EXHIBIT 2.1
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE : CHAPTER 11 CASE NO.
:
ACTERNA CORPORATION, ET AL., : 03-12837 (BRL)
-- --- :
:
DEBTORS. : (JOINTLY ADMINISTERED)
:
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DISCLOSURE STATEMENT FOR
DEBTORS' JOINT PLAN OF REORGANIZATION
-------------------------------------
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
(212) 310-8000
Attorneys for Debtors
and Debtors in Possession
Dated: August 26, 2003
TABLE OF CONTENTS
PAGE
GLOSSARY.......................................................................................................................1
I. INTRODUCTION........................................................................................................4
A. HOLDERS OF CLAIMS ENTITLED TO VOTE........................................................................5
B. VOTING PROCEDURES.........................................................................................6
C. CONFIRMATION HEARING......................................................................................7
II. OVERVIEW OF THE PLAN................................................................................................8
III. GENERAL INFORMATION................................................................................................11
A. OVERVIEW OF CHAPTER 11...................................................................................11
B. DESCRIPTION AND HISTORY OF BUSINESS......................................................................12
1. Communications Test............................................................................12
2. Communications Test International Operations...................................................13
3. Acterna IPMS SAS (France)......................................................................14
4. Itronix........................................................................................15
5. da Vinci.......................................................................................15
C. MARKET INFORMATION.......................................................................................15
IV. EVENTS PRECEDING THE COMMENCEMENT OF THE CHAPTER 11 CASES..........................................................16
A. THE CD&R ACQUISITION AND THE SUBORDINATED NOTES..........................................................16
B. THE TENDER OFFERS........................................................................................16
C. DEBT FINANCING...........................................................................................17
D. THE CONVERTIBLE NOTES....................................................................................18
E. FINANCIAL PERFORMANCE AND PREPETITION RESTRUCTURING EFFORTS.............................................18
F. COST CUTTING INITIATIVES.................................................................................19
G. SIGNIFICANT PREPETITION DIVESTITURES.....................................................................19
1. Airshow, Inc...................................................................................19
2. Zurich Wireless Systems........................................................................19
3. Wiltek Communications GmbH.....................................................................19
4. Status Monitoring and Performance..............................................................20
5. Computer Medical Systems, Inc..................................................................20
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H. TERM SHEET NEGOTIATIONS..................................................................................20
V. THE REORGANIZATION CASE............................................................................................21
A. COMMENCEMENT OF THE CHAPTER 11 CASES.....................................................................21
B. ADMINISTRATION OF THE CHAPTER 11 CASES...................................................................21
1. First Day Orders...............................................................................21
2. Debtor in Possession Financing.................................................................22
3. Key Employee Retention Plan....................................................................22
4. Assets Sales During the Chapter 11 Cases.......................................................23
5. Restructuring of International Operations......................................................23
C. CREDITORS' COMMITTEE.....................................................................................24
D. BAR DATE AND CLAIMS PROCESS..............................................................................24
VI. THE PLAN OF REORGANIZATION.........................................................................................25
A. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS..............................................27
1. Administrative Expense Claims..................................................................27
2. Compensation and Reimbursement Claims..........................................................28
3. Priority Tax Claims............................................................................28
4. Class A - Priority Non-Tax Claims (Subclasses A1-A8)...........................................29
5. Class B - Other Secured Claims (Subclasses B1-B8)..............................................29
6. Class C - Senior Lender Claims (Subclasses C1(a) and (b)-C8(a) and (b))........................30
7. Class D - General Unsecured Claims (Subclasses D1-D8)..........................................34
8. Class E - Convertible Notes Claims (Subclasses E1-E8)..........................................34
9. Class F - Subordinated Notes Claims (Subclasses F1-F2).........................................34
10. Class G - Intercompany Claims (Subclasses G1-G8)...............................................35
11. Class H - Securities Litigation Claim (Subclass H1)............................................35
12. Class I - Equity Interests (Subclasses I1-I8)..................................................35
B. SECURITIES TO BE ISSUED UNDER THE PLAN...................................................................36
1. New Common Stock...............................................................................36
2. New Warrants...................................................................................36
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3. Restriction on the Transfer of New Warrants....................................................37
C. METHOD OF DISTRIBUTION UNDER THE PLAN....................................................................38
1. Date and Delivery of Distribution..............................................................38
2. Distributions With Respect to Disputed Claims..................................................39
3. Distributions With Respect to Holders of Class D Claims........................................39
4. Distributions by the Disbursing Agent..........................................................40
5. Distributions on Account of Subordinated Notes Claims..........................................40
D. TIMING OF DISTRIBUTIONS UNDER THE PLAN...................................................................40
E. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES...................................................41
F. PROVISIONS FOR TREATMENT OF DISPUTED CLAIMS..............................................................42
G. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN........................................................43
H. IMPLEMENTATION AND EFFECT OF CONFIRMATION OF THE PLAN....................................................44
1. Incurrence of New Indebtedness.................................................................44
2. The Restructuring Transactions.................................................................44
I. DISCHARGE AND INJUNCTION.................................................................................45
J. VOTING...................................................................................................46
1. Voting of Claims...............................................................................46
2. Elimination of Vacant Classes..................................................................46
3. Nonconsensual Confirmation.....................................................................47
K. SUMMARY OF OTHER PROVISIONS OF THE PLAN..................................................................47
1. Retiree Benefits...............................................................................47
2. Continuation of Pension Plans and Benefit Plans................................................47
3. By-laws and Certificates of Incorporation......................................................47
4. Amendment or Modification of the Plan..........................................................48
5. Limited Releases...............................................................................48
6. Cancellation of Existing Securities and Agreements.............................................49
7. Revocation or Withdrawal of the Plan...........................................................49
8. Termination of the Creditors' Committee........................................................49
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9. Claims Preserved...............................................................................50
10. Effectuating Documents and Further Transactions................................................50
11. Corporate Action...............................................................................50
12. Exculpation....................................................................................50
13. Plan Supplement................................................................................51
14. Retention of Jurisdiction......................................................................51
16. Injunction Regarding Worthless Stock Deduction.................................................53
17. Post-Effective Date Fees and Expenses..........................................................53
18. Payment of Statutory Fees......................................................................54
19. Severability...................................................................................54
20. Binding Effect.................................................................................54
21. Governing Law..................................................................................54
22. Withholding and Reporting Requirements.........................................................54
23. Sections 1125 and 1126 of the Bankruptcy Code..................................................54
24. Allocation of Plan Distributions...............................................................55
25. Minimum Distributions..........................................................................55
26. Notices........................................................................................55
VII. CONFIRMATION AND CONSUMMATION PROCEDURE............................................................................56
A. SOLICITATION OF VOTES....................................................................................56
B. THE CONFIRMATION HEARING.................................................................................57
C. CONFIRMATION.............................................................................................58
1. Acceptance.....................................................................................58
2. Unfair Discrimination and Fair and Equitable Tests.............................................59
3. Feasibility....................................................................................60
4. Best Interests Test............................................................................60
D. CONSUMMATION.............................................................................................62
VIII. MANAGEMENT OF REORGANIZED DEBTORS..................................................................................62
A. BOARD OF DIRECTORS AND MANAGEMENT........................................................................62
1. Newco and Reorganized Acterna Board of Directors...............................................62
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2. Reorganized Subsidiaries Board of Directors....................................................63
3. Officers of Reorganized Debtors................................................................63
4. Identity of the Debtors' Executive Management..................................................63
B. COMPENSATION OF THE DEBTORS' EXECUTIVE MANAGEMENT........................................................63
C. COMPENSATION MATTERS.....................................................................................64
1. The New Management Incentive Plan..............................................................64
2. Securities Law Compliance......................................................................64
D. CONTINUATION OF EXISTING BENEFIT PLANS AND D&O INSURANCE.................................................65
IX. SECURITIES LAWS MATTERS............................................................................................65
A. BANKRUPTCY CODE EXEMPTIONS FROM REGISTRATION REQUIREMENTS................................................65
B. REGISTRATIONS RIGHTS AGREEMENT...........................................................................69
X. VALUATION..........................................................................................................69
XI. CERTAIN RISK FACTORS TO BE CONSIDERED..............................................................................72
A. CERTAIN BANKRUPTCY LAW CONSIDERATIONS....................................................................72
1. Risk of Non Confirmation of the Plan ..........................................................72
2. Non Consensual Confirmation....................................................................72
3. Risk of Non-Occurrence of the Effective Date...................................................73
B. RISKS RELATING TO THE PLAN SECURITIES....................................................................73
1. Variances from Projections.....................................................................73
2. Dividend Policies..............................................................................73
3. Restrictions on Transfer.......................................................................73
C. RISKS ASSOCIATED WITH THE BUSINESS.......................................................................73
XII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN................................................................73
A. CONSEQUENCES TO THE DEBTORS..............................................................................74
1. Cancellation of Debt...........................................................................75
2. Limitations on Tax Carryforwards and Other Tax Benefits........................................76
3. Alternative Minimum Tax........................................................................78
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4. Implementation of the Restructuring Transactions...............................................79
B. CONSEQUENCES TO HOLDERS OF CERTAIN CLAIMS................................................................80
1. Consequences to Holders of Senior Lender Claims and Allowed General Unsecured Claims...........81
2. Holders of Allowed Subordinated Notes Claims...................................................83
3. Distributions in Discharge of Accrued but Unpaid Interest......................................84
4. Ownership and Disposition of the New Secured Term Notes........................................84
5. Tax Treatment of Contingent Payment Right......................................................89
6. Subsequent Sale of Acterna Common Stock........................................................90
7. Ownership and Disposition of Warrants; Constructive
Distributions to Holders of New Common Stock...................................................91
8. Information Reporting and Withholding..........................................................91
XIII. FINANCIAL INFORMATION AND PROJECTIONS..............................................................................92
A. General.................................................................................................100
B. Projected Statement of Operations.......................................................................100
C. Projected Balance Sheet and Statements of Cash Flow.....................................................102
XIV. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN ........................................................103
A. LIQUIDATION UNDER CHAPTER 7.............................................................................103
B. ALTERNATIVE PLAN OF REORGANIZATION......................................................................103
XV. CONCLUSION AND RECOMMENDATION.....................................................................................104
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GLOSSARY
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Acterna Common Stock New common stock of Reorganized Acterna.
Administrative Agent JPMorgan Chase Bank, in its capacity as
administrative agent under the Bank
Credit Agreement.
Administrative Expense
Claim Any expense relating to the
administration of any of the chapter 11
cases, including (i) actual and
necessary costs and expenses of
preserving the Debtors' estates and
operating the Debtors' businesses, (ii)
any indebtedness or obligations incurred
or assumed during the chapter 11 cases,
(iii) allowances for compensation and
reimbursement of expenses to the extent
allowed by the Bankruptcy Court, and
(iv) certain statutory fees chargeable
against the Debtors' estates.
Bank Credit Agreement The Credit Agreement, dated as of May
23, 2000, as amended, among Acterna LLC,
as borrower, various lenders party
thereto, JPMorgan Chase Bank, as
administrative agent, Credit Suisse
First Boston, as syndication agent and
JPMorgan Chase Bank and Deutsche Bank
Trust Company Americas, as
co-documentation agents, and all
documents and instruments relating
thereto, as amended, supplemented, or
modified from time to time. See Section
IV.C.
Bankruptcy Code Title 11 of the United States Code.
Bankruptcy Court The United States Bankruptcy Court for
the Southern District of New York.
Business Day Any day other than a Saturday, a Sunday,
or any other day on which banking
institutions in New York, New York are
required or authorized to close by law
or executive order.
CD&R Clayton, Dubilier & Rice, Inc. and (i)
its Affiliates, (ii) any investment fund
managed by Clayton, Dubilier & Rice,
Inc. and its Affiliates, (iii) any
Affiliates of any such investment fund,
and (iv) current or former directors,
officers, employees, and partners of the
entities described in (i)-(iii) above.
Claim The meaning set forth in section
101 of the Bankruptcy Code.
Communications Test The Debtors' communications test
businesses.
Convertible Notes The publicly held debt issued by Acterna
LLC. See Section IV.D.
Convertible Notes Claim Any Claim arising under or in connection
with the Convertible Notes.
Creditors' Committee The statutory committee of unsecured
creditors appointed in the Debtors'
chapter 11 cases, as constituted from
time to time. da Vinci da Vinci Systems,
Inc.
Designated Asset Sales The sale of all or substantially all of
the equity or assets of Itronix and da
Vinci.
Debtor Affiliate Claim Any Claim, whether secured or unsecured,
of a Debtor against another Debtor.
Debtors Collectively, Acterna Corporation,
Acterna LLC, Acterna WG International
Holdings LLC, TTC International Holdings
LLC, Acterna Business Trust, da Vinci
Systems, Inc., Itronix Corporation, and
TTC Federal Systems, Inc.
DIP Agreement The Revolving Credit Agreement, dated as
of May 6, 2003 (as may be amended,
modified or supplemented from time to
time), as approved by orders of the
Bankruptcy Court, dated May 6, 2003 and
June 19, 2003, among Acterna LLC, as
Borrower, and the other Debtors, as
guarantors, the lenders from time to
time party thereto, JPMorgan Chase Bank,
as administrative agent, J.P. Morgan
Securities Inc., as Lead Arranger and
General Electric Capital Corporation, as
Syndication Agent and all Loan Documents
(as defined therein).
DIP Claims All Claims arising under the DIP
Agreement.
Disclosure Statement This document together with the annexed
exhibits and schedules.
Effective Date A Business Day selected by the Debtors
and the Administrative Agent on which
the conditions to the effectiveness of
the Plan specified in Article IX of the
Plan have been satisfied or waived.
Employee Equity The stock, options and/or similar
incentive awards issued pursuant to the
New Management Incentive Plan.
General Unsecured Claim Any prepetition Claim against any of the
Debtors that is not an Other Secured
Claim, Administrative Expense Claim,
Priority Tax Claim, Priority Non-Tax
Claim, Subordinated Notes Claim,
Convertible Notes Claim, Securities
Litigation Claim, Intercompany Claim, or
Senior Lender Claim.
German L/C Participant Holders of Senior Lender Claims that
also hold a German L/C Participation
Commitment (as defined in the Bank
Credit Agreement) and that has a Claim
against the Debtors for unpaid
reimbursement obligations arising in
connection with drawings under the
German L/C (as defined in the Bank
Credit Agreement).
Indenture Trustee U.S. Bancorp Piper Jaffray, Inc., as
indenture trustee under the Subordinated
Notes Indenture, and any successor
indenture trustee that may be appointed.
Intercompany Claim Any Debtor Affiliate Claim and
Non-Debtor Affiliate Claim.
Itronix Itronix Corporation.
New Common Stock The Acterna Common Stock if the
Restructuring Transactions are not
implemented and, if the Restructuring
Transactions are implemented, both the
Acterna Common Stock and the Newco
Common Stock.
New Management Incentive
Plan The management incentive plan of the
Debtors. See Plan Supplement.
New Secured Term Notes The secured term notes authorized and to
be issued by Reorganized Acterna LLC in
the principal amount of $75,000,000.
New Warrants The three year warrants, if any, to
purchase an aggregate of 5.0% of the
shares of Acterna Common Stock (or, if
the Restructuring Transactions are
implemented, Newco Common Stock). See
Section VI.B.2.
Newco At the Debtors' and the Administrative
Agent's discretion, a Delaware
corporation to be formed on or before
the Effective Date in the event the
Debtors and the Senior Lenders desire to
implement the Restructuring
Transactions.
Newco Common Stock The shares of common stock of Newco.
Non-Debtor Affiliate Claim Any Claim, whether secured or unsecured,
of a Non-Debtor Affiliate against a
Debtor.
Non-Debtor Affiliates Each and every legal entity owned by the
Debtors, either directly or indirectly,
including, Acterna World Holdings GmbH
(Germany), Acterna Communications GmbH
(Germany), Acterna International GmbH
(Germany), Acterna Optical SA (France),
Acterna Investments Limited (Guernsey),
Dynatech Holdings, Ltd. (Guernsey), TTC
Telecommunications SARL (France),
Acterna Export Incorporated (Barbados),
Acterna R & D Japan, Inc. (Japan), da
Vinci Technologies Pte Ltd. (Singapore),
Applied Digital Access Canada Holding
Company, Inc. (Canada), Applied Digital
Access Canada, Inc. (Acterna), Wandel &
Goltermann Tech. Canada (Canada),
Acterna ABC S.A. (France), Acterna
Argentina SA (Argentina), Acterna Asia
Pacific PTY Ltd. (Australia), Acterna
Benelux BV (Netherlands), Acterna Canada
Ltd. (Canada), Acterna de Brasil Ltda &
Cia (Brazil), Acterna de Mexico SA de CV
(Mexico), Acterna Enigen GmbH (Germany),
Acterna Deutscheland GmbH (Germany),
Acterna Espana S.A. (Spain), Acterna
France SARL (France), Acterna Japan K.K.
(Japan), Acterna Malaysia Sdn Bhd
(Malaysia), Acterna Nordic AB (Sweden),
Acterna Schweiz AG (Switzerland),
Acterna Zurich AG (Switzerland), Wandel
& Goltermann Vertriebs GmbH (Austria),
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Wandel & Goltermann Investments Pty Ltd.
(Australia), Acterna India Pvt. Ltd.
(India), Wandel & Goltermann Management
Ltd. (England), Acterna Plymouth Ltd.
(England), Acterna U.K. Ltd. (England),
Acterna Italia SRL (Italy), Wandel &
Goltermann Telektronik BV (Netherlands),
Acterna Hong Kong Ltd. (Hong Kong),
Acterna Korea Ltd. (Korea), Acterna
Austria GmbH (Austria), Wavetek Wandel
Goltermann (Russian Federation), Wavetek
Wandel Goltermann Canada, Inc. (Canada),
Wavetek Wandel Goltermann Polska
Sp.z.o.o. (Poland), WGB Electronica de
Precisao Ltd. (Brazil).
Other Secured Claim Any Secured Claim, as defined in the
Plan, not constituting a Senior Lender
Claim or a Convertible Notes Claim.
Petition Date May 6, 2003.
Plan The Debtors' Joint Plan of
Reorganization Under Chapter 11 of the
Bankruptcy Code, annexed as Exhibit A to
this Disclosure Statement.
Plan Securities The New Common Stock and the New
Warrants, if any.
Plan Supplement The supplement to the Plan to be filed
within 5 days of the Voting Deadline.
Priority Non-Tax Claim Any Claim entitled to priority under the
Bankruptcy Code, other than an
Administrative Expense Claim or a
Priority Tax Claim.
Priority Tax Claim Any Claim of a governmental unit of the
kind entitled to priority in payment
under the Bankruptcy Code.
Ratable Proportion The ratio (expressed as a percentage) of
the amount of an Allowed Claim in a
Class to the aggregate amount of all
Allowed Claims in the same Class.
Reorganized Acterna Acterna Corporation as reorganized as of
the Effective Date in accordance with
the Plan.
Reorganized Acterna LLC Acterna LLC as reorganized as of the
Effective Date in accordance with the
Plan.
Reorganized Debtors The Debtors, and any successor thereto
by merger, consolidation or otherwise
(including, but not limited to, Newco),
on and after the Effective Date.
Reorganized Subsidiaries All of the direct and indirect domestic
subsidiaries of Acterna Corporation that
are debtors-in-possession in these
chapter 11 cases, on and after the
Effective Date.
Restructured German Term
Debt and Restructured
German Term Debt Guranty The debt authorized to be restructured
by Acterna International GmbH, a
Non-Debtor Affiliate of Restructured
German Term Debt Acterna Corporation and
subject to the Restructuring German Term
Debt Guaranty, in the principal Guaranty
amount of (euro)82,498,945.20.
Restructuring Transactions Those transactions described in Section
5.12 of the Plan.
Securities Litigation Claims Any Claim against any of the Debtors,
whether or not the subject of an
existing lawsuit, arising from
rescission of a purchase or sale of
shares or notes of any of the Debtors,
for damages arising from the purchase or
sale of any such security, or for
reimbursement or contribution allowed
under section 502 of the Bankruptcy Code
on account of any such Claim.
Senior Lender Claim All Claims of the Senior Lenders against
the Debtors arising under the Bank
Credit Agreement.
Senior Lenders The agents, lenders and letter of credit
issuing banks that are from time to time
parties to the Bank Credit Agreement.
Subordinated Notes Claim A Claim against Acterna LLC, as
borrower, and Acterna Corporation, as
guarantor, as applicable, arising under
the Subordinated Notes Indenture.
Subordinated Notes Indenture The trust indenture, dated as of May 21,
1998, between Acterna LLC, as issuer of
the Subordinated Notes, and the
Indenture Trustee, and all of the
documents and instruments relating
thereto, as amended, supplemented,
modified or restated as of the Petition
Date.
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I. INTRODUCTION
Acterna Corporation, Acterna LLC, Acterna Business Trust, da Vinci
Systems, Inc., Itronix Corporation, TTC Federal Systems, Inc., Acterna WG
International Holdings LLC, and TTC International Holdings, Inc., as Debtors,
submit this Disclosure Statement pursuant to section 1125 of the Bankruptcy Code
to the holders of Claims against and equity interests in the Debtors in
connection with (i) the solicitation of acceptances of the Debtors' Plan, dated
August 1, 2003, filed by the Debtors with the Bankruptcy Court and (ii) the
Confirmation Hearing scheduled on September 25, 2003. Unless otherwise defined
herein, all capitalized terms contained herein shall have the meanings ascribed
to them in the Plan.
Attached as Exhibits to this Disclosure Statement are copies of the
following documents:
o The Plan (Exhibit A);
o Order of the Bankruptcy Court dated August 26, 2003 (the
"Disclosure Statement Order"), among other things, approving this
Disclosure Statement and establishing certain procedures with
respect to the solicitation and tabulation of votes to accept or
reject the Plan (Exhibit B);
o Acterna Corporation's Audited Consolidated Financial Statements
for the fiscal year ended March 31, 2003 (Exhibit C);
o Acterna Corporation's Unaudited Consolidated Financial
Information for the fiscal quarter ended June 30, 2003 (Exhibit
D);
o Liquidation Analysis (Exhibit E); and
o Letter from the Creditors' Committee Supporting the Plan (Exhibit
F).
In addition, a Ballot for the acceptance or rejection of the Plan is
enclosed with the Disclosure Statement submitted to the holders of Claims that
the Debtors believe may be entitled to vote to accept or reject the Plan.
On August 26, 2003, after notice and a hearing, the Bankruptcy Court
signed the Disclosure Statement Order approving this Disclosure Statement as
containing adequate information of a kind and in sufficient detail to enable
hypothetical, reasonable investors typical of the Debtors' creditors to make an
informed judgment whether to accept or reject the Plan. APPROVAL OF THIS
DISCLOSURE STATEMENT DOES NOT, HOWEVER, CONSTITUTE A DETERMINATION BY THE
BANKRUPTCY COURT AS TO THE FAIRNESS OR MERITS OF THE PLAN.
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The Disclosure Statement Order, a copy of which is annexed hereto as
Exhibit B, sets forth in detail the deadlines, procedures and instructions for
voting to accept or reject the Plan and for filing objections to confirmation of
the Plan, the record date for voting purposes and the applicable standards for
tabulating Ballots. In addition, detailed voting instructions accompany each
Ballot. Each holder of a Claim entitled to vote on the Plan should read this
Disclosure Statement, the Plan, the Disclosure Statement Order and the
instructions accompanying the Ballot in their entirety before voting on the
Plan. These documents contain important information concerning the
classification of Claims and Equity Interests for voting purposes and the
tabulation of votes. No solicitation of votes to accept the Plan may be made
except pursuant to section 1125 of the Bankruptcy Code. The Debtors believe that
the Plan provides the best overall mechanism to maximize the value of the
Debtors. The Plan has the support of certain of the Debtors' key lenders and, as
set forth in the letter annexed hereto as Exhibit F, the Creditors' Committee.
A. HOLDERS OF CLAIMS ENTITLED TO VOTE
Pursuant to the provisions of the Bankruptcy Code, only holders of
allowed Claims or equity interests in classes of Claims or equity interests that
are impaired and that are not deemed to have rejected a proposed chapter 11 plan
are entitled to vote to accept or reject such plan. Classes of Claims or equity
interests in which the holders of Claims or equity interests are unimpaired
under a chapter 11 plan are deemed to have accepted the plan and are not
entitled to vote to accept or reject the plan. Classes of Claims or equity
interests in which the holders of Claims or equity interests will receive no
recovery under a chapter 11 plan are deemed to have rejected the plan and are
not entitled to vote to accept or reject the plan. For a detailed description of
the treatment of Claims and Equity Interests under the Plan, see Article VI of
this Disclosure Statement.
Classes C (Senior Lender Claims), D (General Unsecured Claims), E
(Convertible Notes Claims), F (Subordinated Notes Claims), H (Securities
Litigation Claims), and I (Equity Interests) of the Plan are impaired. Holders
of Allowed Claims in Classes C (Senior Lender Claims), D (General Unsecured
Claims), E (Convertible Notes Claims) and F (Subordinated Notes Claims) may
receive distributions under the Plan. As a result, holders of Claims in Classes
C (Senior Lender Claims), D (General Unsecured Claims), E (Convertible Notes
Claims) and F (Subordinated Notes Claims) are entitled to vote to accept or
reject the Plan. Class H (Securities Litigation Claims) and Class I (Equity
Interests) of the Plan, consisting of Securities Litigation Claims and Equity
Interests, respectively, will not receive any distributions under the Plan. As a
result, holders of Claims and Equity Interests in these Classes are conclusively
presumed to have rejected the Plan. Classes A (Priority Non-Tax Claims), B
(Other Secured Claims) and G (Intercompany Claims) of the Plan are unimpaired.
As a result, holders of Claims in those Classes are conclusively presumed to
have accepted the Plan.
The Bankruptcy Code defines "acceptance" of a plan by a class of
Claims as acceptance by creditors in that class that hold at least two thirds in
5
dollar amount and more than one half in number of the Claims that cast ballots
for acceptance or rejection of a proposed chapter 11 plan. For a more detailed
description of the requirements for confirmation of the Plan, see Section VII.C
of this Disclosure Statement.
If a Class of Claims entitled to vote on the Plan rejects the Plan,
the Debtors reserve the right to amend the Plan or request confirmation of the
Plan pursuant to section 1129(b) of the Bankruptcy Code or both. Section 1129(b)
permits the confirmation of a plan of reorganization notwithstanding the
nonacceptance of a plan by one or more impaired classes of Claims or equity
interests. Under that section, a plan may be confirmed by a bankruptcy court if
it does not "discriminate unfairly" and is "fair and equitable" with respect to
each nonaccepting class. For a more detailed description of the requirements for
confirmation of a nonconsensual plan, see Section VII.C.2 of this Disclosure
Statement.
With respect to those Classes of Claims and Equity Interests that are
deemed to have rejected the Plan, i.e., Class H (Securities ---- Litigation
Claims) and Class I (Equity Interests), the Debtors shall request confirmation
of the Plan pursuant to section 1129(b) of the Bankruptcy Code.
B. VOTING PROCEDURES
If you are entitled to vote to accept or reject the Plan, a Ballot is
enclosed for the purpose of voting on the Plan. Please vote and return your
Ballot(s) to:
-------------------------------------------------
FOR VOTING CLASSES C (SENIOR LENDER CLAIMS), D
(GENERAL UNSECURED CLAIMS), E (CONVERTIBLE NOTES
CLAIMS) AND F (SUBORDINATED NOTES CLAIMS):
ACTERNA CORPORATION
c/o Bankruptcy Services LLC
757 Third Avenue, Third Floor
New York, NY 10017
Attn: Cassandra Murray
-------------------------------------------------
DO NOT RETURN ANY NOTES OR SECURITIES WITH YOUR BALLOT.
TO BE COUNTED, YOUR BALLOT INDICATING ACCEPTANCE OR REJECTION OF THE
PLAN MUST BE RECEIVED BY NO LATER THAN 4:00 P.M., EASTERN TIME, ON --------
SEPTEMBER 22, 2003. ANY EXECUTED BALLOT RECEIVED THAT DOES NOT INDICATE EITHER
AN ACCEPTANCE OR REJECTION OF THE PLAN SHALL BE DEEMED TO CONSTITUTE AN
ACCEPTANCE OF THE PLAN.
Pursuant to the Disclosure Statement Order, the Bankruptcy Court set
August 26, 2003 as the record date for voting on the Plan. Accordingly, only
holders of record as of August 26, 2003 that otherwise are entitled to vote
under the Plan will receive a Ballot and may vote on the Plan.
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If you are a holder of a Claim entitled to vote on the Plan and did
not receive a Ballot, received a damaged Ballot or lost your Ballot, or if you
have any questions concerning this Disclosure Statement, the Plan or the
procedures for voting on the Plan, please call Ms. Cassandra Murray of
Bankruptcy Services LLC at (646) 282-2500.
C. CONFIRMATION HEARING
Pursuant to section 1128 of the Bankruptcy Code, the Confirmation
Hearing will be held on September 25, 2003, commencing at 10:00 a.m. Eastern
Time, before the Honorable Burton R. Lifland, United States Bankruptcy Judge, at
the United States Bankruptcy Court for the Southern District of New York, One
Bowling Green, New York, New York 10004, or such other location as the
Bankruptcy Court directs. The Bankruptcy Court has directed that objections, if
any, to confirmation of the Plan be served and filed so that they are received
by no later than September 15, 2003, at 4:00 p.m. Eastern Time, in the manner
described below in Section VII.B of this Disclosure Statement. The Confirmation
Hearing may be adjourned from time to time by the Bankruptcy Court without
further notice except for the announcement of the adjournment date made at the
Confirmation Hearing or at any subsequent adjourned Confirmation Hearing.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF
THE DATE HEREOF UNLESS ANOTHER TIME IS SPECIFIED HEREIN, AND THE DELIVERY OF
THIS DISCLOSURE STATEMENT SHALL NOT CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION STATED SINCE THE DATE HEREOF. HOLDERS OF CLAIMS
ENTITLED TO VOTE SHOULD CAREFULLY READ THIS DISCLOSURE STATEMENT, IN ITS
ENTIRETY, INCLUDING THE PLAN, PRIOR TO VOTING ON THE PLAN.
FOR THE CONVENIENCE OF HOLDERS OF CLAIMS AND EQUITY INTERESTS, THIS
DISCLOSURE STATEMENT SUMMARIZES THE TERMS OF THE PLAN, BUT THE PLAN ITSELF
QUALIFIES ALL SUMMARIES. IF ANY INCONSISTENCY EXISTS BETWEEN THE PLAN AND THIS
DISCLOSURE STATEMENT, THE TERMS OF THE PLAN ARE CONTROLLING. THIS DISCLOSURE
STATEMENT MAY NOT BE RELIED ON FOR ANY PURPOSE, OTHER THAN TO DETERMINE WHETHER
TO VOTE TO ACCEPT OR REJECT THE PLAN, AND NOTHING STATED HEREIN SHALL CONSTITUTE
AN ADMISSION OF ANY FACT OR LIABILITY BY ANY PARTY, OR BE ADMISSIBLE IN ANY
PROCEEDING INVOLVING THE DEBTORS OR ANY OTHER PARTY, OR BE DEEMED CONCLUSIVE
EVIDENCE OF THE TAX OR OTHER LEGAL EFFECTS OF THE PLAN ON THE DEBTORS OR HOLDERS
OF CLAIMS OR EQUITY INTERESTS. CERTAIN OF THE STATEMENTS CONTAINED IN THIS
DISCLOSURE STATEMENT, BY NATURE, ARE FORWARD LOOKING AND CONTAIN ESTIMATES AND
7
ASSUMPTIONS. THERE CAN BE NO ASSURANCE THAT SUCH STATEMENTS WILL BE REFLECTIVE
OF ACTUAL OUTCOMES. ALL HOLDERS OF CLAIMS SHOULD CAREFULLY READ AND CONSIDER
FULLY THE RISK FACTORS SET FORTH IN ARTICLE XI OF THIS DISCLOSURE STATEMENT.
SUMMARIES OF CERTAIN PROVISIONS OF AGREEMENTS REFERRED TO IN THIS
DISCLOSURE STATEMENT DO NOT PURPORT TO BE COMPLETE AND ARE SUBJECT TO, AND ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, THE FULL TEXT AND TO ALL OF THE
PROVISIONS OF THE APPLICABLE AGREEMENT, INCLUDING THE DEFINITIONS OF TERMS
CONTAINED IN SUCH AGREEMENT.
THE DEBTORS BELIEVE THAT THE PLAN WILL ENABLE THEM TO SUCCESSFULLY
REORGANIZE AND ACCOMPLISH THE OBJECTIVES OF CHAPTER 11 AND THAT ACCEPTANCE OF
THE PLAN IS IN THE BEST INTERESTS OF THE DEBTORS, THEIR CREDITORS AND ALL
PARTIES IN INTEREST.
II. OVERVIEW OF THE PLAN
The following table briefly summarizes the classification and
treatment of Claims and Equity Interests under the Plan:
SUMMARY OF CLASSIFICATION AND TREATMENT
OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN
Class Type of Claim or Treatment Estimated
- ----- Equity Interest --------- Recovery
--------------- --------
- -- Administrative Unimpaired; paid in full, in Cash, or in accordance with the 100%
Expense Claims terms and conditions of transactions or agreements relating to
obligations incurred in the ordinary course of business during
the pendency of these Chapter 11 Cases or assumed by the
Debtors.
- -- Priority Tax Claims Unimpaired; except to the extent paid prior to Effective Date 100%
or the holder agrees to a different treatment, at the option of
the Reorganized Debtors either (i) paid in full, in Cash, or
(ii) paid over a six year period from the date of assessment as
provided in section 1129(a)(9)(C) of the Bankruptcy Code with
interest payable at a rate of 5.0% per annum or as otherwise
established by the Bankruptcy Court, provided, however, that,
unless an Allowed Priority Tax Claim is of a kind that is
supported by the personal liability of an employee or a former
employee of the Debtors, the Debtors must obtain the consent of
the Administrative Agent to elect option (i).
8
A Priority Non-Tax Claims Unimpaired; except to the extent paid prior to Effective Date 100%
or agrees to a different treatment, paid in full, in Cash.
B Other Secured Claims Unimpaired; except to the extent paid prior to Effective Date 100%
or the holder agrees to a different treatment, at the option of
the Reorganized Debtors either (i) reinstated by curing all
outstanding defaults, with all legal, equitable and contractual
rights remaining unaltered, (ii) paid in full, in Cash, plus
interest required to be paid pursuant to section 506(b) of the
Bankruptcy Code, or (iii) fully and completely satisfied by
delivery or retention of the Collateral securing the Other
Secured Claims and payment of interest required to be paid
pursuant to section 506(b) of the Bankruptcy Code.
C Senior Lender Claims (1) Impaired; distribution of a Ratable Proportion of (i) 100% of 41% (2)
the shares of the New Common Stock, subject to dilution by
- -----------------------------------
(1) The Senior Lender Claims shall be deemed Allowed Claims in the aggregate
amount not less than $701,717,408 plus interest fees and expenses therein.
(2) The estimated recoveries for holders of Senior Lender Claims are based upon
the current estimates of the (i) mid-point value of the New Common Stock
($93,425,000), (ii) the principal amount of the New Secured Term Notes projected
to be outstanding on the Effective Date ($75,000,000), (iii) the principal
amount of the Restructured German Term Debt projected to be outstanding on the
Effective Date (approximately $91,572,000), and (iv) the principal amount of
Non-Debtor Affiliate secured debt projected to be outstanding on the Effective
Date (approximately $20,003,000). The estimated recoveries also include
$24,392,000 in Cash, which represents the portion of Cash proceeds projected to
be generated from the divestitures of the Itronix and da Vinci business units
that, subject to the consummation of such divestitures, is projected to be
distributed to the Senior Lenders pursuant to the Plan. See Article X of this
Disclosure Statement. To the extent that the actual values of the New Common
Stock, the New Secured Term Notes and the Restructured German Term Debt vary
from the amounts set forth herein, the recoveries of holders of Senior Lender
Claims may be higher or lower.
9
Management Incentive Plan; (ii) $75,000,000 in principal amount
of the New Secured Term Notes; (iii) any excess cash available
on the Effective Date, and (iv) net cash proceeds from
Designated Asset Sales. In addition, each German L/C
Participant shall receive its Ratable Proportion of the
Restructured German Term Debt.
D General Unsecured Claims (3) Impaired; distribution of a Ratable Proportion of the lesser of Approx-imately
$5,000,000 and 10% of the aggregate Allowed General Unsecured 10%
Claims, provided, however, that in no event shall the
distribution to holders of Allowed Claims in Class D be less
than $3,500,000.
E Convertible Notes Claims (4) Impaired; with the agreement and consent of CD&R, the holders N/M
of Allowed Claims in Class E shall receive no distribution on
account of such Claims.
F Subordinated Notes Claims (5) Impaired; if holders of Allowed Claims in Class F vote to N/M (6)
accept the Plan by the requisite statutory majorities set forth
in section 1126(c) of the Bankruptcy Code,
such holders will receive a Ratable Proportion of the New
Warrants. If the releases set forth in Section 5.11 of the
Plan and the exculpation in Section 10.6 of the Plan are
approved, CD&R will waive in its entirety, its right to receive
- -------------------------------
(3) The estimated recoveries for holders of Allowed General Unsecured Claims are
based upon the estimate of the aggregate Allowed General Unsecured Claims being
equal to between $30,000,000 and $35,000,000, which is the aggregate amounts set
forth in the Debtors' Schedules of Assets and Liabilities, dated June 24, 2003.
(4) The Convertible Notes Claims shall be deemed Allowed Claims solely for
purposes of the Plan in the aggregate amount of $89,252,818. Allowance of the
Convertible Notes Claims is subject to confirmation of the Plan.
(5) The Subordinated Notes Claims shall be deemed Allowed Claims solely for
purposes of the Plan in the aggregate amount of $176,479,264. Allowance of the
Subordinated Notes Claims is subject to confirmation of the Plan.
(6) The Debtors estimate that the New Warrants will have nominal economic value.
10
any recovery as a holder of a Class E or Class F Claim and
assign such right of distribution so as to allow the
distribution which would have been otherwise provided to CD&R
to be provided to the other holders of the Subordinated Notes
Claims.
G Intercompany Claims (7) Unimpaired; the legal, equitable, and contractual rights of 100%
holders of Intercompany Claims are unaltered by the Plan,
unless such Intercompany Claims are canceled, or subordinated,
at the option of the Debtors.
H Securities Litigation Claims Impaired; no distribution. 0%
I Equity Interests Impaired; no distribution. 0%
III. GENERAL INFORMATION
A. OVERVIEW OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of itself, its creditors and its
equity interest holders. In addition to permitting the rehabilitation of a
debtor, another goal of chapter 11 is to promote equality of treatment for
similarly situated creditors and similarly situated equity interest holders with
respect to the distribution of a debtor's assets.
The commencement of a chapter 11 case creates an estate that is
comprised of all of the legal and equitable interests of the debtor as of the
commencement date. The Bankruptcy Code provides that the debtor may continue to
operate its business and remain in possession of its property as a "debtor in
possession."
The consummation of a plan of reorganization is the principal
objective of a chapter 11 reorganization case. A plan of reorganization sets
forth the means for satisfying Claims against and equity interests in a debtor.
Confirmation of a plan of reorganization by the bankruptcy court binds the
debtor, any issuer of securities under the plan, any person acquiring property
under the plan and any creditor or equity interest holder of a debtor. Subject
to certain limited exceptions, the order approving confirmation of a chapter 11
plan discharges a debtor from any debt that arose prior to the date of
confirmation of the plan and substitutes therefor the obligations specified
under the confirmed plan.
- --------------------------
(7) The Debtors' books and records reflect Intercompany Claims in the aggregate
amount of $236,870,460.
11
Certain holders of allowed Claims against and interests in a debtor
are permitted to vote to accept or reject the plan. Prior to soliciting
acceptances of the proposed plan, however, section 1125 of the Bankruptcy Code
requires a debtor to prepare a disclosure statement containing adequate
information of a kind, and in sufficient detail, to enable a hypothetical
reasonable investor to make an informed judgment regarding the plan.
B. DESCRIPTION AND HISTORY OF BUSINESS
Acterna Corporation is the ultimate parent corporation of the
Subsidiary Debtors and the Non-Debtor Affiliates. The Debtors were formed in
1959 and are a global communications equipment company focused on network
technology solutions. The Debtors' operations are conducted by wholly-owned
subsidiaries located principally in the United States and Europe with other
operations, primarily sales offices, located in Asia and Latin America. The
Debtors operate through three principal business segments: (i) Communications
Test; (ii) industrial computing and communications businesses through Itronix;
and (iii) digital color correction systems businesses through da Vinci.
1. Communications Test.
The Debtors operate the world's second largest communications test
and management company. In 2000, the Debtors established their current market
position through the merger of a former subsidiary of Acterna Corporation, TTC,
LLC -- at the time, the third largest communications test company in the world
- -- and Wavetek Wandel Golterman ("WWG") -- at the time, the world's second
largest communications test company.
The Debtors, through their Communications Test business segment,
develop, manufacture, and market a broad range of instruments, systems,
software, and services around the globe, through their direct sales force in
thirty-one (31) countries and their representation in one hundred sixty-four
(164) countries. The Debtors own more than fifty (50) patents in communications
test technology. Communications service providers, equipment manufacturers, and
service users utilize the Debtors' Communications Test equipment and services to
more cost-effectively develop, manufacture, deploy, and manage advanced
communications networks. The Debtors enjoy market leadership in providing
communications test solutions for access/metro and cable networks, and are among
the leaders in the optical transport market.
The Debtors provide services to communications service providers
around the world, including companies such as Verizon, AT&T Corp., SBC
Communications, Inc., Deutsche Telekom, France Telecom, and British Telecom.
These companies, and others, rely on the Debtors' products and services to
configure, test and manage network elements and the traffic that runs across
their individual networks. Communications equipment manufacturers, such as Cisco
12
Systems, Inc., Alcatel, Siemens AG, Lucent Telecommunications, Inc., Nortel
Networks Corporation, and others, depend on the Debtors to develop new products
and to verify the proper functioning of their products during final assembly and
qualifications testing. Finally, service users rely on these products to ensure
the proper functioning of their communications networks.
2. Communications Test International Operations.
As stated above, the Debtors, through their Communications Test
business segment, maintain a direct sales force in thirty-one (31) countries and
representation in one hundred sixty-four (164) countries throughout the world.
Specifically, Communications Test maintains manufacturing facilities and sales
subdivisions or branches in North America and Europe, and sales subdivisions in
Latin America and Asia and have distribution agreements in other countries where
sales volume does not warrant a direct sales organization. After the acquisition
of WWG in May 2000, Communication Test's foreign sales (including exports from
North America directly to foreign customers) grew from 12% of consolidated sales
in FY 2000 to 39% and 42% of consolidated net sales in FY 2001 and FY 2002,
respectively. The countries in which Communication Test's main foreign
operations are located are set forth in the table below:
- -------------------------------------------- -------------------------------------------- ------------------------------------------
NORTH AMERICA
AND LATIN AMERICA ASIA PACIFIC EUROPE
- -------------------------------------------- -------------------------------------------- --------------------- --------------------
United States Japan Germany Austria
Canada Hong Kong U.K. Russia
Mexico South Korea France Sweden
Brazil China Italy Switzerland
Taiwan Spain
Australia
India
- -------------------------------------------- -------------------------------------------- --------------------- --------------------
Separate legal entities own the foreign operations of each of the
Debtors' three business lines, although certain international functions, such as
foreign cash management, are largely controlled centrally through Communication
Test's operations in Germany. Acterna International GmbH (Germany), a non-Debtor
indirect subsidiary of Acterna Corporation, owns the primary foreign
subsidiaries in the Communications Test business; Dynatech Corporation Ltd.
(England), a non-Debtor indirect subsidiary of Acterna Corporation, owns the
Itronix foreign subsidiaries; and TTC International Holdings, Inc., one of the
Debtors, owns the da Vinci foreign subsidiary. A summary of the Debtors'
organizational structure is set forth below.
13
-------------------
Acterna Corporation
-------------------
| 100%
|
-------------------
Acterna LLC
-------------------
|
|
------------------------------------------------------------
100% 100% 100%
- ----------------- ------------------------ ------------------ ---------------------
Acterna World Acterna WG International TTC International 100% Acterna
Holdings GmbH Holdings LLC Holdings, Inc. --- Business Trust
- ----------------- ------------------------ ------------------ ---------------------
| 6% | | | | 100%
| | | 2% | | ------------- ---------------------
| 94% | | | | da Vinci 100% da Vinci
- ---------------------- | | | subsidiary --- Systems, Inc.
Acterna International | ________|<_| ------------- ---------------------
GmbH | | 98%
- ---------------------- | ---------------- --------------------
| | | Dynatech 100% Itronix
| ------| | Corporation Ltd --- Corporation
| | | ----------------- ---------------------
| 100% | | | 100%
- --------------------- | | ----------------- ---------------------
Foreign | | 14.5% Itronix 100% TTC Federal
Communications | 85.5% | Subsidiaries --- Systems, Inc.
Test Subsidiaries | | ----------------- ---------------------
- --------------------- -----------------------
TTC Telecommunications
France SARL
(France)
-----------------------
|
| 100%
-----------------------
Acterna IPMS
SAS (France)
-----------------------
3. Acterna IPMS SAS (France).
Acterna IPMS SAS (France) ("IPMS") is a research and development
company that is wholly owned by TTC Telecommunications France SARL, a non-Debtor
Affiliate of Acterna Corporation which develops, manufactures, and markets a
broad range of instruments, systems, software, and services in Europe. IPMS
designs and manufactures hardware systems and probes for deployment in central
offices, remote terminals and customer's premises throughout Europe and Asia.
IPMS has its own manufacturing capabilities and a limited sales force. If the
Restructuring Transactions are implemented, IPMS intends to enter into arms'
length agreements with the Reorganized Debtors in order to assist in marketing
its products and systems after the Effective Date.
IPMS' product line can be divided into two separate categories. The
first product line focuses on an in line system that collects performance
monitoring data. The performance monitoring systems are mature products and
deployed by private line and cellular service providers. The second product line
is an adjunct test head used for testing high speed internet services. The test
head is a newly released product and represents significant growth opportunities
providing services in Europe for companies such as British Telecom.
14
4. Itronix.
Itronix, headquartered in Spokane, Washington, is a leading global
provider of mobile, wireless ruggedized computing solutions, including laptop
and handheld computing devices. Ruggedized devices are devices that are
specially strengthened for better resistance to wear, stress and abuse. Business
and governmental units, including those responsible for providing public safety,
telecommunications companies, and the military, use ruggedized devices
regularly. Itronix also provides a wide range of support services including
long-term maintenance contracts, implementation support, product installation,
and asset management.
Itronix offers a broad product and service line, including computing
devices across the full continuum of semi-rugged to fully-rugged configurations.
Itronix products and services are sold worldwide through its direct sales force
as well as resellers and manufacturers representatives.
5. da Vinci.
da Vinci manufactures and sells digital color correction systems.
Video post-production and commercial production facilities use these systems to
correct and enhance color saturation levels as video images are transferred from
film to video tape for editing and distribution. da Vinci sells its systems
worldwide through its direct sales force in the United States, and in Europe and
Asia via marketing representatives, as well as in conjunction with manufacturers
of related products. da Vinci sells its products primarily to post-production
and video production professionals and producers of content for standard and
high-definition television markets.
C. MARKET INFORMATION
Acterna Corporation is a reporting company under Section 12(g) of the
Securities and Exchange Act of 1934, with its common stock currently listed on
the Over-the-Counter Bulletin Board (ticket symbol "ACTR.OB"). On February 3,
2003, the common stock of Acterna was delisted from the NASDAQ SmallCap Market
("NASDAQ"), where it previously traded under the ticker symbol "ACTR." As of
March 31, 2003, there were 192,259,985 shares of Acterna Corporation's common
stock outstanding. All Equity Interests in Acterna Corporation, including all
shares of Acterna Corporation's common stock, will be cancelled on the Effective
Date pursuant to the Plan.
15
IV. EVENTS PRECEDING THE
COMMENCEMENT OF THE CHAPTER 11 CASES
A. THE CD&R ACQUISITION AND THE SUBORDINATED NOTES
On December 19, 1997, the Board of Directors of Acterna Corporation
approved a management-led recapitalization by CD&R, by way of merger, pursuant
to the Agreement and Plan of Merger, dated as of December 20, 1997, between
Acterna Corporation and CD&R.
On May 21, 1998, CD&R completed the $848 million management-led
recapitalization of Acterna Corporation. As of March 31, 2002, CD&R held
approximately 80.1% of the outstanding shares of common stock of Acterna
Corporation.
In connection with the acquisition, Acterna LLC issued $275 million
in principal amount of the Subordinated Notes pursuant to the Subordinated Notes
Indenture. The Subordinated Notes are guaranteed by Acterna Corporation.
B. THE TENDER OFFERS
In June 2002, the Debtors determined to reduce the outstanding
obligations under the Subordinated Notes by tendering for the Subordinated Notes
at a discount. Specifically, on June 24, 2002, Acterna LLC, along with CD&R VI
(Barbados), Ltd., a wholly-owned subsidiary of CD&R Fund VI, commenced cash
tender offers, as amended, for up to $155 million in principal amount (56% of
aggregate principal amount), on a combined basis, of its outstanding
Subordinated Notes (the "Tender Offers"). The Tender Offers provided for cash
consideration of $220 in exchange for each $1,000 principal amount of
Subordinated Notes tendered. These combined Tender Offers expired on August 12,
2002, and, while not fully subscribed, resulted in the purchase and retirement
of Subordinated Notes having an aggregate principal value of $106.3 million (39%
of aggregate principal amount) by Acterna LLC and the purchase of Subordinated
Notes having an aggregate principal value of $43.0 million (16% of aggregate
principal amount) by CD&R Barbados. In connection with these combined Tender
Offers, Acterna LLC granted CD&R Barbados the right (which CD&R Barbados agreed
to exercise only at the request of the administration agent under the Bank
Credit Facility (defined below)) to invest all future cash interest received, on
an after tax basis, on the Subordinated Notes held by CD&R Barbados, in new
senior secured convertible notes of Acterna LLC. The new notes issued upon such
reinvestment have terms substantially similar to the Convertible Notes (defined
below) with an additional adjustable interest rate to be determined every six
months. During December 2002, in connection with an interest payment on the
Subordinated Notes by Acterna LLC, CD&R Barbados exercised the right to reinvest
$2.8 million of its after-tax interest proceeds in newly issued Convertible
Notes outstanding.
16
C. DEBT FINANCING
In May 2000, in order to finance the acquisition of WWG, and to
provide additional working capital, the Debtors entered into the Bank Credit
Agreement. The Bank Credit Agreement originally consisted of approximately
$585.0 million in term loans (the "Term Loan Facility"), a revolving credit
facility of $175.0 million, including availability of approximately $35.0
million in letters of credit (the "Revolving Credit Facility"), approximately
(euro)108.375 million in an additional term loan (the "German Term Loan
Facility") pursuant to which a letter of credit in the face amount of
(euro)110,000,000 was issued as collateral for the German Term Loan. The Term
Loan Facility, the Revolving Credit Facility, the German Term Loan Facility and
the German L/C Facility, are collectively referred to herein as the "Bank Credit
Facility". The borrower under the Term Loan Facility and the Revolving Credit
Facility is Acterna LLC. Acterna International GmbH, a Non-Debtor Affiliate, is
the borrower under the German Term Loan and the primary obligor under the German
L/C.
The obligations under the Bank Credit Agreement are guaranteed by
each of the Debtors and are (other than the German Term Loan, but including the
reimbursement obligation under the German L/C) secured by liens on substantially
all of the assets of Acterna LLC and the Credit Agreement Guarantors, including
(i) cash, (ii) accounts receivable, (iii) inventory, (iv) 100% of the equity of
Acterna LLC, Acterna Business Trust, da Vinci Systems, Inc., Itronix
Corporation, and TTC Federal Systems, Inc., (v) 65% of the equity of certain
other subsidiaries of Acterna Corporation, including Acterna World Holdings GmbH
(Germany), Acterna WG International Holdings LLC, TTC International Holdings,
Inc., and Applied Digital Access Canada Holding Company, Inc. (Canada), (vi)
chattel paper, (vii) contracts, (viii) documents, (ix) equipment, (x) general
intangibles, (xi) instruments, (xii) intellectual property, (xiii) all books and
records pertaining to the foregoing, and (xiv) all proceeds and products of the
foregoing.
Since 2001, the Debtors have actively engaged in negotiations with
the Senior Lenders in order to remain in compliance with the covenants set forth
in the Bank Credit Agreement. These negotiations have led to two modifications
to the Bank Credit Agreement.
On December 27, 2001, in order to remain in compliance with the Bank
Credit Facility and obtain a waiver of potential covenant defaults, CD&R Fund VI
invested an additional $75 million in the Debtors in the form of Convertible
Notes, which are described below.
In addition, during July 2002, the Debtors reached agreement with the
Senior Lenders regarding a second amendment to the Bank Credit Facility. Under
these amendments, which became effective on August 7, 2002, the Senior Lenders,
among other things, agreed to certain changes to financial covenants in the
Revolving Credit Facility. As part of this agreement, the minimum cumulative
EBITDA covenants were modified and the sale of Airshow, Inc. was permitted (as
described below). In addition, the Senior Lenders permitted the Debtors to use
up to $24 million to purchase a portion of the Subordinated Notes pursuant to
the Tender Offers, as described above.
17
D. THE CONVERTIBLE NOTES
On January 15, 2002, and in furtherance of the first amendment of the
Bank Credit Facility described above, Acterna LLC issued to CD&R Fund VI $75
million in principal amount of Convertible Notes pursuant to that certain
Investment Agreement, dated as of January 15, 2002, between and among Acterna
Corporation, Acterna LLC and CD&R Fund VI. The Convertible Notes bear interest
at the rate of 12% per annum. Interest on the Convertible Notes is payable
semi-annually in arrears on the last day each of March and September, with
interest payments having commenced on March 31, 2002. At the option of Acterna
LLC, interest on the Convertible Notes is payable in cash or in-kind by the
issuance of additional Convertible Notes. Due to limitations imposed under the
Bank Credit Facility, Acterna LLC has paid interest on the Convertible Notes
in-kind by issuing additional Convertible Notes. The Convertible Notes are
secured by a second lien on all of the assets of Acterna Corporation and its
subsidiaries that secure the Bank Credit Facility, and are guaranteed by Acterna
Corporation and each of its domestic subsidiaries that have guaranteed the Bank
Credit Facility.
E. FINANCIAL PERFORMANCE AND
PREPETITION RESTRUCTURING EFFORTS
The Debtors have experienced and continue to experience financial
difficulties due primarily to the dramatic downturn in the communications
industry and the decline in network expansion activity and capital spending
generally by the Debtors' communication and networking customers. The economic
downturn has impaired the Debtors' large communication and networking customer
base and has resulted in diminished product demand, excess manufacturing
capacity and erosion of average selling prices. The Debtors' revenue has
decreased dramatically from approximately $1.29 billion in FY 2001 to
approximately $680 million in FY 2003.
In response to the continuing decline in product demand, commencing
in 2001, the Debtors (i) initiated aggressive cost reduction and head count
reduction programs aimed at aligning their ongoing operating costs with their
expected revenues, (ii) sought to divest unprofitable and/or non-core business
units and utilize net proceeds to pay down long-term debt, (iii) obtained
waivers from the Senior Lenders to remain in compliance with the Bank Credit
Facility, and (iv) received additional capital from CD&R, the Debtors' equity
sponsor. Additionally, in their efforts to restructure their operations and
their long-term debt, the Debtors engaged legal and financial advisors
experienced in restructurings and have appointed John Dubel of AP Services, LLC
(an affiliate of AlixPartners LLC), as chief restructuring officer to augment
their management team.
18
F. COST CUTTING INITIATIVES
Since March 2001, the Debtors have implemented nine rounds of cost
cutting initiatives and have recently initiated their tenth work force
reduction. The Debtors' cost cutting initiatives have primarily focused on
consolidating operations, closing excess manufacturing and other facilities,
reducing the size of the work force and outsourcing the manufacture of certain
of its product lines. The Debtors have also enacted certain benefit reductions
for existing employees. From March 2001 through April 2003, the Debtors
(excluding certain divestitures) have reduced their workforce by approximately
3,000 employees (54%) and have announced annualized cost savings of
approximately $340 million.
G. SIGNIFICANT PREPETITION DIVESTITURES
1. Airshow, Inc.
On June 13, 2002, Acterna signed a definitive agreement to sell its
wholly- owned subsidiary, Airshow, Inc., to Rockwell Collins, Inc. for $160
million. On August 9, 2002, the Airshow sale was consummated. The Airshow
business was a non-core business that provided inflight video information
systems and services for passengers of private and commercial aircraft. The
Debtors used the net proceeds from the sale of Airshow to repay $128.5 million
of outstanding debt under the Bank Credit Facility. Concurrent with the sale of
Airshow, the Debtors completed the Tender Offers for the Subordinated Notes,
described above.
2. Zurich Wireless Systems.
On March 20, 2003, Acterna LLC entered into a purchase and sale
agreement with Noser Services AG for the sale of certain of Acterna LLC's
wireless assets. The transaction was closed on March 31, 2003. To induce Noser
Services to assume liabilities and obligations to certain customers, Acterna LLC
paid Noser Services approximately $4.3 million. Acterna LLC retained certain
customer contracts and accounts receivable which Acterna LLC will collect from
customers based on the ongoing performance of Noser Services. As a result of
this divestiture, Acterna LLC expects to achieve cost savings of approximately
$4.0 million in FY 2004 as compared to a controlled shutdown of these assets.
3. Wiltek Communications GmbH.
On March 31, 2003, the Debtors completed the disposition of certain
assets of their Communications Test wireless business via the sale of the
Debtors' interest in voting rights of Wiltek Communications GmbH to Investcorp.
Investcorp paid $4.9 million for such interest, which amount represented
repayment of a loan previously provided by the Debtors to Wiltek, settlement of
outstanding accounts receivable and payment of the final installments on the
original sale of the assets to Wiltek by the Debtors.
19
4. Status Monitoring and Performance.
On February 13, 2003, Acterna entered into a purchase and sale
agreement with Tollgrade Communications for its Status Monitoring and
Performance assets for a total purchase price of $16.7 million, subject to a
contingent payment obligation based upon the achievement of certain performance
obligations.
5. Computer Medical Systems, Inc.
On March 7, 1997, Acterna sold all of the assets of Computerized
Medical Systems, Inc. to CMSI Holdings Corp. ("CMSI"). These assets are
comprised of business developing, marketing, and computerized planning systems
serving the field of radiation oncology. Acterna owns 6,300 preferred shares of
CMSI with a due date/payment date of March 31, 2004. Acterna is currently in
discussions with CMSI about the redemption of these shares.
H. TERM SHEET NEGOTIATIONS
Prior to the commencement of these Chapter 11 Cases, the Debtors
concluded that all parties in interest would be best served by a pre-negotiated
chapter 11 case that would permit the Debtors to emerge expeditiously from
chapter 11 with minimal additional disruption to operations. As a result, the
Debtors and their professionals engaged in extensive negotiations with the
steering committee for the Senior Lenders regarding the terms of a
pre-negotiated plan of reorganization.
On or about May 5, 2003, following these negotiations, the Debtors
and certain key Senior Lenders reached an agreement on a term sheet regarding,
among other things, the treatment of the Senior Lender Claims in these Chapter
11 Cases and the proposed capital structure of the Debtors upon emergence from
chapter 11. The term sheet, which provides the foundation for the Plan, provided
for, among other things:
o a recovery to the Senior Lenders of (i) 100% of the equity of
Reorganized Acterna, subject to dilution by (x) shares issued in
connection with warrants to be issued to CD&R in respect of the
Convertible Notes and to the holders of the Subordinated Notes,
and (y) equity securities to be issued in connection with a
post-Effective Date management incentive plan; (ii) a $75,000,000
secured note, with interest principally payable in kind; (iii)
any excess cash available on the Effective Date; and (iv) net
cash proceeds from Designated Asset Sales. Additionally, each
German L/C Participant shall receive its Ratable Proportion of
the Restructured German Term Debt.
o a recovery to holders of the Convertible Notes and the holders of
the Subordinated Notes of two year warrants for each Class to
purchase 2.5% of the new common stock of Reorganized Acterna
(subject to dilution by any equity securities to be issued in
connection with a post-Effective Date management incentive plan).
20
o a recovery to general unsecured creditors of their pro rata share
of the lesser of $5,000,000 and 10% of the allowed amount of
general unsecured Claims.
V. THE REORGANIZATION CASE
A. COMMENCEMENT OF THE CHAPTER 11 CASES
The Chapter 11 Cases were commenced on May 6, 2003. The Debtors
continues to operate their businesses and manage their properties as
debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
B. ADMINISTRATION OF THE CHAPTER 11 CASES
1. First Day Orders.
On the Petition Date, the Debtors obtained a series of orders from
the Bankruptcy Court designed to minimize any disruption of business operations
and to facilitate their reorganization.
o Case Administration Orders. These orders: (i) authorized the
joint administration of the chapter 11 cases, (ii) established
notice procedures, (iii) established procedures for interim
compensation for professionals, (iv) granted an extension of the
time to file the Debtors' schedules and statements, and (v)
authorized the mailing of initial notices and all other mailings
directly to parties in interest and the filing of a list of
creditors without claim amounts in lieu of a matrix.
o Payments on Account of Certain Prepetition Claims. The Bankruptcy
Court authorized the payment of prepetition: (i) wages,
compensation, and employee benefits, (ii) sales and use taxes,
(iii) claims of common carriers and warehousemen, (iv) custom
duties and customs broker charges, (v) claims of critical trade
vendors, and (vi) claims of foreign creditors.
o Business Operations. The Bankruptcy Court authorized the Debtors
to: (i) continue certain customer service programs, (ii) continue
prepetition premium obligations under workers' compensation
insurance and all other insurance policies, (iii) maintain
existing bank accounts and business forms, (iv) continue their
centralized cash management system, including the ability to fund
the Non-Debtor Affiliates, (v) provide adequate assurance to
utility companies including the payment of certain prepetition
claims, and (vi) grant administrative expense status to
21
undisputed obligations arising from the postpetition delivery of
goods ordered in the prepetition period and make payment of such
claims in the ordinary course of business.
o Bankruptcy Matters. The Bankruptcy Court authorized the Debtors
to: (i) reject 19 unexpired leases of nonresidential real
property, and (ii) obtain postpetition financing in the amount of
$30 million under the DIP Agreement on a secured and
superpriority basis.
2. Debtor in Possession Financing.
On the Petition Date, the Debtors obtained an interim order from the
Bankruptcy Court authorizing the Debtors (through borrowings from Acterna LLC)
to borrow up to $30,000,000 under the DIP Credit Facility provided by the DIP
Lenders. The Bankruptcy Court entered a final order approving the DIP Credit
Facility on June 19, 2003.
The DIP Agreement is the Revolving Credit Agreement, dated as of May
5, 2003, among Acterna LLC and each of its subsidiaries named therein, the
lenders thereto, JPMorgan Chase Bank, as Lenders' Agent (as defined in the DIP
Agreement). The Debtors entered into the DIP Agreement in order to ensure that
they had the necessary liquidity to fund their operations during the Chapter 11
Cases.
The lenders under the DIP Agreement agreed to provide credit, subject
to a borrowing base limit, of up to $30 million (including a $10 million letter
of credit sublimit). In the absence of the sale of Itronix and/or da Vinci, the
borrowing base under the DIP Agreement is approximately $15 million. Borrowings
under the DIP Agreement initially bear interest at (i) 3.00% plus the alternate
base rate, payable monthly in arrears; or (ii) 4.00% plus the adjusted LIBOR
rate, which rates will be reduced to (x) 1.00% plus the alternate base rate or
(y) 2.00% plus the adjusted LIBOR if certain asset sale proceeds are obtained
and funded into an asset sale proceeds account. The DIP Agreement terminates on
the earliest of May 6, 2004 and the Effective Date of the Plan.
The obligations under the DIP Agreement are secured by a first
priority senior priming lien on substantially all assets of the Debtors.
Moreover, the obligations under the DIP Agreement are entitled to superpriority
status. That is, they are to be paid before any other unsecured obligations of
the Debtors, including administrative expenses and other Claims entitled to
priority under the Bankruptcy Code.
As of the date hereof, no amounts are outstanding and no letters of
credit have been issued under the DIP Agreement.
3. Key Employee Retention Plan.
On July 22, 2003, the Bankruptcy Court approved the Debtors' employee
retention policy for key employees. The retention policy was designed to
22
encourage key employees and key executives to remain with the Debtors by
providing them with additional compensation of approximately $2.7 million. This
retention program supplements the prepetition retention program, pursuant to
which the Debtors made prepetition retention payments aggregating approximately
$2.8 million to certain key employees on December 15, 2002 and April 15, 2003,
respectively. The Bankruptcy Court also approved the continuation and
modification of the Debtors' severance policy.
4. Assets Sales During the Chapter 11 Cases.
a. Airaudit
On May 28, 2003, the Debtors entered into a purchase agreement to
sell certain of the assets of a non-core wireless business to Casabyte, Inc. for
$600,000, plus the assumption of certain liabilities. On July 15, 2003, the
Bankruptcy Court approved the sale to Casabyte, Inc.
b. Itronix and da Vinci
It is the Debtors' intention to divest Itronix and/or da Vinci during
the course of the Chapter 11 Cases or after the Effective Date if an offer that
maximizes the value of the assets is received. It is a condition precedent to
the effectiveness of the Plan that the Debtors have sufficient liquidity on the
Effective Date, either through availability under the Exit Facility, or through
retention of the proceeds of asset dispositions, to operate as a feasible going
concern.
5. Restructuring of International Operations.
Following the commencement of these Chapter 11 Cases, the Debtors
were forced to respond to the risk of possible insolvency in some of their
international entities due to possible insufficient liquidity. Many countries
outside of the United States do not permit conventional reorganizations as
authorized by the Bankruptcy Code. Rather, these countries may compel
liquidation of an insolvent company, impose personal liability on directors and
officers of insolvent entities that continue to conduct business, and pursue
other remedies that jeopardize a company's ability to function.
Therefore, during the Chapter 11 Cases, the Debtors implemented
initiatives designed to restructure their international operations and conserve
cash resources, including the implementation of strict control on the use of
cash, accelerated collections of outstanding receivables in each country, weekly
monitoring of cash receipts and disbursements and elimination of requirements
for cash collateral where possible, leading to improved liquidity in the
Non-Debtor Affiliates. The Debtors developed and implemented a plan to reduce
redundant operating centers, close unprofitable sales offices and sell
underutilized assets leading to reductions in operating costs and expenses on a
going forward basis. These actions improved the competitiveness of the
international operations.
23
C. CREDITORS' COMMITTEE
On May 20, 2003, the United States Trustee, pursuant to section
1102(a)(1) of the Bankruptcy Code, appointed a five-member Creditors' Committee
to represent the interests of unsecured creditors of the Debtors. The members
of, and the attorneys and financial advisors retained by, the Creditors'
Committee are set forth below:
- ------------------------------------------------------------------------------------------------------------------------------------
Creditors' Committee Members
- ------------------------------------------------------------------- ----------------------------------------------------------------
IMCO, Inc. Benchmark Electronics, Inc.
858 North Lenola Road 3000 Technology Drive
Moorestown, New Jersey 08057 Angleton, Texas 88517
Attn: Jason Fuller, Controller Attn: Anh U. Tran, Esq., Corporate Counsel
(856) 235-7540 (979) 848-5247
- ------------------------------------------------------------------- ----------------------------------------------------------------
US Bank, National Association Witmer Asset Management
One Federal Street, Third Floor 237 Park Avenue, Suite 800
Boston, Massachusetts 02110 New York, New York 10017
Attn: Meryl Witmer, General Partner
Attn: Robert Butzier, Vice President (212) 692-3667
(617) 603-6430
- ------------------------------------------------------------------- ----------------------------------------------------------------
First Campus, L.P.
c/o Guardian Realty Management, Inc.
702 Russell Avenue, Suite 400
Gaithersburg, Maryland 20877
Attn: William Carbaugh, Esq., Counsel
(301) 417-6173
- ------------------------------------------------------------------------------------------------------------------------------------
Creditors' Committee Professionals
- ------------------------------------------------------------------- ----------------------------------------------------------------
Blank Rome LLP Ernst & Young Corporate Finance LLC
405 Lexington Avenue 5 Times Square
New York, New York 10174 New York, New York 10036-6530
- ------------------------------------------------------------------- ----------------------------------------------------------------
Since its formation, the Debtors have consulted with the Creditors'
Committee concerning the administration of the Chapter 11 Cases. The Debtors
have kept the Creditors' Committee informed with respect to their operations and
have sought the concurrence of the Creditors' Committee for actions and
transactions outside of the ordinary course of the Debtors' business, including
the Plan.
D. BAR DATE AND CLAIMS PROCESS
On June 24, 2003, the Debtors filed their Schedules of Assets and
Liabilities and on July 21, 2003, the Debtors filed their Statements of
Financial Affairs.
24
Bar Date.
By order dated June 24, 2003, pursuant to Bankruptcy Rule 3003(c)(3),
the Bankruptcy Court fixed July 31, 2003 as the date by which proofs of Claim
were required to be filed in the Chapter 11 Cases, except as otherwise provided
for in this bar date order. In accordance with this order, on or about June 25,
2003, a proof of claim form, a notice regarding the scheduling of each Claim and
a notice regarding the bar date and the bar date order were mailed to all
creditors listed on the Debtors' schedules. A proof of claim form, a notice
regarding the bar date and the bar date order were also mailed, in accordance
with the bar date order, to, among others, the members of the Creditors'
Committee and all persons and entities requesting notice pursuant to Bankruptcy
Rule 2002 as of the entry of the bar date order.
VI. THE PLAN OF REORGANIZATION
Pursuant to the Plan, the holders of Senior Lender Claims, which
aggregate no less than $701,717,408, plus interest, fees and expenses thereon,
will receive on the Effective Date, in exchange for such Claims, (i) 100% of the
shares of the New Common Stock, subject to dilution by (a) any shares issued in
connection with the New Warrants, and (b) Employee Equity to be issued in
connection with the New Management Incentive Plan; and (ii) $75,000,000 in
principal amount of the New Secured Term Notes. Any excess cash available on the
Effective Date shall be distributed ratably to holders of Senior Lender Claims.
In the event that the Debtors or the Reorganized Debtors receive net cash
proceeds from Designated Asset Sales at any time before or after the Effective
Date, Acterna LLC shall pay in Cash to the holders of Senior Lender Claims in an
amount equal to a portion of the net cash proceeds to be determined by the
Debtors and the Administrative Agent. Such amount shall be distributed to the
holders of Senior Lender Claims in proportion to the principal amount of the
respective Commitments (as defined in the Bank Credit Agreement) as of the
Effective Date (without giving effect to any distributions hereunder).
Distributions shall be made on the Effective Date, in the event that the net
cash proceeds are received on or prior to the Effective Date, and not later than
one Business Day after such net cash proceeds are received by the Reorganized
Debtors in the event that the net cash proceeds are received after the Effective
Date. The right of holders of Senior Lender Claims to receive Cash payments
after the Effective Date on account of Designated Asset Sales is referred to
herein as the "Contingent Payment Right." Any amounts received by the German L/C
Participants shall be applied to reduce, dollar-for-dollar, principal
outstanding amounts under the Restructured German Term Debt. Any amounts
received by the holders of the Senior Lender Claims (excluding amounts received
on account of Claims of the German L/C Participants) shall constitute a
distribution to such holders on account of their Senior Lender Claims. For the
purposes of these distributions, net cash shall mean the cash proceeds of such
sale after the payment of or reservation for expenses that are directly related
to the transaction of sale.
Reorganized Acterna LLC and Newco, if the Restructuring Transactions
are implemented, will cause each letter of credit that is not expired,
terminated, replaced, or fully drawn on or before the Effective Date, to be
replaced or cash collateralized at 105% of the face amount of each letter of
credit on the Effective Date.
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In addition, each holder of Senior Lender Claims shall be entitled to
retain all amounts paid to it or on its behalf as adequate protection or
otherwise. On or after the Confirmation Date, the Reorganized Debtors will
continue to honor the obligations set forth in Section 17.5 of the Bank Credit
Agreement (Payment of Expenses and Taxes) including without limitation payment
of professional fees and expenses of the holders of Senior Lender Claims with
respect to matters related to the Plan or the Chapter 11 Cases.
The holders of Allowed Claims in Class D (General Unsecured Claims)
will receive their Ratable Proportion of the lesser of $5,000,000 and 10% of the
aggregate Allowed General Unsecured Claims, provided, however, that in no event
shall the amount distributed in Class D be less than $3,500,000. With the
agreement and consent of CD&R, the holders of Allowed Claims in Class E
(Convertible Notes Claims) shall receive no distribution on account of such
Claims. If the holders of Allowed Claims in Class F (Subordinated Notes Claims)
accept the Plan by the requisite majorities set forth in section 1126(c) of the
Bankruptcy Code, such holders will receive their Ratable Proportion of the New
Warrants. If the releases set forth in Section 5.11 of the Plan and the
exculpation in Section 10.6 of the Plan are approved, CD&R will waive in its
entirety, its right to receive any recovery as a holder of a Class E or Class F
Claim and assign such right of distribution so as to allow the distribution
which would have been otherwise provided to CD&R to be provided to the other
holders of the Subordinated Notes. However, if Class F does not vote to accept
the Plan by the requisite statutory majorities, the holders of Subordinated
Notes Claims shall not receive any distributions on account of such Claims. All
other pre-Petition Date creditors of the Debtors, including, without limitation,
the holders of Securities Litigation Claims and all holders of Equity Interests
in Acterna Corporation, will receive no recovery under the Plan. In addition,
each German L/C Participant shall receive its Ratable Proportion of the
Restructured German Term Debt.
The Plan provides for the payment of all fees due and owing to the
United States Trustee.
The financial restructuring contemplated under the Plan will reduce
the Debtors' outstanding debt obligations to levels more consistent with their
business operations and projected financial performance. The financial
restructuring contemplated under the Plan will enhance the Debtors' ability to
effectively compete and maintain critical relationships with their suppliers and
retail vendors.
The Plan is annexed hereto as Exhibit A and forms a part of this
Disclosure Statement. The summary of the Plan set forth below is qualified in
its entirety by reference to the provisions of the Plan.
26
A. CLASSIFICATION AND TREATMENT OF
CLAIMS AND EQUITY INTERESTS
The Plan classifies Claims and Equity Interests separately and
provides different treatment for different Classes of Claims and Equity
Interests in accordance with the provisions of the Bankruptcy Code. As described
more fully below, the Plan provides, separately for each Class, that holders of
certain Claims will receive various amounts and types of consideration, thereby
giving effect to the different rights of holders of Claims and Equity Interests
in each Class.
1. Administrative Expense Claims
Administrative Expense Claims are Claims constituting a cost or
expense of administration of the Chapter 11 Cases allowed under sections 503(b)
and 507(a)(1) of the Bankruptcy Code. Such Claims include all actual and
necessary costs and expenses of preserving the estate of the Debtors, all actual
and necessary costs and expenses of operating the business of the Debtors in
Possession, any indebtedness or obligations incurred or assumed by the Debtors
in Possession in connection with the conduct of its business, all cure amounts
owed in respect of leases and contracts assumed by the Debtors in Possession,
all compensation and reimbursement of expenses to the extent Allowed by the
Bankruptcy Court under section 330 or 503 of the Bankruptcy Code, and any fees
or charges assessed against the estate of the Debtor under section 1930 of
chapter 123 of title 28 of the United States Code.
On the Effective Date, all DIP Claims under or evidenced by the DIP
Agreement shall be an Allowed Administrative Expense Claim and shall be paid in
Cash in an amount equal to the amount of such DIP Claims, or in the case of
outstanding letters of credit will either be replaced or cash collateralized at
105% of the face amount in accordance with the provisions of the DIP Agreement.
Except to the extent that any entity entitled to payment of any
Allowed Administrative Expense Claim agrees to a less favorable treatment, each
holder of an Allowed Administrative Expense Claim shall receive Cash in an
amount equal to such Allowed Administrative Expense Claim on the later of the
Effective Date and the date such Administrative Expense Claim becomes an Allowed
Administrative Expense Claim, or as soon thereafter as is practicable; provided,
however, that Allowed Administrative Expense Claims representing liabilities
incurred in the ordinary course of business by the Debtors or liabilities
arising under loans or advances to or other obligations incurred by the Debtors
in Possession shall be paid in full and performed by the Reorganized Debtors in
the ordinary course of business in accordance with the terms and subject to the
conditions of any agreements governing, instruments evidencing or other
documents relating to such transactions.
27
2. Compensation and Reimbursement Claims
Compensation and reimbursement Claims are Administrative Expense
Claims for the compensation of professionals and reimbursement of expenses
incurred by such professionals pursuant to sections 503(b)(2), 503(b)(3),
503(b)(4) and 503(b)(5) of the Bankruptcy Code. All payments to professionals
for Compensation and Reimbursement Claims will be made in accordance with the
procedures established by the Bankruptcy Code, the Bankruptcy Rules and the
Bankruptcy Court relating to the payment of interim and final compensation for
services rendered and reimbursement of expenses. The Bankruptcy Court will
review and determine all applications for compensation for services rendered and
reimbursement of expenses.
Pursuant to the Plan, each holder of a Compensation and Reimbursement
Claim shall (a) file its final application for the allowance of compensation for
services rendered and reimbursement of expenses incurred by no later than the
date that is 60 days after the Effective Date or such other date as may be fixed
by the Bankruptcy Court and (b) if granted such an award by the Bankruptcy
Court, be paid in full in such amounts as are Allowed by the Bankruptcy Court
(i) on the date such Compensation and Reimbursement Claim becomes an Allowed
Claim, or as soon thereafter as is practicable or (ii) upon such other terms as
may be mutually agreed upon between such holder of a Compensation and
Reimbursement Claim and the Reorganized Debtors. Pursuant to Section 2.3 of the
Plan, professionals may obtain the interim payment of professional fees pending
the filing of a final fee application.
3. Priority Tax Claims
Priority Tax Claims are Claims for taxes entitled to priority in
payment under section 507(a)(8) of the Bankruptcy Code.
Pursuant to the Plan, except to the extent that a holder of an
Allowed Priority Tax Claim has been paid by the Debtors prior to the Effective
Date or agrees to a different treatment, each holder of an Allowed Priority Tax
Claim shall receive, at the sole option of Reorganized Acterna, (a) Cash in an
amount equal to such Allowed Priority Tax Claim on the later of the Effective
Date and the date such Priority Tax Claim becomes an Allowed Priority Tax Claim,
or as soon thereafter as is practicable or (b) equal annual Cash payments in an
aggregate amount equal to such Allowed Priority Tax Claim, together with
interest at a fixed annual rate equal to 5.0%, over a period through the sixth
anniversary of the date of assessment of such Allowed Priority Tax Claim, or
upon such other terms determined by the Bankruptcy Court to provide the holder
of such Allowed Priority Tax Claim with deferred Cash payments having a value,
as of the Effective Date, equal to such Allowed Priority Tax Claim, provided,
however, that, unless an Allowed Priority Tax Claim is of a kind that is
supported by the personal liability of an employee or a former employee of the
Debtors, the Debtors must obtain the consent of the Administrative Agent to
elect option (a).
28
4. Class A - Priority Non-Tax Claims (Subclasses A1-A8)
Priority Non-Tax Claims are Claims that are entitled to priority in
accordance with section 507(a) of the Bankruptcy Code (other than Administrative
Expense Claims and Priority Tax Claims). Such Claims include unpaid Claims for
(a) accrued employee compensation earned within ninety (90) days prior to
commencement of the Chapter 11 Cases to the extent of $4,650 per employee and
(b) contributions to employee benefit plans arising from services rendered
within 180 days prior to the commencement of the Chapter 11 Cases, but only for
each such plan to the extent of (i) the number of employees covered by such plan
multiplied by $4,650, less (ii) the aggregate amount paid to such employees from
the estate for wages, salaries or commissions during the ninety (90) days prior
to the Petition Date.
Pursuant to the Plan, except to the extent that a holder of an
Priority Non-Tax Claim has been paid by the Debtors prior to the Effective Date
or agrees to a different treatment, each holder of Priority Non-Tax Claims, if
any exist, will be paid in full, in Cash, on the later of the Effective Date and
the date its Priority Non-Tax Claim becomes an Allowed Claim, or as soon
thereafter as is practicable. The Debtors estimate that the total amount of
Allowed Priority Tax Claims is between $0 and $210,000.
5. Class B - Other Secured Claims (Subclasses B1-B8)
Other Secured Claims consist of all Secured Claims other than Senior
Lender Claims and Intercompany Claims that are Secured Claims. The Debtors
believe that the Other Secured Claims will include, among other Claims, Claims
relating to capitalized leases, mechanics' and materialmen's liens and secured
tax Claims.
Pursuant to the Plan, except to the extent that a holder of an
Allowed Other Secured Claim has been paid by the Debtors prior to the Effective
Date or agrees to a different treatment, at the option of the Reorganized
Debtors, each holder of an Allowed Other Secured Claim shall be (a) reinstated
and rendered unimpaired in accordance with section 1124(2) of the Bankruptcy
Code, (b) receive Cash in an amount equal to such Allowed Other Secured Claim,
including any interest on such Allowed Other Secured Claim required to be paid
pursuant to section 506(b) of the Bankruptcy Code, on the later of the Effective
Date and the date such Allowed Other Secured Claim becomes an Allowed Other
Secured Claim, or as soon thereafter as is practicable or (c) receive the
Collateral securing its Allowed Other Secured Claim and any interest on such
Allowed Other Secured Claim required to be paid pursuant to section 506(b) of
the Bankruptcy Code, on the later of the Effective Date and the date such
Allowed Other Secured Claim becomes an Allowed Other Secured Claim, or as soon
thereafter as is practicable. The Debtors estimate that the total amount of
Allowed Other Secured Claims is $50,000.
29
6. Class C - Senior Lender Claims (Subclasses C1(a) and (b)-C8(a) and
(b))
The Secured Bank Claims consist of all Claims of the Senior Lenders
arising under the Bank Credit Agreement. Class C consists of two subclasses, the
Senior Lenders and a subset of the Senior Lenders, the German L/C Participants.
Pursuant to the Plan, the Senior Lender Claims (inclusive of the Claims of the
German L/C Participants) are deemed Allowed Claims in the aggregate amount of
not less than $701,717,408 (8), plus interest, fees and expenses thereon, and
the Senior Lender Claims (inclusive of the Claims of the German L/C
Participants) shall not be subject to setoff, counterclaim, recoupment,
reduction or offset. Pursuant to the Plan, on the Effective Date, each holder of
a Senior Lender Claim (exclusive of the Claims of the German L/C Participant)
shall receive its Ratable Proportion of (i) 100% of the shares of the New Common
Stock, subject to dilution by (a) any shares issued in connection with the New
Warrants, if any, and (b) Employee Equity to be issued in connection with New
Management Incentive Plan; (ii) $75,000,000 in principal amount of the New
Secured Term Notes; and (iii) its Ratable Proportion of any excess cash
available on the Effective Date.
In the event that the Debtors or the Reorganized Debtors receive net
cash proceeds from Designated Asset Sales at any time before or after the
Effective Date, Acterna LLC or Reorganized Acterna LLC shall pay in Cash to the
holders of Senior Lender Claims in an amount equal to a portion of the net cash
proceeds to be determined by the Debtors and the Administrative Agent. Such
amount shall be distributed to the holders of Senior Lender Claims in proportion
to the principal amount of the respective Commitments (as defined in the Bank
Credit Agreement) as of the Effective Date (without giving effect to any
distributions hereunder). Distributions will be made on the Effective Date, in
the event that the net cash proceeds are received on or prior to the Effective
Date, and no later than one Business Day after such net cash proceeds are
received by the Reorganized Debtors in the event that the net cash proceeds are
received after the Effective Date. The right of holders of Senior Lender Claims
(other than the German L/C Participants) to receive Cash payments after the
Effective Date on account of Designated Asset Sales is referred to herein as the
"Contingent Payment Right." Any amounts received by the German L/C Participants
shall be applied to reduce, dollar-for-dollar, principal outstanding amounts
under the Restructured German Term Debt. Any amounts received by the holders of
the Senior Lender Claims (excluding amounts received on account of Claims of the
German L/C Participants) shall constitute a distribution to such holders on
account of their Senior Lender Claims. For the purposes of these distributions,
net cash shall mean the cash proceeds of such sale after the payment of or
reservation for expenses that are directly related to the transaction of sale.
Reorganized Acterna LLC and Newco, if the Restructuring Transactions
are implemented, will cause each letter of credit that is not expired,
terminated, replaced, or fully drawn on or before the Effective Date, to be
replaced or cash collateralized at 105% of the face amount of each letter of
credit on the Effective Date.
- ---------------------
(8) This amount includes Claims of the German L/C Participants in a principal
amount of not less than (euro)82,498,945 converted at an exchange rate of 1.15
and stated above as not less than $94,873,787.
30
On the Effective Date, each German L/C Participant shall receive (i)
its Ratable Proportion of any excess cash available on the Effective Date, and
(ii) its Ratable Proportion of the Restructured German Term Debt. The
Restructured Term Debt Guaranty shall remain unimpaired and, notwithstanding
anything herein or in the Confirmation Order to the contrary, the guaranty
obligations of each Debtor and each Reorganized Debtor, as set forth in the Bank
Credit Agreement and the Restructured German Term Documents, shall remain in
full force and effect at all times from and after the Effective Date. The
Restructured German Term Debt may be secured by collateral to be agreed upon
between the Administrative Agent and the Debtors.
In addition, each holder of Senior Lender Claims (inclusive of the
Claims of the German L/C Participants) shall be entitled to retain all amounts
paid to it or on its behalf as adequate protection or otherwise. On or after the
Effective Date, the Reorganized Debtors will continue to honor the obligations
set forth in Section 17.5 of the Bank Credit Agreement (Payment of Expenses and
Taxes) including without limitation payment of professional fees and expenses of
the holders of Senior Lender Claims with respect to matters related to the Plan
or the Chapter 11 Cases.
The terms of the New Secured Term Notes and Restructured German Term
Debt are as follows:
TERMS OF NEW SECURED TERM NOTES
ISSUER: Reorganized Acterna LLC.
GUARANTORS: Reorganized Acterna (or Newco, if the
Restructuring Transactions are implemented) and
the Reorganized Subsidiaries. Reorganized Acterna
shall not be a guarantor if the Restructuring
Transactions are implemented.
PRINCIPAL AMOUNT: $75,000,000.
AGENT: JPMorgan Chase Bank.
MATURITY: Five (5) years after the Effective Date.
INTEREST RATE: 12.00%, to accrue and compound monthly (2% paid
currently in Cash, 10% accrued and payable at
maturity).
31
EXCESS CASH FLOW: On an annual basis, 50% of excess cash flow, if
any, from domestic operations shall be applied as
a mandatory prepayment.
COVENANTS: Financial covenants to include: minimum EBITDA,
total leverage ratio and interest coverage.
Covenants shall also include baskets for asset
sales, permitted liens and other standard
covenants, to be negotiated.
REPORTING: Standard monthly reporting, quarterly delivery of
twenty six (26) week rolling cash flow statement.
RANKING: Pari passu with the obligations of the guarantors
under the Restructured German Term Debt.
COLLATERAL: In the event that an Exit Facility is in effect on
the Effective Date, a second priority lien on and
security interest in substantially all of the
Debtors' assets, including, without limitation, a
pledge of (i) 100% of the equity interests of the
Reorganized Debtors, and (ii) not more than 66% of
the equity interest of any foreign subsidiaries.
In the event that no Exit Facility is in effect on
the Effective Date, a first priority lien on and
security interest in substantially all of the
Debtors' assets.
GOVERNING LAW: State of New York
TERMS OF RESTRUCTURED GERMAN TERM DEBT
ISSUER: Acterna International GmbH or a new entity to be
determined with the consent of the Senior Lenders
(the "German Borrower").
GUARANTORS: Reorganized Acterna (or Newco, if the
Restructuring Transactions are implemented) and
the Reorganized Subsidiaries. Reorganized Acterna
shall not be a guarantor if the Restructuring
Transactions are implemented.
PRINCIPAL AMOUNT: (euro)82,498,945, plus accrued and unpaid interest
to the Effective Date on the reimbursement
obligations of the German Borrower in respect of
the German L/C.
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AGENT: JPMorgan Chase Bank.
LENDERS: Each German L/C Participant on the Effective Date.
MATURITY: Coterminous with maturity of the New Secured Term
Notes, i.e., five (5) years after the Effective
Date.
AMORTIZATION: Bullet amortization on the fifth anniversary of
the Effective Date.
EXCESS CASH FLOW: On an annual basis, 50% of excess cash flow, if
any, from the German Borrower's operations shall
be applied as a mandatory prepayment.
INTEREST RATE: From the Effective Date through 3/31/05: LIBOR
plus 2.00%
From 4/1/05 through 3/31/06: LIBOR plus 2.50%
From 4/1/06 through 9/30/06: LIBOR plus 3.00%
From 10/1/06 through 3/31/07: LIBOR plus 3.50%
From 4/1/07 through Maturity Date: LIBOR plus
4.50%.
COVENANTS: Covenants for international operations to be
agreed upon by the Administrative Agent and the
Debtors.
REPORTING: To be determined.
RANKING: Pari passu with the obligations of the guarantors
under the New Secured Term Notes.
Senior unsecured obligation of German Borrower.
COLLATERAL: Second priority lien on and security interest in
all of the Debtors' assets, including, without
limitation, up to 100% of the equity interest of
any first tier subsidiaries of the Reorganized
Debtors, provided, however, that in the event the
Debtors do not enter into an Exit Facility, the
lien on all of the Debtors' assets shall be first
priority. Additional collateral to be agreed upon
by the Debtors and the Administrative Agent.
GOVERNING LAW: State of New York.
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7. Class D - General Unsecured Claims (Subclasses D1-D8)
The General Unsecured Claims consist of all Claims other than Secured
Claims, Administrative Expense Claims, Priority Tax Claims, Priority Non-Tax
Claims, Subordinated Notes Claims, Securities Litigation Claims, and
Intercompany Claims. General Unsecured Claims include, without limitation, (a)
Claims arising from the rejection of leases of nonresidential real property and
executory contracts, (b) Claims relating to personal injury, property damage,
products liability, discrimination, employment or any other similar litigation
Claims asserted against the Debtors, and (c) Claims, if any, of the Debtor's
vendors, suppliers and service providers. The Debtors estimate that the total
amount of Allowed General unsecured Claims will be between $30,000,000 and
$35,000,000.
Each holder of an Allowed General Unsecured Claim shall receive its
Ratable Proportion of the lesser of $5,000,000 and 10% of the aggregate Allowed
General Unsecured Claims, provided, however, that Class D shall receive a
distribution of no less than $3,500,000.
8. Class E - Convertible Notes Claims (Subclasses E1-E8)
The Convertible Notes Claims consist of all Claims arising under the
Investment Agreement, as supplemented, by an additional note executed on
December 4, 2002, issued by Acterna LLC and CD&R VI (Barbados), Ltd. Pursuant to
the Plan, the Convertible Notes Claims shall be deemed Allowed Claims solely for
purposes of the Plan in the aggregate amount of $89,252,818.
With the agreement and consent of CD&R, the holders of Allowed Claims
in Class E shall receive no distribution on account of such Claims.
9. Class F - Subordinated Notes Claims (Subclasses F1-F2)
The Subordinated Notes Claims consist of all Claims arising under the
Subordinated Notes Indenture as of the Petition Date. Pursuant to the Plan, the
Subordinated Notes Claims shall be deemed Allowed Claims solely for purposes of
the Plan in the aggregate amount of $176,479,264.
Pursuant to the Plan, if Class F votes to accept the Plan by the
requisite majorities set forth in section 1126(c) of the Bankruptcy Code, each
holder of an Allowed Subordinated Notes Claim shall receive its Ratable
Proportion of the New Warrants. If the releases set forth in Section 5.11 of the
Plan and the exculpation in Section 10.6 of the Plan are approved, CD&R will
waive in its entirety, its right to receive any recovery as a holder of a Class
E or Class F Claim and assign such right of distribution so as to allow the
distribution which would have been otherwise provided to CD&R to be provided to
the other holders of the Subordinated Notes. If Class F does not vote to accept
the Plan by the requisite statutory majorities, the holders of Subordinated
Notes Claims shall not receive any distributions on account of such Claims and
no New Warrants shall be issued.
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10. Class G - Intercompany Claims (Subclasses G1-G8)
The Intercompany Claims consist of any Claim, whether secured or
unsecured, of an Affiliate. As of the Petition Date, the aggregate amount of
Intercompany Claims was approximately $236,870,460.
The legal, equitable, and contractual rights of holders of
Intercompany Claims are unaltered by the Plan, except to the extent determined
by the Debtors.
11. Class H - Securities Litigation Claim (Subclass H1)
The Securities Litigation Claims consist of any and all Claims and
Causes of Action, of any kind whatsoever, known or unknown, asserted or which
might have been, or might in the future be, asserted in a direct or other
capacity against any of the Debtors arising out of, relating to or in connection
with: (a) the purchase, ownership, sale or other decision or action made or
taken, or declined, or failed or refused to be made or taken, or otherwise
foregone, concerning or relating to the Equity Interests or the Subordinated
Notes; (b) the facts, transactions, events, occurrences, acts, representations,
disclosures, statements, omissions or failures to act which were alleged or
could have been alleged in the pending litigation asserted against the Debtors,
whether asserted individually or on behalf of a class of plaintiffs, which
generally arise from allegations of alleged acts or omissions of the Debtors or
any other persons or entities prior to the Petition Date with respect to or
concerning the Equity Interests or the Subordinated Notes, or the purchase, sale
or ownership thereof; (c) any other Claims and Causes of Action arising out of,
relating to, or in connection with the Equity Interests or the Subordinated
Notes that would be subject to and subordinated under section 510(b) of the
Bankruptcy Code; and (d) indemnification, reimbursement or contribution Claims
against the Debtors with respect to any of the foregoing.
Pursuant to the Plan and section 510(b) of the Bankruptcy Code, the
holders of Securities Litigation Claims shall not receive any distributions on
account of such Claims and shall be enjoined from pursuing any Securities
Litigation Claims against any of the Debtors, the Debtors in Possession or the
Reorganized Debtors.
12. Class I - Equity Interests (Subclasses I1-I8)
Equity Interests consist of any share of common stock or other
instrument evidencing an ownership interest in the Debtors, whether or not
transferable, and any option, warrant or right, contractual or otherwise, to
acquire any such interest.
Pursuant to the Plan, holders of Equity Interests shall not receive
any distributions on account of such Equity Interests. On the Effective Date,
all Equity Interests shall be extinguished.
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B. SECURITIES TO BE ISSUED UNDER THE PLAN
1. New Common Stock
Pursuant to the Plan, on the Effective Date, all Equity Interests
will be cancelled, except that Equity Interests in the Reorganized Subsidiaries
formerly held by Acterna Corporation or Acterna LLC and their subsidiaries shall
be transferred to Newco (or Reorganized Acterna or Reorganized Acterna LLC, if
the Restructuring Transactions are not implemented). Pursuant to the Plan, all
of the shares of the New Common Stock will be issued to holders of Senior Lender
Claims. Such shares shall constitute 100% of the shares of the New Common Stock
outstanding as of the Effective Date, subject to dilution by (a) any shares
issued in connection with the New Warrants (if any), and (b) Employee Equity to
be issued in connection with the New Management Incentive Plan.
2. New Warrants
Pursuant to the Plan, New Warrants to purchase up to 5.0% of the
Acterna Common Stock (or, if the Restructuring Transactions are implemented,
Newco Common Stock) may be issued. Each Warrant shall be exercisable to acquire
one share of Acterna Common Stock (or, if the Restructuring Transactions are
implemented, Newco Common Stock).
If holders of Allowed Claims in Class F vote to accept the Plan by
the requisite majorities set forth in section 1126(c) of the Bankruptcy Code,
each holder of an Allowed Subordinated Notes Claim shall receive its Ratable
Proportion of the New Warrants. If the releases set forth in Section 5.11 of the
Plan and the exculpation in Section 10.6 of the Plan are approved, CD&R will
waive its recovery in this Class. If Class F does not vote to accept the Plan by
the requisite statutory majorities, the holders of Subordinated Notes Claims
shall not receive any distributions on account of such Claims and no New
Warrants shall be issued. The specific terms of the New Warrants and the
Registration Rights Agreement shall be included in the Plan Supplement. The
Committee has requested that the New Warrants and the Registration Rights
Agreement include certain terms and the Debtors, the Administrative Agent and
the Committee have agreed to use reasonable efforts to reach mutually agreeable
terms for the New Warrants and Registration Rights Agreement.
TERMS OF NEW WARRANTS:
NUMBER OF WARRANTS: Holders of Allowed Subordinated Notes
Claims may be issued New Warrants to
purchase up to 5.0% of the Acterna
Common Stock (or, if the Restructuring
Transactions are implemented, Newco
Common Stock) on the Effective Date,
subject to dilution by Employee Equity
issued under the New Management
Incentive Plan. Each New Warrant shall
be exercisable to acquire one share of
New Common Stock (or, if the
Restructuring Transactions are
implemented, Newco Common Stock).
36
HOLDERS OF NEW WARRANTS: Holders of New Warrants are deemed to be
parties to the Warrant and Registration
Rights Agreement.
TERM: The New Warrants shall be exercisable at
any time, or from time to time, for a
term commencing on the Initial Exercise
Date and until the third anniversary of
the Effective Date.
STRIKE PRICE: The New Warrants shall have a fair
market value strike price based upon
assumed equity value for the Reorganized
Debtors of approximately
$516,900,000.(9)
ANTIDILUTION PROTECTION: Customary antidilution provisions.
TRANSFERABILITY: The New Warrants will be transferable by
the holders thereof in whole and not in
part. As a result, recipients of New
Warrants under the Plan may not
transfer, assign or encumber less than
all of their respective holdings of New
Warrants. No transfer shall be permitted
if, after giving effect to such
transfer, the Reorganized Debtors shall
become a reporting company under the
Securities Exchange Act of 1934.
TERMINATION: To the extent not already exercised, the
New Warrants shall terminate in the
event of a sale of substantially all the
assets of the Reorganized Debtors or
other liquidity event.
3. Restriction on the Transfer of New Warrants
It is anticipated that after the issuance of the New Common Stock and
New Warrants according to the terms set forth above in Section VI.A, there will
be fewer than 300 holders of record of the New Common Stock and New Warrants.
The Debtors intend to file a Form 15 certifying the number of holders of the New
Common Stock and New Warrants with the Securities and Exchange Commission and
seeking to terminate their registration and periodic filing requirements
pursuant to the Securities Exchange Act of 1934. The Debtors cannot ensure that
a liquid market will develop for the New Common Stock and New Warrants, that the
holders of the New Common Stock and New Warrants will be able to sell any of
- ---------------------------
(9) The assumed equity value represents the amount required to satisfy in full
the Senior Lender Claims as of the Petition Date plus accrued interest (at the
contract rate applicable under the Bank Credit Facility) from the Petition Date
through the Effective Date. The calculation of such value assumes a hypothetical
Effective Date of September 30, 2003.
37
such securities at a particular time if at all or that the prices that holders
will receive when they sell will be favorable. Since the New Common Stock and
New Warrants will be issued pursuant to an exemption from registration under the
Securities Act of 1933 and the Debtors intend to file a certification
terminating their periodic filing requirements, there will be no public market
for the New Common Stock or New Warrants.
The New Warrants will be subject to certain transfer restrictions set
forth in the New Warrant Agreement. Such transfer restrictions in the New
Warrant Agreement will prohibit a holder of New Warrants from transferring any
New Warrants to any person not already holding such New Warrants as proposed to
be transferred at any time such class has record holders of 450 or more persons.
Until the New Warrant Agreement is terminated, the New Warrants will bear an
additional legend which will provide in form and substance:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS
AND PROVISIONS OF A WARRANT AGREEMENT DATED AS OF _______, 2003 (AS SUCH
AGREEMENT MAY BE SUPPLEMENTED, MODIFIED, AMENDED OR RESTATED FROM TIME TO TIME,
THE "NEW WARRANT AGREEMENT") AND MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED (COLLECTIVELY, "TRANSFERRED") UNLESS AND
UNTIL SUCH TRANSFER COMPLIES WITH THE NEW WARRANT AGREEMENT, COPIES OF WHICH ARE
ON FILE WITH THE SECRETARY OF THE COMPANY.
C. METHOD OF DISTRIBUTION UNDER THE PLAN
1. Date and Delivery of Distribution
Except as otherwise ordered by the Court or provided in the Plan or
the Confirmation Order, distributions will be made by Reorganized Acterna or its
designee to the holders of Allowed Claims (a) at the addresses set forth on the
Schedules unless superseded by proofs of Claims or transfers of Claims pursuant
to Bankruptcy Rule 3001, or (b) at the last known addresses of such holders if
the Debtors have been notified in writing of a change of address.
All distributions under the Plan to holders of Senior Lender Claims
(Class C) will be made by Reorganized Acterna to the Administrative Agent, which
in turn, will make the distributions to holders of such Claims at the addresses
last known to the Administrative Agent.
As of the close of business on the record date, the claims register
will be closed and there will not be any further changes in the record holder of
any Claim without the consent of the Reorganized Debtors. The Reorganized
Debtors may, but in no event shall be obligated to, recognize the transfer of
any Claim occurring after the record date. The Reorganized Debtors will be
authorized and entitled to recognize and deal for all purposes under the Plan
with only those record holders stated on the claims register as of the close of
business of the record date.
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2. Distributions With Respect to Disputed Claims
No distributions will be made with respect to Disputed Administrative
Expenses or Disputed Claims. To the extent that a Disputed Administrative
Expense or Disputed Claim is allowed after the Effective Date, the holder
thereof will receive the distribution to which the Plan entitles such holder in
respect of such Allowed Administrative Expense or Claim. Except as otherwise
ordered by the Court or provided in the Plan, each distribution to be made on a
specific date will be deemed to have been made on such date if actually made on
the later of such date and the date on which such administrative expense claim
or equity interest is allowed, or as soon thereafter as practicable.
3. Distributions With Respect to Holders of Class D Claims.
a. Distributions as to Class D Claims. The holder of a Class D Claim
that is or becomes, in part, an allowed General Unsecured Claim, no later than
ten (10) days prior to the Class D Initial Distribution Date will receive a
distribution in respect of the allowed portion of such General Unsecured Claim
on the Class D Initial Distribution Date.
b. Distributions Withheld for Disputed Class D Claims. On the Class D
Initial Distribution Date and each Subsequent Distribution Date, the Disbursing
Agent will reserve from the distributions to be made on such dates to the
holders of allowed General Unsecured Claims an amount equal to 100% of the Cash
distributions to which holders of disputed General Unsecured Claims would be
entitled under the Plan (including the portion of the Cash distribution that
relates to Disputed Claims) as of such dates as if such disputed General
Unsecured Claims were Allowed Claims in their Disputed Claim amounts.
c. Property Held by the Disbursing Agent. The Cash that relates to
Disputed Class D Claims will be held by the Disbursing Agent. Amounts so held
will then be distributed to holders of Disputed General Unsecured Claims
pursuant to Section 6.8 of the Plan as disputed General Unsecured Claims are
resolved. All amounts held by the Disbursing Agent will be held in a segregated,
non-interest bearing account in the name of the Disbursing Agent.
d. Distributions Upon Allowance of Disputed Class D Claims. The
holder of a Disputed Class D Claim that becomes an Allowed Claim subsequent to
the Class D Initial Distribution Date will receive a distribution of Cash that
would have been made to such holder under Section 6.7 of the Plan if the
Disputed Class D Claim had been an Allowed Claim on or prior to the Class D
Initial Distribution Date, without any post-Initial Distribution Date interest
on such Claims, on the Subsequent Distribution Date that follows the fiscal
quarter during which such Disputed Class D Claim becomes an Allowed Claim.
39
4. Distributions by the Disbursing Agent
All distributions under the Plan shall be made the Disbursing Agent.
The Disbursing Agent shall not be required to provide any bond, surety or other
security for the performance of its duties, unless otherwise ordered by the
Bankruptcy Court; and, in the event that the Disbursing Agent is so otherwise
ordered, all costs and expenses of procuring any such bond, surety or other
security shall be borne by Reorganized Acterna (or Newco if the Restructuring
Transactions are implemented).
5. Distributions on Account of Subordinated Notes Claims
Distributions to the holders of Subordinated Notes Claims shall be
made by the Indenture Trustee. The record date will be the date for determining
the holders of Subordinated Notes Claims entitled to receive the distributions,
if any, provided under the Plan. As of the close of business on the record date,
the Indenture Trustee will have no obligation to recognize any transfer of
Subordinated Notes occurring after the record date for purposes of making
distributions under the Plan. The Indenture Trustee will be entitled to
recognize and deal for all purposes herein with only those holders of record
stated on the transfer ledger maintained by the Indenture Trustee or its
designee for the Subordinated Notes Claims as of the close of business on the
record date.
As a condition to receiving any distributions under the Plan, each
holder of a Subordinated Note must surrender such note to the Indenture Trustee
for subsequent surrender to Reorganized Acterna or its designee. Any holder of a
Subordinated Note who fails to (a) surrender such note or (b) execute and
deliver an affidavit of loss and/or indemnity reasonably satisfactory to the
Indenture Trustee and Reorganized Acterna and furnish a bond in form, substance,
and amount reasonably satisfactory to the Indenture Trustee and Reorganized
Acterna before the first anniversary of the Effective Date shall be deemed to
have forfeited all rights and Claims and may not participate in any distribution
under the Plan.
D. TIMING OF DISTRIBUTIONS UNDER THE PLAN
Except as otherwise provided above, payments and distributions to
holders of Allowed Administrative Expense Claims, Allowed Priority Tax Claims,
Allowed Non-Tax Priority Claims, Allowed Other Secured Claims, Allowed General
Unsecured Claims (if any), Allowed Convertible Notes Claims (if any) and Allowed
Subordinated Notes Claims (if any) that are Allowed Claims on the Effective Date
shall be made on the Effective Date, or as soon thereafter as is practicable.
Payments and distributions to holders of Senior Lender Claims shall
be made on the Effective Date.
40
E. TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
The Bankruptcy Code grants the Debtors the power, subject to the
approval of the Bankruptcy Court, to assume or reject executory contracts and
unexpired leases. If an executory contract or unexpired lease is rejected, the
counter party to the agreement may file a Claim for damages incurred by reason
of the rejection. In the case of rejection of leases of real property, such
damage Claims are subject to certain limitations imposed by the Bankruptcy Code.
Pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code,
all executory contracts and unexpired leases set forth in Schedule 8.1 shall be
deemed assumed by the Debtors as of the Effective Date, which Schedule shall be
included in the Plan Supplement and shall be in form and substance satisfactory
to the Administrative Agent. All other executory contracts shall be deemed
rejected including any executory contract or unexpired lease (i) that has been
rejected pursuant to an order of the Bankruptcy Court entered prior to the
Confirmation Date and (ii) as to which a motion for approval of the rejection of
such executory contract or unexpired lease has been filed and served prior to
the Confirmation Date. The Debtors reserve the right to amend, no later than
five (5) days prior to the Confirmation Date, Schedule 8.1 to delete any
executory contract or unexpired lease therefrom or add any executory contract or
unexpired lease thereto and such amendments shall be in form and substance
satisfactory to the Administrative Agent, in which event such executory
contract(s) or unexpired lease(s) shall be deemed to be, respectively, assumed
by the Debtors or rejected. The Debtors shall provide notice of any amendments
to Schedule 8.1 to the parties to the executory contracts and unexpired leases
affected thereby. The listing of a document on Schedule 8.1 shall not constitute
an admission by the Debtors that such document is an executory contract or an
unexpired lease or that the Debtor has any liability thereunder.
Pursuant to the Plan, each executory contract and unexpired lease
listed or to be listed on Schedule 8.1 that relates to the use or occupancy of
real property shall include (i) modifications, amendments, supplements,
restatements, or other agreements made directly or indirectly by any agreement,
instrument, or other document that in any manner affects such executory contract
or unexpired lease, without regard to whether such agreement, instrument or
other document is listed on Schedule 8.1 and (ii) executory contracts or
unexpired leases appurtenant to the premises listed on Schedule 8.1, including,
without limitation, all easements, licenses, permits, rights, privileges,
immunities, options, rights of first refusal, powers, uses, usufructs,
reciprocal easement agreements, vault, tunnel or bridge agreements or
franchises, and any other interests in real estate or rights in rem relating to
such premises to the extent any of the foregoing are executory contracts or
unexpired leases, unless any of the foregoing agreements previously has been
assumed or assumed and assigned by the Debtors.
41
Pursuant to the Plan, subject to and upon the occurrence of the
Effective Date, entry of the Confirmation Order by the Bankruptcy Court shall
constitute (i) the approval, pursuant to sections 365(a) and 1123(b)(2) of the
Bankruptcy Code, of the assumption and assignment of the executory contracts and
unexpired leases assumed and assigned pursuant to the Plan, (ii) the extension
of time, pursuant to section 365(d)(4) of the Bankruptcy Code, within which the
Debtors may assume, assume and assign or reject the unexpired leases pursuant to
the Plan, through the date of entry of an order approving the assumption,
assumption and assignment or rejection of such unexpired leases and (iii) the
approval, pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code, of
the assumption of the executory contracts and unexpired leases assumed pursuant
to Section 8.1 of the Plan.
Except as may otherwise be agreed to by the parties, within thirty
(30) days after the Effective Date, the Reorganized Debtors shall cure any and
all undisputed defaults under any executory contract or unexpired lease assumed
by the Debtors pursuant to the Plan, in accordance with section 365(b)(1) of the
Bankruptcy Code. All disputed defaults that are required to be cured shall be
cured either within thirty (30) days of the entry of a Final Order determining
the amount, if any, of the Reorganized Debtors' liability with respect thereto
or as may otherwise be agreed to by the parties.
Claims arising out of the rejection of an executory contract or
unexpired lease pursuant to the Plan must be filed with the Bankruptcy Court and
served upon the Debtors or, on and after the Effective Date, the Reorganized
Debtors, no later than thirty (30) days after the later of (i) notice of entry
of an order approving the rejection of such executory contract or unexpired
lease, (ii) notice of entry of the Confirmation Order and (iii) notice of an
amendment to Schedule 8.1. All such Claims not filed within such time will be
forever barred from assertion against the Debtors, their estates, the
Reorganized Debtors and their property. Unless otherwise ordered by the
Bankruptcy Court, all Claims arising from the rejection of executory contracts
or unexpired leases shall be treated as General Unsecured Claims under the Plan.
F. PROVISIONS FOR TREATMENT OF DISPUTED CLAIMS
Except as to applications for allowance of compensation and
reimbursement of expenses under sections 330 and 503 of the Bankruptcy Code, the
Reorganized Debtors shall, on and after the Effective Date, have the exclusive
right to make and file objections to Disputed Administrative Expense Claims and
Claims. On and after the Effective Date, the Reorganized Debtors shall have the
authority to compromise, settle, otherwise resolve or withdraw any objections to
Administrative Expense Claims and Claims and compromise, settle or otherwise
resolve Disputed Administrative Expense Claims and Disputed Claims without
approval of the Bankruptcy Court. Unless otherwise ordered by the Bankruptcy
Court, the Debtors and, on and after the Effective Date, The Reorganized Debtors
shall file all objections to Administrative Expense Claims that are the subject
of proofs of Claim or requests for payment filed with the Bankruptcy Court
(other than applications for allowances of compensation and reimbursement of
expenses) and Claims and serve such objections upon the holder of the
42
Administrative Expense Claim or Claim as to which the objection is made as soon
as is practicable, but in no event later than ninety (90) days after the
Effective Date or such later date as may be approved by the Bankruptcy Court.
G. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN
The Plan shall not become effective unless and until the following
conditions shall have been satisfied or waived pursuant to Article IX of the
Plan:
(a) The Class of holders of Senior Lender Claims (Class C) shall
have voted to accept the Plan by the requisite majorities provided in
section 1126(c) of the Bankruptcy Code;
(b) All exhibits to the Plan, including those contained in the
Plan Supplement, shall be in form and substance reasonably acceptable
to the Debtors and the Administrative Agent;
(c) No monetary default or event of default under the DIP
Agreement shall have occurred and be continuing;
(d) The terms of the Restructured German Term Debt and the New
Secured Term Notes shall be in form and substance reasonably
satisfactory to the Administrative Agent;
(e) The Debtors and the Administrative Agent shall be satisfied
that the Debtors have sufficient liquidity either through availability
under the Exit Facility or through proceeds from asset sales;
(f) The Confirmation Order shall provide for the release of all
Claims held by the Debtors against the Senior Lenders and their
respective Affiliates and known loan participants;
(g) The Confirmation Order, in form and substance reasonably
acceptable to the Debtors and the Administrative Agent, shall have
become a Final Order;
(h) The Effective Date shall have occurred on or before twenty
(20) days following the Confirmation Hearing, or such later date as
the Debtors and the Administrative Agent may agree;
(i) All actions, documents and agreements necessary to implement
the Plan in form and substance reasonably acceptable to the Debtors
and the Administrative Agent shall have been effected or executed;
43
(j) The Debtors shall have received all authorizations, consents,
regulatory approvals, rulings, letters, no-action letters, opinions or
documents that are determined by the Debtors to be necessary to
implement the Plan;
(k) The Administrative Agent shall continue to be satisfied with
the composition, and employment terms, of the senior management of
Reorganized Acterna or Newco, as the case may be; and
(l) The terms of the Benefit Plans shall be acceptable to the
Administrative Agent.
H. IMPLEMENTATION AND EFFECT OF CONFIRMATION
OF THE PLAN
On the Effective Date, except as otherwise provided in the Plan, the
property of the estate of the Debtors shall vest in the Reorganized Debtors.
From and after the Effective Date, the Reorganized Debtors may operate their
businesses, and may use, acquire and dispose of property free of any
restrictions imposed under the Bankruptcy Code. As of the Effective Date, all
property of the Reorganized Debtors shall be free and clear of all liens, Claims
and interests of holders of Claims and Equity Interests, except as otherwise
provided in the Plan. All injunctions and stays provided for in the Chapter 11
Cases under sections 105 and 362 of the Bankruptcy Code, or otherwise, and in
existence on the Confirmation Date, shall remain in full force and effect until
the Effective Date.
1. Incurrence of New Indebtedness
On the Effective Date, subject to the consent of the Administrative
Agent, the Reorganized Debtors will be authorized (but not required if
sufficient asset sale proceeds are retained) to incur indebtedness under the
Exit Facility, having principal terms and conditions no less favorable to the
Reorganized Debtors than those set forth in the Plan Supplement. The receipt by
the Debtors of satisfactory written commitments to provide the facility, or
sufficient liquidity from assets sales, is a condition precedent to
effectiveness of the Plan.
2. The Restructuring Transactions
On or as of the Effective Date, the distributions provided for under
the Plan may be effectuated pursuant to the Restructuring Transactions described
in this Article VI, the documentation for which shall be satisfactory to the
Debtors and the Senior Lenders. On or before the Confirmation Date, the Debtors
and the Senior Lenders may elect to effectuate the following Restructuring
Transactions, all of which shall occur in seriatim:
(a) Newco shall be formed (but no shares of capital stock shall
be issued prior to the issuances set forth below);
44
(b) TTC, a non-Debtor Affiliate which develops, manufactures, and
markets a broad range of instruments, systems, software, and services
in Europe, shall sell all the shares of IPMS, a wholly owned
subsidiary of TTC and which is the research and development center of
TTC, to Acterna for an amount of Cash equal to the fair market value
of IPMS;
(c) On the Effective Date, Acterna shall transfer, or cause to be
transferred, to Newco all of its ownership interests in Acterna LLC
(the "LLC Interests"), which represents 100% of the ownership of
Acterna LLC. The LLC Interests transferred to Newco pursuant to the
preceding sentence shall be subject to, and Newco shall assume sole
and exclusive responsibility for (a) all Claims, liabilities and
obligations of Acterna Corporation incurred after the Petition Date
(including, without limitation, any Claims liabilities and obligations
incurred pursuant to the Plan) to the extent not paid on or prior to
the Effective Date, and (b) any tax liabilities of Acterna Corporation
for periods ending on or before the Effective Date to the extent
payable after the Effective Date (whether or not relating to the LLC
Interests), including, without limitation, any taxes incurred in
connection with the transfer of the LLC Interests. Immediately after
the Effective Date, the net asset value of Reorganized Acterna will be
at least approximately $5 million;
(d) In consideration for, and in connection with, the transfer of
the LLC Interests:
(i) Newco shall transfer to Acterna all of the Newco Common
Stock, New Secured Term Notes, New Warrants, and the Contingent
Payment Rights; and
(ii) In accordance with Article IV of the Plan, Acterna
shall distribute (A) to the holders of Senior Lender Claims, all
of the New Common Stock, the New Secured Term Notes, and the
Contingent Payment Rights and (B) to the holders of Allowed
Subordinated Notes Claims, all of the New Warrants.
Subject to the consent of the Administrative Agent, the Debtors
intend to effectuate the Restructuring Transactions described above.
I. DISCHARGE AND INJUNCTION
The rights afforded pursuant to the Plan and the treatment of all
Claims and Equity Interests under the Plan shall be in exchange for and in
complete satisfaction, discharge and release of Claims and Equity Interests of
any nature whatsoever, including any interest accrued on such Claims from and
after the Petition Date, against the Debtors and the Debtors in Possession, or
any of their assets or properties. Except as otherwise provided in the Plan, (i)
45
on the Effective Date, all such Claims against and Equity Interests in the
Debtors shall be satisfied, discharged and released in full and (ii) all persons
shall be precluded from asserting against the Reorganized Debtors, their
successors, or their assets or properties any other or further Claims or Equity
Interests based upon any act or omission, transaction or other activity of any
kind or nature that occurred prior to the Confirmation Date.
Except as otherwise expressly provided in the Plan, the Confirmation
Order or a separate order of the Bankruptcy Court, all entities who have held,
hold or may hold Claims against or Equity Interests in the Debtors, are
permanently enjoined, on and after the Effective Date, from (i) commencing or
continuing in any manner any action or other proceeding of any kind with respect
to any such Claim or Equity Interest, (ii) the enforcement, attachment,
collection or recovery by any manner or means of any judgment, award, decree or
order against the Debtors on account of any such Claim or Equity Interest, (iii)
creating, perfecting or enforcing any encumbrance of any kind against the
Debtors or against the property or interests in property of the Debtors on
account of any such Claim or Equity Interest, (iv) asserting any right of
setoff, subrogation or recoupment of any kind against any obligation due from
the Debtors or against the property or interests in property of the Debtors on
account of any such Claim or Equity Interest and (v) commencing or continuing in
any manner any action or other proceeding of any kind with respect to any Claims
and Causes of Action which are extinguished, dismissed or released pursuant to
the Plan. Such injunction shall extend to successors of the Debtors, including,
without limitation, the Reorganized Debtors and their respective properties and
interests in property. Section 10.5 of the Plan does not enjoin, bar or
otherwise impair the commencement or prosecution of direct personal Claims
against any Person other than the Debtors.
J. VOTING
1. Voting of Claims
Each holder of an Allowed Claim in an impaired Class of Claims that
is entitled to vote on the Plan pursuant to Article IV of the Plan shall be
entitled to vote separately to accept or reject the Plan as provided in such
order as is entered by the Bankruptcy Court establishing procedures with respect
to the solicitation and tabulation of votes to accept or reject the Plan, or any
other order or orders of the Bankruptcy Court.
2. Elimination of Vacant Classes
Any Class of Claims that is not occupied as of the date of
commencement of the Confirmation Hearing by an Allowed Claim or a Claim
temporarily allowed under Bankruptcy Rule 3018 shall be deemed eliminated from
the Plan for purposes of voting to accept or reject the Plan and for purposes of
determining acceptance or rejection of the Plan by such Class pursuant to
section 1129(a)(8) of the Bankruptcy Code.
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3. Nonconsensual Confirmation
If any impaired Class of Claims entitled to vote shall not accept the
Plan by the requisite majorities provided in section 1126(c) of the Bankruptcy
Code, the Debtors reserve the right to amend the Plan in accordance with Section
12.10 of the Plan or undertake to have the Bankruptcy Court confirm the Plan
under section 1129(b) of the Bankruptcy Code or both. With respect to impaired
Classes of Claims that are deemed to reject the Plan, the Debtors shall request
the Bankruptcy Court to confirm the Plan under section 1129(b) of the Bankruptcy
Code.
K. SUMMARY OF OTHER PROVISIONS OF THE PLAN
The following subsections summarize certain other significant
provisions of the Plan. The Plan should be referred to for the complete text of
these and other provisions of the Plan.
1. Retiree Benefits
The Plan provides that, pursuant to section 1114(a) of the Bankruptcy
Code, payments, if any, due to any person for the purpose of providing or
reimbursing payments for retired employees and their spouses and dependents for
medical, surgical, or hospital care benefits, or benefits in the event of
sickness, accident, disability, or death under any plan, fund, or program
(through the purchase of insurance or otherwise) maintained or established in
whole or in part by the Debtors prior to the Petition Date shall be continued
for the duration of the period the Debtors have obligated themselves to provide
such benefits, subject to the Debtors' right to amend or modify such benefit
plans, funds or programs in accordance with the terms thereof and applicable
law. A schedule listing such benefits shall be provided to the Administrative
Agent no later than thirty (30) days prior to the deadline for voting on the
Plan.
2. Continuation of Pension Plans and Benefit Plans
The Debtors sponsor and administer several Benefit Plans, including
two pension plans. The Debtors will continue the Benefit Plans subject to the
terms of such plans and applicable law, including ERISA. A schedule listing the
Benefit Plans shall be provided to the Senior Lenders no later than thirty (30)
prior to the deadline for voting on the Plan.
3. By-laws and Certificates of Incorporation
The Reorganized Debtors' By-laws and the Reorganized Debtors'
Certificates of Incorporation shall contain provisions necessary (a) to prohibit
the issuance of nonvoting equity securities as required by section 1123(a)(6) of
the Bankruptcy Code, subject to further amendment of such certificates of
incorporation and by laws as permitted by applicable law and (b) to effectuate
the provisions of the Plan, in each case without any further action by the
stockholders or directors of the Debtors, the Debtors in Possession or the
Reorganized Debtors.
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The proposed forms of Reorganized Debtors' Certificates of
Incorporation and the Reorganized Debtors' By-laws will be included in the Plan
Supplement.
4. Amendment or Modification of the Plan
a. Plan Modifications. The Plan may be amended, modified, or
supplemented by the Debtors, with the consent of the Administrative Agent, in
the manner provided for by section 1127 of the Bankruptcy Code or as otherwise
permitted by law without additional disclosure pursuant to section 1125 of the
Bankruptcy Code, except as the Bankruptcy Court may otherwise direct. In
addition, after the Confirmation Date, so long as such action does not
materially adversely affect the treatment of holders of Claims or Equity
Interests under the Plan (or, in the case of the Senior Lender Claims, does not
affect the treatment for holders of such Claims), the Debtors may institute
proceedings in the Bankruptcy Court to remedy any defect or omission or
reconcile any inconsistencies in the Plan or the Confirmation Order, with
respect to such matters as may be necessary to carry out the purposes and
effects of the Plan.
b. Other Amendments. Prior to the Effective Date, the Debtors may
make appropriate technical adjustments and modifications to the Plan without
further order or approval of the Bankruptcy Court, provided that such technical
adjustments and modifications do not adversely affect in a material way the
treatment of holders of Claims or Equity Interests.
5. Limited Releases
Pursuant to the Plan, as of the Effective Date, the Debtors and the
Debtors in Possession release all of the Releasees from any and all Causes of
Action held, assertable on behalf of or derivative from the Debtors or the
Debtors in Possession, in any way relating to the Debtors, the Debtors in
Possession, the Chapter 11 Cases, the Plan and the ownership, management and
operation of the Debtors. Releasees means all present and former officers and
directors of the Debtors who were directors and/or officers, respectively, on or
after the Petition Date, and any other Persons who serve or served as members of
management of the Debtors on or after the Petition Date, all present and former
members of the Creditors' Committee, CD&R, the Administrative Agent, the DIP
Agent, all other agents and letter of credit issuing banks under the Bank Credit
Agreement and the DIP Agreement, all present and former Senior Lenders and DIP
Lenders (and known loan participants), any of the respective Affiliates of each
of these parties in interest, all present and former officers and directors and
other Persons who serve or served as members of the management of any present or
former member of the Creditors' Committee or of any present or former Senior
Lender or DIP Lender (and their respective Affiliates), and all advisors,
consultants or professionals of or to each Debtor, the Creditors' Committee, the
members of the Creditors' Committee, CD&R, the Administrative Agent, the DIP
48
Agent, all other agents under the Bank Credit Agreement and the DIP Agreement,
the Senior Lenders and the DIP Lenders (and their respective Affiliates). The
foregoing shall not operate as a waiver of or release from any Causes of Action
arising out of any express contractual obligation owing by any former director,
officer or employee to the Debtors or any reimbursement obligation of any former
director, officer or employee with respect to a loan or advance made by the
Debtors to such former director, officer or employee and is not a waiver of or
release for any attorneys retained in connection with this Chapter 11 Cases from
Claims by their respective clients. Nothing contained herein shall effect a
release in favor of any person other than the Debtors with respect to any Causes
of Action based on willful misconduct, or gross negligence.
6. Cancellation of Existing Securities and Agreements
Pursuant to the Plan, on the Effective Date, the promissory notes,
share certificates, bonds and all other instruments or documents evidencing any
Claim or Equity Interest (except for Equity Interests in the Reorganized
Subsidiaries formerly held by Acterna Corporation or Acterna LLC and their
subsidiaries shall be transferred to Newco (or Reorganized Acterna, if the
Restructuring Transactions are not implemented)), other than an Other Secured
Claim that is reinstated and rendered unimpaired pursuant to Section 4.2 of the
Plan, shall be deemed cancelled without further act or action under any
applicable agreement, law, regulation, order or rule, and, except as otherwise
set forth in the Plan, the obligations of the Debtors under the agreements,
indentures and certificates of designations governing such Claims and Equity
Interests, as the case may be, shall be discharged.
Except as expressly provided for in the Plan, holders of promissory
notes, share certificates, bonds and any and all other instruments or documents
evidencing any Claim or Equity Interest shall not be required to surrender such
instruments pursuant to the Plan.
7. Revocation or Withdrawal of the Plan
Subject to the approval of the Administrative Agent, the Debtors
reserve the right to revoke or withdraw the Plan prior to the Confirmation Date.
If the Debtors revoke or withdraw the Plan prior to the Confirmation Date, then
the Plan shall be deemed null and void. In such event, nothing contained in the
Plan shall constitute or be deemed a waiver or release of any Claims by or
against the Debtors or any other person or entity or to prejudice in any manner
the rights of the Debtors or any person or entity in any further proceedings
involving the Debtors.
8. Termination of the Creditors' Committee
Pursuant to the Plan, the appointment of the Creditors' Committee
shall terminate on the Effective Date.
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9. Claims Preserved
Except as otherwise provided in the Plan or in a Final Order entered
in these Chapter 11 Cases, the Reorganized Debtors shall retain any and all
avoidance claims accruing to the Debtors under sections 502(d), 544, 545, 547,
548, 549, 550 and 551 of the Bankruptcy Code and prosecute such claims at the
discretion of the Reorganized Debtors.
During the ninety (90) day period prior to the Petition Date, the
Debtors paid approximately $52,591,444 to or for the benefit of creditors
pursuant to arrangements with those creditors for goods provided and services
performed or to be performed. A portion of those payments may constitute
voidable preferences, if determined that the payments were not made in the
ordinary course of business. The recipients of those payments may assert other
defenses as well.
10. Effectuating Documents and Further Transactions
Pursuant to the Plan, each of the Debtors and the Reorganized Debtors
are authorized to execute, deliver, file or record such contracts, instruments,
releases, indentures and other agreements or documents and take such actions as
may be necessary or appropriate to effectuate and further evidence the terms and
conditions of the Plan and any securities issued pursuant to the Plan.
11. Corporate Action
Pursuant to the Plan, on the Effective Date, all matters provided for
under the Plan that would otherwise require approval of the stockholders or
directors of the Debtors or the Reorganized Debtors, including, without
limitation, (a) the authorization to form Newco and to issue or cause to be
issued Newco Common Stock, (b) the authorization to issue or cause to be issued
New Common Stock, New Secured Term Notes, and New Warrants, (c) the
authorization and effectiveness of the Reorganized Debtors' Certificates of
Incorporation, the Reorganized Debtors' By-laws, Registration Rights Agreement,
New Secured Loan Documents, Restructured German Term Debt Documents, Exit
Facility Documents, Employee Equity and the New Management Incentive Plan, and
(d) the election or appointment, as the case may be, of directors and officers
of the Reorganized Debtors pursuant to the Plan, shall be deemed to have
occurred and shall be in effect from and after the Effective Date pursuant to
the applicable general corporation or other law of the state in which applicable
Reorganized Debtor is formed and established, without any requirement of further
action by the stockholders or directors of the Debtors or the Reorganized
Debtors.
12. Exculpation
Neither the Debtors, the Disbursing Agent, the Creditors' Committee,
all present and former holders of the Senior Lender Claims (or their known
participants), all present and former DIP Lenders (or their known loan
participants), Administrative Agent, the DIP Agent, all other agents and letter
of credit issuing banks under the Bank Credit Agreement and DIP Agreement, CD&R,
50
nor any of the respective Affiliates of each of those parties in interest,
members, present or former officers, directors, employees, agents or
professionals shall have or incur any liability to any holder of any Claim or
Equity Interest for any act or omission in connection with, related to, or
arising out of, the Chapter 11 Cases, negotiations regarding or concerning the
Plan, the confirmation of the Plan, the consummation of the Plan or the
administration of the Plan or property to be distributed under the Plan, except
for willful misconduct or gross negligence. The Debtors, the Reorganized
Debtors, the Disbursing Agent, the Creditors' Committee, all present and former
holders of the Senior Lender Claims (or their known participants), all present
and former DIP Lenders (or their known loan participants), Administrative Agent,
the DIP Agent, all other agents under the Bank Credit Agreement and DIP
Agreement, CD&R, nor any of the respective Affiliates of each of those parties
in interest, and each of their respective members, officers, directors,
employees, advisors, professionals and agents shall be entitled to rely upon the
advice of counsel with respect to their duties and responsibilities under the
Plan.
13. Plan Supplement
The Reorganized Debtors By-laws, New Management Incentive Plan,
Reorganized Debtors Certificate of Incorporation, a term sheet outlining the
principal terms of the New Secured Loan Agreement, a term sheet outlining the
principal terms of the Restructured German Term Debt Documents, New Warrant
Agreement, and Registration Rights Agreement shall be contained in the Plan
Supplement and filed with the Clerk of the Bankruptcy Court at least five days
prior to the last day upon which holders of Claims may vote to accept or reject
the Plan. In the event that there is a stockholders' agreement governing the New
Common Stock, the Employee Equity, the New Warrants, and/or the shares, if any,
to be issued upon the exercise of the New Warrants, such stockholders' agreement
shall also be contained in the Plan Supplement. Upon its filing with the
Bankruptcy Court, the Plan Supplement may be inspected in the office of the
Clerk of the Bankruptcy Court during normal court hours.
14. Retention of Jurisdiction
Pursuant to the Plan, the Bankruptcy Court shall have exclusive
jurisdiction of all matters arising out of, and related to, the Chapter 11 Cases
and the Plan 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 motion, adversary proceeding, application,
contested matter, and other litigated matter pending on the Confirmation Date.
51
c. To ensure that distributions to holders of Allowed Claims are
accomplished as provided herein.
d. To consider Claims or the allowance, classification, priority,
compromise, estimation, or payment of any Claim, Administrative Expense Claim,
or Equity Interest.
e. To hear and determine all actions commenced by the Debtors
pursuant to sections 505, 542, 543, 544, 545, 547, 548, 549, 550, and 553 of the
Bankruptcy Code, collection matters related thereto, and settlements thereof.
f. To enter, implement, or enforce such orders as may be appropriate
in the event the Confirmation Order is for any reason stayed, reversed, revoked,
modified, or vacated.
g. To issue injunctions, enter and implement other orders and take
such other actions as may be necessary or appropriate to restrain interference
by any person with the consummation, implementation, or enforcement of the Plan,
the Confirmation Order, or any other order of the Bankruptcy Court.
h. To hear and determine any application to modify the Plan in
accordance with section 1127 of the Bankruptcy Code, to remedy any defect or
omission or reconcile any inconsistency in the Plan, the Disclosure Statement,
or any order of the Bankruptcy Court, including the Confirmation Order, in such
a manner as may be necessary to carry out the purposes and effects thereof.
i. 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.
j. To hear and determine disputes arising in connection with the
interpretation, implementation, or enforcement of the Plan, the Confirmation
Order, any transactions or payments contemplated hereby or any agreement,
instrument, or other document governing or relating to any of the foregoing,
other than matters related to the Exit Facility, the New Secured Term Notes and
the Restructured German Term Debt.
k. To take any action and issue such orders as may be necessary to
construe, enforce, implement, execute, and consummate the Plan or to maintain
the integrity of the Plan following consummation.
l. To determine such other matters and for such other purposes as may
be provided in the Confirmation Order.
m. To hear and determine matters concerning state, local, and federal
taxes in accordance with sections 346, 505, and 1146 of the Bankruptcy Code.
52
n. To hear and determine any other matters related hereto and not
inconsistent with the Bankruptcy Code and title 28 of the United States Code.
o. To enter a final decree closing the Chapter 11 Cases.
p. To recover all assets of the Debtors and property of the Debtors'
estates, wherever located.
q. To resolve any Disputed Claims.
r. To determine the scope of any discharge of any Debtor under the
Plan or the Bankruptcy Code.
15. Exemption from Transfer Taxes
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance,
transfer or exchange of notes or issuance of debt or equity securities under the
Plan, the creation of any mortgage, deed of trust or other security interest,
the making or assignment of any lease or sublease, or the making or delivery of
any deed or other instrument of transfer under, in furtherance of, or in
connection with the Plan, including, without limitation, 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, shall not
be subject to any stamp, real estate transfer, mortgage recording, sales or
other similar tax. All sale transactions consummated by the Debtors and approved
by the Bankruptcy Court on and after the Petition Date, including, without
limitation, the sales, if any, by the Debtors of owned property or assets
pursuant to section 363(b) of the Bankruptcy Code and the assumptions,
assignments and sales, if any, by the Debtors of unexpired leases of
non-residential real property pursuant to section 365(a) of the Bankruptcy Code,
shall be deemed to have been made under, in furtherance of, or in connection
with the Plan and, therefore, shall not be subject to any stamp, real estate
transfer, mortgage recording, sales or other similar tax.
16. Injunction Regarding Worthless Stock Deduction
Unless otherwise ordered by the Bankruptcy Court, on and after the
Confirmation Date, any "fifty percent shareholder" within the meaning of section
382(g)(4)(D) of the Internal Revenue Code of 1986, as amended, shall be enjoined
from claiming a worthless stock deduction with respect to any Equity Interests
held by such entity for any taxable year of such shareholder ending prior to the
Effective Date.
17. Post-Effective Date Fees and Expenses
From and after the Effective Date, Reorganized Acterna (or Newco, if
the restructuring Transactions are implemented) shall, in the ordinary course of
business and without the necessity for any approval by the Bankruptcy Court, pay
the reasonable fees and expenses of professional persons thereafter incurred by
53
Reorganized Acterna (or Newco, if the restructuring Transactions are
implemented), including, without limitation, those fees and expenses incurred in
connection with the implementation and consummation of the Plan.
18. Payment of Statutory Fees
All fees payable pursuant to section 1930 of title 28 of the United
States Code, as determined by the Bankruptcy Court at the Confirmation Hearing,
shall be paid on the Effective Date.
19. Severability
In the event that the Bankruptcy Court determines that any provision
in the Plan is invalid, void or unenforceable, such provision shall be invalid,
void or unenforceable with respect to the holder or holders of such Claims or
Equity Interests as to which the provision is determined to be invalid, void or
unenforceable. The invalidity, voidness or unenforceability of any such
provision shall in no way limit or affect the enforceability and operative
effect of any other provision of the Plan.
20. Binding Effect
The Plan shall be binding upon and inure to the benefit of the
Debtors, the holders of Claims and Equity Interests and their respective
successors and assigns, including, without limitation, Reorganized Acterna and
Newco.
21. Governing Law
Except to the extent the Bankruptcy Code, Bankruptcy Rules or other
federal law is applicable, or to the extent an exhibit to the Plan provides
otherwise, or contract, instrument or other agreement or document entered into
in connection with the Plan provides otherwise, the rights and obligations
arising under this Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York.
22. Withholding and Reporting Requirements
In connection with the consummation of the Plan, the Debtors or
Reorganized Debtors, as the case may be, shall comply with all withholding and
reporting requirements imposed by any federal, state, local or foreign taxing
authority and all distributions hereunder shall be subject to any such
withholding and reporting requirements.
23. Sections 1125 and 1126 of the Bankruptcy Code
As of and subject to the occurrence of the Confirmation Date, (i) the
Debtors shall be deemed to have solicited acceptances of the Plan in good faith
and in compliance with the applicable provisions of the Bankruptcy Code,
including, without limitation, section 1125(a) of the Bankruptcy Code, and any
54
applicable nonbankruptcy law, rule or regulation governing the adequacy of
disclosure in connection with such solicitation and (ii) the Debtors, the Senior
Lenders and the DIP Lenders (and each of their respective affiliates, agents,
directors, officers, employees, advisors and attorneys) shall be deemed to have
participated in good faith and in compliance with the applicable provisions of
the Bankruptcy Code in the offer and issuance of any securities under the Plan,
and therefore are not, and on account of such offer, issuance and solicitation
will not be, liable at any time for any violation of any applicable law, rule or
regulation governing the solicitation of acceptances or rejections of the Plan
or the offer and issuance of any securities under the Plan.
24. Allocation of Plan Distributions
All distributions in respect of Allowed Claims will be allocated
first to the portion of such Claims representing interest (as determined for
federal income tax purposes), second to the original principal amount of such
Claims (as determined for federal income tax purposes), and any excess to the
remaining portion of such Claims.
25. Minimum Distributions
No payment of Cash less than $75 shall be made by the Disbursing
Agent to any holder of a Claim.
26. Notices
All notices, requests and demands to or upon the Debtor or, on and
after the Effective Date, Reorganized Acterna, to be effective shall be in
writing and, unless otherwise expressly provided herein, shall be deemed to have
been duly given or made when actually delivered or, in the case of notice by
facsimile transmission, when received and telephonically confirmed, addressed as
follows:
If to the Debtors or the Reorganized Debtors:
Acterna Corporation
12410 Milestone Center Drive
Germantown, Maryland 20876-7100
Attn: Richard H. Goshorn, Esq.
Telephone: (240) 404-1115
Facsimile: (240) 404-1196
55
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Paul M. Basta, Esq.
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
If to the Senior Lenders or the DIP Lenders:
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
Attn: Peter V. Pantaleo, Esq.
Alice Belisle Eaton, Esq.
Telephone: (212) 455-2000
Facsimile: (212) 455 2502
If to the Creditors' Committee:
Blank Rome LLP
405 Lexington Avenue
New York, New York 10174
Attn: Andrew B. Eckstein, Esq.
Telephone: (212) 885-5505
Facsimile: (917) 332-3724
VII. CONFIRMATION AND CONSUMMATION PROCEDURE
Under the Bankruptcy Code, the following steps must be taken to
confirm the Plan:
A. SOLICITATION OF VOTES
In accordance with sections 1126 and 1129 of the Bankruptcy Code, the
Claims in Classes C, D, E and F -- Senior Lender Claims, General Unsecured
Claims, Convertible Notes Claims and Subordinated Notes Claims -- are impaired,
and the holders of Allowed Claims in such Classes are entitled to vote to accept
or reject the Plan. Classes H and I -- Securities Litigation Claims and Equity
Interests respectively -- are impaired and shall not receive any distributions
under the Plan. Accordingly, the holders of Claims or Equity Interests in such
Classes are conclusively presumed to have rejected the Plan, and the
solicitation of acceptances with respect to such Classes is not required under
section 1126(f) of the Bankruptcy Code. Claims in Classes A (Priority Non-Tax
Claims), B (Other Secured Claims) and G (Intercompany Claims) are unimpaired.
Accordingly, the holders of Allowed Claims in each of such Classes are
conclusively presumed to have accepted the Plan, and the solicitation of
acceptances with respect to such Classes is not required under section 1126(f)
of the Bankruptcy Code.
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As to the classes of Claims entitled to vote on a plan, the
Bankruptcy Code defines acceptance of a plan by a class of creditors as
acceptance by holders of at least two thirds in dollar amount and more than one
half in number of the Claims of that class that have timely voted to accept or
reject a plan.
A vote may be disregarded if the Bankruptcy Court determines, after
notice and a hearing, that acceptance or rejection was not solicited or procured
in good faith or in accordance with the provisions of the Bankruptcy Code.
B. THE CONFIRMATION HEARING
The Bankruptcy Code requires the Bankruptcy Court, after notice, to
hold a confirmation hearing. The Confirmation Hearing in respect of the Plan has
been scheduled for September 25, 2003 commencing at 10:00 a.m. Eastern Time,
before the Honorable Burton R. Lifland, United States Bankruptcy Judge, at the
United States Bankruptcy Court for the Southern District of New York, One
Bowling Green, New York, New York 10004, or such other location as the
Bankruptcy Court directs. The Confirmation Hearing may be adjourned from time to
time by the Bankruptcy Court without further notice except for the announcement
of the adjournment date made at the Confirmation Hearing or at any subsequent
adjourned Confirmation Hearing. Any objection to confirmation must be made in
writing and specify in detail the name and address of the objector, all grounds
for the objection and the amount of the Claim or the number of shares of common
stock of the Debtors held by the objector. Any such objection shall be filed
with the Bankruptcy Court, together with proof of service thereof, in accordance
with General Order of the United States Bankruptcy Court for the Southern
District of New York M-242, which order may be found at www.nysb.uscourts.gov,
and served upon the following parties on or before September 15, 2003 at 4:00
p.m. Eastern Time:
Acterna Corporation
12410 Milestone Center Drive
Germantown, Maryland 20876-7100
Attn: Richard H. Goshorn, Esq.
Telephone: (240) 404-1115
Facsimile: (240) 404-1196
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Paul M. Basta, Esq.
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
57
Simpson Thacher & Bartlett LLP
Attorneys for the Senior Lenders
425 Lexington Avenue
New York, New York 10017
Attn: Peter V. Pantaleo, Esq.
Alice Belisle Eaton, Esq.
Telephone: (212) 455-2000
Facsimile: (212) 455 2502
Blank Rome LLP
Attorneys for the Creditors' Committee
405 Lexington Avenue
New York, New York 10174
Attn: Andrew B. Eckstein, Esq.
Telephone: (212) 885-5505
Facsimile: (917) 332-3724
The Office of the United States Trustee
33 Whitehall Street, 21st Floor
New York, New York 10004
Attn: Hollie T. Elkins, Esq.
Objections to confirmation of the Plan 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.
C. CONFIRMATION
At the Confirmation Hearing, the Bankruptcy Court will confirm the
Plan only if all of the requirements of section 1129 of the Bankruptcy Code are
met. Among the requirements for confirmation of a plan are that the plan is (i)
accepted by all impaired classes of Claims and equity interests or, if rejected
by an impaired class, that the plan "does not discriminate unfairly" and is
"fair and equitable" as to such class, (ii) feasible and (iii) in the "best
interests" of creditors and stockholders that are impaired under the plan.
1. Acceptance
Class C (Senior Lender Claims), Class D (General Unsecured Claims),
Class E (Convertible Notes Claims), and Class F (Subordinated Notes Claims) are
impaired under the Plan and holders of Allowed Claims in such Classes are
entitled to vote to accept or reject the Plan. Class H (Securities Litigation
Claims) and Class I (Equity Interests) are impaired under the Plan and shall not
receive any distributions under the Plan, and, therefore, are conclusively
presumed to have voted to reject the Plan. Classes A (Priority Non-Tax Claims),
B (Other Secured Claims) and G (Intercompany Claims) of the Plan are unimpaired
and, therefore, are conclusively presumed to have voted to accept the Plan.
58
With respect to those Classes of Claims and Equity Interests that are
deemed to have rejected the Plan, i.e., Class H (Securities ---- Litigation
Claims) and Class I (Equity Interests), the Debtors shall request confirmation
of the Plan pursuant to section 1129(b) of the Bankruptcy Code. The Debtors
reserve the right to amend the Plan in accordance with Section 12.10 of the Plan
or seek nonconsensual confirmation of the Plan under section 1129(b) of the
Bankruptcy Code or both with respect to any Class of Claims that is entitled to
vote to accept or reject the Plan, if such Class rejects the Plan.
2. Unfair Discrimination and Fair and Equitable Tests
To obtain nonconsensual confirmation of the Plan, it must be
demonstrated to the Bankruptcy Court that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each impaired,
nonaccepting class. The Bankruptcy Code provides a non exclusive definition of
the phrase "fair and equitable." The Bankruptcy Code establishes "cram down"
tests for secured creditors, unsecured creditors and equity holders, as follows:
o Secured Creditors. Either (i) each impaired secured creditor
retains its liens securing its secured Claim and receives on
account of its secured Claim deferred Cash payments having a
present value equal to the amount of its allowed secured Claim,
(ii) each impaired secured creditor realizes the "indubitable
equivalent" of its allowed secured Claim or (iii) the property
securing the Claim is sold free and clear of liens with such
liens to attach to the proceeds of the sale and the treatment of
such liens on proceeds to be as provided in clause (i) or (ii)
above.
o Unsecured Creditors. Either (i) each impaired unsecured creditor
receives or retains under the plan property of a value equal to
the amount of its allowed Claim or (ii) the holders of Claims and
interests that are junior to the Claims of the dissenting class
will not receive any property under the plan.
o Equity Interests. Either (i) each holder of an equity interest
will receive or retain under the plan property of a value equal
to the greatest of the fixed liquidation preference to which such
holder is entitled, the fixed redemption price to which such
holder is entitled or the value of the interest or (ii) the
holder of an interest that is junior to the nonaccepting class
will not receive or retain any property under the plan.
A plan of reorganization does not "discriminate unfairly" with
respect to a nonaccepting class if the value of the Cash and/or securities to be
distributed to the nonaccepting class is equal to, or otherwise fair when
compared to, the value of the distributions to other classes whose legal rights
are the same as those of the nonaccepting class.
59
The Debtors believe and will demonstrate at the Confirmation Hearing
that the Plan "does not discriminate unfairly" and is "fair and equitable" with
respect to each impaired, nonaccepting Class.
3. Feasibility
The Bankruptcy Code permits a plan to be confirmed if it is not
likely to be followed by liquidation or the need for further financial
reorganization. For purposes of determining whether the Plan meets this
requirement, the Debtors have analyzed their ability to meet their obligations
under the Plan. As part of this analysis, the Debtors have prepared projections
of its financial performance for each of the three fiscal years in the period
ending March 31, 2007 (the "Projection Period"). These projections, and the
assumptions on which they are based, are included in the Projected Financial
Information, annexed hereto as Exhibit E. Based upon such projections, the
Debtors believe that they will be able to make all payments and distributions
required pursuant to the Plan and, therefore, that confirmation of the Plan is
not likely to be followed by liquidation or the need for further reorganization.
The pro forma financial information and the projections are based on
the assumption that the Plan will be confirmed by the Bankruptcy Court and, for
projection purposes, that the Effective Date of the Plan will occur in October
2003.
The Debtors have prepared these financial projections based upon
certain assumptions that they believe to be reasonable under the circumstances.
Those assumptions considered to be significant are described in the financial
projections, which are annexed hereto as Exhibit E. The financial projections
have not been examined or compiled by independent accountants. The Debtors make
no representation as to the accuracy of the projections or the Debtors' ability
to achieve the projected results. Many of the assumptions on which the
projections are based are subject to significant uncertainties. Inevitably, some
assumptions will not materialize and unanticipated events and circumstances may
affect the actual financial results. Therefore, the actual results achieved
throughout the Projection Period may vary from the projected results and the
variations may be material. All holders of Claims that are entitled to vote to
accept or reject the Plan are urged to examine carefully all of the assumptions
on which the financial projections are based in connection with their evaluation
of the Plan.
4. Best Interests Test
With respect to each impaired Class of Claims and Equity Interests,
confirmation of the Plan requires that each holder of a Claim or Equity Interest
either (i) accept the Plan or (ii) receive or retain under the Plan property of
a value, as of the Effective Date, that is not less than the value such holder
would receive if the Debtor were liquidated under chapter 7 of the Bankruptcy
Code. To determine the recovery that holders of Claims and Equity Interests in
60
each impaired Class would receive if the Debtors were liquidated under chapter
7, the Bankruptcy Court must determine the dollar amount that would be generated
from the liquidation of the Debtors' assets and properties in the context of a
chapter 7 liquidation case. The Cash amount that would be available for
satisfaction of Claims and Equity Interests would consist of the proceeds
resulting from the disposition of the unencumbered assets and properties of the
Debtors, augmented by the unencumbered Cash held by the Debtors at the time of
the commencement of the liquidation case. Such Cash amount would be reduced by
the costs and expenses of liquidation and by such additional administrative and
priority Claims that might result from the termination of the Debtors' business
and the use of chapter 7 for the purposes of liquidation.
The Debtors' costs of liquidation under chapter 7 would include the
fees payable to a trustee in bankruptcy, as well as those fees that might be
payable to attorneys and other professionals that such a trustee might engage.
In addition, Claims would arise by reason of the breach or rejection of
obligations incurred and leases and executory contracts assumed or entered into
by the Debtors during the pendency of the Chapter 11 Cases. The foregoing types
of Claims and other Claims that might arise in a liquidation case or result from
the pending Chapter 11 Cases, including any unpaid expenses incurred by the
Debtors during the Chapter 11 Cases, such as compensation for attorneys,
financial advisors and accountants, would be paid in full from the liquidation
proceeds before the balance of those proceeds would be made available to pay
prepetition Claims.
To determine if the Plan is in the best interests of each impaired
Class, the value of the distributions from the proceeds of a liquidation of the
Debtors' unencumbered assets and properties, after subtracting the amounts
attributable to the foregoing Claims, must be compared with the value of the
property offered to such Classes of Claims under the Plan.
After considering the effects that a chapter 7 liquidation would have
on the ultimate proceeds available for distribution to creditors in the Chapter
11 Cases, 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) the substantial
increases in Claims that would be satisfied on a priority basis or on parity
with creditors in the Chapter 11 Cases, the Debtors have determined that
confirmation of the Plan will provide each holder of an Allowed Claim with a
recovery that is not less than such holder would receive pursuant to the
liquidation of the Debtors under chapter 7.
The Debtors also believe that the value of any distributions to each
Class of Allowed Claims in a chapter 7 case, including all Secured Claims, would
be less than the value of distributions under the Plan because such
distributions in a chapter 7 case would not occur for a substantial period of
time. It is likely that distribution of the proceeds of the liquidation could be
delayed for two years after the completion of such liquidation in order to
resolve Claims and prepare for distributions. In the likely event litigation was
necessary to resolve Claims asserted in the chapter 7 case, the delay could be
prolonged.
61
The Debtors' Liquidation Analysis is annexed hereto as Exhibit E. The
information set forth in Exhibit E provides a summary of the liquidation values
of the Debtors' assets, assuming a chapter 7 liquidation in which a trustee
appointed by the Bankruptcy Court would liquidate the assets of the Debtor's
estate. Reference should be made to the Liquidation Analysis for a complete
discussion and presentation of the Liquidation Analysis.
Underlying the Liquidation Analysis are a number of estimates and
assumptions that, although developed and considered reasonable by the Debtors'
management, are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of the Debtors and their
management. The Liquidation Analysis also is based on assumptions with regard to
liquidation decisions that are subject to change. Accordingly, the values
reflected might not be realized if the Debtors were, in fact, to undergo such a
liquidation.
D. CONSUMMATION
The Plan will be consummated on the Effective Date. The Effective
Date of the Plan will occur on the first Business Day on which the conditions
precedent to the effectiveness of the Plan, as set forth in Section 9.1 of the
Plan, have been satisfied or waived pursuant to Section 9.3 of the Plan. For a
more detailed discussion of the conditions precedent to the Effective Date of
the Plan and the consequences of the failure to meet such conditions, see
Section VI.G.
The Plan is to be implemented pursuant to its terms, consistent with
the provisions of the Bankruptcy Code.
VIII. MANAGEMENT OF REORGANIZED DEBTORS
A. BOARD OF DIRECTORS AND MANAGEMENT
1. Newco and Reorganized Acterna Board of Directors
The initial Board of Directors of Reorganized Acterna (and Newco, if
the Restructuring Transactions are implemented) shall consist of seven members.
Six members will be selected by the holders of the Senior Lender Claims. The
remaining member shall be the Chief Executive Officer of Reorganized Acterna.
Each of the members of such initial Board of Directors shall serve a one-year
term. After selection of the initial Board of Directors, the holders of the New
Common Stock will elect members of the Board of Directors of Reorganized Acterna
(and Newco, if the Restructuring Transactions are implemented) in accordance
with the applicable Certificate of Incorporation, applicable By-laws and
applicable nonbankruptcy law.
62
2. Reorganized Subsidiaries Board of Directors
Subject to the approval of the Administrative Agent, the members of
the Boards of Directors of the Reorganized Subsidiaries immediately prior to the
Effective Date shall serve as the initial members of the Boards of Directors of
such Reorganized Subsidiaries on and after the Effective Date. Each of the
members of such initial Boards of Directors shall serve in accordance with the
applicable Reorganized Debtors Certificates of Incorporation and applicable
Reorganized Debtors By-laws, as the same may be amended from time to time.
3. Officers of Reorganized Debtors
Subject to the approval of the Administrative Agent, the officers of
the Debtors immediately prior to the Effective Date shall serve as the initial
officers of the Reorganized Debtors on and after the Effective Date. Such
officers shall serve in accordance with any employment agreement with the
Reorganized Debtors and applicable law.
4. Identity of the Debtors' Executive Management
Set forth below is the name, age and position of the executive
management of the Debtors during the Chapter 11 Cases:
- ----------------------------------------- --------- --------------------------------------------------------------------------------
NAME AGE TITLE
- ----------------------------------------- --------- --------------------------------------------------------------------------------
John Peeler 48 President and Chief Executive Officer of Acterna Corporation
- ----------------------------------------- --------- --------------------------------------------------------------------------------
John Dubel 44 Chief Restructuring Officer of Acterna Corporation
- ----------------------------------------- --------- --------------------------------------------------------------------------------
Grant Barber Chief Financial Officer of Acterna Corporation
- ----------------------------------------- --------- --------------------------------------------------------------------------------
Richard H. Goshorn, Esq. 47 Corporate Vice President, General Counsel and Corporate Secretary of Acterna
Corporation
- ----------------------------------------- --------- --------------------------------------------------------------------------------
Tom Turner 55 President and CEO of Itronix Corporation
- ----------------------------------------- --------- --------------------------------------------------------------------------------
Michael Arbuthnot 56 President and CEO of da Vinci Systems, Inc.
- ----------------------------------------- --------- --------------------------------------------------------------------------------
B. COMPENSATION OF THE DEBTORS' EXECUTIVE MANAGEMENT
The following table sets forth all cash compensation paid by the
Debtors to executive management of the Debtors, for services rendered in their
respective capacities for the fiscal year ended March 31, 2003:
63
COMPENSATION
-------------------------------------------------
NAME CAPACITY IN WHICH SERVED SALARY BONUS OTHER
-- -- ------------------------ ------ ----- -----
John Peeler President and CEO of Acterna Corporation $410,833.44 $325,000.00 $15,600.00
Grant Barber Chief Financial Officer of Acterna
Corporation $220,000.00 (10) $0.00 $95,000
Michael Arbuthnot President and CEO of da Vinci Systems,
Inc. $170,000.00 $251,500.00 $0.00
Rick Goshorn Corporate Vice President, General
Counsel and Corporate Secretary of
Acterna Corporation $263,442.31 $75,000.00 $11,100.00
Tom Turner President and CEO of Itronix Corporation $226,442.00 $100,000.00 $12,000.00
C. COMPENSATION MATTERS
1. The New Management Incentive Plan.
The Debtors and the Administrative Agent have negotiated the
principal terms and conditions of compensation and benefits for executive
management and the board of directors of Reorganized Acterna (or Newco, if the
Restructuring Transactions are implemented) to receive Employee Equity to
purchase up to 8.5% of Acterna Common Stock or, if a Restructuring Transaction
is implemented, Newco Common Stock. These terms and conditions are subject to
finalization. A summary of certain of the principal terms will be included in
the Plan Supplement.
2. Securities Law Compliance.
Reorganized Acterna (or Newco if the Restructuring Transactions are
implemented) is relying on the exemption from the registration requirements of
the federal securities laws set forth in section 4(2) of the Securities Act (as
defined below) for the offering and issuance of Employee Equity pursuant to the
New Management Incentive Plan. As a result, the offering and issuance of
Employee Equity pursuant to the New Management Incentive Plan will be made by
Reorganized Acterna in compliance with federal securities laws.
- ------------------------
(10) The amount reflected herein is based on a full year salary. Mr. Barber
began working for the Debtors on January 6, 2003 as Corporate Comptroller but
has since been promoted to Chief Financial Officer.
64
D. CONTINUATION OF EXISTING BENEFIT PLANS AND D&O INSURANCE
Except as provided in Section 8.1 of the Plan, all Benefit Plans, all
directors and officers liability and other insurance and all workers'
compensation programs are treated as executory contracts under the Plan and
shall, on the Effective Date and subject to the consent of the Administrative
Agent be deemed assumed by the Debtors, in accordance with sections 365(a) and
1123(b)(2) of the Bankruptcy Code. A schedule listing the Benefit Plans shall be
provided to the Administrative Agent no later than thirty (30) prior to the
deadline for voting on the Plan.
IX. SECURITIES LAWS MATTERS
A. BANKRUPTCY CODE EXEMPTIONS FROM
REGISTRATION REQUIREMENTS
In reliance upon section 1145 of the Bankruptcy Code, the New Common
Stock to be issued to holders of Senior Lender Claims, the New Warrants to be
issued to holders of Subordinated Notes Claims on the Effective Date will be
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act") and equivalent provisions in state securities
laws. Section 1145(a) of the Bankruptcy Code generally exempts from such
registration the issuance of securities, and, in the case of warrants, also
generally exempts the issuance of stock issued upon exercise of such warrants,
if the following conditions are satisfied: (i) the securities are issued by a
debtor (or its successor) under a plan of reorganization; (ii) the recipients of
the securities hold a Claim against, an interest in, or a Claim for an
administrative expense against the debtor; and (iii) the securities are issued
entirely in exchange for the recipient's Claim against or interest in the
debtor, or are issued principally in such exchange and partly for Cash or
property. The Debtors believe that the exchange of the Plan Securities for the
Senior Lender Claims, the Convertible Notes Claims and the Subordinated Notes
Claims (the holders of such Claims, collectively, the "New Security Holders")
under the circumstances provided in the Plan will satisfy the requirements of
section 1145(a) of the Bankruptcy Code.
The Plan Securities to be issued to the New Security Holders pursuant
to the Plan on the Effective Date will be deemed to have been issued in a public
offering under the Securities Act and, therefore, may be resold by any holder
thereof without registration under the Securities Act pursuant to the exemption
provided by Section 4(1) thereof, unless the holder is an "underwriter" with
respect to such securities, as that term is defined in section 1145(b)(1) of the
Bankruptcy Code (a "statutory underwriter"). In addition, such securities
generally may be resold by the recipients thereof without registration under
state securities or "blue sky" laws pursuant to various exemptions provided by
the respective laws of the individual states. However, recipients of securities
issued under the Plan are advised to consult with their own counsel as to the
availability of any such exemption from registration under federal securities
laws and any relevant state securities laws in any given instance and as to any
applicable requirements or conditions to the availability thereof.
65
Section 1145(b)(i) 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, or (b)
offers to sell securities issued under a plan for the holders of such securities
and under an agreement made in connection with the plan with the consummation of
the plan, or with the offer or sale of securities under the plan, or (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 of such securities, or (d)
is an issuer of the securities within the meaning of Section 2(11) of the
Securities Act.
The term "issuer" is defined in Section 2(4) of the Securities Act;
however, the reference contained in section 1145(b)(1)(D) of the Bankruptcy Code
to Section 2(11) of the Securities Act purports to include as statutory
underwriters all persons who, directly or indirectly, through one or more
intermediaries, control, are controlled by, or are under common control with, an
issuer of securities. "Control" (as defined in Rule 405 under the Securities
Act) means the possession, direct or indirect, of the power to direct or cause
the direction of the policies of a person, whether through the ownership of
voting securities, by contract, or otherwise. Accordingly, an officer or
director of a reorganized debtor or its successor under a plan of reorganization
may be deemed to be a "control person" of such debtor or successor, particularly
if the management position or directorship is coupled with ownership of a
significant percentage of the reorganized debtor's or its successor's voting
securities. Moreover, the legislative history of section 1145 of the Bankruptcy
Code suggests that a creditor who owns at least ten percent (10%) of the voting
securities of a reorganized debtor may be presumed to be a "control person."
The Debtors believe that the Employee Equity, New Common Stock and
options to purchase additional shares of New Common Stock, which will be granted
to officers and other senior management of Reorganized Acterna (or Newco, if the
Restructuring transactions are implemented) pursuant to the New Management
Incentive Plan, under the Plan will be exempt from the registration requirements
of the Securities Act, pursuant to section 4(2) of the Securities Act, as
transactions by an issuer not involving any public offering, and equivalent
exemptions under state securities laws.
To the extent that persons deemed to be "underwriters" receive Plan
Securities pursuant to the Plan (collectively, "Restricted Holders"), resales by
Restricted Holders would not be exempted by section 1145 of the Bankruptcy Code
from registration under the Securities Act or other applicable law. Restricted
Holders may, however, be able, at a future time and under certain conditions
described below, to sell securities without registration pursuant to the resale
provisions of Rule 144 and Rule 144A under the Securities Act.
Under certain circumstances, Restricted Holders who are deemed to be
statutory underwriters by virtue of being in a control relationship with the
applicable issuer of the Plan Securities ("affiliates") may be entitled to
resell their securities pursuant to the limited safe harbor resale provisions of
Rule 144, to the extent available, and in compliance with applicable state and
foreign securities laws. Generally, Rule 144 provides that persons who are
66
affiliates of an issuer who resell securities will not be deemed to be
underwriters if certain conditions are met. These conditions include the
requirement that current public information with respect to the issuer be
available, a limitation as to the amount of securities that may he sold in any
three-month period, the requirement that the securities be sold in a "brokers
transaction" or in a transaction directly with a "market maker" and that notice
of the resale be filed with the SEC. The Debtors cannot assure, however, that
adequate current public information will exist with respect to any issuer of
securities under the Plan and, therefore, that the safe harbor provisions of
Rule 144 will be available. Under paragraph (k) of Rule 144, the aforementioned
conditions will not limit the resale of restricted securities that are sold for
the account of a holder who is not an affiliate of the company at the time of
such resale and was not an affiliate of the company during the three- (3-) month
period preceding such sale, so long as a period of at least two years has
elapsed since the later of (i) the Effective Date and (ii) the date on which
such holder acquired his or its securities from Reorganized Acterna or an
affiliate of Reorganized Acterna (including Newco).
Restricted Holders who are not affiliates as described above may
resell their securities received pursuant to the Plan in "ordinary trading
transactions" made on a national securities exchange or over-the-counter. What
constitutes "ordinary trading transactions" within the meaning of section 1145
of the Bankruptcy Code is the subject of interpretive letters by the staff of
the SEC. Generally, ordinary trading transactions are those which do not involve
(i) concerted activity by recipients of securities under a plan of
reorganization, or by distributors acting on their behalf, in connection with
the sale of such securities, (ii) use of informational documents in connection
with the sale other than the disclosure statement relating to the plan, any
amendments thereto, and reports filed by the issuer with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange
Act"), or (iii) payment of special compensation to brokers or dealers in
connection with the sale.
Rule 144A provides a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for resales to certain
"qualified institutional buyers" of securities which are "restricted securities"
within the meaning of the Securities Act, irrespective of whether the seller of
such securities purchased its securities with a view towards reselling such
securities, if certain other conditions are met (e.g., the availability of
information required by paragraph (d)(4) of Rule 144A and certain notice
provisions). Under Rule 144A, a "qualified institutional buyer" is defined to
include, among other persons, "dealers" registered as such pursuant to Section
15 of the Exchange Act, and entities which purchase securities for their own
account or for the account of another qualified institutional buyer and which
(in the aggregate) own and invest on a discretionary basis at least $100 million
in the securities of unaffiliated issuers. Subject to certain qualifications,
Rule 144A does not exempt the offer or sale of securities which, at the time of
their issuance, were securities of the same class of securities then listed on a
national securities exchange (registered as such pursuant to section 6 of the
Exchange Act) or quoted in a U.S. automated inter-dealer quotation system.
67
Pursuant to the Plan, certificates evidencing shares of New Common
Stock received by Restricted Holders or holders of ten percent (10%) or more of
the outstanding New Common Stock will bear a legend substantially in the form
below:
THE SECURITIES EVIDENCED 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.
Any holder of a certificate evidencing shares of New Common Stock
bearing such legend may present such certificate to the transfer agent for the
shares of New Common Stock for exchange for one or more new certificates not
bearing such legend or for transfer to a new holder without such legend at such
time as (a) such securities are sold pursuant to an effective registration
statement under the Securities Act or (b) such holder delivers to Reorganized
Acterna an opinion of counsel reasonably satisfactory to Reorganized Acterna to
the effect that such securities are no longer subject to the restrictions
applicable to "underwriters" under section 1145 of the Bankruptcy Code or (c)
such holder delivers to Reorganized Acterna an opinion of counsel reasonably
satisfactory to Reorganized Acterna to the effect that such securities are no
longer subject to the restrictions pursuant to an exemption under the Securities
Act and such securities may be sold without registration under the Securities
Act or to the effect that such transfer is exempt from registration under the
Securities Act, in which event the certificate issued to the transferee shall
not bear such legend.
IN VIEW OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
RECIPIENT OF SECURITIES MAY BE AN UNDERWRITER OR AN AFFILIATE OF
REORGANIZED ACTERNA, THE DEBTORS MAKE NO REPRESENTATIONS CONCERNING
THE RIGHT OF ANY PERSON TO TRADE IN SECURITIES TO BE DISTRIBUTED
PURSUANT TO THE PLAN. ACCORDINGLY, THE DEBTORS RECOMMEND THAT
POTENTIAL RECIPIENTS OF SECURITIES CONSULT THEIR OWN COUNSEL
CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
68
B. REGISTRATIONS RIGHTS AGREEMENT
The Plan provides that the holders of any shares of Reorganized
Acterna (or Newco, if the Restructuring Transactions are implemented), including
shares issued upon the exercise of the New Warrants, and the Employee Equity
issued under the New Management Incentive Plan, shall be deemed to be parties to
the Registration Rights Agreement in the form set forth in the Plan Supplement.
X. VALUATION
The Debtors have been advised by Miller Buckfire Lewis Ying & Co.,
LLC ("MBLY") with respect to the estimated enterprise value of the Reorganized
Debtors' Communications Test business unit, inclusive of all Communications Test
operations conducted by the Debtors and the Non-Debtor Affiliates. Inasmuch as
the Debtors currently are marketing and may divest their Itronix and da Vinci
business units prior to the Effective Date of the Plan, MBLY's valuation
analysis excludes such business units.(11) The Debtors have relied upon MBLY's
valuation analysis for the purpose of determining value available for
distribution to creditors pursuant to the Plan and to analyze recoveries to
creditors thereunder.
The valuation of the Reorganized Debtors' Communications Test
business unit for purposes of the Plan is as of an assumed Effective Date of
October 2003 and is based on an enterprise valuation analysis (premised on
publicly available information and information provided by the Debtors) prepared
by MBLY in July 2003. The enterprise valuation comprises the going concern value
of Communications Test. For purposes of MBLY's analysis, consistent with the
financial projections prepared by the Debtors, all projected corporate-level
expenses are incorporated into the financial projections of Communications Test.
Based upon the foregoing assumptions, the enterprise value of Communications
Test was assumed for purposes of the Plan by the Debtors, based on advice from
MBLY, to be within a range of $200,000,000 to $300,000,000, with a mid-point
value of $250,000,000. Pursuant to the Plan, subject to the consummation of the
divestitures of the Debtors' Itronix and da Vinci business units, the Debtors
project that they will be able to retain $50,000,000 in Cash upon emergence from
chapter 11. The Debtors have assumed that $30,000,000 of such Cash is excess
Cash, above amounts necessary to operate the business, resulting in an estimated
enterprise value of the Reorganized Debtors of $230,000,000 to $330,000,000,
with a midpoint value of $280,000,000.
Based on the estimated enterprise value set forth above, the
principal amount of the New Secured Term Notes to be issued pursuant to the Plan
($75,000,000), the principal amount of the Reinstated German Term Debt
(approximately $91,572,000), (12) and the principal amount of other Non-Debtor
- ------------------------
(11) For FY 2003 (ended March 31, 2003), Itronix had revenues of $140.8 million
and EBITDA of $6.9 million. For FY 2003 (ended March 31, 2003), da Vinci had
revenues of $22.7 million and EBITDA of $7.7 million.
(12) Estimate of U.S. dollar amount based on exchange rate EUR(euro)1 = $1.15.
69
Affiliate debt outstanding on the Effective Date ($20,003,000), the Reorganized
Debtors' equity value, at the midpoint of MBLY's enterprise valuation range, is
assumed to be $93,425,000. Based upon the distribution of 5,000,000 shares of
New Common Stock to holders of Senior Lender Claims under the Plan, the value
per share of New Common Stock, at the midpoint of MBLY's enterprise valuation
range, is $18.68 per share. For purposes of determining the value per share of
New Common Stock, MBLY assumed that the impact on the value of the New Common
Stock of the New Warrants to be issued pursuant to the Plan to holders of
Allowed Convertible Notes Claims and Allowed Subordinated Notes Claims,
respectively, and the equity to be issued pursuant to the Plan to certain
members of senior management of the Reorganized Debtors, would be minimal. Such
assumption is based on, among other things, the facts that the exercise prices
of the Reorganization Warrants are set substantially in excess of the value per
share of Reorganized Acterna Common Stock set forth herein. The foregoing
valuation also reflects a number of assumptions, including a successful
reorganization of the Debtors' Communications Test business in a timely manner,
the achievement of the forecasts reflected in the financial projections, market
conditions and the Plan becoming effective in accordance with its terms on a
basis consistent with the estimates and other assumptions discussed herein.
In preparing the enterprise valuation contained herein, MBLY: (a)
reviewed certain historical financial information relating to Communications
Test for recent years and interim periods; (b) reviewed certain internal
financial and operating data of Communications Test; (c) met with certain
members of senior management of the Debtors to discuss the operations and future
prospects of Communications Test; (d) reviewed publicly available financial data
and considered the market values of public companies that MBLY deemed generally
comparable to Communications Test; (e) reviewed the financial terms, to the
extent publicly available, of certain transactions involving companies that MBLY
believed were comparable to Communications Test; (f) considered certain economic
and industry information relevant to Communications Test; and (g) reviewed
certain analyses prepared by other firms retained by the Debtors and conducted
such other analyses as MBLY deemed appropriate. Although MBLY conducted a review
and analysis of the Communications Test business unit, its operating assets and
liabilities and business plan, MBLY assumed and relied on the accuracy and
completeness of all (i) financial and other information furnished to it by the
Debtors and by other firms retained by the Debtors and (ii) publicly available
information. MBLY did not independently verify the assumptions underlying the
financial projections in connection with such valuation and no independent
evaluations or appraisals of the Debtors' assets were sought or were obtained in
connection therewith.
Estimates of enterprise value do not purport to be appraisals, nor do
they necessarily reflect the values that might be realized if assets were to be
sold. The estimates of enterprise value prepared by MBLY assume that the
Reorganized Debtors will continue as the owner and operator of the
Communications Test business unit and assets. Such estimates were developed
solely for purposes of formulating and negotiating a plan of reorganization and
70
analyzing implied recoveries to creditors thereunder. Such estimates do not
purport to reflect or constitute appraisals, liquidation values or estimates of
the actual market value that may be realized through the sale of any securities
to be issued pursuant to the Plan, which may be significantly different from the
amounts set forth herein. Such estimates reflect computations of the estimated
enterprise value of the Communications Test business unit through the
application of various valuation techniques, including, among others: (a) a
comparable companies analysis; (b) a discounted cash flow analysis; and (c) a
comparable acquisitions analysis. These valuation techniques reflect both the
market's current view of the Debtors' operations, as well as a longer-term focus
on the intrinsic value of the cash flow projections in the Debtors' business
plan.
An estimate of enterprise value is not entirely mathematical. Rather,
it involves considerations and judgments concerning various factors that could
affect the value of an operating business. Moreover, the value of an operating
business is subject to uncertainties and contingencies that are difficult to
predict and will fluctuate with changes in factors affecting the financial
conditions and prospects of such a business. As a result, the estimate of
enterprise value set forth herein is not necessarily indicative of actual
outcomes, which may be significantly more or less favorable than those set forth
herein. Because such estimates are inherently subject to uncertainties, none of
the Debtors, the Reorganized Debtors, MBLY or any other person assumes
responsibility for their accuracy. Depending on the results of the Debtors'
operations or changes in the financial markets, MBLY's valuation analysis as of
the Effective Date may differ from that disclosed herein.
In addition, the valuation of newly issued securities is subject to
additional uncertainties and contingencies, all of which are difficult to
predict. Actual market prices of such securities at issuance will depend upon,
among other things, prevailing interest rates, conditions in the financial
markets, the anticipated initial securities holdings of pre-petition creditors,
some of which may prefer to liquidate their investment rather than hold it on a
long-term basis, and other factors that generally influence the prices of
securities. Actual market prices of such securities also may be affected by the
Debtors' history in chapter 11, conditions affecting the Debtors' competitors or
the general industry in which the Debtors participate or by other factors not
possible to predict. Accordingly, the equity value estimated by MBLY does not
necessarily reflect, and should not be construed as reflecting, values that will
be attained in the public or private markets. The equity value ascribed in the
analysis does not purport to be an estimate of post-reorganization market
trading values. Such trading values may be materially different from the equity
value ranges reflected in MBLY's valuation analysis. Indeed, there can be no
assurance that a trading market will develop for the new securities issued
pursuant to the reorganization.
THE ESTIMATED ENTERPRISE VALUE DEPENDS HIGHLY UPON ACHIEVING THE
FUTURE FINANCIAL RESULTS SET FORTH IN THE PROJECTIONS AS WELL AS THE REALIZATION
OF CERTAIN OTHER ASSUMPTIONS THAT ARE NOT GUARANTEED.
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THE VALUATIONS SET FORTH HEREIN REPRESENT ESTIMATED ENTERPRISE
VALUATIONS AND DO NOT NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN THE
PUBLIC OR PRIVATE MARKETS. THE ESTIMATED EQUITY VALUE ASCRIBED IN THE ANALYSIS
DOES NOT PURPORT TO BE AN ESTIMATE OF THE POST-REORGANIZATION MARKET TRADING
VALUE. SUCH TRADING VALUE, IF ANY, MAY DIFFER MATERIALLY FROM THE ESTIMATED
EQUITY VALUE ASSOCIATED WITH THE VALUATION ANALYSIS.
XI. CERTAIN RISK FACTORS TO BE CONSIDERED
HOLDERS OF CLAIMS AGAINST THE DEBTORS SHOULD READ AND CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET
FORTH IN THIS DISCLOSURE STATEMENT (AND THE DOCUMENTS DELIVERED TOGETHER
HEREWITH AND/OR INCORPORATED BY REFERENCE HEREIN), PRIOR TO VOTING TO ACCEPT OR
REJECT THE PLAN. THESE RISK FACTORS SHOULD NOT, HOWEVER, BE REGARDED AS
CONSTITUTING THE ONLY RISKS INVOLVED IN CONNECTION WITH THE PLAN AND ITS
IMPLEMENTATION.
A. CERTAIN BANKRUPTCY LAW CONSIDERATIONS
1. Risk of Non Confirmation of the Plan
Although the Debtors believe that the Plan 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 to the Plan will not be required
for confirmation or that such modifications would not necessitate the
resolicitation of votes.
2. Non Consensual Confirmation
In the event any impaired Class of Claims or Equity Interests does
not accept the Plan, the Bankruptcy Court may nevertheless confirm the Plan at
the Debtors' request if at least one impaired Class has accepted the Plan (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, if the
Bankruptcy Court determines that the Plan "does not discriminate unfairly" and
is "fair and equitable" with respect to the dissenting impaired classes. See
Section VII.C.2. Because the Plan deems certain Classes to have rejected the
Plan, these requirements must be satisfied with respect to such Classes. The
Debtors believe that the Plan satisfies these requirements.
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3. Risk of Non-Occurrence of the Effective Date
Although the Debtors believes that the Effective Date will occur soon
after the Confirmation Date, there can be no assurance as to the timing of the
Effective Date.
B. RISKS RELATING TO THE PLAN SECURITIES
1. Variances from Projections
The Projections included herein are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ materially include, but are
not limited to, the Reorganized Debtors' ability to operate their business
consistent with their projections, comply with the covenants of their financing
agreements, attract and retain key executives, and respond to adverse regulatory
actions taken by the federal and state governments.
2. Dividend Policies
The Debtors do not anticipate that Reorganized Acterna (or Newco if
the Restructuring Transactions are implemented) will pay dividends on the New
Common Stock in the near future.
3. Restrictions on Transfer
Holders of Plan Securities who are deemed to be "underwriters" as
defined in section 1145(b) of the Bankruptcy Code, including holders who are
deemed to be "affiliates" or "control persons" within the meaning of the
Securities Act, will be unable freely to transfer or to sell their securities
except pursuant to (i) "ordinary trading transactions" by a holder that is not
an "issuer" within the meaning of section 1145(b), (ii) an effective
registration of such securities under the Securities Act and under equivalent
state securities or "blue sky" laws or (iii) pursuant to the provisions of Rule
144 under the Securities Act or another available exemption from registration
requirements. For a more detailed description of these matters, see Section IX.A
hereof.
C. RISKS ASSOCIATED WITH THE BUSINESS
Additional discussion of risks related to the Debtors' business are
set forth in greater detail in Acterna Corporation's most recent Form 10-K,
filed with the Securities and Exchange Commission on June 30, 2003. See the
sections entitled: Forward looking Statements and Risk Factors, Quantitative and
Qualitative Disclosures about Market Risk.
XII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following discussion summarizes certain U.S. federal income tax
consequences of the implementation of the Plan to the Debtors and certain
holders of Claims. The following summary does not address the federal income tax
73
consequences to creditors whose Claims are entitled to reinstatement or payment
in full in cash or are otherwise unimpaired under the Plan (e.g., holders of
Administrative Expense Claims and Priority Non-Tax Claims), secured creditors
(other than holders of Senior Lender Claims), or creditors whose Claims will be
extinguished for no consideration (e.g., the Securities Litigation Claims and
Convertible Notes Claims). Additionally, the following discussion does not
address any Claims against any non-Debtor (including the receipt of Restructured
German Term Debt by the German L/C Participants).
The following summary is based on the Internal Revenue Code of 1986,
as amended (the "Tax Code"), Treasury Regulations promulgated thereunder,
judicial decisions, and published administrative rules and pronouncements of the
Internal Revenue Service ("IRS"), all 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.
The federal income tax consequences of the Plan are complex and are
subject to significant uncertainties. The Debtors have 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 addresses neither the foreign, state, or
local income or other tax consequences of the Plan, nor 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, persons holding Claims as part of a hedge,
integrated constructive sale or straddle, and investors in pass through
entities).
Additionally, this discussion assumes that the various debt and other
arrangements to which the Debtors are a party will be respected for federal
income tax purposes in accordance with their form.
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. ALL HOLDERS OF CLAIMS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR THE
FEDERAL, STATE, LOCAL, AND OTHER TAX CONSEQUENCES APPLICABLE TO THEM UNDER THE
PLAN.
A. CONSEQUENCES TO THE DEBTORS
Acterna and its U.S. corporate subsidiaries (the "Acterna Group")
file a consolidated federal income tax return, which takes into account the
operations of all of the Debtors (some of which are treated as partnerships or
disregarded entities for federal income tax purposes). The Acterna Group
reported in its most recent Form 10K consolidated net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $2.8 million as
of March 31, 2003. See Exhibit C, Acterna Corporation 2003 Form 10K, at Note M
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(Income Taxes). The Acterna Group also expects to incur additional losses during
the taxable year ending March 31, 2004. In addition, the Acterna Group has
certain tax credit carryovers. The amount of any such losses and credits remains
subject to adjustment by the IRS.
As discussed below, it is anticipated that any losses and
credits of the Acterna Group will be either utilized or eliminated in
connection with the implementation of the Plan (whether on account of attribute
reduction resulting from the cancellation of debt ("COD"), or as a result of
transactions occurring on or before the Effective Date, including, if
implemented, the Restructuring Transactions). In addition, the tax basis of the
assets held by Reorganized Acterna and possibly certain of its subsidiaries will
be significantly reduced in connection with the implementation of the Plan.
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, net capital loss
carryforwards, current year NOLs, capital losses, tax credits and tax basis in
assets - by the amount of any COD. COD is the amount by which the indebtedness
discharged (reduced by any unamortized discount) exceeds any consideration given
in exchange therefor, 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 without
current or future further tax cost to the debtor. If, however, nonrecourse debt
is satisfied with the underlying collateral, generally the debtor recognizes a
gain from the disposition of property based on an amount realized equal to the
nonrecourse debt satisfied, as opposed to COD.
It is unclear whether the reduction in tax attributes (other than tax
basis) occurs on a separate company basis where, as here, the debtor joins (or
is otherwise included) in the filing of a consolidated federal income tax
return. The IRS has, in certain cases, asserted that such reduction in respect
of consolidated tax attributes (other than tax basis) such as NOLs generally
should occur on a consolidated basis. Moreover, legislation has recently been
proposed that would require the reduction in all tax attributes (including tax
basis) on a consolidated basis. It is uncertain whether the proposed legislation
will be passed in its current form or at all, and if passed, what its effective
date will be.
Any reduction in tax attributes does not occur until the end of the
taxable year or, in the case of asset basis reduction, the first day of the
taxable year following the taxable year in which the COD is incurred.
Accordingly, in the event the Restructuring Transactions are implemented, the
Debtors do not expect the attribute reduction resulting from the discharge of
debt under the Plan to affect the federal income tax treatment of such
transactions. However, should the Restructuring Transactions be implemented, the
tax basis of the Acterna assets transferred to Newco will be reduced to fair
market value in connection with the implementation of the Plan (see Section
XII.A.4., below).
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As a result of the discharge of Claims pursuant to the Plan, the
Debtors will incur substantial COD. The extent of such COD and resulting tax
attribute reduction will depend, in principal part, on the value of the New
Common Stock, New Secured Term Notes, and New Warrants distributed. Based on the
projected reorganization value of the Reorganized Debtors (see Article X), it is
estimated that the Reorganized Debtors will incur approximately $670 million of
COD (substantially all of which will be allocable to Reorganized Acterna for
federal income tax purposes). Consequently, in the event the Restructuring
Transactions are not implemented, it is anticipated that the consolidated loss
and tax credit carryforwards and any current year NOLs of the Acterna Group
would be eliminated or utilized in connection with the implementation of the
Plan, and that the tax basis of Reorganized Acterna and any subsidiary that is
treated as a disregarded entity for federal income tax purposes would be
significantly reduced. However, the tax basis in the underlying assets of each
subsidiary that is not disregarded for federal income tax purposes should remain
the same, subject to reduction by the amount of COD allocable to such subsidiary
and absent effective legislation.
2. Limitations on Tax Carryforwards and Other Tax Benefits
Following the implementation of the Plan, any remaining NOL, capital
loss and tax credit carryforwards and certain other tax attributes (including
current year NOLs) 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 the
Reorganized Debtors.
This limitation is in addition to, and not in lieu of, any reduction
in such tax attributes on account of COD. Accordingly, regardless of whether the
Restructuring Transactions are implemented, the Debtors do not anticipate that
Reorganized Acterna would have any significant tax attributes remaining to which
section 382 would apply. It is possible, however, that the limitations of
section 382 still could apply to any U.S. corporate subsidiary of Acterna that
is acquired by Newco if the Restructuring Transactions are implemented.
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 that
are "built-in" (i.e., economically accrued but unrecognized) as of the date of
the ownership change and that are subsequently recognized.
The issuance of the Acterna Common Stock to holders of Senior Lender
Claims (and if the Restructuring Transactions are implemented, the acquisition
by Newco of the subsidiaries of Acterna) pursuant to the Plan will constitute an
ownership change of the Debtors.
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a. General Section 382 Limitation.
In general, the amount of the annual limitation to which a
corporation (or consolidated group) 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 common parent) 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 (4.35% for ownership
changes occurring in August 2003). For a corporation (or consolidated group) in
bankruptcy that undergoes the change of ownership pursuant to a confirmed plan,
the stock value generally is determined immediately after (rather than before)
the ownership change, after giving effect to the surrender of creditors' Claims.
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.
b. Built In Gains and Losses.
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
unrealized 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 unrealized 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 join 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 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. Due to certain
legal and factual uncertainties, it is unclear whether the Acterna Group or, in
the event the Restructuring Transactions are implemented, any of the corporate
Debtors to be acquired by Newco will be in a net built-in loss or net built-in
gain position as of the Effective Date.
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c. 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 bankruptcy proceeding.
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
result in an annual limitation of zero, and thus would preclude the debtor's
future utilization of any pre-change losses existing at the time of the
subsequent ownership change.
The Debtors anticipate that Reorganized Acterna may qualify for this
exception. Nevertheless, the Debtors currently intend to elect not to have the
exception apply since it is anticipated that Reorganized Acterna's tax
attributes will be utilized or otherwise substantially reduced or eliminated in
connection with the implementation of the Plan, such that the annual limitation
described above would not have a material adverse effect, if any, on Reorganized
Acterna.
3. Alternative Minimum Tax
In general, a federal alternative minimum tax ("AMT") is imposed on a
corporation's alternative minimum taxable income at a 20% rate to the extent
that such tax exceeds the corporation's regular federal income tax. For purposes
of computing taxable income for AMT purposes, certain tax deductions and other
beneficial allowances are modified or eliminated. In particular, even though a
corporation otherwise might be able to offset all of its taxable income for
regular tax purposes by available NOL carryforwards, only 90% of a corporation's
taxable income for AMT purposes may be offset by available NOL carryforwards (as
computed for AMT purposes).
In addition, if a corporation (or consolidated group) undergoes an
"ownership change" within the meaning of section 382 of the Tax Code and is in a
net unrealized built-in loss position on the date of the ownership change, the
corporation's (or group's) aggregate tax basis in its assets would be reduced
for certain AMT purposes to reflect the fair market value of such assets as of
the change date. Although not entirely clear, it appears that the application of
this provision to the Debtors is unaffected by whether the Debtors otherwise
qualify for the special bankruptcy exception to the annual limitation rules of
section 382 discussed in the preceding section.
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Any AMT that a corporation pays generally will be allowed as a
nonrefundable credit against its regular federal income tax liability in future
taxable years when the corporation is no longer subject to the AMT.
4. Implementation of the Restructuring Transactions
On or before the Confirmation Date, the Debtors and the Senior
Lenders may elect to effectuate the distribution under the Plan in accordance
with the Restructuring Transactions. Pursuant to the Restructuring Transactions,
Acterna would transfer the LLC Interests in Acterna LLC (an entity which is
disregarded for federal income tax purposes) to Newco on the Effective Date.
Accordingly, for federal income tax purposes, the transfer of Acterna LLC to
Newco would be treated as a transfer by Acterna of the underlying assets of
Acterna LLC and of any other subsidiary of Acterna LLC that is also treated as a
disregarded entity for federal income tax purposes. Such transfer has been
structured as a taxable transaction for federal income tax purposes (a "Taxable
Transfer") so that Newco would obtain a new cost basis in all of the assets
deemed transferred (which aggregate cost basis, including Cash, is projected to
be at approximately $164 million, based upon the projected reorganization value
(see Article X)). Newco would not succeed to any tax attributes of Acterna,
although any U.S. corporate subsidiaries generally would retain their tax
attributes subject to application of the provisions discussed in the preceding
sections (including any required reductions on account of COD and any resulting
section 382 limitation).
Assuming a Taxable Transfer, Acterna generally would recognize gain
or loss upon the transfer to Newco in an amount equal to the difference between
the fair market value of the assets deemed transferred and its tax basis in such
assets. Based upon the projected reorganization value, and due to Acterna's
substantial tax basis in such assets (in the aggregate, projected to be
approximately $450 million as of September 30, 2003), the Debtors believe that
no significant federal, state or local income tax liability, if any, should be
incurred upon the transfer. However, the fair market value of the property may
vary from current estimates and, in any event, the Debtors' determination of
gain or loss and resulting tax liability would be subject to adjustment on audit
by the IRS.
Although structured as a Taxable Transfer, there is no assurance that
the transaction would be so treated by the IRS. For example, were the transfer
of assets to Newco deemed to constitute a tax-free reorganization under section
368(a)(1)(G) of the Tax Code (a "G Reorganization"), Newco would effectively
step into the shoes of Acterna, and the Reorganized Debtors, for federal income
tax purposes, would be in substantially the same position as had the
Restructuring Transactions not been implemented. Thus, Newco would have no NOL
carryforwards and would have a significantly diminished tax basis in the
transferred assets (due to the reduction in tax attributes by reason of the
substantial COD), with the result that future tax depreciation and amortization
with respect to real and personal property could be eliminated.
To qualify as a G Reorganization, it would be necessary for Acterna
to be treated as having (i) transferred substantially all of its assets to Newco
and for Acterna to have distributed all of its remaining assets to its creditors
79
or (ii) distributed more than eighty percent (80%) of the Newco Common Stock and
Acterna Common Stock to holders of debt instruments treated as "securities" for
federal income tax purposes and for Reorganized Acterna to continue to carry on
an active five-year trade or business. Based in part on Acterna's intention to
continue to own IPMS after the Effective Date (having acquired IPMS from TTC, an
indirect wholly owned subsidiary of Acterna, pursuant to the Restructuring
Transactions), and on the fact that TTC acquired IPMS in a taxable transaction
within the five-year period preceding the Effective Date, the Debtors believe
that the transfer of assets to Newco would not qualify as a G Reorganization.
B. CONSEQUENCES TO HOLDERS OF CERTAIN CLAIMS
Pursuant to the Plan, holders of Allowed General Unsecured Claims
(Class D) will receive cash in satisfaction of their Claims, provided that such
holders vote as a class to accept the Plan. On the Effective Date, holders of
Senior Lender Claims (Class C) will receive Acterna Common Stock, New Secured
Term Notes, possibly cash and/or a Contingent Payment Right and, if the
Restructuring Transactions are implemented, Newco Common Stock, in satisfaction
of their Claims. Holders of Allowed Subordinated Notes Claims (Class F) will
receive New Warrants in satisfaction of their respective Claims, provided that
such class votes to accept the Plan.
The federal income tax consequences to holders of Allowed Claims
(other than General Unsecured Claims) depend, in part, on whether such Claims
constitute "securities" of Acterna for federal income tax purposes (or of
Acterna LLC, as Acterna LLC is considered to be part of Acterna for federal
income tax purposes), and in the case of Senior Lender Claims whether the New
Secured Term Notes constitute securities. The term "security" is not defined in
the Tax Code or in the Treasury Regulations issued thereunder and has not been
clearly defined by judicial decisions. The determination of whether a particular
debt constitutes a "security" depends on an overall evaluation of the nature of
the debt. One of the most significant factors considered in determining whether
a particular debt is a security is its original term. In general, debt
obligations issued with a weighted average maturity at issuance of five years or
less (e.g., trade debt and revolving credit obligations) do not constitute
securities, whereas debt obligations with a weighted average maturity of ten
years or more constitute securities. For purposes of this disclosure, it has
been assumed that the Allowed Subordinated Notes Claims constitute "securities"
of Acterna, and that the New Secured Term Notes do not constitute securities.
Each holder is urged to consult its tax advisor regarding the status of its
Claim, or any portion thereof, as a "security" of Acterna.
The following discussion assumes that the Restructuring Transactions
will be treated as a Taxable Transfer and not as a G Reorganization. In
addition, the following discussion does not necessarily apply to holders who
have Claims in more than one class relating to the same underlying obligation
(such as where the underlying obligation is classified as partially secured and
partially unsecured). Such holders should consult their tax advisor regarding
the effect of such dual status obligations on the federal income tax
consequences of the Plan to them.
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1. Consequences to Holders of Senior Lender Claims and Allowed
General Unsecured Claims
a. Holders of Senior Lender Claims That Do Not Constitute
"Securities," and holders of Allowed General Unsecured Claims
The receipt of solely cash by a holder of an Allowed General
Unsecured Claim, and the receipt of stock, notes and/or cash by holders of
Senior Lender Claims in satisfaction of any portion of such Claims that do not
constitute "securities" for federal income tax purposes, will be a fully taxable
transaction. Accordingly, a holder of such Claim generally will recognize gain
or loss in an amount equal to the difference between (i) the "amount realized"
by the holder in satisfaction of its Claim (other than any Claim for accrued but
unpaid interest) and (ii) the holder's adjusted tax basis in its Claim (other
than any Claim for accrued but unpaid interest). For a discussion of the
treatment of any Claim for accrued but unpaid interest, see "- Distributions in
Discharge of Accrued But Unpaid Interest," below.
Generally, the "amount realized" by a holder will equal the sum of
(i) the amount of any cash received by such holder (excluding any portion
required to be treated as imputed interest due to the post-Effective Date
distribution of such cash, as discussed below), and (ii) additionally, in the
case of holders of Senior Lender Claims, the fair market value of any Acterna
Common Stock, New Secured Term Notes, Contingent Payment Right, and (in the
event the Restructuring Transaction are implemented) Newco Common Stock received
by such holder in satisfaction of its Claim. However, in the event the
Restructuring Transactions are not implemented, the amount realized with respect
to the New Secured Term Notes will be the "issue price" of such notes as
determined for federal income tax purposes (see section XII.B.4.a., below),
which may or may not be equal to the fair market value of such notes. For a
discussion of the federal income tax treatment of the Contingent Payment Right,
see -"Tax Treatment of Contingent Payment Right," below.
Due to the possibility that a holder of Allowed General Unsecured
Claims may receive additional cash distributions subsequent to the Effective
Date of the Plan upon a subsequent disallowance of Disputed Claims in that
class, the imputed interest provisions of the Tax Code may apply to treat a
portion of such subsequent distributions as imputed interest.
Additionally, because additional distributions may be made to holders
of Allowed General Unsecured Claims after the initial distribution, any loss and
a portion of any gain realized by such holder may be deferred until such time as
such holder has received its final distribution. All holders of Allowed General
Unsecured Claims are urged to consult their tax advisors regarding the possible
application of (or ability to elect out of) the "installment method" of
reporting any gain that may be recognized by such holder in respect of its
Allowed Claim.
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Where gain or loss is recognized by a holder, the character of such
gain or loss as long-term or short-term capital gain or loss or as ordinary
income or loss will be determined by a number of factors, including the tax
status of the holder, whether the Claim constitutes a capital asset in the hands
of the holder and how long it has been held, whether the Claim was acquired at a
market discount, and whether and to what extent the holder previously claimed a
bad debt deduction. A holder of an Allowed Claim which purchased its Claim from
a prior holder at a market discount may be subject to the market discount rules
of the Tax Code. Under those rules, assuming that the holder has made no
election to amortize the market discount into income on a current basis with
respect to any market discount instrument, any gain recognized on the exchange
of its Claim (subject to a de minimis rule) generally would be characterized as
ordinary income to the extent of the accrued market discount on such Claim as of
the date of the exchange.
A holder's tax basis in any Acterna Common Stock received in
satisfaction of a Senior Lender Claim that does not constitute a security and in
any Newco Common Stock or Contingent Payment Right received will equal the fair
market value of such common stock or right. A holder's tax basis in any New
Secured Term Notes received will equal (i) the issue price of such notes if the
Restructuring Transactions are not implemented or (ii) the fair market value of
such notes if the Restructuring Transactions are implemented. A holder's holding
period for any Acterna Common Stock, Newco Common Stock, New Secured Term Notes,
and Contingent Payment Right generally will begin the day following the
Effective Date.
b. Holders of Senior Lender Claims That Constitute "Securities"
The receipt of Acterna Common Stock in partial satisfaction of any
portion of a Senior Lender Claim that constitutes a "security" for federal
income tax purposes will constitute a "recapitalization" of Acterna for federal
income tax purposes. Accordingly, in general, the holder of such Claim will not
recognize loss in respect of such portion of its Claim upon the receipt of
consideration pursuant to the Plan, but will recognize any gain realized in
respect of such portion (computed as described in the preceding section) in an
amount not in excess of the other consideration received therefor (i.e., the New
Secured Notes, the Contingent Payment Right, any cash, and any Newco Common
Stock). Accordingly, in the event the Restructuring Transactions are
implemented, a holder that realizes a gain will probably be required to
recognize its full gain, since substantially all of the value of the reorganized
operations will be reflected in the Newco Common Stock and New Secured Notes
received, rather than in the Acterna Common Stock.
The character and timing of such gain will be determined in
accordance with the principles discussed in the preceding section. For a
discussion of the tax consequences of Claims for accrued but unpaid interest,
see "Distributions in Discharge of Accrued but Unpaid Interest," below.
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A holder's aggregate tax basis in any Acterna Common Stock received
in satisfaction of any portion of a Senior Lender Claim that constitutes a
security will equal the holder's aggregate adjusted tax basis in such portion
(including any Claim for accrued but unpaid interest), increased by any gain and
unpaid interest income recognized in respect of such portion, and decreased by
(i) the amount of other consideration received in satisfaction thereof and (ii)
the amount of any deductions claimed in respect of any interest previously
accrued but not paid in full pursuant to the Plan. In general, the holder's
holding period for any Acterna Common Stock received will include the holder's
holding period for the Claim, except to the extent that such stock was issued in
respect of a Claim for accrued but unpaid interest (which will begin the day
following its receipt of such interest).
A holder's tax basis in any Newco Common Stock and any Contingent
Payment Right received will equal the fair market value of such common stock or
right. A holder's tax basis in any New Secured Term Notes received will equal
(i) the issue price of such notes if the Restructuring Transactions are not
implemented or (ii) the fair market value of such notes if the Restructuring
Transactions are implemented. A holder's holding period for any Newco Common
Stock, New Secured Term Notes and Contingent Payment Right generally will begin
the day following the Effective Date.
2. Holders of Allowed Subordinated Notes Claims
a. If the Restructuring Transactions are Not Implemented
As noted in Article I (Overview of the Plan), the Debtors estimate
that the New Warrants will have nominal economic value. Ordinarily, the receipt
of warrants of a corporation by a holder of a debt obligation of that
corporation that constitutes a "security" for federal income tax purposes would
be treated as a "recapitalization" for federal income tax purposes. Accordingly,
if the receipt of a New Warrant by a holder of an Allowed Subordinated Notes
Claim is treated as a recapitalization, the holder of such an Allowed Claim
generally will not recognize gain or loss upon such exchange. For a discussion
of the treatment of any Claim for accrued but unpaid interest, see "-
Distributions in Discharge of Accrued but Unpaid Interest," below.
A holder's aggregate tax basis in any New Warrants received in
satisfaction of such Claim will equal the holder's aggregate adjusted tax basis
in its Claim (including any Claim for accrued but unpaid interest), increased by
any unpaid interest income recognized in respect of its Claim and decreased by
any deductions claimed in respect of any interest previously accrued but not
paid in full pursuant to the Plan. In general, the holder's holding period for
the New Warrants received will include the holder's holding period for its
Claim, except to the extent that the New Warrants were issued in respect of a
Claim for accrued but unpaid interest (which will begin the day following its
receipt of such interest).
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b. If the Restructuring Transactions are Implemented
If the Restructuring Transactions are implemented, the receipt of New
Warrants by the holders of Allowed Subordinated Notes Claims will be a taxable
transaction. Accordingly, such holders will recognize gain or loss in an amount
equal to the difference between (i) the fair market value of the New Warrants
received (other than in respect of a Claim for accrued but unpaid interest) and
(ii) the holder's adjusted tax basis in its Claim (other than any Claim for
accrued but unpaid interest). In such event, a holder's tax basis in any New
Warrants received will equal the fair market value of such New Warrants, and the
holding period for such New Warrants will begin the day following the Effective
Date. The character of such gain will be determined in accordance with the
principles discussed in Section XII.B.1.a. For a discussion of the treatment of
any Claims for accrued but unpaid interest, see "Distributions in Discharge of
Accrued but Unpaid Interest," below.
3. Distributions in Discharge of Accrued but Unpaid Interest
In general, to the extent that any consideration received pursuant to
the Plan by a holder of an Allowed Claim (whether paid in cash, stock or
warrants) is received in satisfaction of accrued interest or amortized original
issue discount ("OID") during its holding period, such amount will be taxable to
the holder as interest income (if not previously included in the holder's gross
income). Conversely, a holder generally recognizes a deductible loss to the
extent any accrued interest claimed or amortized OID was previously included in
its gross income and is not paid in full. However, the IRS has privately ruled
that a holder of a security, in an otherwise tax-free exchange, could not claim
a current deduction with respect to any unpaid OID. It is also unclear whether,
by analogy, a holder of a Claim that does not constitute a security would be
required to recognize a capital loss, rather than an ordinary loss, with respect
to previously included OID that is not paid in full.
Pursuant to the Plan, all distributions in respect of Allowed Claims
will be allocated first to the principal amount of such Claims, as determined
for federal income tax purposes, and thereafter, to the portion of such Claim,
if any, representing accrued but unpaid interest. However, there is no assurance
that such allocation would be respected by the IRS for federal income tax
purposes.
Each holder of a Claim is urged to consult its tax advisor regarding
the allocation of consideration and the deductibility of unpaid interest for tax
purposes.
4. Ownership and Disposition of the New Secured Term Notes
a. Interest and Original Issue Discount on the New Secured Term
Notes.
The application of the OID provisions of the Tax Code, and the
federal income tax treatment of stated interest, with respect to the New Secured
Term Notes depends, in part, upon whether the "issue price" of the New Secured
Term Notes is equal to their face amount.
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Pursuant to applicable Treasury Regulations, if the Restructuring
Transactions are not implemented, the "issue price" of the New Secured Term
Notes depend upon whether such notes are traded on an "established securities
market" during the sixty day period ending thirty days after the Effective Date,
or whether a significant portion of the Senior Lender Claims are so traded. For
this purpose, an "established securities market" includes, among other things,
(i) a system of general circulation (including a computer listing disseminated
to subscribing brokers, dealers, or traders) that provides a reasonable basis to
determine fair market value by disseminating either recent price quotations or
actual prices of recent sales transactions, and (ii) the ready availability of
price quotations from dealers, brokers or traders. If either the New Secured
Term Notes or a significant portion of the Senior Lender Claims are traded on an
established securities market, the "issue price" will be equal to (or
approximate) the fair market value of the New Secured Term Notes. Otherwise, the
issue price of the New Secured Term Notes will be their stated principal amount
(if, as the Debtors expect, the stated interest rate will be greater than the
applicable federal rate in effect on the Confirmation Date for obligations of
similar maturity).
Pursuant to the applicable Treasury Regulations, if the Restructuring
Transactions are implemented, the "issue price" of the New Secured Term Notes
will depend solely upon whether the notes are traded on an "established
securities market" (see above). If so traded, the "issue price" will be equal to
(or approximate) the fair market value of the New Secured Term Notes. Otherwise,
the issue price of the New Secured Term Notes will be their stated principal
amount (if, as the Debtors expect, the stated interest rate will be greater than
the applicable federal rate in effect on the Confirmation Date for obligations
of similar maturity).
(i) Issue Price Equals Principal Amount. If the issue price of the
New Secured Notes equals the stated principal amount of such notes, the portion
of the stated interest constituting "qualified stated interest" (i.e., the 2%
portion payable in cash annually) will be includable in a holder's gross income
as interest in accordance with such holder's normal method of accounting. The
remaining portion of the stated interest will be treated as OID, even though
payable in kind through the issuance of additional New Secured Term Notes.
(Despite the fact that the excess cash flow will affect the timing of payments
on the New Secured Term Notes, the OID generally should equal 10% per year.)
Because the New Secured Term Notes will be treated as issued with
OID, each holder of a New Secured Term Note will be required to include in its
gross income, as interest for federal income tax purposes, the portion of the
OID that accrues while the holder held the note (including the day the note is
acquired but excluding the day it is disposed of), regardless of such holder's
normal method of accounting. Any OID will accrue over the term of the New
Secured Term Notes based on the constant interest method (with the amount of OID
attributable to each accrual period allocated ratably to each day in such
period). Accordingly, a holder may be required to recognize income prior to the
receipt of cash payments attributable to such income.
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A holder's tax basis in a New Secured Term Note will be increased by
the amount of any OID included in its gross income and reduced by any payments
of cash (other than payments of qualified stated interest) made with respect to
such note.
(ii) Issue Price Less Than Principal Amount. If the issue price of
the New Secured Term Notes is less than the stated principal amount of such
notes, the discussion in the preceding section will not apply. Instead, a
holder's inclusion of interest income will be governed by certain Treasury
Regulations (the "Contingent Payment Regulations") that generally provide for
the treatment of debt instruments with one or more contingent payments. Because
the New Secured Term Notes require that they be repaid out of 50% of excess cash
flow from operations, and the effective yield on the New Secured Term Notes
(based on an issue price less than face) can vary depending on when repaid, the
Contingent Payment Regulations will apply to such notes. In this instance, all
interest on the New Secured Term Notes (including all stated interest, whether
or not paid in cash) together with the difference between the issue price and
the stated principal amount of the notes will be OID and will be treated as
described below.
Under the Contingent Payment Regulations, Acterna LLC must construct
a projected payment schedule for the New Secured Term Notes and holders
generally must recognize all interest income with respect to a note on a
constant yield basis based on this projected payment schedule, subject to
certain adjustments if actual contingent payments differ from those projected.
In particular, the projected payment schedule will be determined by including
all noncontingent payments and the "expected amount," as of the issue date, of
any excess cash flow prepayments. The projected payment schedule must produce
the "comparable yield," which is the yield at which Acterna LLC would issue a
fixed rate debt instrument with terms and conditions similar to those of the New
Secured Term Notes.
The amount of interest that accrues each accrual period is the
product of the "comparable yield" and the New Secured Term Note's "adjusted
issue price" at the beginning of each accrual period. The "adjusted issue price"
of a New Secured Term Note is the issue price of a note, increased by interest
previously accrued on the note (determined without adjustments for differences
between the projected payment schedule and the actual payments on the note,
discussed below), and decreased by the amount of any noncontingent payments and
the projected amount of any contingent payments previously made on the note.
Except for adjustments made for differences between actual and
projected payments, the amount of interest included in income by a holder of a
New Secured Term Note is the portion that accrues while the holder held such
note (with the amount attributable to each accrual period allocated ratably to
each day in such period). If actual payments differ from projected payments,
then holders generally will be required in any given taxable year either to
include additional interest in gross income (in case the actual payments exceed
projected payments in such taxable year) or to reduce the amount of interest
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income otherwise accounted for on the New Secured Term Notes (in case the actual
payments are less than the projected payments in such taxable year). If the
negative adjustment exceeds the interest for the taxable year that otherwise
would have been accounted for on the notes, the excess will be treated as
ordinary loss. However, the amount treated as an ordinary loss in any taxable
year is limited to the amount by which the holder's total interest inclusions on
the New Secured Term Notes exceed the total amount of the net negative
adjustments treated as ordinary loss in prior taxable years. Any remaining
excess will be a negative adjustment carryforward and treated as a negative
adjustment in the succeeding year. If a New Secured Term Note is sold,
exchanged, or retired, any negative adjustment carryforward from the prior year
will reduce the holder's amount realized on the sale, exchange or retirement.
Thus, under the rules described in the preceding paragraph, depending
on the projected payment schedule, holders of New Secured Term Notes may be
required to include amounts in income for United States federal income tax
purposes prior to the receipt of cash payments attributable to such income. The
projected payment schedule for the New Secured Term Notes will consist of all
fixed interest payments, all scheduled principal payments and a projected amount
and time for each contingent payment. The yield, timing and amounts set forth on
the projected payment schedule are for United States federal income tax purposes
only and are not assurances by us with respect to any aspect of the New Secured
Term Notes. Any holder may obtain the comparable yield, the projected payment
schedule, the issue price, the amount of OID, and the issue date of the notes by
writing to Acterna LLC. For United States federal income tax purposes, a holder
must use the comparable yield and projected payment schedule in determining the
amount and accrual of OID, unless the holder explicitly discloses in accordance
with the Contingent Payment Regulations its differing position. The IRS is not
bound by such schedule and will not respect a projected payment schedule which
it determines to be unreasonable.
Holders are strongly urged to consult their tax advisors with respect
to the application of the Contingent Payment Regulations described above to the
New Secured Term Notes.
b. Sale, Exchange or Redemption of New Secured Term Notes.
Unless a non-recognition provision applies, a holder generally will
recognize gain or loss upon the sale, exchange or redemption of a New Secured
Term Note equal to the difference, if any, between the holder's adjusted tax
basis in the note and the amount realized on the sale, exchange or redemption.
For this purpose, a holder's adjusted tax basis in a New Secured Term Note
generally will equal the holder's initial tax basis in the note, increased by
the amount of any OID accrued on the note (determined without adjustments) up
through the date of the sale, exchange, or redemption, and decreased by (i) the
amount of any cash payments (other than qualified stated interest) if the note
is not subject to the Contingent Payment Regulations or (ii) by the amount of
any fixed payments and the projected amount of any excess cash flow prepayments
previously made on the note, if the note is subject to the Contingent Payment
Regulations.
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Any gain or loss generally will be capital gain or loss (subject to
the market discount rules discussed below), unless the New Secured Note is
subject to the Contingent Payment Regulations and is sold or otherwise disposed
of when there are remaining contingent payments due on the note under the
projected payment schedule. In the latter event, any gain recognized will be
ordinary interest income and any loss will be an ordinary loss to the extent the
holder's total interest inclusions on a note exceed the total amount of ordinary
loss the holder took into account under the contingent payment rules discussed
in the preceding section with respect to differences between actual payments and
projected payments (any additional loss generally will be capital loss).
c. Acquisition and Bond Premium
In the event the Restructuring Transactions are implemented, it is
possible that a holder of a Senior Lender Claim will have a tax basis (because
it will be based upon fair market value) in the New Secured Term Notes received
in respect of its Claim different than the issue price of such notes. If a
holder of a Senior Lender Claim has a tax basis in the New Secured Term Notes
received that exceeds the issue price of such notes, but is less than or equal
to the sum of all remaining amounts payable under such notes (other than
qualified stated interest, if the Contingent Payment Regulations discussed above
do not apply), the amount of OID includible in the holder's gross income
generally is reduced in each period in proportion to the percentage of the OID
represented by the excess basis. (Alternatively, if a holder treats all stated
interest as OID, such holder may elect to recompute the OID accruals by treating
its acquisition as a purchase at original issue and applying the constant yield
method. Such an election may not be revoked without the consent of the IRS.)
If a holder has a tax basis in any of the New Secured Term Notes
received that exceeds the sum of all such remaining amounts payable under the
notes (i.e., at a "bond premium"), the holder will not include any of the OID in
income. Moreover, if the Contingent Payment Regulations discussed above do not
apply, a holder may elect to deduct any bond premium over the period from its
acquisition of such note to the maturity date of such note (or, if it results in
a smaller amount of amortizable bond premium, until an earlier call date), but
not in excess of the qualified stated interest. If such bond premium is
amortized, the amount of qualified stated interest on the New Secured Term Notes
that must be included in the holder's gross income for each period ending on an
interest payment date or at the maturity date, as the case may be, will (except
as Treasury Regulations may otherwise provide) be reduced by the portion of bond
premium allocable to such period based on the note's yield to maturity. The
holder's tax basis in its New Secured Term Notes will be reduced by a like
amount. If such an election to amortize bond premium is not made, a holder will
receive a tax benefit from the premium only in computing such holder's gain or
loss upon the sale or other taxable disposition of the note, or upon the full or
partial payment of principal.
An election to amortize bond premium will apply to amortizable bond
premium on all notes and other bonds the interest on which is includable in the
holder's gross income and that are held at, or acquired after, the beginning of
the holder's taxable year as to which the election is made. The election may be
revoked only with the consent of the IRS.
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d. Market Discount
Any holder of a Senior Lender Claim that has a tax basis in any of
the New Secured Term Notes received that is less than the issue price of such
note generally will be subject to the market discount rules of the Tax Code
(subject to a de minims exception). Under the market discount rules, a holder is
required to treat any principal payment on, or any gain recognized on the sale,
exchange, retirement or other disposition of, a note as ordinary income to the
extent of the market discount that has not previously been included in income
and is treated as having accrued on such note at the time of such payment or
disposition. A holder could be required to defer the deduction of a portion of
the interest expense on any indebtedness incurred or maintained to purchase or
to carry a market discount note, unless an election is made to include all
market discount in income as it accrues. Such an election would apply to all
bonds acquired by the holder on or after the first day of the first taxable year
to which such election applies, and may not be revoked without the consent of
the IRS.
Any market discount will be considered to accrue on a straight-line
basis during the period from the date of acquisition of such note to the
maturity date of the note, unless the holder irrevocably elects to compute the
accrual on a constant yield basis. This election can be made on a note-by-note
basis.
5. Tax Treatment of Contingent Payment Right
The federal income tax treatment of the Contingent Payment Right is
subject to significant uncertainty. Given the wholly contingent nature and
uncertain term of the Contingent Payment Right, the Debtors intend to take the
positions, absent future clarifications, that (i) in view of the uncertainty
that any amount will be paid on the Contingent Payment Right, it is a
contractual obligation that is not a "debt instrument" for federal income tax
purposes, and (ii) any amounts ultimately paid under the Contingent Payment
Right (to the extent in excess of a holder's tax basis in the Contingent Payment
Right) should be taxed independently of, and not treated as further payment on,
Senior Lender Claims.
So treated, it appears that any amounts received under the Contingent
Payment Right in excess of a holder's adjusted tax basis in such right generally
would be ordinary income, unless the receipt of the payment terminates all
rights of the recipient under the Contingent Payment Right. Where the receipt of
the payment terminates all rights of the recipient under the Contingent Payment
Right, any gain or loss attributable to the payment generally would be capital
gain or loss under section 1234A of the Tax Code. (It is not clear whether the
same treatment would apply to a partial payment, including a payment that would
terminate a holder's rights with respect to the sale of some (but not all) of
the designated assets.) Any such income, gain or loss would be calculated with
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reference to the recipient's adjusted tax basis in the Contingent Payment Right
(which would equal the fair market value of the Contingent Payment Right on the
Effective Date). The timing of such income, gain or loss depends upon, among
other things, whether the Designated Assets Sales occur at one time or over an
extended period of time, and upon the structure of any such sales. If a holder
receives a payment that is less than its basis in the Contingent Payment Right,
the holder may not be allowed a loss until it is determined that no further
payments will be made. If identifiable events occur which establish the
worthlessness of the Contingent Payment Right, a holder of the right would be
entitled to deduct as a capital loss, in the year of such identifiable event,
the holder's adjusted tax basis in the right.
There can be no assurance that the IRS will not take a contrary
position to Debtor's. If, contrary to Debtor's position, payments under the
Contingent Payment Right are treated for federal income tax purposes as
additional payments for the Senior Lender Claims, a portion of such payments may
be treated as imputed interest under section 483 of the Tax Code with the
remainder treated as additional amounts realized in respect of each holder's
Allowed Claim. Additionally, any loss and a portion of any gain realized by a
holder of a Contingent Payment Right may be deferred until such time as such
holder has received its final distribution.
Alternatively, if the Contingent Payment Right constitutes a "debt
instrument" for federal income tax purposes, the character of a holder's income
in respect of the receipt of the Contingent Payment Right, and the timing and
character of a holder's income in respect of payment Contingent Payment Right
may differ. In such instance, each recipient may be required to accrue imputed
interest income (on a projected basis) over time with the result that interest
income may be recognized earlier than the actual receipt of a payment, and that
the excess of any payment received over the amount of interest imputed would be
treated as additional interest income.
6. Subsequent Sale of Acterna Common Stock
Any gain recognized by a holder upon a subsequent taxable disposition
of Acterna Common Stock received in satisfaction of a Claim (or any stock or
property received for it in a later tax free exchange) will be treated as
ordinary income to the extent of (i) any bad debt deductions (or additions to a
bad debt reserve) claimed with respect to its Claim and any ordinary loss
deductions incurred upon satisfaction of its Claim, less any income (other than
interest income) recognized by the holder upon satisfaction of its Claim, and
(ii) with respect to a cash basis holder, also any amounts which would have been
included in its gross income if the holder's Claim had been satisfied in full
but which was not included by reason of the cash method of accounting.
In addition, the Treasury Department is expected to promulgate
regulations that will provide that any accrued "market discount" not treated as
ordinary income upon a tax-free exchange (including a "recapitalization"
exchange) of market discount bonds would carry over to the nonrecognition
property received in the exchange. If such regulations are promulgated and
applicable to the Plan (and likely even without issuance of regulations), any
90
holder of an Allowed Claim which has accrued market discount that is exchanged
in a "recapitalization" would carry over such accrued market discount to any
Acterna Common Stock or New Warrants received pursuant to the Plan (presumably
allocated on the basis of relative fair market value), such that any gain
recognized by the holder upon a subsequent disposition of such stock or warrants
would be treated as ordinary income to the extent of any accrued market discount
not previously included in income.
7. Ownership and Disposition of Warrants; Constructive Distributions
to Holders of New Common Stock
A holder of a New Warrant generally will not recognize gain or loss
upon the exercise of such warrant. A holder's tax basis in the Newco Common
Stock or Acterna Common Stock, as applicable, received upon exercise of a New
Warrant will be equal to the sum of the holder's tax basis in the warrant and
the exercise price. The holder will commence a new holding period with respect
to the Newco Common Stock or Acterna Common Stock received. In the event that
the holder carried over to the New Warrant accrued market discount (as discussed
in the preceding section), it is possible that such taint would carry over to
the common stock acquired upon exercise of such warrant.
If the terms of the New Warrant provide for any adjustment to the
number of shares of Newco Common Stock or Acterna Common Stock, as applicable,
for which the warrant may be exercised or to the exercise price of the warrants,
such adjustment may, under certain circumstances, result in constructive
distributions that could be taxable to the holder of the new warrants. If no
appropriate adjustment is made to the number of shares of Newco Common Stock or
Acterna Common Stock, as applicable, for which New Warrants may be exercised or
to the exercise price of such warrants, a constructive distribution may result
that could be taxable to the holders of Newco Common Stock or Acterna Common
Stock or the holders of the other class of warrants, as applicable. Upon the
lapse or disposition of a New Warrant, the holder generally would recognize gain
or loss equal to the difference between the amount received (zero in the case of
a lapse) and its tax basis in the warrant. In general, such gain or loss would
be a capital gain or loss, long term or short term, depending on whether the
requisite holding period was satisfied.
8. Information Reporting and Withholding
All distributions to holders of Allowed Claims under the Plan are
subject to any applicable withholding (including employment tax withholding).
Under federal income tax law, interest, dividends, and other reportable payments
may, under certain circumstances, be subject to "backup withholding" at the then
applicable rate (currently 28%). Backup withholding generally applies if the
holder (a) fails to furnish its social security number or other taxpayer
identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails
properly to report interest or dividends, or (d) under certain circumstances,
fails to provide a certified statement, signed under penalty of perjury, that
the TIN provided is its correct number and that it is not subject to backup
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withholding. Certain persons are exempt from backup withholding, including, in
certain circumstances, corporations and financial institutions. Backup
withholding is not an additional tax but merely an advance payment, which may be
refunded to the extent it results in an overpayment of tax and the appropriate
information is supplied to the IRS.
Recently effective Treasury Regulations generally require disclosure
by a taxpayer on its federal income tax return of certain types of transactions
in which the taxpayer participated after January 1, 2003, including, among other
types of transactions, the following (i) certain transactions that result in the
taxpayer claiming a loss in excess of specified thresholds; and (ii) certain
transactions in which the taxpayer's book-tax differences exceed a specified
threshold in any tax year. Holders are urged to consult their tax advisors
regarding these regulations and whether the transactions contemplated by the
Plan would be subject to these regulations and require disclosure on the
holders' tax returns.
XIII. FINANCIAL INFORMATION AND PROJECTIONS
The Debtors prepared the projected consolidated financial results
(the "Projections") for the three and one-half years beginning October 1, 2003
and ending March 31, 2007.
The Projections are based on a number of assumptions made by
management with respect to the future performance of the Company's various
business units. The Projections should be reviewed in conjunction with a review
of these assumptions including the qualifications and footnotes, set forth
herein.
The Projections included herein are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ materially include, but are
not limited to, the Reorganized Debtors' ability to operate their business
consistent with their projections, comply with the covenants of their financing
agreements, attract and retain key executives, and respond to adverse regulatory
actions taken by the federal and state governments.
The Projections should be read in conjunction with the assumptions,
qualifications and footnotes to the Projections set forth herein, the historical
consolidated financial information (including the notes and schedules thereto),
and the unaudited actual results reported in the monthly operating reports of
the Debtors. The Projections were prepared by management in good faith based
upon assumptions believed to be reasonable and applied in a manner consistent
with past practices.
The Projections were not prepared with a view towards complying with
the guidelines for prospective financial statements published by the American
Institute of Certified Public Accountants. The Projections have not been
compiled, or prepared for examination or review, by the Debtors' independent
auditors (who accordingly assume no responsibility for them).
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While presented with numerical specificity, the Projections are based
upon a variety of assumptions and are subject to significant business, economic,
and competitive uncertainties and contingencies, many of which are beyond the
control of the Debtors. Consequently, the inclusion of the Projections herein
should not be regarded as a representation by the Debtors (or any other person)
that the Projections will be realized, and actual results may vary materially
from those presented below. The industry in which the Debtors compete is highly
competitive and the Debtors' earnings may be significantly adversely affected by
changes in the competitive environment, changes in supply and demand dynamics,
the price erosion of services provided, regulatory changes and future
improvements in technology. Due to the fact that such Projections are subject to
significant uncertainty and are based upon assumptions which may not prove to be
correct, neither the Debtors nor any other person assumes any responsibility for
their accuracy or completeness.
There are substantial risks in achieving the Projections. These risks
include:
o the restructuring process entails significant business process
changes throughout the organization, which may be disruptive;
o difficulties arising from the slowing economy, which has
adversely affected demand for telecommunications services, may
delay revenue growth and the length of time required to achieve
profitability and positive cash flow;
o the possibility of adverse regulatory, legislative and other
governmental developments;
o the risk that the Debtors will lose customers and leaves it open
to aggressive tactics of competitors;
o potential difficulties in recruiting and retaining quality
management to execute the new operational strategy; and
o insufficient capital to invest in improved business systems to
support a larger and more efficient enterprise.
One or more of these factors, individually or combined, could adversely affect
the Debtors' ability to conduct their operations.
93
PRO FORMA PROJECTED BALANCE SHEET
AS OF OCTOBER 1, 2003
(Unaudited)
(dollars in thousands) PRE-REORG (a) "FRESH START" (b) REORGANIZED
BALANCE SHEET ADJUSTMENTS BALANCE SHEET
---------------------- ------------------ ----------------------
ASSETS:
Cash and cash equivalents $ 95,076 $ (45,076) (c) $ 50,000
Trade accounts receivable, net 48,141 - 48,141
Inventories, net 45,294 4,000 49,294
Other current assets 35,717 (6,486) (d) 29,231
---------------------- ------------------ ----------------------
TOTAL CURRENT ASSETS $ 224,228 $ (47,562) (d) $ 176,666
Property plant and equipment, net 78,428 (26,500) (d) 51,928
Reorganization value in excess of identifiable assets - 216,770 (e) 216,770
Other assets 29,862 (21,298) (d) 8,564
---------------------- ------------------ ----------------------
Total noncurrent assets 108,290 168,972 277,262
---------------------- ------------------ ----------------------
TOTAL ASSETS $ 332,518 $ 121,410 $ 453,928
====================== ================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Accounts payable and accrued liabilities $ 74,914 (4,271) (f) $ 70,643
Accrued interest 1,617 - 1,617
Other current liabilities 20,846 - 20,846
---------------------- ------------------ ----------------------
TOTAL CURRENT LIABILITIES $ 97,377 $ (4,271) $ 93,106
Restructured German Term Debt 94,874 (3,302) (g) 91,572
New Secured Term Notes - 75,000 (h) 75,000
Other debt 20,003 - 20,003
Deferred compensation 74,209 - 74,209
Other long-term liabilities 6,613 - 6,613
---------------------- ------------------ ----------------------
TOTAL LIABILITIES $ 293,076 $ 67,427 $ 360,503
LIABILITIES SUBJECT TO COMPROMISE
Accounts payable 25,307 (25,307) (i) -
Accrued interest 19,265 (19,265) (i) -
Debt 842,574 (842,574) (i) -
Other 75,128 (75,128) (i) -
---------------------- ------------------ ----------------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE $ 962,274 $ (962,274) $ -
Shareholders' equity (deficit) (922,832) 1,016,257 (j) 93,425
---------------------- ------------------ ----------------------
TOTAL LIABILITIES & EQUITY $ 332,518 $ 121,410 $ 453,928
====================== ================== ======================
94
NOTES TO PRO FORMA PROJECTED "FRESH START" BALANCE SHEET
(dollars in thousands unless otherwise noted)
a. The Pre-Reorganization Balance Sheet as of October 1, 2003 assumes that the
Company has sold substantially all of the non-cash assets of its
subsidiaries, Itronix and da Vinci, for net proceeds of $60 million prior
to the Effective Date.
b. The pro forma balance sheet adjustments contained herein account for the
reorganization and related transactions pursuant to the Plan using the
principles of "fresh start" accounting as required by the Statement of
Position 90-7 ("SOP 90-7") issued by the American Institute of Certified
Public Accountants (the "AICPA"). The fresh start adjustments are based on
an estimated Reorganized Acterna enterprise value of $280 million as more
fully described in the Disclosure Statement (see Article X - Valuation).
The estimated Reorganized Acterna equity value may change depending on the
amount of cash retained by the Company post-emergence. Under SOP 90-7,
reorganization value is allocated first to tangible assets, then to
identifiable intangible assets, and lastly to excess reorganization value.
Please note that although management has followed the principles of "fresh
start" accounting, the actual adjustments will be determined at a later
date and may be materially different than those presented herein upon
completion of the required asset appraisals.
c. Reflects the use of cash pursuant to the Plan. Cash uses included (a) $12.1
million for Administrative Expense Claims, including cure costs and
Compensation and Reimbursement Claims, (b) $5.7 million for professional
fees, (c) $2.9 million for Key Employee Retention Payments and (d) $24.4
million in payments to the pre-petition holders of the Senior Secured
Credit Facility. The Debtors anticipate that a portion of the cash will be
paid after the Effective Date thus resulting in a higher amount of cash on
hand at closing than presented herein.
d. Represents adjustments pursuant to SOP 90-7.
e. Under SOP 90-7, reorganization value is allocated first to tangible assets,
then to identifiable intangible assets, and lastly to excess reorganization
value. For purposes of this analysis, management has determined to allocate
the excess reorganization value to Excess reorganization value. The actual
adjustments will be determined at a later date and may be materially
different than those presented herein upon completion of the required asset
appraisals.
f. Reflects the payment of $2.9 million of Key Employee Retention Payments and
$1.4 million of professional fees which are projected to be accrued for in
the Estimated Pre-Reorganization Balance Sheet as of October 1, 2003.
g. Under the terms of the Plan, a portion of the excess cash noted in item b.
above is paid to the holders of the European Term Loan and is a reduction
to the post-petition debt obligation.
95
h. Reflects the issuance of $75 million of New Secured Term Notes to certain
of the pre-petition lenders of the Senior Secured Credit Facility in
accordance with the Plan.
i. Liabilities subject to compromise eliminated at emergence pursuant to the
Plan.
j. Reflects the adjustment to shareholders' deficit based on the estimated
equity value of Reorganized Acterna in accordance with the "fresh start"
accounting provisions of SOP 90-7.
96
ACTERNA CORPORATION
PROJECTED BALANCE SHEETS
(Unaudited)
PROJECTED
----------------------------------------------------------------------
AS OF MARCH 31,
----------------------------------------------------------------------
(dollars in thousands) 2004 2005 2006 2007
--------------- -------------- --------------- ---------------
ASSETS:
Cash and cash equivalents $ 59,111 $ 68,026 $ 78,524 $ 101,773
Trade accounts receivable, net 50,816 49,123 51,773 54,611
Inventories, net 42,182 38,968 37,830 37,965
Other current assets 19,583 20,230 20,231 20,500
--------------- -------------- --------------- ---------------
TOTAL CURRENT ASSETS $ 171,692 $ 176,346 $ 188,357 $ 214,848
PP&E, net 46,732 48,803 51,803 51,803
Reorganization value in excess of identifiable assets 216,769 216,769 216,769 216,769
Other assets 8,564 8,564 8,564 8,564
--------------- -------------- --------------- ---------------
Total noncurrent assets 272,065 274,136 277,136 277,136
--------------- -------------- --------------- ---------------
TOTAL ASSETS $ 443,757 $ 450,482 $ 465,493 $ 491,984
=============== ============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 69,024 $ 69,966 $ 72,736 $ 76,976
Accured interest 1,621 1,621 1,621 1,621
Other current liabilities 19,700 20,547 21,903 23,349
--------------- -------------- --------------- ---------------
TOTAL CURRENT LIABILITIES $ 90,345 $ 92,134 $ 96,260 $ 101,946
Long-term debt 189,030 193,726 199,267 206,393
Deferred income taxes 4,477 4,477 4,477 4,477
Deferred compensation 74,209 74,209 74,209 74,209
Other long-term liabilities 2,136 2,136 2,136 2,136
--------------- -------------- --------------- ---------------
TOTAL LIABILITIES $ 360,197 $ 366,682 $ 376,350 $ 389,161
Shareholders' equity 83,559 83,800 89,143 102,823
--------------- -------------- --------------- ---------------
TOTAL LIABILITIES & EQUITY $ 443,757 $ 450,482 $ 465,493 $ 491,984
=============== ============== =============== ===============
97
ACTERNA CORPORATION
PROJECTED STATEMENTS OF OPERATIONS
(Unaudited)
PROJECTED
PROJECTED --------------------------------------------------------------
6 MOS. FISCAL YEAR ENDED MARCH 31,
ENDED --------------------------------------------------------------
(dollars in thousands) 3/31/2004 2005 2006 2007
------------------ ----------------- ------------------ -----------------
Net Sales $ 182,002 $ 365,048 $ 389,140 $ 414,823
Cost of sales 93,028 175,161 186,721 199,045
------------------ ----------------- ------------------ -----------------
Gross profit 88,974 189,887 202,419 215,778
Selling, general and administrative expense 67,531 128,876 130,561 128,714
Product development expense 22,107 44,998 46,343 47,705
Restructuring Expense 4,166 999 999 -
------------------ ----------------- ------------------ -----------------
Total operating expenses 93,804 174,873 177,903 176,419
------------------ ----------------- ------------------ -----------------
Operating income (loss) (4,830) 15,014 24,516 39,359
Interest Expense 7,034 14,626 15,896 17,292
------------------ ----------------- ------------------ -----------------
Income (loss) before income taxes (11,864) 388 8,620 22,067
Provision (benefit) from income taxes (2,000) 148 3,277 8,387
------------------ ----------------- ------------------ -----------------
NET INCOME (LOSS) $ (9,864) $ 240 $ 5,343 $ 13,680
================== ================= ================== =================
98
ACTERNA CORPORATION
PROJECTED STATEMENTS OF CASH FLOW
(UNAUDITED)
PROJECTED
PROJECTED -----------------------------------------------------
6 MOS. FISCAL YEAR ENDED MARCH 31,
ENDED -----------------------------------------------------
(dollars in thousands) 3/31/2004 2005 2006 2007
--------------- -------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before distributions & dividends $ (9,864) $ 240 $ 5,343 $ 13,680
Depreciation, amortization & other non-cash expenses 8,094 11,213 10,094 12,959
Changes in working capital, deferred taxes 11,325 6,049 2,614 2,443
& other liabilities
--------------- -------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 9,555 $ 17,502 $ 18,051 $ 29,082
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures $ (2,898) $ (13,284) $ (13,094) $ (12,959)
--------------- -------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES $ (2,898) $ (13,284) $ (13,094) $ (12,959)
CASH FLOWS FROM FINANCING ACTIVITIES
Existing long term debt $ 2,455 $ 4,696 $ 5,541 $ 7,126
--------------- -------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES $ 2,455 $ 4,696 $ 5,541 $ 7,126
BEGINNING CASH AND CASH EQUIVALENTS BALANCE $ 50,000 $ 59,112 $ 68,026 $ 78,524
Net increase/(decrease) in cash 9,112 8,914 10,498 23,249
--------------- -------------- --------------- ---------------
BEGINNING CASH AND CASH EQUIVALENTS BALANCE $ 59,112 $ 68,026 $ 78,524 $ 101,773
99
NOTES TO FINANCIAL PROJECTIONS
KEY ASSUMPTIONS
A. GENERAL
1. Methodology: The Projections are aggregated from
operating forecasts for each of Acterna's major
business segments (Telecom Field Services,
Workflow Solutions, Optical Transport/Fiber,
Cable Networks, Services and Complementary
Products)
2. Plan Consummation: The operating assumptions
underlying the revenue and expense forecasts
assume the Plan will be confirmed and consummated
October 2003. The "fresh start" accounting
adjustments are more specifically based on a
projected emergence at October 1st, 2003.
3. Key Accounting/Reporting Elements: The
Projections include results for all Acterna
Communications Test entities. Itronix and da
Vinci are assumed to be sold as of October 1,
2003 for aggregate net proceeds of $60 million.
The income statement and balance sheet for
October 2003 and subsequent periods exclude the
results of Itronix and da Vinci.
4. Macroeconomic and Industry Environment: The
Projections assume a generally stable economic
environment with low inflation, consistent with
prevailing analyst forecasts. The Projections
assume that the market for communications test
equipment stabilizes in 2004 with a return to
modest industry growth. Interest rate and debt
balance projections assume a stable LIBOR rate
and stable USD/EUR exchange rate of 1.15.
B. PROJECTED STATEMENT OF OPERATIONS
1. Revenues: Consolidated Communications Test
revenues are projected to decline by 32% in
fiscal year 2004 and increase by 4% in FY 2005,
7% in FY 2006 and 7% in FY 2007. The assumed
industry growth rates are consistent with the
prevailing analyst forecasts.
2. Cost of Goods Sold: Cost of goods sold which
consist of material, labor, and other
manufacturing and service delivery related costs
are projected to decrease as a percent of
consolidated revenue from 50% in fiscal year 2004
to 48% in fiscal years 2005 - 2007.
100
3. Gross Margin: Gross margin is projected to
increase from 50% in fiscal year 2004 to 52% in
fiscal years 2005 - 2007. Gross margin
improvement is driven by unit cost savings from
outsourcing agreements, increased efficiencies
from higher volumes and restructuring related
savings from cost reductions implemented during
fiscal year 2004.
4. Research and Development Expense: Research and
Development expense ("R&D") includes employee
salaries and benefits, facility costs,
depreciation and other expenses related to
product development activities. R&D expense is
projected to decrease from 13.6% of consolidated
Communications Test revenues in fiscal year 2004
to 12.3% in FY 2005, 11.9% in FY 2006, and 11.5%
in FY 2007. Reductions in R&D as a percent of
revenues is driven by cost reductions implemented
in FY 2004 and by efficiencies realized from
revenue growth outpacing expense growth in FY
2005 - FY 2007.
5. Selling, General and Administrative: Selling,
General and Administrative expense ("SG&A")
includes employee salaries and benefits, facility
costs, depreciation and other expenses related to
selling, general and administrative activities.
SG&A expense is projected to decrease from 42% of
consolidated Communications Test revenues in
fiscal year 2004 to 35% in FY 2005, 33% in FY
2006, and 31% in FY 2007. Reductions in SG&A as a
percent of revenues is driven by cost reductions
implemented in FY 2004, reductions in D&O
insurance in FY 2005 and FY 2006 and by
efficiencies realized from revenue growth
outpacing SG&A expense growth in FY 2005 - FY
2007. Expense savings are partially offset by
salary increases and the reinstatement of
management bonuses in FY 2005 - FY 2007.
6. Interest Expense: Interest expense reflects
projected interest on mortgages and other
miscellaneous debt outside of the US, and
interest on the (euro) 82 million Euro Loan and
$75 million New Facility issued pursuant to the
Plan.
7. Restructuring Costs: Restructuring costs of $4
million in fiscal year 2004 and $1 million in FY
2005 and $1 million in FY 2006 consist of cash
severance payments from previously announced cost
reductions.
8. Income Taxes: The Projections assume no income
tax expense in fiscal year 2004 due a projected
net operating loss. After 2004, the Projections
assume that NOL carryforwards are eliminated as a
result of the discharge of indebtedness pursuant
to the Plan and that income is taxed at an
effective rate of 38%.
101
C. PROJECTED BALANCE SHEET AND STATEMENTS OF CASH FLOW
1. Cash: The cash shown on the projected balance
sheets is net of outstanding checks. The beginning
cash balance of $50 million at October 1, 2003
reflects the use of cash pursuant to the plan.
Cash uses include (a) $12.1 million for
Administrative Expense Claims, including cure
costs and Compensation and Reimbursement Claims,
(b) $5.7 million for professional fees, (c) $2.9
million for Key Employee Retention Payments and
(d) $24.4 million in payments to the pre-petition
holders of the Senior Secured Credit Facility. The
Debtors anticipate that a portion of the cash will
be paid after the Effective Date thus resulting in
a higher amount of cash on hand at closing than
presented herein.
2. Working Capital: Accounts receivable are projected
to fluctuate during the 2nd half of fiscal year
2004, then improve from 48 days sales outstanding
in FY 2005 and FY 2006 to 47 days in FY 2007.
Other current assets are projected to grow with
revenue throughout the projection period.
Inventory turns are projected to improve from 4.0
turns in fiscal year 2004 to 4.5 turns in FY 2005,
4.9 turns in FY 2006, and 5.2 turns in FY 2007.
The increase in inventory turns is driven by
operational improvements and increased
manufacturing outsourcing. Accounts payable days
to pay are projected in increase from 51 days in
fiscal year 2004 and 2005 to 52 days in FY 2006
and 53 days in FY 2007. Deferred revenue, accrued
warranty and other current liabilities are
projected to fluctuate with revenue throughout the
projection period. Employee related accruals are
projected to fluctuate with payroll expense
throughout the projection period.
3. $11 million of cash flow from working capital is
projected to be generated during the six month
period ended March 14, 2004. This includes about
$10 million of cash from a German tax refund due
to the company, which was anticipated as a
collection during October of 2003. In fact the
company collected the refund on about August 22,
2003 or about 60 days sooner than anticipated.
However, the included projections reflect the
collection of this refund during the October
period. Additionally, $4 million of working
capital is generated by amortization of the
inventory step-up due to "Fresh Start" accounting
rules. Excluding these two items, projected cash
flow from changes in operating assets and
liabilities is negative $3 million for the
six-month period ended March 14, 2004.
4. Capital Expenditures: Capital Expenditures of $6
million in fiscal year 2004 are projected to
increase to $13 million in fiscal years 2005 -
2007. Growth in capital expenditures is primarily
attributable to new product introductions,
development of new features for existing products,
and investments in IT systems.
102
5. Asset Sales: The Projections assume that the
Company's Itronix and da Vinci subsidiaries are
sold for aggregate net proceeds of $60 million on
October 1, 2003.
XIV. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
If the Plan is not confirmed and consummated, the Debtors'
alternatives include (i) liquidation of the Debtors under chapter 7 of the
Bankruptcy Code and (ii) the preparation and presentation of an alternative plan
or plans of reorganization.
A. LIQUIDATION UNDER CHAPTER 7
If no chapter 11 plan can be confirmed, the Chapter 11 Cases may be
converted to cases under chapter 7 of the Bankruptcy Code in which a trustee
would be elected or appointed to liquidate the assets of the Debtors. A
discussion of the effect that a chapter 7 liquidation would have on the
recoveries of holders of Claims is set forth in Section VII.C.4 of the
Disclosure Statement. The Debtors believe that liquidation under chapter 7 would
result in, among other things, (i) smaller distributions being made to creditors
than those provided for in the Plan because of additional administrative
expenses attendant to the appointment of a trustee and the trustee's employment
of attorneys and other professionals, (ii) 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 the Debtors' operations and (iii) the failure to
realize the greater, going concern value of the Debtors' assets.
B. ALTERNATIVE PLAN OF REORGANIZATION
If the Plan is not confirmed, the Debtors or any other party in
interest could attempt to formulate a different plan of reorganization. Such a
plan might involve either a reorganization and continuation of the Debtors'
business or an orderly liquidation of its assets. The Debtors have concluded
that the Plan represents the best alternative to protect the interests of
creditors and other parties in interest.
The Debtors believe that the Plan enables them to successfully and
expeditiously emerge from chapter 11, preserve their business and allows
creditors to realize the highest recoveries under the circumstances. In a
liquidation under chapter 11 of the Bankruptcy Code, the assets of the Debtors
would be sold in an orderly fashion which could occur over a more extended
period of time than in a liquidation under chapter 7 and a trustee need not be
appointed. Accordingly, creditors would receive greater recoveries than in a
chapter 7 liquidation. Although a chapter 11 liquidation is preferable to a
chapter 7 liquidation, the Debtors believe that a liquidation under chapter 11
is a much less attractive alternative to creditors because a greater return to
creditors is provided for in the Plan.
103
XV. CONCLUSION AND RECOMMENDATION
The Debtors believe that confirmation and implementation of the Plan
is preferable to any of the alternatives described above because it will provide
the greatest recoveries to holders of Claims. Other alternatives would involve
significant delay, uncertainty and substantial additional administrative costs.
The Debtors urges holders of impaired Claims entitled to vote on the Plan to
accept the Plan and to evidence such acceptance by returning their Ballots so
that they will be received no later than 4:00 p.m., Eastern Time, on September
22, 2003.
Dated: New York, New York
August 26, 2003
ACTERNA CORPORATION
By: /s/ John S. Dubel
-----------------------------
Name: John S. Dubel
Title: Chief Restructuring Officer
Acterna Corporation
104
EXHIBIT A
PLAN OF REORGANIZATION
EXHIBIT B
DISCLOSURE STATEMENT ORDER
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- --------------------------------------------------- X
IN RE :
: CHAPTER 11 CASE NO.
ACTERNA CORPORATION, ET AL., : 03-12837 (BRL)
-- ---
:
: (JOINTLY ADMINISTERED)
DEBTORS. :
- --------------------------------------------------- X
ORDER (I) APPROVING DISCLOSURE STATEMENT,
(II) ESTABLISHING RECORD HOLDER DATE, (III) APPROVING
SOLICITATION PROCEDURES, FORMS OF BALLOTS, AND
MANNER OF NOTICE, AND (IV) FIXING DATE, TIME
AND PLACE FOR CONFIRMATION HEARING AND
DEADLINE FOR FILING OBJECTIONS THERETO
A hearing having been held on August 26, 2003 (the "Hearing") to
consider the motion of Acterna Corporation and certain of its subsidiaries, as
debtors and debtors in possession (collectively, the "Debtors"), dated August 1,
2003 (the "Motion"), seeking, inter alia, approval pursuant to section 1125 of
title 11 of the United States Code (the "Bankruptcy Code") of the Disclosure
Statement for Debtors' Joint Plan of Reorganization, dated August 26, 2003,
heretofore filed with the Court; approval of proposed solicitation procedures;
approval of the forms of ballots; the date, time and place for the confirmation
hearing on the Debtors' Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, dated August 26, 2003 (as same may be amended, the "Plan") and
the deadline for filing objections thereto, and it appearing from the affidavits
of service on file with this Court that proper and timely notice of the Hearing
has been given; and it appearing that such notice was adequate and sufficient;
and the appearances of all interested parties having been duly noted on the
record of the Hearing; and each of the objections, if any, filed to the proposed
B-1
disclosure statement or the Motion having been either (a) withdrawn or rendered
moot by modifications to the disclosure statement, or (b) overruled by the
Court; and the Debtors having made the conforming additions, changes,
corrections and deletions to the disclosure statement necessary to comport with
the record of the Hearing and the agreements reached with the parties, if any,
that had filed objections, a copy of which revised disclosure statement is
annexed hereto as Exhibit "A" (as same may be amended, the "Disclosure
Statement"); and upon the Motion, the Disclosure Statement and the record of the
Hearing and upon all of the proceedings heretofore had before the Court and
after due deliberation and sufficient cause appearing, therefore it is
ORDERED, FOUND AND DETERMINED THAT:
1. The Disclosure Statement contains adequate information within the
meaning of section 1125 of the Bankruptcy Code.
2. The Disclosure Statement and the Motion are hereby approved.
3. For voting purposes and mailing of notices pursuant to this Order,
the date the Court enters this Order on the docket shall be the "Record Holder
Date" for the holders of claims in the Voting Classes, as defined in the Motion.
4. The Debtors shall mail ballots (with instructions), substantially
in the forms of the ballots (with instructions) annexed hereto as Exhibits "B,"
"C," "D," "E," "F" and "G"(collectively, the "Ballots"), to each holder of a
claim in the Voting Classes under the Plan.
B-2
5. No more than three (3) business days after the Record Holder Date,
the Debtors shall deposit or cause to be deposited in the United States mail,
postage prepaid, a sealed solicitation package (the "Solicitation Package")
which shall include:
(a) notice of the confirmation hearing and related matters,
substantially in the form of Exhibit "H" annexed hereto (the
"Confirmation Hearing Notice"), setting forth the time fixed for
filing acceptances and rejections to the Plan, the time fixed for
filing objections to confirmation of the Plan, and the date and
time of the hearing on confirmation;
(b) a copy of the Disclosure Statement, as approved by the Court
(with exhibits including the Plan); and
(c) a Ballot (with instructions), in substantially the form approved
by the Court.
6. The Debtors shall mail the Solicitation Packages to holders of
claims, as of the Record Holder Date, in the Voting Classes.
7. In lieu of mailing the Solicitation Package to holders of claims
and equity interests in unimpaired classes, or classes that are impaired and
receive no distribution under the Plan, on or before August 29, 2003 the Debtors
shall deposit in the United States mail, postage prepaid, the Notice of
Non-Voting Status, substantially in the form annexed hereto as Exhibit "I" to
each holder of a claim and equity interest in an unimpaired class, or in a class
that is impaired and receives no distribution under the Plan.
8. The Debtors shall cause the Confirmation Hearing Notice to be
published once in The Wall Street Journal (national edition) and the
International Herald Tribune on a date not less than twenty five (25) calendar
days prior to the hearing to consider confirmation of the Plan.
B-3
9. All persons and entities entitled to vote on the Plan shall
deliver their Ballots by mail, hand delivery or overnight courier no later than
4:00 p.m. Eastern Time on September 22, 2003 (the "Voting Deadline") to the
Voting Agent at:
ACTERNA CORPORATION
BANKRUPTCY SERVICES LLC
757 THIRD AVENUE, THIRD FLOOR
NEW YORK, NEW YORK 10017
ATTENTION: CASSANDRA MURRAY
(646) 282-2500
Any Ballot received after such time shall not be counted other than as provided
for herein. Ballots submitted by facsimile shall not be counted.
10. The Debtors shall have the ability to extend the Voting Deadline
at the Debtors' sole discretion.
11. With respect to Ballots submitted by a holder of a claim:
(a) a holder of a claim in Class E (Convertible Notes Claims) and
Class F (Subordinated Notes Claims) that has claims in more than
one subclass within that class, shall be permitted to cast one
Ballot and such Ballot shall be deemed to be a vote in each
subclass of that class;
(b) any Ballot which is otherwise properly completed, executed and
timely returned to the Voting Agent that does not indicate an
acceptance or rejection of the Plan shall not be counted;
(c) any Ballot which is returned to the Voting Agent indicating
acceptance or rejection of the Plan but which is unsigned shall
not be counted;
(d) whenever a creditor casts more than one Ballot voting the same
claim prior to the Voting Deadline, only the last timely Ballot
received by the Voting Agent shall be counted;
(e) if a creditor casts simultaneous duplicative Ballots voted
inconsistently, then such Ballots shall count as one vote
accepting the Plan;
B-4
(f) each creditor shall be deemed to have voted the full amount of
its claim except a creditor holding an unliquidated or contingent
claim shall be deemed to have voted in the amount of $1;
(g) creditors shall not split their vote within a class, thus each
creditor shall vote all of its claim within a particular class
either to accept or reject the Plan;
(h) any Ballot that partially reject and partially accept the Plan
shall not be counted; and
(i) any Ballot received by the Voting Agent by telecopier, facsimile
or other electronic communication shall not be counted.
12. The hearing on confirmation of the Plan is scheduled for
September 25, 2003 at 10:00 a.m. Eastern Time, at the Bankruptcy Court, One
Bowling Green, New York, New York. This hearing may be adjourned from time to
time without further notice other than an announcement of the adjourned date(s)
at said hearing and at any adjourned hearing(s).
13. Any objection to confirmation of the Plan must be filed with the
Clerk of the Bankruptcy Court, together with proof of service, no later than
4:00 p.m., Eastern Time, on September 15, 2003, and must be served on each of
the persons listed on Exhibit "J" annexed hereto so as to be received by them no
later than 4:00 p.m., Eastern Time, on September 15, 2003. Any objection to
confirmation of the Plan must be in writing and (a) must state the name and
address of the objecting party and the amount of its claims or the nature of its
interest, and (b) must state, with particularity, the nature of its objection.
Any confirmation objection not filed and served as set forth herein shall be
deemed waived and may not be considered by the Bankruptcy Court.
Dated: New York, New York
August 26, 2003
/s/Burton R. Lifland
---------------------------------------
HONORABLE BURTON R. LIFLAND
UNITED STATES BANKRUPTCY JUDGE
B-5
EXHIBIT C
ACTERNA CORPORATION'S AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 2003
EXHIBIT D
ACTERNA CORPORATION'S UNAUDITED CONSOLIDATED FINANCIAL
INFORMATION FOR THE FISCAL QUARTER ENDED JUNE 30, 2003
EXHIBIT E
LIQUIDATION ANALYSIS
ACTERNA CORPORATION
LIQUIDATION ANALYSIS (1)
(USD in 000s)
Projected
BV as of Average
COMMUNICATIONS TEST Note Sept. 30, 2003 Estimated Estimated
PROCEEDS FROM LIQUIDATION References (unaudited) Recovery Rate Liquidation Value
------------- --------------- --------------- -------------------
Cash and equivalents 2 $ 35,192 100% $ 35,192
Trade accounts receivable, net 3 22,614 68% 15,474
Inventories, net 4 17,144 48% 8,167
Deferred income taxes - 0% -
Taxes receivable - 0% -
Prepaids & other current assets 5 8,246 16% 1,351
PP&E, net 6 22,532 27% 6,179
Goodwill & intangibles, net 7 (1,448) n/a 3,000
Deferred debt issuance costs, net 16,862 0% -
Other assets 3,436 8% 279
--------------- -------------------
Total assets $ 124,578 69,643
===============
Other proceeds:
Itronix net liquidation proceeds 8 10,289
da Vinci net liquidation proceeds 9 489
Proceeds from liquidation of non-debtors subs 10 -
Proceeds from avoidance and preference actions 11 -
-------------------
Gross Asset Liquidation Value 80,421
LESS COSTS ASSOCIATED WITH LIQUIDATION:
Corporate expenses 12 (33,000)
Retention 13 (3,750)
Other professional fees 14 (3,750)
-------------------
39,921
Chapter 7 Trustee fees 15 (1,357)
-------------------
NET ESTIMATED PROCEEDS AVAILABLE FOR CREDITOR DISTRIBUTION $ 38,564
-------------------
Less Super Priority Liens (section 507) - DIP fees 16 (123)
NET ESTIMATED PROCEEDS AVAILABLE FOR SECURED CREDITOR DISTRIBUTION $ 38,442
-------------------
700,915
Estimated Senior Lender Claims 17 5.48%
% Recovery
NET ESTIMATED PROCEEDS AFTER SENIOR LENDER DISTRIBUTION $ -
-------------------
Estimated other secured claims 18 89,253
% Recovery 0.00%
NET ESTIMATED PROCEEDS AFTER SECURED CREDITOR DISTRIBUTION $ -
-------------------
Less chapter 11 Administrative Expense Claims 19
NET ESTIMATED PROCEEDS AVAILABLE FOR UNSECURED CREDITOR DISTRIBUTION 20 $ -
-------------------
Estimated unsecured claims 21 225,822
Secured claim deficiency 22 751,726
-------------------
Total other secured, unsecured and deficiency claims 977,548
% Recovery 0.00%
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NOTES TO LIQUIDATION ANALYSIS
1. GENERAL: This analysis (the "Liquidation Analysis") presents
management's estimate of the net proceeds that would be realized if
Acterna Corporation's (the "Company") assets were liquidated under the
provisions of chapter 7 of the Bankruptcy Code.
The Liquidation Analysis assumes a liquidation period of twelve
months.
This Liquidation Analysis is based on the projected book
values of Acterna Corporation as of September 30, 2003. Any
difference in asset values between the projected values
used herein and the actual values on the date a liquidation
process would begin would result in a variance to the
estimated recoveries.
Underlying the Liquidation Analysis are a number of
estimates and assumptions that, although developed and
considered reasonable by management, are inherently subject
to significant economic and competitive uncertainties and
contingencies beyond the control of the Company and its
management, and upon assumptions with respect to
liquidation decisions that could be subject to change.
Accordingly, there can be no assurance that the values
reflected in the Liquidation Analysis would be realized in
the event of such liquidation, and actual results could
vary materially from those shown here.
This analysis has not been examined or reviewed by
independent accountants in accordance with standards
promulgated by the AICPA.
2. CASH: The cash balance reflects management's projected estimate of
cash as of September 30, 2003. Management estimates that approximately
$35.2 million of cash will be held by the Company and is assumed to be
included in the Communications Test projected cash balance. Cash
includes cash and cash equivalents.
3. TRADE ACCOUNTS RECEIVABLE: Estimated proceeds realized from accounts
receivable under a liquidation are based upon management's assessment
of the collectibility of those receivables taking into consideration
the credit quality of the counter-parties and the aging of the
accounts. For purposes of this analysis the liquidation value of the
accounts receivable was estimated by applying a range of collection
rates to the account receivables based upon the estimated aging
category of the accounts receivable. The aging categories were:
current to 30 days, 31-60 days past due, 61-90 days past due, 91-120
days past due and over 120 days past due. The result is assumed to be
an estimate of the proceeds that would be available in an orderly
liquidation scenario and takes into account the inevitable difficulty
a liquidating company has in collecting its receivables and any
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concessions which might be required to facilitate the collection of
certain accounts. Collections during a liquidation of the Debtors may
be further impaired by the likely damage Claims for breaches of and/or
the likely rejection of customer contracts as customers attempt to set
off outstanding amounts owed to the Debtors against such Claims.
4. INVENTORIES: Estimated proceeds from the sale of inventory on hand as of
the liquidation date are based upon management's best estimate of the
net value realized from the sale of such inventory. It is assumed that
labor is retained at the beginning of the liquidation process to
complete work in process, wind down manufacturing processes and prepare
manufacturing-related fixed assets for sale. Consequently, work in
process is assigned recovery rate estimates equal to finished goods. To
the extent that raw materials and demo inventories are not used to
complete the work in process, it is assumed that they are liquidated as
is.
5. PREPAID AND OTHER CURRENT ASSETS: These assets consist primarily of
prepaid insurance, prepaid rents and utilities, deposits and advances
and other miscellaneous current assets. Management has reviewed the
individual components of the Prepaid and Other Current Assets and has
estimated a liquidation recovery of approximately $1.1 million for the
Debtors. Full recoveries are estimated for prepaid rent & utilities and
travel advances.
6. PROPERTY, PLANT AND EQUIPMENT, NET ("PP&E"): PP&E includes assets such
as land, buildings, automobiles, machinery and equipment, furniture and
fixtures, leasehold improvements and construction in process.
Consideration was given to the need to prepare the assets for sale, the
physical location, market rates and other factors in estimating recovery
rates. Land, buildings and automobiles were given higher recovery rates
and furniture & fixtures, leasehold improvements and construction in
process were given lower recovery percentages. Only the foreign
Non-Debtor Affiliates have land and buildings. The overall net recovery
rate for all PP&E was approximately 27%.
7. INTANGIBLES: The net proceeds assumed in the liquidation analysis are
from the sale of patents, trademarks and other various intangible assets
that the company owns. This amount was estimated based upon management's
assumption of what proceeds could be generated from the sale of patents
that the Company owns based upon the Company's prior success in
collecting from prior patent infringement cases.
8. ITRONIX NET PROCEEDS: For purposes of this Liquidation Analysis only, it
is assumed that Itronix has not been sold and is therefore liquidated.
The net proceeds from the liquidation of Itronix are based upon a
similar asset liquidation analysis. The analysis was performed based
upon the combined Itronix Corporation, a Debtor entity, as well as
Itronix's non-Debtor foreign subsidiaries. The net Itronix liquidation
value was then added to the Debtors' recovery. It was assumed, based
upon the May 31, 2003 balance sheet, that 75% of all Itronix assets are
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located within the US and are subject to secured creditor liens. The
foreign non-Debtor assets were assumed to satisfy all foreign Itronix
liabilities. For the non-US Itronix assets, 65% of the net equity
proceeds were assumed to be subject to secured creditor liens per the
secured creditor agreement. Based upon this liquidation analysis, the
foreign liabilities exceed the foreign net asset liquidation value
therefore the foreign equity would have no value.
9. DAVINCI NET PROCEEDS: For purposes of this Liquidation Analysis only, it
is assumed that daVinci has not been sold and is therefore liquidated.
The net proceeds from the liquidation of daVinci are based upon a
similar asset liquidation analysis. Although daVinci has some assets
located outside of the US, it is assumed that the net proceeds from
liquidating these assets would not be enough to satisfy the foreign
obligations. Therefore, for purposes of this analysis, the total
projected balance sheet for daVinci is assumed to be for the US entity.
10. PROCEEDS FROM NON-DEBTOR SUBSIDIARIES: Proceeds from the Communication
Test non-Debtor subsidiaries consist of net expected recoveries to the
Debtors. A similar asset liquidation analysis was performed on the
non-Debtor subsidiaries to arrive at the net estimated proceeds
available for creditor allocation. Due to the amounts owed under the
Commerzbank obligation agreement and other secured Claims as well as the
estimated amounts due for deferred compensation and other general
liabilities, it is anticipated that there will be no proceeds available
to the Debtors.
11. PROCEEDS FROM AVOIDANCE AND PREFERENCE ACTIONS: Under a liquidation, the
trustee may be able to bring certain avoidance actions against various
parties. Currently, the Company does not believe that there is any basis
to estimate such avoidance actions. It should be noted that no formal
avoidance action analysis has been performed.
12. CORPORATE EXPENSES: It is assumed that the liquidation process occurs
over a twelve-month period. A nearly full complement of corporate
expenses is assumed to be required during the first three months, with
declining amounts of expenses required in the following months. As part
of the build-out process of the work in process as of the liquidation
date, certain cost of sales, product development and marketing and
selling costs are assumed to be incurred during the first three-month
period. Division and corporate expenses are assumed to be incurred
during the entire liquation period; however, the amounts decline over
time.
13. RETENTION: During the liquidation period, it is assumed that retention
payments will have to be made to certain members of management and other
employees of the Company in order to retain their services. Management
believes that these retention payments are essential in order to
maintain an appropriate workforce that will be required to assist the
trustee in liquidation the estate and will ultimately result in a
greater yield from the liquidation of the assets.
14. OTHER PROFESSIONAL FEES: During the liquidation period, it will be
necessary for the Debtors' estate to engage the services of various
professionals to assist in the estates liquidation including, but not
necessarily limited to, counsel, accountants, financial advisors,
investment bankers and brokers.
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15. CHAPTER 7 TRUSTEE FEES: Compensation for the chapter 7 trustee will be
limited to fee guidelines in section 326 of the Bankruptcy Code. For
purposes of this analysis, management has assumed trustee fees of 3.0%
of the proceeds recovered from non-Cash assets in the liquidation.
16. SUPER PRIORITY CLAIMS: Super priority Claims pursuant to section 507 of
the Bankruptcy Code are assumed to be paid prior to any distribution to
any secured creditor and include various commitment fees allowed per the
DIP Agreement, dated May 6, 2003.
17. ESTIMATED SENIOR LENDER CLAIMS: The Debtors' Senior Lender Claims are
estimated to be approximately $700.9 million. This amount includes the
Revolving Credit Facility, Term A Loan and Term B Loan, including both
current and long term amounts as well as accrued interest as of the
filing date, and all letters of credit that have been drawn down
including the letter of credit issued to a German subsidiary secured
creditor that was not satisfied with the liquidation of the non-Debtor
subsidiaries.
18. OTHER SECURED CLAIMS: The Convertible Notes Claims are secured Claims
that are subject to a second lien on all assets securing the Senior
Lender Claims and therefore are shown to be structurally subordinated to
the Senior Lender Claims.
19. ADMINISTRATIVE EXPENSES: Prior to determining what proceeds would be
available for distribution to the general unsecured creditors under a
chapter 7 proceeding, cash and asset liquidation proceeds would be
reduced in order to satisfy chapter 11 Administrative Expenses that are
senior to general unsecured Claims. These Claims represent postpetition
chapter 11 accounts payable, accrued expenses, professional fees, and
any additional secured borrowing related to a chapter 11 proceeding. Due
to no net asset proceeds available after disbursement to secured
creditors, there was no estimation of chapter 11 administrative expenses
performed for this liquidation analysis. To the extent that there could
be proceeds available after disbursement to secured creditors, then
those proceeds would need to be used to satisfy chapter 11
administrative expenses before any disbursement to general unsecured
creditors.
20. NET ESTIMATED PROCEEDS AVAILABLE FOR UNSECURED CREDITOR DISTRIBUTION:
Based upon the Liquidation Analysis and its related assumptions, there
are no proceeds estimated to be available for distribution to unsecured
creditors. Most assets are covered by a secured lender lien and any
assets that are not subject to a secured lender lien (see Notes 8, 9 and
10), including a portion of the equity in the non-US subsidiaries, were
deemed to have no value; therefore no proceeds are estimated to be
available to unsecured creditors.
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21. ESTIMATED UNSECURED CLAIMS: The unsecured Claims of the Debtors are
estimated to be approximately $225.8 million. Included in the estimate
are general unsecured Claims from vendors, contract rejection Claims,
Subordinated Notes Claims and accrued employee Claims.
22. SECURED CLAIM DEFICIENCY: For purposes of this analysis, the deficiency
Claim results from the net difference of the estimated secured Claim and
the net amount available for secured Claims resulting from the
liquidation of assets that are subject to secured Claim liens.
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EXHIBIT F
CREDITORS' COMMITTEE SUPPORT LETTER
OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF ACTERNA CORPORATION, ET AL.
----------------------------------------
August 26, 2003
To: General Unsecured Creditors and Holders of Subordinated
Notes of Acterna Corporation, et al. (the "Debtors")
On behalf of the Official Committee of Unsecured Creditors of the
Debtors (the "Committee") and at the Committee's direction, we, as the Committee
professionals, are pleased to advise you that the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court") has approved the
First Amended Disclosure Statement (the "Disclosure Statement") in connection
with the Debtors' First Amended Joint Plan of Reorganization under Chapter 11 of
the Bankruptcy Code (the "Plan") in the Debtors' Chapter 11 bankruptcy cases
(Bankr. Case No. 03-12837 (BRL)) (the "Bankruptcy Case"). The Bankruptcy Court
has scheduled a hearing on September 25, 2003 at the Bankruptcy Court, One
Bowling Green, New York, New York 10004 at 10:00 a.m. to consider confirmation
of the Plan.
The Plan represents the culmination of intense negotiations by and
among the Debtors, the Committee, and other stakeholders over a short period of
time to maximize the recovery of creditors of the Debtors, as the Debtors
reorganize their business on what appears to be a necessarily expedited basis.
The intensity and short time frame of the process and negotiations minimized and
minimizes the disruption of the Debtors' business operations from the pendency
of the Bankruptcy Case.
Shortly after the Debtors' May 6, 2003 bankruptcy filing, the Office
of the United States Trustee, the arm of the United States Justice Department
that regulates the bankruptcy process, appointed the Committee to represent the
interests of the Debtors' general unsecured creditors (the "Unsecured
Creditors") and subordinated note holders (the "Subordinated Note Holders"). The
members of the Committee are: (i) Benchmark Electronics, Inc., (ii) Witmer Asset
Management, (iii) First Campus, L.P. c/o Guardian Realty Management, Inc., (iv)
IMCO, Inc., and (v) US Bank, National Association. The Committee, through its
advisors, has been actively involved in the Debtors' Chapter 11 cases in an
effort to maximize the recovery to Unsecured Creditors and Subordinated Note
Holders. The Committee has consulted extensively with and acted through its
counsel, Blank Rome LLP and its financial advisors, Ernst & Young Corporate
Finance LLC. The Committee, through its advisors, has devoted substantial time
and effort to the negotiation and formulation of the Plan. Simultaneously with
this letter, you will receive a copy of the Disclosure Statement regarding the
Plan, the Plan and a Ballot for voting on the Plan.
THE COMMITTEE SUPPORTS THE PLAN AND RECOMMENDS THAT HOLDERS OF (A)
GENERAL UNSECURED CLAIMS, DEFINED AS CLASS D IN THE PLAN, AND (B) SUBORDINATED
NOTE CLAIMS, DEFINED AS CLASS F IN THE PLAN, VOTE TO ACCEPT THE PLAN. YOUR
BALLOT MUST BE RECEIVED BY NO LATER THAN BY NO LATER THAN 4:00 P.M., EASTERN
TIME, ON SEPTEMBER 22, 2003.
As to the holders of allowed general unsecured claims in Class D (the
"General Unsecured Claims"), the Plan provides that such Claim holders will be
entitled to receive the lesser of 10% of the face amount of their Claims or
their pro rata share of $5 million, with a minimum aggregate distribution of
$3.5 million. Based upon the Debtors' estimates regarding claims reconciliation,
it appears that Unsecured Creditors will receive no less than 10% of their
Claims.
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As to the claims of the Subordinated Note Holders (the "Subordinated
Note Claims"), assuming that the Subordinated Note Holders vote to accept the
Plan, warrants will be issued to the Subordinated Note Holders for their pro
rata share of an aggregate of 5% of the equity of the Reorganized Debtors
(subject to dilution for equity to be issued as a management incentive) with a
strike price equal to the outstanding amount of the senior secured debt held by
a bank group (the "Senior Secured Debt") with interest accrued thereon at the
contract rate through the effective date of the Plan. These warrants have a
three year term. Supplementing the opportunity for recovery by the non-insider
Subordinated Note Holders, in consideration for a release to be provided under
the Plan, the Debtors' majority insider shareholders and their affiliates are
waiving their right of recovery on account of their subordinated notes and are
assigning the same to the non-insider holders of the Subordinated Note Claims.
It is uncertain whether these warrants will ultimately have any value, but as
discussed below, given the financial realities of the Debtors' bankruptcy case
and the fact that the holders of the Subordinated Note Claims are contractually
subordinated to the Senior Secured Lenders, the Committee believes that this
treatment exceeds that to which the holders of the Subordinated Note Claims
would be otherwise entitled. THIS TREATMENT, HOWEVER, IS DEPENDENT ON THE CLASS
OF HOLDERS OF THE SUBORDINATED NOTE CLAIMS VOTING TO ACCEPT THE PLAN. IF THE
CLASS OF HOLDERS OF THE SUBORDINATED NOTE CLAIMS REJECTS THE PLAN, SUBORDINATED
NOTE HOLDERS WILL NOT RECEIVE THE WARRANTS OR ANY RECOVERY UNDER THE PLAN.
The Committee has given its support for the Plan after reviewing and
analyzing the available alternatives. Indeed, the Committee has concluded that,
given the financial realities of the Debtors' business and based upon the
enterprise value of the Debtors in comparison to the magnitude of the Senior
Secured Debt, if the priorities of recovery between senior classes of claims
like the Senior Secured Debt and junior classes of claims like the General
Unsecured Claims and the Subordinated Note Claims under the Bankruptcy Code were
applied strictly, the holders of General Unsecured Claims and Subordinated Note
Claims would likely be entitled to receive a lesser recovery than that provided
by the Plan. Moreover, in the event of a liquidation, where the Debtors would
pursue a wind down or sale, the Committee believes that there would be no
distribution for the holders of General Unsecured Claims and Subordinated Notes
Claims. It is for these reasons that the Committee recommends that you to vote
to ACCEPT THE PLAN BY MARKING THE BOX OF THE BALLOT AND RETURNING IT SO THAT IT
IS RECEIVED BY NO LATER THAN 4:00 P.M., EASTERN TIME, ON SEPTEMBER 22, 2003.
The Plan, the Disclosure Statement and accompanying documents and
exhibits are complicated legal documents setting forth in detail the interests
and rights of various classes of creditors and interest holders under the Plan.
The Committee requests that you carefully read the Plan, the Disclosure
Statement and accompanying materials before voting on the Plan. You are also
encouraged, if you wish, to consult with your tax advisor regarding the tax
consequences of the treatment of your claims under the Plan. NEITHER THE
COMMITTEE NOR ITS COUNSEL OR FINANCIAL ADVISORS CERTIFIES ANY REPRESENTATIONS
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WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE PLAN AND DISCLOSURE
STATEMENT OR ANY DOCUMENTS PREPARED BY THE DEBTORS OR THE INFORMATION CONTAINED
THEREIN. The Committee urges you to review these documents and all related
documents to satisfy yourselves independently that voting in favor of the Plan
is in your own best interest. Once you have read these documents, the Committee
recommends you vote to accept the Plan by executing and returning the enclosed
ballot in accordance with the accompanying instructions. IT IS IMPORTANT THAT
THE ENCLOSED BALLOT BE EXECUTED AND RETURNED BY NO LATER THAN 4:00 P.M., EASTERN
TIME, ON SEPTEMBER 22, 2003 SO THAT YOUR VOTE CAN BE TABULATED. YOUR VOTE IS
IMPORTANT.
Should you have any questions with respect to the foregoing
recommendation by the Committee, please do not hesitate to contact the
Committee's advisors at the addresses below.
Andrew B. Eckstein
as Counsel for the Official Unsecured
Creditors Committee of Acterna
Corporation, et al., Debtors
Blank Rome LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
(212) 885-5000
Ernst & Young Corporate Finance LLC
Robert J. Tannor, Director
5 Times Square
New York, New York 10036-6530
(212) 773-3334
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