures all
defaults (other than those arising from the debtor's insolvency, the
commencement of the case or nonperformance of a nonmonetary obligation),
reinstates the maturity of the claims or interests in the class, compensates the
holders for actual damages incurred as a result of their reasonable reliance
upon any acceleration rights, and does not otherwise alter their legal,
equitable and contractual rights. Typically, this means that the holder of an
unimpaired claim will receive on the later of the consummation date or the date
on which amounts owing are actually due and payable, payment in full, in cash,
with postpetition interest to the extent appropriate and provided for under the
governing agreement (or if there is no agreement, under applicable nonbankruptcy
law), and the remainder of the debtor's obligations, if any, will be performed
as they come due in accordance with their terms. Thus, other than its right to
accelerate the debtor's obligations, the holder of an unimpaired claim will be
placed in the position it would have been in had the debtor's case not been
commenced.
Under certain circumstances, a class of claims or equity
interests may be deemed to reject a plan of reorganization. For example, a class
is deemed to reject a plan of reorganization under section 1126(g) of the
Bankruptcy Code if the holders of claims or interests in such class do not
receive or retain property under the plan of reorganization on account of their
claims or equity interests. Under this provision of the Bankruptcy Code, the
holders of claims in Class 5 (General Unsecured Claims) and equity interests in
Class 6 (Old Preferred Stock Interests), Class 7 (Old Common Stock Interests)
and Class 8 (Old Warrants) are deemed to reject the Plan of Reorganization
because they receive no distribution under the Plan of Reorganization and such
plan discharges the Debtor from obligations to holders of General Unsecured
Claims and cancels the Old Preferred Stock Interests, Old Common Stock
Interests, and Old Warrants. Because Class 5 (General Unsecured Claims), Class 6
(Old Preferred Stock Interests), Class 7 (Old Common Stock Interests) and Class
8 (Old Warrants) are deemed to reject the Plan of Reorganization, Headway is
required to demonstrate that the Plan of Reorganization satisfies the
requirements of section 1129(b) of the Bankruptcy Code with respect to such
classes. Among these are the requirements that the plan be "fair and equitable"
and not "discriminate unfairly" against the holders of equity interests in such
10
classes. For a more detailed description of the requirements for confirmation,
see Section VIII.B. below, entitled "CONFIRMATION OF THE PLAN OF REORGANIZATION
- -- Requirements for Confirmation of the Plan of Reorganization."
Consistent with these requirements, the Plan of Reorganization
divides the allowed claims against, and allowed equity interests in, Headway
into the following classes:
Unclassified Administrative Expenses
Unclassified Priority Tax Claims
Class 1 Priority Non-Tax Claims Unimpaired
Class 2 Secured Credit Agreement Claims Impaired
Class 3 Other Secured Claims Unimpaired
Class 4 Old Senior Subordinated Note Claims Impaired
Class 5 General Unsecured Claims Deemed Rejected
Class 6 Old Preferred Stock Interests Deemed Rejected
Class 7 Old Common Stock Interests Deemed Rejected
Class 8 Old Warrants Deemed Rejected
ADMINISTRATIVE EXPENSES
Administrative expenses are the actual and necessary costs and
expenses of Headway's chapter 11 case that are allowed under sections 503(b) and
507(a)(1) of the Bankruptcy Code. Those expenses will include, but are not
limited to, amounts owed to vendors providing goods and services to Headway
during the chapter 11 case, tax obligations incurred after the Petition Date,
and certain statutory fees and charges assessed under section 1930, chapter 123,
title 28, United States Code. Other administrative expenses include the actual,
reasonable and necessary professional fees and expenses of Headway's advisors,
which fees and expenses are incurred during the pendency thereof.
Administrative expenses representing liabilities incurred by
Headway in the ordinary course of business, consistent with past practice, or
liabilities arising under loans or advances to Headway after the Petition Date,
whether or not incurred in the ordinary course of business, will be paid by
Headway in accordance with the terms and conditions of the particular
transaction and any related agreements and instruments. All other administrative
expenses will be paid, in full, in cash, on the Consummation Date or as soon
thereafter as is practicable, or on such other terms to which Headway and the
holder of such administrative expense claim agree.
All payments to professionals for compensation and reimbursement
of expenses and all payments to reimburse expenses of members of any statutory
committees will be made in accordance with the procedures established by the
Bankruptcy Court and Bankruptcy Rules relating to the payment of interim and
final compensation and expenses.
11
In addition to the foregoing, section 503(b) of the Bankruptcy
Code provides for payment of compensation to creditors, indenture trustees and
other Persons making a "substantial contribution" to a chapter 11 case, and to
attorneys for, and other professional advisors to, such Persons. Requests for
such compensation must be approved by the Bankruptcy Court after notice and a
hearing at which Headway and other parties in interest may participate, and, if
appropriate, object to such requests.
All Cash Collateral Obligations shall be deemed Allowed
Administrative Expense Claims and paid in full in cash on the Consummation Date
in accordance with section 2.1 of the Plan of Reorganization.
PRIORITY TAX CLAIMS
Priority Tax Claims essentially consist of unsecured claims of
federal and state governmental authorities for the kinds of taxes specified in
section 507(a)(8) of the Bankruptcy Code, such as certain income taxes, property
taxes, excise taxes, and employment and withholding taxes. These unsecured
claims are given a statutory priority in right of payment. Headway does not
intend to set a bar date and therefore it is difficult to estimate the number
and amount, if any, of Priority Tax Claims that will be filed with the
Bankruptcy Court. Headway believes that there will be no Allowed Priority Tax
Claims.
With respect to any Priority Tax Claims not paid pursuant to
prior Bankruptcy Court order, on the Consummation Date, except to the extent
that a holder of an Allowed Priority Tax Claim agrees to less favorable
treatment of such Allowed Priority Tax Claim, Reorganized Headway shall pay to
each holder of an Allowed Priority Tax Claim cash in an amount equal to such
Allowed Priority Tax Claim. All Allowed Priority Tax Claims which are not due
and payable on or before the Consummation Date shall be paid thereafter in the
ordinary course of business in accordance with the terms thereof.
CLASS 1 -- PRIORITY NON-TAX CLAIMS
(Unimpaired. Presumed to accept the Plan of
Reorganization and not entitled to vote.)
Priority Non-Tax Claims include certain claims that are granted
priority in payment under section 507(a) of the Bankruptcy Code, including
certain wage, salary and other compensation obligations to employees of Headway.
Headway does not intend to set a bar date and therefore it is difficult to
estimate the number and amount, if any, of Priority Non-Tax Claims that will be
filed with the Bankruptcy Court.
With respect to any Priority Non-Tax Claims not paid pursuant to
prior Bankruptcy Court order, on the Consummation Date, except to the extent
that a holder of an Allowed Priority Non-Tax Claim agrees to less favorable
treatment of such Allowed Priority Non-Tax Claim, each Allowed Priority Non-Tax
Claim shall be unimpaired in accordance with section 1124 of the Bankruptcy
Code. All Allowed Priority Non-Tax Claims that are not due and payable on or
12
before the Consummation Date shall be paid in the ordinary course of business in
accordance with the terms thereof.
CLASS 2 - SECURED CREDIT AGREEMENT CLAIMS
(Impaired. Entitled to vote.)
Class 2 consists of the Allowed Secured Credit Agreement Claims.
Headway estimates that, as of the Petition Date, the aggregate amount of Allowed
Secured Credit Agreement Claims will be approximately $74.9 million.
The Plan of Reorganization provides that each Secured Credit
Agreement Claim constitutes an Allowed Secured Credit Agreement Claim.
On the Consummation Date, except to the extent that a holder of
an Allowed Secured Credit Agreement Claim agrees to less favorable treatment of
such Allowed Secured Credit Agreement Claim, each holder of an Allowed Secured
Credit Agreement Claim shall receive its Ratable Proportion of (i) 100% of the
New Common Stock, subject to dilution by the New Convertible Subordinated Note
and (ii) the notes to be issued under the New Credit Agreement, which shall be
in the aggregate principal amount of $26.6 million, including $1.6 million in
letters of credit, on the Commencement Date.
Headway estimates that the overall recovery for Class 2 will be
approximately 33.4% under the Plan of Reorganization.
The Lenders have consented to the distribution to be provided to
the holders of Old Senior Subordinated Note Claims under the Plan of
Reorganization. The Lenders can, in the exercise of their discretion, distribute
value that would otherwise belong to them to any holders of Claims or Equity
Interests. The Lenders are consenting to the distribution to the holders of the
Old Senior Subordinate Note Claims, based upon, among other reasons, such
holders' agreement to release any claims they may have against the Subsidiaries.
CLASS 3 -- OTHER SECURED CLAIMS
(Unimpaired. Presumed to accept the Plan of
Reorganization and not entitled to vote.)
Class 3 consists of Allowed secured claims, other than the Class
2 Secured Credit Agreement Claims. Such Claims generally would include Claims
arising under agreements relating to the financing of Headway's office equipment
or equipment located at its offices. Headway does not intend to set a bar date
and therefore it is difficult to estimate the number and amount, if any, of
Other Secured Claims that will be filed with the Bankruptcy Court. Headway
estimates that, as of the Consummation Date, there will not be any Allowed Other
Secured Claims.
On the Consummation Date, except to the extent that a
holder of an Allowed Other Secured Claim agrees to less favorable treatment of
such Allowed Other Secured Claim, each Allowed Other Secured Claim shall be
13
reinstated or rendered unimpaired in accordance with section 1124 of the
Bankruptcy Code, notwithstanding any contractual provision or applicable
nonbankruptcy law that entitles the holder of an Allowed Other Secured Claim to
demand or receive payment of such Allowed Other Secured Claim prior to the
stated maturity of such Allowed Other Secured Claim from and after the
occurrence of a default. All Allowed Other Secured Claims that are not due and
payable on or before the Consummation Date shall be paid in the ordinary course
of business in accordance with the terms thereof.
CLASS 4 -- OLD SENIOR SUBORDINATED NOTE CLAIMS
(Impaired. Entitled to vote.)
Class 4 consists of the Allowed Claims of the holders of Old
Senior Subordinated Notes. The Plan of Reorganization provides that each Old
Senior Subordinated Note Claim constitutes an Allowed Old Senior Subordinated
Note Claim. On the Consummation Date, each holder of an Allowed Old Senior
Subordinated Note Claim shall receive, in full satisfaction of such Allowed Old
Senior Subordinated Note Claim and in full consideration of the discharge and
satisfaction of all claims such holders have against the Subsidiaries, its
Ratable Proportion of the New Convertible Subordinated Note. Upon the execution
of the Sub Debt Lock Up Agreement, the holders of Old Senior Subordinated Note
Claims were reimbursed for fees and expenses in connection with the Plan of
Reorganization in the amount of $75,000. On the Consummation Date, the holders
of Old Senior Subordinated Note Claims shall be reimbursed for their additional
reasonable fees and expenses in connection with the Plan of Reorganization up to
$75,000.
Headway estimates that the overall recovery for Class 4 will be
approximately 7.8% under the Plan of Reorganization, because the Old Senior
Subordinated Notes represent claims in the aggregate principal amount of $10
million, plus approximately $2.9 million in accrued and unpaid interest.
CLASS 5 -- GENERAL UNSECURED CLAIMS
(Deemed to reject the Plan of Reorganization. Not
entitled to vote.)
Class 5 consists of Allowed General Unsecured non-priority
claims which generally include the claims of trade and other business creditors
for goods and services provided to Headway prior to the Petition Date and other
damage or general litigation claims. Headway does not intend to set a bar date
and therefore it is difficult to estimate the number and amount, if any, of
General Unsecured Claims that will be filed with the Bankruptcy Court.
Headway's books and records, prepared according to generally
accepted accounting principles, reflect certain accrued and other liabilities
which for classification purposes in a chapter 11 proceeding could be classified
as contingent and/or unliquidated. As of the Consummation Date, Headway
estimates that accrued and other liabilities will total approximately $1.2
million, as measured by generally accepted accounting principles.
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On the Consummation Date, the Debtor shall be discharged from
any obligations to holders of Allowed General Unsecured Claims and each holder
of an Allowed General Unsecured Claim shall not receive or retain any property
or interest in property on account of its Allowed General Unsecured Claim.
CLASS 6 -- OLD PREFERRED STOCK INTERESTS
(Deemed to reject the Plan of Reorganization. Not
entitled to vote.)
Class 6 consists of the Allowed Old Preferred Stock Interests.
The Plan of Reorganization provides that each Old Preferred Stock Interest
constitutes an Allowed Old Preferred Stock Interest. On the Consummation Date,
the Allowed Old Preferred Stock Interests shall be cancelled, and the holders of
the Allowed Old Preferred Stock Interests will not be entitled to, and shall not
receive or retain, any property or interest in property on account of such
Allowed Old Preferred Stock Interests.
CLASS 7 -- OLD COMMON STOCK INTERESTS
(Deemed to reject the Plan of Reorganization. Not
entitled to vote.)
Class 7 consists of the Allowed Old Common Stock Interests. The
Plan of Reorganization provides that each Old Common Stock Interest constitutes
an Allowed Old Common Stock Interest. On the Consummation Date, the Allowed Old
Common Stock Interests shall be cancelled and the holders of the Allowed Old
Common Stock Interests will not be entitled to, and shall not receive or retain,
any property or interest in property on account of such Allowed Old Common Stock
Interests.
CLASS 8 -- OLD WARRANTS
(Deemed to reject the Plan of Reorganization. Not
entitled to vote.)
Class 8 consists of the Allowed Old Warrants. The Plan of
Reorganization provides that each Old Warrant constitutes an Allowed Old
Warrant. On the Consummation Date, the Allowed Old Warrants will be cancelled,
and the holders of the Allowed Old Warrants will not be entitled to, and shall
not receive or retain, any property or interest in property on account of such
Allowed Old Warrants.
C. SECURITIES TO BE ISSUED PURSUANT TO THE PLAN OF REORGANIZATION
1. New Credit Agreement
Pursuant to the Plan of Reorganization, on the Consummation
Date, Headway will enter into that certain Note Purchase and Revolving Credit
Agreement providing for (i) a revolving credit line of up to $7 million (the
"Revolver"), consisting of (x) commitments for cash borrowings of up to $5.4
million and (y) commitments for the replacement, extension or continuation of
existing letters of credit of up to $1.6 million, (ii) a tranche of term loans
in the aggregate principal amount of $8 million (the "Term Loans") and (iii)
payment in kind notes in the original aggregate principal amount of $11.6
15
million (the "PIK Notes"). Each of the cash borrowing portions of the Revolver,
Term Loans and the PIK Notes will be deemed fully funded on the Consummation
Date and will, in each case, represent a like amount of Headway's pre-petition
secured Obligations under the Old Credit Agreement.
A copy of the New Credit Facility has been filed with the
Bankruptcy Court as Exhibit C to the Plan of Reorganization Supplement.
2. New Convertible Subordinated Note
Pursuant to the Plan of Reorganization, on the Consummation
Date, Headway will enter into that $1 million 5% convertible subordinated note
due 2009 and (i) convertible at the option of the holders into 5% of the New
Common Stock, or (ii) convertible at the option of Reorganized Headway into 5%
of the New Common Stock, in the event of a sale of Reorganized Headway, a sale
of substantially all of Reorganized Headway's assets, or a liquidation or
subsequent bankruptcy of Reorganized Headway. The holders of the Old Senior
Subordinated Note Claims are receiving the foregoing distribution based upon,
among other reasons, such holders' agreement to release any claims they may have
against the Subsidiaries. A copy of the form of the New Convertible Subordinated
Note has been filed with the Court as Exhibit D to the Plan of Reorganization
Supplement.
3. New Common Stock
Pursuant to the Plan of Reorganization, on the Consummation
Date, 10 million shares of common stock of Headway (the "New Common Stock", and
together with the Revolver, Term Loans, PIK Notes, and New Convertible
Subordinated Notes, the "New Securities"), representing 100% of Headway's issued
and outstanding common stock, will be distributed to the Lenders, subject to
dilution of up to 5% by the New Convertible Subordinated Note.
The New Common Stock held by the Lenders and the New Common
Stock issuable upon conversion of the New Convertible Subordinated Note will be
subject to a Stockholders Agreement, a copy of which has been filed with the
Bankruptcy Court as Exhibit E to the Plan of Reorganization Supplement.
4. Securities Law Matters
(a) Issuance and Resale of New Securities Under the Plan of
Reorganization. Section 1145 of the Bankruptcy Code generally exempts from
registration under the Securities Act the offer or sale of a debtor's securities
under a chapter 11 plan if such securities are offered or sold in exchange for a
claim against, or equity interest in, such debtor. In reliance upon this
exemption, the New Securities generally will be exempt from the registration
requirements of the Securities Act, and state and local securities laws.
Accordingly, such securities may be resold without registration under the
Securities Act or other federal securities laws pursuant to the exemption
provided by Section 4(1) of the Securities Act, unless the holder is an
"underwriter" with respect to such securities, as that term is defined in the
16
Bankruptcy Code. In addition, such securities generally may be resold without
registration under state securities laws pursuant to various exemptions provided
by the respective laws of the several states. However, recipients of securities
issued under the Plan of Reorganization are advised to consult with their own
legal advisors as to the availability of any such exemption from registration
under state law in any given instance and as to any applicable requirements or
conditions to such availability.
Section 1145(b) of the Bankruptcy Code defines "underwriter" for
purposes of the Securities Act as one who (a) purchases a claim with a view to
distribution of any security to be received in exchange for the claim other than
in ordinary trading transactions, (b) offers to sell securities issued under a
plan for the holders of such securities, (c) offers to buy securities issued
under a plan from Persons receiving such securities, if the offer to buy is made
with a view to distribution, or (d) is a control Person of the issuer of the
securities.
Notwithstanding the foregoing, statutory underwriters may be
able to sell securities without registration pursuant to the resale limitations
of Rule 144 under the Securities Act which, in effect, permit the resale of
securities received by statutory underwriters pursuant to a chapter 11 plan,
subject to applicable volume limitations, notice and manner of sale
requirements, and certain other conditions. Parties who believe they may be
statutory underwriters as defined in section 1145 of the Bankruptcy Code are
advised to consult with their own legal advisors as to the availability of the
exemption provided by Rule 144.
(b) Listing. Headway's common stock is currently traded on the
American Stock Exchange under the symbol "HEA." Upon the Consummation Date,
however, Headway will no longer be a public company. Pursuant to the Plan of
Reorganization, Headway's common stock will be cancelled and the New Common
Stock will not be listed on the American Stock Exchange or any other nationally
recognized market or exchange. Accordingly, no assurance can be given that a
holder of New Common Stock will be able to sell such securities in the future or
as to the price at which any sale may occur.
(c) Legend. Pursuant to the Plan of Reorganization, certificates
evidencing shares of New Common Stock received by holders of at least 10% of the
outstanding New Common Stock will bear a legend substantially in the form below:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION
AND MAY NOT BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED
UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR UNLESS THE COMPANY RECEIVES AN OPINION
OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATION
OR QUALIFICATION IS NOT REQUIRED.
17
D. MEANS OF IMPLEMENTATION OF THE PLAN OF REORGANIZATION
1. Credit Facility
On the Consummation Date, without any requirement of further
action by the holders of Claims or Equity Interests in Headway, Reorganized
Headway will enter into the New Credit Agreement. For a description of the New
Credit Agreement, see subsection C.1 in this Section IV entitled "Securities to
Be Issued Pursuant to the Plan of Reorganization - New Debt." A copy of the New
Credit Agreement has been filed with the Bankruptcy Court and is annexed as
Exhibit C to the Plan of Reorganization Supplement.
2. New Convertible Subordinated Note
On the Consummation Date, without any requirement of further
action by the holders of Claims or Equity Interests in Headway, Reorganized
Headway will enter into the New Convertible Subordinated Note. For a description
of the New Convertible Subordinated Note, see subsection C.2 in this Section IV
entitled "Securities to Be Issued Pursuant to the Plan of Reorganization - New
Convertible Subordinated Note." A copy of the form of the New Convertible
Subordinated Note has been filed with the Bankruptcy Court and is annexed as
Exhibit D to the Plan of Reorganization Supplement.
3. Corporate Action Regarding Issuance of New Securities
The Plan of Reorganization provides that the issuance of the New
Securities by Reorganized Headway is authorized by the Plan of Reorganization
without the need for any further corporate action or without any further action
by a holder of Claims or Equity Interests in Headway. On the Consummation Date,
100% of the New Common Stock shall be issued to holders of the Allowed Secured
Credit Agreement Claims (or their designees).
4. Registration Rights Agreement and Stockholders Agreement
On the Consummation Date, the Registration Rights Agreement and
the Stockholders Agreement shall be executed and delivered by the parties
thereto.
5. General Unsecured Claims
On the Consummation Date, the holders of General Unsecured
Claims shall not receive or retain any property or interest in property on
account of their General Unsecured Claims.
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6. Cancellation of Existing Securities and Agreements
On the Consummation Date, the Old Credit Agreement, the Old
Senior Subordinated Note Documents, the Old Preferred Stock Interests, the Old
Common Stock Interests, the Old Warrants or any other agreements or commitments,
contractual or otherwise, obligating Headway to issue, transfer or sell Old
Preferred Stock Interests, Old Common Stock Interests, Old Warrants or any other
Equity Interests of Headway shall be cancelled. Except for purposes of
effectuating the distributions under this Plan of Reorganization on the
Consummation Date, the Old Indenture shall be cancelled.
7. General Corporate Action
(a) Restated Certificate of Incorporation and Restated Bylaws.
The Restated Certificate of Incorporation and Restated Bylaws shall be adopted
effective as of the Consummation Date. On or about the Consummation Date,
Reorganized Headway shall adopt the Restated Certificate of Incorporation and
file it with the Secretary of State of Delaware.
(b) Board of Directors of Reorganized Headway. On the
Consummation Date, the operation of Reorganized Headway shall become the general
responsibility of its Board of Directors, subject to, and in accordance with,
its certificate of incorporation and bylaws. The initial Board of Directors of
Reorganized Headway shall consist of five members (i) three of whom shall be
selected by the Required Lenders, (ii) one of whom shall be Barry S. Roseman,
Reorganized Headway's Chief Executive Officer and (iii) the fifth director shall
be an independent director acceptable to the Required Lenders. The names of the
directors that will comprise the Board of Directors of Reorganized Headway will
be filed with the Bankruptcy Court.
(c) Officers of Reorganized Headway. The selection of officers
of Reorganized Headway after the Consummation Date will be as provided in the
Restated Certificate of Incorporation and bylaws. The biographical information
on the executive officers of Reorganized Headway is set forth in Headway's
Annual Report on Form 10-K/A for the period ended December 31, 2002, a copy of
which is annexed as Exhibit 3 to this Disclosure Statement.
E. PROVISIONS GOVERNING DISTRIBUTIONS
1. Date of Distributions
Unless otherwise provided herein, any distributions and
deliveries to be made under the Plan of Reorganization will be made on the
Consummation Date or as soon as practicable thereafter. In the event that any
payment or act under the Plan of Reorganization is required to be made or
performed on a date that is not a business day, then the making of such payment
or the performance of such act may be completed on the next succeeding business
day, but will be deemed to have been completed as of the required date.
19
2. Disbursing Agent
In general, a disbursing agent is an entity designated to
administratively effect the distributions to be provided under a plan of
reorganization. Headway does not intend to set a bar date by which creditors and
equity holders must file proofs of claim or proofs of equity interest. In
addition, Headway does not anticipate designating a special disbursing agent. It
is anticipated that all distributions under the Plan of Reorganization will be
made by Reorganized Headway as disbursing agent. Headway reserves the right to
designate another entity as a disbursing agent on the Consummation Date. A
disbursing agent will not be required to give any bond or surety or other
security for the performance of its duties unless otherwise ordered by the
Bankruptcy Court. In the event that a disbursing agent is so otherwise ordered,
all costs and expenses of procuring any such bond or surety will be borne by
Reorganized Headway.
3. Surrender of Instruments
Plans of reorganization generally require a holder of an
instrument or security of a debtor to surrender such instrument or security
prior to receiving a new instrument or security in exchange therefore under a
plan of reorganization. This rule avoids disputes regarding who is the proper
recipient of instruments or securities under a plan of reorganization. Pursuant
to this rule, as a condition to receiving any distribution under the Plan of
Reorganization, each holder of an Old Senior Subordinated Note must surrender
such Old Senior Subordinated Note to Reorganized Headway or its designee. Any
holder of an Old Senior Subordinated Note that fails to (a) surrender such
instrument or (b) execute and deliver an affidavit of loss and/or indemnity
reasonably satisfactory to Reorganized Headway and furnish a bond in form,
substance and amount reasonably satisfactory to Reorganized Headway before the
first anniversary of the Consummation Date, shall be deemed to have forfeited
all rights and claims and may not participate in any distribution under the Plan
of Reorganization.
4. Compensation of Professionals
Each Person retained or requesting compensation in the
Reorganization Case pursuant to sections 330 or 503(b) of the Bankruptcy Code
will be required to file an application for allowance of final compensation and
reimbursement of expenses in the Reorganization Case on or before a date to be
determined by the Bankruptcy Court in the Confirmation Order or any other order
of the Bankruptcy Court. Objections to any application made under Section 7.4 of
the Plan of Reorganization will be filed on or before a date to be fixed and
determined by the Bankruptcy Court in the Confirmation Order or such other order
of the court.
5. Delivery of Distributions
Subject to Bankruptcy Rule 9010, all distributions to any holder
of an Allowed Claim will be made at the address of such holder as set forth on
the schedules of liabilities filed by Headway with the Bankruptcy Court or on
the books and records of Headway or its agents, unless Headway or Reorganized
20
Headway, as applicable, has been notified in writing of a change of address,
including, without limitation, by the filing of a proof of claim or interest by
such holder that contains an address for such holder different from the address
reflected on such schedules for such holder. In the event that any distribution
to any holder is returned as undeliverable, the disbursing agent will use
reasonable efforts to determine the current address of such holder, but no
distribution to such holder will be made unless and until the disbursing agent
has determined the then current address of such holder, at which time such
distribution will be made to such holder without interest; provided that such
distributions will be deemed unclaimed property under section 347(b) of the
Bankruptcy Code at the expiration of one year from the Consummation Date. After
such date, all unclaimed property or interest in property shall revert to
Reorganized Headway, and the claim of any other holder to such property or
interest in property will be discharged and forever barred.
6. Manner of Payment Under Plan of Reorganization
At the option of the disbursing agent, any cash payment to be
made under the Plan of Reorganization may be made by a check or wire transfer or
as otherwise required or provided in applicable agreements.
7. Fractional Shares
No fractional shares of New Common Stock or cash in lieu thereof
will be distributed. For purposes of distribution, fractional shares of New
Common Stock shall be rounded up to the next whole number.
8. Setoffs and Recoupment
Headway may, but shall not be required to, set off against, or
recoup from, any claim and the payments to be made pursuant to the Plan of
Reorganization in respect of such claim (other than Secured Credit Agreement
Claims), any claims of any nature whatsoever that Headway may have against the
claimant, but neither the failure to do so nor the allowance of any claim under
the Plan of Reorganization will constitute a waiver or release by Headway of any
such claim it may have against such claimant.
9. Distributions After Consummation Date
Distributions made after the Consummation Date to holders of
Disputed Claims that are not Allowed Claims as of the Consummation Date but
which later become Allowed Claims will be deemed to have been made on the
Consummation Date.
10. Rights and Powers of Disbursing Agent
(a) Powers of the Disbursing Agent. The Disbursing Agent will be
empowered to (i) effect all actions and execute all agreements, instruments and
other documents necessary to perform its duties under the Plan of
Reorganization, (ii) make all distributions contemplated by the Plan of
Reorganization, (iii) employ professionals to represent it with respect to its
responsibilities and (iv) exercise such other powers as may be vested in the
21
Disbursing Agent by order of the Bankruptcy Court, pursuant to the Plan of
Reorganization, or as deemed by the Disbursing Agent to be necessary and proper
to implement the provisions of the Plan of Reorganization.
(b) Expenses Incurred On or After the Consummation Date. Except
as otherwise ordered by the Bankruptcy Court, the amount of any reasonable fees
and expenses incurred by the Disbursing Agent on or after the Consummation Date
(including, without limitation, taxes) and any reasonable compensation and
expense reimbursement claims (including, without limitation, reasonable attorney
fees and expenses) made by the Disbursing Agent, will be paid in Cash by
Reorganized Headway.
11. Exculpation
Headway, Reorganized Headway, the Lenders, the Agent, the
Committee, if any, the holders of the Old Senior Subordinated Note Claims, the
holders of Old Preferred Stock Interests, the Old Warrants, the Old Indenture
Trustee and the Disbursing Agent, and their respective members, officers,
directors, employees and agents (including any attorneys, financial advisors,
investment bankers and other professionals retained by such Persons) shall have
no liability to any holder of a Claim or Equity Interest or any other Person for
any act or omission in connection with, or arising out of, the pursuit of
approval of the Disclosure Statement or the Plan of Reorganization or the
solicitation of votes for, or confirmation of, the Plan of Reorganization, the
consummation of the Plan of Reorganization, or the administration of the Plan of
Reorganization or the property to be distributed under the Plan of
Reorganization, except for willful misconduct or gross negligence as determined
by a Final Order of the Bankruptcy Court and, in all respects, shall be entitled
to rely upon the advice of counsel with respect to their duties and
responsibilities under the Plan of Reorganization.
12. Exemption from Securities Law
The issuance of the New Common Stock, the notes to be issues
under the New Credit Agreement and the New Convertible Subordinated Note
pursuant to the Plan of Reorganization shall be exempt from any securities laws
registration requirements to the fullest extent permitted by section
1145(a)(1)(A) of the Bankruptcy Code and Section (3)(a)(7) of the Securities
Act.
F. PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER PLAN OF REORGANIZATION
1. Disputed Claims/Process
Headway does not intend to set a bar date by which holders of
Claims and Equity Interests must file proofs of claim and proofs of equity
interest. Headway may elect at its sole option, to object under section 502 of
the Bankruptcy Code to any proof of claim filed by or on behalf of a holder of a
Claim, or to any Claim that is scheduled by the Debtor as contingent,
unliquidated or disputed.
22
2. Objections to Claims
Except insofar as a Claim is Allowed under the Plan of
Reorganization, Reorganized Headway shall be entitled to object to Claims. Any
objections to Claims shall be served and filed on or before the latest of (a)
one hundred and twenty (120) days after the Consummation Date, (b) forty-five
(45) days after a Claim is filed with the Bankruptcy Court or (c) such date as
may be fixed by the Bankruptcy Court.
3. No Distributions Pending Allowance
If a holder of a Claim files a proof of Claim and Headway
objects to such Claim, no payment or distribution provided under the Plan of
Reorganization will be made on account of such Claim unless and until such
disputed claim becomes an Allowed Claim.
4. Distributions After Allowance
To the extent that a Disputed Claim or Disputed Equity Interest
ultimately becomes an Allowed Claim or Allowed Equity Interest, distributions
(if any) shall be made to the holder of such Allowed Claim or Allowed Equity
Interest in accordance with the provisions of the Plan of Reorganization. As
soon as practicable after the date that the order or judgment of the Bankruptcy
Court allowing any Disputed Claim or Disputed Equity Interest becomes a final
order, the Disbursing Agent shall provide to the holder of such Claim or Equity
Interest the distribution (if any) to which such holder is entitled under the
Plan of Reorganization.
G. PROVISIONS GOVERNING EXECUTORY CONTRACTS AND UNEXPIRED LEASES
1. Assumed Contracts and Leases
Except as otherwise provided herein, or in any contract,
instrument, release, indenture, or other agreement or document entered into in
connection with this Plan of Reorganization, as of the Consummation Date,
Headway shall be deemed to have assumed each executory contract and unexpired
lease to which it is a party, unless such contract or lease (i) was previously
assumed or rejected by Headway, (ii) previously expired or terminated pursuant
to its own terms, (iii) is the subject of a motion to reject filed on or before
the Confirmation Date or (iv) is set forth in a schedule, as an executory
contract or unexpired lease to be rejected, filed as part of the Plan of
Reorganization. The Confirmation Order shall constitute an order of the
Bankruptcy Court under sections 365 and 1123(b) of the Bankruptcy Code approving
the contract and lease assumptions or rejections described above, as of the
Consummation Date.
Each executory contract and unexpired lease that is assumed and
relates to the use, ability to acquire, or occupancy of real property shall
include (a) all modifications, amendments, supplements, restatements, or other
agreements made directly or indirectly by any agreement, instrument, or other
document that in any manner affect such executory contract or unexpired lease
and (b) all executory contracts or unexpired leases appurtenant to the premises,
including all easements, licenses, permits, rights, privileges, immunities,
23
options, rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vaults, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights in rem related to such premises, unless any
of the foregoing agreements has been rejected pursuant to an order of the
Bankruptcy Court.
2. Payments Related to Assumption of Contracts and Leases
Any monetary amounts by which any executory contract and
unexpired lease to be assumed hereunder is in default shall be satisfied, under
section 365(b) (1) of the Bankruptcy Code, by Headway, subject to the approval
of the Required Lenders (not to be unreasonably withheld). If there is a dispute
regarding (i) the nature or amount of any Cure, (ii) the ability of Headway or
any assignee to provide "adequate assurance of future performance" (within the
meaning of section 365 of the Bankruptcy Code) under the contract or lease to be
assumed or (iii) any other matter pertaining to assumption, Cure shall occur
following the entry of a Final Order of the Bankruptcy Court resolving the
dispute and approving the assumption or assumption and assignment, as the case
may be.
3. Rejected Contracts and Leases
Except as otherwise provided herein or in any contract,
instrument, release, indenture or other agreement or document entered into in
connection with the Plan of Reorganization, none of the executory contracts and
unexpired leases to which Headway is a party shall be rejected hereunder;
provided, however, that Headway reserves the right, at any time prior to the
Confirmation Date, to seek to reject any executory contract or unexpired lease
to which Headway is a party.
4. Claims Based on Rejection of Executory Contracts or Unexpired
Leases
All Claims arising out of the rejection of executory contracts
and unexpired leases must be served upon Headway and its counsel within 30 days
after the earlier of (i) the date of entry of an order of the Bankruptcy Court
approving such rejection or (ii) the Confirmation Date. Any Claims not filed
within such times shall be forever barred from assertion against Headway, its
Estate, and its property.
5. Compensation and Benefit Plans and Treatment of Retirement Plan
Except and to the extent previously assumed by an order of the
Bankruptcy Court, on or before the Confirmation Date, all employee compensation
and Benefit Plans of Headway, including Benefit Plans and programs subject to
sections 1114 and 1129(a) (13) of the Bankruptcy Code, entered into before or
after the Petition Date and not since terminated, shall be deemed to be, and
shall be treated as if they were, executory contracts that are to be assumed
hereunder. Headway's obligations under such plans and programs shall survive
confirmation of the Plan of Reorganization, except for (i) executory contracts
or Benefit Plans specifically rejected pursuant to the Plan of Reorganization
(to the extent such rejection does not violate sections 1114 and 1129(a) (13) of
the Bankruptcy Code) and (ii) such executory contracts or employee benefit plans
24
as have previously been rejected, are the subject of a motion to reject as of
the Confirmation Date, or have been specifically waived by the beneficiaries of
any employee benefit plan or contract.
H. CONDITIONS PRECEDENT TO CONSUMMATION DATE
1. Conditions Precedent to Consummation Date of Plan of
Reorganization
The occurrence of the Consummation Date of the Plan of
Reorganization is subject to satisfaction of the following conditions precedent:
(a) Confirmation Order. The Clerk of the Bankruptcy Court shall
have entered the Confirmation Order and the same shall have become a
Final Order.
(b) New Credit Agreement Documents. The New Credit Agreement
Documents shall have been executed and delivered and all conditions
precedent to the effectiveness of such documents shall have been
satisfied or waived in accordance with the terms hereof.
(c) New Convertible Subordinated Note. The New Convertible
Subordinated Note, and any related documents, shall have been executed
and delivered and all conditions precedent to the effectiveness of
such documents shall have been satisfied or waived.
(d) Registration Rights Agreement and Stockholders Agreement. The
Registration Rights Agreement shall have been executed and delivered
by Reorganized Headway and the Stockholders Agreement shall have been
executed and delivered by Reorganized Headway, the Lenders and the
holders of the New Convertible Subordinated Note.
(e) Execution and Delivery of Other Documents. All other actions
and all agreements, instruments or other documents necessary to
implement the terms and provisions of the Plan of Reorganization shall
have been effected.
2. Waiver of Conditions Precedent
Each of the conditions precedent in Section 10.1 of the Plan of
Reorganization may be waived, in whole or in part, by Headway. None of the
conditions precedent in Section 10.1 of the Plan of Reorganization may be waived
without prior written consent of the Required Lenders, which consent shall not
be unreasonably withheld.
I. EFFECT OF CONFIRMATION
1. Vesting of Assets
On the Consummation Date, Headway, its properties and interests
in property and its operations shall be released from the custody and
25
jurisdiction of the Bankruptcy Court, and the estate of Headway, as Debtor,
shall vest in Reorganized Headway. From and after the Consummation Date,
Reorganized Headway may operate its business and the business of its
Subsidiaries and may use, acquire and dispose of property free of any
restrictions of the Bankruptcy Code or the Bankruptcy Rules, subject to the
terms and conditions of the Plan of Reorganization.
2. Binding Effect
Except as otherwise provided in section 1141(d)(3) of the
Bankruptcy Code and subject to the occurrence of the Consummation Date, on and
after the Confirmation Date, the provisions of the Plan of Reorganization will
bind any holder of a Claim against, or Equity Interest in, Headway and such
holder's respective successors and assigns, whether or not the Claim or Equity
Interest of such holder is impaired under the Plan of Reorganization and whether
or not such holder has accepted the Plan of Reorganization.
3. Discharge of Headway
Except to the extent otherwise provided in the Plan of
Reorganization, the treatment of all Claims against or Equity Interests in
Headway under the Plan of Reorganization shall be in exchange for and in
complete satisfaction, discharge and release of, all Claims against or Equity
Interests in Headway of any nature whatsoever, known or unknown, including,
without limitation, any interest accrued or expenses incurred thereon from and
after the Petition Date, or against its Estate or properties or interests in
property. Except as otherwise provided in the Plan of Reorganization, upon the
Consummation Date, all Claims against and Equity Interests in Headway will be
satisfied, discharged and released in full exchange for the consideration
provided under the Plan of Reorganization. Except as otherwise provided in the
Plan of Reorganization, all entities shall be precluded from asserting against
Headway or Reorganized Headway or their respective properties or interests in
property, any other Claims based upon any act or omission, transaction or other
activity of any kind or nature that occurred prior to the Consummation Date.
4. Term of Injunctions or Stays
Unless otherwise provided, all injunctions or stays arising
under or entered during the Reorganization Case under sections 105 or 362 of the
Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, will
remain in full force and effect until the Consummation Date.
5. Indemnification Obligations
Subject to the occurrence of the Consummation Date, the
obligations of Headway as of the Petition Date to indemnify, defend, reimburse
or limit the liability of directors or officers who were directors or officers
of Headway, on or after the Petition Date, respectively, against any claims or
causes of action as provided in Headway's certificate of incorporation, bylaws
or applicable state law, shall survive confirmation of the Plan of
Reorganization, remain unaffected thereby and not be discharged, irrespective of
26
whether such indemnification, defense, reimbursement or limitation is owed in
connection with an event occurring before or after the Petition Date.
6. Limited Release
On the Consummation Date, Headway, on behalf of itself and its
Subsidiaries, hereby releases the officers and directors of Headway and its
Subsidiaries holding office at any time prior to the Consummation Date, the
Lenders, the Agent, the Committee, if any, the Indenture Trustee, each of the
holders of Old Senior Subordinated Notes, Old Preferred Stock Interests and Old
Warrants and each of their respective agents, employees, advisors (including any
attorneys, financial advisors, investment bankers and other professionals
retained by such Persons or entities), affiliates and representatives from any
and all claims, debts, obligations, rights, suits, damages, actions, causes of
action, remedies, and liabilities whatsoever, whether known or unknown, foreseen
or unforeseen, existing as of the Consummation Date or thereafter arising, in
law, at equity, or otherwise, that Headway, or any of its Subsidiaries, would
have been legally entitled to assert in its own right (whether individually or
collectively) or that any holder of a Claim or Equity Interest or other Person
or entity would have been able to assert on behalf of Headway or any of its
Subsidiaries, based in whole or in part upon any act or omission, transaction,
agreement, event, or other occurrence taking place on or before the Consummation
Date. On the Consummation Date, the Lenders, the Agent, the Committee, if any,
the Indenture Trustee, each of the holders of Old Senior Subordinated Notes, Old
Preferred Stock Interests and Old Warrants and each of their respective agents,
employees, advisors (including any attorneys, financial advisors, investment
bankers and other professionals retained by such Persons or entities),
affiliates and representatives (the "Releasing Parties") hereby release Headway
and the officers and directors of Headway and its Subsidiaries holding office at
any time prior to the Consummation Date and each of their respective agents,
employees, advisors (including any attorneys, financial advisors, investment
bankers and other professionals retained by such Persons or entities),
affiliates and representatives from any and all claims, debts, obligations,
rights, suits, damages, actions, causes of action, remedies, and liabilities
whatsoever, whether known or unknown, foreseen or unforeseen, existing as of the
Consummation Date or thereafter arising, in law, at equity, or otherwise, that
the Releasing Parties would have been legally entitled to assert in their own
right (whether individually or collectively) or that any holder of a Claim or
Equity Interest or other Person or entity would have been able to assert on
behalf of Headway or any of its Subsidiaries, based in whole or in part upon any
act or omission, transaction, agreement, event, or other occurrence taking place
on or before the Consummation Date. Nothing herein shall be deemed to release
any rights, claims or interests that any Person may be receiving or retaining
pursuant to the Plan of Reorganization on or after the Consummation Date.
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J. WAIVER OF CLAIMS
1. Avoidance Actions
Effective as of the Consummation Date, Headway will waive the
right to prosecute any avoidance or recovery actions under sections 545, 547,
548, 549, 550, 551 and 553 of the Bankruptcy Code that belong to Headway as
debtor or debtor in possession.
K. RETENTION OF JURISDICTION
The Bankruptcy Court will have exclusive jurisdiction of all
matters arising out of, or related to, the Reorganization Case and the Plan of
Reorganization pursuant to, and for the purposes of, sections 105(a) and 1142 of
the Bankruptcy Code and for, among other things, the following purposes:
(a) To hear and determine pending applications for the assumption
or rejection of executory contracts or unexpired leases and the
allowance of claims resulting therefrom;
(b) To determine any and all adversary proceedings, applications
and contested matters;
(c) To ensure that distributions to holders of Allowed Claims are
accomplished as provided in the Plan of Reorganization;
(d) To hear and determine any timely objections to administrative
expense claims or to proofs of claim and equity interests, including,
without limitation, any objections to the classification of any Claim
or Equity Interest, and to allow or disallow any Disputed Claim or
Disputed Equity Interest, in whole or in part;
(e) To enter and implement such orders as may be appropriate in
the event the Confirmation Order is for any reason stayed, revoked,
modified or vacated;
(f) To issue such orders in aid of execution of the Plan of
Reorganization, to the extent authorized by section 1142 of the
Bankruptcy Code;
(g) To consider any amendments to or modifications of the Plan of
Reorganization, or to cure any defect or omission, or reconcile any
inconsistency in any order of the Bankruptcy Court, including, without
limitation, the Confirmation Order;
(h) To hear and determine all applications of retained
professionals under sections 330, 331 and 503(b) of the Bankruptcy
Code for awards of compensation for services rendered and
reimbursement of expenses incurred prior to the Confirmation Date;
28
(i) To hear and determine disputes arising in connection with the
interpretation, implementation or enforcement of the Plan of
Reorganization, the Confirmation Order, any transactions or payments
contemplated by the Plan of Reorganization or any agreement,
instrument or other document governing or relating to any of the
foregoing;
(j) To hear and determine matters concerning state, local and
federal taxes in accordance with sections 346, 505 and 1146 of the
Bankruptcy Code;
(k) To hear any other matter not inconsistent with the Bankruptcy
Code;
(l) To hear and determine all disputes involving the existence,
scope and nature of the discharges granted under Section 11.3 of the
Plan of Reorganization;
(m) To issue injunctions and effect any other actions that may be
necessary or desirable to restrain interference by any entity with the
consummation or implementation of the Plan of Reorganization; and
(n) To enter a final decree closing the Reorganization Case.
L. MISCELLANEOUS PROVISIONS
1. Payment of Statutory Fees
All fees payable under section 1930, chapter 123, title 28,
United States Code, as determined by the Bankruptcy Court at the Confirmation
Hearing, will be paid on the Consummation Date. Any such fees accrued after the
Consummation Date will constitute an Allowed Administrative Expense Claim and be
treated in accordance with the Plan of Reorganization.
2. Benefit Plans
Subject to the occurrence of the Consummation Date, all Benefit
Plans will survive confirmation of the Plan of Reorganization.
3. Administrative Expenses Incurred After the Confirmation Date
Subject to the terms and conditions of any interim or Final
Order of the Bankruptcy Court authorizing the use of cash collateral,
administrative expenses incurred by Headway or Reorganized Headway after the
Confirmation Date, including (without limitation) claims for professionals' fees
and expenses, shall not be subject to application and may be paid by Headway or
Reorganized Headway, as the case may be, in the ordinary course of business and
without further Bankruptcy Court approval.
29
4. Section 1125(e) of the Bankruptcy Code
As of the Confirmation Date, Headway shall be deemed to have
solicited acceptances of the Plan of Reorganization in good faith and in
compliance with the applicable provisions of the Bankruptcy Code. Headway, the
Lenders, the Agent, each of the holders of Old Senior Subordinated Note Claims
and Old Preferred Stock Interests (and each of their respective affiliates,
agents, directors, officers, employees, investment bankers, financial advisors,
attorneys and other professionals) have participated in good faith and in
compliance with the applicable provisions of the Bankruptcy Code in the offer
and issuance of the securities under the Plan of Reorganization. Accordingly,
such entities and individuals will not be liable at any time for the violation
of any applicable law, rule or regulation governing the solicitation of
acceptances or rejections of the Plan of Reorganization or the offer and
issuance of the securities under the Plan of Reorganization.
5. Compliance with Tax Requirements
In connection with the consummation of the Plan of
Reorganization, Headway shall comply with all withholding and reporting
requirements imposed by any taxing authority, and all distributions under the
Plan of Reorganization shall be subject to such withholding and reporting
requirements.
6. Dissolution of Committee
On the Consummation Date, the Committee (to the extent that
there is one) shall be dissolved and the members thereof shall be released and
discharged of and from all further authority, duties, responsibilities, and
obligations related to and arising from and in connection with the
Reorganization Case, and the retention or employment of the Committee's
attorney, accountants, and other agents, shall terminate.
7. Exemption from Transfer Taxes
Pursuant to Section 1146(c) of the Bankruptcy Code, the
issuance, transfer or exchange of notes or equity securities under or in
connection with the Plan of Reorganization, 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 of Reorganization,
including the New Credit Agreement Documents, any merger agreements or
agreements of consolidation, deeds, bills of sale or assignments executed in
connection with any of the transactions contemplated under the Plan of
Reorganization shall not be subject to any stamp, real estate transfer, mortgage
recording or other similar tax.
8. Severability of Plan Provisions
In the event that, prior to the Confirmation Date, any term or
provision of the Plan of Reorganization is held by the Bankruptcy Court to be
invalid, void or unenforceable, the Bankruptcy Court shall have the power to
30
alter and interpret such term or provision to make it valid or enforceable to
the maximum extent practicable, consistent with the original purpose of the term
or provision held to be invalid, void or unenforceable, and such term or
provision shall then be applicable as altered or interpreted. Notwithstanding
any such holding, alteration or interpretation, the remainder of the terms and
provisions of the Plan of Reorganization shall remain in full force and effect
and shall in no way be affected, impaired or invalidated by such holding,
alteration or interpretation. The Confirmation Order shall constitute a judicial
determination and shall provide that each term and provision of the Plan of
Reorganization, as it may have been altered or interpreted in accordance with
the foregoing, is valid and enforceable in accordance with its terms. To the
extent that action under the Plan of Reorganization affects the treatment of the
Secured Credit Agreement Claims, such action shall require the consent of the
Required Lenders, which consent shall not be unreasonably withheld.
9. Governing Law
Except to the extent that the Bankruptcy Code or other federal
law is applicable, or to the extent an Exhibit to the Plan of Reorganization or
Plan of Reorganization Supplement provides otherwise (in which case the
governing law specified therein shall be applicable to such Exhibit), the
rights, duties and obligations arising under the Plan of Reorganization shall be
governed by, and construed and enforced in accordance with, the laws of the
State of New York without giving effect to the principles of conflict of laws.
V.
PROJECTIONS AND VALUATION ANALYSIS
A. CONSOLIDATED CONDENSED PROJECTED FINANCIAL STATEMENTS
1. Responsibility for and Purpose of the Projections
As a condition to confirmation of a plan, the Bankruptcy Code
requires, among other things, that the Bankruptcy Court determine that
confirmation is not likely to be followed by the liquidation or the need for
further financial reorganization of the debtor. In connection with the
development of the Plan of Reorganization, and for purposes of determining
whether the Plan of Reorganization satisfies this feasibility standard,
Headway's management has analyzed the ability of Headway to meet its obligations
under the Plan of Reorganization and retain sufficient liquidity and capital
resources to conduct its business.
The Projections should be read in conjunction with Section VI
below, entitled "CERTAIN FACTORS AFFECTING HEADWAY" and with the assumptions,
qualifications and footnotes to tables containing the Projections set forth
herein, the historical consolidated financial information (including the notes
and schedules thereto) and the other information set forth in Headway's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 and Headway's
Quarterly Report on Form 10-Q for the period ended March 31, 2003 annexed hereto
as Exhibits 2 and 4, the full texts of which are incorporated herein by
31
reference, and the Selected Financial Data appearing in Item 6 of the Form 10-K.
The Projections were prepared in good faith based upon assumptions believed to
be reasonable and applied in a manner consistent with past practice.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO COMPLYING WITH
THE GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. HEADWAY'S INDEPENDENT ACCOUNTANTS,
ERNST & YOUNG LLP, HAS NEITHER COMPILED NOR EXAMINED THE ACCOMPANYING
PROSPECTIVE FINANCIAL INFORMATION TO DETERMINE THE REASONABLENESS THEREOF AND,
ACCORDINGLY, HAS NOT EXPRESSED AN OPINION OR ANY OTHER FORM OF ASSURANCE WITH
RESPECT THERETO.
HEADWAY DOES NOT, AS A MATTER OF COURSE, PUBLISH ITS PROJECTIONS
OF ITS ANTICIPATED FINANCIAL POSITION, RESULTS OF OPERATIONS OR CASH FLOWS.
ACCORDINGLY, HEADWAY DOES NOT INTEND, AND DISCLAIMS ANY OBLIGATION TO, (A)
FURNISH UPDATED PROJECTIONS TO HOLDERS OF CLAIMS OR EQUITY INTERESTS PRIOR TO
THE CONSUMMATION DATE OR TO HOLDERS OF NEW SECURITIES OR ANY OTHER PARTY AFTER
THE CONSUMMATION DATE, (B) INCLUDE SUCH UPDATED INFORMATION IN ANY DOCUMENTS
THAT MAY BE REQUIRED TO BE FILED WITH THE SEC, OR (C) OTHERWISE MAKE SUCH
UPDATED INFORMATION PUBLICLY AVAILABLE.
THE PROJECTIONS PROVIDED IN THE DISCLOSURE STATEMENT HAVE BEEN
PREPARED EXCLUSIVELY BY HEADWAY'S MANAGEMENT. THESE PROJECTIONS, WHILE PRESENTED
WITH NUMERICAL SPECIFICITY, ARE NECESSARILY BASED ON A VARIETY OF ESTIMATES AND
ASSUMPTIONS WHICH, THOUGH CONSIDERED REASONABLE BY MANAGEMENT, MAY NOT BE
REALIZED, AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND HEADWAY'S
CONTROL. HEADWAY CAUTIONS THAT NO REPRESENTATIONS CAN BE MADE AS TO THE ACCURACY
OF THESE FINANCIAL PROJECTIONS OR TO REORGANIZED HEADWAY'S ABILITY TO ACHIEVE
THE PROJECTED RESULTS. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE, AND
EVENTS AND CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE DATE ON WHICH THESE
PROJECTIONS WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED OR MAY BE
UNANTICIPATED, AND THUS MAY AFFECT FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY
ADVERSE MANNER. THE PROJECTIONS, THEREFORE, MAY NOT BE RELIED UPON AS A GUARANTY
OR OTHER ASSURANCE OF THE ACTUAL RESULTS THAT WILL OCCUR.
32
THE FOLLOWING ASSUMPTIONS AND RESULTANT COMPUTATIONS WERE MADE
SOLELY FOR PURPOSES OF PREPARING THE PROJECTIONS. REORGANIZED HEADWAY WILL BE
REQUIRED TO ESTIMATE HEADWAY'S REORGANIZATION VALUE, THE FAIR VALUE OF ITS
ASSETS, AND ITS ACTUAL LIABILITIES AS OF THE CONSUMMATION DATE. SUCH
DETERMINATION WILL BE BASED UPON THE FAIR VALUES AS OF THAT DATE, WHICH COULD BE
MATERIALLY GREATER OR LOWER THAN THE VALUES ASSUMED IN THE FOREGOING ESTIMATES.
IN ALL EVENTS, THE REORGANIZATION VALUE, AS WELL AS THE DETERMINATION OF THE
FAIR VALUE OF REORGANIZED HEADWAY'S ASSETS AND THE DETERMINATION OF ITS ACTUAL
LIABILITIES, WILL BE MADE AS OF THE CONSUMMATION DATE. ALTHOUGH HEADWAY EXPECTS
TO UTILIZE A CONSISTENT METHODOLOGY, THE AMOUNTS OF ANY OR ALL OF THE FOREGOING
ESTIMATES AS ASSUMED IN THE PROJECTIONS, AS COMPARED WITH THE ACTUAL AMOUNTS
THEREOF AS OF THE CONSUMMATION DATE, MAY BE MATERIAL.
2. Summary of Significant Assumptions
The projections are based on and assume the successful
implementation of management's business plan, and include assumptions with
respect to the future performance of Headway, the performance of the industry,
general business and economic conditions and other matters, many of which are
beyond the control of management. Therefore, while the projections are
necessarily presented with numerical specificity, the actual results achieved
during the projection period will vary from the projected results, and may vary
substantially. No representation can be or is being made with respect to the
accuracy of the projections or the ability of Headway to achieve the projected
results. While management believes that the assumptions which underlie the
projections are reasonable in light of current circumstances and in light of the
information available, holders of claims and interests must make their own
determinations as to the reasonableness of the assumptions and the reliability
of the projections in deciding whether to vote to accept the Plan of
Reorganization.
Additional information concerning the assumptions underlying the
projections is as follows:
(a) Plan Terms and Consummation. The projections assume a
Consummation Date as of September 30, 2003, with allowed claims and
equity interests treated in accordance with the treatment provided in
the Plan of Reorganization with respect to such allowed claims and
equity interests. With respect to the projection of expenses to be
incurred as a result of the Reorganization Case, if the Consummation
Date does not occur by September 30, 2003, additional bankruptcy
expenses will be incurred until such time as a plan of reorganization
is confirmed. These expenses could significantly impact Headway's
results of operations and cash flows.
33
(b) Assumptions Preceding the Consummation Date. The 2003 Income
Statement projection includes 5 months of actual results, excluding
discontinued operations and restructuring costs. The business is
projected to continue at its current level for the period from May
through the consummation date.
(c) General Economic Conditions. The projections were prepared
assuming that economic conditions in the markets served by Headway do
not differ markedly over the next year from current economic
conditions. Inflation in revenues and costs are assumed to remain
relatively low until 2005, when an economic recovery is projected to
begin.
(d) Revenues. The projections for the remainder of 2003 and for
the year 2004 assume that the economic recovery does not materialize
during that time and, therefore, the level of business remains at its
current level. An economic recovery is projected to begin at the end
of 2004. As a result, the Company anticipates business recovery in
2005, with revenue growth of approximately 13% in 2005 and an
additional 13% revenue growth in 2006. If the economic recovery does
not materialize as projected, actual results could vary significantly
during these years.
(e) Gross Margin. The annual gross margin percentage (before
workers compensation costs) is projected to remain constant at
approximately 13.3% of revenues. This assumes a relatively consistent
mix of business and no further margin pressure from clients. Gross
margin percentages are typically lower in the beginning of the year,
when the Company's temporary employees have not yet reached their
statutory wage caps, resulting in a higher payroll tax rate. As caps
are met, the payroll tax rate declines and gross margins improve in
the later quarters of the year. This seasonal payroll tax effect has
been taken into account in the projections.
(f) Workers' Compensation. The Company's employees are covered
under a guaranteed cost policy under which Headway pays an annual
premium determined by the level of payroll in each state and in each
workers compensation job code. The costs have been projected assuming
that Headway continues to maintain this type of policy. The
projections assume that the workers compensation premiums are
approximately 2.4% of the direct wages, which is consistent with the
current experience. If premiums increase in states where the Company
does business, the actual results could vary.
(g) Salaries. Salaries of internal staff were projected for the
remainder of 2003 using the Company's current run-rate and taking into
account some further reductions associated with the closing of the
Company's subsidiary in Montebello, California. In 2004, modest salary
increases were assumed with no significant additions or reductions to
staffing levels. In 2005 and 2006, staffing levels are projected to
increase to accommodate the growth in the business.
34
(h) Commissions. Commissions paid to sales people are generally
calculated as a percentage of gross margin (before the impact of
workers compensation). For the projection period, commissions are
projected to remain at approximately 10.7% of gross margin before
workers' compensation costs.
(i) Employee Benefits. Employee benefits costs are projected to
remain stable at a rate of 6.9% of salaries.
(j) Advertising. Advertising expense is directly correlated to
revenue growth and is projected to increase accordingly.
(k) Rent. The projections assume that the Company maintains its
existing locations, with the exception of office closures in Texas,
Connecticut and Florida. Annual escalations are projected in
accordance with the terms of the various leases.
(l) Insurance. The projections assume aggregate insurance costs
of $750,000 for the year 2004, with modest increases for each of the
years 2005 and 2006.
(m) Professional Fees. The Company incurs professional fees for
accounting, legal and consulting work. Accounting fees include the
cost of an annual audit, as well as the costs pertaining to the
preparation of the Company's federal and state income tax returns.
These accounting costs are projected to decline in 2004 as a result of
the change in the Company's status from a public to private company.
Legal and consulting fees are projected with modest increases. Costs
associated with this restructuring are not included, either in the
five months of actual results or in the projected results but are
reflected in the projected balance sheets and statements of cash
flows.
(n) Travel and Entertainment. These expenses are typically
correlated to the level of business. Accordingly, they are projected
to increase at a rate comparable to the projected increase in sales.
(o) Bad Debt. Bad debt expense is projected at a rate of 0.13% of
revenue, which is consistent with the Company's experience over the
past few years. The projected rate is expected to remain constant
through 2006.
(p) Interest Expense. The interest expense projections were
prepared based on the terms of the new debt. Market interest rates
were projected to remain at their current levels.
(q) Income Taxes. As of December 31, 2002 the Company did not
have any net operating loss carryforwards due to the fact that the
Company was entitled to carryback its net operating loss carryforwards
to offset income from its prior taxable year. The projections assume
that Reorganized Headway will also not have the benefit of any net
operating loss carryforwards for income tax purposes as any net
operating losses will be used to offset debt forgiveness.
35
Nevertheless, the projections assume that the Company will not be a
taxpayer during the projection period because, although the Company no
longer amortizes goodwill for book purposes, the Company will continue
to do so for tax purposes. Accordingly, the Company anticipates that
its net income in each of the projected years will be more than offset
by the amount of the annual amortization of intangibles. The Company's
ability to offset its net income by the amount of the annual
amortization of intangibles is based on the assumption that (i)
qualified (so-called "old and cold") creditors of the Company receive,
in respect of their claims, at least 50% of the vote and value of the
stock of Reorganized Headway pursuant to a confirmed chapter 11 plan
and (ii) that .there will not be a change of control in the Company
for the two years following the date of consummation of such plan.
(r) EBITDA. EBTDA is not a term recognized by GAAP. For purposes
of these projections EBITDA is defined as earnings before interest
expense, income tax provision, depreciation and amortization,
reorganization items and extraordinary items.
(s) Capital Expenditures. The projected capital expenditures are
in line with historical amounts. These expenditures are primarily for
computer equipment and software related to operating the Company's
business.
(t) Fresh Start Accounting. The projections have been prepared
using the basic principles of "fresh start" accounting for periods
after September 30, 2003. These principles are contained in the
American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code." Under "fresh start" accounting principles,
Headway will determine the reorganization value of the reorganized
company at the Consummation Date. This value will be allocated, based
on estimated fair market values, to specific assets, and Headway will
record an intangible asset equal to the amount, if any, by which the
reorganization value exceeds amounts so allocable to identifiable
assets.
As of the Consummation Date, the Company will not recognize the
deferred tax assets related to the future income tax deductions for
amortization of the intangibles because the Company does not consider
the realization of the deferred tax assets to be more likely than not
in accordance with SFAS No. 109, "Accounting for Income Taxes."
The provision for income taxes in the accompanying projections
for all periods after the Consummation Date reflects the Company's
statutorily computed tax provision without the benefit of amortization
of the intangibles as required by fresh start accounting. The tax
savings realized resulting from amortization of the intangibles for
income tax purposes only is reflected as an addition to equity
(additional paid in capital) in the accompanying projections after the
Consummation Date.
36
(u) Reorganization Value. For purposes of this Disclosure
Statement and in order to prepare the projections, management has
estimated the reorganization value of Reorganized Headway as of
September 30, 2003 to be approximately $26.0 million. See subsection B
below, entitled "Valuation."
(v) Working Capital. Components of working capital are projected
on the basis of historic patterns applied to projected levels of
operation.
3. Special Note Regarding Forward-Looking Statements
Some matters discussed herein contain forward-looking statements
that are subject to certain risks, uncertainties or assumptions and may be
affected by certain other factors which may impact future results and financial
condition". In some cases, you can identify forward-looking statements by
terminology such as "may," "should," "could," "expects," "plans," "projected,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continues,"
or the negative of these terms or other comparable terminology. In addition,
except for historical facts, the "Projections and Valuation Analysis" provided
in Section V herein, and the "Certain Factors Affecting Headway" provided in
Section VI herein, should be considered forward-looking statements. Should one
or more of these risks, uncertainties or other factors materialize, or should
underlying assumptions prove incorrect, actual results, performance or
achievements of Headway may vary materially from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions
of Headway's management and on information currently available to such
management. Forward-looking statements speak only as of the date they are made,
and Headway undertakes no obligation to update publicly any of them in light of
new information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance. For additional
information about Headway, its operating and financial condition, and relevant
risk factors, reference is made to Headway's Annual Report on Form 10-K and Form
10-K/A for the fiscal year ended December 31, 2002 and Quarterly Report on Form
10-Q for the quarter ended March 31, 2003, as filed with the SEC and annexed as
Exhibits 2, 3 and 4 hereto.
4. Financial Projections
Each of the following tables summarizes management's projections
for the periods indicated including:
a. The fiscal year ending December 31, 2003; and
b. The three fiscal years ending December 31, 2004, 2005 and 2006
The projections include Projected Statements of Operations,
Projected Balance Sheets, and Projected Statements of Cash Flows.
37
HEADWAY CORPORATE RESOURCES, INC.
PROJECTED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
JANUARY 1, 2003 TO OCTOBER 1, 2003
SEPTEMBER 30, 2003 TO DECEMBER 31, YEAR ENDING YEAR ENDING YEAR ENDING
2003 DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2005 2006
Revenues $ 185,878 $ 53,888 $ 229,864 $ 259,560 $ 292,468
Operating expenses:
Direct costs 166,372 47,404 203,450 229,684 259,064
Selling, general and administrative 17,842 5,513 22,262 24,487 26,751
----------- ---------- ----------- ----------- -----------
1,655
EBITDA 971 4,152 5,389 6,653
Depreciation and amortization 941 300 895 928 865
----------- ---------- ----------- ----------- -----------
724
EBIT 671 3,257 4,462 5,788
Other (income) / expense:
5,103 549 2,252 2,298 2,074
Interest expense
Interest income (66) - - - -
----------- ---------- ----------- ----------- -----------
Pretax income/(loss) (4,315) 122 1,005 2,163 3,714
Income tax (benefit)/expense - 42 342 736 1,263
----------- ---------- ----------- ----------- -----------
Net income/(loss) $ (4,315) $ 80 $ 663 $ 1,427 $ 2,451
=========== ========== =========== =========== ===========
38
HEADWAY CORPORATE RESOURCES, INC.
PROJECTED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
2003 2003 2004 2005 2006
---------------- -------------- --------------- ------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 5,256 $ 5,457 $ 8,534 $ 7,904 $ (19,451)
Short-term investments 1,200 1,200 1,200 1,200 1,200
Accounts receivable, trade, net 26,276 24,792 24,350 27,921 32,730
Prepaid expenses and current assets 2,010 1,900 1,860 1,900 2,010
Prepaid and refundable income taxes - - - - -
---------- ---------- ---------- ----------- ------------
Total current assets 34,741 33,350 35,944 38,925 16,489
Property and equipment, net 2,794 2,644 2,399 2,147 2,078
Other assets 1,384 1,384 1,384 1,384 1,384
---------- ---------- ---------- ----------- ------------
Total assets 38,919 37,378 39,727 42,456 19,951
========== ========== ========== =========== ============
Liabilities and stockholders (deficit)
Current liabilities:
Accounts payable 625 547 734 876 1,022
Accrued expenses 5,357 5,335 6,375 7,501 5,171
Accrued payroll 6,799 5,252 5,904 6,736 7,544
Long-term debt, current portion 5,650 5,900 6,900 23,000 -
Capital lease obligations, current portion 24 15 15 15 15
---------- ---------- ---------- ----------- ------------
Total current liabilities 18,454 17,049 19,928 38,127 13,752
Capital lease obligations, less current portion - - - - -
Long term debt, less current portion 20,350 20,100 18,600 1,000 1,000
Deferred rent 114 105 71 37 11
Stockholders' (deficit)
Common stock 1 1 1 1 1
Additional paid-in capital - 42 383 1,119 1,763
Notes receivable - - - - -
Deferred compensation - - - - -
Accumulated earnings - 80 744 2,171 3,424
Other comprehensive loss - - - - -
---------- ---------- ---------- ----------- ------------
Total stockholders' equity 1 123 1,128 3,291 5,188
Total liabilities and stockholders'
equity $ 38,919 $ 37,378 $ 39,727 $ 42,456 $ 19,951
========== ========== ========== =========== ============
39
HEADWAY CORPORATE RESOURCES, INC.
PROJECTED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
3 MONTHS ENDING YEAR ENDING YEAR ENDING 9 MONTHS ENDING
DECEMBER 31 DECEMBER 31, DECEMBER 31, SEPTEMBER 30
2003 2004 2005 2006
------------------- ----------------- ----------------- ----------------
Operating activities:
Net income $ 122 $ 663 $ 1,427 $ 1,251
Adjustments to reconcile net income / (loss) to
net cash provided by operation activities:
Depreciation and amortization 300 895 928 631
Provision in lieu of taxes 42 342 736 645
Provision for bad debt - - - -
Changes in assets and liabilities
Accounts receivable 1,484 442 (3,571) (4,809)
Prepaid expenses and other assets 110 40 (40) (110)
Prepaid and refundable income taxes - - - -
Other assets - - - -
Accounts payable and accrued expenses (100) 1,227 1,268 (2,184)
Accrued payroll (1,547) 651 832 809
Deferred rent (9) (34) (34) (34)
----------- -------- ---------- -----------
Net cash provided by (used in) operating activities 360 4,226 1,551 (3,801)
Investing activities:
Expenditures for property and equipment (150) (650) (675) (563)
Cash paid for acquisitions - - - -
----------- -------- ---------- -----------
Net cash (used in) investing activities (150) (650) (675) (563)
Financing activities:
Payment of capital lease obligations (9) - - -
Repayment of long-term debt - (500) (1,500) (23,000)
----------- -------- ---------- -----------
Net cash (used in) financing activities (9) (500) (1,500) (23,000)
Increase/(decrease) in cash and cash equivalents 202 3,076 (624) (27,363)
=========== ======== ========== ===========
Cash and cash equivalents at beginning of period 5,256 5,457 8,533 7,909
----------- -------- ---------- -----------
Cash and cash equivalents at end of period $ 5,457 $ 8,533 $ 7,909 $ (19,454)
=========== ======== ========== ===========
40
B. VALUATION
THE VALUATIONS SET FORTH HEREIN REPRESENT ESTIMATED
REORGANIZATION VALUES AND DO NOT NECESSARILY REFLECT VALUES THAT COULD BE
ATTAINABLE IN THE PUBLIC OR PRIVATE MARKETS. THE EQUITY VALUE ASCRIBED IN THE
ANALYSIS DOES NOT PURPORT TO BE AN ESTIMATE OF THE POST-REORGANIZATION MARKET
VALUE. SUCH TRADING VALUE, IF ANY, MAY BE MATERIALLY DIFFERENT FROM THE
REORGANIZATION VALUE RANGES ASSOCIATED WITH THE VALUATION ANALYSIS.
Management estimates that the reorganization value of Headway is
$1,000. Headway has selected a valuation multiple of 6.3 times EBITDA. This is
based on the projected 2004 EBITDA of $4.15 million, a review of comparable
companies' values, and management's assessment of the fair market value of
Headway's assets and liabilities.
Reorganization Value..................................$26.001 million
Less Debt.............................................$26.000 million
New Equity Value.......................................$0.001 million
VI.
CERTAIN FACTORS AFFECTING HEADWAY
A. CERTAIN BANKRUPTCY LAW CONSIDERATIONS
1. Risk of Non-Confirmation of the Plan of Reorganization
Although Headway believes that the Plan of Reorganization will
satisfy all requirements necessary for confirmation by the Bankruptcy Court,
there can be no assurance that the Bankruptcy Court will reach the same
conclusion. Moreover, there can be no assurance that modifications of the Plan
of Reorganization will not be required for confirmation.
2. Non-Consensual Confirmation
In the event any impaired class of claims or equity interests
does not accept a plan of reorganization, a bankruptcy court may nevertheless
confirm such plan at the proponent's request if at least one impaired class has
accepted the plan (with such acceptance being determined without including the
vote of any "insider" in such class), and as to each impaired class that has not
accepted the plan, the bankruptcy court determines that the plan of
reorganization "does not discriminate unfairly" and is "fair and equitable" with
respect to the dissenting impaired classes. See Section VIII below, entitled
"CONFIRMATION OF THE PLAN OF REORGANIZATION -- Requirements for Confirmation of
the Plan of Reorganization -- Nonconsensual Confirmation." Because the Plan of
Reorganization deems Class 5 (General Unsecured Creditors), Class 6 (Old
41
Preferred Stock Interests), Class 7 (Old Common Stock Interests) and Class 8
(Old Warrants) to reject the Plan of Reorganization, these requirements must be
satisfied with respect to such classes. Headway believes that the Plan of
Reorganization satisfies these requirements.
3. Risk of Non-Occurrence of the Consummation Date
Although Headway believes that the Consummation Date will occur
soon after the Confirmation Date, there can be no assurance as to such timing.
Moreover, if the conditions precedent to the Consummation Date have not occurred
or been waived within six months after the Confirmation Date, the Bankruptcy
Court may vacate the Confirmation Order, in which event the Plan of
Reorganization would be deemed null and void, and Headway may propose and
solicit votes on an alternative plan of reorganization that may not be as
favorable to parties in interest as the Plan of Reorganization.
4. Effect of Headway's Chapter 11 Case on Relations With Customers
The commencement of a chapter 11 case by Headway may adversely
affect its Subsidiaries' business and cause certain customers to cease using the
Subsidiaries' temporary employee services. Although the Subsidiaries believe
that they have good relationships with their customers, there can be no
assurance that such customers will continue to use the Subsidiaries' services
after the commencement of the Headway's Reorganization Case.
B. FACTORS AFFECTING THE VALUE OF THE SECURITIES TO BE ISSUED UNDER THE PLAN
OF REORGANIZATION
1. Competitive Conditions
The staffing industry is intensely competitive and fragmented
and has limited barriers to entry. Headway competes for employees and clients in
national, regional, and local markets with full-service and specialized
temporary staffing service businesses. A significant number of Headway's
competitors have greater marketing, financial, and other resources and more
established operations than Headway. Price competition in the staffing industry
is intense and pricing pressures from competitors and customers are increasing.
Many of Headway's clients have relationships with more than one staffing service
company. However, in recent years, an increasing number of companies have
consolidated their staffing services purchases and entered into exclusive
contracts with a single temporary staffing company or small number of temporary
staffing companies. If current or potential clients enter into exclusive
contracts with competitors of Headway, it will be difficult or impossible for
Headway to obtain business from such clients. Headway expects that the level of
competition will remain high in the future, which could limit Headway's ability
to maintain or increase its market share or maintain or increase gross margins.
However, Headway believes that its strategy of becoming a dominant provider in
each of its markets will allow it to remain competitive in this environment.
42
2. Capital Requirements
The business of Reorganized Headway is expected to have
substantial capital expenditure needs. Although Headway intends to enter into
the New Credit Facility, Headway will not be receiving new funds. Each of the
cash borrowing portions of the Revolver, Term Loans and the PIK Notes will be
deemed fully funded on the Consummation Date and will, in each case, represent a
like amount of Headway's pre-petition secured Obligations under the Old Credit
Agreement. Headway's ability to gain access to additional capital, if needed,
cannot be assured, particularly in view of competitive factors and industry
conditions.
3. Variances from Projections
The fundamental premise of the Plan of Reorganization is the
deleveraging of Headway and the implementation and realization of Headway's
business plan, as reflected in the projections contained in this Disclosure
Statement. The projections reflect numerous assumptions concerning the
anticipated future performance of Reorganized Headway and its subsidiaries, some
of which may not materialize. Such assumptions include, among other items,
assumptions concerning the general economy, the ability to make necessary
capital expenditures, the ability to establish market strength, consumer
purchasing trends and preferences, and the ability to stabilize and grow the
company's sales base and control future operating expenses. Headway believes
that the assumptions underlying the projections are reasonable. However,
unanticipated events and circumstances occurring subsequent to the preparation
of the projections may affect the actual financial results of Reorganized
Headway. Therefore, the actual results achieved throughout the periods covered
by the projections necessarily will vary from the projected results, and such
variations may be material and adverse.
Moreover, the estimated percentage recovery by holders of
allowed claims is based upon Headway's estimate of the values of the New
Securities. Because the market and economic conditions upon which such values
are based are beyond the control of Headway, the actual results achieved
necessarily will vary from the estimate. Such variations may be material and
adverse.
4. Disruption of Operations
The commencement and pendency of Headway's chapter 11 case could
adversely affect Headway's and its Non-Debtor Subsidiaries' commercial
relationships, as well as the Non-Debtor Subsidiaries' ability to retain or
attract high-quality employees. In such event, weakened operating results may
occur that could give rise to variances from Headway's projections.
5. Lack of Trading Market
Headway's common stock is currently traded on the American Stock
Exchange under the symbol "HEA." Upon the Consummation Date, however, Headway
will no longer be a public company. Pursuant to the Plan of Reorganization,
Headway's common stock will be cancelled and the New Common Stock will not be
43
listed on the American Stock Exchange or any other nationally recognized market
or exchange. Accordingly, no assurance can be given that a holder of New Common
Stock will be able to sell such securities in the future or as to the price at
which any sale may occur. If a holder of New Common Stock is able to sell such
securities in the future, the price of the securities could be higher or lower
than the value ascribed to them in this Disclosure Statement, depending upon
many factors, including prevailing interest rates, markets for similar
securities, industry conditions and the performance of, and investor
expectations for, Reorganized Headway and its subsidiaries.
6. Dividend Policies
Headway does not anticipate that any dividends will be paid on
the New Common Stock in the foreseeable future. In addition, the covenants in
the New Credit Facility prohibit Reorganized Headway from paying dividends.
C. CERTAIN TAX MATTERS
For a summary of certain federal income tax consequences of the
Plan of Reorganization to holders of claims and equity interests and to Headway,
see Section XI below, entitled "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN OF REORGANIZATION."
D. PENDING LITIGATION OR DEMANDS ASSERTING PREPETITION LIABILITY
As of the date of this Disclosure Statement, there were no
pending demands or litigation asserting prepetition liability which Headway
believes will have a material adverse effect upon the operations or financial
position of Headway, Reorganized Headway or its subsidiaries, if determined
unfavorably to Headway.
VII.
VOTING PROCEDURES AND REQUIREMENTS
A. VOTING DEADLINE
IT IS IMPORTANT THAT THE HOLDERS OF CLAIMS IN CLASS 2 (SECURED
CREDIT AGREEMENT CLAIMS) AND CLASS 4 (OLD SENIOR SUBORDINATED NOTE CLAIMS)
TIMELY EXERCISE THEIR RIGHT TO VOTE TO ACCEPT OR REJECT THE PLAN OF
REORGANIZATION. All known holders of Secured Credit Agreement Claims and Old
Senior Subordinated Note Claims entitled to vote on the Plan of Reorganization
have been sent a Ballot together with this Disclosure Statement. Such holders
should read the Ballot carefully and follow the instructions contained therein.
Please use only the Ballot that accompanies this Disclosure Statement.
Headway has engaged Weil, Gotshal & Manges LLP, as its Voting
Agent to assist in the transmission of voting materials and in the tabulation of
votes with respect to the Plan of Reorganization. IN ORDER FOR YOUR VOTE TO BE
44
COUNTED, YOUR VOTE MUST BE RECEIVED BY THE VOTING AGENT AT THE ADDRESS SET FORTH
BELOW BEFORE THE VOTING DEADLINE OF 5:00 P.M., EASTERN TIME, ON [DATE].
IF YOU MUST RETURN YOUR BALLOT TO YOUR BANK, BROKER OR OTHER
NOMINEE, OR TO THEIR AGENT, YOU MUST RETURN YOUR BALLOT TO THEM IN SUFFICIENT
TIME FOR THEM TO PROCESS IT AND RETURN IT TO THE VOTING AGENT BEFORE THE VOTING
DEADLINE.
IF A BALLOT IS DAMAGED OR LOST, YOU MAY CONTACT HEADWAY'S VOTING
AGENT AT THE NUMBER SET FORTH BELOW. ANY BALLOT THAT IS EXECUTED AND RETURNED
BUT WHICH DOES NOT INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN OF
REORGANIZATION WILL NOT BE COUNTED.
IF YOU HAVE ANY QUESTIONS CONCERNING VOTING PROCEDURES, YOU MAY
CONTACT THE VOTING AGENT AT:
WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
ATTN: TAL SAPEIKA
TEL (212) 310-8000
FAX (212)310-8007
Additional copies of this Disclosure Statement are available
upon request made to the Voting Agent, at the address set forth immediately
above.
B. HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE
Class 2 (Secured Credit Agreement Claims) and Class 4 (Old
Senior Subordinated Note Claims) are the only classes of claims and equity
interests under the Plan of Reorganization that are impaired and entitled to
vote to accept or reject the Plan of Reorganization. Each holder in Class 2
(Secured Credit Agreement Claim) or Class 4 (Old Senior Note Claim) as of the
Petition Date (the record date established by Headway for purposes of this
solicitation) may vote to accept or reject the Plan of Reorganization.
C. VOTE REQUIRED FOR ACCEPTANCE BY A CLASS
Under the Bankruptcy Code, acceptance of a plan of
reorganization by a class of claims occurs when holders of at least two-thirds
in dollar amount and more than one half in number of the allowed claims of that
class that cast ballots for acceptance or rejection of the plan of
reorganization vote to accept the plan. Thus, acceptance of the Plan of
Reorganization by Class 2 (Secured Credit Agreement Claims) will occur only if
at least two-thirds in dollar amount and a majority in number of the holders of
Secured Credit Agreement Claims that cast their Ballots vote in favor of
acceptance. Similarly, acceptance of the Plan of Reorganization by Class 4 (Old
45
Senior Subordinated Note Claims) will occur only if at least two-thirds in
dollar amount and a majority in number of the holders of Old Senior Subordinated
Note Claims that cast their Ballots vote in favor of acceptance. As noted supra
in Article II, Headway has entered into the (i) Lock-Up Agreement with the
Lenders and (ii) the Sub Debt Lock Up Agreement with the holders of the Old
Senior Subordinated Notes. Pursuant to the terms and conditions of the Lender
Lock Up Agreement and the Sub Debt Lock Up Agreement, each of the Lenders and
holders of Old Senior Subordinated Notes, respectively, has agreed to vote to
accept the Plan of Reorganization.
A vote may be disregarded if the Bankruptcy Court determines,
after notice and a hearing, that such acceptance or rejection was not solicited
or procured in good faith or in accordance with the provisions of the Bankruptcy
Code.
D. VOTING PROCEDURES
1. Holders of Class 2 (Secured Credit Agreement Claims)
All record holders of Secured Credit Agreement Claims in Class 2
should complete the enclosed Ballot and return it to the Voting Agent so that it
is received by the Voting Agent before the Voting Deadline.
2. Holders of Class 4 (Old Senior Subordinated Note Claims)
All record holders of Old Senior Subordinated Notes Claims in
Class 4 should complete the enclosed Ballot and return it to the Voting Agent so
that it is received by the Voting Agent before the Voting Deadline.
3. Delivery of Old Securities
Headway is not at this time requesting the delivery of, and
neither Headway nor the Voting Agent will accept, certificates representing any
Old Senior Subordinated Notes. In connection with the Consummation Date, Headway
will furnish all such holders with appropriate letters of transmittal to be used
to remit such securities in exchange for the distribution under the Plan of
Reorganization. Information regarding such remittance procedure (together with
all appropriate materials) will be distributed by Headway after confirmation of
the Plan of Reorganization.
4. Withdrawal of Ballot or Master Ballot
Any voter that has delivered a valid Ballot or Master Ballot may
withdraw its vote by delivering a written notice of withdrawal to the Voting
Agent before the Voting Deadline. To be valid, the notice of withdrawal must (a)
be signed by the party who signed the Ballot or Master Ballot to be revoked, and
(b) be received by the Voting Agent before the Voting Deadline. Headway may
contest the validity of any withdrawals.
Any holder that has delivered a valid Ballot or Master Ballot
may change its vote by delivering to the Voting Agent a properly completed
46
subsequent Ballot or Master Ballot so as to be received before the Voting
Deadline. In the case where more than one timely, properly completed Ballot or
Master Ballot is received, only the Ballot or Master Ballot that bears the
latest date will be counted.
VIII.
CONFIRMATION OF THE PLAN OF REORGANIZATION
A. CONFIRMATION HEARING
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy
Court, after appropriate notice, to hold a hearing on confirmation of a plan of
reorganization. As promptly as practicable after the commencement by Headway of
its chapter 11 case, Headway will request the Bankruptcy Court to schedule a
confirmation hearing. Notice of the confirmation hearing will be provided to all
creditors and equity holders or their representatives. The confirmation hearing
may be adjourned from time to time by the Bankruptcy Court without further
notice except for an announcement of the adjourned date made at the confirmation
hearing or any subsequent adjourned confirmation hearing.
Section 1128(b) of the Bankruptcy Code provides that any party
in interest may object to confirmation of a plan of reorganization. Any
objection to confirmation of the Plan of Reorganization must be in writing, must
conform to the Bankruptcy Rules, must set forth the name of the objector, the
nature and amount of claims or interests held or asserted by the objector
against Headway's estate or property, the basis for the objection and the
specific grounds therefore, and must be filed with the Bankruptcy Court, with a
copy to Chambers, together with proof of service thereof, and served upon (i)
Weil, Gotshal & Manges LLP, Attorneys for Headway, 767 Fifth Avenue, New York,
New York 10153, Attention: Jeffrey L. Tanenbaum, Esq., (ii) O'Melveny & Myers
LLP, 30 Rockefeller Plaza, New York, NY 10112, Attorneys for the Lenders,
Attention: Sandeep Qusba, Esq., and (iii) Swidler Berlin Shereff Friedman, LLP,
The Chrysler Building, 405 Lexington Avenue, New York, NY 10174, Attorneys for
GarMark Partners, L.P., Attention: Martin Nussbaum, Esq., so as to be received
no later than the date and time designated in the notice of the confirmation
hearing.
Objections to confirmation of the Plan of Reorganization are
governed by Bankruptcy Rule 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY
SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN OF REORGANIZATION
1. Requirements of Section 1129(a) of the Bankruptcy Code
(a) General Requirements. At the confirmation hearing, the
Bankruptcy Court will determine whether the following confirmation
requirements specified in section 1129 of the Bankruptcy Code have
been satisfied:
47
(1) The Plan of Reorganization complies with the applicable
provisions of the Bankruptcy Code.
(2) Headway has complied with the applicable provisions of the
Bankruptcy Code.
(3) The Plan of Reorganization has been proposed in good faith
and not by any means proscribed by law.
(4) Any payment made or promised by Headway or by a Person
issuing securities or acquiring property under the Plan of
Reorganization for services or for costs and expenses in, or in
connection with, the chapter 11 case, or in connection with the Plan
of Reorganization and incident to the chapter 11 case, has been
disclosed to the Bankruptcy Court, and any such payment made before
confirmation of the Plan of Reorganization is reasonable, or if such
payment is to be fixed after confirmation of the Plan of
Reorganization, such payment is subject to the approval of the
Bankruptcy Court as reasonable.1
(5) Headway has disclosed the identity and affiliations of any
individual proposed to serve, after confirmation of the Plan of
Reorganization, as a director or officer of Headway, an affiliate of
Headway participating in a Plan of Reorganization with Headway, or a
successor to Headway under the Plan of Reorganization, and the
appointment to, or continuance in, such office of such individual is
consistent with the interests of creditors and equity holders and with
public policy, and Headway has disclosed the identity of any insider
that will be employed or retained by Headway, and the nature of any
compensation for such insider.
(6) With respect to each class of claims or equity interests,
each holder of an impaired claim or impaired equity interest either
has accepted the Plan of Reorganization or will receive or retain
under the Plan of Reorganization on account of such holder's claim or
equity interest, property of a value, as of the Consummation Date,
that is not less than the amount such holder would receive or retain
if Headway were liquidated on the Consummation Date under chapter 7 of
the Bankruptcy Code. See discussion of "Best Interests Test" below.
(7) Except to the extent the Plan of Reorganization meets the
requirements of section 1129(b) of the Bankruptcy Code (discussed
- --------
1 The Subsidiaries have agreed to a key employee retention plan for key
executives and certain other employees of the Company. The aggregate amount of
such payments to the 11 key executives and other employees is $476,000 to be
paid over four months following the Consummation Date.
48
below), each class of claims or equity interests has either accepted
the Plan of Reorganization or is not impaired under the Plan of
Reorganization.
(8) Except to the extent that the holder of a particular claim
has agreed to a different treatment of such claim, the Plan of
Reorganization provides that administrative expenses and priority
claims other than priority tax claims will be paid in full on the
Consummation Date and that priority tax claims will receive on account
of such claims deferred cash payments, over a period not exceeding six
years after the date of assessment of such claims, of a value, as of
the Consummation Date, equal to the allowed amount of such claims.
(9) At least one class of impaired claims has accepted the Plan
of Reorganization, determined without including any acceptance of the
Plan of Reorganization by any insider holding a claim in such class.
(10) Confirmation of the Plan of Reorganization is not likely to
be followed by the liquidation or the need for further financial
reorganization of Headway or any successor to Headway under the Plan
of Reorganization, unless such liquidation or reorganization is
proposed in the Plan of Reorganization. See discussion of
"Feasibility" below.
(11) The Plan of Reorganization provides for the continuation
after the Consummation Date of payment of all Retiree Benefits (as
defined in section 1114 of the Bankruptcy Code), at the level
established pursuant to subsection 1114(e)(1)(B) or 1114(g) of the
Bankruptcy Code at any time prior to confirmation of the Plan of
Reorganization, for the duration of the period Headway has obligated
itself to provide such benefits.
(b) Best Interests Test. As described above, the Bankruptcy Code
requires that each holder of an impaired claim or equity interest either (a)
accepts the plan of reorganization or (b) receives or retains under the plan
property of a value, as of the Consummation Date, that is not less than the
value such holder would receive or retain if Headway were liquidated under
chapter 7 of the Bankruptcy Code on the Consummation Date.
The first step in meeting this test is to determine the dollar
amount that would be generated from the liquidation of Headway's assets and
properties in the context of a chapter 7 liquidation case. The gross amount of
cash available would be the sum of the proceeds from the disposition of
Headway's assets and the cash held by Headway at the time of the commencement of
the chapter 7 case. The next step, however, is to reduce that total by the
amount of any claims secured by such assets, the costs and expenses of the
liquidation, and such additional administrative expenses and priority claims
that may result from the termination of Headway's business and the use of
chapter 7 for the purposes of liquidation. Any remaining net cash would be
49
allocated to creditors and shareholders in strict priority in accordance with
section 726 of the Bankruptcy Code (see discussion below). Finally, the present
value of such allocations (taking into account the time necessary to accomplish
the liquidation) are compared to the value of the property that is proposed to
be distributed under the Plan of Reorganization on the Consummation Date.
Headway's costs of liquidation under chapter 7 would include the
fees payable to a chapter 7 trustee in bankruptcy, as well as those that might
be payable to attorneys and other professionals that such a trustee may engage,
plus any unpaid expenses incurred by Headway during the chapter 11 case and
allowed in the chapter 7 case, such as compensation for attorneys, financial
advisors, appraisers, accountants and other professionals, and costs and
expenses of members of any statutory committee of unsecured creditors appointed
by the United States Trustee pursuant to section 1102 of the Bankruptcy Code and
any other committee so appointed. Moreover, additional claims would arise by
reason of the breach or rejection of obligations incurred and executory
contracts or leases entered into by Headway both prior to, and during the
pendency of, the chapter 11 case.
The foregoing types of claims, costs, expenses, fees and such
other claims that may arise in a liquidation case would be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay pre-chapter 11 priority and unsecured claims. Under the
absolute priority rule, no junior creditor would receive any distribution until
all senior creditors are paid in full, with interest, and no equity holder
receives any distribution until all creditors are paid in full, with interest.
Headway believes that in a chapter 7 case, holders of Old Senior Subordinated
Notes, General Unsecured Claims, Old Preferred Stock Interests, Old Common Stock
Interests and Old Warrants would receive no distributions of property.
After consideration of the effects that a chapter 7 liquidation
would have on the ultimate proceeds available for distribution to creditors in a
chapter 11 case, including (i) the increased costs and expenses of a liquidation
under chapter 7 arising from fees payable to a trustee in bankruptcy and
professional advisors to such trustee, (ii) the erosion in value of assets in a
chapter 7 case in the context of the expeditious liquidation required under
chapter 7 and the "forced sale" atmosphere that would prevail and (iii)
substantial increases in claims which would be satisfied on a priority basis,
Headway has determined that confirmation of the Plan of Reorganization will
provide each creditor and equity holder with a recovery that is not less than it
would receive pursuant to a liquidation of Headway under chapter 7 of the
Bankruptcy Code.
Moreover, Headway believes that the value of any distributions
from the liquidation proceeds to each class of allowed claims in a chapter 7
case would be the same or less than the value of distributions under the Plan of
Reorganization because such distributions in a chapter 7 case may not occur for
a substantial period of time. In this regard, it is possible that distribution
of the proceeds of the liquidation could be delayed for a year or more after the
completion of such liquidation in order to resolve the claims and prepare for
distributions. In the event litigation were necessary to resolve claims asserted
50
in the chapter 7 case, the delay could be further prolonged and administrative
expenses further increased.
HEADWAY'S LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS
THAT MAY BE GENERATED AS A RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE
ASSETS OF HEADWAY. THE ANALYSIS IS BASED UPON A NUMBER OF SIGNIFICANT
ASSUMPTIONS WHICH ARE DESCRIBED. THE LIQUIDATION ANALYSIS DOES NOT PURPORT TO BE
A VALUATION OF HEADWAY'S ASSETS AND IS NOT NECESSARILY INDICATIVE OF THE VALUES
THAT MAY BE REALIZED IN AN ACTUAL LIQUIDATION.
(c) Liquidation Analysis. Headway's chapter 7 liquidation
analysis and assumptions are set forth below:
51
HEADWAY CORPORATE RESOURCES
LIQUIDATION ANALYSIS
SUMMARY
BASED ON MARCH 2003 BALANCE SHEET
CATEGORY COMPANY RECOVERY % RECOVERY
- -----------------------------------------------------------------------------------------
ASSETS
Cash & Cash Equivalents 9,953.0 100% 9,953.0
Accounts Receivable 28,623.7 36.3% 10,384.2
Prepaid expenses and other current assets 1,479.3 0.0% 0.0
Deferred financing costs, current 587.3 0.0% 0.0
Prepaid Income Taxes 0.0 0.0% 0.0
-----------
TOTAL CURRENT ASSETS 40,643.3 20,337.2
Property and equipment, net 3,206.5 10.0% 320.7
Intangibles 0.0 0.0% 0.0
Deferred financing costs 388.8 0.0% 0.0
Investment in subsidiary 45.0 0.0% 0.0
Interco Accounts 0.0 0.0% 0.0
Intercompany Notes 1,400.0 0.0% 0.0
Other assets 1,570.6 0.0% 0.0
Assets Held for Sale 0.0 0.0% 0.0
----------- ----------
TOTAL ASSETS 47,254.2 20,657.8
TOTAL ESTIMATED RECOVERY COSTS 5,688.9
NET ESTIMATED RECOVERY AVAILABLE TO CREDITORS 14,968.9
SINCE THE AMOUNT OF THE SECURED CREDITOR CLAIMS IS IN EXCESS OF $74,000,000, ALL
OF THE RECOVERY WOULD BE ALLOCATED TO THE SECURED CREDITORS AND THERE WOULD BE
NO RECOVERY AVAILABLE FOR THE UNSECURED CREDITOR CLAIMS OR EQUITY INTERESTS.
- --------------------------------------------------------------------------------
ASSUMPTIONS
(1) Assumes liquidation over a 120 day period
(2) As major pieces of business drop, related revenue and expenses drop
(3) No enterprise recovery for any business unit as a going concern
(4) A/R Recovery A/R Recovery% Recovery % of Total
---------------------------------------------------------------------------------
Under 90 Days 25,072.7 40.0% 10,029.1 35.0%
Over 90 Days 3,551.0 10.0% 355.1 1.2%
-------------------- ------------------------
Total 28,623.7 10,384.2 36.3%
(5) Estimated Shutdown Costs: Amount
--------------------
(a) Shut down (after 90 days) 2,099.7
(b) Key Employee Retention Bonus 680.0
(c) Legal Fees (CH 11 filing) 1,000.0
(d) Other Professional Fees 800.0
(e) Stub period Insurance 800.0
(f) Completion of Collections 269.2
(g) Sale of FF&E 40.0
-------------------
Total Estimated Shutdown Costs 5,688.9
52
(d) Feasibility. The Bankruptcy Code requires a debtor to
demonstrate that confirmation of a plan of reorganization is not likely to be
followed by the liquidation or the need for further financial reorganization of
a debtor unless so provided by the plan of reorganization. For purposes of
determining whether the Plan of Reorganization meets this requirement, Headway
has analyzed its ability to meet its obligations as contemplated thereunder. As
part of this analysis, Headway has prepared the projections contained in Section
V above, entitled "PROJECTIONS AND VALUATION ANALYSIS." These projections are
based upon the assumption that the Plan of Reorganization will be confirmed by
the Bankruptcy Court, and for projection purposes, that the Consummation Date of
the Plan of Reorganization and its substantial consummation will take place on
or about September 30, 2003. The projections include balance sheets, statements
of operations and statements of cash flows. Based upon the projections, Headway
believes it will be able to make all payments required to be made pursuant to
the Plan of Reorganization.
2. Requirements of Section 1129(b) of the Bankruptcy Code
The Bankruptcy Court may confirm the Plan of Reorganization over
the rejection or deemed rejection of the Plan of Reorganization by a class of
claims or equity interests if the Plan of Reorganization "does not discriminate
unfairly" and is "fair and equitable" with respect to such class.
No Unfair Discrimination. This test applies to classes of claims
or equity interests that are of equal priority and are receiving different
treatment under a plan of reorganization. The test does not require that the
treatment be the same or equivalent, but that such treatment be "fair."
Fair and Equitable Test. This test applies to classes of
different priority (e.g., unsecured versus secured) and includes the general
requirement that no class of claims receive more than 100% of the allowed amount
of the claims in such class. As to the dissenting class, the test sets different
standards, depending on the type of claims or interests in such class:
Secured Claims. Each holder of an impaired secured claim either
(i) retains its liens on the property (or if sold, on the proceeds thereof) to
the extent of the allowed amount of its secured claim and receives deferred cash
payments having a value, as of the consummation date of the plan, of at least
the allowed amount of such claim or (ii) receives the "indubitable equivalent"
of its allowed secured claim.
Unsecured Claims. Either (i) each holder of an impaired
unsecured claim receives or retains under the plan property of a value equal to
the amount of its allowed unsecured claim or (ii) the holders of claims and
interests that are junior to the claims of the dissenting class will not receive
or retain any property under the plan of reorganization.
53
Equity Interests. Either (i) each equity interest holder will
receive or retain under the plan of reorganization property of a value equal to
the greater of (a) the fixed liquidation preference or redemption price, if any,
of such stock and (b) the value of the stock, or (ii) the holders of interests
that are junior to the equity interests of the dissenting class will not receive
or retain any property under the plan of reorganization.
Headway believes the Plan of Reorganization will satisfy the
"fair and equitable" requirement notwithstanding that Class 5 (General Unsecured
Claims), Class 6 (Old Preferred Stock Interests), Class 7 (Old Common Stock
Interests) and Class 8 (Old Warrants) are deemed to reject the Plan of
Reorganization, because as to Class 5, Class 6, Class 7 and Class 8, no class
that is junior to such a dissenting class will receive or retain any property on
account of the claims or equity interests in such class.
As to Class 2 (Secured Credit Agreement Claims), the holders of
Secured Credit Agreement Claims have affirmatively consented to the distribution
to the holders of Old Senior Subordinated Note Claims. Because the distribution
to a class of Claims junior to Class 2 (Secured Credit Agreement Claims) is
predicated upon the consent of the holders of Secured Credit Agreement Claims,
Headway believes that the Plan of Reorganization is "fair and equitable" with
respect to such classes and complies with the absolute priority rule. The
distribution pursuant to this Plan of Reorganization to holders of Old Senior
Secured Note Claims is fair and equitable with respect to the holders of General
Unsecured Claims because the holders of Secured Credit Agreement Claims, each of
whom are impaired pursuant to this Plan of Reorganization, may, in the exercise
of their discretion, distribute value that would otherwise belong to them to any
class of Claims or Equity Interests. Moreover, in consideration for the receipt
of the New Convertible Notes, the holders of the Old Senior Subordinated Note
Claims are releasing any and all claims against the Subsidiaries.
IX.
FINANCIAL INFORMATION
A. GENERAL
The audited consolidated balance sheets for each of the three
fiscal years ended December 31, 2002, December 31, 2001 and December 31, 2000
and the related consolidated statements of operations and consolidated
statements of cash flows of Headway and its subsidiaries are contained in Item 8
- - "Financial Statements and Supplementary Data" in Headway's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, a copy of which is
annexed as Exhibit 2 to this Disclosure Statement, and the full text of which is
incorporated herein by reference. This financial information is provided to
permit the holders of claims and equity interests to better understand Headway's
historical business performance and the impact of the Reorganization Case on
Headway's business.
54
B. SELECTED FINANCIAL DATA
See Item 6 - "Selected Financial Data" set forth in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 annexed as
Exhibit 2 to this Disclosure Statement.
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For a detailed discussion by management of Headway and its
Subsidiaries' financial condition, results of operations, and liquidity and
capital resources, see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report on Form 10-K
for the fiscal year ended December 31, 2002 annexed as Exhibit 2 to this
Disclosure Statement.
D. RECENT PERFORMANCE
See Headway's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 annexed as Exhibit 4 to this Disclosure Statement.
X.
ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN OF REORGANIZATION
If the Plan of Reorganization is not confirmed and consummated,
the alternatives to the Plan of Reorganization include (i) liquidation of
Headway under chapter 7 of the Bankruptcy Code and (ii) an alternative chapter
11 plan of reorganization.
A. LIQUIDATION UNDER CHAPTER 7
If no plan can be confirmed, Headway's chapter 11 case may be
converted to a case under chapter 7 of the Bankruptcy Code, pursuant to which a
trustee would be appointed to liquidate the assets of Headway for distribution
in accordance with the priorities established by the Bankruptcy Code. A
discussion of the effects that a chapter 7 liquidation would have on the
recovery of holders of claims and equity interests and Headway's liquidation
analysis are set forth in Section VIII above, entitled "CONFIRMATION OF THE PLAN
OF REORGANIZATION -- Requirements for Confirmation of the Plan of Reorganization
- -- Consensual Confirmation -- Best Interests Test." Headway believes that
liquidation under chapter 7 would result in smaller distributions being made to
creditors than those provided for in the Plan of Reorganization because of (a)
the likelihood that the assets of Headway would have to be sold or otherwise
disposed of in a less orderly fashion over a shorter period of time, (b)
additional administrative expenses involved in the appointment of a trustee and
(c) additional expenses and claims, some of which would be entitled to priority,
which would be generated during the liquidation and from the rejection of leases
and other executory contracts in connection with a cessation of Headway's
55
operations. In a chapter 7 liquidation, Headway believes that there would be no
distribution to the holders of Old Senior Subordinated Note Claims, General
Unsecured Claims or the holders of Equity Interests.
B. ALTERNATIVE PLAN OF REORGANIZATION
If the Plan of Reorganization is not confirmed, Headway (or if
Headway's exclusive period in which to file a plan of reorganization has
expired, any other party in interest) could attempt to formulate a different
chapter 11 plan of reorganization. Such a plan of reorganization might involve
either a reorganization and continuation of Headway's business or an orderly
liquidation of its assets under chapter 11. With respect to an alternative plan,
Headway has explored various alternatives in connection with the formulation and
development of the Plan of Reorganization. Headway believes that the Plan of
Reorganization, as described herein, enables creditors and equity holders to
realize the most value under the circumstances. In a liquidation under chapter
11, Headway's assets would be sold in an orderly fashion over a more extended
period of time than in a liquidation under chapter 7, possibly resulting in
somewhat greater (but indeterminate) recoveries than would be obtained in
chapter 7. Further, if a trustee were not appointed, because such appointment is
not required in a chapter 11 case, the expenses for professional fees would most
likely be lower than those incurred in a chapter 7 case. Although preferable to
a chapter 7 liquidation, Headway believes that any alternative liquidation under
chapter 11 is a much less attractive alternative to creditors and equity holders
than the Plan of Reorganization because of the greater return provided by the
Plan of Reorganization.
XI.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE PLAN OF REORGANIZATION
The following discussion summarizes certain federal income tax
consequences of the implementation of the Plan to the Debtor. The following
summary does not address the federal income tax consequences to holders of
Claims whose Claims are entitled to reinstatement or payment in full in cash
under the Plan (e.g., holders of Priority Non-Tax Claims and Other Secured
Claims) or holders whose interests are extinguished without a distribution in
exchange therefore (e.g., holders of General Unsecured Claims, Old Preferred
Stock Interests, Old Common Stock Interests and Old Warrants). Additionally,
this summary does not address the federal income tax consequences to holders of
Secured Credit Agreement Claims and Old Senior Subordinated Note Claims as it is
the Debtor's understanding that such holders have retained separate counsel to
advise them with respect thereto.
The following summary is based on the Tax Code, Treasury
Regulations promulgated thereunder, judicial decisions, and published
administrative rules and pronouncements of the Internal Revenue Service ("IRS")
as in effect on the date hereof. Changes in such rules or new interpretations
thereof may have retroactive effect and could significantly affect the federal
income tax consequences described below.
56
The federal income tax consequences of the Plan are complex and
are subject to significant uncertainties. The Debtor has not requested a ruling
from the IRS or an opinion of counsel with respect to any of the tax aspects of
the Plan. Thus, no assurance can be given as to the interpretation that the IRS
will adopt. In addition, this summary does not address foreign, state or local
tax consequences of the Plan, nor does it purport to address the federal income
tax consequences of the Plan to special classes of taxpayers (such as foreign
taxpayers, broker-dealers, banks, mutual funds, insurance companies, financial
institutions, small business investment companies, regulated investment
companies, tax-exempt organizations, and investors in pass-through entities).
This discussion assumes that the various debt and other
arrangements to which the Debtor is a party will be respected for federal income
tax purposes in accordance with their form.
ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES
PERTAINING TO A HOLDER OF A CLAIM OR EQUITY INTEREST. ALL HOLDERS OF CLAIMS OR
EQUITY INTERESTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR THE FEDERAL,
STATE, LOCAL AND OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN.
A. CONSEQUENCES TO HEADWAY
Due to the fact that the Debtor was entitled to carryback its
consolidated net operating losses ("NOLs") to offset income from its prior
taxable years the Debtor has no NOL carryforwards for federal income tax
purposes as of the Effective Date. However, the Debtor expects to incur
approximately $4 million of losses during the taxable year ending December 31,
2003.
1. Cancellation of Debt
The Tax Code provides that a debtor in a bankruptcy case must
reduce certain of its tax attributes - such as NOL carryforwards, current year
NOLs, tax credits and tax basis in assets - by the amount of any cancellation of
debt ("COD"). COD is the amount by which the indebtedness discharged (reduced by
any unamortized discount) exceeds any consideration given in exchange therefore,
subject to certain statutory or judicial exceptions that can apply to limit the
amount of COD (such as where the payment of the cancelled debt would have given
rise to a tax deduction). To the extent the amount of COD exceeds the tax
attributes available for reduction, the remaining COD is simply forgiven without
any tax effect on the company. Any reduction in tax attributes as a result of
COD does not effectively occur until the first day of the taxable year following
the year the COD occurs.
As a result of the discharge of Claims pursuant to the Plan, the
Debtor will suffer substantial COD. The extent of such COD and resulting tax
57
attribute reduction will depend, in part, on the value of the New Common Stock
distributed. Based on the estimated reorganization value of Reorganized Headway
(see Section V), it is anticipated that Reorganized Headway will incur
approximately $60 million of COD. Consequently, due to the fact that Reorganized
Headway will have no NOL carryforwards or tax credits and minimal current year
NOLs as of the Effective Date, there will be a significant reduction in the
basis Reorganized Headway has in its assets. The only significant assets which
Reorganized Headway has is the stock of its subsidiaries and goodwill.
2. Limitation on NOL Carryforwards and Other Tax Attributes
Following the implementation of the Plan, any remaining NOL and
tax credit carryforwards and, possibly, certain other tax attributes of the
Reorganized Debtors allocable to periods prior to the Effective Date
(collectively, "pre-change losses") may be subject to limitation under section
382 of the Tax Code as a result of the change in ownership of Reorganized
Headway.
Under section 382, if a corporation undergoes an "ownership
change" and the corporation does not qualify for (or elects out of) the special
bankruptcy exception discussed below, the amount of its pre-change losses that
may be utilized to offset future taxable income is subject to an annual
limitation. Such limitation also may apply to certain losses or deductions which
are "built-in" (i.e., economically accrued but unrecognized) as of the date of
the ownership change that are subsequently recognized.
The issuance of the New Common Stock to the holders of Secured
Credit Agreement Claims pursuant to the Plan will constitute an ownership change
of Reorganized Headway.
(a) General Section 382 Annual Limitation
In general, the amount of the annual limitation to which a
corporation (or a consolidated group) that undergoes an ownership change would
be subject is equal to the product of (i) the fair market value of the stock of
the corporation (or, in the case of a consolidated group, the parent
corporation) immediately before the ownership change (with certain adjustments)
multiplied by (ii) the "long-term tax-exempt rate" in effect for the month in
which the ownership change occurs (4.45% for ownership changes occurring during
June 2003). For a corporation (or consolidated group) in bankruptcy that
undergoes the ownership change pursuant to a confirmed plan, the stock value
generally is determined immediately after (rather than before) the ownership
change, and certain adjustments that ordinarily would apply do not apply. Thus,
if the fair market value of the stock of a corporation experiencing an ownership
change during June 2003 was approximately $200 million (after appropriate
adjustments), the resulting annual limitation generally would be approximately
$9 million.
Any unused limitation may be carried forward, thereby increasing
the annual limitation in the subsequent taxable year. However, if the
corporation (or the consolidated group) does not continue its historic business
or use a significant portion of its assets in a new business for two years after
the ownership change, the annual limitation resulting from the ownership change
is zero.
58
As indicated above, section 382 can operate to limit the
deductibility of built-in losses recognized subsequent to the date of the
ownership change. If a loss corporation (or consolidated group) has a net
unrealized built-in loss at the time of an ownership change (taking into account
most assets and items of "built-in" income and deduction), then any built-in
losses recognized during the following five years (up to the amount of the
original net built-in loss) generally will be treated as pre-change losses and
similarly will be subject to the annual limitation. Conversely, if the loss
corporation (or consolidated group) has a net unrealized built-in gain at the
time of an ownership change, any built-in gains recognized during the following
five years (up to the amount of the original net built-in gain) generally will
increase the annual limitation in the year recognized, such that the loss
corporation (or consolidated group) would be permitted to use its pre-change
losses against such built-in gain income in addition to its regular annual
allowance. Although the rule applicable to net unrealized built-in losses
generally applies to consolidated groups on a consolidated basis, certain
corporations that joined the consolidated group within the preceding five years
may not be able to be taken into account in the group computation of net
unrealized built-in loss. Such corporations would nevertheless still be taken
into account in determining whether the consolidated group has a net unrealized
built-in gain. In general, a loss corporation's (or consolidated group's) net
unrealized built-in gain or loss will be deemed to be zero unless it is greater
than the lesser of (i) $10 million or (ii) 15% of the fair market value of its
assets (with certain adjustments) before the ownership change.
(b) Special Bankruptcy Exception
An exception to the foregoing annual limitation rules generally
applies where qualified (so-called "old and cold") creditors of a debtor
receive, in respect of their claims, at least 50% of the vote and value of the
stock of the reorganized debtor (or a controlling corporation if also in
bankruptcy) pursuant to a confirmed chapter 11 plan. Under this exception, a
debtor's pre-change losses are not limited on an annual basis but, instead, are
required to be reduced by the amount of any interest deductions claimed during
the three taxable years preceding the effective date of the reorganization, and
during the part of the taxable year prior to and including the reorganization,
in respect of all debt converted into stock in the reorganization. Moreover, if
this exception applies, any further ownership change of the debtor within a
two-year period after the consummation of the chapter 11 plan will preclude the
debtor's utilization of any pre-change losses at the time of the subsequent
ownership change against future taxable income.
The Debtor anticipates that the receipt of the New Common Stock
by the holders of Secured Credit Agreement Claims will qualify for this
exception. Neither the statute nor the regulations address, however, whether
this exception can be applied on a consolidated basis or only on a separate
company basis. Even if the Debtor qualifies for this exception, the Debtor may,
if it so desires, elect not to have the exception apply and instead remain
59
subject to the annual limitation described above. Such election would have to be
made in the Debtor's federal income tax return for the taxable year in which the
change occurs.
THE FOREGOING SUMMARY HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY. ALL
HOLDERS OF CLAIMS AND EQUITY INTERESTS ARE URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL, AND OTHER TAX CONSEQUENCES APPLICABLE
UNDER THE PLAN.
60
XII.
CONCLUSION
Headway believes that confirmation and implementation of the
Plan of Reorganization is in the best interests of the Lenders and each of the
holders of the Old Senior Subordinated Notes, and urges holders of impaired
claims entitled to vote on the Plan of Reorganization to vote to accept the Plan
of Reorganization and to evidence such acceptance by returning their Ballots so
that they will be received no later than 5:00 p.m. (Eastern Time) on [_______],
2003.
Dated: July 1, 2003
Respectfully submitted,
Headway Corporate Resources, Inc.
By: /s/ Philicia G. Levinson
---------------------------------
Name: Philicia G. Levinson
Title: Senior Vice-President
COUNSEL:
- -----------------------------
Jeffrey L. Tanenbaum, Esq. (JT 9797)
Weil, Gotshal & Manges LLP
Attorneys for Headway Corporate
Resources, Inc.
767 Fifth Avenue
New York, New York 10153
(212) 310-8000
61
EXHIBIT 1
[ PLAN OF REORGANIZATION ]
62
EXHIBIT 2
[ 10 K ]
63
EXHIBIT 3
[ 10 K/A ]
64
[ EXHIBIT 4 ]
10 Q
65
EXHIBIT 5
[ LENDER LOCK UP AGREEMENT ]
66
EXHIBIT 6
[ SUB DEBT LOCK UP AGREEMENT ]
67